New rules strengthen supervision of asset restructuring

Approval guidelines
After issuing the Guiding Opinion on Promoting Adjustment of State-owned Capital and Restructuring of State-owned Companies and the Opinions on Regulating the Activities of State-owned Shareholders of Listed Companies, the New Rules were issued to specifically regulate the procedural issues on the approval process and provide necessary guidelines for asset restructuring.

The New Rules set pre-approval by the regulatory body before a listed company's board of directors approves the restructuring plan. According to the New Rules, after the SOS complete their internal decision-making process, they are required to notify the listed company in writing pursuant to relevant provisions. The listed company shall disclose the same and apply for suspension of trading of its shares. Meanwhile, the SOS shall submit a feasibility report to the regulatory body at provincial level or above for pre-approval. The regulatory body shall make a decision within 10 days and inform the SOS in a timely manner after which the SOS shall notify the listed company in writing for disclosure.

During the suspension period prescribed by the China Securities Regulatory Commission (CSRC) and the stock exchange, if the restructuring plan fails to be approved by the regulatory body the listed company's shares shall be traded again immediately and the SOS shall not restart the asset restructuring within three months. Since the suspension period prescribed by a stock exchange shall not exceed 30 days normally, the SOS and the regulatory body are required to complete the pre-approval process within a limited period of time.

A listed company's board of directors shall not deliberate on the restructuring plan before the regulatory body granting its pre-approval. If this is obtained, the SOS shall report the plan to the regulatory body at provincial level or above for approval at least 20 days before the shareholders meeting. The regulatory body shall issue an official reply five days before the shareholders meeting.

According to the CSRC's Rules on Shareholders Meetings of Listed Companies, if such official reply cannot be obtained from the regulatory body five days before the scheduled shareholders meeting, the listed company is required to issue a notice to postpone the meeting. It is also specified in the New Rules that the SOS should submit the restructuring plan to its shareholder(s) for approval after the pre-approval is granted by the regulatory body if the plan is required to be resolved by its shareholder(s).

The establishment of the pre-approval process strengthens supervision of asset restructuring between SOS and listed companies and avoids a situation where the restructuring plan is announced in the absence of pre-approval by the regulatory body. Since quality assets will be injected into listed companies on most occasions in asset restructuring, the regulatory body should conduct substantial examination before the meetings of a listed company's board of directors with the aim of strengthening the supervision of state-owned assets.

The pre-approval process should also eliminate market fluctuations, effects on the rights and interests of investors, and other legal risks associated with uncertainty of the approval process. This will better protect the interests of public investors and keep the stability and health of the capital market.

The New Rules also require that SOS actively work with listed companies to perform their disclosure obligations. Where necessary, they should urge listed companies to apply for suspension on trading of the shares with the stock exchange. If the prices of the securities or other derivatives of listed companies change abnormally and it causes material effect on the asset restructuring, SOS should adjust the asset restructuring plan.