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Source：CVSource, ZDB Database, Dealogic, CSRC''s website 【作者简介】 刘轶，单位为南开大学。 【注释】Associate Professor of Law at Nankai University (China). I acknowledge the helpful technical assistance provided by China International Capital Corporation Limited, Goldman Sachs GaoHua Securities Company Limited, Zero2IPO Research Center, ChinaVenture Investment Consulting Group, and LexisNexis China. I also thank the editors and staff of the SRLJ for their dedication and assistance improving this article. This article forms part of a research project commissioned by the Ministry of Justice of the People’s Republic of China (PRC) and the China Postdoctoral Research Foundation. Some PRC laws, regulations and rules are only playing a less important supporting role for the analysis of this article, so their Chinese-language weblinks are not included in the citation.Data on the number of overseas IPO by Chinese companies and the total amount of raised capital were obtained and integrated from different sources, including the databases such as CVSource, ZDB Database and Dealogic, and the website of the CSRC at http://www.csrc.gov.cn/pub/newsite/sjtj/ (last visited Dec. 15, 2011). Dennis K. Berman, Congress and SEC Hit Stocks Made in China, WALL ST. J., Dec. 20, 2010. PCAOB, ACTIVITY SUMMARY AND AUDIT IMPLICATIONS FOR REVERSE MERGERS INVOLVING COMPANIES FROM THE CHINA REGION: JANUARY 1, 2007 THROUGH MARCH 31, 2010 (PCAOB Research Note # 2011-P1), available athttp://pcaobus.org/Research/Documents/Chinese_Reverse_Merger_Research_Note.pdf. Investor Bulletin, SEC, REVERSE MERGERS (Jun. 9, 2011), available at http://www.sec.gov/investor/alerts/reversemergers.pdf. MOODY''S INVESTORS SERVICE, RED FLAGS FOR EMERGING-MARKET COMPANIES: A FOCUS ON CHINA (Jul. 11, 2011), available at http://members.zkiz.com/storage/1610/6c2dPBC_134306.pdf. CORNERSTONE RESEARCH, SECURITIES CLASS ACTION FILINGS: 2011 MID-YEAR ASSESSMENT, available at http://securities.stanford.edu/clearinghouse_research/2011_YIR/Cornerstone_ Research_Filings_2011_Mid_Year_Assessment.pdf. PRESS RELEASE, SEC, U.S. AND CHINESE REGULATORS MEET IN BEIJING ON AUDIT OVERSIGHT COOPERATION (Aug. 8, 2011), available at http://www.sec.gov/news/press/2011/2011-164.htm. On the international capital market, the term “red chips” generally refers to the stocks that are traded on overseas stock exchanges and are issued by companies established outside of the PRC Mainland but controlled by legal or natural persons in the PRC Mainland, and those issuing red chips are called red-chip companies. However, there are no strict and uniform definitions to separate these two terms, red chips and-red chip companies. For example, in HKEX’s opinion, a red chip company is a company that has at least 30% of its shares in aggregate held directly by Mainland China entities and/or indirectly through companies controlled by them, with the Mainland China entities being the single largest shareholders in aggregate terms. Alternatively, a company is a red chip company if less than 30% but more than 20% of its shares are held directly and/or indirectly by Mainland China entities and there is a strong influential presence of Mainland China-linked individuals on the company''s board of directors. Mainland China entities include SOEs and entities controlled by Mainland China provincial and municipal authorities. For HKEX’s interpretation of the difference between H-share companies and red chips, see HKEX, Overview of the HKEX Markets (Aug. 31, 2009), available at http://www.hkex.com.hk/chi/global/faq/hkex%20markets_c.htm. Hang Seng Indexes Company Limited (Hang Seng Indexes) considers that a red chip refers to a company with a minimum of 30% of shareholdings held by the Mainland entities (including state-owned organizations, provincial or municipal authorities of the Mainland) and at least 50% of their sales revenue (or profits or assets if more relevant) derived from the Mainland. For the selection criterion of the Hang Seng China-Affiliated Corporations Index, see HANG SENG INDEXES, HANG SENG CHINA-AFFILIATED CORPORATIONS INDEX: OVERVIEW, available at http://www.hsi.com.hk/HSI-Net/HSI-Net. Moreover, there are different versions of definition for grand red-chips and small red-chips. For example, Morgan Stanley Capital International Inc. (MSCI) respectively denote grand red-chips and small red-chips as red chips and P chips when compiling its MSCI China Indices, hence giving rise to MSCI China Red Chip Index and MSCI China P Chip Index. For an overview of MSCI China Indices, see MSCI, MSCI CHINA INDICES, available at http://www.msci.com/products/indices/country_and_regional/domestic_equity_indices/ china/. Reverse merger is broadly used to describe any acquisition of a private operating company by a public shell company that typically results in the owners and management of the private operating company having actual or effective voting and operating control of the combined company. Through a reverse merger transaction, although the public shell company is the surviving entity, the private operating company’s shareholders