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On December 28, 2018, the Shanghai Stock Exchange (SSE) collectively dealt with the three companies of *ST Jiangsu Protruly Vision Technology Group Co., Ltd. (*ST Protruly), *ST Harbin Gong Da High-Tech Enterprise Development Co., Ltd. (*ST Gong Da High-Tech) and *ST Shandong Tyan Home Co., Ltd. (*ST Tyan) for their behaviors of capital occupation and illegal guarantee, with the highest penalties imposed on relevant persons liable. In this regard, an official of the relevant SSE department answered the questions, which also involved the recent regulation on the controlling shareholders' behaviors causing improper infringement of the interests of the listed companies.
Q: The market and the investors have paid much attention to the violations of the three companies and their controlling shareholders and actual controllers. The SSE has imposed severe sanctions on them collectively. Can you brief us on the relevant situations?
A: The controlling shareholders' behaviors of capital occupation and illegal guarantee seriously infringe on the legitimate rights and interests of listed companies and small and medium-sized shareholders, and have been the focus in the SSE's frontline regulation. Since the beginning of the year, with tight capital and credit, there have been more cases in which some companies' controlling shareholders or actual controllers embezzled the companies' funds or violated the rules to require the companies to provide guarantees through various means. In this regard, the SSE has remained on high alert, and made efforts in regulation in a timely manner based on the general principle of early prevention, rapid response and severe punishment.
First of all, the cases of capital occupation and illegal guarantee at the three companies are serious offences, and seriously infringed on the interests of the listed companies and the investors. Therefore, severe sanctions should be imposed.
Among the three companies, the actual controller Zhuang Min of the *ST Protruly extracted the company's funds through external investment and other means for a long time, causing the company to withdraw a total of nearly RMB7.3 billion provision for relevant impairment losses and bad debts; the controlling shareholders of the *ST Gong Da High-Tech occupied RMB1.016 billion of the listed company's funds through its subordinate enterprises; the controlling shareholders of the *ST Tyan directly violated the rules to occupy RMB987 million of the listed company's funds. At the same time, all the three companies provided huge quantities of non-compliance guarantees for their controlling shareholders or actual controllers, amounting to RMB652 million, RMB5.906 billion and RMB1.167 billion, respectively. The investigations show that the three companies also had various major violations such as delayed performance forecast, undisclosed major lawsuits, and unfulfilled earnings compensation.
The facts show that the internal control of the three companies was in extreme disorder, and in 2017 they had the negative opinions on internal control issued. The controlling shareholders and actual controllers of the three companies seriously violated their fiduciary responsibilities for the company and investors, disregarded the requirements of laws and regulations, arbitrarily encroached on the interests of the listed companies, and caused significant losses to the investors. In terms of liable persons, not only the controlling shareholders and the actual controllers should bear the primary liability for the violations, but the companies' directors, supervisors and executives should also be blamed. The directors, supervisors and executives of the three companies went against the interests of the company's investors, especially the small and medium-sized investors, and did nothing to stop the controlling shareholders' long-term misappropriation of the interests of the listed company. They even provided support and shield, and seriously violated their obligation of diligence. According to the laws and rules, they should also be dealt with severely.
In handling the violations of the three companies, the SSE has adhered to rapid response and strict regulation. Immediately after finding the signs of significant cases of capital occupation, the SSE urged the companies to verify the situations and recover the losses. At the same time, the procedure for disciplinary sanction was initiated to seriously hold the liable persons accountable. Based on the facts of the relevant cases, the three companies and related liable parties were publicly condemned according to the laws and rules, and it was publicly confirmed that the actual controllers (then chairpersons) of *ST Protruly and *ST Tyan and the then chairperson of *ST Gong Da High-Tech should not be suitable for life long for the positions of director, supervisor or executive at any listed company, and other directors, supervisors and executives liable should not be suitable for the positions of director, supervisor or executive at any listed company for 10 years. In general, the centralized treatment towards the three companies aimed to persist in strictly cracking down on vicious violations of listed companies, purify the market environment, severely punish the violators, maintain the market order for healthy operation, and safeguard the fundamental interests of the investors.
Secondly, the SSE has strengthened the in-process regulation, and stepped up the intensity and frequency of inquiries about information disclosure, so as to tightly prevent the controlling shareholders from using the asset transactions to improperly extract cash from listed companies.
