New restructuring rules for backdoor listings

In September 2016, the China Securities Regulatory Commission (CSRC) issued its Decision on Amending the Administrative Measures for Material Asset Restructurings of Listed Companies and additionally made revisions to three complementary documents: the Interim Provisions on Strengthening the Oversight of Irregular Stock Transactions Relating to Material Asset Restructurings of Listed Companies; the Provisions on Several Issues Concerning the Regulation of Material Asset Restructurings of Listed Companies; and the Opinions on the Application of Articles 14 and 44 of the Administrative Measures for Material Asset Restructurings of Listed Companies. This follows upon the previous revision of the acquisition and restructuring measures in November 2014.

Background of new rules. A backdoor listing constitutes a material asset restructuring of a listed company, and article 13 of the Administrative Measures for Material Asset Restructurings of Listed Companies (the measures) expressly addresses the criteria for recognizing a backdoor listing. In August 2011, the measures specified for the first time that restructuring listings will be subject to more stringent oversight, requiring them to dovetail with IPOs; and in November 2013, they further provided for equivalence with the criteria for IPOs. The CSRC requirements on backdoor listings are hence much more stringent than those for other material asset restructurings.

In recent years, with the increasingly serious IPO blockage, backdoor listings have shown a growth trend. However, both listed companies and restructurers have done their best to avoid triggering the backdoor listing conditions, thereby sidestepping the CSRC’s regulation. Large quantities of financing have been used to purchase shells, resulting in an explosion in their price. Such unreasonable acts have seriously distorted the optimal allocation of resources by the market.

Jiang Fengtao is the managing partner and Liu Bing is a partner at Hengdu Law Firm