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On January 11, 2019, SZSE published the revised Implementation Rules of Shenzhen Stock Exchange on the Share Repurchase of Listed Companies (the Repurchase Rules) and Format of Announcements on the Share Repurchase Business of Listed Companies (the Announcement Format). SZSE spokesperson answered questions of concern to the market at a press conference.
Q: Please introduce the background of this Repurchase Rules.
A: A sound share repurchase mechanism is a major achievement in the reform of China's capital market. On October 26, 2018, the NPC Standing Committee adopted the Decision on Amending the Company Law of the People's Republic of China, which provides a legal ground for improving share repurchase system, broadening share repurchase scenarios, streamlining repurchase decision-making process and establishing treasury stock system. Later on, the CSRC, the Ministry of Finance and the SASAC released a joint opinion to support the share buybacks by listed companies (the Opinion), and the CSRC published the Notice on Studying and Implementing the Decision of the NPC Standing Committee on Amending the Company Law of China (the Notice). These documents further specify favorable measures for share repurchase to guide and normalize the share repurchase practices of listed companies.
The revised Repurchase Rules give listed companies a bigger say, and provide them with more convenient and more market-oriented choices in retaining company value, protecting shareholders' interests and rights and implementing long-term stimulation mechanism. In this way, we can improve the quality of listed companies, optimize investor return mechanism and boost healthy development of China's capital market. According to statistics, more than 400 SZSE-listed companies launched repurchase programs and the total share buybacks hit CNY40 billion over the period from 2015 to 2018. Among others, over 100 companies released repurchase plans for up to CNY20 billion after the Company Law was amended.
Q: What are the general idea and major content of the Repurchase Rules?
A: To earnestly implement the new share repurchase requirements, SZSE gave overall consideration to superior laws and regulations and its own regulation practices. It reviewed share repurchase rules for listed companies, sought advice from all market participants and carried out a thorough analysis. After all these efforts, the Repurchase Rules came out, a comprehensive revision of the Guidelines of Shenzhen Stock Exchange for the Share Repurchase via Central Bidding by Listed Companies published in 2008.
On one hand, the Repurchase Rules give due consideration to new share repurchase requirements, further specifying share repurchase scenarios, procedures, methods, information disclosure and dispose of repurchased shares. On the other hand, it defines the obligations of all market participants to prevent insider trading, market rigging, tunneling and securities fraud.
This revision mainly:
1. expands the applicable scope of share repurchase, specifying that share repurchase is permitted where it is necessary for protecting company value and shareholders' interests;
2. streamlines the share repurchase review procedure for certain scenarios and standardizes the share repurchase proposal procedure;
3. defines share repurchase disclosure and plan change requirements, introducing the "crawling" repurchase provision (which stipulates that the number of repurchased shares every 5 trading days, except where it is necessary for protecting company value and shareholders' interests and where the repurchase volume is under 1 million shares, shall not exceed 25% of the total transaction volume during the 5 trading days period prior to the implementation of the first share repurchase);
4. specifies the source of repurchase funds, considering share-based payments as cash dividends;
5. stipulates the requirements and restrictions on repurchased share reduction "necessary for protecting company value and shareholders' interests"; and
6. enhances share repurchase regulation by taking a tough line with all violations of laws and regulations.
Q: Please introduce the opinions sought on the Repurchase Rules and how they are adopted.
A: SZSE published a notice to seek public opinions on the implementation of Repurchase Rules on November 23, 2018. It asked advice from all market participants in various ways and kept a close eye on media reviews. In the end, it received more than fifty suggestions from listed companies, securities companies and medium and small investors. The majority of market participants attached great importance to the repurchase system reform. They reckoned that such reform will boost robust development of the capital market. However, a few people worried that repurchase financing may raise the financial exposure of listed companies and that companies may rig its share prices by reducing repurchased shares.
After thorough analyses and argumentation, SZSE adopted some of the opinions and accordingly made the following improvement and revision of the Repurchase Rules:
The first is the proposal that lessening is forbidden in the case where the share repurchase is necessary to safeguard corporate value and shareholders' rights and interests. The Notice specifies that in the case of "the repurchase is out of the necessity for maintaining the value of listed companies and the rights and interests of shareholders", the shares may be reduced after certain procedures have been performed. The exposure draft of the Repurchase Rules clearly defined the requirements and restrictions on the reduction of shares repurchased, and made strict regulations on the lock-up period and the procedures, pre-disclosure, progress disclosure and amount of share lessening. In order to further strengthen the restrictions and restraints for shareholding lessening, after fully considering the market opinions, we extends the lock-up period from "6 months" to "12 months" in the Repurchase Rules. Besides, a restriction clause that within any 90 consecutive natural days, the total number of shares reduced shall not exceed 1% of the total number of shares of the company has been added
The second is the proposal that share repurchase shall not be implemented through debt financing. The Repurchase Rules requires companies to clarify the source of funds for the share repurchase in the repurchase plan, and stresses that "the board of directors should pay full attention to the companies' capital status, debt performance ability and the ability to continue as a going concern. They shall carefully formulate and implement share repurchase plans, and the number of shares repurchased and the size of the funds should match the actual financial situation of the companies." The listed companies shall improve the internal management system, fully consider the capital situation, and reasonably implement share repurchase to ensure that the repurchase will not damage their debt performance ability and the ability to continue operations.
