4 Shanghai Stock Exchange Memos To Regulate Listed Firms' Annual Report Disclosure

The Shanghai Stock Exchange (SSE) releases at the beginning of the Chinese New Year 4 memoranda on the work of annual reports of 2011 in response to the forthcoming peak of annual report disclosure. The 4 memoranda involve internal control reports of listed companies, announcements on performance prediction of the companies with delisting risk alerts, occupation of non-operational capital, registration of insiders in annual reports, etc. It is especially mentioned that if a company with delisting risk alert predicts a profit in 2011, it should provide the special remarks issued by the CPA in charge of annual audit while disclosing an announcement on performance prediction.

Again, the above memoranda show the SSE's high concern about the risks derived from the companies under special treatments. Generally, the companies featuring delisting risk realize the "security shell" by subsidy injection, assets sale, etc. with their business performance data "dramatically improved" as well. Thus, the SSE has put forward stricter requirements towards the supervision over the above illegal actions. The No. 2 memorandum requires that if a company with delisting risk alert due to its losses for 2 consecutive years in 2009 and 2010 continues to suffer a loss in 2011, the company's stocks will face the risk of listing suspension. Therefore, the company's directorate should seriously examine its profit and loss in 2011 and release in time an announcement on performance prediction. If the company predicts a profit in 2011, it should provide the special remarks on profit pre-audit issued by the CPA in charge of annual audit while disclosing an announcement on performance prediction.

Moreover, the memorandum stresses again that the above company should make an announcement on performance prediction before January 31, 2012 according to relevant requirements in the "SSE Stock Listing Rules" whether it made a profit in 2011 or not. If it predicts a loss in 2011, it should issue an announcement on alert of listing suspension risk before January 31, 2012 and release the same announcement for 2 times at least before disclosing its annual report.

The SSE has strengthened the registration of insiders in the listed companies characterized by high proportions of bonus shares or capitalized shares. In addition to requiring to smoothly complete the registration and filing of insiders of listed companies' annual reports, the SSE emphasizes that the companies with high proportions of bonus shares or capitalized shares (5 bonus shares and 5 capitalized shares or above for every 10 shares) in their profit distribution schemes of 2011, if necessary, should file relevant insiders' information with the SSE within 10 working days after disclosure of their annual reports.

The No. 3 memorandum involves the disclosure of the occupation of listed companies' non-operational capital and the transfer of other related funds. It is required that a listed company with capital occupation by major shareholders and their affiliated enterprises for non-operational purpose should make additional disclosure of the occupation date, amount, reason, repayment amount, ending balance, predicted repayment mode, discharging date, principal and the directorate's planned solutions in the "Creditor's Rights and Liabilities between Related Parties" in the "Significant Events" in the full text of its annual report. The SSE stresses that a listed company should seriously judge whether the "transfer of other related funds" is the transfer of non-operational capital by referring to long-term arrears.

In the No. 1 memorandum, the SSE made explicit requirements on compilation, discussion and disclosure of internal control reports as follows: the SSE-listed companies in the SSE Corporate Governance Sector, the companies who issue shares both domestically and overseas as well as the financial companies are required to disclose their internal control reports. In addition, other listed companies planning to apply for entering the SSE Corporate Governance Sector are encouraged to disclose their internal control reports. Furthermore, the listed companies conducting trials of internal control reports are also encouraged to disclose their internal control reports and the audit reports on internal control of financial reports issued by their CPAs.