control the surviving entity or hold shares that are publicly traded. Through a reverse merger transaction, the private company, in effect, becomes a SEC reporting company with registered securities without filing a registration statement under the U.S. Securities Act of 1933 or the U.S. Securities Exchange Act of 1934. As such, listing through reverse merger is usually referred to as back-door listing. See supra note 2, at 1. In Oct. 1992, the 14th National Congress of the Communist Party of China (CPC) set the goal of establishing the system of socialist market economy for economic reform. See CPC, RESOLUTION OF THE 14TH NATIONAL CONGRESS OF THE CHINESE COMMUNIST PARTY ON THE REPORT OF 13TH CENTRAL COMMITTEE OF THE COMMUNIST PARTY OF CHINA (Oct. 18, 1992), available at http://www.gov.cn/test/2008-07/04/content_1036104.htm. In Nov. 1993, the 3rd Plenary Session of 14th Central Committee of the CPC adopted a resolution which specified the above-mentioned objectives and general principles of economic reform. The resolution states that the policy of joint development of multiple economic elements with the economy of public ownership as the main body should be insisted, the operational mechanism of state-owned enterprises should be further transformed, and a modern enterprise system caters for the requirements of market economy, characterized by clearly established ownership, well defined power and responsibility, separation of enterprise from administration, and scientific management, should be established. See CPC, DECISION OF THE CPC CENTRAL COMMITTEE ON CERTAIN ISSUES IN ESTABLISHING A SOCIALIST MARKET ECONOMY SYSTEM (Nov. 14, 1993), available at http://www.people.com.cn/GB/shizheng/1024/2145119.html. A-share market and B-share market are separate on both the SHSE and the SZSE. B shares are subscribed and traded in foreign currencies, with par value denominated in Renminbi (RMB). A shares, officially called RMB ordinary shares, are subscribed and traded in RMB, with par value denominated in RMB. Brilliance Automotive delisted its American Depositary Shares (ADSs) from the NYSE, effectively on Jul. 27, 2007 due to the decline in trading volume of it''s ADSs and the increase in administrative costs to comply with U.S. reporting and registration obligations. Brilliance Automotive is the first China-based company that gave up the listing status on the NYSE. See Peter M. Friedman, China’s Information Control Practices and the Implications for the United States (Jul. 30, 2010) (Testimony before the U.S. China Economic and Security Review Commission (USCC)), available at http://www.uscc.gov/hearings/2010hearings/transcripts/10_06_30_trans/friedman_ testimony.pdf. See the Circular of the General Office of the PRC State Council Concerning the Establishment of the Securities Commission of the PRC State Council (GUOBANFA No. 54) (promulgated by the General Office of the PRC State Council, Oct. 12, 1992, effective as the date of promulgation), available at http://law.lawtime.cn/d611227616321.html. The former SCSC was the competent authority responsible for the unified macro administration of securities markets. Its director was the premier of the PRC State Council and its commissioners comprised the persons-in-charge of 13 relevant departments such as the People’s Bank of China. The CSRC was the executive body under the former SCSC. In Apr. 1998, the former SCSC and the CSRC merged and the latter, being the entity directly under the PRC State Council, is responsible for the centralized and unified regulation of China''s securities and futures markets. For an overview of CSRC’s statutory duties, see the Circular of the General Office of the PRC State Council Concerning the Responsibilities, Internal Departments and Staffing of the China Securities Regulatory Commission (GUOFA No. 5) (promulgated by the General Office of the PRC State Council, Sep. 30, 1992), available at http://www.sse.com.cn/sseportal/dmxh/zhx_new_20030803b.pdf. Promulgated by the PRC State Council on Apr. 22, 1993 and effective as of the date of promulgation, available at http://www.law-lib.com/law/law_view.asp?id=9488. Promulgated by the PRC State Council on Dec. 17, 1992, available at http://www.law-lib.com/law/law_view.asp?id=55541. Promulgated by the former SCSC on Apr. 9, 1993, available at http://www.law-lib.com/law/law_view.asp?id=56006. Published by the CSRC on Feb. 4, 1994, available at http://law.lawtime.cn/d617064622158.html. SCSC Circular, para. 2. Share Issuance and Trading Regulation, Art. 6; SCSC Circular, para. 3. CSRC''s Letter, para. 6. Id., paras. 7-8. See Table 1 annexed to this article. Promulgated by the PRC State Council on Jun. 20, 1997, and effective as of the date of promulgation, available at http://www.law-lib.com/law/law_view.asp?id=65014. Grand Red-chip Circular, paras. 2-3. Id., paras. 