How to create charge over listed shares in China

March 17, 2009 | BY

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Philips Zhenyu Ding and Xiang LiRun Ming Law [email protected], [email protected] the December 2008/January 2009 issue of China Law &…

Philips Zhenyu Ding and Xiang Li

Run Ming Law Office

[email protected], [email protected]


In the December 2008/January 2009 issue of China Law & Practice, the authors introduced the Measures on Registration of Equity Pledge with Administrative Authorities for Industry and Commerce (Measures), which came into effect on October 1 2008. However, Article 2 provides that the Measures do not apply to charge over the shares of a company limited by shares, which have already been registered with China Securities Depositary and Clearing Corporation Limited (China Clearing). To supplement the previous commentary, this article examines relevant PRC laws, rules and practices as to the creation of charge over listed shares in this issue.

Creation of charge over listed shares

The PRC Property Law and PRC Security Law expressly allow the creation of charge over listed shares in China through entry into share charge contract by the chargor and chargee.

Unlike the laws and practices of certain overseas jurisdictions where fixed charge over shares does not need to be registered, the Property and Security Laws provide that share charge takes effect upon its registration with China Clearing.

It is also a mandatory requirement that the charged shares shall not be transferred without the consent of the chargee. Contravention of such requirement will render the transfer of charged shares void.

Registration of charge over
listed shares

As mentioned above, no charge over listed shares could be effectively created without perfection through registration with China Clearing, which has branch offices in Shanghai and Shenzhen. Shares traded on the Shanghai Stock Exchange are registered with the Shanghai office while those traded on the Shenzhen Stock Exchange are registered with the Shenzhen office.

For the time being, only the Shanghai office accepts applications for registration of share charge. It has also promulgated a guidance note on registration of share charge in order to facilitate the application process. The Shenzhen office of China Clearing is also considering the acceptance of the application for registration of share charge although no detailed rules have yet been promulgated by that office.

The Guidance Note sets out the requisite documents for the registration of share charge as follows:

• Application Form for Registration of Charge over Securities;

• Original and copy of the duplicate of business licence of the chargor (when the chargor is a company), or original and copy of identity card (when the chargor is an individual);

• Power of attorney granted by the chargor and chargee respectively;

• Original and copy of the securities account of the chargor;

• The principal contract to which the share charge contract is ancillary;

• Notarised share charge contract;

• Original and copy of the identity card of the person handling the registration; and

• Filing Form for Charge over Listed Shares Owned by the State acknowledged by the State-owned Assets Supervision and Administration Commission or the state-owned assets supervision and administration department at the provincial level, when the charged shares are state-owned.

Registration fees must be paid before the completion of the registration formality. The fees amount to 0.1% of the value of charged shares. If the number of charged shares exceeds 5 million, the percentage of registration fees applicable to the part of shares over 5 million is reduced to 0.01%.

When the charge is created over the shares subject to certain lock-up period, both the chargor and the chargee must undertake that the charged shares will not be transferred during the lock-up period.

In order to satisfy the statutory requirement that the charged shares shall not be transferred without the consent of the chargee, the Shanghai office of China Clearing will freeze the charged shares in the securities account of the chargor. If the charged shares are B shares, the whole securities account of the chargor will be frozen.

When the charged shares account for 5% or more of the total share capital of a listed company, the registration of the charge will lead to the disclosure obligations pursuant to the Listing Rules of Shanghai Stock Exchange.

Conclusion

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