Guiding Opinions on the Launch of the Pilot Project for Preference Shares

(Issued by the State Council on November 30 2013.)

Guo Fa [2013] No.46

People's governments of the provinces, autonomous regions and municipalities directly under the central government, and ministries, commissions and organisations directly under the State Council:

With a view to thoroughly implementing the spirit of the 18th National Congress of the Communist Party of China and the Third Plenum of the 18th Central Committee of the Communist Party of China, intensifying the reform of the financial system and supporting the development of the real economy, the State Council has decided, in accordance with relevant provisions of the Company Law and the Securities Law, to launch the pilot project for preference shares. The launching of the pilot project for preference shares will be conducive to further intensifying the reform of the enterprise share system, providing issuers with a flexible direct financing instrument, optimising the financial structure of enterprises and promoting enterprise consolidation and restructuring; and will be conducive to increasing the number of securities products available, providing investors with diversified investment channels, increasing the ratio of direct financing and promoting the stable development of the capital markets. With a view to launching the pilot project for preference shares in a sound and orderly manner, we hereby set forth the following guiding opinions:

1. Rights and obligations of holders of preference shares

(1) Meaning of preference shares: the term “preference shares” means, in accordance with the Company Law, a specified type of shares other than generally specified common shares, the holders of which have preference over holders of common shares in the distribution of company profits and remaining property but whose rights to participate in the decision making and management of the company and other such rights are limited.

Unless otherwise provided herein, the rights and obligations of holders of preference shares and the management of preference shares shall comply with the Company Law. During the pilot period, the offering of preference shares of varying seniority in terms of the distribution of dividends and the distribution of remaining property is not permitted, but the offering of preference shares with differences in other terms is permitted.

(2) Preference in the distribution of profits: holders of preference shares shall have preference over holders of common shares in the distribution of company profits at the specified par dividend rate. The company shall pay dividends to holders of preference shares in cash, and may not distribute profits to holders of common shares until it has paid in full the specified dividends to the holders of the preference shares.

The company shall specify the following matters in its articles of association: (1) whether the dividend rate of preference shares is a fixed dividend rate or a floating dividend rate, and correspondingly specify the fixed dividend rate level or method of calculating the floating dividend rate; (2) whether the company must distribute profits if it has profits available for distribution after taxes; (3) if the company's profits available for distribution for the current financial year are insufficient and it does not distribute dividends to the holders of the preference shares in full, whether the shortfall will be cumulated to the following financial year; (4) whether, after the distribution of dividends at the specified dividend rate, holders of preference shares have the right to participate in the distribution of the remaining profit together with the holders of common shares; and (5) other matters that have a bearing on the distribution of profits in connection with preference shares.

(3) Preference in the distribution of remaining property: when the company is liquidated upon dissolution, bankruptcy or otherwise, the liquidation amount specified in the company's articles of association and the undistributed dividends shall be paid on a preference basis to the holders of preference shares from the company's property remaining after liquidation carried out in accordance with the Company Law and the Bankruptcy Law, and if the remaining property is insufficient, the distribution shall be made pro rata according to the shareholding percentages of the holders of preference shares.

(4) Conversion and buyback of preference shares: the company may specify in its articles of association the conditions, prices and percentages for the conversion of preference shares into common shares and the buyback of preference shares by the issuer. It may be specified that conversion options or buyback options shall be exercised by the issuer or by the holders of preference shares. If the issuer requests the buyback of preference shares, it must pay the dividends in arrears in full, except in the case of a commercial bank that has issued preference shares to top up its capital. Once the preference shares have been bought back, a corresponding write-down of the total number of outstanding preference shares shall be made.

