Research on Legal Issues of Domestic Listing of Unlisted Red Chip Structure Enterprises

Abstract:With the development and improvement of China's capital market, some of the unlisted enterprises that have built a red-chip structure will shift their listing locations to the domestic capital market, and the domestic listing of red-chip structure enterprises must clean up the red-chip structure. The purpose of this paper is to discuss the legal issues of domestic listing of unlisted red-chip structure enterprises, so as to contribute to the operation of domestic listing of unlisted red-chip structure enterprises.

Key words:Red Chip Framework Domestic Listing Law

In the case that the domestic capital market is not perfect, especially when the gem has not yet been launched, some small and medium-sized enterprises are in urgent financing needs, turning their attention to the overseas capital market and building a red chip framework for planning overseas listing. With the development and improvement of China's capital market, some enterprises that have set up overseas listed red-chip structures but have not yet been listed have chosen to return to the domestic capital market. at present, more than a dozen red-chip enterprises have successfully landed in the domestic capital market.

The trend of domestic listing of unlisted red-chip structured companies in 1..

Since 2009, the rapid development of small and medium-sized boards and gem in China's domestic capital market has attracted people's attention. Since 2009, the small and medium-sized board composite index of Shenzhen Stock Exchange has repeatedly set new highs, reaching a record high of 8017.67 points in November 2010. From its 1959.13 low in October 2008 to its all-time high in November 2010, the small and medium-sized composite index rose 309.2 per cent in more than two years.

From the gem, which opened on October 30, 2009 to May 31, 2011, more than 230 companies have been successfully listed, and the issuance price-earnings ratio of more than 60 times on the gem has created one after another millionaires of 100 million yuan or even 1 billion yuan. The myth of Shenzhou Taiyue's stock price soaring for half a year is vivid. High market earnings and high share price rates have attracted a number of high-growth companies scrambling to land on the GEM.

The high price-to-earnings ratio of small and medium-sized boards and gem in the domestic capital market, as well as the frequently doubled stock price trend, have become important considerations to attract red-chip enterprises to re-choose the listing location. more and more red-chip enterprises choose to dismantle the red-chip structure that has been built or is in the process of being built, and domestic entity companies will be listed directly in the country.

As of December 31, 2010, more than a dozen red-chip framework companies, such as Hai Communications, Delis, Yuheng Pharmaceutical, Qixing Chen, 263 and Sunflower, have been successfully listed in China. The successful landing of red-chip framework companies in the domestic capital market undoubtedly provides experience and motivation for latecomers.

2. Red Chip Architecture Basic Model and Red Chip Architecture Cleanup

The basic model of (I) red-chip architecture.

The "red-chip structure" is generally considered to be the structure in which the actual controller of a domestic enterprise registers a special purpose company abroad, and the special purpose company controls the rights and interests of domestic enterprises through mergers and acquisitions or agreements to achieve overseas listing.

At present, most of the red-chip structure companies that have successfully returned to the domestic capital market are equity control models, while the agreement control model red-chip companies are relatively few. Because the protocol control model is usually more common in the Internet, education industry, the Internet, education industry overseas listing has a unique advantage. For the Internet industry, most companies choose to list on the Nasdaq Stock Exchange in the United States. Internet companies are often difficult to make profits at the initial stage of their establishment. The Nasdaq Stock Exchange in the United States does not require companies to make profits when they are listed, and Chinese Internet companies In the United States, Nasdaq can often achieve a higher price-earnings ratio, and Chinese Internet companies often prefer overseas listings. For the education industry, due to the restrictions on the profitability of the private education industry in China, it is often difficult for the education industry to be listed in China. Therefore, the education industry often goes overseas through the agreement control mode.

1. Equity control model

The equity control model is the most common form of red-chip architecture. Except for the fact that domestic enterprises cannot be controlled through equity due to national laws and policies, most red-chip companies adopt the equity control mode. The basic structure of the equity control mode is as follows: domestic enterprises (or shareholders of domestic enterprises) set up special purpose companies abroad; The special purpose company returns to invest in mergers and acquisitions of domestic enterprises in China; Apply for overseas listing in the name of overseas special purpose company.

