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China Watch: CSRC Notice on Offshore Listings for Chinese Companies Leaves Questions Unanswered

October 11, 2006

Last month, the China Securities Regulatory Commission (CSRC) issued a notice listing the documents that must be submitted when CSRC approval is required in connection with an offshore listing or going-public transaction involving a Chinese operating company.

This notice follows the new M&A Rules promulgated by six PRC government agencies that went into effect on September 8, 2006. Those Rules have generated a good deal of confusion as to what transactions are covered and when CSRC approvals will be required. Two key questions are:

Is CSRC approval required for a subsequent going-public transaction wherein the Chinese company accomplished its offshore restructuring by way of a cash-for-equity transaction, or only where the restructuring was accomplished by an equity swap? Articles 39 and 40 of the new Rules on their face say that CSRC approval is required in cases of equity swap restructurings, but they do not say approval is required in cases of cash-for-equity restructurings. Is this a carve-out or an oversight?
Is CSRC approval required when the Chinese-controlled offshore SPV goes public via an OTCBB shell, a Form 10 reporting company, or any other method short of listing on NASDAQ or another recognized exchange?

Unfortunately, the September 2006 release from CSRC does not answer either question. Frustratingly, inquiries to CSRC in China produce an equal number of answers. For example, the September 2006 release requires only two years of audited financials for the Chinese company in the case of "listings on the second board," but CSRC officials have given different and contradictory guidance on whether an OTCBB company, or a reporting but not listed company, is captured by this language. PRC law firms do not agree among themselves on these questions, leading to a certain amount of "opinion shopping" by foreign investors as well as Chinese companies looking to go public.

The first half of the release merely excerpts relevant language from the Securities Law, the new M&A Rules, and another Notification relating to offshore listings. The second half lists the documents that must be submitted when CSRC approval is required.

Observers are still waiting for CSRC to clarify precisely when and in what circumstances its approval will be required. For now, we are reduced to "reading the tea leaves" by making guesses based on a list of documents.

Click here for a translation of the September 2006 CSRC release.

For more information, contact:

Thomas M. Shoesmith
Managing Partner, Shanghai
+86.21.5117.5408
tshoesmith@thelenreid.com

Joseph R. Tiano
202.508.4306
jtiano@thelenreid.com

Louis A. Bevilacqua
202.508.4281
lbevilacqua@thelenreid.com

Click here to learn more about Thelen's China practice group.

Click here to learn more about Thelen's Shanghai office.

©2006 by Thelen LLP. China Watch is published as an information service for clients and friends. Please recognize that the information is general in nature and must not be relied upon as legal advice. Our China practice group attorneys or your Thelen contact would be pleased to discuss the information in this article, and its application to your specific situation, in greater detail. We welcome your comments and suggestions.

About Thelen LLP
Thelen LLP is an international law firm with approximately 400 attorneys, and offices in New York, San Francisco, Washington, DC, Los Angeles, Silicon Valley, Northern New Jersey, and Shanghai, China. Thelen provides superior legal services in complex commercial litigation; corporate and capital markets transactions; project and asset finance; construction; labor and employment; intellectual property; domestic and international tax; employee benefits; government affairs; and real estate.

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