Little red-chips get an overseas opening

Before the promulgation of China's M&A Rules in 2006, the so-called Little red-chip model was a common way used by private Chinese companies to seek listing on overseas stock exchanges.

In this model, the owner of the private Chinese company sets up a special purpose company in a tax-haven country, such as the British Virgin Islands (BVI). The BVI special purpose company then sets up a subsidiary in Cayman or Bermuda. The Cayman or Bermuda special purpose vehicle (SPV) then acquires the shares of the Chinese company with the result that it becomes the holding company of the Chinese company. Finally, the Cayman or Bermuda SPV seeks listing on an overseas exchange.

The M&A Rules – formally the Provisions for the Acquisition of Domestic Enterprises by Foreign Investors (关于外国投资者并购境内企业的规定)– have made this model unworkable. According to Article 11 of the M&A Rules, where a foreign company established or controlled by a domestic company, enterprise or natural person intends to take over its domestic affiliated company, it shall be subject to the examination and approval of the Ministry of Commerce (Mofcom). The parties concerned can not get round these requirements by making investments within China through a foreign-funded enterprise, or other means.