Taking Shandong Delis Food Co., Ltd. (hereinafter referred to as "Delis"), which is currently listed in China, as an example, its red chip structure construction and clean-up process is as follows:

Delis predecessor Shandong Delis Food Technology Co., Ltd. (hereinafter referred to as "Delis Co., Ltd.") is a Sino-foreign joint venture established on June 20, 2003 by Shandong Delis Agricultural Technology Co., Ltd. (hereinafter referred to as "Agricultural Technology") and Dongshun International Investment Enterprise Co., Ltd. (hereinafter referred to as "Dongshun International") with a registered capital of US $10 million. In 2004, Delis Limited planned to go public in Singapore. According to the listing plan at that time, Delis Holding Company registered in Singapore was the main body of listing in Singapore. On April 26, 2004, Agricultural Science and Technology and Dongshun International signed the Equity Transfer Agreement with Delis Holdings, which is registered in Singapore, to transfer 75% and 25% of their shares in the limited company to Delis Holdings. Upon completion of the share transfer, Delis Holdings holds a 100 percent stake in Delis Limited.

In 2005, Delis Limited abandoned the Singapore listing and gradually restored the shareholding structure before the proposed Singapore listing. On April 17, 2005, Delis Holdings signed an Equity Transfer Agreement with Panghai Holdings to transfer 100 per cent of its equity interest in Delis Limited to Panghai Holdings at a price of US $1 through negotiation between the two parties. On April 17, 2005, Delis Holdings signed an Equity Transfer Agreement with Panghai Holdings to transfer 100 per cent of its equity interest in Delis Limited to Panghai Holdings at a price of US $1 through negotiation between the two parties. On June 26, 2005, Panghai Holdings signed the Equity Transfer Agreement with Agricultural Science and Technology, transferring 50% of the equity of Delis Limited to Agricultural Science and Technology. On September 24, 2007, Panghai signed an Equity Transfer Agreement with Pedestrian, agreeing that Panghai would transfer its 22% stake in Delis Limited to Pedestrian. On the same day, Agricultural Science and Technology signed an Equity Transfer Agreement with Tongxuanshi, agreeing that Agricultural Science and Technology will transfer its 47% stake in Delis Limited to Tongxuanshi. Agricultural Science and Technology transferred its limited 3% stake in Delis to Zhucheng Jingkai.

On 2 August 2005, Delis Holdings commissioned KPMG business Advisory Pte.Ltd to liquidate the write-off. On December 13, 2007, Delis Holdings held a final meeting to conclude the liquidation and form a "final liquidation resolution". On 13 December 2007, the "Final Resolution of Liquidation" was submitted to the Singapore Business Register (Accounting & Corporate Regulatory Authority Singapore). From that date, Delis Holdings made a three-month announcement, which ended on March 12, 2008.

2. Protocol control mode

The protocol control mode is also referred to as "Sina mode". Because Sina first adopted this model when it was listed in the United States, this model is often used in the red chip structure of the Internet, education and other industries, so this model is often called "Sina model". "Agreement control" provides a way for overseas listing in industries that restrict foreign investment in China. The basic framework of the Sina model is as follows: foreign institutional investors and domestic enterprises (or shareholders of domestic enterprises) set up special purpose companies abroad, and then the special purpose companies set up a wholly foreign-owned enterprise in China, such as consulting service agreements, asset transfer agreements, intellectual property transfer agreements, intellectual property licensing agreements, etc., and sign equity pledge agreements with domestic companies to pledge the equity of Chinese-funded enterprises held by domestic companies to wholly foreign-owned enterprises, and control domestic Chinese-funded enterprises And transfer its profits to wholly foreign-owned companies, and finally to listed companies abroad.