(5) Limitations on voting rights: except in the circumstances set forth below, holders of preference shares shall not attend shareholders' general meetings, and voting rights do not attach to the shares they hold: (1) revision of provisions of the company's articles of association relating to preference shares; (2) a one-time reduction or aggregate reductions of the company's registered capital exceeding 10%; (3) merger, division, liquidation or change in the corporate form of the company; (4) issuance of preference shares; or (5) another circumstance specified in the company's articles of association. Resolutions on the aforementioned matters shall, in addition to requiring at least two-thirds of the votes held by the holders of common shares (including holders of preference shares with restored voting rights) present at the meeting for adoption, require at least two-thirds of the votes held by the holders of preference shares (excluding holders of preference shares with restored voting rights) present at the meeting for adoption.

(6) Restoration of voting rights: if the company fails to pay dividends on preference shares as agreed for an aggregate of three financial years or for two financial years in succession, holders of preference shares shall have the right to attend shareholders' general meetings and the voting rights specified in the company's articles of association shall attach to each of the preference shares. For cumulative preference shares, voting rights shall be restored until the company pays in full the dividends in arrears. For non-cumulative preference shares, voting rights shall be restored until the dividends for the year in question have been paid in full by the company. Other circumstances under which voting rights of preference shares are restored may be specified in the company's articles of association.

(7) Calculations relating to the type of shares: when calculating shareholding percentages in connection with the following matters, only common shares and preference shares with restored voting rights shall be counted: (1) a request to call an extraordinary shareholders' general meeting pursuant to Article 101 of the Company Law; (2) convening and presiding over a shareholders' general meeting pursuant to Article 102 of the Company Law; (3) submission of an extempore motion for consideration at a shareholders' general meeting pursuant to Article 103 of the Company Law; or (4) determination of the controlling shareholder pursuant to Article 217 of the Company Law.

2. Offering and trading of preference shares

(8) Scope of issuers: issuers making public offerings of preference shares shall be limited to listed companies specified by the China Securities Regulatory Commission (CSRC), and issuers making private placements of preference shares shall be limited to listed companies (including companies listed abroad whose place of registration is in the PRC) and unlisted public companies.

(9) Offering conditions: the outstanding preference shares of a company may not exceed 50% of its total number of common shares and the proceeds raised may not exceed 50% of the net assets before the offering. Preference shares that have been bought back or converted shall not be counted. The provisions of the Securities Law shall apply to the other conditions for the public offering of preference shares by a company and the private placement of preference shares by a listed company. The conditions for the private placement of preference shares by an unlisted public company shall be specified separately by the CSRC.

(10) Public offering: a company that publicly offers preference shares shall specify the following matters in its articles of association: (1) that it has adopted a fixed dividend rate; (2) where it has after-tax distributable profit, it must distribute dividends to the holders of preference shares; (3) the shortfall when it is unable to pay dividends in full to the holders of preference shares shall be cumulated to the following financial year; and (4) once holders of preference shares have been distributed dividends at the specified dividend rate, they do not participate in the distribution of the remaining profit together with the holders of common shares. Where a commercial bank offers preference shares to top up its capital, it may provide otherwise in respect of Items (2) and (3).

(11) Trading, transfer, registration and deposit: preference shares shall be traded or transferred on a stock exchange, the National Equities Exchange and Quotations or other securities trading venue approved by the State Council. Preference shares shall be centrally registered and deposited with the China Securities Depository and Clearing Corporation Limited. The investor suitability criteria at the preference shares trading or transfer stage shall be identical to those at the offering stage.

(12) Information disclosure: in the offer documents, the company shall describe in detail the rights and obligations of holders of preference shares, and fully disclose the risks. Additionally, it shall truthfully, accurately, completely, fairly and in a timely manner disclose or provide information in accordance with provisions, and may not make false records, misleading statements or material omissions.

(13) Company acquisition: preference shares may serve as a means of payment in an acquisition or restructuring. The takeover offer for a listed company shall apply to all of the shareholders of the target company, but different takeover conditions may be proposed to the holders of preference shares and to the holders of common shares. When calculating the percentage of the outstanding shares of the listed company held by the acquirer pursuant to Article 86 of the Securities Law and when making the calculation for the triggering of the takeover offer obligation pursuant to Articles 88 and 96 of the Securities Law, the preference shares without restored voting rights shall not be counted as part of the number of shares held or the total share capital.

