Today, on the basis of the earlier public solicitation of opinions, the Shanghai Stock Exchange (SSE) officially promulgated the "Detailed Rules for Listed Companies Implementing Share Repurchase" (the "Repurchase Rules" for short). At the same time, in order to implement the relevant institutional arrangements for the "Repurchase Rules", the SSE has simultaneously issued the revised guidelines for the formats of the announcements on share repurchase. On the one hand, the revision of the "Repurchase Rules" is aimed at implementing the amendments to the "Company Law" and the requirements of the documents on supporting the listed companies in share repurchase issued by the China Securities Regulatory Commission (CSRC) and relevant ministries and commissions, and giving full play to the functions of the share repurchase system; on the other hand, the measures such as increasing the share repurchase situations, expanding the sources of repurchase funds and appropriately simplifying the implementation procedures will pave the way for the listed companies to implement share repurchase more flexibly and conveniently. In addition, to tackle potential violations, a dual prevention mechanism combining market constraints and regulatory interventions will be established so as to ultimately facilitate the formation of a long-term, win-win and sustainable market mechanism.
I. Fully solicit opinions and actively responding to market concerns
In the early stage of soliciting opinions from the market, the SSE received more than 50 valid feedback emails and letters from various market participants such as investors, listed companies and securities companies. The feedbacks mainly focused on lessening holding of repurchased shares, changing purposes for repurchased shares, arranging the linkage of old and new rules, sources of repurchase funds, proposals of repurchase, disclosure of repurchase matters and other issues. In addition, a number of mainstream financial media and we-media also followed and covered the "Repurchase Rules" after the announcement of the exposure draft. According to most opinions, the "Repurchase Rules", balanced in relaxation and tightness, improves the convenience and independence for the listed companies in share repurchase. At the same time, the market participants put forward pertinent comments, opinions and suggestions for the revision. After the end of the consultation period, the SSE attached great importance to, carefully analyzed, and discussed the feedback comments one by one before adopting reasonable suggestions, so as to further improve the "Repurchase Rules".
II. Strengthening the constraint mechanism and improving the system of sale of repurchased shares
The institutional arrangement that the repurchased shares can be sold was an issue that the market and investors paid much attention to and discussed a lot, with the market participants holding different opinions. Some feedback views and media reports worried that with potential space for arbitrage, the move might cause the companies to buy low and sell high and lead to problems such as manipulating the stock prices and profiting from speculation on stocks, and therefore, the repurchased shares should be completely cancelled instead of being sold. However, there was also the opinion that in order to open up the institutional space for repurchase, the repurchased shares should be allowed to circulate in the secondary market, but special instructions and restrictions are necessary. Another view was that not only should holding of repurchased shares be allowed to be lessened, but also modes of shareholding lessening should be further diversified by adding approaches such as contractual transfer and targeted transfer.
Regarding this issue, relevant industry insiders believed that a company can carry out the repurchase in order to safeguard the company's value and the shareholders' equity, which is an important newly-added repurchase situation in the revision of the "Company Law". On the one hand, if a company's stock price falls below the net asset value or declines sharply by more than 30% in a short period of time, the situation usually results from significant fluctuations in the market, which are difficult to predict in advance. On the other hand, the repurchase implemented by a company's raising funds in a short period can avoid continuous irrational decline in stock prices, but it may also lead to occupation of funds for production and operation, putting the company under high financial pressure. Under this circumstance, allowing the sale of the repurchased shares through the secondary market in the later stage can alleviate the company's worries to a certain extent, and help the company's board of directors to make responses and decisions quickly, so as to safeguard the company's value and the shareholders' equity in a timely manner.
From this perspective, the repurchase to safeguard a company's value and the shareholders' equity is a "semi-passive" repo in a special situation, which is different from the repurchase under other circumstances. Allowing the sale of the repurchased shares in such a case can provide the companies with more flexible market-oriented means, which will help the company to better balance the fund demands for share repurchase and production and operation in an emergency, and the move can be regarded as a necessary attempt in system to encourage share repurchase. At present, Item (4) of Article 2 of the "Notice on Earnestly Studying and Implementing the 'Decision of the Standing Committee of the National People's Congress on Amending the Company Law of the People's Republic of China'" issued by the CSRC on November 20, 2018 provides that the shares repurchased for the necessary purpose of safeguarding the company's value and the shareholders' equity may be sold through auction after fulfilling the pre-event disclosure obligations in accordance with the conditions and procedures stipulated by the stock exchange. According to this provision, the "Repurchase Rules" of the SSE and the Shenzhen Stock Exchange clearly provide the specific conditions, procedures, pre-event disclosure and other requirements for a company to sell repurchased shares.
