南宁糖业,QFII,短线交易,调解结案-Nanning Sugar settles high profile securities dispute with Marti.doc

Nanning Sugar settles high profile securities dispute with Martin Currie 2 August 2010 FAI HUNG CHEUNGPartner China and Hong Kong JANE JIANGHead of PRC Regulatory Group China and Hong Kong NORMAN LIAssociate China and Hong Kong MITCHELL SILKPartner United States HUAWEI SUNSenior Associate China and Hong Kong PETER THORPPartner China and Hong Kong On 14 July 2010 the board of directors of Nanning Sugar Manufacturing Co Ltd Nanning Sugar issued a public announcement stating that the company had settled its long running legal dispute with UK based investment manager Martin Currie Ltd MCL and its two wholly owned subsidiaries Martin Currie Investment Management Ltd MCIM and Martin Currie Inc MCI collectively the MCL Subsidiaries MCL and the MCL Subsidiaries settled the case by agreeing to pay Nanning Sugar a lump sum amount equivalent to RMB40 million As the first dispute involving a Qualified Foreign Institutional Investor QFII under the PRC securities regulatory regime the court proceedings initiated by Nanning Sugar had attracted significant public interest The settlement of the case prior to the court s ruling ensures that the legal issues arising from the dispute will continue to be the subject of debate Nanning Sugar s Claim Nanning Sugar is a company listed on the Shenzhen Stock Exchange In a suit brought before the Nanning Intermediate People s Court of Guangxi Province in June 2008 Nanning Sugar claimed that MCL MCIM and MCI had breached Article 47 of the PRC Securities Law by failing to account to Nanning Sugar for the proceeds of the sale by the MCL Subsidiaries of shares in Nanning Sugar that had been purchased less than six months earlier Article 47 holds that if a shareholder holding a stake of more than 5 in a listed company sells its shares in the company within six months of purchasing them the proceeds arising from the sale will belong to the listed company and will be recovered by the listed company s board of directors This is commonly referred to in the PRC as the short swing profit rule The fact that the MCL Subsidiaries had engaged in the purchase and sale of shares in Nanning Sugar within a period of less than six months was not disputed having been reported by MCL in a series of public announcements According to those announcements MCIM and MCI had through a series of transactions occurring in August 2007 acquired shares in Nanning Sugar of 2 5 and 3 4 respectively Then approximately five months later the MCL Subsidiaries proceeded to sell the majority of these shares with MCIM selling all of its shares in Nanning Sugar and MCI being left with only an 0 8 share in the listed company QFII Regime and the Shares Held by the MCI Subsidiaries Under the PRC QFII Regime a QFII may purchase shares listed on a PRC stock exchange subject to the limit of its investment quota granted by SAFE Further foreign investors that have not obtained a QFII licence may obtain access to the Chinese A share market by investing through a QFII within its quota MCIM has obtained QFII qualification Nanning Sugar s claims concerned share market investments that the MCL Subsidiaries managed for their clients who had made investments both through MCIM s own QFII quota and through the QFII quotas of other third parties Disclosure of Interests Requirements Under the PRC securities and QFII regulatory regime there are detailed requirements on disclosure by investors and QFIIs of their shareholdings in publicly traded companies According to Article 86 of the Securities Law and Article 13 of the Measures for the Administration of the Takeover of Listed Companies the Takeover Measures disclosure is required each time an investor acquires an interest of 5 or more in the total issued shares of an issuer or holds 5 or more of the total issued shares of an issuer and there is an increase or decrease of 5 in its holding Detailed provisions regarding shares held by QFIIs on behalf of their clients are set out in various measures provisions and circulars collectively the QFII Regime issued by the CSRC PBOC and SAFE Under the QFII Regime the securities accounts that a QFII may open include i accounts opened in its own name for the purposes of proprietary trading and ii client account s opened in its name as nominee or fund manager A QFII is obliged to report to the CSRC the identity and investments of the beneficiary owners of its client accounts In particular it should report to the CSRC and to the relevant exchange details of the actual investors or funds including their names places of incorporation assets and securities investments within eight business days following the end of each quarter Thus where it holds 5 or more of the total issued shares of an issuer through a QFII an offshore investor rather than the QFII managing the investment on behalf of its investor is under a primary obligation to disclose its holdings in the issuer However it should submit the disclosure information to the relevant exchange through the relevant QFII and the QFII is obliged to ensure that each offshore investor strictly complies with its disclosure requirements Calculation of the Shareholdings Held by an Investor Article 12 of the Takeover Measures states that The interests held by an investor in a listed company shall include the shares registered in its name as well as those shares in respect of which it can exercise the voting rights even though they are not registered in its name The interests in a listed company of an investor and its concerted parties 一致行动人 shall be calculated on a consolidated basis MCL and the MCL Subsidiaries acknowledged that they qualified as investors under Article 12 of the Takeover Measures since the MCL Subsidiaries exercised control over the voting rights of their clients Also because MCIM and MCI are both wholly owned by MCL and thus under its common control they were considered to be concerted parties under Article 83 2 of the Takeover Measures Thus MCL and the MCL Subsidiaries each had an obligation to disclose their shareholding interests in Nanning Sugar as their aggregate shareholding interests had passed the 5 threshold It is not disputed that the calculation mechanism under Article 12 of the Takeover Measures applies to the disclosure requirements of an investor Short Swing Profit Rule However it is far from clear whether the aggregate shareholdings of the MCL Subsidiaries should be calculated on a consolidated basis for the purpose of determining a shareholder holding a stake of more than 5 in a listed company under Article 47 of the Securities Law The short swing profit rule specified in Article 47 is generally understood to serve as a defence against insider trading by shareholders who by virtue of holding a significant stake in a company are presumed to have privileged access to important information concerning the company s operations One argument against aggregating the shareholding interests of investment managers such as MCIM and MCI is that their control over a diffuse collection of client shareholdings does not enable them to obtain any substantial insider information about the listed company Moreover with Article 86 the disclosure requirements and Article