State Council Reform and Acquisition of Non-floating Shares in Listed Companies

We outline below changes in regulatory practice since the reform of the State Council, based on some transactions completed since the reform, as well as oral testimonies we received from officials in the relevant ministries.

MOFCOM

MOFCOM has succeeded to certain functions of the former SETC and MOFTEC. According to confirmation from MOFCOM and the Acquisition of Domestic Enterprises by Foreign Investors Tentative Provisions (外国投资者并购境内企业暂行规定)issued by MOFTEC on April 12 2003, MOFCOM is the approval authority for the following:

(i) industry policy (formerly the responsibility of the SETC);

(ii) share transfers and foreign investment in target companies, amended articles of association of the target company and issuance of a certificate of approval to the target company in relation to foreign-invested enterprises; and

(iii) anti-trust clearance (such clearance would be necessary should the transaction trigger an anti-trust review, and the SAIC is jointly responsible for such a review).

SAAC

The state asset administration function has been transferred from the MOF to the SAAC. Notwithstanding the lack of any new written rules or regulations, according to a transaction closed in September 2003, it seems clear now that the SAAC is responsible for the following: receiving filing of the state asset valuation results (formerly filed with the MOF); and approving the transfer of state-owned shares to foreign investors.

An official of the CSRC said in a public conference in August that the MOF will remain responsible for approval of transfer of shares in listed financial institutions. But according to a recently closed transaction in which a foreign bank acquired shares from a listed domestic commercial bank, such approval was granted by the SAAC, not the MOF.

Other Authorities

The responsibilities of the other approval authorities under the Joint Circular remains unchanged.

In particular, all information disclosures as well as securities regulatory matters in relation to the acquisition of shares in listed companies shall be subject to the CSRC's and the relevant stock exchange's approval.

Further, upon receipt of the approval of MOFCOM and the SAAC, foreign investors shall register with SAFE in respect of the foreign capital used for the acquisition. Also, registration shall be made with the SAIC in respect of a change of shareholders,¹ board members or amendment to the articles of association. Finally, registration shall be made with the China Securities Registration and Clearing Company (the CSRCC) in respect of the transfer of shares after all the approvals are in place. The records at the CSRC evidence the legal title of shares in listed companies.

All such regulatory changes in the absence of written rules or regulations should not come as a surprise to those foreign investors who are seriously interested in China. They no doubt know that they are doing business in a changing regulatory environment, and probably will continue to do so in the foreseeable future.

Endnote

1. In practice, the SAIC only accepts the registration of promoters of companies limited by shares. The change of shareholders that are not promoters is not subject to registration with the SAIC. However, if a promoter is no longer a shareholder of the company, such change shall be registered with the SAIC.