China’s MOFCOM Issues Regulations on the Strategic Investment of Foreign Investors in Listed Companies
Published 8 November 2024
Sarah Xuan
On November 1, 2024, the Ministry of Commerce and five other departments jointly revised and issued the Regulations on the Strategic Investment of Foreign Investors in Listed Companies (hereinafter referred to as the “Regulations”). The revised Regulations mainly reduce the investment thresholds in five key areas, aiming to further expand foreign investment channels in the securities market, leverage the potential of strategic investment to attract capital, and encourage foreign investors to engage in long-term and value-based investments. The specific changes and expansions of the provisions are as follows:
1. Allowing Foreign Natural Persons to Make Strategic Investments
The 2005 Regulations stipulated that only foreign legal persons or other organizations could make strategic investments, excluding foreign natural persons (i.e., individual investors) from the eligible investor pool. The revised Regulations (Article 3) now include foreign natural persons in the scope of eligible investors, allowing them to make strategic investments in listed companies. This change aligns with the Foreign Investment Law of the People’s Republic of China. Specifically, if foreign natural persons meet the prescribed investment requirements, they can participate in strategic investments in listed companies, further expanding the pool of foreign investors and increasing investor diversity. This also helps attract more personal capital, particularly from foreign individual investors who have a strategic vision and the ability to engage in long-term investments.
2. Relaxing the Asset Requirements for Foreign Investors
According to the 2005 Regulations, foreign investors were required to meet relatively high asset thresholds. For example, the total overseas assets of the investor should not be less than USD 100 million, or the total overseas assets under management should not be less than USD 500 million.
To encourage more non-controlling foreign investors to participate, the 2024 revised Regulations significantly reduce the asset requirements for non-controlling investors. The revised asset requirements are as follows:1) If a foreign investor does not become a controlling shareholder of the listed company after making a strategic investment, the investor’s total overseas assets must be at least USD 50 million, or the total overseas assets under management must be at least USD 300 million.2) If the foreign investor becomes the controlling shareholder of the listed company, the requirement remains that the investor’s total overseas assets must be at least USD 100 million, or the total overseas assets under management must be at least USD 500 million.
This adjustment not only lowers the entry barrier for foreign investors but also opens the door for more investors with smaller capital but long-term strategic vision, particularly for medium and small international institutions and high-net-worth individuals.
3. Introduction of Tender Offers as a Strategic Investment Method
In the 2005 Regulations, the only methods available for foreign investors to make strategic investments were through private placements and agreement transfers. The ways in which foreign investors could acquire shares of listed companies on the capital market were relatively limited. In Article 5 of the 2024 Regulations, a new investment method, tender offers, is introduced as a strategic investment approach. This allows foreign investors to make strategic investments through a tender offer.
A tender offer is a public acquisition method where foreign investors can acquire a specified number of shares of a listed company at a predetermined price, typically used to obtain control of the company or achieve specific investment objectives. The introduction of this new method broadens the avenues for foreign investors to acquire stakes in Chinese listed companies, allowing them to use not only private placements and agreement transfers but also tender offers on the public market for strategic investments. This method aligns with the Securities Law of the People’s Republic of China and provides foreign investors with more flexible investment tools.
4. Allowing the Use of Shares of Non-listed Foreign Companies as Payment
The 2005 Regulations did not address cross-border share swaps or allow foreign investors to use shares of non-listed companies as payment. However, Article 6 of the 2024 Regulations explicitly allows foreign investors to use shares of non-listed foreign companies as payment when making strategic investments, particularly in private placements and tender offers. Specifically, foreign investors can use shares of a non-listed foreign company as consideration for strategic investments in listed companies, providing greater flexibility for cross-border mergers and acquisitions (M&A) and capital operations.
The introduction of this cross-border share swap mechanism facilitates the capital integration of domestic listed companies when acquiring overseas assets via strategic investments and provides a new channel for foreign companies to enhance their connection with the Chinese market through share swaps.
5. Lowering Shareholding Ratio and Lock-up Period Requirements
The 2005 Regulations stipulated that foreign investors must acquire at least 10% of the shares when making a strategic investment through a private placement, and these shares could not be transferred for three years. In the 2024 Regulations (Article 7), the requirements for the shareholding ratio and lock-up period are relaxed:1) The minimum shareholding ratio requirement for private placements is removed, allowing foreign investors to choose an appropriate investment ratio based on their actual needs.2) For strategic investments via agreement transfer or tender offer, the shareholding ratio requirement is reduced from 10% to 5%, significantly lowering the entry threshold.3) The lock-up period requirement is also relaxed from three years to at least 12 months, increasing the liquidity of foreign investments.
These changes make it more flexible for foreign investors to participate in strategic investments, especially for those who seek long-term investments but also want greater flexibility in the short term. Meanwhile, these changes still maintain the long-term nature of strategic investments, ensuring that foreign investors contribute to the stability of the Chinese capital market.
