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Recently, the Shanghai Stock Exchange (SSE) has released the Guidelines of Shanghai Stock Exchange on Stock Suspension and Resumption of Trading for Listed Companies Planning for Material Events (referred to as the Guidelines hereinafter). SSE has provided answers to the following questions regarding the background and main contents of the Guidelines.
1. Question: SSE previously issued relevant notices and guidelines on stock suspension and resumption of trading to regulate listed companies’ planning for non-public offerings and major asset reorganizations. What are the main considerations behind the recent release of the Guidelines?
Answer: In recent years, SSE’s scheme for stock suspension and resumption of trading has been improved continuously. In 2012, SSE lifted routine stock suspensions for unusual share price movement notices and shareholder meetings. The number of stock suspensions dropped by approximately 70% accordingly. Not long ago, the number of stock suspensions increased, mainly due to increasingly active M&A and asset reorganization as well as refinancing activities, where stock suspension plays the roles in ensuring fair information disclosure, preventing unusual share price movements, preventing insider trading and locking in stock offering prices. To clarify standards and requirements for stock suspension and resumption of trading for non-public offerings, M&A and asset reorganizations, SSE issued around January 2015 the Notice on Stock Suspension and Resumption of Trading to Regulate Listed Companies Planning for Non-Public Offerings and Related Events and the Guidelines on Listed Companies’ Material Information Disclosure and Stock Suspension and Resumption of Trading for Major Asset Reorganizations.
The aforementioned two business rules have been well implemented. Currently, suspension duration for SSE-listed companies planning for non-public offering has been controlled within one month; that for 90% of stock suspensions for major asset reorganization has been controlled within three months. Most cases exceeding three months of suspension have got administrative approval in advance. The few companies suspended for over five months have usually experienced unprecedented major events. For companies suspended for other issues, the duration has stayed within 10 days. The market discipline for prudentially filing suspension and strictly controlling suspension duration has been formed. However, in practice, situations such as suspension at will, suspension for too long and insufficient information disclosure during suspension still exist, which calls for improvement of relevant suspension and resumption mechanisms. On the institutional level, listed companies’ right to suspend trading and investors’ right to trade shall be better balanced. In particular, issues such as how to transfer between different types of suspensions, how to aggregate the duration of suspensions, how to determine the reasonable maximum suspension duration, and how to implement phased information disclosure during suspensions need to be broken down to details.
The newly released Guidelines are formulated based on summarizing and evaluating the above-mentioned conditions, as an improved and consolidated version of the two past rules. After the release of the Guidelines, SSE’s standards for stock suspension and resumption of trading will be more integrated and consistent, with more comprehensive requirements. This will facilitate listed companies in filing applications for stock suspension and resumption of trading. It should be noted that the Guidelines combine provisions on non-public offerings and major asset reorganizations, hence the Notice on Stock Suspension and Resumption of Trading to Regulate Listed Companies Planning for Non-Public Offerings and Related Events and Chapter 3 of the Guidelines on Listed Companies’ Material Information Disclosure and Stock Suspension and Resumption of Trading for Major Asset Reorganizations will be abolished.
2、Question: During the unusual market volatility in 2015, it came to the attention of both the domestic and overseas investors that the listed companies flocked to suspend their stocks and resume trading later on. Has the newly released Guidelines provided certain rules for stock suspension and resumption of trading during unusual market volatility?
Answer: Early July 2015 witnessed unusual stock market volatility, during which quite a few listed companies flocked to apply for stock suspension. This resulted to the increase in stock suspensions of listed companies in a relatively short period of time. These stock suspensions were the same as the stock suspensions under ordinary market circumstances in that the suspension applications were filed by the listed companies to the Exchange based on their own decisions. However, the difference lies in that the ordinary stock suspensions are to ensure fair information disclosure while the massive extraordinary stock suspensions last July were to avoid and prevent share price slump in a short period of time and the risks associated with.
In general, the aforementioned massive stock suspensions taking place under unusual market circumstances were based on the existing stock trading and market liquidity risk management systems, and therefore, were of certain uniqueness. SSE hereby releases the Guidelines to curb stock suspensions at will and to regulate suspensions. In particular, Article 9 provides that should extreme circumstances arise during securities trading, the Shanghai Stock Exchange can stop accepting the stock suspension applications by listed companies based on the decisions by China Securities Regulatory Commission or on actual market conditions, so as to maintain trading continuity and market liquidity as well as to protect investors’ right to trade. The objective of this article is to better align the ordinary needs of listed companies to suspend stock trading with the requirement to maintain market order.
3、Question: The listed companies have to consider investors’ right to trade when filing applications for stock suspension. Do the Guidelines have any requirements in this regard?
Answer: Stock suspension and resumption of trading is a common category of Exchange business upon the application by listed companies. In general, it is a basic right entitled to listed companies. It has such functions as ensuring investors’ fair access to information, prevention of insider trading and prevention of unusual stock price movements. However, the right to suspend and/or resume stock trading should be carefully exercised but not abused, for it has direct impact on investors’ right to trade and on market order. Therefore, the Guidelines have reinforced the obligatory prudence required of listed companies and of other related parties while satisfying the basic needs of listed companies to suspend stock trading.
