On November 16, 2018, on the basis of the opinions solicited earlier, the Shanghai Stock Exchange (SSE) officially issued the "Measures of the Shanghai Stock Exchange for the Implementation of the Compulsory Delisting of Listed Companies for Serious Violations" (the "Implementation Measures" for short), while also releasing at the same time the "Rules Governing the Listing of Stocks on Shanghai Stock Exchange (Revised in November 2018)" and the "Measures of the Shanghai Stock Exchange for the Implementation of the Re-listing of Delisted Companies (Revised in November 2018)". In the process, the SSE has widely absorbed the opinions from all parties concerned in the market to build consensus, defined the specific violation situations and implementation procedures for the compulsory delisting caused by serious violations, and formulated the business rules for the compulsory delisting for serious violations, which are characterized by more objective criteria, more transparent procedures, improved pertinence and more effective deterrence. The release and implementation of the new delisting rules will further consolidate the basic system, standardize the market exit, advocate the concept of compliance development, and enhance the overall quality of listed companies.
1. Resolutely implementing the decision made by the China Securities Regulatory Commission (CSRC), the SSE will effectively assume the responsibilities of delisting implementer.
On July 27, 2018, the CSRC officially issued the "Decision on Amending the ‘Some Opinions on Reforming, Improving and Strictly Implementing the Delisting System for Listed Companies" (the "Decision" for short), requiring to better define the main situations of compulsory delisting for serious violations and strengthen the responsibility of the exchanges as implementers of the delisting system. According to the decision made by the CSRC, the SSE has brought the function of frontline regulation into full play, and set up the decision-making mechanism, procedure norms and identification standards with clear rights and liabilities. In accordance with the principle of strict control, the SSE will, according to law, impose the delisting risk alert or the decisions of listing suspension or termination on the stocks of related companies. In the reform of the delisting reform, the SSE has formulated and released the "Implementation Measures", and accordingly revised the "Rules Governing the Listing of Stocks", the "Measures for the Implementation of Re-listing of Delisted Companies" and other related rules.
In 2016, because of the serious violation in information disclosure, Boyuan Investment had the listing terminated according to the laws and rules, becoming the first of its kind in the capital market. The practice has been recognized by all parties concerned in the market and has provided valuable reference for the follow-up reform. In this delisting reform, the SSE has earnestly summed up the practical experience and, in accordance with the principles and requirements in the CSRC's "Decision", better defined the situations of compulsory delisting for serious violations by categorizing and specifying the cases in a relatively clear way, with the operability of the rules improved. The new rules mainly stipulate the two kinds of situations of compulsory delisting for serious violations, namely, those involving the securities and those related to the public safety, and especially included in the new rules as a kind of situations for delisting were the listed companies that seriously endanger the market order, severely infringe on the public interest, and cause major social impacts. The issuance and implementation of the above-mentioned series of rules adequately demonstrates that the SSE has earnestly carried out the requirements of the CSRC and given play to the function of frontline regulation as a securities exchange, with the CSRC’s basic principles and objectives for the delisting reform fully put into place.
2. The situations of securities delisting for serious violations have been better defined, so as to enhance operability in practice.
The establishment of the entire system of securities delisting for serious violations mainly focuses on whether the violations in the disclosure of the relevant information in the securities market affect the listing status. Therefore, based on the above-mentioned objectives, the "Implementation Measures" provides categorized rules on the basis of the original two major areas of fraudulent issuance and serious violations in information disclosure, clarifying the four kinds of situations of delisting for serious violations, namely, fraudulent issuance in IPO, fraudulent issuance in reorganization-based listing, evading delisting with a false annual report, and other situations identified by the SSE. The four kinds of situations focus on whether the violations affect the company's listing status for the purpose of regulation, and the relevant criteria are more clear, objective and detailed, providing a sufficient and reliable basis for the follow-up implementation.
Among the situations of compulsory delisting for serious violations, the fraudulent issuance mainly targets the listing of IPO and the reorganization-based listing, involving whether there are false records, misleading statements or major omissions in the application or disclosure documents, which are subject to the administrative sanctions imposed by the CSRC in accordance with the corresponding provisions of the Securities Law or the offence of fraudulent issuance sentenced by the people's court. The legislative logic is that the companies committing the fraudulent issuance have flaws when they first obtain the listing status. Eliminating them from the market will maintain the foundation of honesty and credit in the whole market, and help standardize the entrance to the capital market in a strict way; in terms of the situation of evading delisting with false annual reports, the main logic for regulation is to assess whether the company has concealed the fact that it has triggered the financial indicators leading to the listing termination during the period of listing. With the information disclosure severely deviating from their real financial conditions, the companies in such a situation are not able to provide the investors with key pricing information and reference for investment decisions, distorting the normal pricing mechanism and elimination mechanism in the market. It is not suitable for them to remain on the SSE main board market from the perspectives of both their financial conditions and their compliance level of information disclosure, and as a result, they should be delisted in accordance with the listing rules. If the companies maintain their listing status through financial fraud, they will disrupt the order of information disclosure, undermine the value discovery function of the market, and seriously damage the interests of the investors, resulting in the necessity to be delisted for the purpose of strict regulation.
