Q1. What are the main backgrounds and objectives of the Implementing Rules?
A: Recently, China Securities Regulatory Commission (hereinafter, CSRC) released the revised Several Regulations on the Reduction of Shareholdings by Shareholders, Directors, Supervisors and Senior Executives of Listed Companies (CSRC Announcement [2017] No.9) (hereinafter, Regulations) to further regulate reduction of shares by shareholders, directors, supervisors and senior executives of listed companies and promote the long-term sound and stable development of the securities market. In order to implement the requirements of the Regulations, the Shenzhen Stock Exchange (SZSE) formulated the Detailed Implementation Rules of Shenzhen Stock Exchange on the Reduction of Shareholdings by Shareholders, Directors, Supervisors and Senior Executives of Listed Companies (hereinafter, Implementing Rules) after systematic summarization of its practice in front-line supervision of share sales by shareholders.
The Implementing Rules are question-oriented and contain specific and pertinent provisions to address prominent problems such as shareholders’ evasion of share-reduction restrictions through “liquidation-like” share sales, shareholders’, directors’, supervisors’ and senior executives’ “precision reduction” by using their information dominance, “cliff-like” reduction of restricted IPO shares and private placement shares after the lock-up period, and directors’, supervisors’ and senior executives’ evasion of share sales restrictions by resigning before the expiration of their terms.
When developing the Implementing Rules under the unified arrangement of the CSRC, SZSE adhered to the concepts of protecting investors, maintaining the trading order of the market, striking a balance between the interests of the primary market shareholders and the secondary market shareholders, taking into account shareholders’ right to transfer shares, and guiding orderly share reduction. Based on the practice of share reduction by shareholders of SZSE-listed companies and after repeated calculations, assessments and arguments, SZSE set the quantities, proportions and time limits of the reduction of various classes of share by various types of shareholders as well as regulatory requirements such as information disclosure, and will adjust and refine them in light of actual implementation results. In the follow-on implementation of the new regulations, SZSE will urge relevant market players to strictly comply with share-reduction provisions, make timely information disclosure, and will take regulatory measures against non-compliant share reduction activities. SZSE will timely report share sales behaviors suspected of breaching of laws, administrative regulations or CSRC rules to the CSRC for punishment.
Q2: What is the scope of application of the Implementing Rules?
A: Corresponding to the provisions of the Regulations, article 2 of the Implementing Rules defines the scope of application. Compared with the original Several Regulations on the Reduction of Shareholdings by Substantial Shareholder, Directors, Supervisors and Senior Executives of Listed Companies (CSRC Announcement [2016] No. 1), the new Regulations extended the scope of application. Besides controlling shareholders and shareholders holding 5 percent or more of the shares of listed companies (hereinafter collectively, substantial shareholders), directors, supervisors and senior executives of listed companies, shareholders holding pre-IPO shares and private placement shares (hereinafter, specific shareholders) are further included. In addition, exceptions to share sales restrictions were further adjusted to include only substantial shareholders’ reduction of “shares obtained through collective auction”.
It should be emphasized that except the aforesaid “key minority” shareholders, the Implementation Rules do not restrict stock trading of other investors, especially small and medium investors. As such, the Implementing Rules do not change the existing stock trading rules of the secondary market.
Q3: Are there any special arrangement regarding share sales through block trading?
A: In addition to the restriction of share sales by not more than 1 percent of the total shares of a listed company during any period of 90 consecutive calendar days, shareholders governed by the Implementing Rules may not reduce shares by more than 2 percent of the total shares of the company through block trading during the same period pursuant to article 5 of the Implementing Rules. Reduction of shareholdings through block trading as set forth in the Implementing Rules will be accepted and handled manually by the SZSE, subject to the procedures set forth in The Manual on Reduction of Shareholdings by Shareholders of Listed Companies (hereinafter, The Manual) released by the SZSE on the same day.
Q4: Are there any specific requirement on the transferee in block trading?
A：To further prevent shareholders from evading the requirements of quantities and proportions reduced through “bridge reduction” in block trading, in addition to the aforesaid reasonable restriction on the transferor in block trades , the relevant transferee shall, in strict accordance with the Implementing Rules, not transfer the shares obtained within 6 months following the completion of share-transfer.
Q5: How should a shareholder conduct share-reduction by manual block transactions?
A: Similar to normal block trading, the shareholder, when a shareholder sells its shares through manual block transactions, the shareholder and the transferee shall separately file applications to respective depository brokerages. It is important to note that as required by The Manual, the two parties of the block trade shall also file the pre- and post-deal share change information with the depository brokerages. The shareholder selling shares shall also fill in the relevant information about its reduction of the same security through all the securities accounts it has opened.
