China Securities Regulatory Commission and China Banking Regulatory Commission, Circular on Regulation of the Provision of Security to Outside Parties by Listed Companies

Issued: December 23 2005
Effective: January 1 2006
Applicability: The term "provision of security to outside parties" refers to provision of security by listed companies to other parties, including security provided by listed companies to holding subsidiaries. This Circular does not apply to financial listed companies. Where there is an inconsistency between provisions of the Circular on Questions Relevant to the Provision of Security to a Third Party by Listed Companies and the Circular on Several Issues Concerning the Regulation of Cash Flows Between Listed Companies and Their Affiliates and Security Provided to Outside Parties by Listed Companies, and those of this Circular, those of this Circular shall prevail (Section Four).

Main contents: Provision of security to outside parties by listed companies must be subject to deliberation by the board of directors or shareholders' general meeting. Listed companies' articles of association shall specify the authority of the shareholders' general meeting and board of directors with respect to the examination and approval of provision of security to outside parties, and accountability system regarding violation of the examination and approval authority and deliberation procedure. Provision of security to outside parties that shall be examined and approved by the shareholders' general meeting must be deliberated and adopted by the board of directors before submission to the shareholders' general meeting for examination and approval. Provision of security to outside parties that shall be examined and approved by the majority of the voting rights held by the attending shareholders of the shareholders' general meeting include, but not limited to, the following circumstances: (i) the portion of the total amount of security provided to outside parties of listed companies and their holding subsidiaries in excess of 50% of the audited net assets of the most recent period; (ii) security provided to parties whose asset-liability ratio exceeds 70%; (iii) single security transactions whose amount exceeds the audited net assets for the most recent period by 10%; and (iv) security provided to shareholders, the de facto controller and their affiliated parties. Security provided to outside parties that shall be examined and approved by the board of directors shall be deliberated and agreed by two-thirds of the attending directors and a resolution shall be passed thereon. Security provided to outside parties deliberated and approved by the board of directors or shareholders' general meeting of listed companies shall be disclosed in the newspapers and periodicals designated for information disclosure by the China Securities Regulatory Commission in a timely manner (Section One).
Related legislation: PRC Company Law (Amended), Oct 27 2005, CLP 2005 No.10 p.21; PRC Securities Law (Amended), Oct 27 2005, CLP 2006 No.1 p.31; PRC Banking Regulation Law, Dec 27 2003, CLP 2004 No.1 p.45; PRC Security Law, Jun 30 1995, CLP 1995 No.6 p.21; Interpretations on Several Issues Concerning the Application of the «PRC Security Law», Dec 8 2000, CLP 2001 No.1 p.24; Circular on Questions Relevant to the Provision of Security to a Third Party by Listed Companies, Jun 6 2000, CLP 2000 No.6 p.6 and Circular on Several Issues Concerning the Regulation of Cash Flows Between Listed Companies and Their Affiliates and Security Provided to Outside Parties by Listed Companies, Aug 28 2003, CLP 2003 No.8 p.62