Switzerland and China have established a "Stock Connect" programme enabling Chinese companies listed on the Shanghai or Shenzhen stock exchange to access the Swiss capital market by listing Global Depositary Receipts (GDRs) on the SIX Swiss Exchange (SIX). The programme became effective on 25 July 2022.
On 28 July 2022, GEM Co., Ltd., Gotion High-Tech Co., Ltd., Keda Industrial Group Co., Ltd., and Ningbo Shanshan Co., Ltd., became the first Chinese companies to list GDRs accordingly. Since then, another four Chinese companies (Hangzhou GreatStar Industrial Co., Ltd., Joincare Pharmaceutical Group Industry Co., Ltd., Lepu Medical Technology (Beijing) Co., Ltd., and Sunwoda Electronic Co., Ltd.) listed GDRs on SIX. The prices of these GDRs have remained stable since their listing, and there does not appear to have been a sell-off by the initial investors.
The present article sets forth the requirements that must be fulfilled to list GDRs on SIX (listing requirements), as well as the requirements to maintain the listing (ongoing requirements). When outlining the listing requirements, not only Swiss but also Chinese law will be addressed.
The Swiss law requirements to obtain and maintain a listing of GDRs are set forth in the SIX Listing Rules (SIX LR). The specific rules concerning the listing of GDRs are provided for in art. 90 et seqq. of the SIX LR. The SIX LR are detailed in numerous other regulations of SIX, in particular so-called directives. The SIX LR explicitly refer to these regulations where appropriate.
The Chinese law requirements to list GDRs abroad, including on SIX, are set forth in the Provisions on the Supervision and Administration of Depository Receipts under the Stock Connect Scheme between Domestic and Overseas Stock Exchanges (CSRC Provisions), which were issued by the China Securities Regulatory Commission (CSRC) and became effective on 11 February 2022.
The Swiss law listing requirements concern, first of all, the issuer (i.e. the Chinese company, referred to in this article as the "Chinese Issuer"). The respective requirements are provided for in art. 10-16 SIX LR (art. 91 SIX LR), and are generally the same as for issuers of equity securities on the main segment of SIX. They concern the due incorporation of the Chinese Issuer, its track record (including in terms of financials), the auditors and audit reports of the Chinese Issuer, and its equity capital. The most noteworthy requirements are as follows:
- The Chinese Issuer must have a track record and audited financials for three full years. The Chinese Accounting Standards for Business Enterprises (ASBE) belong to the accounting standards recognized by SIX.
- The auditors of the Chinese Issuer must be supervised by the CSRC.
- The Chinese Issuer must have reported equity capital of at least CHF 25 Mio.
Furthermore, the listing requirements concern the securities to be listed (i.e. in particular the GDRs). In this respect, the requirements concerning equity securities listed on the main segment of SIX apply mutatis mutandis (art. 94 para. 1 SIX LR). The relevant requirements cover namely the legal validity of the securities to be listed, the free float, the proper tradability of the securities, clearing and settlement, and payments and corporate actions. The main requirements are the following:
- There must be a confirmation available that (i) the GDRs and (ii) the underlying shares have been validly created.
- The securities must have a certain free float, which must be present on the GDR-level (and not only on the level of the underlying securities). Specifically, 20% of the GDRs must be freely tradable, and the freely tradable securities must have a capitalisation of at least CHF 25 Mio.
- The GDRs can be created with Euroclear Bank (home CSD), in which case a Swiss paying agent is not required.
A central role is assumed by the depositary, which actually issues the GDRs. The depositary regime must meet namely the following requirements (art. 92 et seq. SIX LR):
- The depositary must be subject to appropriate Swiss or foreign supervision (i.e. appropriately supervised foreign depositaries may also take on the role).
- The agreement with the depositary (depositary agreement) must have a certain minimal content to assure that the GDR investors are (i) protected if the depositary becomes insolvent, and can (ii) profit from the membership and financial rights related to the underlying shares. Also, the depositary agreement must provide for information rights of SIX vis-à-vis the depositary.
The Chinese Issuer must publish a prospectus (unless an exception to the prospectus duty applies; art. 95 SIX LR in connection with art. 35 et seqq. of the Swiss Financial Services Act). The prospectus must be approved by an official prospectus office. The contents of a prospectus for GDRs generally correspond to those of prospectuses for other equity securities. There are, however, special disclosures to be included concerning the depository, the global depository receipts and the depository agreement (art. 95 para. 2 SIX LR).
Exceptions to the listing requirements are possible if the interests of the investors and the stock exchange remain protected, and the applicant can provide evidence that the purpose of the provision, from which an exception shall be granted, can be properly fulfilled by other means.
Under the CSRC Provisions, the Chinese Issuer must already have its shares listed on one of the stock exchanges in China (when it comes to listing of GDRs on SIX in Shanghai or Shenzen). Furthermore, for Chinese Issuers to lawfully list GDRs abroad, including on SIX, none of the following can be present:
- The application documents for the GDR offering contain misrepresentations, misleading statements or major omissions.