Q6: How should a brokerage firm handle share-reduction through manual block transactions for its clients?
A: The Manual contains detailed provisions on how a member should handle share-reduction through block transactions for its clients. Similar to normal block trading, the member shall, pursuant to relevant regulations, conduct compliance check on client identity, trading account, transaction price, number of shares involved, trading value and the number of shares to be reduced in the block trading order submitted by the client to ensure that the client’s identity information and trading account are correct and valid, that the block trading order conforms to the relevant requirements for block transactions set forth in the SZSE Trading Rules, and that the number of shares to be reduced meets the share-reduction proportion restrictions prescribed in the Regulations and the Implementation Rules.
It should be noted that as the block trade is accepted and handled manually, the member shall work on the number of shares in the investor’s block trading order or the amount of capital involved on a real-time basis, to ensure timely inclusion of the manually input data into the trading management system and to prevent the risk of default on clearing and settlement.
The specific procedures are as follows: firstly, the two members related to the two trading parties shall obtain complete and accurate information about the two trading parties, particulars of the order, class of shares involved and source of the shares in respect of the same transaction, and fill in the Application Form for Reduction of Shareholdings by Shareholders, Directors, Supervisors and Senior Executives through Manual Block Transactions respectively with the seals of members, their branches or relevant business departments affixed thereon; secondly, the two members shall, before 13:00 on the proposed trading day, fax the Application Form to the market surveillance department of the SZSE and confirm by telephone; thirdly, SZSE will process the application if the application meets the relevant requirements. The results of block trades are as per the clearing and settlement data sent by China Securities Depository and Clearing Corporation Limited Shenzhen Branch. SZSE does not send any transaction confirmation. SZSE will refuse the application and notify the contact person by telephone if the application does not meet the relevant requirements.
Q7: What other duties must brokerage firms perform when handling share-reduction through block trading for shareholders of listed companies?
A: Brokerage firms shall perform the obligations of reminding, notifying and urging for their clients. Firstly, brokerage firms shall remind the client who reduces shares that the proposed share-reduction shall meet the regulatory requirements imposed by the CSRC and SZSE regarding share changes of listed companies and urge its client to stop trading, report and disclose information as required by relevant obligations. Secondly, brokerage firms shall remind the transferee that it shall be aware of and comply with the restrictive provisions on share transfer as set forth in the Implementation Rules.
Q8: Are there any provisions in the Implementation Rules that apply to share-reduction by shareholders through negotiated transfer?
A: The notice issued by the SZSE in January 2016 prescribed the minimum transfer proportion, lowest transfer price and continuing obligations in respect of negotiated transfer. Based on the existing provisions, the Implementation Rules contain supplementary provisions regarding new matters such as share-reduction by specific shareholders
Firstly, the Implementation Rules further clarify that the stake to be received by a single transferee from negotiated transfer shall be no less than 5 percent of its share capital and that the lowest transfer price shall be governed by block trading rules.
Secondly, the Implementation Rules add new provisions on the continuing obligations of specific shareholders who receive specific shares in a negotiated transfer deal. Such shareholders must observe share-reduction proportion requirements set forth in the Implementation Rules together with the transferor within 6 months after completion of share transfer. If the transferee constitutes a 5 percent shareholder or reduces specific shares, it shall still comply with the relevant provisions of the Implementation Rules.
Thirdly, the Implementation Rules further clarify the continuing obligations of specific shareholders whose stake falls below 5 percent as a result of the share transfer. The transferor shall continue to observe share-reduction proportion requirements set forth in the Implementation Rules together with the transferee within the subsequent 6 months and perform information disclosure obligations pursuant to relevant regulations.
In order to heighten shareholders’ sense of compliance, SZSE will require the transferor and transferee to make a written undertaking when conducting negotiated transfer that they will continue to observe share-reduction proportion requirements set forth in the Implementation Rules and information disclosure obligations within 6 months after completion of share transfer.
For example, shareholder A holds a 15 percent stake in the listed company X and intends to transfer a 12 percent stake to B and after the transfer, A’s stake in X falls to 3 percent. Though shareholder A is no longer a substantial shareholder, it shall still observe the one percent share-reduction limit, i.e., “the total number of shares reduced through collective auction during any period of 90 consecutive calendar days shall not exceed 1 percent of the total shares of the listed company”. Moreover, shareholder B becomes a substantial shareholder after the completion of the deal and therefore shall also comply with other provisions in the Implementing Rules relating to share transfer by substantial shareholders.
Q9: How should a shareholder calculate its share-reduction proportions if it holds shares from various sources?
