August 2024

China Substantial Shareholding

Update

The Interim Measures for the Management of Divestment of Shares by Shareholders of Listed Companies (the New Measures) issued by the China Securities and Regulatory Commission (the CSRC) on 24 May 2024, which took effect on the same date and replaced the Provisions on Divestment of Shares by Shareholders, Directors, Supervisors and Senior Management Personnel of Listed Companies issued by CSRC on 26 May 2017 (the Circular No.9).

The Shanghai Stock Exchange (the SSE), Shenzhen Stock Exchange (the SZSE) and Beijing Stock Exchange have amended their divestment rules according to the New Measures.

The key areas addressed in the New Measures are:

1.Aggregation Rules for the Shareholding Percentage Calculation: 

The Circular No.9 requires large shareholders to aggregate their holdings with those of their concert parties when calculating sold share percentages. Article 20 of the New Measures mandates that both large shareholders and their concert parties must comply with divestment restrictions, including aggregating holdings for the 5% threshold and sold shares. Additionally, Article 22 clarifies that all shares in normal and credit accounts, as well as shares in other people’s accounts and those involved in lending or repurchase agreements, must be aggregated for shareholding calculations.2.

2. Prohibition on Circumventing the Divestment Restrictions: 

The New Measures aim to prevent evasion of divestment restrictions through various means. Key points include:

• Article 18: Large shareholders cannot short sell or enter derivatives for the same issuer, and Lock-Up Shares cannot be lent or short sold.
• Article 16: In cases of divorce or corporate restructuring, both the transferee and transferor must comply with divestment restrictions.
• Article 21: Parties must adhere to divestment restrictions for six months after terminating a concert party relationship.
• Article 28: A catch-all provision prohibits any circumvention of the New Measures or related regulations.

Articles 16 and 18 were previously addressed in existing regulations, while Articles 21 and 28 are newly introduced

3. Pre-disclosure Obligation for Large Shareholders Selling Shares through Block Trades:

Under Circular No.9, large shareholders must report their intention to sell shares on the stock exchange (either in a single trade or multiple trades) and disclose their selling plan 15 trading days before the first sale. Article 9 of the New Measures extends this pre-disclosure requirement to block trades, excluding shares bought through centralized auctions, during IPOs, or via private placements.

4. Extension of Lock-up Period to Agreement Transfers: 

Under Circular No.9, shares acquired from large shareholders (except those bought through centralized auctions) or pre-IPO shareholders through block trading are subject to a 6-month lock-up period. Article 13 of the New Measures extends this lock-up restriction to shares acquired via agreement transfers, excluding shares purchased by large shareholders through centralized auctions, during IPOs, or via private placements.

Under Circular No.9, large shareholders are defined as controlling shareholders and those holding 5% or more of shares. The New Measures redefine large shareholders to include the actual controller of an issuer and shareholders holding 5% or more.

Our Thoughts

The new Interim Measures for the Management of Divestment of Shares by Shareholders of Listed Companies from the CSRC introduce significant updates to enhance regulatory oversight in China’s capital markets. Key changes include:

1. Clarified Aggregation Rules: Large shareholders and their concert parties must aggregate holdings for compliance, ensuring stricter monitoring and reducing evasion risks.
2. Stronger Anti-Circumvention Provisions: New prohibitions on short selling and derivatives trading for lock-up shares, along with ongoing compliance requirements after ownership changes, aim to prevent manipulation.
3. Expanded Pre-Disclosure Requirements: Large shareholders must disclose plans for block trades, promoting market transparency and stability.
4. Extended Lock-Up Period: The lock-up period for shares acquired through agreement transfers has been lengthened, discouraging rapid turnover and price destabilization.
5. Redefined Large Shareholders: The definition now includes actual controllers and those holding 5% or more of shares, broadening regulatory scope.

Overall, these measures reflect the CSRC’s commitment to fostering a transparent and stable investment environment, enhancing investor protection, and promoting sustainable growth in China’s capital markets.

The above content is purely for information and does not purport to offer legal or professional counsel.