On 7 March 2018 the China Insurance Regulatory Commission (CIRC) issued its amended "Insurer Shareholder Regulations" (the Regulations). Among other items, the Regulations delineate Shareholders in CIRC-authorised domestically-invested PRC insurance companies (Insurers) into four categories:
- Financial Investor Class I - (less than 5%)
- Financial Investor Class II - (5% or greater but less than 15%)
- Strategic Investor - (15% or greater but less than 1/3)
- Controlling Investor - (1/3 or greater)
However, due to the fact that the Regulations also specifically prohibit any future changes to an Insurer’s Shareholder register resulting in the emergence of a single shareholder (or affiliated/acting-in-concert group) holding greater than 1/3 of an Insurer’s shares then, for the purposes of any new application to acquire an Insurer’s shares (New Applicant), Controlling Investor means in effect 1/3, and 1/3 only.
The Regulations set out the qualifying criteria to be met by any New Applicant for each of an Insurer’s Four Categories of Shareholders as follows:
1. Financial Class I New Applicants must satisfy the following criteria:
(i) Being operationally sound, with a reasonable level of operating revenue.
(ii) Being financially sound, with the most recent financial year being profitable.
(iii) Having sound and complete tax records, with an unbroken and unblemished tax history for the three most recent years.
(iv) Having sound integrity, with no major integrity failing for the three most recent years.
(v) Having sound governance and compliance, with no major regulatory or legal breaches for the three most recent years.
2. Financial Class II New Applicants must, in addition to the Financial Class I criteria, also satisfy the following additional criteria:
(i) Having sound reputation; stable and secure investment record; excellence in its core business.
(ii) Having the financial strength to make the investment, with the most recent two financial years being profitable.
(iii) Having a strong balance sheet, with net assets exceeding RMB 200 million.
3. Strategic Investor New Applicants must, in addition to both Financial Class I and Financial Class II criteria, also satisfy the following additional criteria:
(i) Having a strong balance sheet, with the most recent three financial years being profitable.
(ii) Having net assets exceeding RMB 1 billion.
(iii) Having an equity investment balance not exceeding net asset value
4. Controlling Investor New Applicants (i.e for 1/3 and 1/3 only) must, in addition to all of Financial Class I, Financial Class II and Strategic Investor criteria, also satisfy the following additional criteria:
(i) Having gross assets exceeding RMB 10 billion.
(ii) As at the end of the most recent financial year, having a net asset value greater than 30% of gross assets.
In addition to all the New Applicant qualifying criteria set out above, the Regulations also for the first time in the insurance sector introduce a "Negative List" of disqualifying criteria for all New Applicants. All New Applicants are subject to seven disqualifying criteria (Universal Disqualifications). All Controlling Investor New Applicants (i.e 1/3 and 1/3 only) are subject to an additional ten disqualifying criteria (Controlling Disqualifications).
The Universal Disqualifications, in respect of all New Applicants, are:
(i) Serious integrity failure
(ii) Opaque shareholding structure
(iii) Either ever having held Insurer shares as a nominee, or ever having appointed a nominee to hold Insurer shares.
(iv) In respect of investing in any Insurer, ever having submitted false or misleading material or statements.
(v) In respect of investing in any Insurer, ever having in the immediately prior 3 years borne material responsibility for the failure of an Insurer’s business.
(vi) In respect of investing in any Insurer, ever having borne material responsibility for an Insurer’s material breach of regulations.
(vii) In respect of investing in any Insurer, ever having refused to assist or co-operate with any CIRC supervision or investigation.
The additional ten Controller Disqualifications, in respect of Controlling Investor New Applicants (i.e 1/3 and 1/3 only) are:
(i) Cashflow volatility being significantly impacted by the condition of the economy generally.
(ii) Operating forecasts appear unfeasible.
(iii) Insufficient financial strength to provide the support necessary to allow the Insurer to operate without interruption.
(iv) Lack of excellence in its core business, and overly diverse participation in multiple industry sectors.
(v) Clear short-comings in its corporate governance structures and systems.
(vi) A multitude of affiliated entities; opacity and complexity in respect of it and its affiliates’ shareholding structures; unusual and multitudinous related party arrangements and transactions.
(vii) A record of unsound investment practices in the public domain.
(viii) Lack of integrity in its commercial practices, leading to unsavoury outcomes.
(ix) An investigative finding by any regulator of improper practices.
(x) Any other factor which might cause a material adverse impact for the Insurer.
In its Explanatory Notes accompanying the Regulations, CIRC noted that it did not anticipate immediately subjecting an Insurer’s pre-existing Shareholders’ share-holdings to the Regulations’ requirements. However, CIRC also noted in its Explanatory Notes that it reserved the right to provide guidance to, and take measures in respect of, those Insurers which may be at risk due to their pre-existing Shareholder structures. It cannot therefore be ruled out that, in particular, CIRC may use the Regulations to force divestment of all or some of an Insurer’s shares currently held greater than 1/3 by one, or an affiliated/acting-in-concert group, Shareholder(s).