Legal Requirements for Listing a Foreign-Invested Enterprise in China -

In response to the small number of foreign-invested enterprises ("FIEs") listed on Chinese stock exchanges and the decline of inbound direct foreign investment, the PRC Ministry of Commerce in the summer of 2009 announced that it would formulate policies to encourage FIEs to "go public" in China. Along similar lines, work is progressing on the establishment of an international board at the Shanghai Stock Exchange to facilitate the future issuance of A shares by foreign companies.

So far only a few FIEs organised as a foreign-invested company limited by shares ("FICLS") have been listed on a stock exchange in China.

This article discusses how to establish or convert into a FICLS and also describes the key requirements in order to be listed on a stock exchange in China.

I. Qualification of a FICLS

1. General Requirements

The PRC Company Law and the Provisional Regulations of the Ministry of Foreign Trade and Economic Corporation on Certain Issues Concerning the Establishment of Companies Limited by Shares with Foreign Investment ("FICLS Provisional Regulations") outline requirements for establishing a FICLS and a listed FICLS.

They stipulate a number of general conditions:

conformity with state industrial policies concerning foreign investment;
a minimum registered capital of RMB 30 million, which must be actually paid in and have its total share capital actually registered with the appropriate authority;
foreign shareholders holding at least 25% of the registered capital.

Specific requirements for a FICLS established by means of promotion (i.e., promoters subscribe to all the shares):

conformity with the requirements for promoters as provided in the PRC Company Law (e.g., not less than two and not more than 200, more than half of which must be domiciled in the PRC);
at least one of the promoters must be a foreign shareholder.

Specific requirements for a FICLS established by means of offer (i.e., promoters subscribe to part of the shares and offer the rest to the public):

satisfaction of the conditions for the means of promotion as stated above;
at least one of the promoters has been profitable in each of the three years prior to the offer, which must be supported by financial and accounting reports audited by a certified public account.

2. Conversion to a FICLS

In addition to the incorporation of a FICLS by foreign and Chinese investors, certain forms of a PRC company may convert to a FICLS.

2.1 FIEs Converted to a FICLS

A FICLS is a type of FIE. However, other forms of FIEs, such as the Sino-foreign equity joint venture enterprise, Sino-foreign cooperative/contractual joint venture enterprise and wholly foreign-owned enterprise (all of which usually take the form of a limited liability company), can seek a domestic listing by converting to a FICLS.

The FIE must have been profitable for at least three years prior to application, which is subject to government approval. When converted, any preferential tax treatment period is not recalculated.

2.2 State-owned Enterprise or Collectively-owned Enterprise Converted to a FICLS

A state-owned enterprise or a collectively-owned enterprise may apply to convert to a FICLS provided that the following conditions are satisfied:

conformity with the FICLS Provisional Regulations;
operation for at least five years, the last three of which have been profitable;
at least 25% of the registered capital is purchased by foreign shareholders using free convertible foreign currency;
its business scope complies with industrial policies concerning foreign investment.

2.3 Domestic Stock Company Converted to a FICLS

A domestic stock company fulfilling the following conditions may apply for converting to a FICLS:

conformity with the FICLS Provisional Regulations;
establishment has been officially approved;
at least 25% of the shares of the company are purchased by foreign shareholders using freely convertible foreign currency;
its business scope complies with industrial policies concerning foreign investment.

The subscription of foreign shareholders to a domestic stock company may be realised by means of the issuance of new shares, share transfer or issuance of foreign capital shares listed domestically or offshore.

II. Initial Public Offering ("IPO") and Listing of a FICLS on the Mainland Stock Exchange

1. General Conditions

For an initial public offering and listing of a PRC company on a mainland stock exchange, the following general conditions as stipulated in the PRC Company Law, PRC Securities Law and the Measures for the Administration of Initial Public Offering and Listing of Stocks ("IPO Administration Measures") must be satisfied:

1.1 Qualification of the Company as an Issuer

legally established and lawfully existing;
has been continuously operating for at least three years after its establishment as a company limited by shares, unless otherwise approved by the State Council;
registered capital is fully paid in, procedures for transfer of ownership of the assets contributed as capital by the promoters or shareholders have been completed and ownership of the company's major assets is not in dispute;
compliance of the company's operation with laws, administrative regulations, the company's articles of association and state industrial policy;
no major change of core business, directors or senior officer and no alteration of the actual controller of the company over the last three years;
ownership of the company's shares is not in dispute.

1.2 Independence

The company must have an integrated business system and be capable to operate in the market independently. The assets of the company must be integrated and the company must be independent with regard to personnel, financial affairs, company organs and business.

1.3 Lawful Operation

establishment of relevant organs or posts according to legal provisions, such as shareholders' meeting, board of directors, independent directors, and relevant organs or personnel capable of performing their duties and responsibilities;
qualifications of the directors, supervisors and senior officers comply with laws, administrative regulations and rules, especially those set out in the IPO Administration Measures;
no major irregularity in the past three years, in particular those provided for in the IPO Administration Measures;
no illegal provision of security by the company to its controlling shareholder, actual controller or other enterprises controlled by the controlling shareholder or actual controller;
existence and sound operation of a strict financial management system.

1.4 Financial Affairs and Accounting

The company as a issuer must comply with certain requirements in the IPO Administration Measures on several issues relating to financial affairs and accounting, including asset-liability structure, internal control, affiliated relationship, tax and continuous profitability.

The following specific requirements are particularly notable:

net profit in each of the last three financial years must be positive and, in aggregate, exceed RMB 30 million;
total net cash flow generated from business activities over the last three financial years must exceed RMB 50 million, or total operating revenue over last three financial years must exceed RMB 300 million;
total share capital before the offering must not be less than RMB 30 million;
shares publicly issued must account for more than 25% of total share capital, but only 10% if total share capital exceeds RMB 400 million;
intangible assets (after deduction of land use rights, aquaculture rights and mining rights) must account for less than 20% of all net assets in the latest period;
no uncovered deficit in the latest period; and
no false records in financial statements over the last three years.

1.5 Appropriate and Lawful Use of Funds Raised from IPO and Listing

1.5.1 Special Requirements for a FICLS

According to the Several Opinions Relevant to Foreign Investment in Listed Companies, a FICLS that contemplates an IPO must also satisfy the following requirements:

has passed the joint annual FIE inspections for the three years prior to the application for an IPO;
the business scope complies with relevant regulations concerning foreign investment;
the proportion of shares held by foreign investors must not be less than 10% of the total shares post-IPO; and
if the FICLS is controlled by Chinese parties (according to relevant provisions), or the proportion of shareholding of the Chinese parties is subject to special provisions, the Chinese parties must maintain their controlling position or proportional shareholding after the IPO.

If the foreign capital proportion of a FICLS' total share capital falls below 25% after it is listed in China and issues shares, it must return its FIE approval certificate and carry out the relevant amendment procedures in accordance with legal provisions.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

China: Legal Requirements for Listing a Foreign-Invested Enterprise in China