- The rights and interests of the Chinese Issuer have been severely impaired by activities of its controlling shareholder or de facto controller (such as not at arm's length transactions), and such impairment still exists.
- The Chinese Issuer or any of its affiliated companies has illegally provided external guarantees, and such guarantees have not been removed.
- Any incumbent board director or senior executive of the Chinese Issuer has been subject to administrative penalties of the CSRC in the last 36 months or has been censured publicly by the domestic stock exchange in the last 12 months.
- The Chinese Issuer or any of its incumbent board directors or senior executives is under ongoing investigation by judicial authorities for suspected criminal offences, or under ongoing investigation by the CSRC for suspected violations of laws or regulations.
- The auditor has issued a qualified opinion or adverse opinion, or has refused to issue an opinion, on the Chinese Issuer's financial reports for the most recent financial year, unless the impact of the matters addressed in the aforesaid opinions has substantially ceased to exist or the GDR offering involves a material asset restructuring.
- There are other circumstances where investors legitimate rights and interests, or public interests, are severely impaired.
Where the underlying shares of the GDRs are newly issued shares of the Chinese Issuer, the offering price of the GDRs after a pro-rata conversion must, in principle, not be lower than 90% of the average price of the underlying shares over the 20 trading days prior to the first day of the offering period of the GDRs.
The CSRC is the competent authority in China to approve the offering and listing of GDRs on overseas stock exchanges by Chinese Issuers. The approval letter of the CSRC is usually valid for 12 months and states the maximum number of GDRs that can be offered and the number of underlying shares represented by the GDRs.
Upon having listed GDRs on SIX, several ongoing requirements must be met under Swiss law. Of course, Chinese Issuers are also subject to ongoing requirements under Chinese law, which are not the subject of this article. The main Swiss law requirements are the following:
- The Chinese Issuer must publish an audited annual report and a semi-annual interim report (art. 49 et seqq. SIX LR).
- The Chinese Issuer is subject to the duty to inform the market, ad hoc, of price-sensitive facts (ad hoc publicity; art. 103 and art. 53 et seq. SIX LR). In that regard, it is noteworthy that the GDRs are traded during a condensed trading window starting at 3 pm in the afternoon Swiss time. This allows Chinese Issuers to disclose price-sensitive facts after the Chinese market closes and before the Swiss market opens, and thus helps them to comply with the rule to not disclose price sensitive facts during trading hours under both jurisdictions.
- The Chinese Issuer must disclose to SIX transactions in both the underlying shares and the GDRs by the members of its board of directors and executive management team (disclosure of management transactions; art. 100 and art. 56 SIX LR). In order to become aware of these transactions, the Chinese Issuer must impose on these individuals the obligation to report their management transactions to it first.
- The Chinese Issuer is also subject to regular reporting duties towards SIX provided for in the Directive Regular Reporting Obligations of the SIX (DRRO). Regarding GDRs, SIX considers it generally sufficient that the GDRs currently issued are reported to SIX on a yearly basis (which does not arise from the DRRO). Furthermore, changes concerning the depository or depository agreement must be reported to SIX at the same time as the holders of the GDRs themselves are informed (art. 104 SIX LR).
On the other hand, Swiss law does not require the Chinese Issuer to include specific information on corporate governance in its annual report. Instead, the Chinese Issuer must declare in the prospectus and the annual report that it adheres to the corporate governance standards of its domestic market (i.e. the respective Chinese law standards; art. 100 SIX LR). Also, the Swiss rules on the disclosure of major shareholdings (starting at a threshold of 3% of the voting rights) and on public takeover law are not applicable to issuers of GDRs or their shareholders.
Generally, the applicable ongoing requirements are similar to those Chinese Issuers must comply with due to applicable Chinese stock exchange rules. However, the details may vary. For example, that an ad hoc disclosure is required (or may be postponed) under the applicable Chinese rules does not necessarily imply that the same holds true under Swiss law.
There is emerging interest among Chinese companies to list GDRs on SIX, in particular among companies that have or plan to have business operations in Europe. The new rules enacted in connection with the "Stock Connect" programme established by Switzerland and China accommodate such interest and facilitate GDR listings by Chinese Issuers. Proof of this include the recognition by SIX of ASBE as relevant accounting standard and the condensed trading window for GDRs, which helps Chinese Issuers to comply with their ad hoc disclosure duties. Since the end of July, already eight Chinese Issuers have seized the opportunity and listed GDRs on SIX.
The Swiss and Chinese "Stock Connect" programme is not a one-way road, but also opens up the Chinese capital markets to Swiss companies. Swiss companies have not yet listed securities on Chinese exchanges accordingly, but with the good prospects for the Chinese economy expected in 2023, Swiss companies may pursue this opportunity in the future.
For more details on listing GDRs on SIX and the "Stock Connect" programme between China and Switzerland, contact your CMS client partner or local CMS experts: