China IPO Watch

中概股 · 2025-12-17

How PRC Lawyers Verify Material Contracts for an Offshore Issuer

The decision by the China Securities Regulatory Commission (CSRC) on 17 February 2023 to implement the Trial Administrative Measures of Overseas Securities Offering and Listing by Domestic Companies (《境内企业境外发行证券和上市管理试行办法》) (the “Measures”), effective 31 March 2023, fundamentally re-engineered the due diligence obligations for PRC legal counsel engaged by offshore issuers. Under the previous regime of the Special Provisions of the State Council on the Overseas Offering and Listing of Shares by Joint Stock Limited Companies (1994), verification of material contracts was largely a mechanical exercise, focused on confirming the existence of agreements filed with the issuer’s Hong Kong or Cayman Islands counsel. The 2023 Measures, however, shifted the burden of proof onto PRC counsel to affirmatively demonstrate that no offshore listing structure—including variable interest entity (VIE) arrangements—violates PRC laws on foreign investment access, data security, or antitrust review. This is not a procedural formality. In 2024, the CSRC rejected or requested supplementary filings on 12 of 47 offshore IPO applications (25.5%), with the most common deficiency cited being inadequate verification of material contracts, particularly those involving VIE control agreements and PRC operating entity licenses (CSRC, Annual Report on Overseas Listings Filing Review, 2024). For PRC lawyers, the verification of a material contract now demands a forensic, multi-jurisdictional analysis that reconciles the contractual rights of a Cayman-incorporated issuer against the statutory prohibitions of PRC law, a task requiring specific methodologies that are often misunderstood by cross-border deal teams.

The Material Contract Universe: Defining the Scope Under HKEX and CSRC Rules

The first operational challenge for PRC counsel is defining the precise population of “material contracts” that require verification. The scope is not co-extensive with the definition under HKEX Listing Rule 14.04(1) (which governs notifiable transactions) nor with the US Securities and Exchange Commission (SEC) Regulation S-K Item 601(b)(10). For an offshore issuer seeking a dual listing on the Hong Kong Stock Exchange (HKEX), the applicable standard is set by the HKEX Guidance Letter HKEX-GL94-18 (revised January 2024), which requires that PRC legal opinions confirm the legality and enforceability of all contracts that are “material to the issuer’s business operations in the PRC.” This phrase is deliberately broad. In practice, PRC counsel must identify contracts that meet any one of three thresholds: (i) contracts representing 10% or more of the issuer’s total revenue for the most recent financial year; (ii) contracts that are exclusive or near-exclusive in nature, such as VIE control agreements, asset purchase agreements, or technology licensing arrangements; or (iii) contracts that are required for the issuer to hold a specific PRC operating license, such as an ICP license (增值电信业务经营许可证) or a medical device registration certificate.

The VIE Control Agreement Suite: The Highest Verification Priority

Within this universe, the VIE control agreement suite—comprising the Exclusive Business Cooperation Agreement, Exclusive Option Agreement, Equity Pledge Agreement, and Power of Attorney—represents the highest verification priority. PRC counsel cannot simply review the signed copies provided by the issuer. The methodology, as articulated in the CSRC Filing Guidelines for Overseas Listings (2023), requires counsel to independently confirm that each counterparty to the VIE agreements (typically the PRC operating entity and its individual shareholders) had the legal capacity to execute the agreements on the date of signing. This means obtaining and reviewing: (i) the valid PRC identity documents of all individual shareholders; (ii) the business license and articles of association of the PRC operating entity; and (iii) board resolutions or shareholder resolutions authorising the execution of the agreements. A failure to verify the corporate authorisation chain is a recurring issue. In the 2024 filing of a Cayman-incorporated EdTech issuer, the CSRC requested a supplemental opinion because the PRC counsel had not reviewed the board minutes of the PRC operating entity authorising the VIE agreements, even though the minutes were prepared and available (CSRC, Public Feedback on Filing No. 2024-0317, 2024).

