Major Asset Restructuring Rules of Companies Listed on the SSE STAR Market

In the Examination Rules, synergy has, for the first time, been interpreted in a concise manner and defined as the additional benefits in excess of the individual asset return acquired by a listed company through a MAR transaction. As enumerated in the Examination Rules, these additional benefits include various types of positive economic effects on the principal business of the listed company, such as the increase of pricing power, reduction of costs, being able to obtain key technologies and R&D personnel, increase of market development abilities and preferential tax treatment.

Criterion on Reverse Takeover

As part of the market-oriented reform on the merger, acquisition and restructuring of listed companies, the reverse takeover of companies listed on the GEM board or the STAR Market has been adopted by the CSRC in the revised Measures for the Administration of Major Asset Restructuring of Listed Companies (上市公司重大资产重组管理办法).

In general, all reverse takeovers must be reported to the CSRC for approval and can be launched if the Target Assets meet relevant IPO listing criterion. However, in pursuit of market-oriented reform and the piloting of a registration-based securities issuance mechanism, the STAR Market MAR Rules have provided the following:

1 . unless share issuance is involved in a reverse takeover, registration with the CSRC (or any approval from the CSRC) is not required; and

2 .  substantially, two of the total five STAR Market listing criteria, the profit scale test and the revenue and cash flow test, are accepted in case of reverse takeovers to ensure the profitability and asset quality of STAR Market listed companies, details of which are as follows:

i.    the net profit of the most recent two years is positive and accumulated to not less than Rmb50 million; or

ii.   the operating revenue in the most recent year is not less than Rmb300 million, and the net cash flows from operating activities in the last three years is not less than Rmb100 million.

iii.  where different voting rights arrangements have been made by the operating entities of the Target Asset, in addition to either of the two criteria above, the operating revenue in the most recent year must not be less than Rmb500 million.

The MAR Reviewing Authorities

The supervision functions on ad hoc disclosures of MARs have been emphasized, as a result of registration-based and market-oriented stock market reform.

More specifically, the STAR Market MAR Rules provide measures to simplify the preliminary reviewing procedures and turn to in-process and post-event supervision on the MARs, including, among others:

i.    MARs on the STAR Market that do not involve share issuance and reverse takeovers are subject to information disclosure and do not require substantive reviewing by the SSE;

ii.   the listed company supervision department has been given more functions for reviewing MARs. MARs that involve share issuance and/or reverse takeovers will be reviewed jointly by both the stock issuance and listing department, and the listed company supervision department of the SSE; and

iii.  disclosure-based market regulation has been expressly stipulated and emphasized in the Examination Rules because the SSE's reviewing or approval of a MAR does not indicate its material judgment or guarantee on the economic value of the relevant MAR.

The STAR Market MAR Rules has overall integrated the registration-based reviewing system into the MAR rules and strengthened the disclosure-oriented approach

Other Highlights

The STAR Market MAR Rules have overall integrated the registration-based reviewing system into the MAR rules and strengthened the disclosure-oriented approach. Further, the STAR Market MAR Rules reflect characteristics of STAR Market listed companies. For example, in consideration of the STAR Market listing criteria, i.e., a company with a higher market value of not less than Rmb4 billion and a promising growth potential may seek to list on the STAR Market regardless of its revenue scope because the Examination Rules provide an absolute revenue standard on the revenue test. Namely, MAR will not be triggered when the revenue generated by the Target Asset exceeds 50% of the listed company but does not exceed Rmb50 million in absolute amount.

Upon implementation of the Examination Rules, the STAR Market MAR Rules are elaborate in detail and feasible in most material aspects. The remaining issues are limited, such as those concerning red chip enterprises, which may be the most significant ones. While waiting for further guidance regarding corporate governance, the disclosure and financial standards on MARs involving red chip enterprises, other rules and regulations for the STAR Market, including the equity disclosure and takeover rules are also greatly anticipated.