(14) Calculations relating to the number of shares held: when the number of shares held is calculated in connection with the following matters, only common shares and preference shares with restored voting rights shall be counted: (1) determining the list of the 10 shareholders with the largest holdings of the company's shares and the number of shares they hold pursuant to Articles 54 and 66 of the Securities Law; and (2) determining the shareholders that hold at least 5% of the shares of the company pursuant to Articles 47, 67 and 74 of the Securities Law.

3. Organisation administration and supporting policies

(15) Strengthening of organisation administration: the CSRC shall strengthen its coordination and cooperation with relevant departments, and arrange for the launching of the work on the pilot project for preference shares in an active and sound manner. The CSRC shall formulate and issue specific provisions for the pilot project for preference shares in accordance with the Company Law, Securities Law and these Guiding Opinions and guide securities self-regulation organisations in improving relevant business rules.

The CSRC shall strengthen its market regulation, procure the earnest performance of information disclosure obligations by companies, procure the acting in good faith and with due diligence of intermediary firms, investigate and deal with violations of laws and regulations in accordance with the law and duly protect the lawful rights and interests of investors.

(16) Improvement of supporting policies: accounting treatment and financial reports relating to preference shares shall comply with the enterprise accounting guidelines and other related accounting standards issued by the Ministry of Finance. The dividends, extra dividends and other such investment benefits obtained by an enterprise from an investment in preference shares may, provided that they satisfy the conditions specified in tax laws, be treated as tax exempt income for enterprise income tax. Investments in preference shares by the National Social Security Fund and enterprise annuities shall not be subject to the current restrictions on percentages that can be invested in securities products, and the specific policies therefor will be formulated by the relevant competent department of the State Council. In the administration of access to industries by foreign investors, the percentage of preference shares and common shares held by a foreign investor shall be calculated together. Other policy matters that need to be formulated complementarily in the course of the pilot project shall be proposed by the CSRC based on the success of the roll out of the pilot project and handled in concert with relevant departments. Major matters shall be reported to the State Council.

(Issued by the State Council on November 30 2013.)

Guo Fa [2013] No.46

People's governments of the provinces, autonomous regions and municipalities directly under the central government, and ministries, commissions and organisations directly under the State Council:

With a view to thoroughly implementing the spirit of the 18th National Congress of the Communist Party of China and the Third Plenum of the 18th Central Committee of the Communist Party of China, intensifying the reform of the financial system and supporting the development of the real economy, the State Council has decided, in accordance with relevant provisions of the Company Law and the Securities Law, to launch the pilot project for preference shares. The launching of the pilot project for preference shares will be conducive to further intensifying the reform of the enterprise share system, providing issuers with a flexible direct financing instrument, optimising the financial structure of enterprises and promoting enterprise consolidation and restructuring; and will be conducive to increasing the number of securities products available, providing investors with diversified investment channels, increasing the ratio of direct financing and promoting the stable development of the capital markets. With a view to launching the pilot project for preference shares in a sound and orderly manner, we hereby set forth the following guiding opinions:

1. Rights and obligations of holders of preference shares

(1) Meaning of preference shares: the term “preference shares” means, in accordance with the Company Law, a specified type of shares other than generally specified common shares, the holders of which have preference over holders of common shares in the distribution of company profits and remaining property but whose rights to participate in the decision making and management of the company and other such rights are limited.

Unless otherwise provided herein, the rights and obligations of holders of preference shares and the management of preference shares shall comply with the Company Law. During the pilot period, the offering of preference shares of varying seniority in terms of the distribution of dividends and the distribution of remaining property is not permitted, but the offering of preference shares with differences in other terms is permitted.

(2) Preference in the distribution of profits: holders of preference shares shall have preference over holders of common shares in the distribution of company profits at the specified par dividend rate. The company shall pay dividends to holders of preference shares in cash, and may not distribute profits to holders of common shares until it has paid in full the specified dividends to the holders of the preference shares.

