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The draft for comment on the “Opinions on Reform, Improvement and Implementation of the Delisting System of Listed Companies” (the “Opinions” for short) was released by the China Securities Regulatory Commission (CSRC) on July 4, 2014. Revisions were made to the “SSE Stock Listing Rules” by the Shanghai Stock Exchange (SSE) to carry out the “Opinions”, with public opinions solicited as well. Recently, an official of the SSE replied to questions on how to improve and implement the delisting system.
I. Compared with the previous delisting system, major reform and improvement have been made this time. What’s the fundamental principle of this reform?
The delisting system, a fundamental system in the capital market, is essential in such aspects as improving the quality of listed companies and the elimination mechanism, and rationally allocating the market resources. The “Opinions” has developed general planning and made top-level design for the reform, improvement, and implementation of the delisting system in the new market environment, and it has given clear requirements for the SSE to organize and implement the delisting work. The rationality of the delisting system’s reform and improvement is reflected in the following 4 aspects:
a. It could meet the new changes in the construction of the multi-layer capital market. The pattern and environment of China’s capital market have undergone fundamental changes. The construction of the multi-layer capital market is in the steady progress, and the segmentation and positioning of different market levels such as the Main Board, the SME Board, the Growth Enterprise Board, and the New Third Board as well as regional equity markets are all the more clear, increasing the possibility of enriching the content and type of delisting. For instance, enterprises will have a stronger will to make active choices among different markets in a multi-layer capital market, and delisting will be no longer the only standard of judging an enterprise, which provides foundation and space to establish a flexible delisting system.
b. It could drive the liberalization, legalization and normalization of delisting. The delisting of listed companies, a tough issue in China’s capital market, always encounters resistances and conflicts. The “Opinions” spent great effort in two aspects: enriching the content of delisting and reducing the difficulties of delisting in accordance with the “Some Opinions of the State Council on Further Propelling Sound Growth of the Capital Market”. The design of related regulations realized the organic fusion of liberalization, legalization and normalization with clear internal logic and reasonable policies.
c. It could enhance the implementation of the delisting system. The “Opinions” is characterized by its strict implementation. On the one hand, enterprises with such malignant issues as fraud issuance and illegal disclosure of significant information would be forced to be delisted, and the requirements on suspension and termination of listing are clarified. On the other hand, the arrangement and implementation of delisting are all the more clear and detailed. Enhanced implementation and market anticipation increased the operability and solemnity of the delisting system.
d. it could protect the rights and interests of investors, especially small and medium-sized investors. The reform this time sticks to the line of protecting the rights and interests of investors, especially small and medium-sized investors, which is carried through the system design process. Targeted measures have been taken for such aspects as decision-making process, information disclosure, risk disclosure and accountability, which fully demonstrate the protection of investors’ rights and interests.
II. What are the major adjustments in this reform?
The “Opinions” is developed on the basis of discussion and consideration of the delisting system reform in 2012. The major adjustments to the delisting system this time are reflected in two aspects: one is the improvement of self-delisting rules, and the other is that compulsive delisting will be applied to companies with severe illegal acts.
In a mature capital market, it is common for companies to choose to be listed or delisted according to their needs, and this is gradually accepted by our capital market. Some listed companies would prefer to be delisted, go to other boards, or change their listing locations based on their development strategies and considerations of reasonable valuation, stable control and cost-effectiveness. The reform this time defined various situations where listed companies would choose to be delisted according to their own needs by taking into consideration and protecting the willingness of market participants. This follows the future trends of the capital market and meets the potential needs of listed companies.
For the situation that listed companies with severe illegal acts that damage the interests of investors could not be delisted, the new delisting system incorporates two situations where these companies would be forced to be delisted: fraud issuance during IPO and illegal disclosure of significant information after listing, since these two situations could generate extreme negative effects in the market, damaging investors’ interests as well as the market development. Compulsive delisting is a response to the market’s sentiment.
In addition, the delisting system reform added market-oriented standard of delisting, and made proper adjustments to such issues as conditions for re-listing.