Taking the 2633 Network Communications Co., Ltd. (hereinafter referred to as "2633 Network Co., Ltd."), which is currently listed in China, as an example, its red chip structure construction and cleaning process is as follows:

Net263 Holdings Ltd., an overseas listed entity, was incorporated in the Cayman Islands on November 16, 2004. That is, 263 Network Holdings Limited (263 Holdings). On March 11, 2004, NET263 Ltd, BVI263, was incorporated in the British Virgin Islands. On January 17, 2005, BVI263 registered and established a wholly foreign-owned enterprise 263 Information Service Co., Ltd. (263 Information) in Beijing. On January 20, 2005, the shareholders of BVI263 transferred all their shares of BVI263 to 263 Holdings. After the completion of the share transfer, 263 Holdings holds BVI263100 of the shares, becoming the sole shareholder of the company and indirectly controlling 100 of the shares of 263 Information. 263 Holdings conducts overseas private placements. 263 Information signed a relevant business restructuring agreement with 263 Network Co., Ltd. According to the above-mentioned agreements on services and licenses, 263 Network Co., Ltd. paid 263 Information related services and license fees according to a certain proportion of its operating income, and finally reached 263 Holding's consolidated statement joint stock company statement and realized the purpose of overseas listing.

Two-Six-Three Holdings redeemed shares of four overseas institutional investors. While redeeming the shares held by overseas institutional investors, 2633 Holdings repurchased the shares of some natural person shareholders and issued new shares to some natural persons. At the same time, the major shareholder of 263 Holdings Skyscaler Ltd. Transfer of its shares held by 263 Holdings to 12 companies controlled by 100 per cent each of 12 natural persons, including Bruce Lee (to be partially repurchased upon completion of the conversion).

On August 1, 2006, the first extraordinary general meeting of shareholders of 263 Network Co., Ltd. in 2006 deliberated and passed the "Proposal on Dissolution and Amendment of Relevant Agreements with Beijing 263 Information Service Co., Ltd." and "About Beijing Two Six-Three Information Service Co., Ltd. purchases related software copyrights, trademarks, domain names and other intangible assets, as well as machinery and equipment and other assets." agree that the relevant service and asset leasing agreements signed between 263 Network Co., Ltd. and 163 Information will no longer continue to be performed, and 263 Network Co., Ltd. will no longer pay any service and license fees to 163 Information. The agreement will take effect from January 1, 2006. Agree that 263 Network Co., Ltd. will purchase relevant software copyright, trademarks, domain names and other intangible assets as well as machinery and equipment and other assets from Beijing 263 Information Service Co., Ltd. In September and December 2006, the company signed agreements with 263 information to buy back office equipment, network equipment, software copyright and trademark and other assets needed for relevant production and operation. After the completion of the above-mentioned transaction, 263 Network Co., Ltd. independently owns the ownership or right to use the equipment and intangible assets needed for normal production and operation.

In order to restore the real equity composition, in June 2007, 263 Network Co., Ltd. made an equity adjustment. Haotian Xinye, Haicheng Telecom and Zhicheng Network transferred all the equity of the Company held by Haotian Xinye to 12 natural persons such as Bruce Lee and chenchen, Liping Technology, Wuhan Xingyan, Zhaojun Chuangfu and other natural persons.

On August 5, 2007, the board of directors and shareholders' meeting of 263 holding, the board of directors and shareholders' meeting of BVI263, and BVI263, the sole shareholder of 263 information, respectively made decisions on the liquidation of 263 holding, BVI263 and 263 information. After that, the three companies submitted their applications for cancellation to the local company registration authority. By the end of 2008, the three companies had completed the cancellation procedures and obtained the cancellation certificate issued by the local company registration authority.

The clean-up of the red-chip structure listed in (II).

