Backdoor listings to face tighter scrutiny

June 01, 2011 | BY

Janice Qu

Securities regulator raises performance thresholds

In pursuing a backdoor listing, private companies need to be wary of the status of potential shell companies in order to ensure sustainable performance, say counsel.

The China Securities Regulatory Commission (CSRC) issued a draft regulation targeting closer supervision on merger and asset restructurings of listed companies so that, to minimise investor risk, it matches the degree of scrutiny that initial public offerings (IPOs) undergo.

The draft regulation, which is open for public comment until May 28, has raised thresholds for backdoor listings. Its purpose is to improve the quality of all listed companies to better protect the rights and interests of investors, said Shanghai-based partner Lin Zhong of Chen & Co Law Firm.

The draft version proposes that private companies seeking backdoor listings must have been in operation for at least three years and have accumulated gross profits of at least Rmb20 million (US$3.07 million) over the last two fiscal years.

Companies that have already listed, but perform poorly face the risk of being delisted in the future if they fail to comply with certain requirements. Although these requirements are not provided in the draft regulation, the CSRC is currently deliberating adding these standards and a delisting process as a next step.

So, while selecting shell companies for backdoor listings, the private company will have to consider both its own interests and the long-term performance of the company after its listing.

“The debt, and the existing and potential lawsuits of the shell company shall need to be thoroughly investigated to lower the risks of the private company,” said Lin. “The quality and development of the assets of the private company which were injected into the shell company shall also be assured.”

Lin pointed out that shell companies are allowed to raise “supporting funds” under the draft regulation, which would make it more convenient for backdoor listings.

“In the past, the fundraising of the listed company and the carrying out of its backdoor listing were set apart and reviewed by the CSRC twice. The parties should make use of this provision to better plan their backdoor listing scheme,” said Lin.

The current thresholds for backdoor listings, as found in the Measures for the Administration of Material Asset Reorganisations by Listed Companies (上市公司重大资产重组管理办法), are lower than the requirements for IPOs. Some commentators believe that the quality and performance of some listed companies are not the same as those listed by way of an IPO. This may lead to higher risks for investors.

Supervision over backdoor listings is mainly conducted by the Reviewing Committee of Merger Acquisition and Reorganisation of Listed Companies, which reviews and votes on the material assets reorganisation applications. JQ

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