III. What are the duties of stock exchanges in the delisting work?
According to the “Opinions”, a stock exchange is the subject of liabilities in carrying out the delisting system, and guiding opinions are offered on how to carry out the delisting system. In the meantime, the delisting work should be monitored by the CSRC, defining the border of self-regulation and administrative regulation, which is consistent with existing securities laws and regulations and regulatory practices. According to the “Securities Law”, a stock exchange, as the organizer and the manager of the securities market, should develop specific standards for suspension and resumption of listing and re-listing of listed companies and carry them out. The delisting work is highly policy-related, comprehensive, systematic, and complicated according to practices of securities regulation, so it requires the stock exchange to carry it out under the overall planning and guidance of the CSRC.
According to the “Opinions”, a stock exchange should undertake three major responsibilities in the delisting work: first, it should develop listing rules and affiliated rules and optimize, adjust and improve each prescription of delisting in accordance with laws and regulations as well as the “Opinions”; second, it should carry out the delisting system strictly, review and make decisions in accordance with laws and regulations for listed companies that meet such situations as listing suspension, listing resumption, delisting, and re-listing; third, it should urge delisted companies to disclose accurate and complete delisting information on time.
IV. What are specific arrangements for voluntary delisting in the “SSE Stock Listing Rules"?
There are 3 arrangements for voluntary delisting as follows:
First, it defines specific situations and decision-making processes. 7 situations are defined according to different bodies and patterns of voluntary delisting, such as voluntary delisting through a resolution made at the Shareholders’ Meeting, repurchase, acquisition, company merger, and voluntary disincorporation. In the meantime, different decision-making processes and requirements of suspension and resumption of trading are defined according to different types of voluntary delisting.
Second, it adds details to requirements for information disclosure and arrangements for delisted companies. A company would be required to disclose its voluntary delisting progress at different time points, and the disclosure should focus on investor protection and related arrangements after delisting. Besides, companies that choose voluntary delisting could choose to be traded or transferred on stock exchanges, or to make other arrangements according to laws and regulations.
Third, it defines a stock exchange’s review and implementation procedures. Explicit prescriptions are made on review, decision-making, and delisting procedures of voluntary delisting on a stock exchange, including the time limit of review and decision-making, the key points of the review of the listing examination committee, time of delisting, and so on.
V. What are the specific regulations for compulsory delisting due to major illegal acts in the “SSE Stock Listing Rules"?
The rules include 3 aspects:
First, it defines situations applicable to compulsory delisting triggered by major illegal acts. Fraud issuance and illegal disclosure of significant information, which have been recognized by the market as major illegal acts, have been defined as situations applicable to compulsory delisting.
Second, it defines delisting procedures for the above situations. A clear implementation procedure has been developed for compulsory delisting triggered by major illegal acts. After being identified as fraud issuance or illegal disclosure of significant information, relevant listed companies would enter into the following procedure, namely, delisting risk alert, listing suspension and delisting, with clear time points of each section and objective standards provided as well. Since the previous version of the former “SSE Stock Listing Rules” has given explicit definition on exchanges’ review procedures, no adjustment has been made this time.
Third, it adds requirements for relevant information disclosure. There are clear requirements for listed companies’ information disclosure obligation according to major time points during the process of compulsory delisting triggered by major illegal acts, including the time of information disclosure, requirements of announcement content, procedures for trading suspension or resumption, as well as risk alerts to investors.
VI. What’s the concern for adding delisting risk alert for delisting triggered by serious illegal acts in this reform?
It is based on the consideration that for listed companies, the time point of listing suspension triggered by serious illegal acts could be accidental and sudden. Before being identified as conducting fraud issuance or illegal disclosure of significant information, relevant listed company’s delisting risk is uncertain, and it could not be predicted by the market beforehand. Therefore, the immediate listing suspension or delisting could not offer necessary buffer to investors, especially small and medium-sized investors. As a result, we developed delisting risk alert by referring to the existing delisting system, so as to enable investors to retreat from the market. The shares in relevant company could be traded for another 30 trading days after a delisting risk alert is imposed on the company from the day when the CSRC makes a decision of administrative penalty or transfer.
VII. What is the adjustment to application conditions for re-listing in the “SSE Stock Listing Rules"?
The re-listing of delisted companies, an important supporting system, is a key method to dredge the delisting channel and release the delisting pressure. The 2012 delisting system reform developed re-listing conditions according to a standard that is higher than that of back-door listing yet lower than that of IPO, providing a relatively easy way for delisted companies to return to exchange-based markets.
