China Treasury Shares Guide IBA Corporate and M&A Law Committee 2012

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1 China Treasury Shares Guide IBA Corporate and M&A Law Committee 2012 Contact Ning Zhu Guangda Law Firm, China

2 Contents Page INTRODUCTION GENERAL OVERVIEW REGULATORY FRAMEWORK ACQUISITION OF TREASURY SHARES UTILISATION OF TREASURY SHARES SALE OF TREASURY SHARES TREASURY SHARES AND TAKEOVER LAW Page 2

3 INTRODUCTION The following guide shall provide an overview of the PRC legal framework on the acquisition and sale of treasury shares of Chinese corporations. This guide provides general information on treasury shares, on the legal requirements and restrictions of acquisitions and sales of such treasury shares and finally implications of treasury shares under PRC takeover law. The information in this guide cannot substitute professional legal advice. Therefore, anyone involved and considering a buy-back programme of shares should not solely rely on this guide alone and should seek specialist advice GENERAL OVERVIEW Is the buy-back of shares permitted in your jurisdiction? Yes. However, in PRC, the repurchase of shares is subject to significant restrictions under regulations of Company Law (Order No 42 of the President of the People's Republic of China, herein after Company Law ). Companies may repurchase shares only in the cases enumerated and subject to the conditions and restrictions provided in Article 75 and Article 143 Company Law. What are the characteristics (maximum holdings, voting rights and other rights) of the treasury shares? Treasury shares are non-voting and carry no dividend or subscription rights as long as they are held by the company. What are the main reasons to acquire treasury shares? The main reasons for the acquisition of treasury shares are to eliminate the ownerships interests of a stockholder, to increase the market price of the stock that returns capital to shareholders, to potentially increase earnings per share of the stock by decreasing the shares outstanding on the same earnings, to make shares available for a pending merger, to reduce the size of a company s operations and to offer shares to employees as incentives. Page 3

4 REGULATORY FRAMEWORK Under PRC law, limited liability companies and stock corporations (consist of listed and nonlisted companies) are permitted to repurchase treasury shares. The main regulations for repurchasing of treasury shares are governed by Article 75, 143 of Company Law and The Measures for the Administration on Purchasing back of Public Shares by Listed Companies (Decree [2005] No 51 of China Securities Regulatory Commission). Article 75 of Company Law permits that shareholders of limited liability companies voting against the resolution adopted by shareholders meeting may request the company to purchase their equity at a reasonable price under one of the following circumstances: 1. the company fails to distribute its profits to the shareholders for five consecutive years, when it has been making profits for five years running and meets the conditions for distributing profits as is provided for by the Company Law; 2. the company is to be merged or divided, or the principal part of its property is to be transferred; or 3. when the period of business stipulated by the company s articles of association expires or other situations originating the dissolution stipulated by the said articles of association arise, a resolution is adopted by the shareholders meeting to revise the articles of association for continued existence of the company. Article 143 of Company Law outlines the circumstances where a stock cooperation is permitted to repurchase shares: 1. it reduces its registered capital; 2. it merges with another company that holds its shares; 3. it rewards the staff and workers of the cooperation with its shares; or 4. a shareholder requests the cooperation to purchase his shares because he holds objections to the resolution on the merger or division of the cooperation adopted by the shareholders general meeting. The Measures for the Administration on Purchasing back of Public Shares by Listed Companies (Decree [2005] No 51 of China Securities Regulatory Commission) regulates the repurchasing of public shares by listed companies including outlining the various ways treasury shares can be bought back by a listed company, ensuring transparency and limiting insider trading. ACQUISTION OF TREASURY SHARES How can a company acquire treasury shares? There are no specific provisions concerning acquisition way of treasury shares by limited and non-listed companies; in practice, treasury shares are always acquired through negotiation between companies and their shareholders with approval by shareholders meeting. For listed companies, however, Article 9 of the Measures for the Administration on Purchasing back of Public Shares by Listed Companies (Decree [2005] No 51 of China Securities Regulatory Commission) states that a listed company may purchase the shares back by the following ways: 1) open and centralised competitive bidding in Stock Exchange, 2) by offer and 3) other ways approved by China Securities Regulatory Commission. Page 4

