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backCHINAtalk March, 2012

New Circular 7 Introduces Significant Changes to SAFE Filings in China

Since the issuance of PRC State Administration of Foreign Exchange ("SAFE") Circular 78 in April 2007, public companies offering equity compensation to PRC nationals in China have been required to obtain SAFE approval of their equity plans and comply with various ongoing approval and/or reporting requirements, which vary by Chinese province. As many of our clients are all too aware, the SAFE approval process is often long and arduous, and the post-approval landscape difficult to navigate. Thus, it may come as welcome news that - with the goal of simplifying the process - SAFE has now replaced Circular 78 with new Circular 7, issued to its local offices in China on February 20, 2012, and effective immediately.

Under Circular 7, the key changes to the current SAFE processes are as follows:

Initial Approval/Registration Process

·         The documentary requirements of Circular 78 have been pared down to five basic items, including an application letter, a prescribed application form and an employment undertaking letter. It appears no longer necessary to submit a broker agreement or certain other documents that were listed in Circular 78. However, SAFE retains the right to ask for supplementary materials.

·         The scope of the entities and individuals that may be included in a SAFE application has been expanded so that, among other things, it should now be possible to include PRC subsidiaries and affiliates, including representative offices, at any tier level, as well as certain non-employees in the SAFE application. In addition, Circular 7 expressly covers grants to non-PRC nationals, although the precise implications of this provision are yet to be determined.

·         The list of awards now expressly subject to SAFE approval has been expanded to seven enumerated award types, plus a catch-all category for "other" awards. Among others, stock appreciation rights, performance awards and phantom awards are specifically covered by Circular 7.

·         The SAFE offices are supposed to issue a registration certificate to the applicant, once approval has been obtained.

Post-Approval Process

·         Once an initial SAFE registration has been completed, SAFE approval is no longer required for conversion of funds. Instead, the local bank is supposed to manage the fund conversion process.

·         The format and deadline for the quarterly reports due with respect to the activities under the equity plan and in the SAFE-approved bank account in the applicable quarter have been revised.

·         In contrast to Circular 78 (which was silent on the subject), Circular 7 lists specific circumstances in which it is, and is not, necessary to complete a new or supplemental SAFE registration.

Next Steps

Regardless of an issuer's filing status, there are still many open questions with respect to Circular 7's precise impact:

·         Companies with a currently pending SAFE application need to determine whether it is necessary to re-file the application under the new format, which could vary by province and/or stage of application.

·         Companies with an existing SAFE approval need to confirm that they will not have to re-register their plans under Circular 7 – we are hopeful re-registration will not be required, but again this may vary depending on the province and SAFE office handling the file. Even if re-registration is not required, companies will need to confirm whether they should obtain a registration certificate evidencing the previously obtained approval.

·         Companies that have granted equity in China but have not yet commenced their SAFE filing stand to benefit most from the simplified registration process introduced by the new Circular, but it is important that they start the process as soon as possible because all SAFE offices now place a strong emphasis on past non-compliance and the risk of penalties for such non-compliance is steadily increasing.

·         Companies that have avoided a SAFE filing by making grants only to non-PRC nationals in China or by operating phantom plans need to ascertain whether the new Circular introduces a filing obligation for such grants/plans.

Source: Baker & McKenzie - GAI

For more information or to contact Baker & McKenzie, please click here.

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