As seen from practice, the regulation of listed companies’ stock suspension and resumption of trading, especially the duration of stock suspension, requires of the obligatory prudence and compliance not only of listed companies, but also of actual controllers, major shareholders, directors, supervisors and senior management personnel as well as financial advisers. In accordance, the Guidelines have clearly set that listed companies should carefully exercise their right to suspend stock trading, and that application for stock suspension shall never exempt their confidentiality obligation. In addition, the Guidelines also provides that listed companies, shareholders, actual controllers, directors, supervisors and senior management personnel shall all fulfill their duties and obligations to ensure that the suspension duration stays within the required period; intermediaries including but not limited to financial advisers, sponsors and accounting firms shall accelerate their relevant conducts so as not to delay the resumption.
4、Question: What adjustments and improvements have been made in the Guidelines, compared with the previous provisions?
Answer: Compared with the previous provisions for suspension and resumption of trading, the Guidelines have made adjustments and improvements in the following three areas.
First, the coverage of suspension regulation has been expanded. Listed companies have many types of business that involve stock suspension and resumption of trading, other than major asset reorganization and non-public offerings. Those types of business include planning of change of controlling rights, purchase or sale of assets, as well as signing major contracts. The handling of stock suspension and resumption of trading for these events has certain standards in practice to abide by. However, those standards have not been publicized in the form of rules, and are thus inconvenient for listed companies to implement. The Guidelines have included these contents and clarified corresponding standards for stock suspension.
Second, suspension duration has been strictly controlled. The Guidelines have clearly stipulated the durations for various categories of suspensions. For planning of major asset reorganization, the suspension duration cannot exceed 3 months in principle, or 5 months for consecutive plans of reorganization after suspension; for planning of non-public offering, the suspension duration cannot exceed 1 month in principle; for planning of change of controlling rights, of purchase or sale of assets, of overseas investments that necessitates the decision by the general meeting of shareholders, and of signing major contracts, the suspension duration cannot exceed 10 trading days in principle. Besides, the Guidelines have specified the conditions and requirements for extension of suspension. In addition, the Guidelines have clarified that for suspension applications based on planning for material events or on non-public offering that, later on, turn into major asset reorganization, the suspension duration will be aggregated, dating from the start of suspension. Companies that change the target for reorganization during suspension should also resume trading within the specified time frame. After 3 months since the day to start suspension for major asset reorganization, they cannot change the target for reorganization to extend suspension.
Third, requirements for information disclosure during suspension and procedures for suspension extension have been specified. In the case of planning for major asset reorganization, which results to a relatively long suspension, the Guidelines have further clarified the specific contents to be disclosed along the timeline, with a monthly interval. Listed companies have to disclose in time the transaction progress at major points in time during major asset reorganization, so as to facilitate the understanding of investors about the reorganization progress and to set pressure on the listed companies and relevant parties to accelerate the reorganization. At the same time, the Guidelines have considered the internal decision-making procedures of listed companies, including board meetings and general meetings of shareholders, as mandatory if the companies intend to extend the suspension. Those considerations are based on the characteristics and planning progression of major asset reorganization, non-public offering, planning of change of controlling rights, and purchase or sale of assets. Additionally, the Guidelines have provided that interested parties including board members and shareholders should avoid voting in order to fully ensure the rights of small and medium-sized investors in the decision-making of stock suspension and resumption of trading.
5、What measures will SSE take in strengthening the regulation of stock suspension and resumption of trading and of relevant information disclosure?
Answer: The Guidelines have stressed the standards for regulating stock suspension and resumption of trading, and clarified the regulatory measures to curb inappropriate suspension and abuse of suspension. This is in line with SSE’s sustained efforts since the second half of last year to strengthen supervision on those long-time suspensions.
Next step, SSE will strengthen the combination of ad-hoc, in-process and post-hoc regulation. From the ad-hoc prospective, SSE will continue to uphold the principle of “One Letter per Company”. To be specific, SSE will clearly highlight the standards of suspension and other requirements, in the form of regulatory work letters, to the company that intends to suspend its stock, and to the one that has suspended its stock for nearly 3 months. In this way, the companies can coordinate with regulatory agencies, transaction counterparts and intermediaries to manage the progress of reorganization and re-financing, and can thus resume trading on time. During the event, SSE will review the applications by listed companies to extend stock suspension, based on the stipulated conditions and requirements. SSE will also urge the listed companies to disclose information during suspension to enable investors’ access to the information. From the post –hoc prospective, SSE will examine the suspensions by reviewing the conformity, truthfulness and completeness of information disclosure by companies before and after the resumption from a lengthy suspension, and will apply disciplinary sanctions on listed companies and responsible personnel if the suspensions are abused or inappropriately adopted without valid reasons.