1-2. Id., para. 4. Promulgated by the PRC State Council on Feb. 2, 1998, available at http://www.law-lib.com/law/law_view.asp?id=66454. Supra note 21. Adopted at the 5th Meeting of the Standing Committee of the 8th National People’s Congress on Dec. 29, 1993, and effective of Jul. 1, 1994, available at http://www.law-lib.com/law/law_view.asp?id=96136. The PRC Company Law (1993) was revised subsequently in 2004 and 2005. The PRC Company Law (2005 Revision) is currently effective, available at http://www.law-lib.com/law/law_view.asp?id=102906. Promulgated by the PRC State Council on Aug. 4, 1994 and effective as of the date of promulgation, available at http://www.law-lib.com/law/law_view.asp?id=10621. These regulatory documents include: (i) Mandatory Provisions for Articles of Association of Companies to be Listed Overseas (ZHENGWEIFA No. 21) (jointly promulgated by the former SCSC and the abolished PRC State Commission for Restructuring the Economic System on Aug. 27, 1994, and effective as of the date of promulgation); (ii) Circular on Issues Relating to Domestic Enterprises’ Applications for Overseas Listing (ZHENGJIANFAXINGZI No. 83, hereinafter the Circular on Direct Overseas Listing) (promulgated by the CSRC on Jul. 14, 1999); (iii) Guidelines on the Vetting and Regulation of Applications for Listing on the Hong Kong GEM by Domestic Enterprises (ZHENGJIANFAXINGZI No. 126, hereinafter the Guidelines for Listing on the Hong Kong GEM) (approved by the PRC State Council on Sep. 6, 1999, promulgated by the CSRC on Sep. 21, 1999); (iv) Notice on Issues Relating to the Foreign Exchange Regulation for Enterprises Listed Overseas (ZHENGJIANFAZI No. 8) (jointly issued by the CSRC and the PRC State Administration of Foreign Exchange (SAFE) on Jan. 13, 1994); (v) Several Opinions on the Further and Proper Handling of Information Disclosure Work by Companies Listed Overseas (ZHENGJIANFA No. 18) (issued by the CSRC on Mar. 26, 1999); (vi) Opinions on Further Promoting the Regulated Operation and Intensive Reform of Companies Listed Overseas (GUOJINGMAOQIGAI No. 230) (jointly issued by the abolished PRC State Economic and Trade Commission and the CSRC on Mar. 29, 1999); and (vii) Guidelines for Secretaries of the Boards of Directors of Companies Listed Overseas (ZHENGJIANFAXINGZI No. 39) (issued by the CSRC on Apr. 8, 1999). At that time, the regulatory documents concerning overseas direct investment included but not limited to the Tentative Rules for the Approval and Regulation Concerning the Establishment of Non-trade Enterprise Abroad (promulgated by the former MOFERT on Mar. 23, 1993) (repealed). The regulatory documents concerning foreign direct investment included but not limited to the following: (i) PRC Law on Chinese-Foreign Equity Joint Ventures (1990 revision) (adopted by the 2nd Session of the 5th National People’s Congress on Jul. 1, 1979, promulgated on Jul. 9, 1979 and revised on Apr. 4, 1990 and on Mar. 15, 2001 respectively); (ii) PRC Law on Chinese-foreign Contractual Joint Ventures (1988) (adopted at the 1st Session of the 7th National People’s Congress, promulgated on Apr. 13, 1988, and effective as of the date of promulgation); (iii) PRC Law on Foreign-capital Enterprises (1986) (adopted at the 4th Session of the 6th National People’s Congress on Apr. 12, 1986, revised on Oct. 31, 2000); and (iv) the implementing regulations enacted by the PRC State Council under the above-mentioned laws. The regulatory documents concerning the foreign exchange involved in direct investment abroad and in foreign indirect investment included but not limited to the following: (i) Measures for the Administration of the Foreign Exchange Involved in Investment Abroad (1989) (approved by the PRC State Council on Feb. 5, 1989, promulgated by the SAFE on Mar. 6, 1989) (repealed); (ii) Implementing Rules for “Measures for the Administration of the Foreign Exchange Involved in Investment Abroad (1989)”(1990) (promulgated by the SAFE on Jun. 26, 1990) (repealed); and (iii) Tentative Rules for the Foreign Exchange Registration of Foreign-funded Enterprises (1996) (promulgated by the SAFE on Jun. 28, 1996). Before 1993, the competent authority under the PRC State Council was the former Ministry of Foreign Economic Relations and Trade (MOFERT). It was decided in Mar. 1993 at the 1st Session of the 8th National People’s Congress that the former MOFTEC be renamed as the former Ministry of Foreign Trade and Economic Cooperation (MOFTEC). In Mar. 2003, the 1st Session of the 10th National People’s Congress decided to establish the Ministry of Commerce (MOFCOM), replacing the MOFTEC. For an overview of MOFCOM’s history, see MOFCOM, THE HISTORY, available at http://english.mofcom.gov.cn/history.shtml. Adopted at the 6th Meeting of the Standing Committee of the 9th National People’s Congress on Dec. 29, 1998, and effective of Jul. 1, 1999, available at http://www.law-lib.com/law/law_view.asp?id=86449. The PRC Securities Law (1998) was revised subsequently in 2004 and 2005. The PRC Securities Law (2005 Revision) is currently effective, available at http://www.law-lib.com/law/law_view.asp?id=102905. Current Art. 238 of the PRC Securities Law (2005 Revision). In Dec. 2009, Qiao Xing Universal Telephone, Inc. was renamed as Qiao Xing Universal Resources, Inc. On Jul. 7, 2009, Yuxing InfoTec was renamed as Yuxing InfoTech Investment Holdings Limited. For a detailed