Securities Times｜News from the Two Sessions: Cai Jianchun, President of SSE Puts Forward Three Proposals to the Two Sessions

Translated from Securities Times

How to further optimize the policy environment and promote corporate mergers and reorganizations? How to promote the sound and sustainable development of public offering REITs market? How to stimulate the effectiveness of professional financial trials? The Securities Times journalist learned that during the "Two Sessions" this year, Cai Jianchun, member of the National Committee of the Chinese People's Political Consultative Conference (CPPCC) and President of the Shanghai Stock Exchange, prepared several proposals, focusing on themes such as corporate mergers and reorganizations, special legislation for REITs and the "three-in-one" trial mechanism of the Shanghai Financial Court, offering suggestions for the high-quality development of the capital market.

Cai Jianchun proposed that ministries and commissions should further optimize and improve policies such as taxation and asset evaluation guidelines to promote corporate mergers and reorganizations. At the same time, in order to promote the development and growth of the REITs market, he proposed formulating special regulations for REITs. In addition, Cai Jianchun also proposed exploring the establishment of a centralized jurisdiction for financial criminal cases and implementing a "three-in-one trial" mechanism for financial trials in the Shanghai Financial Court, so as to facilitate the resolution of complex disputes involving both criminal and civil matters.

Proposing to Optimize the Policy Environment to Promote Corporate Mergers and Reorganizations

Mergers and acquisitions are effective measures for enterprises to strengthen resource integration, achieve rapid development, and enhance competitiveness. They are also important approaches to resolving overcapacity, industrial restructuring, and achieving high-quality development.

Since 2023, the China Securities Regulatory Commission (CSRC) has repeatedly expressed its support for high-quality industrial mergers and acquisitions (M&As), successively introducing designated convertible bond restructuring rules and extending the validity period of financial information. It has also explicitly proposed to establish a "green channel" for M&As and reorganizations of technology-based enterprises that break through key and core technologies, appropriately increased the valuation inclusiveness for the restructuring of technology-based enterprises with light assets, and optimized and improved the "small quota fast track" review mechanism for mergers and reorganizations, demonstrating an open and inclusive position as a regulator.

Taking the STAR Market as an example, since its inception, more than 350 asset transactions have been disclosed, with a total transaction value of about RMB 57.8 billion. Since the implementation of the comprehensive registration system in 2023, companies on the STAR Market such as Damon Technology Group Co., Ltd., Linkage Software Co., Ltd., and Focuslight Technologies Inc. have implemented M&As and reorganizations by shares issuance and cash purchase. At the same time, there are also cases such as China Merchants Group's strategic investment in Cathay Biotech Inc. to strengthen cooperation in their respective advantageous fields.

Cai Jianchun found in the research that although corporate mergers and reorganizations have achieved positive results, they still face problems and challenges in practice. For example, it is necessary to further clarify and optimize the applicable standards and processing requirements of relevant tax policies for mergers and reorganizations. The bar for special corporate income tax treatment for enterprise legal person remains high. Individual shareholders do not enjoy the same treatment as enterprise legal person shareholders. For cross-border reorganizations, additional conditions need to be met to choose to apply special tax treatment provisions, resulting in a higher threshold. It is difficult to apply special tax treatment to innovative payment tools such as designated convertible bonds for M&As and reorganizations.

Meanwhile, cross-border stock-for-stock M&As still face difficulties. In 2020, the Ministry of Commerce issued the Measures for the Administration of Strategic Investment by Foreign Investors in Listed Companies (Revised Draft for Public Comment) to optimize the relevant institutional arrangements for stock-for-stock M&As, but the measures have not yet been officially issued. At the same time, lengthy administrative procedures and approval processes involved in cross-border stock-for-stock M&As cause difficulties in the pace-control and significant uncertainties in the approval process, resulting in limited operability in cross-border share swap.

In addition, traditional valuation methods tend to overvalue M&As of sci-tech innovation enterprises and goodwills. The core assets of sci-tech innovation enterprises are mainly intangible assets, some of which may be either unidentifiable or difficult to recognize and measure in accounting terms, thus unable to be reflected in the company's books, leading to significant discrepancies between the book value and the appraisal value of the M&A targets. The expected earnings for sci-tech targets are highly uncertain, and traditional valuation methods based on future cash flows of targets have limited applicability and low accuracy.

In light of these, Cai Jianchun proposed the following suggestions: First, it is suggested that the tax authorities optimize tax policies related to M&As. This includes further improving the special tax treatment, and refining the applicable standards for individual shareholders, the application of various innovative payment tools, and the applicable standards for cross-border reorganizations.

Second, it is suggested that the Ministry of Commerce and relevant departments clarify and optimize relevant policies of cross-border share swap. It is proposed to expedite the release of the Measures for the Administration of Strategic Investment by Foreign Investors in Listed Companies, and establish a "white list" for specific areas such as high-end manufacturing and "bottleneck" technologies, thereby reducing pre-communication costs for enterprises and supporting key and core technology enterprises in making full use of cross-border share swap to acquire overseas high-quality assets.

Third, it is suggested that the Ministry of Finance guide, promote and improve the guidelines for asset evaluation of sci-tech innovation enterprises. Based on the relevant evaluation methods outlined in the Guidelines for Asset Appraisal Expert No.14 - Asset Appraisal of Sci-Tech Innovation Enterprises issued by the China Appraisal Society, it is proposed to promote the China Appraisal Society to study and issue detailed guidelines and manuals for the use of evaluation methods and explore research on industry-specific valuation methods.