A: If a substantial shareholder or specific shareholder holds shares from various sources, in the course of reduction of shares, it shall calculate share-reduction proportions set forth in the Implementation Rules according to the following priority sequence and principles:
(1) Pre-IPO shares held by the shareholder;
(2) Private placement shares held by the shareholder; in the case that the shareholder holds shares that were released from lock-up periods at different time, priority will be given to the shares that were released earlier when calculating share-reduction proportions;
(3) Shares held by the shareholder that were obtained in any way other than collective auction.
For example, shareholder C holds a 3 percent stake in the listed company Y, of which 0.5 percent is pre-IPO shares of Y, 1.5 percent is private placement shares of Y; and the rest 1 percent is purchased through collective auction to which the Implementation Rules are not applicable. Suppose that C completed two share-reduction deals through collective auction during a period of 90 consecutive calendar days by reducing 0.7 percent and 0.8 percent respectively, or a total of 1.5 percent. Pursuant to the Implementation Rules and the above calculation principles, C has unloaded all the pre-IPO shares in the first deal and the rest 0.2 percent is private placement shares of Y; in the second deal, 0.3 percent is private placement shares of Y and the rest 0.5 percent is shares purchased through collective auction. Moreover, in the two deals, C unloaded a total of 0.5 percent stake from private placement shares of Y, which does not exceed 50 percent of C’s subscription for the private placement shares of Y and therefore meets the requirement in the second paragraph of article 4 of the Implementation Rules, i.e., “the number of shares reduced by a shareholder within the 12 months after the expiration of the lock-up period shall not exceed 50 percent of the total shares it holds from the same private placement”.
Another example, shareholder D has a 10 percent stake in the listed company Z, of which 8 percent was obtained through negotiated transfer; and the rest 2 percent was purchased through collective auction. Suppose that D completes one share-reduction deal through collective auction during a period of 90 consecutive calendar days by reducing a total of 1.5 percent. Pursuant to the Implementation Rules and the above calculation principles, of the 1.5 percent reduction, 1 percent is shares obtained through negotiated transfer; and the rest 0.5 percent are the shares purchased through collective auction to which the Implementation Rules are not applicable. After share-reduction, D still holds an 8.5 percent stake in Z, of which 7 percent was obtained through negotiated transfer and the rest 1.5 percent are the shares purchased through collective auction.
Q10：How to calculate the share-reduction proportions if the same shareholder has more than one securities account?
A: In the case that a shareholder has more than one securities account, when calculating share-reduction proportions as prescribed in articles 4 and 5 of the Implementation Rules, the shares held in different securities accounts shall be aggregated if such securities accounts have the same name and the numbers of the relevant certificates are also the same; in the case that the shareholder has a client credit securities account, the shares held in the client credit securities account shall be aggregated with those held in the securities account.
In the case that a shareholder has more than one securities account and client credit securities account, the number of shares that can be reduced will be allocated pro rata based on the numbers of non-restricted shares governed by the Implementation Rules and held by the investor in various securities accounts and through various depository units.
For example, shareholder E has a 10 percent stake in the listed company T, of which 3 percent is held in the securities account 1 and purchased through a block transaction; 3 percent is held through the depository unit I of the securities account 2 and is private placement shares of T, and the rest 4 percent is held through the depository unit II of the securities account 2 and was purchased through collective auction. If E intends to reduce its stake through collective auction, during any period of 90 consecutive calendar days, it may cut down 0.5 percent through the securities account 1, and 0.5 percent through the depository unit I of the securities account 2, while the shares held through the depository unit II of the securities account 2 are not governed by the Implementation Rules.
Q11: Could you give some explanation on the restrictive provisions on share-reduction by directors, supervisors and senior executives who resign before the expiration of their terms?
A: In order to stem evasion of share-reduction restrictive provisions by directors, supervisors and senior executives through early departure, the Implementation Rules provide that any director, supervisor or senior executive who leaves office before the expiration of his term shall continue to abide by the restrictive provisions on share reduction within his term of office as determined when he took office as well as within the 6 months after the expiration of his term.
For example, a natural person F, director of the listed company U with term of office from January 1, 2014 to December 31, 2016, holds a 1 percent stake in U. On June 30, 2014, F filed an application for resignation and his application was approved by the board of directors of U. During the period between January 1 to June 30, 2014, F had not cut his stake. Under the Implementation Rules, firstly, within the 6 months after June 30, 2014, F shall not transfer the shares it held in U; next, upon the expiration of the 6 months after June 30, 2014, i.e., on January 1, 2015, the remaining period of the former term of office (two and a half years) will be calculated, and if U intends to reduce its stake during such period (from January 1, 2015 to June 30, 2017), he shall not unload more than 25 percent of his stake in U each year.
