Perspectives on Acquisitions of Non-listed Shares

Preferential Tax Treatment for Listed Companies

There is an ongoing debate whether listed companies with 25% or more in foreign investment are eligible for the preferential tax treatment available to FIEs simply by the acquisition of non-listed shares.

On one hand, Article 9 of the 2002 Circular provides that: "After the transfer of State-owned shares and legal person shares to foreign investors, listed companies shall continue to be governed by the original relevant policies and shall not enjoy treatment as foreign-invested enterprises." On the other hand, Article 1 of the Issues Relevant to Acquisition of Equity Interests in Domestic Enterprises Taxation Circular (the Taxation Circular) issued by the State Administration of Taxation (SAT) on May 5 2003 states: "In the event that foreign equity reaches 25% or more in a post-acquisition company, such company is eligible for application of tax laws and regulations governing FIEs." The Taxation Circular does not discriminate against listed companies with a foreign equity stake of 25% or more that is achieved through acquisition of non-listed shares.

Obviously there is some conflict between the 2002 Circular and the Tax Circular. It is anticipated that this issue will be clarified when acquisition of non-listed shares by foreign investors gains popularity.

Public Bidding

Public bidding is introduced by the 2002 Circular for the purpose of better protecting State-owned assets. Article 3 of the 2002 Circular provides that: "In principle, transfer of State-owned shares and legal person shares in listed companies to foreign investors shall be carried out by the method of public bidding." Since public bidding only applies to foreign investors but not to domestic investors, it may be claimed that such a requirement is discriminatory against foreign investors and is not in line with the national treatment principle as called for by China's WTO framework.

Shortly after the issuance of the 2002 Circular, a CSRC spokesman told the press that public solicitation of potential purchasers of non-listed shares was highly desirable, and that the CSRC and MOF were working on the implementing rules. At the same time, an MOF spokesman confirmed that the MOF was preparing the implementing rules on the public bidding mechanism with the involvement of the CSRC. It is understandable that the MOF's attention is mainly focused on the price of a transfer, while the CSRC is trying to adopt a mechanism through which, in addition to the transfer price offered by the potential purchaser, its credit worthiness, capability, and other relevant issues will also be taken into consideration for the purpose of evaluating competing bids. Currently, there are no implementing rules at all. In practice, public bidding or public solicitation of potential purchasers has not yet been tested in the key completed or ongoing transactions involving acquisition of non-listed shares in listed companies, i.e., in China Resources Co.'s acquisition of non-listed shares in China Resources Jinhua (000810, Shenzhen), Citibank's acquisition of non-listed shares in Shanghai Pudong Development Bank (600000, Shanghai), and New Bridge's acquisition of non-listed shares in Shenzhen Development Bank (000001, Shenzhen).

Consideration for Non-listed Shares

Article 7 of the 2002 Circular provides that: "Foreign investors shall make payment for the transfers (of non-listed shares) in freely convertible currency." Such restrictions have not been reflected in the Acquisition of Domestic Enterprises by Foreign Investors Tentative Provisions (effective April 12 2003) or in any other regulations. Why does such a restriction exist? Is it because part of the purchase price paid by foreign investors may be used to contribute to the national social security funds? It is not obvious why these restrictions would apply to State-owned shares but not to non-State-owned legal person shares as well.