introduction of Yuxing InfoTec''s pre-IPO reorganization, see Yuxing InfoTec''s 1999 IPO prospectus, pp. 37-38, available at http://www.hkexnews.hk/newlistings/prospectuses/e_8005pro-20000125chap03.pdf. See CERTIFICATE OF APPROVAL, CSRC, CERTIFICATE OF APPROVAL ISSUED BY THE CHINA SECURITIES REGULATORY COMMISSION ON THE LISTING OF SHARES ON THE GROWTH ENTERPRISE MARKET OF THE HONG KONG STOCK EXCHANGE BY GOLDEN YUXING ELECTRONICS AND TECHNOLOGY COMPANY LIMITED AFTER ITS REORGANIZATION (ZHENGJIANHAN No. 12), CSRC BULLETIN, Iss. 1, 2000, p. 25. See PRESS RELEASE, CSRC, THE LEGAL DEPARTMENT OF THE CHINA SECURITIES REGULATORY COMMISSION PUBLICLY CRITICIZES BEIJING JINGTIAN LAWYERS'' OFFICE AND RELATED CERTIFIED LAWYER, CSRC BULLETIN, Iss. 2, 2000, p. 22. Promulgated on Jun. 9, 2000, and effective as the date of promulgation, available at http://www.law-lib.com/law/law_view.asp?id=72094. Small Red-chip Circular, Art. 1. Id., Arts. 2-3. Promulgated on Aug. 27, 2003 and effective as of Jul. 1, 2004, available at http://www.law-lib.com/law/law_view.asp?id=79264. Under China’s legislative system, an administrative license may be established by means of laws (adopted either by the PRC National People''s Congress or the PRC Standing Committee of the National People''s Congress) or administrative regulations (enacted by the PRC State Council). See the PRC Administrative License Law (2003), Chpt. II (The Establishment of an Administrative License). The Small Red-chip Circular instituted by the CSRC exists at a lower level than laws and administrative regulations, and thus is not legally qualified to establish an administrative license item. It is worth noting that the reply with regard to indirect overseas listing of Yuxing InfoTec was the only one issued in the name of the CSRC, in which it was stated that “the CSRC gives consent to Yuxing InfoTec Holdings Limited’s intent to apply to issue shares and be listed as Yuxing InfoTec incorporated in Bermuda on Hong Kong GEM after finishing its restructuring.” However, this reply was not sent to Yuxing InfoTec, Beijing Golden Yuxing Electronics and Technology Company Limited, or the related domestic law firm, but to the sponsor of Yuxing InfoTec’s overseas IPO. See CERTIFICATE OF APPROVAL, CSRC, CERTIFICATE OF APPROVAL ISSUED BY THE CHINA SECURITIES REGULATORY COMMISSION ON THE LISTING OF SHARES ON THE GROWTH ENTERPRISE MARKET OF THE HONG KONG STOCK EXCHANGE BY GOLDEN YUXING ELECTRONICS AND TECHNOLOGY COMPANY LIMITED AFTER ITS REORGANIZATION (ZHENGJIANHAN No. 12), CSRC BULLETIN, Iss. 1, 2000, p. 25. See staff reporter, Euro-Asia Sponsor not Entirely to Blame, THE STANDARD, Oct. 16, 2002. Euro-Asia Holdings was incorporated in Bermuda and its beneficiary owner was Mr. Yangbin, a Chinese-Dutch businessman. Euro-Asia Holdings’ main business covered flower-growing and real estate development in the Mainland China. The CSRC issued the no-action letter concerning Euro-Asia Holdings’ indirect overseas listing on Jun. 12, 2001. Then, Euro-Asia Holdings finished its IPO and began to be listed on the HKEX from Jul. 19, 2000. Euro-Asia Holdings'' sponsor and auditor for its share listing in Hong Kong were ICEA Capital Limited and former Arthur Andersen & Co. Euro-Asia Holdings was selected by Forbes magazine as one of the best 200 small companies in Oct. 2001. Since Jun. 2001, the stocks of Euro-Asia Holdings have been suspended repeatedly due to suspicion of providing false financial information in its IPO prospectus and failure to accurately disclose information about shareholders’ reduction of holdings in a timely manner. Hong Kong securities regulators also conducted inspection on the company and ICEA Capital Limited. On May 10, 2004, the Supreme Court of Hong Kong ordered the liquidation of Euro-Asia Holdings, and the company’s listing on HKEX was terminated on May 20, 2004. On Jan. 27, 2005, ICEAC paid HK$30 million to settle with the SFC for not exercising “due skill, care and diligence in the course of performing its duties as the sponsor for the listing of Euro Asia Agricultural (Holdings) Company Limited.” See PRESS RELEASE, SFC, ICEAC PAYS HK$30 MILLION TO SETTLE SFC DISCIPLINARY CASE (Jan. 27, 2005), available at http://www.sfc.hk/sfcPressRelease/EN/sfcOpenDocServlet?docno=05PR17. Previously, the local court of Shenyang, China provided a judgment on Jul. 14, 2003 that sentenced Mr. Yangbin eighteen years in prison and imposed a fine of RMB2.3 million for plural crimes including misstating of registered capital and unlawful occupation of farmland. See SHENYANG INTERMEDIATE COURT OF THE PRC, CRIMINAL JUDGMENT OF THE SHENYANG INTERMEDIATE COURT ( SHENXING''ERCHUZI No. 70), available at http://syzy.chinacourt.org/public/detail.php?id=964.The Higher Court of Liaoning Province of the PRC ruled on Sep. 7, 2003 that Mr. Yangbin’s appeal was dismissed and the original judgment was sustained. See anonymous reporter, The Final Ruling of Yangbin Case, PEOPLE''S COURT DAILY OF CHINA, Sep. 8, 2003. See CSRC, NOTICE ON CANCELING SOME ADMINISTRATIVE LICENSE ITEMS (PHRASE II) AND ADJUSTING THE REGULATORY MEASURES UNDER SOME ADMINISTRATIVE LICENSE