In the earlier public solicitation of opinions, there were feedbacks that the draft included the two kinds of situations of delisting for serious violations, where the administrative sanctions are imposed on the violations in information disclosure repeatedly, or the criminal penalties are given for the offences of violating rules or failing to disclose important information. Although reflecting the requirements for strict regulation according to law, with focus on the administrative or criminal penalties themselves, it is difficult for the two kinds of situations to actually demonstrate the logic for judging whether the facts and the harm degree of the violations will affect the listing status, and the situations can also be covered by other kinds. Therefore, after conscientious deliberations, these two kinds of situations were not included separately in the end.
3. The kind of situation of public safety is newly added to respond to social expectations.
Newly added in the "Decision" issued by the CSRC on July 27 are the provisions on delisting for the serious violations involving national security, public safety, ecological security, work safety, safety of public health and other areas. There was the opinion in the solicitation process earlier that the serious violations severely harming the national interests and public interests should also be included in the scope of compulsory delisting. Correspondingly, the SSE confirms this kind of compulsory delisting situation for serious violations in the new rules for delisting. The regulatory logic for such situations is mainly in the following three aspects:
First of all, the commission of serious violations concerning the public security indicates that the listed company's value orientation for production and operation has significantly deviated from its social responsibility. The "Company Law" stipulates that a company engaged in business activities should abide by social morality and business ethics, and assume social responsibilities. A listed company has a public attribute that is different from that of common enterprises, and while creating profits and taking legal responsibility for shareholders and employees, it shall also assume the responsibility for consumers, communities, the environment and other stakeholders. The relevant legal norms for the capital market also require listed companies to effectively assume the comprehensive public responsibilities for society, environment, public welfare, integrity and other factors in the production process. The commission of serious violations in the public security and other areas shows that the value orientation of the company's production and operation has significantly deviated, and the company is really unlikely to assume the due responsibilities and missions of a public company.
Secondly, the serious violations concerning the public security not only harm the interests of the investors in the capital market, but also directly affect the public interests of the entire society and even the national interests, which is not in line with the value basis for the legislation and supervision of the capital market. The first article of the "Securities Law" provides for the maintenance of social and economic order as well as the public interests as one of the legislative purposes, which is also the fundamental objective of the capital market regulation. If a listed company has serious violations concerning the public safety, it indicates that the company is using the capital market to harm the society, severely violating the basic requirements for market access, and it should be dealt with strictly and be eliminated from the market.
Thirdly, the listed companies with serious violations concerning the public security tend to be deprived of the qualifications for production and operation, and lose their ability to continue operations. Objectively, they should not and are not able to maintain their listing status. For example, if a listed company has its business license revoked, it must be dissolved and cancelled according to law, with the entity no longer existing; if the main business production and operation license is revoked, the company will lose the legal qualification for further conducting its main business. The former itself is an existing situation for delisting; for the latter, as the company has lost its sustainable profitability, the tolerance for it to remain in the capital market will undoubtedly cause secondary harm to the investors and the public.
The situations of compulsory delisting for serious violations concerning public security are categorized and specified in the following three kinds: first of all, the listed company or its main subsidiary has its business license revoked according to law, is ordered to close or is revoked; secondly, the listed company or its main subsidiary has its the production and operation license for the main business revoked according to the law, or loses its legal qualification for continuous production and operation; thirdly, based on the severity of the harm caused by the serious violations of the listed company to the national and public interests, the kind of legal liability assumed by the company, the degree of the impact on the company’s production and operation and listing status, and other factors, the SSE judges that the listing of the company’s shares should be terminated.
4. The procedures for compulsory delisting for serious violations have been strictly defined to stabilize the market expectations.