Accelerating the Special Legislation for Real Estate Investment Trusts (REITs)

In June 2021, the first batch of nine publicly offered REIT products were officially listed, marking the formal launch of publicly offered REITs in China. At present, China's public REITs market has seen 30 initial offerings and 4 additional offerings listed, with total funds raised exceeding RMB 100 billion. Practice has proved that REIT products play an important role in revitalizing existing assets, expanding effective investments, promoting a benign cycle of investment and financing, and improving asset operation and management mechanisms.

Cai Jianchun said that China's REITs have achieved positive results in the pilot phase by adopting a framework of "public funds + asset-backed securities". However, the basic system of top-level design needs to be improved urgently, and relevant institutional arrangements pose significant constraints on further expanding the REITs market and serving the real economy. Specifically, there are multiple layers of nested products, complex transaction structures, and high transaction costs. The operation and management mechanism of products is complex, with multiple layers of delegation and agency, and the obligations and responsibilities of all parties need to be strengthened through institutional mechanisms. The supporting systems for REITs, such as tax support, accounting treatment, and investor access, still need continuous improvement.

"Considering the principles of business adaptability and legislative convenience, and referring to the practice of special legislation in overseas REITs markets, it is relatively realistic and feasible to formulate special regulations for REITs at the State Council level based on the Securities Law," said Cai Jianchun. "This approach can comprehensively solve the various institutional constraints faced by REITs, conform to the law of REITs development, and promote the development and growth of REITs market."

In terms of specific legislative priorities, Cai Jianchun proposed clarifying five aspects:

First, it is proposed to clarify that REITs fall within the scope of securities regulated by the Securities Law, and stipulate matters such as the issuance, trading, information disclosure, and investor protection of REITs, with matters not specified in the regulation subject to the provisions of the Securities Law.

Second, it is proposed to clarify the relevant arrangements for the issuance and trading of REITs, specify the conditions for the issuance and listing of REITs, the management of REITs managers, the market-making mechanism, etc., and solve issues related to product structure and the responsibilities and obligations of participating institutions.

Third, it is proposed to clarify the management structure and holder meeting mechanism of REITs, determine the product structure of "REITs vehicle + project company", establish and improve the REITs holder meeting mechanism based on the shareholders' meeting system, and solve operation and management efficiency issues.

Fourth, it is proposed to clarify the relevant supporting mechanisms of REITs taxation, accounting treatment, transfer of state-owned assets, etc., to solve constraints and incentives issues.

Fifth, it is proposed to clarify the regulatory arrangements and legal responsibilities of the REITs market, specify relevant regulatory arrangements such as information disclosure of REITs issuers and use of raised funds, and solve issues related to legal liability subjects and mechanisms.

Proposing the Implementation of a "Three-in-One" Trial Mechanism at the Shanghai Financial Court

In August 2018, the Shanghai Financial Court, the first financial court in China, was officially established. In 2018 and 2021, the Supreme People's Court clarified the jurisdiction of the Shanghai Financial Court, implementing centralized jurisdiction over financial civil and commercial cases and administrative cases involving finance within the jurisdiction of Shanghai.

Since its establishment, the Shanghai Financial Court has conscientiously fulfilled its financial trial functions and played an active role in deepening the reform of China's professional financial trial mechanism, enhancing the professionalism and efficiency of financial justice, and providing high-quality financial trial services to support the building of Shanghai as an international financial center.

Cai Jianchun stated that in recent years, with the rapid development of the financial market and the continuous deepening of financial innovation, the issue of involving both criminal and civil matters in financial case trials has become increasingly prominent. This poses a realistic demand for further adjusting and optimizing the jurisdiction scope of cases and implementing centralized jurisdiction of financial crime cases.

Specifically, financial crime cases are highly specialized, and general courts may lack a team of professional case-handling judges. When trying civil cases involving financial crimes, it is difficult for trial courts to fully grasp the criminal information. Separately trying criminal cases and civil cases arising from the same illegal acts is not conducive to the efficient use of judicial resources. For example, in the case of manipulating the securities market by Xian, the Shanghai High People's Court ruled in 2020 that Xian committed the crime of manipulating the securities market and made an effective criminal judgment. In 2022, the Shanghai Financial Court further tried the liability dispute of Xian's manipulation of the securities trading market, facing issues such as evidence transfer and the mechanism for prioritizing criminal fines for civil compensation during the trial of the case.

In order to better implement the spirit of the Central Financial Work Conference and implement the requirement of "zero tolerance" in combating securities crimes, Cai Jianchun proposed referring to the successful practice of the Hainan Free Trade Port Intellectual Property Court in taking full jurisdiction over civil, administrative and criminal cases related to intellectual property rights. He suggested exploring the establishment of a centralized jurisdiction for financial criminal cases and implementing a "three-in-one" trial mechanism for financial trials in the Shanghai Financial Court, so as to facilitate the resolution of complex disputes involving both criminal and civil matters, thereby further enhancing the efficiency of professional financial trials. At the same time, based on ensuring a smooth start to the reform and taking into account the current situation of the trial institution and the construction of the trial team of the Shanghai Financial Court, the scope of "three-in-one" jurisdiction will be limited to cases involving the capital market and foreign financial cases at the pilot phase.