Time to Go: New CSRC De-listing Regulations
March 31, 2001 | BY
clpstaff &clp articles &The introduction of a law that purports to suspend or terminate listed companies that incur losses over a given period of time reflects the growing development…
The introduction of a law that purports to suspend or terminate listed companies that incur losses over a given period of time reflects the growing development of China's securities markets. While such a provision already exists in the PRC Company Law, this new regulation may help to further improve the management and corporate governance of listed companies.
Mandatory de-listing of problematic companies is not a new concept in the legal regime in China. Article 158 of the PRC Company Law (中华人民共和国公司法)provides, among other things, that if a listed company that has had losses for three consecutive years cannot make a profit within a specified period of time and fails to meet the listing requirements, the securities regulatory authorities under the State Council may terminate the listing of such company's stock on the stock exchange.
However, it is not uncommon in China to find that published laws are not fully implemented until implementation regulations have been devised by the government authority that is primarily responsible for the enforcement of such laws. That may explain why a company listed on the Shanghai Stock Exchange has not been ordered to de-list although it has suffered losses for more than five years. Therefore, the market recognized the promulgation by the China Securities Regulatory Commission (CSRC) of the Suspending and Terminating the Listings of Loss-making Listed Companies Implementing Procedures (CSRC Procedures) on February 22 2001 as a milestone in the development of China's securities markets.
The CSRC Procedures set out the rules and procedures in connection with the suspension and termination of listed companies that incur losses over a substantial period of time. Concurrently with the promulgation of the CSRC Procedures, the CSRC also issued a notice (CSRC Notice) that applies to companies that were suspended from listing before the promulgation of the CSRC Procedures. The release of the CSRC Procedures and CSRC Notice signals that the Chinese government has decided that it is time to begin enforcing the de-listing rules. The clock for loss-making companies to exit the market has just started ticking.
SCOPE OF APPLICATION
The CSRC Procedures apply to loss making listed companies in both the A share market and B share market in China. Article 2 of the CSRC Procedures provides that the CSRC Procedures apply to the suspension, resumption and termination of stock listing by loss-making companies. Under the PRC Company Law (中华人民共和国公司法), a listed company may be subject to de-listing for reasons other than incurring continuous losses, such as serious violation of law, but such other reasons are not addressed by the CSRC Procedures.
| KEY POINTS: ¤ De-listing rules under the PRC Company Law (中华人民共和国公司法)have not been well enforced. The CSRC Procedures |
SUSPENSION
Suspension of the stock listing of loss-making companies is not novel in the stock markets in China. Both the Shanghai Stock Exchange and the Shenzhen Stock Exchange have adopted rules on the suspension of the listing of companies that have incurred losses for three consecutive years. To date, a total of eight companies have been suspended because they have had three or more consecutive years of losses.
The CSRC Procedures confirm the rules of the two stock exchanges. Article 3 specifically authorizes the stock exchanges to decide whether to suspend the listing of loss-making companies. Under Article 5, if a company has incurred losses for three consecutive years, the stock exchange shall suspend trading of the company's stock upon the release of its annual report, or, if the annual report is not released in a timely manner, upon the deadline for release of the annual report. The stock exchange shall decide, within five business days thereafter, whether the company's stock should be suspended from listing. The CSRC Procedures, however, do not say what standards should be applied by the stock exchange in making such decision.
Under Article 6, a company whose listing has been suspended by a stock exchange shall publish an Announcement on the Suspension of Stock Listing to disclose, among other things, its board of directors' opinion as to whether the company may attempt to apply for the resumption of stock listing and specific measures that the company will take to resume the listing. In addition, in order to avoid immediate termination of listing by the CSRC, the company has to apply to the stock exchange for a grace period to extend the suspension for 12 months, commencing from the date of suspension of the listing. Under Article 9, as part of its application the company must present a resolution approving such application, analyze for the stock exchange the possibility of making a profit in the near term and explain to the stock exchange the specific actions to be taken by the company to make a profit in the near term. As suggested by a CSRC spokesperson upon the release of the CSRC Procedures, if the board of directors' analysis indicates that the company is not able to achieve any profit in the near term, the company should not apply for a grace period. It is unlikely, however, that a suspended company will not grasp this last chance to resume its listing.