The new rules have set rigorous and standardized decision-making and implementation procedures for delisting. First of all, the decision-making mechanism of the listing committee is established, stipulating that based on the decisions on administrative penalties made by the relevant administrative departments and the facts affirmed by the effective judgments made by the people's courts, the listing committee shall deliberate, make professional judgments independently and provide the opinions of examination on whether the listed company's behaviors seriously affect its listing status and whether the delisting for serious violations should be imposed on it. The decisions of deliberation such as the time limit for the listing committee to deliberate, the issuance of the notice on the affirmation options, the proposal of the defenses and hearings, the time limit for making the decision on delisting and other processes have been specified. Secondly, the new rules will offer reasonable ways and means of remedy to the parties, mainly granting the rights to the listed companies suspected of serious violations leading to delisting, including applying for hearings, submitting written statements and defenses, requesting review, and so on, so as to safeguard their legitimate procedural rights and protect the basic rights of the parties. Thirdly, the related processes for delisting for serious violations have been specified, including the trading suspension, the delisting risk alert, the listing suspension and the listing termination, and the listing suspension is shortened from 1 year to 6 months, thus improving the efficiency of delisting implementation.
In addition, the plan for the delisting reform has also revised the conditions for re-listing. The new rules will not give the re-listing opportunity to the companies with the violations of fraudulent issuance at the market entrance that are extremely serious and spark strong responses; the delisted companies for other serious violations will be able to apply for re-listing only after 5 complete accounting years of listing and transfer on a stock transfer company. In addition, the companies entering the delisting procedures for triggering the situations of compulsory delisting for serious violations will not be allowed to be re-listed unless the relevant decisions on administrative penalties or the judiciary decisions are revoked according to law, invalidated or changed according to law, so as to send the signal of strictly implementing the delisting for serious violations, further stabilize the market expectations, and avoid unnecessary twists and turns in the delisting process that may cause speculation in the market.
5. Multiple measures have been taken to improve the supporting mechanisms and protect the interests of small and medium-sized investors.
The investor protection is the starting point and objective for reforming and improving the important systems of the capital market. As one of the basic systems in the capital market, the delisting system has a direct bearing on the interests of the investors, with concentrated contradictions and entanglements as well as complicated demands for interests. For the investors who directly hold the shares in a listed company, the delisting of the company's shares means that the investors will lose the trading opportunities in the main board market. But on the whole, the elimination of the companies disrupting the market order and endangering the society from the market is a fundamental solution for protecting the investors’ rights and interests, which will purify the market environment, enhance the mechanism of survival of the fittest in the market, urge the companies to regulate their operations, and truly improve the quality of listed companies.
In the current delisting reform, in terms of the measures for investor protection, specific arrangements have been made in information disclosure by listed companies, the design of the risk alert system, the restrictions on the rights of parties concerned, the disciplinary actions imposed on the responsible entities and other aspects. When a listed company faces the risk of delisting, it will be timely urged to conduct disclosure and disclose the risks. In the delisting process, the delisting risk alert system has been set up, so as to providing rules in the trading mechanism. The design of the series of systems aims to encourage investors to invest rationally and fully consider the compatibility between investment decisions and risk tolerance. In addition, the rules for shareholding lessening issued earlier have stipulated that the major shareholders of a listed company shall not reduce their shareholding when the company is registered and investigated by the CSRC or the judicial authorities on suspicion of violations or offences in securities or futures, or if the decision on administrative penalty or criminal judgment was made less than 6 months ago. Moreover, we have also noticed that the civil compensation mechanism for false statements in the securities market has become increasingly mature, the people's courts have gradually stepped up the trial of such cases, and the investors can demand for their interests through judicial channels. In practice, there have been investors receiving relief through judicial channels in quite a few individual cases.
6. The arrangements for linking up the rules have been made to ensure the smooth implementation of the new rules for delisting.
After the release of the new rules, in order to ensure the smooth implementation of the new rules, specific arrangements have been made for the linkage of the old and new rules:
First of all, the original rules are applicable to the listed companies that had had the serious violations identified or had been transferred to the public security departments according to law with the decision on listing termination made before the enforcement of the CSRC’s "Decision"; the new rules are applicable to the situations where the listing of a company is suspended or terminated for the violations identified by the decisions on administrative penalties made by relevant administrative departments or the effective judicial judgments regardless of the time when the violations occur. The arrangement is consistent with the principles of the CSRC's "Decision", as the violations identified by decisions on the relevant penalties or judicial judgments are likely to have a significant impact on the listing status of the company as soon as the decisions are made. The application of the new rules is in line with the actual situations and the regulation logic of the new rules for delisting, and meets the inevitable requirements for strictly governing the market, purifying the market environment and promoting survival of the fittest.