6. Enhancing Regulation and Risk Prevention
The 2024 Regulations emphasize the need for stronger regulation and risk prevention, enhancing the accountability of intermediary institutions, the information disclosure obligations, and the alignment with other safety review and anti-monopoly review systems. Specific provisions include:
1) Strengthening the Responsibility of Intermediary Institutions
In the 2005 Regulations, the responsibilities of intermediary institutions were relatively broad, with more reliance on self-regulation and market oversight, without detailed provisions on their due diligence obligations, particularly regarding the compliance of foreign investors. Article 8 of the 2024 Regulations explicitly defines the responsibilities of intermediary institutions, requiring them to disclose foreign investors’ shareholding information and ensure compliance with investment behavior. Specific measures include:a. Requiring intermediary institutions to issue professional opinions: Intermediary institutions must conduct due diligence on whether strategic investments comply with the Regulations and issue professional opinions.b. Compliance review: If an intermediary institution finds that a foreign investor’s investment does not meet compliance requirements, they must report and explain the situation, and the securities registration and settlement institution will refuse to process the relevant procedures.c. Penalty mechanisms: If an intermediary institution fails to conduct due diligence or fails to disclose the combined shareholding of the investor and their concerted parties through different mechanisms (such as QFII/RQFII, Shanghai-Hong Kong Stock Connect, etc.), the China Securities Regulatory Commission (CSRC) may impose penalties according to the Securities Law.
This provision primarily aims to prevent foreign investors from combining shareholdings through different means to exceed the shareholding limits or gain control of a listed company covertly. By strengthening intermediary institutions’ responsibilities, the regulations ensure transparency and compliance throughout the investment process, helping to avoid potential systemic risks in the capital market.
2) Investor Compliance Commitments in Information Disclosure
The 2005 Regulations had relatively simple information disclosure requirements, mainly focusing on timely disclosure of relevant investment information, with relatively relaxed requirements regarding compliance commitments. Article 9 of the 2024 Regulations explicitly requires foreign investors to make compliance commitments when fulfilling their information disclosure obligations, including disclosing whether their investments comply with the Regulations. Additionally, foreign investors may make commitments not to exercise voting rights, pledge shares, etc., for a certain period if they violate relevant compliance requirements. This measure aims to increase investors’ compliance awareness and self-discipline, reducing violations and abuse of power in the market.
3) Linkage with Foreign Investment Security Review System
The 2005 Regulations did not specify the security review process for foreign investment, and it was not clear how it linked to the national security review system. Article 10 of the 2024 revision explicitly states that strategic investments involving national security must undergo a security review in accordance with the Foreign Investment Security Review Regulations and other relevant provisions. This provision ensures that foreign strategic investments do not pose a threat to national security while expanding foreign investment, safeguarding the national security baseline.
4) Linkage with Anti-Monopoly Review Rules
The 2005 Regulations did not address the linkage between foreign investment and anti-monopoly review. Article 11 of the 2024 Regulations explicitly states that if a foreign investor’s strategic investment meets the criteria for business concentration and reaches the relevant filing threshold, the investor must file with the State Council’s anti-monopoly enforcement agency. Without filing, the concentration cannot be implemented. This provision effectively prevents foreign investors from using strategic investments to monopolize the Chinese market, ensuring fair competition and maintaining market order.
5) Administrative Penalties by the Ministry of Commerce
Although the 2005 Regulations outlined basic procedures for foreign investment, it did not provide detailed penalty measures for violations, mainly relying on securities regulators. Article 12 of the 2024 Regulations introduces administrative penalty provisions by the Ministry of Commerce, strengthening cross-departmental regulatory coordination. If the Ministry of Commerce finds that foreign investment behavior violates the Regulations, it can impose administrative penalties, further enhancing the multi-dimensional supervision of foreign investment.
7. Complete Removal of Approval and Filing for the Establishment and Change of Foreign-Invested Enterprises
The 2024 Regulations completely remove the approval and filing requirements for the establishment and change of foreign-invested enterprises, meaning the Ministry of Commerce no longer approves strategic investment matters. Foreign investors and listed companies implementing strategic investments must fulfill the information reporting obligations as per the Foreign Investment Law and the Foreign Investment Information Reporting Regulations, ensuring accurate and complete disclosure of investment information.
[Conclusions]
The 2024 Regulations build on and develop the 2005 version, introducing many key adjustments and optimizations. The revised Regulations not only promote a more open Chinese capital market but also strengthen regulatory oversight and risk prevention. By relaxing investment thresholds, encouraging long-term and value-based investments, and enhancing the responsibilities of intermediary institutions, the 2024 Regulations ensure that foreign strategic investments are more transparent and compliant. Additionally, the 2024 Regulations align with foreign investment security reviews and anti-monopoly rules, effectively mitigating potential security and market monopoly risks associated with foreign investments.
