In recent years, the Shanghai Stock Exchange (SSE) has focused on propelling the improvement of the quality of listed companies, intensified the “zero tolerance” deterrence, and timely imposed disciplinary sanctions on all kinds of violations. Additionally, in order to protect the legitimate rights and interests of the parties, the SSE has continued to improve the disciplinary hearing, the review system and the operating mechanism. In response to the review applications submitted by the parties on disciplinary measures, the Shanghai Stock Exchange has timely organized a Review Committee to hold a meeting for deliberation, so as to give full play to the function of self-discipline supervision and internal relief mechanism. Meanwhile, through the review mechanism the Shanghai Stock Exchange has clarified the logic and criteria for self-regulation and conveyed the stances of the front-line supervision.
1. Overview of review of cases concerning disciplinary actions imposed on listed companies
Since 2019, the SSE has issued a total of 308 disciplinary sanctions, involving 329 listed companies, and 1,134 directors, supervisors and senior executives of listed companies (the “DSEs” for short) and related entities. Specifically, 93 cases resulted in public condemnation and 215 cases led to criticism notices, and 69 people responsible were publicly identified to be unsuitable to take the position of director, supervisor, or senior executive. Meanwhile, the SSE has severely dealt with a total of 55 cases related to financial fraud, capital occupation, illegal guarantees, internal control defects and other violations that seriously affected the quality improvement of listed companies. The crackdown accounted for 17.86% of the total cases of disciplinary action during the period.
In response to the abovementioned disciplinary sanctions, some of the parties submitted applications for review to the SSE, which dealt with a total of 13 review cases, accounting for 4.22% of the total disciplinary actions during the period, involving 58 review applicants. The main characteristics of the relevant review cases are as follows: First, the cases were mostly concentrated in high-risk listed companies, as more than 70% of the review cases involved the high-risk listed companies that had been warned of delisting risks or had been delisted; second, the types of violations were mostly concentrated in the prominent problems that affected the quality of listed companies, including financial fraud, illegal guarantees, capital occupation, serious internal control defects, and the DSEs’ refusal to ensure the authenticity of the annual reports; and third, the applicants were mostly individuals, as more than 95% of the relevant applicants for review were directors, supervisors and senior executives of listed companies.
2. Review of cases involving listed companies “hollowed out” by controlling shareholders or actual controllers
Due to the relatively concentrated control of listed companies in China, urging the controlling shareholders and actual controllers to be honest and trustworthy and to operate in compliance with laws and regulations is the key to improving the quality of listed companies. The SSE has severely punished the acts of “hollowing out” the listed company masterminded by the “critical few”. In addition, the DSEs’ failure to perform their duties diligently and lack of effective supervision and restraint on the exercise of control rights was also one of the causes for the frequent occurrence of such violations, and the SSE imposed corresponding penalties on them to urge their diligence in fulfilling responsibilities.
A total of 3 such cases were filed for review. Judging from the basic facts of the cases, the controlling shareholder or actual controller abused the controlling position, and bypassed the company’s internal control and decision-making procedures in the violations such as capital occupation, illegal guarantees, and improper connected transactions, involving huge amounts and serious nature. For example, a controlling shareholder accepted a total of 37 guarantees from the listed company in violation of regulations, with the total amount exceeding RMB4 billion, putting the listed company under the delisting risk alert.
The main reasons for application review, proposed by the applicants, included: the violation involved malicious crime and was difficult to prevent; the responsible person did not know about the situation; the independent director did not participate in daily operation and should not bear responsibilities.
In accordance with the review and deliberation, the review committee believed that the controlling shareholders and actual controllers were the “initiators” and actual beneficiaries of capital occupation and illegal guarantees, and the reason for knowing nothing about the violations was hardly convincing. The DSEs failed to urge the companies to set up and improve the sound internal control systems and guarantee the effective implementation. The supervision of the company's management and standardized operation is often a mere formality, lacking sustainable, in-depth attention and effective supervision measures, and failing to meet the standards of due diligence and responsibility. They should not shirk their responsibilities on the grounds that the violations involved crime, or that they were unaware and did not participate. The independent director has the legal responsibility to urge the company to establish effective internal control and operate compliantly, so they should bear responsibilities when they have not diligently fulfilled their duty.
3. Review of cases involving disclosure violations in periodic reports
The periodic reports of listed companies have a significant impact on investors' decision-making and are vital documents of information disclosure. Listed companies and their DSEs should fully understand the seriousness of the preparation and disclosure of periodic reports. By imposing punishments on violations, the SSE has urged the DSEs to perform their duties diligently by making full use of the means stipulated by laws, rules and the company's articles of association, pay attention to the problems in the preparation of annual reports and take effective measures to facilitate solution. All this aims to ensure that the listed companies disclose regular reports according to rules in a timely manner, thus propelling the listed companies to continuously improve corporate governance and regulated operations.
A total of 5 such cases were filed for review, with the proportion on the rise. Judging from the basic facts of the cases, in addition to the inaccurate disclosure of financial information in the periodic reports, there were also the cases of failure to disclose the annual report on time and the refusal of all the DSEs to ensure the authenticity of the annual report. One company put off the disclosure of the annual report by 4 months. All the DSEs of another company could not ensure that the disclosure of the annual report was true, accurate, and complete. This seriously affected investors’ access to the information for investment decision-making. Another company failed to prepare the annual report according to the rules and refused to make corrections, leaving a bad influence on the market.
In terms of the reasons for application for review, the applicants mainly argued that there was not sufficient time for reviewing the annual report, and the DSEs had the right not to guarantee the authenticity of the annual report and to disapprove of the opinions of annual auditors.