5 Are there any restrictions in acquiring treasury shares? (eg, purpose-wise; accountingwise?) The limited liability companies can only acquire treasury shares when required by certain shareholder as stipulated by Article 75 of Company Law. The restrictions for acquiring treasury shares by stock corporations are as follows: 1. Purpose restriction Article 143 paragraph 1 of Company Law states that A company shall not purchase its own shares, except where: (1) It reduces its registered capital; (2) It merges with another company that holds its shares; (3) It rewards the staff and workers of the company with its shares; or (4) A shareholder requests the company to purchase his shares because he holds objections to the resolution on the merger or division of the company adopted by the shareholders general meeting. Article 143 paragraph 4 of Company Law states that A company shall not accept its own shares as the subject matter of a mortgage, emphasising that company should not acquire treasure shares as collateral security. As to listed companies, there are more specific restrictions since Article 2 of the Measures for the Administration on Purchasing back of Public Shares by Listed Companies (Decree [2005] No 51 of China Securities Regulatory Commission) states that repurchasing by listed companies of public shares shall mean the act listed companies firstly in repurchase of their own public shares to reduce their registered capitals and then cancel such shares according to law. In other words, listed companies can only repurchase the shares in order to reduce their registered capitals. 2. Authorisation restriction Article 143 paragraph 2 of Company Law states that Purchasing of its own shares by a company due to the reasons specified in subparagraph (1), (2) or (3) of the preceding paragraph shall be subject to resolution adopted by the shareholders general meeting. 3. Arrangement restriction Article 143 paragraph 2 of Company Law states that Where a company purchases its own shares on grounds of subparagraph (1) as specified in the preceding paragraph, such shares shall be cancelled within 10 days from the date it purchases them; and where the shares are purchased on grounds of Subparagraph (2) or (4), such shares shall be transferred or cancelled within six months, and also, in paragraph 3, states that the shares purchased on ground of subparagraph (3) shall be transferred to its staff and workers within one year. 4. Accounting restriction Article 143 paragraph 3 of Company Law states that The number of its own shares purchased by a company in accordance with the provisions of Subparagraph (3) of the first paragraph shall not exceed five per cent of the total number of the shares issued by the company; the funds used for such purchase shall be allotted from the after-tax profits of the company. 5. The time limit requirements for repurchasing treasure shares from particular person For listed companies, timing for purchasing shares from particular shareholders is limited according to Article 142 of Company Law which states that Shares held by the promoters of a company shall not be transferred within one year from the date the company is Page 5

6 incorporated. Shares issued prior to the public issue by a company shall not be transferred within one year from the date the shares of the company are listed and traded at stock exchanges. Shares held by directors, supervisors and senior managers of a company shall not be transferred within one year from the date the shares are listed and traded. The company's shares held by persons mentioned above shall not be transferred within six months after they leave office. Consequently, stock corporations can only repurchase the treasury share after one year from the date the company is incorporated from promoters; if listed companies intend to repurchase treasure shares from their directors, supervisors and senior managers, they can only do it after one year from the date the shares of the company are listed and traded. Which authorisation is needed? Generally speaking, authorisation by shareholders meeting is needed for repurchasing treasure shares, the specific regulations are as follows: Shareholders meeting may authorise limited liability companies to repurchase treasure shares because Article 75 paragraph 2 of Company Law states that Where a shareholder fails to reach an agreement on the equity purchase with the company within 60 days from the date the resolution is adopted by the shareholders meeting, he may bring a suit before a people s court within 90 days from the date the resolution is adopted by the shareholders meeting. We may reason out that repurchasing treasure shares should be authorised by shareholders meeting. For stock corporations, authorisation by shareholders meeting are needed for repurchasing due to specific reasons; Article 143 paragraph 2 of Company Law states that: purchase of its own shares by a company due to the reasons specified in Subparagraph (1), (2) or (3) of the preceding paragraph shall be subject to resolution adopted by the shareholders general meeting. Supportive proportion requirement of voting right in shareholders meeting. Article 104 of the Company Law states that resolutions to be made by the shareholders general meeting on revision of the company's articles of association, on increase or reduction of the registered capital, on merger, division, dissolution or transformation of the company shall be subject to adoption by more than two thirds of the voting rights held by the shareholders present at the meeting. The repurchasing of treasury shares always lead to the alteration of company s articles of association, and the listed companies can only repurchase the shares in order to reduce their registered capitals as previously mentioned. As a result, companies will always need the authorisation of more than two thirds of the voting rights held by the shareholders present at the shareholders general meeting. For listed companies, the authorisation of more than two thirds of the voting rights held by the shareholders present at the shareholders general meeting is very clearly stated in Article 17 of the Measures for the Administration on Purchasing back of Public Shares by Listed Companies(Decree [2005] No 51 of China Securities Regulatory Commission) and Article 4 of Supplementary Provisions on Repurchasing Stocks by Listed Companies through Auction Trading (Announcement [2008] No 39 of China Securities Regulatory Commission). What are the publicity requirements in the event of acquisition of treasury shares? There are no publicity requirements for limited and non-listed companies repurchasing treasury shares while there are clear publicity requirements and procedures for listed companies. The detail publicity requirements for listed companies in the event of acquisition of treasure shares can refer to Articles 13, 14, 15,16,18,19 of the Measures for the Administration on Purchasing back of Public Shares by Listed Companies (Decree Page 6