Since the beginning of the year, the SSE has noticed that there were intensive cases of the controlling shareholders extracting cash by selling assets to the listed company in the tightened external financial environment. The end of the year saw such cases increasing. Statistics show that in the year, by mid-December 2018, we found a total of 39 such transactions with major suspicions in the daily regulation. Specifically, from November to mid-December this year, a total of 17 improper assets transactions with suspicions were newly discovered in the regulation, with the number of transactions and the amounts involved significantly increased.
Specifically, the transactions have the following characteristics: the participants in the transactions were mainly small and medium-sized private enterprises, and the controlling shareholders were tightly funded; the counterparties were generally the controlling shareholders or related parties, with strong motives for profit transfer; the basic quality of the underlying assets was poor, and the premiums were high, with the rationality doubted; the payment was mainly in cash, with large amounts; in procedure, some transactions were suspected of avoiding shareholders' meetings and fast trading. The significant manifestation of such transactions was that there was no violation on the surface, the transactions were advanced in the form of shareholders selling assets, and it was difficult to regulate and deal with the cases after the outflow of funds.
In this regard, we have strengthened the in-process regulation in a targeted manner, and increased the frequency and intensity of the inquiries. For the 39 transactions with significant suspicions, we carried out public inquiry or urged the supplementary disclosure, and conducted a second inquiry on 9 transactions with more significant suspicions. For the violations with clear clues, we promptly submitted the cases to the China Securities Regulatory Commission (CSRC) for investigation. The main goal of the efforts was rapid response so as to achieve concrete results in regulation. With the regulation and urge, 13 companies have directly terminated the transactions under the pressure of the market and investors, and 5 companies have taken the initiative to adjust the transaction plan. For the transactions that were advanced continuously, we have intensified the risk disclosure, strengthened the market discipline, urged the companies and their shareholders to increase shareholder commitments, lower the purchasing prices and standardize the procedure of the shareholders' meeting, and revealed the suspicions of the transactions. In general, these efforts have achieved certain results and safeguarded the interests of the listed companies. We will continue to tighten the regulation of such transactions according to law, and strictly prevent the controlling shareholders from improperly cashing out.
Thirdly, we have continuously advanced the development of the basic system of the capital market and established a long-term market discipline mechanism to fundamentally prevent the controlling shareholders from illegally encroaching on the interests of the listed companies.
The practice showed that in the above-mentioned three violation cases of capital occupation and the transactions with significant suspicions found in the year, it was obvious that the directors, supervisors and executives of the listed company failed to fulfill their duties, seldom took the initiative to raise questions or call for verification, and even less expressed dissenting opinions. For the transactions submitted to the shareholders' meetings for review, the minority shareholders were not aware enough of exercising their rights, and even with the related parties not present, the relevant transactions were still approved smoothly. Mostly ignoring the essence of the transactions, the related intermediaries mainly issued their opinions from the perspectives of satisfying the clients and facilitating the transactions, and regarding whether there were any significant suspicions and infringement of the interests of the listed company in the transaction, the opinions expressed by them were not objective enough. The cases indicate that there are still obvious deficiencies in the current market discipline mechanism, and it is necessary to strengthen the development of market systems and foster long-term restraint mechanisms, so as to achieve effective regulation of the behaviors of controlling shareholders and actual controllers.
This year's Central Economic Work Conference pointed out that it is necessary to propel reforms to create a standardized, transparent, open, dynamic and resilient capital market and improve the quality of listed companies. To implement the requirements of the Central Economic Work Conference, one of the important tasks is to standardize the behaviors of the listed companies, improve the quality of the listed companies, and consolidate the foundation for the development of the capital market. Going forward, the SSE will analyze the relevant cases and make effective efforts in the following aspects. First of all, we will formulate relevant behavioral norms for the controlling shareholders and actual controllers on the basis of the problems found in the regulatory practice; secondly, for the directors, supervisors and executives of the listed companies, we will further refine the performance requirements, clearly reveal relevant responsibilities, and step up the supervision on their performance of duties. Thirdly, for the intermediaries, we will strengthen the accountability, and urge them to effectively play the role of "gatekeeper"; fourthly, we will improve our service for the small and medium-sized investors, further strengthen the investor education, and strive to cultivate and enhance their awareness of exercising rights and ability of risk identification.