Shang Fulin, Chairman of the China Securities Regulatory Commission, said when talking about the "international board" at the Lujiazui Forum in May 2011 that it is getting closer and closer to us, and the "international board" has once again become the focus of public opinion. However, the listing rules of the "International Board" have not yet been announced, and the attitude of the "International Board" towards the domestic listing of red-chip companies, especially unlisted red-chip companies, is currently unknown. According to the current successful cases of domestic listing of red-chip framework companies and the attitude of the CSRC, red-chip framework companies must clean up the red-chip framework for listing in China, and can apply for listing only after the red-chip framework is cleaned up, for the following reasons:

1, the red-chip structure clean-up is conducive to the listed company's equity clarity, to avoid improper transfer of interests. In the process of building the red-chip framework, the shareholders or actual controllers of domestic enterprises set up special purpose companies abroad for overseas listing and the introduction of investors and established a complex shareholding structure. Overseas special purpose companies are usually registered in offshore registration places such as the Cayman Islands and the British Virgin Islands, the registration information is not transparent, the actual controller is difficult to verify, the clean-up of the red-chip structure is conducive to the clarity of the equity of domestic listed companies, to avoid improper transfer of interests.

2, red-chip structure clean-up is conducive to foreign exchange management under capital projects. Foreign exchange flows under China's capital account are subject to control by the foreign exchange administration. Under the red-chip structure, the establishment of overseas special purpose companies and the return investment of special purpose companies all involve foreign exchange management under capital projects. If the red-chip structure exists, foreign exchange flows such as profit distribution and equity transfer price will be involved between special purpose companies and domestic companies, which will not only increase the difficulty of foreign exchange management, but also often lead to the debate of "true and false foreign investment", and the clean-up of the red-chip structure will be conducive to foreign exchange supervision under capital projects.

3, the clean-up of the red-chip structure is conducive to tax regulation. In the red-chip structure, special purpose companies usually choose to register in the Cayman Islands, the British Virgin Islands, Bermuda and other regions, which tend to have lower tax burdens and are called "tax havens". In order to regulate the tax behavior in the process of building the red-chip structure and avoid tax evasion, it is necessary to clean up the red-chip structure and regulate tax payment before the domestic listing of the red-chip structure company.

Legal issues to be concerned about the domestic listing of 3. red-chip companies.

The author focuses on the red-chip framework enterprises that have been successfully listed on the domestic small and medium-sized board and gem, and discusses the legal issues that need to be paid attention to in the domestic listing of red-chip framework companies as follows.

(I) Determination of Listed Entities

1. Select domestic entity companies or overseas companies as listed entities.

To clean up the red chip structure and list on the domestic capital market, theoretically speaking, there are two options for the selection of domestic listing entities, one is to use overseas special purpose companies as the main body of listing, and the other is to use domestic operating entities as the main body of listing.

As far as the first option is concerned, if an overseas special purpose company is registered abroad, its establishment and operation are governed by the law of the place of registration, and it is not a Chinese corporate legal person in law, and China's Company Law and Securities Law cannot be directly applied. At present, domestic laws do not clearly stipulate whether overseas registered companies can be listed in China, and there is no precedent to follow in practice. Although the domestic capital market is exploring the establishment of an "international board", the timetable for its launch is not clear, and the listing standards have not yet been determined. Although it is not ruled out that overseas special purpose companies can be listed through the "international board" in the future, it is not yet possible for overseas special purpose companies to be listed directly in China.

Therefore, according to the current provisions of China's Company Law and Securities Law, foreign special purpose companies are not yet able to be listed directly in China, and the return of red-chip enterprises can only choose domestic entity companies as the main body of listing.

2. Choice of domestic entity companies as listed entities

In view of the current legal and practical restrictions in China, foreign special purpose companies are not yet able to achieve direct domestic listing, red-chip framework enterprises can only choose domestic entity companies as the main body of listing. This paper will analyze the situation of red-chip framework enterprises controlling domestic entities through equity mergers and acquisitions, asset mergers and acquisitions, and agreement control:

(1) The legal obstacles to the listing of domestic operating entities in the form of equity mergers and acquisitions in the red-chip framework are relatively small. After a special-purpose company acquires a domestic operating entity enterprise, the domestic operating entity changes from a domestic company to a foreign-invested enterprise, but it still belongs to a domestic legal person and is the direct subject of production, operation and profitability. Therefore, the operating performance of the foreign-invested enterprise can usually be calculated continuously. After the foreign-invested enterprise is changed into a joint stock limited company, it can be used as the subject to be listed.