If a company is granted the 12-month grace period, the stock exchange may, pursuant to Article 11, provide so called 'particular transfer service' for the trading of the company's stock. The particular transfer service is not defined in the CSRC Procedures, but is left to the stock exchange to determine. It is the current practice of both the Shanghai Stock Exchange and the Shenzhen Stock Exchange that stock of suspended companies can only be traded, subject to a 5% price increase limit, during normal trading hours on each Friday that the exchange is open for business.
RESUMPTION
A company whose stock is suspended from listing can either resume its listing or be permanently de-listed. Under Article 12, if the company makes a profit in its first fiscal year during the grace period, it may apply to the CSRC to resume its listing. However, if the company fails to show a profit in its first fiscal year during the grace period, the company will be permanently de-listed.
Procedures and requirements contained in the CSRC Notice for the resumption and termination of listing by companies whose listing was already suspended prior to the promulgation of the CSRC Procedures (Pre-Procedures Suspended Companies) are different in many aspects from those contained in the CSRC Procedures applicable to companies whose listing is suspended pursuant to the CSRC Procedures (Post-Procedures Suspended Companies). In order to be able to apply for the resumption of listing, a Post-Procedures Suspended Company must make a profit in the year following three consecutive years of losses. However, a Pre-Procedures Suspended Company may apply for the resumption of stock listing as long as it has made a profit in the year 2000, regardless of how long it had incurred losses before the year 2000.
The CSRC Notice permits certain Pre-Procedures Suspended Companies to make special applications. Companies that:
(a) continued to incur losses in the year 2000;
(b) receive an auditor's report in which the auditor gives a negative opinion, or refuses to give an opinion, on the company's financial statements for the year 2000; or
(c) made profits in the year 2000, but whose application for resumption of listing is denied, can apply to the stock exchange for a six month grace period to extend the suspension. If, during the granted grace period, its audited six month interim report for the year 2001 shows profits, the company may apply for another grace period of six months. If the second grace period is granted and the company shows a profit in its annual report for the year 2001, it may apply to the CSRC for the resumption of its listing.
Article 13 provides that an application for the resumption of listing will be reviewed by the Issuance Examination and Approval Committee of the CSRC and decided by the CSRC within three months of its receipt of such application. Under Article 14, while a company's application is under review, the stock exchange may not trade the stock of the applicant company and shall extend the grace period accordingly. Under Article 15, if a resumption application is approved by the CSRC, the applicant company must, within two business days after its receipt of the CSRC's decision, publish an Announcement on the Resumption of Listing that must disclose, among other things, the analysis and projections of its board of directors with respect to the operations of the company. Pursuant to Article 16, the stock of the applicant company will resume listing and trading on the stock exchange on the first business day after the publication of such announcement.
TERMINATION
The PRC Company Law (中华人民共和国公司法) delegates to the CSRC the authority to determine the de-listing of loss-making companies. The CSRC Procedures make clear that such determination is to be made by the CSRC rather than a stock exchange.
Under Articles 17 and 18 of the CSRC Procedures, the CSRC will terminate the listing of stock of any of the following Post-Procedures Suspended Companies:
(a) that decide not to apply for the 12 month grace period to extend the suspension of listing;
(b) that do not apply for the 12 month grace period within 45 days after their stock is suspended from listing;
(c) whose application for the 12 month grace period is denied by the stock exchange;
(d) that continue to incur losses in the first fiscal year during the 12 month grace period or that receive an auditor's report in which the auditor gives a negative opinion, or refuses to give an opinion, on the company's financial statements for that year;
(e) that fail to release their annual reports within the 12 month grace period; and
(f) whose application for the resumption of listing is denied by the CSRC.