This standard represented our intention to protect investors’ interests in the current market situation. However, the market worried that the re-listing conditions, which are lower than those of IPO, could trigger malicious or careless delisting, leading to regulatory arbitrage, and imposing negative effects in the capital market development and the protection of small and medium-sized investors. Given the fact that the conditions for building a transfer mechanism among various markets are available in China, and there are various ways to protect investors’ interests, the delisting reform this time made further adjustment to re-listing conditions, requiring that the major indicators in re-listing should be equivalent to those of IPO.
In addition, a line was drawn between the present and the past to stabilize the market sentiment in accordance with the principle of non-retroactivity, offering a 36-month transition period to companies that were already delisted before the revised “SSE Stock Listing Rules" comes into effect. The re-listing conditions in the previous “SSE Stock Listing Rules" would still be valid during the transition period.
VIII. What are the arrangements specially made to protect investors in this delisting system reform?
The protection of investors, especially the lawful rights and interests of small and medium-sized investors, is the theme of this reform, and we have detailed policies in each section of delisting, which could be represented in 5 aspects:
First, it strengthens the internal decision-making procedures of companies which want to carry out voluntary delisting. For a company deciding to be delisted upon the resolution of shareholders’ meeting, that resolution should be agreed by no less than 2/3 of all shareholders and public shareholders to prevent malicious delisting, which could damage the interests of small and medium-sized shareholders.
Second, it establishes a special mechanism for re-listing of companies with illegal disclosure of significant information. By taking into consideration of interests of small and medium-sized shareholders, we prescribe that companies that are forced to be delisted due to illegal disclosure of significant information could submit re-listing applications to the SSE if they have made corrections, replaced related responsible persons, and made proper arrangements of civil compensations before the SSE makes a decision of delisting.
Third, it enhances the stakeholder-related constraint mechanism for major illegal acts. It is clearly defined that for fraud issuance or illegal disclosure of significant information during IPO and refinancing, the responsible parties of companies should promise to stop transferring their shares once these companies are being investigated, and relevant implementation procedures are also defined.
Fourth, it promotes the protection mechanism for dissident shareholders and civil compensation. It is clearly defined that companies which want to carry out voluntary delisting should make such special arrangements as repurchase request right and cash option for dissident shareholders. For companies with major illegal acts, their responsible parties would be required to compensate the losses of investors according to rules and regulations or previous promises.
IX. What are the inspirations of the delisting of *ST Changyou (Nanjing Tanker Corporation) to this delisting system reform?
After finishing the trading during the delisting arrangement term, *ST Changyou was delisted by the SSE on June 4, 2014. It is the first state-owned key enterprise to be delisted from the securities market of China, and it is the first company that is subject to new rules in 2012 and be delisted after finishing the trading during the delisting arrangement term. Its delisting attracted many market attentions. Generally speaking, the delisting process was stable and in good order, setting up a new sample for the delisting system’s improvement.
Its delisting has brought inspirations to the delisting system reform in 3 aspects: first, the delisting system must be equal to all listed companies and should be carried out strictly. The case about *ST Changyou showed to the market and investors that listed companies would be delisted as long as they trigger the delisting standards, regardless of their sizes and ownerships. Second, the delisting work must be carried out according to laws and regulations. Take this case, the SSE made a decision of delisting in accordance with procedures in the “SSE Stock Listing Rules", and ensured the monitoring process open and transparent, receiving understandings and recognition of the market and investors. Third, delisting should be carried out through close cooperation among departments. In this case, the CSRC, the relevant securities regulatory bureau, the exchange, and the local government cooperated closely to facilitate the delisting work.
X. What are the arrangements in the transition of the delisting system reform, as well as in follow-up work?
According to the “Opinions”, the new delisting system will become effective on the day of issuance of the revised “SSE Stock Listing Rules". After the issuance, relevant rules on compulsory delisting would be applicable to listed companies punished or investigated by relevant public security organs due to their illegal acts. That is to say, the new delisting rules will prevail if the illegal acts of companies occurred before the revision of the listing rules, yet they are identified after the revised version comes into effect. This arrangement is based on the consideration that major illegal acts could have a heavy blow on the market confidence, casting great impacts to listed companies, investors, and stakeholders. Therefore, tough regulations should be adopted to maintain market credibility and establish investors’ confidence.
For the follow-up work, the SSE will collect public opinions through various means under the guidance of the CSRC, and will finish the revised version of the “SSE Stock Listing Rules" and submit it to the CSRC for approval before issuing. The SSE will also revise supporting business rules to ensure the implementation of various detailed arrangements.