These policy changes will help increase foreign participation in the Chinese capital market, drive deeper internationalization, and support the stable development of the market, while ensuring China’s economic independence, security, and competitiveness in the process of opening up to the outside world.
1. Allowing Foreign Natural Persons to Make Strategic Investments
The 2005 Regulations stipulated that only foreign legal persons or other organizations could make strategic investments, excluding foreign natural persons (i.e., individual investors) from the eligible investor pool. The revised Regulations (Article 3) now include foreign natural persons in the scope of eligible investors, allowing them to make strategic investments in listed companies. This change aligns with the Foreign Investment Law of the People’s Republic of China. Specifically, if foreign natural persons meet the prescribed investment requirements, they can participate in strategic investments in listed companies, further expanding the pool of foreign investors and increasing investor diversity. This also helps attract more personal capital, particularly from foreign individual investors who have a strategic vision and the ability to engage in long-term investments.
2. Relaxing the Asset Requirements for Foreign Investors
According to the 2005 Regulations, foreign investors were required to meet relatively high asset thresholds. For example, the total overseas assets of the investor should not be less than USD 100 million, or the total overseas assets under management should not be less than USD 500 million.
To encourage more non-controlling foreign investors to participate, the 2024 revised Regulations significantly reduce the asset requirements for non-controlling investors. The revised asset requirements are as follows:1) If a foreign investor does not become a controlling shareholder of the listed company after making a strategic investment, the investor’s total overseas assets must be at least USD 50 million, or the total overseas assets under management must be at least USD 300 million.2) If the foreign investor becomes the controlling shareholder of the listed company, the requirement remains that the investor’s total overseas assets must be at least USD 100 million, or the total overseas assets under management must be at least USD 500 million.
This adjustment not only lowers the entry barrier for foreign investors but also opens the door for more investors with smaller capital but long-term strategic vision, particularly for medium and small international institutions and high-net-worth individuals.
3. Introduction of Tender Offers as a Strategic Investment Method
In the 2005 Regulations, the only methods available for foreign investors to make strategic investments were through private placements and agreement transfers. The ways in which foreign investors could acquire shares of listed companies on the capital market were relatively limited. In Article 5 of the 2024 Regulations, a new investment method, tender offers, is introduced as a strategic investment approach. This allows foreign investors to make strategic investments through a tender offer.
A tender offer is a public acquisition method where foreign investors can acquire a specified number of shares of a listed company at a predetermined price, typically used to obtain control of the company or achieve specific investment objectives. The introduction of this new method broadens the avenues for foreign investors to acquire stakes in Chinese listed companies, allowing them to use not only private placements and agreement transfers but also tender offers on the public market for strategic investments. This method aligns with the Securities Law of the People’s Republic of China and provides foreign investors with more flexible investment tools.
4. Allowing the Use of Shares of Non-listed Foreign Companies as Payment
The 2005 Regulations did not address cross-border share swaps or allow foreign investors to use shares of non-listed companies as payment. However, Article 6 of the 2024 Regulations explicitly allows foreign investors to use shares of non-listed foreign companies as payment when making strategic investments, particularly in private placements and tender offers. Specifically, foreign investors can use shares of a non-listed foreign company as consideration for strategic investments in listed companies, providing greater flexibility for cross-border mergers and acquisitions (M&A) and capital operations.
The introduction of this cross-border share swap mechanism facilitates the capital integration of domestic listed companies when acquiring overseas assets via strategic investments and provides a new channel for foreign companies to enhance their connection with the Chinese market through share swaps.
5. Lowering Shareholding Ratio and Lock-up Period Requirements
The 2005 Regulations stipulated that foreign investors must acquire at least 10% of the shares when making a strategic investment through a private placement, and these shares could not be transferred for three years. In the 2024 Regulations (Article 7), the requirements for the shareholding ratio and lock-up period are relaxed:1) The minimum shareholding ratio requirement for private placements is removed, allowing foreign investors to choose an appropriate investment ratio based on their actual needs.2) For strategic investments via agreement transfer or tender offer, the shareholding ratio requirement is reduced from 10% to 5%, significantly lowering the entry threshold.3) The lock-up period requirement is also relaxed from three years to at least 12 months, increasing the liquidity of foreign investments.
These changes make it more flexible for foreign investors to participate in strategic investments, especially for those who seek long-term investments but also want greater flexibility in the short term. Meanwhile, these changes still maintain the long-term nature of strategic investments, ensuring that foreign investors contribute to the stability of the Chinese capital market.