The third is the proposal of defining the repurchase proposer. Some opinions thought that the definition was not clear, which might lead to individual shareholders' speculating of the stock prices and increase the standard operating cost of listed companies. Market opinions were fully absorbed in the Repurchase Rules which defines the proposer as the person who has the right to propose proposals according to relevant laws and regulations and the company's articles of association. This helps prevent bamboozling proposals which may be misleading to investors.
The fourth is the proposal that B-share repurchase shall not apply the "crawling" repurchase clauses. Some opinions thought that the "crawling" repurchase clauses were too restrictive and are not applicable to B shares. In order to guide listed companies to reasonably control repurchase pace and quantity and avoid affecting the normal order of the secondary market, the Repurchase Rules has included a "crawling" repurchase requirement that the number of repurchased shares every 5 trading days, except where it is necessary for protecting company value and shareholders' interests and where the repurchase volume is under 1 million shares, shall not exceed 25% of the total transaction volume during the 5 trading days period prior to the implementation of the first share repurchase. Taking into account the objective situation of B-share transaction being inactive and the transaction volume is low, an exception clause has been added to improve institutional flexibility, saying that "B-share repurchases shall implement preceding provisions in principle. In case that the preceding provisions are not followed by B-share repurchases, the reasons and reasonability shall be fully disclosed".
Q: The Repurchase Rules adds the circumstance of "necessity for maintaining the value of listed companies and the rights and interests of shareholders", where reduction of repurchased shares is permitted. Some investors worry that listed companies may take advantage of this provision to manipulate stock prices and adjust profits. Are there any measures to prevent such violations in the Repurchase Rules?
A: Strict restrictions are placed on share repurchase "necessary for maintaining the value of listed companies and the rights and interests of shareholders". The closing share price of a listed company must be lower than its most recent net asset value per share or must decrease by 30% over the last twenty trading days in a row. The listed company must hold a board meeting to review the repurchase plan within ten trading days from the date of occurrence of such facts or from the date of receiving the repurchase proposal. Besides, the share repurchase program must be completed within three months. To prevent tunneling, listed companies' directors, supervisors, senior management, controlling stockholders, de facto controller, share repurchase proposer and its persons acting in concert shall not reduce shares of the listed company directly or indirectly during the period.
Meanwhile, the Repurchase Rules provides strict provisions for the reduction of the repurchased shares of listed companies. The shares repurchased by a listed company that is 'necessary to safeguard the value of the company and shareholders' must meet certain conditions before they can be sold through centralized bidding transactions, specifically including: the number of shares to be reduced shall be clearly disclosed in the repurchase plan and shall be limited for sale for 12 months after the completion of the repurchase; the pre-disclosure of the reduce of shareholding shall be conducted 15 trading days in advance, no reduction of shareholding is allowed during the sensitive period; the daily reduction volume shall not exceed 25% of the daily average trading volume during the 20 trading days previous to the pre-disclosure date for reduction; and any reduction of shareholding within 90 consecutive natural days shall not exceed 1% of the total volume of shares of the Company, etc. Besides, the Repurchase Rules also makes clear requirements on the application and reporting period and the price limit and progress disclosure of the shareholding reduction.
It should be noted that share repurchase under the situation of 'necessity for maintaining the value of the Company and shareholders' differs greatly from other situations in terms of implementation conditions, repurchase period, volume requirements, and following treatment, etc.. Combined with situations such as registered capital decrease, employee stock ownership plan or equity incentive and debt-to-equity conversion, the implementation of share repurchase shall be more complicated.
According to the accounting standards, the shares repurchased by a company shall be managed as treasury shares before cancellation or transfer, and shall be included in the cost of the treasury shares in accordance with the total expenses of the repurchased shares. If the amount actually received is higher than the cost of the treasury shares when a company conducts treasury share transfer, the difference shall be included in the capital reserve; while the actual amount received is lower than the cost of the stock, the difference shall be offset against the capital reserve, surplus reserve and undistributed profits in turn. Therefore, whether a listed company repurchase, hold and sell its proprietary shares, the profit of the current period will not be affected, which means profit cannot be adjusted via repurchase and sale of proprietary shares.
