Shell game

After a new mergers and acquisition (M&A) rule was released last August regulating overseas "shell companies", worries prevailed among domestic companies eager to list overseas through using that route - commonly known as a "small red chip listing".

The so-called small red chip listing is a model that many Chinese companies have used on their journeys to launch initial public offerings (IPOs) overseas.

In this process, a company establishes a shell company, also known as special purpose vehicle (SPV), in the Cayman or British Virgin Islands and then transfers equity in their domestic enterprises to the offshore SPV in cross-border share swaps.

But on August 8, 2006, six ministries, including the Ministry of Commerce (MOFCOM) and the China Securities Regulatory Commission (CSRC), adopted M&A rules that took effect on September 8, 2006.

The new regulation requires MOFCOM approval for Chinese individuals or companies establishing an SPV and engaging in a cross-border share swaps.

The stricter government rules brought uncertainty to domestic companies that are ready to list abroad, because their IPO plans are required to go through stricter examination by more government departments for a longer period.

Yet fears were alleviated when solar energy company Yingli Green Energy Holding Co Ltd (Yingli Cayman) successfully became listed on the US stock market on June 8.

"Tianwei Yingli, the predecessor of Yingli Cayman, was the first company approved by the MOFCOM for cross border share swaps under the new M&A regulation," Kenneth Zhou, a lawyer with Wilmer Cutler Pickering Hale and Dorr LLP, wrote earlier this year in Invest China, a domestic magazine.

The company, Yingli Cayman, became a case that drew heated discussion due to the sensitive timing of its IPO preparation.

Zhou and others asserted that Tianwei Yingli was a trailblazer to learn from and imitate for domestic companies that followed in attempting overseas listings.

But other analysts and industry insiders say that the company may not be the representative case it seemed.

"Because Tianwei Yingli finished its offshore restructuring, which is the key step for red chip listing, before the September 8, it was not necessary to apply the new M&A regulation, and is not subject to MOFCOM scrutiny", says a lawyer with Morrison & Foerster LLP, who requested anonymity.

"Yingli received approval before the new regulation went into force," a source with Yingli's bookrunner, Goldman Sachs, tells China Business Weekly.

Tianwei Yingli's offshore SPV, Yingli Cayman, was incorporated on August 7, 2006 in the Cayman Islands.

On September 5, 2006, three days before the new regulation took effect, Yingli Group transferred a 51 percent controlling equity interest in Tianwei Yingli to Yingli Cayman.

As a result of the transfer, Tianwei Yingli became Yingli Cayman's subsidiary and a Sino-foreign joint venture enterprise.

CSRC's approval

The new M&A rule also requires that an SPV formed for listing purposes and controlled directly or indirectly by Chinese companies or individuals must obtain the approval of the CSRC prior to listing and trading on overseas stock exchanges.

"Given that we completed the transfer of our controlling equity interest in Tianwei Yingli before September 8, 2006, the date on which the new regulation became effective, it is not necessary for us to submit an application to the CSRC to obtain its approval of the listing and subsequent trading of our shares on the New York Stock Exchange," Yingli's Chinese counsel, Fangda Partners, said in a legal opinion for the company's prospectus filed with the US Securities and Exchange Commission.

"The application of this new Chinese regulation and the notice remains unclear and there currently is no consensus among the leading Chinese law firms regarding the scope and applicability of the CSRC approval requirement," Fangda says.

"The CSRC's approval for the listing and trading of SPV securities on an overseas stock exchange is actually a grey area in China - it is not very difficult to obtain," the source with Goldman Sachs says.

Some securities analysts say Tianwei Yingli's State-owned background may have to some extent served as a back-up for it to gain support from the government and that is why it could complete key steps for overseas listings before the new rule came in to force.

Thus far no company has claimed approval for cross-border share swaps from the MOFCOM or has been through examination from various regulators since the new M&A regulation took effect, sources with CSRC tell China Business Weekly.

Tianwei Yingli was established as a limited liability company in China in August 1998 to engage in the manufacturing of multicrystalline silicon ingots and wafers, photovoltaic (PV) cells, PV modules and PV systems.

Its controlling shareholder, Yingli Power Holding Company Ltd, holds 59.58 percent of its share capital.

Miao Liansheng, the chairperson and CEO of Yingli Cayman, heads the Yingli Group and its controlling shareholder, Yingli Power.

(China Daily 06/16/2007 page4)