New Rules on Transfer of Non-listed Shares1

Meanwhile, it is clearly set out in the Notice that the transfer of non-listed shares by way of agreement shall only be handled at stock exchanges. This reiterates Article 144 of the PRC Company Law (中华人民共和国公司法), under which the shareholders of listed companies are required to transfer their shares at stock exchanges that are legally established. The Notice is consistent with the Company Law on this point, since there is no exception under the Company Law that such rule shall not apply to the transfer of non-listed shares by way of agreement.

How to Transfer Non-listed Shares at Stock Exchanges

Under special guidelines on transfer of non-listed shares by way of agreement (Special Guidelines) issued by the Shanghai Stock Exchange (SSE) on December 29 1997, the parties to an agreement on transfer of shares shall report to the CSRC and the SSE within two days after such agreement is concluded. The parties shall also submit the requisite documents listed under the said Special Guidelines to the CSRC and the SSE. The SSE will review all the documents submitted before the transfer can be made public and registered with the central clearing company. Such transfer may not be effective should the SSE find any non-compliance of the submitted documents with the Special Guidelines.

Different from an auction, such transfer by way of agreement is made between parties in private. Before the stock exchange clearance on the transfer is granted, no disclosure of such transfer shall be made due to its price-sensitive nature. In the course of an auction, the information regarding the transfer of the non-listed shares of a company is disseminated before the transfer is effected, which is likely to cause disturbance to the trading price of the listed shares of the same company.

Transfer of Non-listed Shares by Public Soliciting (公开征集)

A new concept of "public soliciting" is mentioned in the Notice. The Notice does not set out the definition of such public soliciting and any corresponding regulatory requirements. However, it does request the stock exchanges to prepare specific rules to regulate the transfer by way of public soliciting.

It is interesting that the spokesman of the CSRC has given certain introduction about the transfer by way of public soliciting. Summarizing the spokesman's comments, the particulars of such transfer may include: (i) certain qualification will be put on the transferee; (ii) such public soliciting shall be organized by the stock exchange and the securities clearing company; (iii) both the transferor and the transferee shall engage a securities house(s) and the information in connection with the transferred shares shall be passed through a stock exchange and the engaged securities house(s), in other words, such information may not be made public; and (iv) the transfer shall be concluded at a stock exchange.

However, it is still unclear whether (i) the qualification on the transferee is to be set out by the transferor or the stock exchange; and (ii) whether direct communication between the transferor and transferee without the involvement of the stock exchange is allowed.

No information is given in the Notice or by the CSRC spokesman as to when the specific rules made by the stock exchanges on such transfer by way of public soliciting will be available. Given the information available at the moment, such transfer shall become a unique scheme for transferring non-listed shares in Chinese listed companies.

Endnotes:

1 The shares in Chinese listed companies are divided into three classes: public shares, legal person shares and state-owned shares. Among these three classes, only public shares are listed on, and publicly tradable at, stock exchanges in the PRC. Neither legal person shares nor state-owned shares are listed on, and publicly tradable at, stock exchanges and therefore are known as non-listed shares.

2 According to the Notice, the transfer by way of auction falls within the category of transfer by way of agreement. To avoid confusion, in this article the transfer by way of agreement refers to transfer by private agreement only.

3 According to a notice issued by the State Council on September 23 1995, the transfer of state-owned shares and legal person shares to foreign companies should be suspended.

By Jonathan Z. Zhou,

Fangda Partners,

Shanghai