Analysis of H Share Full Circulation from a Practical Aspect

Background

H share companies mean the companies which are incorporated in Mainland China and are controlled by domestic government authorities or individuals. Generally speaking, these companies operate their business in Mainland China and part of their shares are listed in Hong Kong as H shares while the remaining domestic shares are not circulated in Hong Kong. As domestic shares cannot be listed and circulated in Hong Kong, there is a difference in equity earnings between domestic shareholders and H shareholders and the difference results in many restrictions to H share companies in different aspects, such as market valuation, financing methods and equity liquidity.

In 2017, China Securities Regulatory Commission (“CSRC”) announced the commencement of the pilot programme for H share full circulation. On 20th April 2018, China Securities Depository and Clearing Corporation Limited (“China Clearing”) and Shenzhen Stock Exchange (“SZSE”) jointly issued the Detailed Rules for the Implementation of the H Share Full Circulation Pilot Programme (Trial Implementation). In 2018, CSRC successfully completed pilot work for the full circulation of three H share companies, namely Legend Holdings Corporation, Shandong Weigao Group Medical Polymer Company Limited and AviChina Industry & Technology Company Limited. On 14th November 2019, CSRC issued the Guidelines for the Application for the Full Circulation of the Domestic Unlisted Shares of H Share Companies (“Guidelines”), specifying that China Clearing and SZSE shall execute H share full circulation in accordance with the Guidelines. On 31st December 2019, China Clearing and SZSE jointly issued the Detailed Rules for the Implementation of H Share Full Circulation (“Detailed Rules”). H share full circulation scheme enables the domestic shares of H share companies to have liquidity and therefore enhances the market valuation of H share companies.

Approval Requirements

According to the market statistics report of the HKEx, as of 9th April 2021, there are 273 main board H share companies and 19 GEM H share companies. As of 15th July 2020, only nine Hong Kong H share companies have completed the H share full circulation. Therefore, there is a substantial market potential for the H share full circulation. However, there are many conditions precedents for the realization of the H share full circulation. Firstly, the H share companies shall apply to CSRC for the H share full circulation and obtain a prior written approval from CSRC. The application documents to the CSRC shall include but not limited to corporate incorporation documents, written business and financial information, authorization of the shareholders of domestic unlisted shares, documents evidencing the lawful acquisition of shares and PRC legal opinion, etc. If all the application documents are in order, CSRC will issue a prior written approval for the H share full circulation. Secondly, the application for H share full circulation shall comply with the requirements of various PRC laws and regulations. For example, it shall comply with the state-owned asset management policies, foreign investment policies and industry regulatory policies. If there is a qualification requirement of shareholders in the industry of the applicant, approval from the relevant government authorities must be obtained in advance as well. Thirdly, companies applying for H share full circulation shall have the discretion regarding the number and proportion of domestic shares for the H share full circulation application. The H share company can apply for the full circulation of all of its domestic shares or part of its domestic shares.

In practice, CSRC will review and pay particular attention to whether the business scope of the applicant involves industries where foreign investment is prohibited or restricted and whether the applicant complied with or will continue to comply with the relevant foreign investment access policies before and after the H share full circulation application. Meanwhile, CSRC will review whether the relevant shareholders of the domestic unlisted shares are substantial untrustworthy entities and whether they have seriously violated PRC laws and/or regulations. CSRC will also check whether the applicant has complied with all internal decision-making requirements for the H share full circulation and whether it has obtained the necessary approval, authorization and permission from the external regulatory authorities. If CSRC is of the view that the applicant can satisfy the requirements under the Detailed Rules, it will issue a notice of approval to the applicant for the H share full circulation.

What Hong Kong Lawyers Can Do

The author and her team, acting as the Hong Kong legal advisers, assisted Zhejiang Chang’an Renheng Technology Co., Ltd. (stock code: 8139) (“Zhejiang Chang’an Renheng”) with the completion of its H share full circulation. This is the first GEM listed enterprise which has completed its H share full circulation. Based on this experience, there are a few points to pay attention to in practice.

Firstly, the Hong Kong legal advisers should assist the listed company in complying with the disclosure requirements in relation to the H share full circulation. During the entire application process for the H share full circulation, a listed company shall make relevant announcements in a timely manner at all important points. For example, after filing an application to the CSRC, an announcement shall be published immediately by the listed company to disclose the company’s application for the H share full circulation. After obtaining the CSRC’s approval, a relevant announcement shall also be published as soon as possible and disclose the detailed information of the CSRC’s approval. After obtaining the listing approval from the Hong Kong Stock Exchange for the H share full circulation and after the completion of the H share full circulation, a relevant announcement shall be published respectively as well. After the completion of the H share full circulation, it is also necessary for the Hong Kong legal advisers to assist the listed company with the publication of the monthly return, the next day disclosure return and the disclosure of interest forms to disclose the updated share information of the listed company in a timely manner.

Secondly, the Hong Kong legal advisers should assist the listed company in coordinating the H share registrar and Hong Kong Securities Clearing Company Limited (“HKSCC”) and preparing all the documents required to convert domestic shares into H shares. For example, the Hong Kong legal advisers shall prepare a board resolutions for the listed company. The board resolutions shall authorize the H share registrar to deposit new H shares into the account of the China Securities Depository and Clearing (Hong Kong) Co., Ltd. (“CSDCC”) in the Central Clearing and Settlement System. In addition, after receiving the share transfer instrument signed by CSDCC as the transferor and a written instruction on transferring the related shares to HKSCC, the Hong Kong legal advisers of the listed company shall ensure that the new H shares have already been transferred to the relevant account of HKSCC.

Thirdly, the Hong Kong legal advisers should assist the applicant in coordinating with various professional parties. Generally speaking, the application and approval process for H share full circulation require the cooperation of all professional parties. For instance, PRC lawyers, Hong Kong lawyers, securities firms, H share registrar, HKSCC and CSDCC need to keep effective communication and cooperation in a timely manner to ensure the smooth conversion of domestic shares into H shares. Based on the author’s experience in providing legal service to the H share full circulation of Zhejiang Chang’an Renheng, professional parties should prepare a detailed timetable before applying for the H share full circulation. The timetable should clearly list out the relevant procedures of H share full circulation application and proposed completion date for each step of work in order to ensure that all work can be completed in time. If all the work for the H share full circulation has been properly arranged in advance, it will only take about one month from obtaining the CSRC approval to the completion of the H share full circulation.

The reform of H share full circulation can help the H share listed companies to promote the alignment of the interests of different shareholders and improve the corporate governance of H share listed companies as well. In addition, it can help the listed enterprises to make better use of the onshore and offshore two capital markets and two types of resources to achieve healthy and sustainable development. The H share full circulation can not only resolve the historical problem which has troubled the PRC domestic capital markets and Hong Kong capital market for a long time, but also strengthen the status of Hong Kong as an international financial centre. Meanwhile, H share full circulation can help to improve the trading volume and liquidity of Hong Kong capital market, reduce the trading cost and increase the market value of Hong Kong listed companies.

Partner, Jeffrey Mak Law Firm

Ms. Ji Hui is the partner of Jeffrey Mak Law Firm. She is a Hong Kong qualified lawyer and has a Master of Law degree. She mainly specializes in corporate nance related legal services, including but not limited to bond issuance of large-scale state-owned enterprises and private enterprises, including public bonds, private placement bonds and perpetual bonds, etc, and initial public offering of the shares of Chinese enterprises on the main board or GEM board of Hong Kong Stock Exchange. She also represented Chinese enterprises to deal with various loan transactions and merger and acquisition transactions.