Horizontal competition and its proper solution

A definition of horizontal competition is not provided for in the existing laws and regulations of the PRC, although restrictions on horizontal competition are scattered here and there in regulatory documents of the China Securities Regulatory Commission (CSRC) and stock exchanges. For example, article 27 of the Code of Corporate Governance for Listed Companies in China requires that: “A listed company’s business must be completely independent from that of its controlling shareholder. The controlling shareholder and its subsidiaries must not engage in any business identical or similar with that of the listed company. The controlling shareholders must take effective measures to avoid horizontal competition with the listed company.”

In connection with restructuring of any material asset of a listed company, the CSRC requires intermediaries to disclose or check whether the listed company upon restructuring is exposed to any actual or potential horizontal competition. In principle, actual horizontal competition that cannot be addressed poses a material threat to success in passing CSRC review procedure. If there is any

potential horizontal competition, however, the review will focus on whether it has material impact on independence of the listed company, and whether there is any solution to the horizontal competition, which may comprise specific measures, timetables, or progress and assurance for addressing horizontal competition. The review will also consider whether the timetable is appropriate, whether the specific measures proposed are justifiable, and whether these measures are sufficiently detailed and feasible.

Cao Yiran is a partner at Grandway Law Offices