Supplementary Rules for Listing Suspension and Termination
May 02, 2003 | BY
clpstaff &clp articlesBy Mao Baigen & Roland Sun, Pu Dong Law Office, ShanghaiAt the end of 2001, the China Securities Regulatory Commission (CSRC) issued rules that outlined…
By Mao Baigen & Roland Sun, Pu Dong Law Office, Shanghai
At the end of 2001, the China Securities Regulatory Commission (CSRC) issued rules that outlined the suspension from trading and de-listing of loss-making companies trading on the Shanghai or Shenzhen stock exchanges in a bid to protect investors. Further to the Suspending and Terminating the Listings of Loss-making Listed Companies Implementing Procedures (Revised) that were issued on November 30 2001, the CSRC recently issued Supplementary Provisions for this legislation. The Supplementary Provisions cover several issues that were not addressed in the Revised Implementing Procedures, and they came into force on March 18 2003.
The first issue addressed in the Supplementary Provisions concerns accounting mistakes or false records in a listed company's financial statement. Accounting irregularities are not covered in the Revised Implementing Procedures, but today their existence is frequently discussed in media coverage of China's stock markets. The Supplementary Provisions state that if a listed company voluntarily makes or is ordered to make a correction and thereby retroactively adjusts past financial statements, which results in losses shown for the last two years, the stock exchange shall make the decision to suspend its listing within 10 working days as of the publication of its annual report of the current year so long as the loss-making continues in the current year.
Pursuant to the Revised Implementing Procedures, the stock exchange shall decide to suspend a company's listing if its annual financial statements show three consecutive years of losses. The Supplementary Provisions now require that such listed company's board of directors, upon examining the annual financial statement of the third year, pass resolutions in respect of the following matters and thereafter submit such resolutions for discussion at the next shareholders' meeting:
(a) that the listed company shall enter into an agreement with a qualified securities company if its listing is then suspended, the contents of which shall include without limitation that such securities company will be engaged to assist in various affairs arising from the subsequent restoration or termination of the company's listing, as the case may be. Notably, the qualified securities company is defined as a securities company qualified for "Share Transfer Agency Service" and qualified as a "Listing Sponsor";
(b) that the listed company shall enter into an agreement with the China Securities Registration and Settlement Co., Ltd, stipulating that if its listing is then suspended, the latter will become the institution for the custody, registration and settlement of all its shares; and
(c) that in the case of its de-listing, the listed company shall apply to transfer its shares in a share transfer agency system and the general meeting of shareholders authorizes the board of directors to handle all relevant affairs.
The board of directors shall as soon as possible carry out the aforesaid resolutions once passed by the general meeting of shareholders, make a public announcement, and report to the Securities Association of China, the local branch of CSRC and the stock exchange.
A third significant aspect to the Supplementary Provisions is that they impose some obligations on the above-mentioned qualified securities company in the event of a de-listing. Within five working days of the stock exchange's decision to terminate a company's listing, the qualified securities company is obliged to make public announcements in media designated by the CSRC. The securities company's announcement shall mainly cover the conditions for handling the listing termination, when and how to handle the share reconfirmation procedures and the requirements and arrangements of a share transfer by the agency. In addition, within 20 working days of the decision for a listing termination made by the stock exchange, the qualified securities company shall complete the preliminary work such as share de-listing registration, handle share reconfirmation procedures for the shareholders and open share transfer accounts for non-listed companies.
Lastly, unlike the Revised Implementing Procedures, the Supplementary Provisions include several clauses concerning legal liability for those parties in default. With respect to civil liability, it is provided that the affected shareholders or listed company may request the board of directors or the qualified securities company to perform relevant legal or contractual obligations, and is entitled to investigate relevant liability in the event of their failure to perform. Regarding administrative liability, the Supplementary Provisions seem to have simply mentioned the same as that for the relevant listed company, which states that the stock exchange shall make the decision to suspend, restore or terminate its listing in accordance with relevant legal provisions where such listed company within the legal term fails to legally disclose its annual or semi-annual financial statements or correct false financial statements. However, the Supplementary Provisions fail to give an explicit answer as to what kind of administrative liability the qualified securities company shall assume as a result of its misconduct.
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