According to the review and deliberation, the review committee believed that the listed companies and their DSEs are obliged by law to disclose the annual reports in a truthful, accurate, complete, and timely manner. Instead of waiting passively for the company to send the annual report only during the review of the report, the DSEs should continuously pay attention to the company’s operations and the preparation of annual reports, and urge the company to solve in time the problems occurring during the process of compiling the annual report. The disagreement between the company and the accountant is a problem that needs to be solved by the DSEs, rather than a reason for accountability exemption. The laws and regulations such as the new Securities Law and the Administrative Measures for Information Disclosure of Listed Companies set specific requirements for the DSEs’ guarantee obligations for periodic reports and the objection mechanism. The DSEs who express objection to the periodic report shall provide clear and specific opinions and state the reasons, instead of using a general statement of not ensuring authenticity to exempt themselves from their statutory duties.
4. Review of cases involving violations in disclosure of information on M&A and reorganizations of companies
Investors are highly concerned about predictive information such as business performance disclosed in major assets restructuring transactions of listed companies, and such information is highly price sensitive. In addition to strict supervision against the violations in major assets reorganizations such as inaccurate disclosure of predictive information, inadequate fulfillment of commitments to performance, and untruthful disclosure of reorganization documents, the SSE has stringently prevented mergers and acquisitions and reorganizations from becoming tools for improper arbitrage and channels for risk transfer.
A total of 3 such cases were filed for review. Regarding the basic facts of the cases, the first type was the inaccurate disclosure of the predictive information on the restructuring, as one company saw the actual performance of its acquisition target only reach 1/4 of the commitment to performance, and the counterparty refused to fulfill the promise of compensation for performance; the second type was the violation in disclosure of information on major capital increase, as one company failed to disclose in a timely manner the relevant material information that the acquisition target could not obtain an important mining right; the third type was untruthful and inaccurate disclosure of reorganization documents and other information, as one company failed to truthfully disclose the fact that the restructuring target had external guarantees, and after the reorganization, the restructuring target still had the violations such as financial fraud, illegal guarantees and capital occupation.
With respect to the reasons for application for review, the applicants mainly argued that the performance predictions had been determined by the evaluation of the listed company and third-party intermediaries, that sufficient notice of risk had been made on related matters, and that the violations involved malicious crime, which the applicants were unaware of and did not participate.
According to the review and deliberation, the review committee believed that the counterparty of the transaction, as the controlling entity of the underlying assets, with a higher duty of care for the reasonableness of performance forecasts and the possibility of fulfillment of commitment to performance, should be cautious in prediction and ensure the objective and proper information disclosure. The evaluation reports provided by the evaluation agencies are only for reference and cannot act as a replacement for both transaction parties’ obligation of information disclosure. The relevant information about the underlying assets disclosed by the company was inconsistent with the facts and misleading, and failed to specifically indicate the potential risks of the underlying assets, resulting in inadequate risk warnings. When the company implemented the high-risk major asset restructuring across industries, the relevant DSEs should be held responsible for failing to provide evidence to prove that they had fulfilled their obligations of due diligence that matched the degree of risks for a major assets restructuring.
5. Review of cases involving violations in companies’ disclosure of major matters
Companies’ performance forecasts, announcements on major external investments and other disclosures are the information necessary for investors to make value judgments and investment decisions. Focusing on the supervision of information disclosure, the SSE has promptly handled through “inquisitive” regulation the violations in information disclosure such as inaccurate performance forecasts, deliberate concealment of important information, “newsjacking” and “hyping up concepts”. All this aims to effectively protect investors’ right to know and maintain the order of the securities market for a favorable market ecosystem.
A total of 2 applications were filed for review. In terms of the basic facts of the cases, the first type involved the inaccurate performance forecasts, as the gap between the predicted performance of a company and its actual performance was as large as RMB2.16 billion, a difference of 125%, seriously affecting the reasonable expectations of the investors; the second type involved the disclosure of misleading information on major investments, as a company failed to truthfully disclose the actual amount of major investment, the business involved, and other key information, resulting in large fluctuations in stock price.
Regarding the reasons for application for review, the applicants mainly argued that they had issued warnings about the performance forecast, that they needed to rely on the opinions of the accountants, and that they had released risk warnings on the external investment matters, or the fluctuations in stock price had nothing to do with information disclosure.
In accordance with the review and deliberation, the review committee believed that as for the inaccuracy of the performance forecast, the independent director and convener of the audit committee, with a higher duty of care for financial matters than ordinary independent directors, failed to meet the standards for due diligence. All this resulted from only one-sidedly and generally reminding the company to pay attention to the accuracy of the performance forecast, passively waiting for the company and accountants to report to them, and relying on the opinions of intermediaries. With regard to the disclosure of misleading information on major investments, the relevant risk warning announcements deliberately concealed the key information such as the actual investment amount and repeatedly highlighted information about the hot-spot industry, which aggravated the misleading of investors. Moreover, the company’s stock price trend deviated significantly, which was apparently correlated with the announcements on the external investment.
Going forward, the SSE will continue to perform the relevant duties for hearing and review in accordance with laws and regulations, guide the regulated entities to fully seek internal remedies, and actively and properly resolve related disputes. In addition, the SSE will resolutely implement the requirements for “zero tolerance” and “targeted regulation”, continue to step up the self-regulation of the listed companies’ violations in information disclosure, deal with major and serious cases in key areas strictly and expeditiously, intensify the accountability for the “critical few” and intermediaries, strengthen the market’s endogenous restraint mechanism, and purify the market ecosystem.