Secondly, the time point for separating the old and the new rules in implementation has been set. Considering that the system of delisting for serious violations was officially put into force after the CSRC issued the "Some Opinions on Delisting Reform" in November 2014, the 2015 annual report was adopted as the starting point for implementing the Item (3) of Article 4 in the "Implementation Measures" concerning the delisting situation for the serious violation of falsifying the annual report, which means that the delisting shall be imposed on those with the financial indicators of the consecutive fiscal years dating back as from 2015 triggering the criteria for listing termination, while the financial conditions in 2014 and the years prior to 2014 will no longer be taken into consideration. For example, if a company falsifies the annual report to evade the net profit indicator for delisting, and the administrative penalty affirms the losses in 4 consecutive years from 2015 to 2018 after the retroactive treatment following the disclosure of the annual report for 2018, the compulsory delisting for serious violations shall be imposed on the shares of the company. For another example, if a company falsifies the annual report to evade the net asset indicator for delisting, and the administrative penalty affirms the negative net assets for three consecutive years from 2015 to 2017 after the retroactive treatment following the disclosure of the annual report for 2017, the compulsory delisting for serious violations shall also be imposed on the shares of the company.
Thirdly, the application of the rules has been stipulated for the reorganization-based listing prior to the implementation of the new rules. If a listed company with serious violations had been "reborn" before the implementation of the new rules with the company’s control right, main business and other factors already changed, then it is not reasonable to delist the company. In this regard, if a company had completed the reorganization-based listing before the implementation of the "Implementation Measures", and all the serious violations had occurred before the reorganization-based listing and were not related to the listing, the company may apply to the SSE for not having the compulsory delisting for serious violations imposed; the compulsory delisting will, in strict accordance with the new rules, still be imposed on the companies with serious violations reorganized and listed after the official implementation of the "Implementation Measures". The reorganization party shall conduct due diligence to avoid the compulsory delisting due to the serious violations committed before the reorganization and listing.
Fourthly, the arrangements for the application of the old and new re-listing systems have been made. The original rules are still applicable to the companies that have had the listing of their stocks terminated according to the SSE’s decision and apply for re-listing within 36 months after the implementation of the new rules.
7. The requirements of the upper-level laws and regulations will be implemented, with the relevant contents of the listing rules simultaneously amended.
In revision of the "Rules Governing the Listing of Stocks", in addition to fulfilling the requirements of the CSRC's decisions and further optimizing and defining the implementation procedures for the compulsory delisting for serious violations, the contents such as the implementation of the "Measures for Administration of Stock Exchanges" have also been added. In particular, the SSE’s means of frontline regulation are enriched by newly adding the regulatory means such as the SSE conducting the on-site inspections of the listed companies and reviewing and checking the working materials of the sponsors and securities service providers, and the new rules also provide for the regular regulatory measures and types of disciplinary actions such as issuing the regulatory advice letters to relevant authorities and collecting punitive liquidated damages. At the same time, the new rules have strengthened the protection of the rights of the punished in disciplinary actions by confirming the right of hearing in disciplinary actions and the right to review the disciplinary actions for the parties. Other amendments to the "Measures for Administration of Stock Exchanges" will also be implemented accordingly, such as confirming that the listing agreements, statements and commitments are the important regulatory basis for the SSE, and extending the scope of application of the rules to the issuers and the counterparties of the major asset restructuring.
In addition, according to the "Rules No. 14 for Report Composition for Information Disclosure" revised by the CSRC, the expression of "non-standard unqualified audit opinion" in the listing rules has been uniformly revised to "non-standard audit opinion", and the provisions that the trading suspension shall be imposed on the listed companies that have had the non-standard audit opinions issued for obviously violating the accounting standards or disclosure norms, have been cancelled. At the same time, the qualification requirements for the re-listing sponsoring securities companies have also been cancelled, and the information disclosure behaviors of the company’s directors, supervisors and executives have also been standardized.
In summary, as an important effort in improving the exit mechanism for market participants, the reform of the delisting system has been characterized by extensive solicitation of the opinions from all parties concerned and the intensive reflection of the consensus in the market. After the delisting system is promulgated and implemented, the SSE will assume its responsibilities as a main player and strictly enforce the new rules by delisting every listed company triggering the delisting situations for serious violations. At the same time, we will also make effective efforts in serving the listed companies, urge and direct the listed companies to strengthen their capacity for operation and improve their quality substantively, promote the healthy development of the securities market, and protect the fundamental interests of investors.