On 21 March 2014, the China Insurance Regulatory Commission (CIRC) released the Administrative Measures for the Merger and Acquisition of Insurance Companies (BAOJIANFA No 26, 2014) (Administrative Measures). This article evaluates the impact of the Administrative Measures, which comes into force from 1 June 2014.
Prior to the introduction of the Administrative Measures, there was no single law or regulation in China that dealt with matters relating to merger and acquisition of insurance companies. These acquisitions were regulated by the Insurance Law (Chairman Order No 11), the Provisions on the Administration of Insurance Companies (CIRC Order No 1, 2009), the Measures for the Administration of Equity in Insurance Companies (CIRC Order No 6, 2010), the Notice of the China Insurance Regulatory Commission on Issues concerning Article 4 of the Measures for the Administration of Equity in Insurance Companies(BAOJIANFA No 29, 2013), and other respective laws and regulations. The introduction of the Administrative Measures, in better regulating equity acquisition transactions, also relaxes shareholder qualifications and other aspects of these transactions, which will help to facilitate mergers and acquisitions involving insurance companies.
The Administrative Measures primarily governs transactions where the target company is a Chinese insurance company (including both domestic insurance companies and foreign-invested insurance companies). It does not apply to insurance companies’ investments in the equity of non-insurance companies and offshore insurance institutions.
Definition of Acquisition
For the purpose of the Administrative Measures, “acquisition” shall refer to the activities where a purchaser (including the investor and its affiliated parties, and parties acting in concert) acquires, at one time or in a cumulative manner, more than one-third of the equity of an insurance company and becomes the largest shareholder of the insurance company, or becomes the largest shareholder of an insurance company and attains a controlling position despite acquiring only one-third or less of the company (at one time or in a cumulative manner).
Relaxation of Shareholder Requirements
The now superseded Provisions on the Administration of Insurance Companies (CIRC Order No 3, 2004) fixed a 20% limitation on the shareholdings of domestic insurance companies.1 In 2010, the Measures for the Administration of Equity in Insurance Companies, taking into account the development of the insurance industry, established the principal provisions for the relaxation of shareholding limits for shareholders in domestic insurance companies.2 The Notice of the China Insurance Regulatory Commission on Issues concerning Article 4 of the Measures for the Administration of Equity in Insurance Companies (Notice), which came into force in 2013, clearly defined specific conditions and procedures for the relaxation of proportionate shareholdings.3 The Notice restricted an investor’s initial investment in an insurance company to 20% of the insurance company’s equity, and only permitted a shareholder to increase their shareholding after they had held those shares for at least three years.
In past involvement with insurance company acquisitions, many purchasers hoped to attain control of a target insurance company with a single investment, but were barred from doing so by the regulations in the Notice regarding shareholder limits. Control of the target insurance company could only be attained by appointing directors and management level personnel and utilizing veto rights in special matters. A purchaser could only increase its equity three years after its earlier acquisition.
The Administrative Measures provide that, where approval from the CIRC is given, purchasers may not need to comply with the three year requirement. Where one hopes to attain a shareholding exceeding 20% of the total company capital by a single investment, the introduction of the Administrative Measures is welcome news.
However, take note that the Administrative Measures does not modify the 51% upper limit on insurance company shareholdings. Moreover, the Administrative Measures does not alter the share acquisition rules prescribed by the Notice for insurance companies that have been established for less than three years. A single shareholder’s shareholding (or that of the shareholder and its affiliates) in those insurance companies remains limited to 20%.4
Relaxation of Sources of Acquisition Capital
The Measures for the Administration of Equity in Insurance Companies stipulates that “a shareholder shall make investment in an insurance company with its proprietary funds from legitimate sources, and shall not do so with bank loans or non-proprietary funds in other forms.” As the Administrative Measures aims to encourage and facilitate the merger and acquisition of insurance companies, it provides that “upon approval by the CIRC, investors in the merger and acquisition activities of insurance companies may raise funds from merger and acquisition loans or by other means, provided that the amount of the merger and acquisition loans borrowed shall not exceed 50% of the total monetary consideration.”
Permitting Same Industry Acquisitions by Insurance Companies
In order to prevent the transfer of risks, and unfair competition conduct, between insurance companies in the same industry, the Measures for the Administration of Equity in Insurance Companies provided that “with regard to two or more insurance companies which are controlled by the same institution or one of which controls the other, they shall not operate the same type of insurance business which will give rise to conflict of interest or competition relationship, unless otherwise stipulated by the CIRC.” This resulted in no purchaser being allowed to concurrently control more than two insurance companies where there was a conflict of interests or competition in their operations. The Administrative Measures relaxes this restriction by providing that “After the conclusion of purchase, the purchaser may be in control of two insurance companies of the same industry with the approval of the CIRC.”
Regulation and Supervision of Acquisition Transactions
The Administrative Measures also lays down regulatory and supervisory requirements regarding acquisition procedures, corporate governance, purchasers’ liabilities, intermediaries’ liabilities, and so forth.
In cases of unlawful conduct or dishonest behaviour by parties involved in mergers and acquisitions of insurance companies, or a contravention by a professional service intermediary, the CIRC can establish credit files, restrict the parties concerned from investing in insurance companies for three years, and restrict the professional service intermediaries from participating in the mergers and acquisitions of insurance companies for three years.
The Administrative Measures also prescribes a transition period for insurance company acquisitions (the period between the signing of the equity transfer agreement, capital contribution agreement, or share subscription agreement and the completion of the ownership transfer of the relevant equity or shares). During the transition period, the purchaser shall not propose re-election of the Board of Directors of the insurance company, and the acquired insurance company shall not make any investment, purchase, or sale of assets that will cause major impact to the company, or engage in any transactions with the purchaser and its affiliated parties, unless this is necessary to rescue a company facing serious financial difficulty.
Furthermore, to ensure the continued stable operation of the target insurance company, the Administrative Measures requires a purchaser to undertake, in writing, not to transfer its holdings of the equity or shares in the target insurance company within three years from the completion of the acquisition.
Review and Prospects
In view of the CIRC’s strict supervisory stance on the issuing of new insurance licences to companies, we believe that the official implementation of the Administrative Measures will result in more institutions entering the insurance market. Some insurance institutions may wish to restructure in order to participate in insurance merger and acquisition transactions under the new measures.