Everton Robertson and Jessica Zhan review the first-ever listing of CDRs on China's Star Market.
Ninebot Limited, an electric scooter producer backed by Xiaomi Corporation recently became the first-ever company to list Chinese Depositary Receipts ("CDRs") on the Shanghai Stock Exchange Science and Technology Innovation Board ("STAR Market"). The ground breaking transaction involved multi-jurisdictional legal advisers covering Cayman Islands and BVI statutes and common law principles, the legal requirements of the People's Republic of China ("PRC"), and, in particular, the rules and regulations under the STAR Market which was essential in getting Ninebot's CDRs listed.
The listing of CDRs follows the publication by the China Securities Regulatory Commission ("CSRC") of rules in June 2018 (as amended) for the listing of CDRs in the PRC on, among others, the STAR Market. The new rules are aimed at allowing for the domestic listing of innovative, high growth enterprises that are incorporated overseas, but carry on their major business activities in China - also known as red chip companies ("red chip").
The new rules reflect a desire on the part of the PRC's Central Government, as set out in the General Office of the State Council's Circular1, to deepen reform of and to open up capital markets; support technology driven and innovative enterprises in launching public offerings; and to facilitate the development and enhancement of the PRC's high-tech and strategic emerging industries. All of this is aimed at driving the continued growth and economic development of the PRC and, consequently, trading in RMB, the official currency of China.
Why is this listing important – segue from ADRs to CDRs?
Mainland Chinese companies, entrepreneurs, financial institutions, state- owned enterprises and investors alike are very familiar with and have made use of Cayman Islands and BVI structures for over 25 years. China has one of the largest science and technology industries in the world often utilising Cayman Islands and BVI structures. At the time of writing, there are approximately 1,084 Cayman Companies (representing over 48% of all listed companies) and 11 BVI companies, respectively, listed on the Hong Kong Stock Exchange ("HKSE").
CDRs are modelled on and similar to financial instruments such as American depositary receipts ("ADRs") which enable investors to purchase the shares of, among others, foreign incorporated companies, including those incorporated in the Cayman Islands and the BVI, through the issuance of 'receipts' that represent the underlying ordinary shares of the listed company. ADRs have been used by red chip, and in particular, Cayman Islands incorporated companies including Alibaba, Baidu, JD.com, Inc, Netease and Pinduoduo.
Similar to ADRs, CDRs are not shares, but depositary 'receipts' representing underlying listed ordinary shares of the company. The depositary ("Depositary") would be the registered holder of the listed ordinary shares whereas the investor holder of the CDRs would hold the corresponding shares that represent the CDRs through the Depositary. Accordingly, the investor would not be the registered holder of the shares nor, directly, would the investor be entitled to exercise shareholder's rights including voting rights that are exercised through the Depositary.
Similar to the listing of ADRs, and now applicable to shares listed on the HKSE, CDRs are structured to afford the issuer company weighted voting rights ("WVR") over certain rights attaching to the unlisted shares being the weighted or additional rights typically held by founding shareholders, except for certain rights that are typically carved out from the WVR regime. The listed shares are unweighted granting the Depositary one vote per share. Consequently, as with listing ADRs in the US, and shares listed on the HKSE, Cayman Islands and BVI companies may no doubt become the vehicle of choice for issuers listing CDRs in China.
Round Trip Structures Coming Full Circle
Historically, science, technology, media and telecom red chip enterprises tended to adopt a variable interest entities ("VIE") structure and would typically be structured through Cayman Islands and BVI companies. Such red chip VIE structures were until now unable to be listed in China. With the listing of the first CDRs in China, such round trip structures, as they are known, have come full circle.
Ninebot's Domestic Offering of CDRs Highlights:
- the first ever foreign company to list CDRs in China - listings like this and other listings on the STAR Market have propelled the Shanghai Stock Exchange to being the second ranked (after NASDAQ) exchange in terms of funds raised during the first half of 20202;
- an important alternative to: (i) a possible restructuring of red chip VIE structures; (ii) a lengthy and expensive privatisation; and (iii) a foreign de-listing and possible re-listing in order to take advantage of a listing in the China market;
- an opportunity for investors to access investment opportunities, onshore, in RMB, should they so wish;
- a further boost in the growth of the China capital markets and in furtherance of the economic development of the PRC; and
- further demonstrates that the Cayman Islands and BVI are the leading foreign jurisdictions in China.
Following the successful first-ever listing of CDRs by Ninebot, this listing has perhaps opened the gateway for red chip enterprises to now seek an onshore listing in China, as an alternative to or perhaps coupled with a dual HKSE listing, through a Cayman Islands or BVI company. A Win win all round.
1. Notice of the General Office of the State Council on Forwarding the Several Opinions of the China Securities Regulatory Commission on Launching the Pilot Program of Innovative Enterprises Domestically Issuing Stocks or Depository Receipts (No. 21  of the General Office of the State Council), effective on 22 March 2018.
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