Financing methods available to New Third Board listed enterprises

A multilevel capital market has taken shape in China. The New Third Board is playing an increasingly prominent role as one of the main levels of the market, particularly by providing a good platform and opportunity for the long-term development of unlisted public companies.

Listing on the New Third Board greatly raises the profile of an enterprise and its brand. Listing guides the enterprise to be compliant in its daily operation and improves its capital structure. More significantly, it gives enterprises diversified financing channels to satisfy their capital needs.

Q: What distinctive financing methods are available to enterprises listed on the New Third Board?

A: Compared with non-listed companies, there are two main distinctive methods of financing available to enterprises listed on the New Third Board, those being preferred share offerings, and private placements.

Q: What are preferred shares? How many types are there, and how are they characterized?

A: The State Council’s Guiding Opinions on Launching a Preferred Share Pilot Project, issued 30 November 2013, set out a definition of preferred shares as a specified class of share other than generally specified common shares, the holders of which have preference over holders of common shares in the distribution of company profits and remaining property but whose rights to participate in the decision-making and management of the company are limited.

Two features are evident from the foregoing definition.

First, holders of preferred shares have priority over common shareholders when the company distributes profits and remaining property.

Second, holders of preferred shares have restricted participation rights in a company’s decision-making and management – though it should be emphasized that they do not completely lack voting rights.

Preferred shareholders have voting rights under certain circumstances, including the issuance of preferred shares, revision of articles of association provisions relating to preferred shares, a one-time reduction or aggregate reductions of the company’s registered capital exceeding 10%, and merger, division, liquidation or change in corporate form of the company.

Preferred shares can be classified into four types.

First, cumulative preferred shares and non-cumulative preferred shares, depending on whether unpaid dividends from preceding years can be cumulated.

Second, participating preferred shares and non-participating preferred shares, depending on whether the shareholders enjoy a share in the remaining profits, over and above their predetermined dividend percentage.

Third, convertible preferred shares and non-convertible preferred shares, depending on whether they can be converted into common shares under specific conditions.

Fourth, callable preferred shares and non-callable preferred shares, depending on whether the issuer of the preferred shares can purchase the preferred shares at a set consideration.

Jiang Shengyang is a partner and Tang Yu is an associate of AnJie Law Firm