The company shall specify the following matters in its articles of association: (1) whether the dividend rate of preference shares is a fixed dividend rate or a floating dividend rate, and correspondingly specify the fixed dividend rate level or method of calculating the floating dividend rate; (2) whether the company must distribute profits if it has profits available for distribution after taxes; (3) if the company's profits available for distribution for the current financial year are insufficient and it does not distribute dividends to the holders of the preference shares in full, whether the shortfall will be cumulated to the following financial year; (4) whether, after the distribution of dividends at the specified dividend rate, holders of preference shares have the right to participate in the distribution of the remaining profit together with the holders of common shares; and (5) other matters that have a bearing on the distribution of profits in connection with preference shares.

(3) Preference in the distribution of remaining property: when the company is liquidated upon dissolution, bankruptcy or otherwise, the liquidation amount specified in the company's articles of association and the undistributed dividends shall be paid on a preference basis to the holders of preference shares from the company's property remaining after liquidation carried out in accordance with the Company Law and the Bankruptcy Law, and if the remaining property is insufficient, the distribution shall be made pro rata according to the shareholding percentages of the holders of preference shares.

(4) Conversion and buyback of preference shares: the company may specify in its articles of association the conditions, prices and percentages for the conversion of preference shares into common shares and the buyback of preference shares by the issuer. It may be specified that conversion options or buyback options shall be exercised by the issuer or by the holders of preference shares. If the issuer requests the buyback of preference shares, it must pay the dividends in arrears in full, except in the case of a commercial bank that has issued preference shares to top up its capital. Once the preference shares have been bought back, a corresponding write-down of the total number of outstanding preference shares shall be made.

(5) Limitations on voting rights: except in the circumstances set forth below, holders of preference shares shall not attend shareholders' general meetings, and voting rights do not attach to the shares they hold: (1) revision of provisions of the company's articles of association relating to preference shares; (2) a one-time reduction or aggregate reductions of the company's registered capital exceeding 10%; (3) merger, division, liquidation or change in the corporate form of the company; (4) issuance of preference shares; or (5) another circumstance specified in the company's articles of association. Resolutions on the aforementioned matters shall, in addition to requiring at least two-thirds of the votes held by the holders of common shares (including holders of preference shares with restored voting rights) present at the meeting for adoption, require at least two-thirds of the votes held by the holders of preference shares (excluding holders of preference shares with restored voting rights) present at the meeting for adoption.

(6) Restoration of voting rights: if the company fails to pay dividends on preference shares as agreed for an aggregate of three financial years or for two financial years in succession, holders of preference shares shall have the right to attend shareholders' general meetings and the voting rights specified in the company's articles of association shall attach to each of the preference shares. For cumulative preference shares, voting rights shall be restored until the company pays in full the dividends in arrears. For non-cumulative preference shares, voting rights shall be restored until the dividends for the year in question have been paid in full by the company. Other circumstances under which voting rights of preference shares are restored may be specified in the company's articles of association.

(7) Calculations relating to the type of shares: when calculating shareholding percentages in connection with the following matters, only common shares and preference shares with restored voting rights shall be counted: (1) a request to call an extraordinary shareholders' general meeting pursuant to Article 101 of the Company Law; (2) convening and presiding over a shareholders' general meeting pursuant to Article 102 of the Company Law; (3) submission of an extempore motion for consideration at a shareholders' general meeting pursuant to Article 103 of the Company Law; or (4) determination of the controlling shareholder pursuant to Article 217 of the Company Law.

2. Offering and trading of preference shares

(8) Scope of issuers: issuers making public offerings of preference shares shall be limited to listed companies specified by the China Securities Regulatory Commission (CSRC), and issuers making private placements of preference shares shall be limited to listed companies (including companies listed abroad whose place of registration is in the PRC) and unlisted public companies.

(9) Offering conditions: the outstanding preference shares of a company may not exceed 50% of its total number of common shares and the proceeds raised may not exceed 50% of the net assets before the offering. Preference shares that have been bought back or converted shall not be counted. The provisions of the Securities Law shall apply to the other conditions for the public offering of preference shares by a company and the private placement of preference shares by a listed company. The conditions for the private placement of preference shares by an unlisted public company shall be specified separately by the CSRC.

