Key legal and regulatory developments driving and shaping M&A
On 7 March 2018, the China Insurance Regulatory Commission (CIRC) finally issued the long awaited amendments to the Administrative Equity Measures of Insurance Companies (the New Equity Rules). Previously, CIRC had issued two successive drafts for public consultation at the end of 2016 and in July 2017 respectively. The New Equity Rules replace existing insurance equity rules, they will also replace the regulatory circular relating to investments in Chinese insurance companies by limited partnerships which was issued by CIRC in 2013 as well as the insurance mergers and acquisitions measures issued by CIRC in 2014.
The New Equity Rules apply to all domestic insurance companies (including those with foreign shareholding less than 25 per cent). The New Equity Rules only apply to foreign invested insurance companies (the FIE Insurers, whose foreign shareholding reaches 25 per cent or more) by reference.
Compared with existing equity rules, which only differentiate general shareholders from major shareholders (holding 15 per cent or more stake in an insurance company), the New Equity Rules provide four types of shareholders as follows:
In addition to the various qualification requirements and restrictions imposed on different types of shareholders, if the investors are overseas financial institutions, they are required to have the following qualifications:
The New Equity Rules substantially reduce the maximum shareholding by any single investor/shareholder in an insurance company from 51 per cent to one third (i.e. up to 33 per cent) of the total equity of the insurance company. This restriction will not apply if:
(a) the investor is itself an insurance company and it needs to set up or acquire a new insurance company for business innovation or business specialisation; or
(b) an insurance company needs to set up a group and thus needs to either establish or acquire a new insurance company.
According to a CIRC press release, such requirements for shareholders and shareholdings (including maximum shareholding restriction) will not have retroactive effect on existing shareholders of insurance companies in general, unless CIRC identifies any potential risks with the shareholding structure of existing insurers.
The single presence policy contained in the existing equity rules have been amended as follows:
(a) Controlling Shareholder (including its affiliates and person-in-concert)
A Controlling Shareholder can only invest in one insurance company engaging in the same category of insurance business. If the Controlling Shareholder is already an insurance company, it cannot invest into another insurance company which engages in the same category of insurance business as the Controlling Shareholder.
These general restrictions can be exempted if:
(b) Strategic Shareholder (including its affiliates and person-in-concert)
(c) Note that the above mentioned amended single presence policy does not apply to Financial I Shareholder or Financial II Shareholder, i.e. these two types of shareholders can invest in an unlimited number of insurance companies.
The New Equity Rules emphasise that an investor shall use its lawful proprietary funds to make a capital contribution into the invested insurance company. Such proprietary funds are limited to the net assets of the investor. No investor may circumvent this requirement by setting up a holding company or transferring expected income rights relating to equity interests.
Additionally, the New Equity Rules expressly prohibit investors from acquiring equity interests in insurance companies by using the following funds, directly or indirectly:
(a) any loans related to insurance companies;
(b) funds obtained as a result of the encumbrance of deposits or other assets of insurance companies; or
(c) funds obtained as a result of improper use of financial influence of or an improper related relationship with insurance companies, etc.
The New Equity Rules also strictly implement the look-through supervisory policy on insurance companies, which may, include, amongst others, the following requirements:
(a) each shareholder in an insurance company must specify (level by level) its shareholding structure up to the de facto controller and its relationship with other shareholder(s) or persons-in-concert;
(b) shareholdings held by the shareholder, its affiliates, and persons-in-concert shall be calculated on aggregated basis;
(c) no nominee arrangement is permitted for a shareholder to hold a stake in the insurance company on behalf of any other party; and
(d) when the value of a shareholder’s stake in an insurance company accounts for 50 per cent or more of the total assets of such shareholder, should the shareholder’s de facto controller change, the new controller should also satisfy the qualification requirements imposed by CIRC.
Under the look-through supervisory policy, any changes to an insurance company’s controlling shareholder or de facto controller should be reported to the insurance companies and also to CIRC.
The New Equity Rules strictly implement the look-through supervisory policy, and CIRC has the right to substantially determine the shareholders of insurance companies, their de facto controllers, related parties and person-in-concert through various measures, including but not limited to:
If any insurance company shareholders are found to have engaged in illegal activities or to have violated the New Equity Rules, CIRC may impose penalties, including (i) limiting the rights of shareholders at fault, (ii) requiring that shareholders transfer their stakes or sell their stake on auction, and (iii) limiting shareholder investments in the insurance industry. CIRC will also create a list of prohibited investors in insurance companies. Investors may be prohibited by CIRC from investing in the insurance industry for periods up to and including a lifetime ban.
The New Equity Rules came into effect on 10 April 2018.
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© Norton Rose Fulbright LLP 2021