China Overhauls its Rules of Foreign Strategic Investment in A-share Listed Companies

On 1 November 2024, the long-awaited Administrative Measures for Strategic Investments in Listed Companies by Foreign Investors (“New Measures”) were jointly released by six government departments, including the Ministry of Commerce (“MOFCOM”) and the Securities Regulatory Commission. The New Measures have taken effect on 2 December 2024. They introduce significant changes, in particular in the areas of eligibility of foreign investors, investment modes, shareholding ratio threshold, lock-up period, and other obligations of the parties concerned.

Currently, valuations in the Chinese capital market are historically low. The New Measures aim to further widen the channels for foreign investment in the A-share market and encourage foreign investors to engage in long-term and value-based investment.

This newsletter summarizes some of the key changes.

1.   Expanding the scope of eligibility

•    In line with the PRC Foreign Investment Law, the New Measures include foreign individuals within the scope of foreign investors eligible for investing in the A-share market. The New Measures do not impose any specific requirements on individuals, other than that they must have "adequate capacity to identify and bear risks".

•    The New Measures lower the capital requirements for foreign investors. The total actual assets of foreign investors now shall not be less than USD 50 million or the total actual assets under management shall not be less than USD 300 million. However, if a foreign investor intends to become the controlling shareholder of an A-share listed company, the former thresholds of USD 100 million and USD 500 million remain applicable.

In addition, the New Measures clarify that if the direct investment entity does not meet such capital threshold but its parent company does, the said entity may still proceed with the investment if the qualified overseas parent company submits a commitment letter to the MOFCOM to jointly and severally assume liabilities.

•    When foreign investors invest in companies listed on the National Equities Exchange and Quotations ("NEEQ") (i.e. the OTC market for small companies, also known as the "Third Board Market" or "Beijing Stock Exchange"), it is now clarified that the New Measures apply mutatis mutandis.

2.   Providing flexibility to invest and exit

•    In the past, the only options available for strategic investment were private placements and share transfer by agreement. The New Measures now also allow foreign investors to make strategic investments through tender offers.

In addition, the minimum shareholding threshold of 10% for initial strategic investments has been abolished for investments through private placement. The threshold for tender offers and share transfers by agreement is only 5% under the New Measures.

•    Although the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors allow foreign investors to pay the consideration by transferring their shares in a foreign listed company ("Cross-border Share Swap"), the previous version of the New Measures did not include this.

Under the New Measures, cross-border share swaps are allowed and, in the case of investments through private placements and tender offers, the shares to be swapped can be those of non-listed companies.

•    Under the New Measures, the lock-up period for foreign investors has been reduced to 12 months from 36 months. The shorter lock-up period will allow investors to respond more quickly and flexibly to market changes and adjust their strategies.

3.   Streamlining the process

In order to align with the existing foreign investment legal system, the New Measures have abolished the prior approval by MOFCOM. They now only require foreign investors or listed companies to report investments to MOFCOM after the investment is completed or when the shareholding of the foreign investor changes by more than 5% or the controlling or relative controlling status of the foreign party changes after the investment is completed.

4.   Conclusion

The New Measures signal the PRC's commitment to further open up its capital markets to foreign investment and promote a more robust and internationalized capital market. Foreign investors can take this opportunity to expand their footprint in the PRC in good companies with high liquidity and reasonable valuations.