(10) Public offering: a company that publicly offers preference shares shall specify the following matters in its articles of association: (1) that it has adopted a fixed dividend rate; (2) where it has after-tax distributable profit, it must distribute dividends to the holders of preference shares; (3) the shortfall when it is unable to pay dividends in full to the holders of preference shares shall be cumulated to the following financial year; and (4) once holders of preference shares have been distributed dividends at the specified dividend rate, they do not participate in the distribution of the remaining profit together with the holders of common shares. Where a commercial bank offers preference shares to top up its capital, it may provide otherwise in respect of Items (2) and (3).

(11) Trading, transfer, registration and deposit: preference shares shall be traded or transferred on a stock exchange, the National Equities Exchange and Quotations or other securities trading venue approved by the State Council. Preference shares shall be centrally registered and deposited with the China Securities Depository and Clearing Corporation Limited. The investor suitability criteria at the preference shares trading or transfer stage shall be identical to those at the offering stage.

(12) Information disclosure: in the offer documents, the company shall describe in detail the rights and obligations of holders of preference shares, and fully disclose the risks. Additionally, it shall truthfully, accurately, completely, fairly and in a timely manner disclose or provide information in accordance with provisions, and may not make false records, misleading statements or material omissions.

(13) Company acquisition: preference shares may serve as a means of payment in an acquisition or restructuring. The takeover offer for a listed company shall apply to all of the shareholders of the target company, but different takeover conditions may be proposed to the holders of preference shares and to the holders of common shares. When calculating the percentage of the outstanding shares of the listed company held by the acquirer pursuant to Article 86 of the Securities Law and when making the calculation for the triggering of the takeover offer obligation pursuant to Articles 88 and 96 of the Securities Law, the preference shares without restored voting rights shall not be counted as part of the number of shares held or the total share capital.

(14) Calculations relating to the number of shares held: when the number of shares held is calculated in connection with the following matters, only common shares and preference shares with restored voting rights shall be counted: (1) determining the list of the 10 shareholders with the largest holdings of the company's shares and the number of shares they hold pursuant to Articles 54 and 66 of the Securities Law; and (2) determining the shareholders that hold at least 5% of the shares of the company pursuant to Articles 47, 67 and 74 of the Securities Law.

3. Organisation administration and supporting policies

(15) Strengthening of organisation administration: the CSRC shall strengthen its coordination and cooperation with relevant departments, and arrange for the launching of the work on the pilot project for preference shares in an active and sound manner. The CSRC shall formulate and issue specific provisions for the pilot project for preference shares in accordance with the Company Law, Securities Law and these Guiding Opinions and guide securities self-regulation organisations in improving relevant business rules.

The CSRC shall strengthen its market regulation, procure the earnest performance of information disclosure obligations by companies, procure the acting in good faith and with due diligence of intermediary firms, investigate and deal with violations of laws and regulations in accordance with the law and duly protect the lawful rights and interests of investors.

(16) Improvement of supporting policies: accounting treatment and financial reports relating to preference shares shall comply with the enterprise accounting guidelines and other related accounting standards issued by the Ministry of Finance. The dividends, extra dividends and other such investment benefits obtained by an enterprise from an investment in preference shares may, provided that they satisfy the conditions specified in tax laws, be treated as tax exempt income for enterprise income tax. Investments in preference shares by the National Social Security Fund and enterprise annuities shall not be subject to the current restrictions on percentages that can be invested in securities products, and the specific policies therefor will be formulated by the relevant competent department of the State Council. In the administration of access to industries by foreign investors, the percentage of preference shares and common shares held by a foreign investor shall be calculated together. Other policy matters that need to be formulated complementarily in the course of the pilot project shall be proposed by the CSRC based on the success of the roll out of the pilot project and handled in concert with relevant departments. Major matters shall be reported to the State Council.