In terms of specific designs for the system, the SSE imposed stricter restrictions on a company's sale of repurchased shares through the secondary market in the exposure draft, in order to prevent possible violations such as "market manipulation" and "improper arbitrage". Specifically, the five requirements are that the holding period should be at least 6 months, the shareholding lessening should not be conducted in the period for sensitive information, the daily shareholding lessening should be within a limit, the prices for shareholding lessening in placing orders should be within a limit, and there should be the pre-event disclosure. Based on the restrictions in the exposure draft, the officially released "Repurchase Rules" adds another four measures for controlling shareholding lessening, imposing stricter constraints in various aspects. First of all, it is required to "make it clear beforehand". If a company intends to use the shares repurchased for the purpose of safeguarding the company's value and the shareholders' equity for sale in auction in the future, the company is obliged to make it clear when disclosing the repurchase plan. Otherwise, the repurchased shares shall not be sold with the purpose changed. Secondly, the holding period before reducing the repurchased shares is extended from 6 months to 12 months. Thirdly, the pace of shareholding lessening should be controlled according to the new rules, as it is required that the shares lessened in any consecutive 90 days should not exceed 1% of the total share capital, so as to reduce the impact on the secondary market. Fourthly, it is required that the companies should use the funds received from the shareholding reduction in the companies' main businesses.
In addition, the companies can't actually use the sale of repurchased shares to manipulate profits, and earlier concerns in the market may not be necessary. The reason is that according to the relevant provisions of the "Accounting Standards for Business Enterprises", the repurchase, sale or cancellation of shares should be treated as changes in equity, and the fair value of the equity instrument should not be recognized. If the proceed from the sale of repurchased shares by a company is higher than the original repurchase cost, the difference can not be included in the current profit and loss and shall be included in the capital reserve as an equity transaction. With the aforementioned institutional arrangements and constraints, it is not easy for a company to manipulate the stock price and conduct arbitrage by selling repurchased shares.
III. Intensifying the shareholding lessening restrictions and disclosure obligations during the repurchase period for special market participants, and preventing profit-making with the opportunity
In addition, one of the key issues of concern to the market and the investors was whether special shareholders such as directors, supervisors and executives, controlling shareholders, and shareholders holding more than 5% of the total shares can reduce their shareholding during the repurchase period and whether they should be allowed to reduce their shareholding. During the process of soliciting opinions, there were feedback comments that the repurchase system may become a tool for the special market participants to cover the shareholding lessening and "cutting leeks". In their opinion, the scope of restricted market participants for shareholding reduction during the repurchase period should be expanded, and the company should not be allowed to repurchase shares while its shareholders are reducing their shareholding.
In this regard, relevant industry insiders said that if the related shareholders are completely banned from lessening shareholding during the repurchase periods in all repurchase cases, it will not only dampen a company's enthusiasm to buy back the shares, but also is not in line with the facts. In effect, in order to prevent the repurchase from "lifting the sedan chair" for major shareholders in shareholding lessening, the SSE has made arrangements in the exposure draft. First of all, it is stipulated that a listed company's shareholders, directors, supervisors and senior executives who reduce their shareholding during the repurchase period shall meet the relevant requirements of the CSRC and the SSE for shareholding lessening; secondly, when a company conducts share repurchase for the necessary purpose of safeguarding the company's value and the shareholders' equity, the above-mentioned special market participants shall not reduce holding of shares in the company during the repurchase period.
The officially released "Repurchase Rules" further tightens the relevant requirements for the shareholding lessening of the specific shareholders in terms of the information disclosure. First of all, if a company conducts share repurchase for the purpose of safeguarding the company's value and the shareholders' equity, considering that the repurchase may have a significant impact on the stock price when it is disclosed for the first time, the time for banning the above-mentioned specific market participants from reducing shareholding is moved forward to the company's first disclosure of the repurchase. Secondly, the obligation of disclosing shareholding lessening is intensified for major shareholders holding more then 5% of the total shares and other special parties during the repurchase period, and the company is required to disclose the inquiry results about whether the directors, supervisors and senior executives, controlling shareholders, actual controllers, proposers and shareholders holding more than 5% of the total shares have plans for shareholding lessening when disclosing the share repurchase for the first time, and the risks in shareholding lessening shall be adequately warned about based on their replies.