ITEMS, Apr. 1, 2003, CSRC BULLETIN, Iss. 4, 2003, pp. 22-24. These no-action letters are available from the CSRC BULLETIN, Iss. 1, 2000, p. 25; Iss. 7, 2002, pp. 44-124; Iss. 8, 2002, pp. 25-67; Iss. 12, 2002, pp. 68-82. See also supra note 21. According to China’s foreign capital utilization policies, the telecommunication industry has always been closed to foreign investment. For example, Art. 6 of the Provisional Measure for Releasing Approval of Engaging in Telecommunication Operation (issued by the former Ministry of Posts and Telecommunications on Sep. 11, 1993, effective from Nov. 1, 1993, already invalidated) stipulates that "overseas institutions and individuals as well as the wholly foreign-owned companies, Sino-foreign joint ventures or cooperative companies within the borders of the PRC are not allowed to invest in, operate or participate in the operation of telecommunication business." Moreover, in each version of the Catalogue for the Guidance of Foreign Investment Industries published by the competent authority under the PRC State Council, “OPERATION AND MANAGEMENT OF TELECOMMUNICATION BUSINESS” was listed in the “CATALOGUE OF PROHIBITED FOREIGN INVESTMENT INDUSTRIES”. However, the competent authorities under the PRC State Council do not suspect the VIE model of evading China’s regulation of foreign capital utilization. For example, the former PRC Ministry of Information Industry (current the PRC Ministry of Industry and Information Technology) issued the Circular Regarding Further Strengthening the Review and Licensing of Internet Information Services and Internet Bulletin Board Services (XINBUDIAN No. 166) on Mar. 27, 2001, stipulating that “foreign capital is prohibited from operating telecommunication businesses including internet content provider (ICP) business, and the websites involving foreign investment can apply for operation permit after stripping off the foreign capital; there are two applicable means for stripping off foreign capital: (i) the foreign-held equity interest in a website is entirely removed or transferred to a Chinese shareholder, and (ii) the assets, employees, domain name, brand, operation right and customer relationships related to ICP business are transferred to a pure Chinese-invested company that is separately established to independently operate the ICP business; the former company involving foreign investment is no longer allowed to operate the website, but can include the Chinese-invested company into its client base and cooperate with it in areas like technical services.” In this sense, it is possible that the Chinese government recognized the VIE model as valid for the purpose of appropriately and effectively controlling the opening of telecommunication business in some particular areas. See, e.g., the Provisions on the Approval and Regulation of Running Non-trade Enterprises Abroad (promulgated by the former MOFERT on Mar. 23, 1993, and effective as the date of promulgation) (repealed), Art. 2; Provisions on the Examination and Approval of Investment to Run Enterprises Abroad (promulgated by the MOFCOM on Oct. 1, 2004, and effective as the date of promulgation), Art. 3. These regulatory documents include: (i) Circular on Issues Relating to the Further Improvement of Foreign Exchange Regulation of Overseas Listing (HUIFA No. 77) (jointly issued by the SAFE and the CSRC on Aug. 5, 2002); (ii) Circular of the Capital Account Management Department under the State Administration of Foreign Exchange on Strengthening the Administration of Foreign Exchange Related to Overseas Listing (HUIZIHAN No. 29) (issued by the SAFE''s Department of Capital Account Administration on Sep. 9, 2002); (iii) Circular on Strengthening the Administration of Foreign Exchange Related to Overseas Listing (HUIFA No. 108) (issued by the SAFE on Sep. 9, 2003); and (iv) Circular on the Administration of Foreign Exchange Related to Overseas Listing (HUIFA No. 6) (issued by the SAFE on Feb. 1, 2005). Promulgated on Mar. 7, 2003 and effective as of Apr. 12, 2003, available at http://www.law-lib.com/law/law_view.asp?id=42949. Provisions on Mergers and Acquisition (2003), Art. 12. Id., Art. 6. Id., Arts. 8 and 9.5. In 2004, a research report published by Chinese Academy of International Trade and Economic Cooperation (CAITEC) under the PRC Ministry of Commerce triggered wide repercussions. That report points out that the lifted position of off-shore financial centers in China’s cross-border capital flows has some positive implications, but also brings about considerable negative influences: (i) providing corrupt officials and unscrupulous businessmen with means of seizing state-owned assets and public wealth; (ii) pushing the size of capital flight to further swell up, hence causing significant pressures on arrangement of Renminbi exchange rate and implementation of monetary policies; (iii) inducing potential dispute over investment; (iv) making convenience for corporate fraud; and (v) transferring the financial risks. See CAITEC, ISSUES OF CROSS-BORDER CAPITAL FLOW BETWEEN CHINA AND OFF-SHORE FINANCIAL CENTERS, in CAITEC eds., BLUE PAPER