The CSRC will de-list any of the following Pre-Procedures Suspended Companies pursuant to the CSRC Notice:
(a) Companies that fail to release their annual reports for the year 2000 by April 30 2001;
(b) Companies that made profits in the year 2000 but fail to apply for the resumption of listing within 45 days after the release of their annual reports;
(c) Companies that:
(i) continued to incur losses in the year 2000, or receive an auditor's report in which the auditor gives a negative opinion, or refuses to give an opinion, on the company's financial statements for the year 2000; and
(ii) decide not to apply for a grace period, or fail to apply for a grace period within 45 days after the release of their annual reports;
(d) Companies that:
(i) made profits in the year 2000;
(ii) are granted a six month grace period after their application for the resumption of listing is denied by the CSRC; and
(iii) show a loss in their audited six month interim reports for the year 2001;
(e) Companies that:
(i) continued to incur losses in the year 2000, or receive an auditor's report in which the auditor gives a negative opinion, or refuses to give an opinion, on the company's financial statements for the year 2000;
(ii) are granted a six month grace period after the release of their annual reports for the year 2000; and
(iii) show a loss in their audited six month interim reports for the year 2001;
(f) Companies that:
(i) made profits in the year 2000;
(ii) are granted a six month grace period after CSRC's denial of their application for the resumption of stock listing;
(iii) are granted another six month grace period after the release of their audited six month interim reports that show a profit; and
(iv) show a loss in their annual reports for the year 2001, or receive an auditor's report in which the auditor gives a negative opinion, or refuses to give an opinion, on the company's financial statements for the year 2001; and
(g) Companies that:
(i) continued to incur losses in the year 2000, or receive an auditor's report in which the auditor gives a negative opinion, or refuses to give an opinion, on the company's financial statements for the year 2000;
(ii) are granted a six month grace period after the release of their annual reports for the year 2000;
(iii) are granted another six month grace period after the release of their audited six month interim reports that show a profit; and
(iv) show a loss in their annual reports for the year 2001, or receive an auditor's report in which the auditor gives negative opinion, or refuses to give an opinion, on the company's financial statements for the year 2001.
What would happen if a Pre-Procedures Suspended Company's application for a grace period is denied by the stock exchange? The CSRC Notice does not answer this question. Logically, if a Pre-Procedures Suspended Company fails to obtain a grace period, it should be de-listed.
A de-listed company shall publish an Announcement on the Termination of Stock Listing within two business days after receiving the de-listing decision from the CSRC. In addition, a de-listed company shall, within one month after the de-listing decision, publicly expound its financial status over the years, all current material credits, debts and lawsuits, and major law and regulatory violations by its senior managerial personnel. Moreover, the board of directors of a de-listed company is required to provide a detailed explanation of the reasons accounting for the company's current status, in particular, related party transactions that caused losses to the company. Such self-assessment required of de-listed companies is intended to give public shareholders an opportunity to examine if there was any misconduct for which senior management could be held accountable for the losses the shareholders have suffered. To ensure the availability of such an opportunity, the CSRC Procedures further authorize the shareholders of a de-listed company to demand that the company make the public announcement of its self-assessment if the company fails to do so within the prescribed one month period of time. However, the CSRC Procedures do not spell out the procedures for exercising such rights. Accordingly, it remains to be seen how such rights of shareholders will be enforced.
EXIT DOOR NOW OPEN
Many investors in the Chinese stock market previously believed that listed companies would never be de-listed and the government would eventually save every poorly managed listed company. By spreading the word that the more distressed a company is, the more likely it is to be acquired as a shell for a backdoor listing, market players engaged in significant manipulation and speculation of the stock of such companies. By releasing the CSRC Procedures, the CSRC has sent out a clear message that the exit door for loss-making companies to leave the market is officially open. The implementation of the new de-listing rules may discourage the manipulation of the stock of distressed companies, and the pressure of leaving the market will stimulate the upgrade of the corporate governance and management of listed companies in China.
However, it is still unclear how the rights and interests of public investors will be taken care of when a listed company in which they have invested is de-listed. In addition, as no company wants to become one of the first group of companies to be de-listed from the Chinese stock market, it is not a wild guess that the new de-listing rules may induce a number of non-arm's length transactions and, in the worst scenario, sham transactions in the months to come and some of those companies near the exit may therefore suddenly look profitable.
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