7 [2005] No 51 of China Securities Regulatory Commission) as well as Article 2 of Supplementary Provisions on Repurchasing Stocks by Listed Companies through Auction Trading (Announcement [2008] No 39 of China Securities Regulatory Commission). Business Guidelines of Shenzhen and Shanghai Stock Exchange for Share Repurchase by Listed Companies through Centralized Price Bidding states what listed companies are required to announce to the public and relevant materials that should be submitted to the Stock Exchange. For example, Article 4 of Business Guidelines of Shenzhen Stock Exchange for Share Repurchase by Listed Companies through Centralized Price Bidding states that The board of directors of a listed company shall, within two business days after making a resolution for repurchasing shares, submit to the Exchange and announce to the public the following materials: 1. Resolution of share repurchase plan approved by the board of directors; 2. Repurchase report (plan); 3. Independent directors opinions; 4. Notice to convene general meeting of shareholders; 5. Other materials required by the Exchange. Put and call options-do they count as acquisition of own shares? Put options on shares by a non-listed company to its shareholders is thought to be equivalent to the actual repurchase of shares due to the company s lack of control over the exercise of the option. As a result, put options on shares approved by a non-listed company to (one of) its shareholders are subject to the same restrictions applicable to the repurchase of treasury shares as described above. In particular, the principles of fairness and impartiality, as stated in Article 127 of Company Law (Order No 42 of the President of the People's Republic of China) The shares shall be issued in compliance with the principles of fairness and impartiality thereby ensuring that shareholders have equal treatment. The re-sale of treasury shares on the stock market or by way of a public offer is deemed to fulfil the requirements of the principle of equal treatment. Call options are not permitted under PRC law as companies are only permitted to acquire treasury shares on the grounds specified in Company Law. UTILISATION OF TREASURY SHARES Are there any statutory obligations to resell or redeem treasury shares? In PRC there are statutory obligations to sell treasury shares, these obligations vary depending on category; listed or not. For limited liability companies, there are no obligations regulated for them to resell treasury shares. Article 143 of Company Law states that non-listed companies will be required to transfer (sell) shares if acquired by (2) merger or (4) if requested by any shareholder to purchase his shares because this shareholder raises objections to the company s resolution on merger or split-up made at a session of the meeting of shareholders. Listed companies, according to Article 2 of the Measures for the Administration on Purchasing back of Public Shares by Listed Companies (Decree [2005] No 51 of China Securities Page 7