Contracts Subject to PRC Regulatory Approval

A distinct sub-category of material contracts includes those that are subject to PRC regulatory approval, pre-filing, or post-filing requirements under specific sectoral laws. For example, a technology licensing agreement between a PRC operating entity and a foreign-invested enterprise (FIE) may require registration with the Ministry of Commerce (MOFCOM) under the Regulations on Technology Import and Export (2001, amended 2019). Similarly, a data processing agreement that involves the transfer of personal information outside the PRC may require a security assessment under the Personal Information Protection Law (PIPL) (2021), Article 38. PRC counsel must verify not only the existence of the contract but also the status of any required regulatory filings. If a required filing has not been made, the contract may be voidable under PRC law. For an offshore issuer, this creates a disclosure risk under HKEX Listing Rule 2.13 (which requires that listing documents contain all information necessary for a reasonable investor to make an informed assessment). The 2023 HKEX Guidance Letter HKEX-GL112-23 explicitly states that an issuer must disclose any material contract that is subject to PRC regulatory approval where the approval has not been obtained.

Verification Methodology: From Document Review to Independent Confirmation

The verification methodology for material contracts has evolved from a passive document review to an active, independent confirmation process. Under the CSRC Measures (2023), Article 12, a PRC legal opinion must be “based on independent verification and due diligence, not solely on representations of the issuer.” This is a critical departure from the prior practice, where PRC counsel often relied on management representations regarding the authenticity and completeness of contract copies. The current standard requires PRC counsel to perform at least three independent verification steps for each material contract.

Step One: Original Document Inspection and Counterparty Confirmation

PRC counsel must inspect the original signed copies of each material contract, not photocopies or scanned versions. This is a physical inspection requirement. The inspection must confirm that each signature page bears a wet-ink signature (or a valid electronic signature under the Electronic Signature Law (2019) of the PRC), that the corporate seals are consistent with the business license of the counterparty, and that the date of execution is legible. For contracts executed outside the PRC (e.g., a Cayman-incorporated issuer’s underwriting agreement signed in Hong Kong), PRC counsel must coordinate with Hong Kong counsel to confirm the authenticity of the foreign signatures. A practical complication arises with VIE agreements executed multiple times due to amendments. In a 2024 filing for a PRC-based consumer goods issuer, the CSRC requested a supplemental opinion because the PRC counsel had reviewed the amended VIE agreements but not the original versions, and the amendments referred to original terms that were not independently verified (CSRC, Public Feedback on Filing No. 2024-0452, 2024).

The verification of counterparty legal status requires PRC counsel to obtain a current business credit report (企业信用报告) from the State Administration for Market Regulation (SAMR) for each PRC corporate counterparty. This report must be dated no more than 30 days before the date of the legal opinion. The report confirms that the counterparty is validly existing, has not been dissolved or placed under bankruptcy proceedings, and has not been subject to material administrative penalties. For individual counterparties, PRC counsel must obtain a copy of the valid PRC identity card and confirm, through a search of the China Judgments Online (中国裁判文书网) database, that the individual is not subject to any court order restricting their capacity to enter into contracts (e.g., a guardianship order). This step is not optional. In the 2024 filing of a Cayman-incorporated healthcare issuer, the CSRC noted that the PRC counsel had not obtained SAMR credit reports for the PRC operating entity’s shareholders, and the CSRC required a supplemental opinion before accepting the filing (CSRC, Public Feedback on Filing No. 2024-0618, 2024).

The third verification step is the legal enforceability analysis. PRC counsel must opine on whether each material contract is valid, binding, and enforceable under PRC law. This analysis requires a review of the contract’s governing law clause. If the contract is governed by PRC law, PRC counsel must confirm that the contract does not violate any mandatory provisions of PRC law, including the Civil Code (2020), the Foreign Investment Law (2019), and sector-specific regulations. If the contract is governed by foreign law (e.g., Hong Kong law or Cayman Islands law), PRC counsel must opine on whether the choice of law clause is valid under PRC conflict-of-laws rules (Article 4 of the Law on the Application of Laws to Foreign-related Civil Relations (2010)). A critical issue arises with VIE agreements that are governed by PRC law but contain provisions that purport to vest voting rights in a Cayman-incorporated issuer. Under the Civil Code (2020), Article 143, a contract that violates a mandatory provision of law is void. The 2024 Supreme People’s Court Interpretation on the Application of the Foreign Investment Law (《最高人民法院关于适用<中华人民共和国外商投资法>若干问题的解释》) confirms that VIE agreements in sectors prohibited to foreign investment (e.g., certain internet content services) may be void. PRC counsel must therefore state, in the legal opinion, whether the issuer’s VIE structure falls within a prohibited or restricted sector under the Special Administrative Measures (Negative List) for Foreign Investment Access (2024 edition). If it does, the enforceability opinion must include a qualification.

