How to get a special legal opinion through without a single round of feedback

Since February 2016, when the Asset Management Association of China (the AMAC) made clear that "where certain major matters of a private fund manager change, a legal opinion issued by a law firm must be submitted through the private fund registration and filing system", the AMAC is understood to have received tens of thousands of legal opinions. Few of them have passed review without difficulty: opinions have been sent back repeatedly, some have come close to being refused altogether, and reports of law firms issuing opinions "carelessly" and filing them with the CSRC have appeared in the press more than once, which has undoubtedly sounded a warning for the legal profession.

What are the specific requirements the AMAC has laid down, and how is a special legal opinion to be issued? Minton's lawyers have summarised them, in the hope of clearing the obstacles at every stage of a special legal opinion.

1. [The relevant provisions]

A change of "major matters" requires a legal opinion

On 5 February 2016 the AMAC's Announcement on Several Matters concerning the Further Regulation of the Registration of Private Fund Managers also required expressly that an institution already registered as a private fund manager submit a "special legal opinion" issued by a lawyer when major matters change.

It should be noted that the special legal opinion on the change must be submitted to the AMAC within ten working days from the date the industrial and commercial registration of the change is completed.

2. [What to know about issuing a special legal opinion]

1. Preparation

In the light of the relevant provisions, and so as better to issue a special legal opinion, a private fund manager is advised, before major matters change, to prepare the plan for the change in advance, to take professional legal advice in good time, and to engage a lawyer to issue the legal opinion.

The lawyer engaged should communicate actively with the manager, obtain the relevant documents, understand the position and form a preliminary view, and begin due diligence promptly, sorting and supplementing the material, so as to issue the opinion in accordance with the AMAC's requirements.

Before issuing the special legal opinion, the following should also be understood:

[The scope of a change of major matters]

The AMAC has listed these: an application by a private fund manager to change its controlling shareholder or its legal representative is a major matter.

In addition, a change in the manager's name, registered address or form of organisation; a change of the fund's custodian; and a change in the manager's legal representative, executive partner (or appointed representative) or actual controller should also be treated as a change of major matters.

[What the legal opinion covers]

Besides a brief outline of the applicant institution's basic position, the special legal opinion should focus on all the information concerning the matter changed, chiefly the complete account of the change and the disclosure of information about it. Specifically, it must cover:

a. the position before and after the change, the reason for it, the procedure followed, whether the position after the change complies with the rules, and the disclosure of information about it;

b. a review of whether the applicant institution has disclosed information about the change truly and completely.

Minton's lawyers suggest that, where several major matters change at once, consideration be given to issuing a separate special legal opinion for each rather than one combined opinion, so reducing the likelihood of its being sent back.

2. Due diligence

In reviewing the internal resolutions, a lawyer must check them one by one against the Company Law, the Law on State-Owned Assets of Enterprises, the articles of association and the other relevant rules. The matter changed must be examined in detail, through such material as the resolution of the shareholders' meeting, the share transfer agreement, the decision of the executive director, the articles of association, the limited partnership agreement and the file of the industrial and commercial registration of the change, analysing whether the whole process of the change went through the relevant formalities. The lawyer should describe the amendments to the articles of association and the particulars of the industrial and commercial registration after the change, so as to show that the procedure was lawful and effective.

It is worth noting that, as to the means of verification in due diligence, the AMAC looks at whether the lawyer handling the matter has verified the applicant institution's actual business comprehensively, including but not limited to reviewing written material, on-site verification, interviews with personnel (the lawyer should keep photographs, recordings and notes of the interviews), internet and database searches, interviews outside the institution, and inquiries to administrative and judicial organs, organisations with public functions and accounting firms, with particular attention to whether on-site verification, interviews and internet searches were used.

Moreover, issuing a legal opinion imposes strict requirements of diligence, and in some cases reported in the press a law firm was referred to the CSRC precisely because it had not been diligent. Take a change of legal representative:

First, in its comments the AMAC has expressly required a clear explanation of the reason for the change of legal representative, and not a bare disclosure of the result after the change.

Secondly, the procedure for the change must be explained by reference to the basis for changing the legal representative, and not merely described. Minton's lawyers suggest that the clauses in the articles of association of the private fund manager on the appointment and change of the legal representative be sorted out and listed, and that, taken with the documents generated in the actual process of the change, an opinion be given on whether the procedure complied with what the articles provide.

In addition, the disclosure of information about the change of legal representative should be complete and true, and a clear opinion should be given on it.

3. Points to note in issuing a special legal opinion

First, as already said, the lawyer should explain the reason for and the process of the change in detail. Minton's lawyers consider that whether the reason accords with the business strategy, and whether the matter, time and method of the change were agreed in advance, should all be taken into account and analysed and explained one by one according to the actual circumstances.

Secondly, as to verifying who the persons are, a lawyer may consult the relevant credit reference websites, or rely on the certificate of no criminal record issued by the public security organ, and have the person himself provide a copy of his identity card, his curriculum vitae, evidence of his education and his fund practising qualification, so as to check the identity of the persons after the change.

Thirdly, where a change of major matters brings a new related party, that party's basic particulars must be set out. The shareholding structure before and after the change, and the identity and functions of the actual controller and the legal representative, should be described in detail, with a legal opinion on them.

Minton's lawyers suggest that the major matters changed be explained thoroughly and comprehensively, that the client company be kept in communication, that the manager's change of major matters be fully understood, and that problems found in the course of the work not be avoided.

3. [Serious supervision]

The AMAC: the legal profession too must reward the good and restrict the poor, and hold to integrity

It is not hard to see that opinions that do not meet the AMAC's requirements, and managers and lawyers who do not rectify matters as the association requires, are the chief cause of the low pass rate. A lawyer should attend to every stage: the self-check by due diligence, rectification to the required standard, and the issuing of the opinion. In completing the opinion efficiently, the client's full cooperation and a sensible division of work within the firm's team are equally important.

The AMAC stresses that law firms too should specialise. In an interview with China Securities Journal the AMAC said that it intends to introduce measures to reward the good and restrict the poor in the legal profession, encouraging law firms with professional ability and industry strengths to practise in the private fund field; otherwise bad money will drive out good, and in the end it is the investors who pay.

The CSRC likewise attaches great importance to the quality of work and the integrity of intermediaries, and holds to "strict, comprehensive supervision in accordance with law". A penalty received in the private fund field is recorded in the capital market integrity file, and may affect practice in other fields, such as initial public offerings and the New Third Board. The state now stresses the comprehensive use of integrity data, so that a breach in one place may in future mean restrictions everywhere.