Q12: What specific information disclosure requirements relating to share reduction are imposed on substantial shareholders, directors, supervisors and senior executives?
A: In order to protect the rights of knowledge of the large number of small and medium investors and further enhance the preliminary disclosure system for share-reduction by substantial shareholders, directors, supervisors and senior executives, the Implementation Rules included substantial shareholders, directors, supervisors and senior executives in the scope of application of the preliminary disclosure system and optimized information disclosure requirements in the following three aspects.
On ex-ante disclosure, substantial shareholders, directors, supervisors and senior executives are required to report and announce its share-reduction plan. Specifically, the number and source of the shares to be reduced, the reason for the reduction, the timeframe and price range shall be disclosed 15 trading days in advance if they intend to sell shares during the 6 months ahead through collective auction.
On in-the-event disclosure, substantial shareholders, directors, supervisors and senior executives are required to disclose the progress of share sales when they unload more than half of the shares to be reduced or when they are more than halfway through the reduction. Meanwhile, substantial shareholders, directors, supervisors and senior executives are also required to disclose the progress of share reduction if, during the share reduction period, the listed company discloses a high-ratio stock dividend distribution plan or high-ratio transfer of public reserve into share capital or the listed company plans M&A and restructuring.
On ex-post disclosure, substantial shareholders, directors, supervisors and senior executives are required to publicize the details of share reduction upon the completion of the reduction or within 2 trading days upon the expiration of the reduction period.
Q13: Are the specific shares that had been released from the lock-up period before the implementation of the Implementation Rules but have yet to be sold out governed by the Implementation Rules?
A: In order to unify regulatory standards, provide a clear market expectation, promote sound operation of the market and prevent complicated application of rules, the Implementation Rules are implemented as of the date of promulgation and all market players that conform to the relevant provisions of the Implementation Rules, i.e., 5 percent shareholders and controlling shareholders, shareholders holding specific shares, and the directors, supervisors and senior executives of listed companies, shall comply with share-reduction provisions in the Implementation Rules.
Therefore, specific shares that had been released from the lock-up period before the implementation of the Implementation Rules but have yet to be sold out are also subject to the share-reduction requirements set forth in the Implementation Rules.
Q14: Do the Implementation Rules have any restrictions on shareholders who are involved in illegal or non-compliant activities?
A: In order to strengthen market supervision and deter illegal and non-compliant activities, the Implementation Rules prohibit share-reduction by substantial shareholders, directors, supervisors and senior executives who are involved in illegal or non-compliant activities. More specifically, there are four types of prohibitions:
First, if a listed company or a substantial shareholder is under investigation for suspected illicit or criminal acts in securities and futures markets, the substantial shareholder is prohibited from reducing shares during the investigation period and within the 6 months following the issuance of criminal judgments or imposition of administrative penalties.
Second, directors, supervisors and senior executives under investigation for suspected illicit or criminal acts in securities and futures markets are prohibited from reducing shares during the aforesaid investigation period.
Third, substantial shareholders, directors, supervisors and senior executives are prohibited from reducing shares within the 3 months upon receiving public censures from the SZSE.
Fourth, if a listed company commits a major violation of law, thus triggering the delisting risk alert standards, its controlling shareholder, actual controller, directors, supervisors, senior executives, and their persons acting in concert are prohibited from selling shares during the period after the issuance of the relevant decision on administrative penalties or on handing over to the public security organ and before the delisting of the company or resumption of listing.
Q15: Regarding self-regulation, are there any measures in the Implementation Rules against non-compliant share-reduction activities by shareholders?
Following the promulgation of the Implementation Rules, SZSE will combine ex-ante, in-the-event and ex-post means to intensify supervision of share-reduction activities and severely punish various non-compliant share-reduction activities.
SZSE will take the following measures against non-compliant share-reduction activities as appropriate:
First, SZSE will impose regulatory measures or disciplinary actions on relevant shareholders, directors, supervisors, or senior executives by issuing written warnings, circulating a notice of criticism, issuing public censures and imposing trading restrictions.
Second, SZSE will impose severe and speedy disciplinary actions against the non-compliant share-reduction activities that lead to unusual movement in stock prices, seriously affect the trading order of the market or impair the interests of investors.
Third, reporting suspected illicit or non-compliant share-reduction activities to the CSRC for investigation and punishment
Q16: Is there any mechanism in place to address the problems that arise in shareholders’ implementation of the Implementation Rules?
A: After the promulgation of the Implementation Rules, shareholders of listed companies may consult the SZSE or China Securities Depository and Clearing Corporation Limited Shenzhen Branch if they have any questions during the execution of the Implementation Rules. See also The Manual for the specific business process.