IV. Regulating important matters such as changing the purpose of repurchased shares, and preventing "dishonest" repurchase
In the process of the SSE's solicitation of opinions, some comments pointed out that due to the rapid changes in the capital market and the constant variations in the external environment, major changes may take place to the purpose of repurchase disclosed by the company. Therefore, it was suggested that the company should be explicitly allowed to change the purpose of the repurchased shares so as to improve the flexibility. Considering that the amendments to the "Company Law" have extended holding of repurchased shares to three years, and there are objective needs for the listed companies to change the purposes of repurchased shares, the "Repurchase Rules" allows a company to change the relevant contents of the repurchase plan according to the provisions when there are indeed justified causes. At the same time, a number of companies disclosing multiple purposes in the repurchase plans earlier should have the guidance and regulation intensified, so as to avoid the adverse effects of arbitrary changes or termination and regulate the companies' behaviors in changing the purposes.
The exposure draft required the companies to clearly disclose the quantity or amount of the shares to be repurchased in the repurchase plan, and to confirm the upper and lower limits, with the upper limit not to exceed one-fold of the lower limit. On this basis, the officially released "Repurchase Rules" adds a "negative list" for changing the purpose of repurchased shares. Specifically, first of all, if the repurchased shares are intended to be written off, the purpose shall not be changed; secondly, if the repurchased shares are intended for sale in the future, the purpose shall be clearly stated and disclosed at the outset, otherwise the repurchased shares shall not be sold. Subsequently, the SSE will pay much attention to and focus on the regulation of the companies' behaviors of changing or terminating the repurchase plans during the enforcement of the rules, and the revealed misconducts will be corrected in a timely manner.
V. Addressing the needs in practice and making arrangements for the linkage of the new and old rules in application
In order to ensure the smooth implementation of the "Repurchase Rules", the SSE has provided corresponding provisions in the notice on promulgating the rules in terms of the arrangements for the linkage of the new and old rules in application:
First of all, the application to the rules for the existing plans for share repurchase has been confirmed. The share repurchase plans, which are disclosed and are not completed in implementation before the enforcement of the "Repurchase Rules" and will be further implemented after the enforcement of the new rules, shall conform to the general provisions, implementation procedures, information disclosure requirements and other requirements of the new rules for the implantation of the repurchase.
Secondly, a period of 3 months is given to the listed companies to specify the purpose for the repurchase in the existing share repurchase plans. Before the implementation of the "Repurchase Rules", the repurchase plans disclosed by a number of listed companies included multiple purposes without determining the specific purposes. In order to settle down the market expectations, the company shall specify the number or the total amount of funds of the shares to be repurchased for each purpose within 3 months.
In addition, if a company fails to complete the repurchase due to compliance with the new rules, the period for implementation of repurchase may be extended according to the new rules, so as to ensure that it has sufficient repurchase time to complete the repurchase. However, it is necessary to perform the decision-making procedures and the obligations for information disclosure as required.
VI. Making effective efforts in market service, and giving full play to the functions of the repurchase system
Going forward, the SSE will adhere to the concept of equal emphasis on service and regulation, focus on the efforts in policy consultation, rules interpretation, market training, etc. for the "Repurchase Rules", and support and guide the listed companies in carrying out share repurchase in accordance with laws and rules, so as to safeguard the companies' value and the shareholders' equity. At the same time, the SSE has revised the guidelines for the formats of supporting announcements related to share repurchase according to the "Repurchase Rules", so as to improve the friendliness of the rules, facilitate the companies' formulation and disclosure of the share repurchase plans, the repurchase reports, the repurchase progress and results and other announcements, strengthen the self-regulation in repurchase, prevent and seriously investigate and deal with violations such as profit transfer, insider trading and market manipulation through the repurchase, give full play to the positive effect of the new share repurchase system, and promote the stable and healthy development of the capital market.