Since the launch of the pilot program for A-share listed companies to spin off their subsidiaries for domestic listing, a total of more than 100 companies have announced their "A-share spin-off to A-share" plans. Among them, 17 listed companies have successfully spun off their subsidiaries for listing. However, behind this positive situation, the number of terminated cases has gradually increased. Combining the policy provisions and relevant cases of spin-off listings, this article briefly discusses the key policy points and audit focuses of domestic spin-off listings.
Analysis of Key Policy Points for Spin-off Listings
In January 2022, the China Securities Regulatory Commission (CSRC) further issued the Rules on Spin-off of Listed Companies (for Trial Implementation) (hereinafter referred to as the Spin-off Rules). The Spin-off Rules took Rules*). The Spin-off Rules took effect on the date of issuance. Meanwhile, the Provisions on Domestic Spin-offs implemented on December 12, 2019, and the Notice on Overseas Spin-offs implemented on July 21, 2004, were repealed simultaneously.
The Spin-off Rules specify the conditions that must be met for spin-off listings and the circumstances under which spin-off listings are not allowed. At the same time, they emphasize that spin-off listings must meet the requirement of independence, and pay attention to issues such as connected transactions and horizontal competition. The specific requirements are as follows:
In addition, the China Securities Regulatory Commission (CSRC) requires that after a spin-off, listed companies shall focus on their core businesses, enhance their independence, and standardize issues such as horizontal competition. The relevant disclosure requirements are as follows:
"A listed company shall fully explain and disclose the following matters in relation to its spin-off:
(1) The spin-off is conducive to the listed company focusing on its core businesses and enhancing its independence.
(2) After this spin-off, both the listed company and the subsidiary to be spun off shall comply with the regulatory requirements of the China Securities Regulatory Commission (CSRC) and stock exchanges regarding horizontal competition and connected transactions; if the spin-off involves listing overseas, there shall be no horizontal competition between the listed company and the subsidiary to be spun off.
(3) After this spin-off, the listed company and the subsidiary to be spun off shall be mutually independent in terms of assets, finance, and institutions, and there shall be no overlapping positions among senior managers and financial personnel."
Analysis of Terminated Spin-off Listing Cases
Since 2021, 15 A-share listed companies have announced the termination of their spin-off plans or the withdrawal of their IPO applications-off plans or the withdrawal of their IPO applications, with varying reasons. The specific details are as follows:
Since 2022, the number of cases where listed companies terminated their spin-off listings has increased significantly compared with 2021. In part, this is due to the impact of the macro environment and recurring COVID-19 outbreaks—both the listed companies themselves and their subsidiaries planned for listing have seen declining performance, making them no longer meet the performance indicators for spin-off listings. However, more of the stated reasons for termination in announcements include adjusting strategic plans, re-coordinating business development, and rearranging capital operation plans. Essentially, the underlying reasons mainly lie in the listed companies’ insufficient in-depth and systematic understanding of the spin-off listing rules, as well as their inaccurate assessment and judgment of the independence of the subsidiaries to be spun off.
Therefore, although the operating performance of the parent and subsidiary companies seems to be the first threshold in the spin-off listing rules, in actual practice, the independence of the subsidiary to be spun off is precisely the major obstacle that causes more spin-off projects to come to an abrupt halt.
Audit Focuses of Spin-off Listings
Independence is actually a general requirement for IPO projects under the registration management measures for the Science and Technology Innovation Board (STAR Market) or ChiNext Board. The specific requirements for independence include: "having complete assets; maintaining independence in business, personnel, finance, and institutions; having no horizontal competition with the controlling shareholder, actual controller, or other enterprises controlled by them that would cause a material adverse impact on the issuer; and having no connected transactions that seriously affect independence or are obviously unfair."
Under normal circumstances, most IPO projects can easily meet the above requirements. However, the business, personnel, and finance of a listed company’s subsidiary are often under the unified management of the parent listed company, and the business operations of the subsidiary are often related to or dependent on the parent company. When balancing the performance growth of the subsidiary and its independence, the parent company often fails to attend to both and finds it difficult to strike a proper balance.
Therefore, when judging the feasibility of a spin-off listing, in addition to performance indicators, issues such as independence, horizontal competition, and connected transactions also need to be coordinated in advance, with scientific planning and reasonable arrangements made. The specific audit focuses are as follows:
In summary, the issue of independence is essentially an internal control issue. Its core lies in protecting the interests of shareholders of both the listed company and the subsidiary to be listed, and preventing the two parties from transferring benefits or manipulating stock prices through unfair and unreasonable transaction arrangements. If a listed company plans to spin off its subsidiary for independent listing, it must first strengthen its internal management, and rectify issues one by one in accordance with the requirements of listing rules to ensure the smooth progress of the spin-off.
Source: Lu Jinlong, General Manager of the Risk Control Department
Review: Xue Yao
Release: You Yi