6. Enhancing Regulation and Risk Prevention
The 2024 Regulations emphasize the need for stronger regulation and risk prevention, enhancing the accountability of intermediary institutions, the information disclosure obligations, and the alignment with other safety review and anti-monopoly review systems. Specific provisions include:
1) Strengthening the Responsibility of Intermediary Institutions
In the 2005 Regulations, the responsibilities of intermediary institutions were relatively broad, with more reliance on self-regulation and market oversight, without detailed provisions on their due diligence obligations, particularly regarding the compliance of foreign investors. Article 8 of the 2024 Regulations explicitly defines the responsibilities of intermediary institutions, requiring them to disclose foreign investors’ shareholding information and ensure compliance with investment behavior. Specific measures include:a. Requiring intermediary institutions to issue professional opinions: Intermediary institutions must conduct due diligence on whether strategic investments comply with the Regulations and issue professional opinions.b. Compliance review: If an intermediary institution finds that a foreign investor’s investment does not meet compliance requirements, they must report and explain the situation, and the securities registration and settlement institution will refuse to process the relevant procedures.c. Penalty mechanisms: If an intermediary institution fails to conduct due diligence or fails to disclose the combined shareholding of the investor and their concerted parties through different mechanisms (such as QFII/RQFII, Shanghai-Hong Kong Stock Connect, etc.), the China Securities Regulatory Commission (CSRC) may impose penalties according to the Securities Law.
This provision primarily aims to prevent foreign investors from combining shareholdings through different means to exceed the shareholding limits or gain control of a listed company covertly. By strengthening intermediary institutions’ responsibilities, the regulations ensure transparency and compliance throughout the investment process, helping to avoid potential systemic risks in the capital market.
2) Investor Compliance Commitments in Information Disclosure
The 2005 Regulations had relatively simple information disclosure requirements, mainly focusing on timely disclosure of relevant investment information, with relatively relaxed requirements regarding compliance commitments. Article 9 of the 2024 Regulations explicitly requires foreign investors to make compliance commitments when fulfilling their information disclosure obligations, including disclosing whether their investments comply with the Regulations. Additionally, foreign investors may make commitments not to exercise voting rights, pledge shares, etc., for a certain period if they violate relevant compliance requirements. This measure aims to increase investors’ compliance awareness and self-discipline, reducing violations and abuse of power in the market.
3) Linkage with Foreign Investment Security Review System
The 2005 Regulations did not specify the security review process for foreign investment, and it was not clear how it linked to the national security review system. Article 10 of the 2024 revision explicitly states that strategic investments involving national security must undergo a security review in accordance with the Foreign Investment Security Review Regulations and other relevant provisions. This provision ensures that foreign strategic investments do not pose a threat to national security while expanding foreign investment, safeguarding the national security baseline.
4) Linkage with Anti-Monopoly Review Rules
The 2005 Regulations did not address the linkage between foreign investment and anti-monopoly review. Article 11 of the 2024 Regulations explicitly states that if a foreign investor’s strategic investment meets the criteria for business concentration and reaches the relevant filing threshold, the investor must file with the State Council’s anti-monopoly enforcement agency. Without filing, the concentration cannot be implemented. This provision effectively prevents foreign investors from using strategic investments to monopolize the Chinese market, ensuring fair competition and maintaining market order.
5) Administrative Penalties by the Ministry of Commerce
Although the 2005 Regulations outlined basic procedures for foreign investment, it did not provide detailed penalty measures for violations, mainly relying on securities regulators. Article 12 of the 2024 Regulations introduces administrative penalty provisions by the Ministry of Commerce, strengthening cross-departmental regulatory coordination. If the Ministry of Commerce finds that foreign investment behavior violates the Regulations, it can impose administrative penalties, further enhancing the multi-dimensional supervision of foreign investment.
7. Complete Removal of Approval and Filing for the Establishment and Change of Foreign-Invested Enterprises
The 2024 Regulations completely remove the approval and filing requirements for the establishment and change of foreign-invested enterprises, meaning the Ministry of Commerce no longer approves strategic investment matters. Foreign investors and listed companies implementing strategic investments must fulfill the information reporting obligations as per the Foreign Investment Law and the Foreign Investment Information Reporting Regulations, ensuring accurate and complete disclosure of investment information.
[Conclusions]
The 2024 Regulations build on and develop the 2005 version, introducing many key adjustments and optimizations. The revised Regulations not only promote a more open Chinese capital market but also strengthen regulatory oversight and risk prevention. By relaxing investment thresholds, encouraging long-term and value-based investments, and enhancing the responsibilities of intermediary institutions, the 2024 Regulations ensure that foreign strategic investments are more transparent and compliant. Additionally, the 2024 Regulations align with foreign investment security reviews and anti-monopoly rules, effectively mitigating potential security and market monopoly risks associated with foreign investments.
These policy changes will help increase foreign participation in the Chinese capital market, drive deeper internationalization, and support the stable development of the market, while ensuring China’s economic independence, security, and competitiveness in the process of opening up to the outside world.