The verification of material contracts for an offshore issuer is not a single-jurisdiction exercise. It requires PRC counsel to reconcile their findings with the due diligence performed by Hong Kong counsel (for HKEX listings) or U.S. counsel (for SEC listings). This reconciliation is particularly important for contracts that contain governing law clauses selecting Hong Kong law. Under the Arrangement on Mutual Recognition and Enforcement of Judgments in Civil and Commercial Matters between the Mainland and the Hong Kong Special Administrative Region (2019, effective 2024), a judgment of the Hong Kong courts on a contract governed by Hong Kong law is enforceable in the PRC only if the PRC courts recognise the judgment. PRC counsel must therefore opine on whether a Hong Kong court judgment on a material contract would be recognised and enforced in the PRC. This requires an analysis of the Civil Procedure Law (2021), Article 289, which allows for recognition of foreign judgments only if they do not violate PRC public policy. A Hong Kong court judgment that enforces a VIE agreement in a sector prohibited by the Negative List would likely be deemed a violation of PRC public policy and would not be enforceable. This risk must be disclosed in the PRC legal opinion and, by extension, in the issuer’s listing document.

The PRC legal opinion on material contracts is a mandatory exhibit to the HKEX listing application (HKEX Listing Rule 9.11(33)). The opinion must be addressed to the HKEX and the sponsor, and it must state the date of the opinion and the date through which the verification was performed. The opinion must also include a list of all material contracts reviewed, with a brief description of each contract and the verification steps performed. The HKEX has shown an increasing willingness to request supplemental opinions. In 2024, the HKEX issued 23 supplemental information requests specifically related to PRC legal opinions on material contracts, representing 14.2% of all HKEX listing application queries for PRC-based issuers (HKEX, Listing Applications Statistics, 2024). The most common queries related to: (i) the completeness of the contract list; (ii) the verification of VIE counterparty legal capacity; and (iii) the enforceability of contracts governed by foreign law.

Practical Challenges and Emerging Issues in 2025

Three practical challenges are emerging in 2025 that will affect how PRC lawyers verify material contracts. First, the increasing use of electronic signatures in PRC commercial practice creates a verification gap. The Electronic Signature Law (2019) recognises electronic signatures as legally valid, but PRC counsel must verify that the electronic signature platform used (e.g., e签宝, 法大大) is certified by the Ministry of Industry and Information Technology (MIIT). If the platform is not certified, the electronic signature may be challenged. Second, the Data Security Law (2021), Article 36, prohibits PRC entities from providing data stored in the PRC to foreign judicial or regulatory authorities without prior approval. This creates a conflict when HKEX or SEC regulators request copies of material contracts that contain sensitive commercial data. PRC counsel must advise the issuer on the appropriate data localisation and cross-border transfer procedures before providing the contracts to offshore regulators. Third, the 2024 revision of the Negative List (effective 1 November 2024) added new restrictions on foreign investment in certain internet data centre services. This requires PRC counsel to re-verify the classification of the issuer’s business activities under the revised Negative List, even if the VIE structure was previously deemed compliant.

Actionable Takeaways

  1. PRC counsel must independently verify the legal capacity of every counterparty to a material contract by obtaining SAMR credit reports for corporate entities and identity documents for individuals, dated no more than 30 days before the legal opinion date.
  2. The legal enforceability analysis for VIE agreements must include a specific assessment of whether the issuer’s business sector falls within the Negative List for Foreign Investment Access (2024 edition), with a qualified opinion required if the sector is prohibited.
  3. For contracts governed by Hong Kong law, PRC counsel must opine on the enforceability of a Hong Kong court judgment in the PRC under the Civil Procedure Law (2021), Article 289, and the 2019 Mainland-Hong Kong Judgments Arrangement.
  4. The PRC legal opinion on material contracts must be dated and addressed to the HKEX and the sponsor, and must include a complete schedule of all contracts reviewed with a description of verification steps performed.
  5. Issuers using electronic signatures must confirm that the signature platform is certified by the MIIT under the Electronic Signature Law (2019), and must establish data localisation procedures before transmitting contract copies to offshore regulators.