8 Regulatory Commission), are only permitted to repurchase shares for sole purpose of reducing registered capitals and as a result not permitted to sell the repurchased treasury shares. How are treasury shares redeemed? Companies should transfer or cancel the treasury shares in compliance with legal restrictions after acquisition as previously discussed, but there are no relevant provisions giving further explain for how the treasury shares shall be redeemed. SALE OF TREASURY SHARES How can the company sell treasury shares? In PRC, a limited or non-listed company may decide to re-sell treasury shares based on the agreement of its shareholders meeting. The sale of shares can be effected by way of negotiation and conclusion of a purchase agreement with an individual shareholder however always subject to the principle of equal treatment of shareholders. Are there any restrictions for selling treasury shares? The first restriction is that only limited and non-listed companies are permitted to sell treasury shares in PRC. Secondly, there are time restrictions for selling treasury shares by non-listed companies. Article 143 paragraph 2 of Company Law states that Where a company purchases its own shares on grounds of Subparagraph (2) or (4), such shares shall be transferred or cancelled within six months. Article 143 paragraph 3 of Company Law also states that the shares purchased on ground of subparagraph (3) shall be transferred to its staff and workers within one year. Although Article 127 of Company Law states that The shares shall be issued in compliance with the principles of fairness and impartiality thereby ensuring that shareholders have equal treatment. There is no specific price restriction for selling treasure shares besides the equal treatment principle. Which authorisation is needed for selling treasury shares? As listed companies are only allowed to repurchase treasury shares for the sole purpose of reducing their registered capitals, they are not allowed to resell treasury shares as the shares will no longer exist. For limited and non-listed companies, the sale of treasury shares is a management decision subject to authorisation of more than two thirds of the voting rights held by the shareholders present at the shareholders meeting. Articles of Association of companies may stipulate more specific proportion above two thirds as needed. Can treasury shares be sold other than via the stock exchange or by public tender offer? Yes, treasury shares can be sold via other channels, as long as the limited and non-listed companies are in compliance with Article 9, 127 and 143 of Company Law. The limited and non-listed companies are permitted to sell the shares anyway they deem fit. What are the publicity requirements in the event of a sale of treasury shares? Page 8

9 As discussed, only limited and non-listed companies are allowed to transfer treasury shares after acquisition. However, there are no specific publicity requirements in the event of a sale of treasury shares since the limited liability companies and non-listed companies are allowed to transfer the treasury without strict publicity requirements apart from registration in related industry and commerce apartments. What legal restrictions are there in order to avoid market abuse? The purchase and sale of treasury shares are not per se exempt from the prohibition of insider dealing and market manipulation (market abuse). However, PRC have implemented various measures in order to avoid mark abuse, for example: Articles 75 and 143 of Company Law outline the stringent circumstances a company is permitted to repurchase and sell treasury shares. Article 127 of Company Law ensures that the principles of fairness and impartiality are always at the forefront of every transaction. Article 9 The Measures for the Administration on Purchasing back of Public Shares by Listed Companies (Decree [2005] No 51 of China Securities Regulatory Commission) outlines the various ways treasury shares can be bought back by a company, ensuring transparency and limiting insider trading. Article 15 The Measures for the Administration on Purchasing back of Public Shares by Listed Companies (Decree [2005] No 51 of China Securities Regulatory Commission) ensures no sale of treasury shares of listed companies prior to the publication of financial information. TREASURY SHARES AND TAKEOVER LAW What are the general implications of treasury shares under the application takeover law regime? In PRC, the takeover law regime (Measures for the Administration on Acquisition of Listed Companies, Order No 56 of the China Securities Regulatory Commission) only apply to listed companies; acquisition of treasury shares by listed companies are solely for reducing registered capital and the treasury shares should be subsequently cancelled. The takeover and repurchasing of treasury shares by listed companies are two separate and independent issues. For limited and non-listed companies, there is no detail regulation or takeover law regime; the treasury shares can be acquired for certain purposes only as previously discussed. As a result, there are only slight influences and connections between takeover and purchasing treasury shares. Treasury shares as defence measures? A company can very well use treasury shares as a defence measure. However it varies in different types of companies. Under PRC law, treasury shares are acquired by listed companies for reducing registered capital only. The remaining shareholders controlling power will be strengthened and price of shares may rise which may increase difficulty of share acquisition or takeover by other people. Page 9

10 Moreover, treasury shares already held by companies will eventually increase the relative voting power of the certain shareholders given the non-voting treasury shares. For limited and non-listed companies, shares are hard to be purchased in public; in addition, other shareholders of company hold the pre-emptive right over the shares to be sold. Besides acquisition of treasury shares for reducing registered capital, acquisition for other purposes may influence companies to a certain degree without defensive quality. As a result, acquiring treasury shares may not be deemed as defence measures. Page 10

Argentina Treasury Shares Guide IBA Corporate and M&A Law Committee 2014

Argentina Treasury Shares Guide IBA Corporate and M&A Law Committee 2014 Contact Juan Javier Negri Negri, Busso & Fariña Abogados, Buenos Aires, Argentina. javier_negri@negri.com.ar Contents Page INTRODUCTION