How a company listing on the NEEQ can meet the "clear shareholding" requirement

Under the Business Rules of the National Equities Exchange and Quotations (Trial), a joint stock company applying to list its shares on the National Equities Exchange and Quotations system shall satisfy the condition that its shareholding is "clear". In practice an unclear shareholding is a substantive obstacle to listing on the NEEQ. Intermediaries accordingly focus, in the course of due diligence, on whether a company's shareholding is clear. This article analyses how a company listing on the NEEQ can meet the "clear shareholding" requirement.

I. The "clear shareholding" requirement of the National Equities Exchange and Quotations

Under the Guidelines on the Basic Standards Applicable to the Conditions for Listing Shares on the National Equities Exchange and Quotations, a clear shareholding means that the company's shareholding structure is clear, ownership is plainly distinguished, genuine and certain, and lawful and compliant, and that there is no dispute over title, or potential dispute, in respect of the shares held by the shareholders, in particular the controlling shareholder, the actual controller and their affiliated shareholders or the shareholders actually in control.

1. None of the company's shareholders is in a position which the laws, regulations, rules and normative documents of the State provide to be unsuitable for holding shares in a company.

2. Where State-owned equity was transferred before the application to list, the rules on the administration of State-owned assets shall be observed.

3. Where equity in a foreign-invested enterprise was transferred before the application to list, the rules of the commerce departments shall be observed.

II. The points checked in practice for "clear shareholding"

1. Ruling out nominee shareholding

Nominee shareholding describes an arrangement by which the actual contributor of capital agrees with another person that the latter shall, in his own name, perform the rights and obligations of a shareholder on the former's behalf, and shall be registered with the administration for industry and commerce as the shareholder of record.

Nominee shareholding is a substantive obstacle to listing on the NEEQ, because on the one hand it is one of the key factors making a listing company's shareholding structure unstable, and on the other it means that investors do not know who the company's real shareholders are and that intermediaries may be unable to verify their true position, so that the real shareholders may infringe the rights and interests of investors.

Where a nominee shareholding exists, the company should first eliminate it and restore the true shareholding structure if it is to list on the NEEQ. The usual way is for the nominee and the actual shareholder to sign an agreement terminating the nominee arrangement and for the actual shareholder to be registered with the authority for industry and commerce as the shareholder of record, so disclosing the company's true shareholding structure to investors.

2. Every transfer of the company's shares has been lawful and compliant

In due diligence on a company intending to list, intermediaries will check whether each transfer of its shares was lawful and compliant, because a transfer that was not compliant leaves a legal defect in the equity held by the transferee and indeed by the existing shareholders. That defect may draw the company or its shareholders into litigation, which makes the shareholding structure less stable. Instability in the shareholding structure may in turn harm the lawful rights and interests of investors.

A company intending to list on the NEEQ should therefore perfect the procedure for each transfer of shares:

(1) Under the Company Law and other relevant laws and regulations, the transferee shall satisfy the conditions for holding shares in a company;

(2) The transferor and the transferee shall sign a share transfer agreement providing for the proportion of equity or the number of shares transferred, the closing date, the consideration, and the rights and obligations of each party;

(3) The transferee shall pay the consideration to the transferor as agreed;

(4) The change shall be registered with the authority for industry and commerce, that is, the transferee shall be registered as the shareholder of record;

(5) Where State-owned equity is transferred, the approval procedure of the competent State-owned asset authority shall be completed;

(6) Where foreign-invested equity is transferred, the approval procedure under the rules of the competent commerce department shall be completed.

3. The shareholders' capital contributions have been paid in full and are genuine

One of the hard requirements for listing on the NEEQ is that the registered capital must be paid up. In Minton's understanding, that requirement means that the shareholders' contributions must be paid in full and must be genuine:

(1) The contributions have been paid in full

Contributions paid in full means that each shareholder has actually paid the amount corresponding to its shareholding. The money should be paid into the company's capital verification account or the company's account, and a qualified accounting firm should issue a capital verification report on it. Where the money is paid into the capital verification account, it should be transferred to the company's account once verification is complete. A company listing on the NEEQ should ensure, before listing, that the whole of its registered capital has been paid up. Under the Company Law and the relevant rules, a shareholder may not withdraw its contribution.

(2) The contributions are genuine

That contributions are genuine has two meanings.

First, the shareholder itself has actually contributed. The money should be transferred from the shareholder's own account into the company's account or the capital verification account. Where someone else pays on the shareholder's behalf, a mandate to pay and similar documents should also be provided, to show that the contribution was in fact made by the shareholder and that the payer merely paid the money on the shareholder's authority. The main purpose of the National Equities Exchange and Quotations requirement that the shareholder contribute in person is to prevent nominee holdings of equity or shares.

Second, the money contributed is the shareholder's own lawful funds.

A lawful source of the contribution guards against defects in the shareholder's holding and latent litigation risk, and so protects the stability of the intending company's shareholding structure.

4. There is no latent dispute over the shareholders' holdings

To preserve the stability and lawfulness of a listing company's shareholding structure, the intending company and its shareholders should ensure that the equity held by the existing shareholders is free from latent dispute, and that there is no possibility of the company or its shareholders being drawn into litigation, dispute or arbitration.

A clear shareholding is a hard requirement of the National Equities Exchange and Quotations for listing, and every contribution of capital and every transfer of equity in the course of a company's establishment and operation should be lawful and compliant, with the corresponding approval and registration procedures completed, so that the shareholding structure is stable and latent litigation risk is excluded. A company intending to list on the NEEQ should rectify its position in accordance with the rules of the National Equities Exchange and Quotations.