ON CHINA''S FOREIGN TRADE AND ECONOMIC RELATIONS (2004), CHINA COMMERCE AND TRADE PRESS, 2004, pp. 385-416. Promulgated by the SAFE on Mar. 6, 1989 and effective as of the date of promulgation. It is stipulated that the companies, enterprises or other business organizations registered in the PRC Mainland should apply for examination by foreign exchange administration on foreign exchange investment risks and sources of funds denominated in foreign currency, and complete related procedures including but not limited to registration, before they are allowed to establish any type of enterprises abroad, or purchase equity or acquire holdings in a foreign company and carry out production or operation activities upon the resulting position. See the Foreign Exchange Control Provisions, Arts. 2-4. Before the No. 11 Foreign Exchange Administration Circular, there was no foreign exchange regulation regarding the overseas investment by natural person residents in China. Therefore, a Chinese citizen who wishes to invest abroad does not have to go through any procedure of foreign exchange registration or ratification. A “domestic resident legal person” shall refer to an enterprise or public institution or other economic organization legally established in the PRC Mainland; while a “domestic resident natural person” shall refer to a natural person who holds a PRC resident identity card, a passport or other lawful identity certificate, or a natural person who has no PRC identity but habitually resides inside the PRC Mainland due to reasons of economic interests. See the No. 75 Foreign Exchange Administration Circular, Section I. An “SPV” shall refer to an overseas enterprise directly established or indirectly controlled by a domestic resident legal person or domestic resident natural person for the purpose of engaging in equity financing (including convertible bond financing) abroad with the enterprise assets or interests it/he holds in the PRC Mainland. “Round-tripping investment” shall refer to the direct investment activities carried out in the PRC Mainland by a domestic resident via an SPV, including but not limited to the following ways: acquisition or exchange of the equity rights of the Chinese party to a domestic enterprise, establishment of a foreign-funded enterprise in the PRC Mainland and acquisition or agreement-based control of assets in the PRC Mainland via this enterprise, agreement-based acquisition of assets in the PRC Mainland and investment with the acquired assets to establish a foreign-funded enterprise, and increase capital to a domestic enterprise. “Control” shall refer to the behavior that a domestic resident obtains the rights to carry out business operation of, to gain proceeds from or to make decisions on a special purpose company or a domestic enterprise by means of acquisition, trusteeship, holding shares on behalf of others, voting rights, repurchase, convertible bonds, etc. See the No. 75 Foreign Exchange Administration Circular, Section I. These major capital alterations may include the situations such as capital increase or decrease, equity transfer or swap, merger or split of companies, long-term equity or credit investment, and guaranties to other parties. See the No. 75 Foreign Exchange Administration Circular, Section 7. This regulatory document is entitled Circular of the SAFE''s Department of General Affaires on the Implementing Rules of the ‘Circular on Further Strengthening the Administration of Foreign Debts’ and the ‘Circular on Relevant Issues Concerning Foreign Exchange Administration for Domestic Residents to Engage in Financing and in Round-tripping Investment via Overseas Special Purpose Vehicles’ (HUIZONGFA No. 124, hereinafter the Implementing Rules on Foreign Exchange Administration (2005)). The provisions related to the No. 75 Foreign Exchange Administration Circular in the Implementing Rules for Foreign Exchange Administration (2005) is effective as the date of promulgation. See Li Shoushuang et al., Red-chip Listing Game, CUPL PRESS, 2011, p. 46. After its coming into effect, the Provisions on Mergers and Acquisition (2006) was promulgated again on Jun. 22, 2009, with a revision made by the MOFCOM, where there was no material change in the provisions except for some modification in the stipulations on anti-monopoly review. Therefore, the catalogue numbers of the original document were used in this article when citing related provisions from the Provisions on Mergers and Acquisition (2006). Provisions on Mergers and Acquisition (2006), Art. 42. Id., Arts. 10, 21 and 27-38. Provisions on Mergers and Acquisition (2006), Arts. 45-48. For example, CPMC Holdings Limited (HK: 0906, hereinafter CPMC) accomplished its IPO and was listed on the HKEX in Nov., 2009. CPMC’s beneficial owner, COFCOA Corporation, is one of the central SOEs supervised by the PRC SASAC. According to the IPO prospectus of CPMC, its overseas listing obtained the approvals from Chinese competent authorities including the CSRC, and the legal basis of these approvals includes but is not limited to the Grand Red-Chip Circular and the Provisions on Mergers and Acquisition (2006). See CPMC’s 2009 IPO prospectus (English version), p.27, available at http://www.hkexnews.hk/listedco/listconews/sehk/2009/1102/LTN20091102004.pdf. The list was originally published on the column of “ADMINISTRATIVE PERMISSION” on CSRC''s website. However, it was deleted before long and has not been re-published since then. Implementing Rules on Foreign Exchange Administration (2007), Annex I, Column “KEY POINTS FOR VETTING”, para. 2, and Column “MATTERS NEED ATTENTION”, paras. 