Questions and Answers on the Oversight of Offerings: Regulatory Requirements in Respect of Matters Relevant to the Bringing in of Strategic Investors by Listed Companies Through the Private Offering of Shares

(Issued by the China Securities Regulatory Commission on March 20, 2020.)

These Questions and Answers have been formulated based on relevant provisions of the Measures for the Administration of Securities Offerings by Listed Companies (the Measures), the Tentative Measures for the Administration of the Offering of Securities by Companies Listed on the Growth Enterprise Market (the Tentative Measures) and the Implementing Rules for the Private Offering of Shares by Listed Companies (the Implementing Rules) in order to correctly understand and apply rules for the bringing in of strategic investors through the private offering of shares, endeavor to enhance the quality of listed companies and strengthen the capital markets' capacity to serve the real economy.

Q:        What specific requirements are there for listed companies to bring in strategic investors in accordance with Article 7 of the Implementing Rules?

A:        The bringing in of strategic investors by listed companies through the private offering of shares should be understood in light of the following requirements:

1 . Basic Requirements for strategic investors

For the purposes of Article 7 of the Implementing Rules, the term "strategic investor" means an investor that has relatively strong key strategic resources in the same industry as the listed company or a related industry, seeks coordinated and complementary long-term mutual strategic benefits with the listed company, is willing to hold a relatively large proportion of the listed company's shares for a long term, is willing and has the capacity to earnestly perform the attendant duties, appoints directors to actually participate in corporate governance, enhances the listed company's governance level, assists the listed company in markedly enhancing its quality and intrinsic value, has a good integrity record and has not been assessed administrative penalties by the CSRC or been criminally prosecuted during the most recent three years.

A strategic investor shall additionally satisfy one of the following circumstances:

(1)        it can bring into the listed company leading international or domestic core technologies and resources, markedly enhance the listed company's core competitiveness and innovation capabilities, drive the upgrading of the listed company's industrial technology and markedly enhance the listed company's profitability; or

(2)        it can bring into the listed company strategic resources, such as a leading international or domestic market, channels, brands, etc., greatly promote expansion of the listed company's market and promote realization of a major improvement in the listed company's sales performance.

2 . Decision-making Procedure for the Bringing in of strategic investors by a Listed Company

A listed company that proposes to bring in strategic investors shall carry out the appropriate decision-making procedures in accordance with the Company Law, the Securities Law, the Measures, the Tentative Measures and its articles of association.

(1)        The listed company shall execute a legally binding strategic cooperation agreement with the strategic investors and produce a genuinely practicable strategic cooperation arrangement. The strategic cooperation agreement shall mainly include: the advantages possessed by the strategic investors and their synergy with the listed company, the method of cooperation between the parties, the sector in which they are to cooperate and the objective and term of their cooperation, the number of shares the strategic investors propose to subscribe for, the pricing basis, the arrangement for the participation in the listed company's operation and management, the shareholding term and the future divestment arrangement, as well as the liability for failure to perform relevant obligations.

(2)        The board of directors of the listed company shall deliberate on the matter of bringing in the strategic investors as a standalone motion and submit the same to the shareholders' general meeting for deliberation. The independent directors and supervisory board shall issue clear opinions on whether the motion is conducive to protecting the lawful rights and interests of the listed company and the small and medium-sized shareholders.

(3)        When the shareholders' general meeting of the listed company is to pass the resolution on the motion to bring in strategic investors, it shall hold a separate vote on each strategic investor and at least two-thirds of the votes held by the shareholders present at the meeting shall be required to pass. The votes of the small and medium-sized investors shall be counted and disclosed separately.

3 . Requirements in Respect of the Disclosure of Information Relating to the Bringing in of strategic investors by a Listed Company

A listed company shall fully perform its information disclosure obligations in accordance with relevant provisions of the Measures, the Tentative Measures and the Implementing Rules.

(1)        The board motion shall fully disclose the objective of bringing in the strategic investors, the commercial logic thereof, the arrangement for use of the offering proceeds, the basic particulars of the strategic investors, penetrative disclosure of the equity or investor structure, the main provisions of the strategic cooperation agreement, etc.

(2)        Once the private offering of shares is completed, the listed company shall disclose the specific details and effect of the strategic investors' participation in the strategic cooperation in its annual and semi-annual reports.

4 . Requirements in Respect of the Performance by the Sponsor and Securities Service Firms of Their Duties

(1)        The sponsor and the issuer's lawyers shall perform their verification obligations with due diligence and issue a clear opinion on the following matters:

(i)         whether the investors satisfy the requirements for being strategic investors and whether the interests of the listed company and the lawful rights and interests of small and medium-sized investors will be effectively protected;

(ii)        whether the listed company is taking advantage of the strategic investors' acquisition of equity interests to prejudice the lawful rights and interests of small and medium-sized investors; and

(iii)       whether the listed company or its controlling shareholder, de facto controller or major shareholders have given, or in a disguised manner given, the offer targets a minimum guaranteed return undertaking or provided financial assistance or compensation to the offering targets directly or through an interested party.

(2)        The sponsor shall perform its duties during the ongoing supervision and guidance period, continue to keep a close eye on the strategic cooperation between the strategic investors and the listed company, procure the due performance by the listed company and the strategic investors of their relevant obligations under the strategic cooperation agreement and duly leverage the function of strategic investors. If it discovers that the listed company or a strategic investor fails to perform its relevant obligations, it shall report the same to the regulator in a timely manner.

5 . Oversight and Penalties

Where a listed company, strategic investor, sponsor, securities service firm or other relevant party fails to disclose relevant information or perform its duties in accordance with the foregoing requirements, or the information that it discloses contains false records, misleading statements or material omissions, the CSRC will pursue the legal liability of the listed company, the relevant parties and the relevant responsible persons in accordance with the Securities Law, the Measures, the Tentative Measures and other such laws and regulations.

Once these Questions and Answers have been issued, listed companies that have not yet submitted a refinancing application to the CSRC shall handle matters in accordance with the foregoing requirements.