(2) Domestic operating entities in the red-chip structure that are established by way of asset acquisition need to be judged according to the mode of asset acquisition and the operating conditions of the surviving company. As a domestic company that sells assets, the main business changes significantly after the sale of core assets, and it is usually difficult for the original domestic company to meet the listing conditions. Newly established foreign-invested enterprises may be considered as the subject to be listed if their duration exceeds three years. If the newly established foreign-invested enterprise does not meet the requirements of the domestic capital market in terms of asset scale, profit or integrity, it needs to be reorganized or adjusted again.

(3) Domestic business entities established in the red-chip framework under the agreement control model are subject to judgment taking into account profit conditions, restrictions on related transactions and foreign investment industry access regulations. Although the domestic operating entity is the main body of the operation, it is generally difficult for the domestic operating entity to meet the listing conditions because the mode of agreement control requires the transfer of its profits to a foreign special purpose company, and the domestic operating entity generally does not retain or retains only a small amount of profits. If you choose to use a domestic operating entity as the subject of listing, you need to terminate the relevant agreement and wait for the domestic operating entity to meet the conditions for domestic listing. Under the agreement control mode, the profits of the wholly foreign-owned enterprises are obtained through related transactions, and generally do not directly own the elements required for operation, lack of independence and integrity, and due to the restrictions on industry access, it is difficult for the wholly foreign-owned enterprises to obtain the license of the domestic business entity, and it is also difficult for the wholly foreign-owned enterprises to meet the listing conditions. Under the agreement control mode, the equity, assets, personnel and financial status of domestic business entities and foreign-invested enterprises need to be reorganized or adjusted to meet the listing conditions of domestic enterprises.

(II) on the identification of the actual controller.

In order to determine that the actual controller of the domestic listed entity has not changed significantly, the red-chip structure enterprise needs to make detailed disclosure of the overseas special purpose company and the original red-chip framework before listing, and to determine whether the actual controller has changed. At present, the red-chip structure companies that have been successfully listed in China have disclosed in detail the construction and liquidation of the red-chip structure.

According to the Securities and Futures Law Application Opinion No. 1 of the Securities and Futures Commission, the right of control of a company is the power that can have a significant impact on the resolutions of the general meeting of shareholders or can actually control the company's actions, and its origin is the direct or indirect equity investment relationship with the company. Therefore, to determine the ownership of the company's control, it is necessary to review the corresponding equity investment relationship, but also according to the actual situation of the case, the issuer's general meeting of shareholders, the substantive impact of the board of directors resolution, the nomination and appointment of directors and senior management and other factors to analyze and judge. It can be seen that the SFC's criteria for identifying the actual controller are based on the principle that substance is greater than form, focusing not only on equity relations, but also on the substantive influence of the proposed listed company. If the actual controller's substantial influence on the company has not changed after the red chip structure is cleaned up, it can be determined that the actual controller has not changed.

Whether there has been a significant change in the main business of the (III).

After the red-chip structure is cleaned up, the domestic operating entity does not meet the listing requirements and usually needs to restructure the main business. In particular, after the liquidation of the red-chip structure of the agreement control model, it is difficult for both domestic operating entities and foreign-invested enterprises to meet the requirements of direct listing, therefore, it is necessary to restructure the assets of listed main enterprises and related enterprises. According to the Securities and Futures Law Application Opinions No. 3 of the China Securities Regulatory Commission, if the same, similar or related businesses under the same company controller are reorganized, if the following two conditions are met at the same time, it can be regarded that the main business has not changed significantly: First, the reorganized party shall be controlled by the same company controller as the issuer from the beginning of the reporting period. If the reorganized party is newly established during the reporting period, from the date of establishment, it is controlled by the same corporate controller as the issuer; second, the business that is reorganized into the issuer is related to the business of the issuer before the reorganization (the same, similar industry or upstream and downstream of the same industrial chain).

