It was a dismal start to 2009 for public offerings. There was no activity in the first half of the year on either the Shanghai Stock Exchange or the Shenzhen Stock Exchange. HKSE was also quiet and lawyers shuffled paper while waiting for their deals to come through the door.

Wrap-up
Cue forward to the second half of 2009 and it seems as though lawyers’ prayers were answered. “Global IPO activities experienced exponential growth in the last quarter of 2009. The US$49.5bn funds [that were] raised in October and November alone exceeded the amount for the first three-quarters combined (US$45.4bn),” says Joe Tsang, the assurance leader of China North at Ernst & Young. “The mainland and Hong Kong lead the global IPO recovery.”

However, a mini-IPO boom erupted on the HKSE. Most of the activity ywas generated by Chinese companies and they captured the headlines as investors rushed to engage with a growing economy, especially China’s Sinopharm Group, the country’s largest distributor of pharmaceutical and healthcare products, made its HKSE debut in September with a US$1.13bn IPO that was 500 times over-subscribed. Sinopharm is the second-largest listing candidate in Hong Kong’s history in terms of total funds frozen, after China Railway Construction Corporation. Similarly, the IPO of China Minsheng Banking Corporation last November was 150 times over-subscribed.

IPO activities in the mainland also picked up in the second half of the year. The Shanghai Stock Exchange saw the completion of nine IPOs and raised RMB118bn. While the Shenzhen Stock Exchange ended the year with 90 public offerings, the total funds raised was only about half that of its Shanghai counterpart.

“China is one of the major economies which has been relatively less impacted by the GFC, therefore the corporate earnings of Chinese companies planning for an IPO are also less affected,” says Tsang. “These two factors, coupled with more foreign funds buying into the shares of Chinese companies, have driven IPO activities in the Chinese mainland and Hong Kong.”

Offshore listings
Although capital markets activity is being driven by Chinese companies, legal work for international counsel is still being generated as offshore listings have proven popular with Chinese issuers.

“I think [Chinese companies] choose overseas jurisdictions because of the efficiency. The approval procedure is more efficient and quicker than the domestic capital markets,” says Liu Yan, a partner at Tian Yuan. “Some companies want to do overseas marketing and offshore IPOs can help to attract foreign capital and help their reputation.”

Of course, there are numerous options for Chinese companies in terms of offshore listings. International law firms with expertise in various jurisdictions are sought out to give advice on the listing rules of different exchanges.

“Chinese companies that want to go public are often very interested in the US or Hong Kong markets,” says David Roberts, a partner at O’Melveny & Myers. “We often get questions from private companies or PE/VC-backed companies about the pros and cons of listing in Hong Kong or the US.”

HKSE is obviously a popular choice for Chinese companies – but so too are American listing boards. “In the past the US was the preferred jurisdiction. There was a lot of prestige associated with [the US] in the minds of a lot of entrepreneurs,” says Edwin Luk, a partner at Orrick, Herrington & Sutcliffe. “But I think they are much more practical these days.”

Hong Kong is also a jurisdiction with an active capital market that has proven to be convenient for Chinese companies. “You don’t lose the international advantage by doing a Hong Kong listing. It’s almost like getting your cake and eating it too – Hong Kong is close to China, people understand your business and the country you are operating in,” says Orrick’s partner Mark Lee.

Making the transition from a private company to a public company subject to public scrutiny can be a difficult one, and the role of the lawyer is sometimes extended. “Completing an IPO is just the beginning. Our main role is helping Chinese companies get mentally and physically ready to live life as a US public company,” says OMM’s Roberts.

It’s not just about understanding the legal requirements but also about communicating to the public in a fair and balanced way. “There are a lot of conversations about the rules – but there are also a lot of conversations about whether or not to disclose or how to disclose. A lot of it is counseling companies about the benefits of transparency,” he says.

Offshore counsel
A company may be generally considered to be Chinese-based on its jurisdiction of incorporation or the location of its primary business operations. However, many listed entities are incorporated in offshore jurisdictions such as the Cayman Islands and this trend appears to be on the rise. Funds raised by companies incorporated in the Cayman Islands and Bermuda accounted for approximately 84% of the total public offerings in 2009 – up from 66% in 2008.