Q: Does the new regulations apply to the repurchase plan disclosed by the listed company before the release of the Repurchase Rules?
A: If the repurchase plan disclosed by the listed company before the implementation of the Repurchase Rules has not been completed, the follow-up implementation shall be compliant to the general provisions, implementation procedures and information disclosure requirements of the Repurchase Rules. Where the disclosure plan includes 'situations that necessary for the maintenance of company value and shareholders' equity', the listed company shall verify whether the preconditions and relevant procedural requirements of the situation are met, and clarified the follow-up arrangements. Where the disclosure plan includes multiple uses, but the specific circumstances corresponding to each use are not clear, the listed company shall specify the quantity of shares to be repurchased for various purposes or total amount of funds to be used for repurchase, and replenish the disclosure in a timely manner after the relevant review procedures are implemented within 3 months from the date of the release of the Repurchase Rules.
Q: Please tell us about the general content of this simultaneous revision of the Announcement Format.
A: The Announcement Format further refines and clarifies the information disclosure requirements on the basis of the Repurchase Rules, specifies the repurchase proposals, the repurchase plan, the repurchase report, the progress and results of the repurchase implementation, and the disposal progress and result of repurchased shares. For example, if the proposal or repurchase plan includes 'situations that necessary for the maintenance of company value and shareholders' equity' , it is necessary to disclose the calculation process of relevant indicators to indicate whether the preconditions are met, and whether the proposed date and the date of the board meeting meet the requirements. If the purchase period expires or the plan has been implemented, it shall be verified in the announcement of the repurchase result whether the repurchase implementation process violates the repurchase rules in the Repurchase Rules concerning requirements of no repurchase during the sensitive period, the "crawling" repurchase clause, the trading commission period limit, certain entities not reducing their holding of shares. If the repurchased shares have been processed, it is necessary to verify in the results announcement whether the share reduction is in compliance with the requirements of no shareholding reduction during the sensitive period, reduction of rhythm and quantity, and limitation of trading commission period.
Q: The market is very concerned about how to ensure the fairness of the repurchase process, and to guard against illegal behaviors such as insider trading, market manipulation, and interest transfer. What are the considerations of the SZSE?
A: Taking into account the status and information advantages of specific entities such as listed companies, directors, supervisors, senior management, and controlling shareholders, the Repurchase Rules require listed companies to establish a standardized and effective internal control system, which require directors, supervisors, senior management and relevant securities service institutions be diligent and responsible. If a listed company fails to disclose the information on the repurchased shares in compliance with laws and regulations, the SZSE may require the listed company to supplement the disclosure of relevant information, or suspend, or terminate the repurchase.
The SZSE will strengthen the monitoring of repurchase transactions and the trading of shares of specific entities, intensify the linkage of transaction monitoring and information disclosure supervision, and take regulatory measures timely after finding abnormal trading behaviors and report to the CSRC, severely crack down on illegal acts such as insider trading and market manipulation, earnestly maintain market order, safeguard the interests of small and medium-sized investors, and give full play to the active role of the share repurchase system
Q: What else should listed companies pay attention to in the process of share repurchase?
A: The release of the Repurchase Rules and Announcement Format further clarifies the process specification and information disclosure requirements for implementation of share repurchase by listed companies. Listed companies should earnestly study the relevant laws and regulations, research and improve the corporate governance mechanism related to share repurchase, optimize the articles of association timely, advance the internal governance system, and carry out repurchase in accordance with the law. They should carefully formulate the repurchase plan, taking their own operating conditions, cash flow, asset-liability ratio, interest-bearing liabilities and others into consideration, and promote sustainable and healthy development. The controlling shareholders and the actual controllers of listed companies should offer support in repurchasing shares in accordance with the law, and shall not abuse their rights or taking advantage of the share repurchase of listed companies to conduct insider trading or market manipulation, etc.. During the repurchase period, the directors, supervisors and senior management of listed companies should be honest, trustworthy, diligent and responsible to safeguard the interests of listed companies and the lawful rights and interests of shareholders and creditors.
The SZSE will actively and steadily promote the implementation of the rules and support listed companies to carry out share repurchase in accordance with law and regulations. The SZSE will conduct special training, policy consulting, rule guidance and other works to help listed companies to familiarize themselves with the new repurchase rules as soon as possible. Also, the SZSE will continuously sort out and evaluate new situations and problems found in supervision, improve relevant business rules and optimize relevant business processes.
