International Corporate Finance – China – LI Ya

The following must be fulfilled before you can distinguish yourself in this area. Firstly, cherish every client, and make every product an art. With this in mind, you may work faster, better and happier. Secondly, be open-minded and creative. This will make your advice more reliable and practical but requires you to be very familiar with the businesses of corporate finance and related laws, regulations and cases. Thirdly, advise top clients and critical cases. This will endorse your expertise, reliability and fame – especially those with prestigious names in the market. Fourthly, be ready to share, by publishing books and articles and speaking at universities and conferences. Fifthly, be kind to and responsible for your associates and small-sized clients. It is also a kind of social responsibility that a lawyer shall take, and you will benefit from their development.

The corporate finance legislation is very complicated in China. From the perspective of efficacy hierarchy, it is composed of: (a) the laws promulgated by the People’s Congress of China, including its Standing Committee, e.g., the Civil Code, the Company Law, the Securities Law, and the Securities Investment Fund Law; (b) the regulations promulgated by the State Council of China, e.g., the Regulations on Administrating and Supervising Securities Companies, and the Regulations on Administrating Futures Trading; (c) the judicial interpretations promulgated by the Supreme People’s Court of China, e.g., the Fifth Provisions on the Issues Applying the Company Law, and the Interpretation on Applying the Security Provisions of the Civil Code; (d) the rules promulgated by different ministries or ministerial organs of China, e.g., the Interim Rules on Administrating Private Investment Funds by the China Securities Regulatory Commission, and the Rules on Administrating and Supervising Insurance Asset Management Companies by the China Banking and Insurance Regulatory Commission; (e) the guidance and discipline rules promulgated by industrial associations or organs, e.g., the Measures on Private Fund Managers’ Registration and Funds’ Filing by the Asset Management Association of China, and the Trading Rules by the Shanghai Stock Exchange. In addition, there are also rules and regulations promulgated by local congresses and governments, e.g., the Regulations on Administrating and Supervising State-owned Asset of Shandong by the People’s Congress of Shandong Province. All the above may affect your corporate finance cases, either from the legal-effect perspective or from the regulatory perspective.

For their application in practice, the first is to study the proposed corporate finance case and identify the applicable legal provisions. The second is to evaluate the effect of such provisions on the case. In general sense, if the activity therein breaches the laws and regulations promulgated by the People’s Congress or the State Council, it will be invalid; and if it breaches the rules and regulations promulgated by other authorities, it may be valid but may be fined or punished in other ways. What shall be noticed is the judicial interpretation, as it may imply how the judicial outcome will be in the future. The third is to advise and complete the documentary work according to the evaluation, including the procedures for and after the closing.

In the corporate finance area, the most active is the investment/financing made by the private equity funds, and it is much more active than traditional investments and M&As. Key reasons are: (1) the Beijing Stock Exchange was just opened, and it may provide more facilitated ways for mid- and small-sized new high-tech companies to be listed; (2) China released many other new rules, regulations and facilities to develop high-tech companies, including tax and banking. These measures enable the private equity funds to have more confidence that they may cash out their investments at a higher price and in an easier way.

The most active industrial sectors are new energy, semiconductor and other domestic high-tech alternatives. In these sectors, you can easily see more deals coming when deals are closing. The key reason is that China is taking these sectors as the national policy, and people believe – as they can see in history – they can succeed if they follow the national policy. This is why the investors in these sectors are confident and making more deals.

There is a tricky scene now. On one hand, private equity funds are searching and investing in more high-tech companies, while on the other hand, the majority shareholders of some high-tech companies are facing the risk of being sued by their private equity fund investors. A typical example is where the company got invested by a private equity fund investors years ago, but due to COVID-19 and other reasons, it is not qualified to be listed in any stock exchange, and at this point the investors will require the majority shareholders to purchase or to find another investor to purchase their shares of the company – otherwise they may claim to sue against the majority shareholders in this respect, and they can always win if only such purchase-back is written in their investment agreements. In fact, the majority shareholders may never find new investors under this situation, as people always know that the company may not be listed in a foreseeable future. That is why you can always see that some private equity funds are busy finding and investing in companies, but some are busy suing.

It is started from the understanding of the business operations of the entrepreneurs; the clearer the better, especially their needs. Sometimes, legal due diligence will be used to achieve this goal. With the clearer understanding of the business operations, then the deal or operation structures may be designed to accommodate the needs of the entrepreneurs in accordance with the applicable laws and regulations. Once the deal or operation structure is defined, the documentary work will get the direction and become easier to handle. However, getting documents fixed and executed is not the end of the legal work, as a document regarding potential risks also needs to be provided to the entrepreneurs for their reminding when they are performing the documents in the future.

In terms of the application of foreign laws, the engagement of local lawyers is a must. However, before the engagement is confirmed, the following work will need to be done: (1) review the resumés of the lawyers and make sure they are capable of handling the proposed investment or other deals; (2) check more information regarding their resumés and backgrounds, via the Internet or by other means, especially the comments or appraisals by international magazines or institutions; (3) if necessary, talk and confirm with the referrers and the lawyers about the potential concerns before the confirmation is made. After the confirmation, the engagement letter will be discussed and executed before the legal work is commenced.

According to the officially released information, there will be many laws and regulations promulgated or updated this year or in the very near future, and in terms of the updates by the State Council, there will be dozens of regulations. Of these new or updated laws and regulations, some are related to the corporate finance, e.g., on tax and patent, while some are not, e.g., on social assistance and consul protection. However, a trend can be seen from the released information; i.e., the new and updated laws and regulations will benefit China’s national policy to develop industries of high-tech, carbon reduction and new energy. This may provide more work opportunities for entrepreneurs and lawyers in the area of corporate finance, but the lawyers need to master such new or updated laws and regulations before they can advise their clients.

Entrepreneurs and lawyers are strongly encouraged to be aware of the complexity of the legal system of China when handling related corporate finance cases. It is crucial for them to find out the right legal provisions applicable to their cases – and then find out the most appropriate way to protect their interests.