At the end of last year, HKSE announced that companies incorporated in the BVI would be able to apply for a listing. “By jurisdiction, BVI companies provide the second-largest source of foreign investment in China, at US$5.8bn (in the year to June 2009),” says Barry Mitchell, a partner at Maples and Calder. “This latest development could encourage more investment in China through BVI companies, as the option of an exit through an IPO is now available.”

Approval also reduces the cost of pre-IPO restructuring to change the jurisdiction of the holding company. “This significant development offers businesses considering a listing on HKSE a greater choice of well-regulated and cost-effective offshore jurisdictions as their corporate domicile,” says Christine Chang, joint managing partner of the Hong Kong office of Maples and Calder.

Offshore legal counsel works closely with both the issuer’s counsel and the underwriters’ counsel to ensure that the interests of both parties are met. “A lot of the time the perception of the market is that the offshore role is somewhat commoditised and that everything is always standard. Therefore it is a very easy rubber-stamping- type role,” says Chang. “That in fact is not correct because there will be situations where your expertise and knowledge of the transaction will be called into play.”

For example, when Maples assisted Evergrande Real Estate Group on its pre-IPO restructuring in 2009, this involved pioneering advice from a Cayman Islands and BVI law perspective on equity and debt restructuring. The restructuring of the security package before the IPO raised novel compliance issues under the listing rules of Hong Kong, which were the subject of a listing decision issued by HKSE in July 2009.

2010 predictions
“With the economy and the capital markets becoming more stable, coupled with a strong IPO pipeline and market liquidity, we forecast 2010 IPO activities in the mainland will continue to be strong,” says Terence Ho, strategic growth markets leader of Ernst & Young. “We forecast that, for the Shanghai Stock Exchange alone, IPO value will increase more than two-fold, reaching RMB380bn.”

China has set in motion plans for the development of an international board for foreign company share trading, in an effort to open up its financial markets. Although the timing for its opening has not yet been officially confirmed, it’s widely anticipated that the board will open in the second half of 2010.

The launch is already generating interest and Liu Gang, partner at Commerce & Finance, is hopeful that plans will stay on track. “I hope that in the second-half of this year one or two companies will successfully list [on the proposed international board] but it is very hard to say. There are a lot of politics and issues,” he says.

Law firms are closely monitoring the development of Listing Rules and some have been engaged by foreign clients who want to ensure that their interests are protected. “We are working with some of the leading securities firms to lobby the CSRC,” says Liu. “They have organised several seminars to discuss the issues and we have been invited to give our opinions.”

Jun He is another PRC law firm investing time and resources into the development of the proposed Listing Rules. “We have done quite extensive research to compare the various requirements in different capital markets,” says Li Maochang, a partner at Jun He. ‘We are trying to determine those rules which are commonly adopted by different stock exchanges that can also be adopted by the Chinese regulators to better accommodate international companies seeking a listing on the international board.”

The launch of the Growth Enterprise Board, officially named ChiNext, on the Shenzhen Stock Exchange should also generate further activity. “I think many Chinese companies will choose the Growth Enterprise Board first because of the high price-earnings ratio and also because the approval procedure is very efficient,” says Tian Yuan’s Liu Yan.

IPO activity in Hong Kong should be maintained as Chinese companies continue to seek listings there. “If the market holds up then there will be a lot of deals that will get launched this year, so I think that this level of activity is expected to continue,” says Orrick’s Luk. “From the lawyers’ side, we do a lot of the work leading up to the deal going to market so generally lawyers are expected to be very busy in capital markets work in the first-half of the year.”

However, OMM’s Roberts is more cautiously optimistic. “What’s happened in 2009 is a good thing but isn’t necessarily indicative of a recovery to the levels we saw in 2006 or 2007 for IPOs from China,” he says. “I do think 2010 looks very promising and we know that because we are beginning to work with clients that are preparing for an IPO in 2010. We are getting requests for proposals from underwriters for other IPOs. There is a very visible pipeline but the hard thing to say is which ones will complete and which will not,” he adds.

Despite the positive predictions on activity, 2010 may not be all smooth sailing. “During the recession there have been a lot of changes in market circumstances and we expect turbulence in the market,” says Li, noting that Jun He will have to be prepared for the challenges that both an increase and a decrease in activity may bring.