1 and 2. Id., Annex IV, Column "MATTERS NEED ATTENTION", para. 2. It is worth to note that, on May 27, 2011, the SAFE issued the Circular of the State Administration of Foreign Exchange on the Implementing Rules of the “Circular on Relevant Issues Concerning Foreign Exchange Administration for Domestic Residents to Engage in Financing and in Round-tripping Investment via Overseas Special Purpose Vehicles” (HUIFA No. 19, hereinafter the Implementing Rules on Foreign Exchange Administration (2011)) which came into force on Jul. 1, 2011. Compared to the Implementing Rules on Foreign Exchange Administration (2007), the Implementing Rules on Foreign Exchange Administration (2011) simplifies the procedures of foreign exchange registration related to domestic natural person residents and repealed the time limit of continuing operation for overseas SPVs and related domestic enterprises. See the Macro-control Circular, Section IV (stating that “the overseas issuance and listing of shares by selected enterprises must be arranged and approved by the State Council Securities Commission”). Promulgated by the CSRC on May 17, 2006 and effective as of May 18, 2006, available at http://www.gov.cn/flfg/2006-05/18/content_283660.htm. The HKEX is the main target market for Chinese enterprises'' overseas listing. According to the main board listing qualification rules of the HKEX, an issuer must satisfy one of the following tests: (i) profit test: a trading record of not less than three financial years during which the profit attributable to shareholders must, in respect of the most recent year, be not less than HKD 20 million; in respect of the two preceding years, be in aggregate not less than HKD 30 million; and a market capitalization of at least HKD 2 billion at the time of listing; (ii) market capitalization/revenue/cash flow test: a trading record of not less than three financial years; a market capitalization of at least HKD 2 billion at the time of listing; revenue of at least HKD 500 million for the most recent audited financial year; and positive cash flow from operating activities carried out by the new applicant, or its group, that are to be listed of at least HKD 100 million in aggregate for the three preceding financial years; (iii) market capitalization/revenue test: a trading record of at least three financial years; a market capitalization of at least HKD 4 billion at the time of listing; and revenue of at least HKD 500 million for the most recent audited financial year. See HKEX, RULES GOVERNING THE LISTING OF SECURITIES ON THE STOCK EXCHANGE OF HONG KONG LIMITED, Chap. 8, available at http://www.hkex.com.hk/eng/rulesreg/listrules/mbrules/documents/chapter_8.pdf. On Dec. 31, 2005, the CSRC promulgated the Tentative Regulatory Rules for Equity Incentive of Listing Companies (ZHENGJIANGONGSIZI No. 151) which came into force on Jan. 1, 2006. Under these rules, listing companies may establish equity incentive plan by means of stock options, restricted stocks or otherwise. For a deep analysis of the loopholes of China''s regulation of direct overseas listing, see my paper, Direct Overseas Listing of Chinese Enterprises: A Clear Regulatory Framework and Explicit Regulatory Requirements are Needed, 3 JOURNAL OF SECURITIES OPERATIONS & CUSTODY 252, 252-267 (2010). Upon the ratification of the PRC State Council, the CSRC issued the Circular on Piloting the Reform of Listing Companies'' Equity Division, which marks the beginning of the reform of listing companies’ equity division. See CSRC, CSRC ANNUAL REPORT (2007), CHINA FINANCIAL AND ECONOMIC PUBLISHING HOUSE, 2008, p. 56. See Erica Fung, Regulatory Competition in International Capital Markets: Evidence from China in 2004-2005, 3 NYU J. OF L. & BUS. 243, 243-299. See also Qi Bin et al., An Analysis of the Competition for China''s Potential Listing Resources from Foreign Stock Exchanges, SHANGHAI SECURITIES NEWS, Feb. 9, 2007. See SAFE, ANNUAL REPORT OF CHINA’S FOREIGN EXCHANGE ADMINISTRATION (2009), p. 67, available at http://www.safe.gov.cn/model_safe/news/ts_detail.jsp?ID=20500000000000000,97. See Yuan Cheng, Listing Overseas: What is the Real Scope of the CSRC Circular?, CHINA LAW & PRACTICE 26, Sep. 2000, 26-27. One example relates to the HKEX listing company BYD Electronic (International) Co., Ltd. (HK: 0285, hereinafter BYD International). The CSRC issued the approval on BYD International''s overseas issuance and listing on Nov. 14, 2007. BYD International seems to be a small red-chip company, as the beneficial owner of BYD International and its controlling shareholder, BYD Co., Ltd.