Untangling the legal issues that surround renminbi funds exits

During the past few years, the performances of renminbi funds have drawn more attention, and the Law on Securities Investment Funds, which is currently being amended, will offer an even better legal framework for the development of renminbi funds. The question is then, what are the legal issues involved in the various means of exit available to renminbi funds?

Means of exit

Exit via initial public offering (IPO) means that a renminbi fund directly invests in a company that is proposed to list and realises exit through the listing of the target company and the sale of that company’s shares. According to publicly available statistics, in 2011, 135 out of 150 exits by renminbi funds were realised by way of an IPO (98 of which were realised by way of a domestic IPO), accounting for 90% of all kind of exits. In the first half of 2012, 84 exits were realised by renminbi funds, 75 of which were realised by way of an IPO (and 68 of which were realised by way of a domestic IPO), accounting for 89.3% of all exits.

Exit via asset restructuring means injecting the assets of a target company into a listed company by way of a share swap or asset acquisition, and then exiting on the secondary market. This can reduce the investment lead time and give rise to relatively high returns. However, asset restructurings by listed companies have long been subject to the Measures for the Administration of Material Asset Restructurings by Listed Companies. An asset purchase or sale by a listed company that exceeds a certain percentage requires submission to the merger, acquisition and restructuring committee of the China Securities and Regulatory Commission (CSRC) for review. At a conference held in September, a senior official of the CSRC’s listed company regulatory department indicated that, for the purpose of realising the philosophy of “easing controls and enhancing service”, and promoting acquisitions and restructurings, the CSRC was considering the gradual elimination of administrative permissions for acquisitions and restructurings, and that at present more than two-thirds of acquisition and restructuring transactions only need to carry out the listed company information disclosure procedure.

Kevin Zhu is a partner at the Beijing office of Zhonglun W&D Law Firm and vice-chairman of its private equity fund practice; Fan Liangliang is an associate at the Beijing office and a member of its private equity fund practice