China Launches Landmark Preference Share Pilot Program

On 30 November 2013, the State Council of China issued the Guiding Opinions on the Pilot Launch of Preference Shares (the "Guiding Opinions") allowing listed companies (上市公司) and unlisted public companies (非上市公众公司) to issue preference shares in both public and private markets in China on a trial basis. The Guiding Opinions indicate that the authorities recognize the concept of preference rights and their understanding of such rights (as discussed in detail in this note) are by and large similar to those in the international domain. The issuance of the Guiding Opinions and other rules are certainly intended to open up additional avenues of financing for listed and public companies, including as an additional instrument for funding M&A transactions. It is also expected that listed commercial banks will be the first to avail themselves of this fund raising opportunity in order to meet increasingly tougher capital adequacy rules.

However, there is one substantive and significant limitation on this development: the type of companies which can issue preference shares is limited to listed companies and unlisted public companies. We discuss these limitations and also consider the effect of the Guiding Opinions on investors engaged in pre-IPO private equity and venture capital investments who have long sought added rights and protections for their investments in China similar to those afforded to preference shares in other jurisdictions.

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