(HK: 1211), is Mr. Wang Chuanfu, and BYD International carries its business mainly through its subsidiaries in the PRC Mainland. However, the CSRC made the above-mentioned approval with reference to the Grand Red-chip Circular. See CERTIFICATE OF APPROVAL, CSRC, CERTIFICATE OF APPROVAL ISSUED BY THE CHINA SECURITIES REGULATORY COMMISSION ON THE LISTING OF SHARES ON THE HONG KONG STOCK EXCHANGE BY THE RELEVANT OVERSEAS SUBSIDIARY OF BYD CO., LTD. (ZHENGJIANGUOHEZI No. 36), CSRC BULLETIN, Iss. 11, 2007, p. 75. See also BYD International''s 2007 IPO Prospectus (English version), p. 35, available at http://www.hkexnews.hk/listedco/listconews/sehk/2007/1207/LTN20071207001.pdf. Provisions on Mergers and Acquisition (2006), Art. 2. Published by the MOFCOM''s Department of Foreign Investment Administration on Dec. 23, 2008, available at http://wzs.mofcom.gov.cn/accessory/200812/1230176759039.doc. Provisions on Mergers and Acquisition (2006), Art. 55.2; Foreign Investment Handbook, p. 68. Those relevant rules on the alteration of investors'' equity in foreign-invested enterprises include but not limited to the following: (i) Provisions on the Alteration of Investors’ Equity in Foreign-invested Enterprises (jointly promulgated by the former MOFTEC and the SAIC on May 28, 1997, and effective as of the date of promulgation); (ii) Tentative Rules on Investment within China by Foreign Investment Enterprises (jointly promulgated by the former MOFTEC and the SAIC on Jul. 25, 2000, and effective as of Sep. 1, 2000); (iii) Provisions on the Merger and Division of Foreign-invested Enterprises (jointly promulgated by the former MOFTEC and the SAIC on Sep. 23, 1999, effective as of Sep. 1, 2000, and re-promulgated on Nov. 22, 2011 after revision). Ed Sun, Still Waiting for Regulation 10, 27 INTERNATIONAL FINANCIAL LAW REVIEW 20, Iss. 9, 2008, p. 21. Circular on Direct Overseas Listing, Part I, Section III. Id., Part I, Section II; Provisions on Mergers and Acquisition (2006), Art. 4. Provisions on Mergers and Acquisition (2006), Art. 11; Foreign Investment Handbook, pp. 68-70. The approvals from the CSRC for grand red-chip listing are available from the relevant issues of the CSRC BULLETIN. The origin of this policy may be traced to the Grand Red-chip Circular. It is emphasized in the Grand Red-chip Circular that “raising capital from overseas securities market by domestic enterprises shall take direct overseas listing of shares as the main form.” See the Grand Red-chip Circular, para. 6. However, no similar statement has appeared after the Grand Red-chip Circular. After the Provisions on Mergers and Acquisition (2006) were implemented, China’s policy guidance for domestic enterprises’ overseas listing has become somewhat unpredictable. For example, the attitude of the PRC State Council toward the use of foreign capital is to “continue to support eligible enterprises’ listing and issuance of shares abroad in accordance with China’s development strategy and their own development needs, in order to well exploit the overseas capital market and resources to continuously promote competitiveness.” See PRC STATE COUNCIL, SOME OPINIONS OF THE PRC STATE COUNCIL ON STRENGTHENING THE ADMINISTRATION OF UTILIZING FOREIGN INVESTMENT (GUOFA No. 9), Part III (REALIZING DIVERSIFICATION OF THE METHODS OF UTILIZING FOREIGN INVESTMENTS), PRC STATE COUNCIL BULLETIN, Iss. 12, 2010, pp. 9-11. Nevertheless, the above policy guidance should be indeed in place according to other related documents and reports. For example, as the outcome of the Third China-UK Economic and Financial Dialogue held in Nov., 2010, “both sides reiterate their support for qualified Chinese companies, including listed companies, to list in London through the issuance of shares or overseas depositary receipts.” See HM TREASURY, COMBINED POLICY OUTCOMES OF THE THIRD CHINA-UK ECONOMIC AND FINANCIAL DIALOGUE, Section IV (FINANCIAL SECTOR DEVELOPMENT AND REGULATION), para. 27, available at www.hm-treasury.gov.uk/chx_asia_efd_outcomes_091110.htm>. Strictly speaking, the above-mentioned “Chinese companies” should refer to joint-stock limited companies established in the PRC Mainland, not including the red-chip companies. For another example, on the Third China Enterprises International Financing Fair held in Shenzhen, China, in Jun. 2009, some official in charge of the MOFCOM''s Department of Foreign Investment Administration said that the MOFCOM encourages the premium domestic enterprises to be listed in China securities market, but in the case that the domestic securities market runs out of room for listing, the form of direct overseas listing is also encouraged. See Ye Yong et al., MOFCOM Plans to Improve Regulation 10 to Encourage Direct Overseas Listing, SHANGHAI SECURITIES NEWS, Jun. 11, 2009. For an analysis of the defects and inadequacies, and the prospect of China’s regulation of direct overseas listing, see my paper, Direct Overseas Listing of Chinese Enterprises: A Clear Regulatory Framework and Explicit Regulatory Requirements are Needed, 3 JOURNAL OF SECURITIES OPERATIONS & CUSTODY 252, 252-267 (2010). |
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