Studies On The Legal Issues In Overseas Private Placement By Domestic Corporations

Overseas private placement is a new approach to take foreign direct investment ("FDI") in the PRC foreign investment area, which refers to domestic corporations issuing new shares to foreign strategic investors who will bring advanced management experience and operation technology to such corporations. As the subscribers of the newly issued share are limited to overseas strategic investors, in terms of the target investor, overseas private placement is different from state-owned enterprises' public offering and listing in overseas stock exchanges. Further, overseas private placement also differs with the traditional FDI model by establishing Sino-foreign joint ventures or wholly foreign owned enterprises or by acquiring Chinese shareholders' existing equity interest in domestic corporations. Aiming at taking the control of the target company, a series of option arrangement, including without limitation call option, put option, and anti-dilution option, will be contemplated in the overseas private placement transactions. Call option means that the strategic investor will have the right to request the target company to issue new shares to it by private placement to increase its shareholding in the target company when certain conditions are satisfied. Anti-dilution right gives the strategic investor an opportunity to demand the target company to issue additional shares to it to maintain its proportionate interest in the target company in the event that the target company's new share issue may dilute its shareholding. According to the put option, the strategic investor will have the chance to exit from the target company by selling its shares back to the target company where there are some material adverse changes with the PRC investment environment.Whilst private placement transactions enjoy the protection from well-developed legal system in the international capital market, it is indeed a new topic for the PRC market. The PRC legal system is not developed enough to contemplate and regulate the sophisticated arrangements in the private placement transactions. Based on the successful experience of other jurisdictions, this article analyzes different legal issues occurring in oversea private placement transactions and also explores some legislative proposals. The main body is divided into 3 parts and the content of the same is as follows:Several legal issues related to private placement are discussed in Chapter 1. Both the call option right and anti-dilution right should be exercised by private placement. Private placement is in nature a kind of private offering, which is one of the transactions which may be exempted from registration with SEC under the US securities law. However, under PRC law, as the regulators do not distinguish the private offering with public offering, it is not clear whether private offering is entitled to be exempted from the verification of the Chinese Securities Regulatory Committee which generally applies to public offering. Hence, based on the experience of foreign jurisdiction, some legislative proposal is explored in the article. In addition, under PRC law, it is also not clear whether private placement as a kind of new share issue will be subject to the pre-emptive right of original shareholders to subscribe new shares. Some legislative suggestions are also proposed herein. Chapter 2 deals with share repurchase issues in the context of overseas private placement. In overseas private placement transactions, international strategic investors may exit from the target company by asking the target company to repurchase the shares. In foreign jurisdiction, whilst enough space is available for share repurchase, share repurchase is also regulated and controlled by the law. However, it is not easy to structure share repurchase transactions in the PRC context. In light of the needs of the PRC economic development, some legislative suggestions are explored herein.The certainty of option arrangement in overseas private placement transaction is discussed in Chapter 3.