If the pre-IPO restructuring of a red-chip structured company meets the above conditions, the main business can be considered to have not changed significantly and the performance can be calculated continuously. If the restructuring fails to meet the above conditions and the main business changes significantly, the domestic listed entity will need to wait three years after the restructuring before applying for listing.

(IV) on the red-chip structure clean-up process of equity transfer pricing, payment.

For the transfer of shares in the process of clearing up the red-chip structure, if there are foreign-related factors, the parties can choose the applicable law by agreement, and if the parties do not choose, the law of the place of habitual residence of the party whose performance of the obligation best reflects the characteristics of the contract or other law most closely related to the contract shall apply. Therefore, if there are foreign-related factors in the transfer of shares in the red-chip structure liquidation process, Chinese law or foreign law may apply. Generally speaking, the equity transfer contract should follow the autonomy of the parties. As long as it does not violate the public interest of our country and the mandatory provisions of the law, the equity transfer agreement should be deemed valid.

However, in order to avoid improper transfer of benefits and surprise shares of domestic listed main enterprises in the process of cleaning up the red chip structure, the CSRC usually not only meets the requirements and legality review, but also pays special attention to the rationality of equity transfer, equity transfer pricing and payment issues in the process of cleaning up the red chip structure. In the process of cleaning up the red-chip structure, whether the pricing of equity transfer is reasonable should usually be judged by taking into account the purpose of the company's equity transfer, the company's net assets, the relationship between the two parties to the transfer, and the expected earnings of the company after listing. The equity transfer price should normally be paid in the process of equity transfer, and the funds should come from the equity transferee's own funds, and if the funds do not come from the transferee, the reasonable source of the funds should be disclosed.

(V) on red chip structure to clean up tax payments.

In the process of cleaning up the red chip structure, it is bound to involve the tax payment of the equity transfer of foreign investors. After the foreign investors transfer the equity of domestic companies, they should pay personal income tax or enterprise income tax in accordance with China's tax laws and regulations. If an overseas investor evades tax obligations, the competent tax authority has the right to make adjustments. According to the Notice on Strengthening the Administration of Enterprise Income Tax on Income from Equity Transfer of Non-resident Enterprises, if the foreign investor (actual controller) indirectly transfers the equity of a Chinese resident enterprise through the abuse of organizational forms and other arrangements, and does not have a reasonable commercial purpose to avoid corporate income tax obligations, the competent tax authority may redefine the equity transfer transaction according to the economic substance after reporting to the State Administration of Taxation for review, deny the existence of an offshore holding company that is used as a tax arrangement. If a non-resident enterprise transfers the equity of a Chinese resident enterprise to its related parties, and the transfer price does not conform to the principle of independent transaction and reduces the taxable income, the tax authorities have the right to adjust it in accordance with reasonable methods.

This paper only makes a preliminary inquiry into the legal issues of domestic listing of red-chip framework companies based on some cases of domestic listing of red-chip framework companies, hoping to help red-chip framework companies land in the domestic capital market.

This article won the first prize of 2011 Jinan lawyer business paper selection

References:

[1] Fu Jun, "Research on the Legal System of Overseas Indirect Listing", Peking University Press, January 2010.

[2] Li Yunli, "Analysis of the latest examples of GEM listings and operational practices: rules, examples and difficulties", Law Press, November 2010.

[3] Zhang Lantian, "Empirical Analysis of Enterprise Listing Audit Standards", Peking University Press, January 2011.

[4] Zhang Yanwei, "Key Points of Review and Sponsorship of GEM Listing", China Legal Publishing House, March 2011.

[5] Juchao Information Network, http://www.cninfo.com.cn.