In the first half of 2019, the Shanghai Stock Exchange (SSE) continued to earnestly perform the duty of frontline regulation in accordance with the work arrangements made by the China Securities Regulatory Commission (CSRC), and make effective efforts in dealing with violations of the listed companies in information disclosure. With the implementation of the classified regulation as the general guideline, the SSE adhered to the principle of “achieving effectiveness by streamlining and refining regulation”, imposed strict regulation on the problematic and risky companies plagued with disorders, focused on investigating and dealing with the violations that harmed the interests of listed companies and investors and stirred up the market significantly, and urged the listed companies to stick to the "four awes" (stand in awe of the market, rule of law, professionalism and risks) and defend the "four bottom lines" (guard against disclosing fake information, conducting insider trading, manipulating stock prices and harming interests of listed companies). The above-mentioned tasks achieved certain results in increasing the listed companies’ costs of violations, maintaining the order of the securities market and protecting legitimate rights and interests of small and medium-sized investors.
According to the results of the actions, the SSE issued 11 public condemnation decisions, 30 notices of criticism, and 45 regulatory attention decisions, bringing the total number to 86, compared with the number of 75 in the same period last year. Specifically, it was publicly determined that two persons liable with severe violations were not suitable to act as director, supervisor or executive of a listed company for three years and lifetime respectively. The handled cases involved 41 listed companies, 149 directors, supervisors or executives, 40 shareholders as well as 6 sponsors of financial advisory projects, 1 annual audit agency and 2 accountants of annual audit, with the total number of persons liable at 198, compared with the number of 179 in the same period last year.
In terms of the types of the cases, in the first half of this year, the SSE focused on investing and dealing with the following six types of violations.
The first type included the serious violations of capital occupation and illegal guarantee committed by controlling shareholders and their related parties. The behaviors of the controlling shareholders and their related parties such as capital occupation and illegal guarantee that hollow out the listed companies have always been the focus of securities regulation as they severely damage the interests of small and medium-sized investors and pose a major hidden danger for the high-quality development of listed companies. Since last year, because of the tightened capital chain, an increasing number of controlling shareholders have encroached on the resources of the listed companies and realized the profit delivery through capital occupation, illegal guarantee and other means. Therefore, it is necessary to crack down on such violations in self-regulation, so as to form the deterrent demonstration effect in the market. Based on the review of the 2018 annual reports, the SSE has initiated the public condemnation procedure for more than 10 cases of capital occupation and illegal guarantee, and the results will be disclosed to the market after taking action. For this type of violations found previously, a number of typical cases were dealt with in the first half of the year. For example, HNA Infrastructure Investment Group Co., Ltd. had a notice of criticism circulated as a result of providing the related party with a guarantee that exceeded the authorized amount and failing to fulfill the information disclosure obligation; for another example, to-be-delisted Hareon Solar Technology Co., Ltd. was condemned publicly because of failing to timely complete the decision-making procedure and fulfill the information disclosure obligation for the outward guarantee, coupled with other violations.
The second type included the violations of failing to fulfill the high-performance commitment in mergers and acquisitions and reorganizations. Since 2015, mergers and acquisitions and reorganizations have become increasingly active. At the same time, a number of false and me-too mergers and acquisitions and reorganizations have resulted in the frequent occurrences of the reorganizations characterized by the “three high levels” (high levels of valuation, goodwill and commitment). Recently, as the three-year performance commitment period has expired, the “after effects” of the restructuring transactions featuring the “three high levels” have been highlighted, and the underlying assets have found it difficult to realize the performance commitments, which has come under the spotlight in the market. In the first half of the year, the SSE intensively dealt with the major violations of the related parties in the major assets restructuring such as those in the disclosure of predictive information in the early stage, the integration control of the underlying assets in the later period and the realization and fulfillment of the performance commitments, so as to vigorously maintain the market ecology of mergers and acquisitions and reorganizations, with 8 cases involved. Among the typical cases, for example, in the reorganization the counterparty of Ningxia Xinri Hengli Steel Wire Rope Co., Ltd. failed to cooperate with the listed company in prudently disclosing the predictive performance information on the underlying assets, and failed to fulfill the commitments to performance compensation and repurchase, causing the listed company to lose control of the assets acquired at a high price and be publicly condemned; Zhongzhu Healthcare Holding Co., Ltd. had a notice of criticism circulated as its shareholder, as a counterparty in a major asset reorganization, failed to honor the commitment to performance compensation in a timely manner after the underlying assets missed the performance target. At the same time, the SSE strived to strike a balance between responsibility and punishment by mitigating the penalties on the basis of the actual circumstances for the reorganization counterparties (Shaanxi Construction Machinery Co., Ltd.) that failed to fulfill the performance commitments as agreed and then were able to honor the commitments by actively making corrections.
The third type was the misconduct that the company's management team made unreasonable decisions in major transactions. In the investment decisions on major transactions made by listed companies, the performance commitments to the underlying assets of the acquisition, the licensing qualifications and other matters are crucial to the entire transaction, and have a significant impact on the decision-making and future expectations of the investors. Therefore, the management team should make adequate evaluations and prudent decisions. In recent years, there were frequently the listed companies that failed to make prudent decisions on the relevant planning and arrangements for major asset transactions, jeopardizing the interests of the company and small and medium-sized investors. In dealing with the cases, the SSE was bold to make substantive judgments and pursue the leadership responsibilities of the chairpersons and board members who were not diligent, with 8 cases handled. Among the typical cases, for example, Deluxe Family Co., Ltd. failed to adequately notice that the actual business performance of the underlying assts had been significantly lower than the forecast set when the initial acquisition decision was made, and later still decided to acquire the underlying assets, resulting in the imprudent disclosure of the predictive information; Shandong Xinchao Energy Corporation Limited passed the stake-taking proposal without adequate and prudent evaluation when the underlying assets had not obtained the mining right, also with significant uncertainty in achieving the right in the future, and failed to warn against relevant risks, causing the company itself to be unable to recover the investment funds and resulting in huge losses.
The fourth type included the violations of the listed companies using the sensitive information for concept scalping. Concept scalping has always been a major problem widely criticized in the A-share market. Earlier, the concepts such as the SSE STAR Market, the venture capital enterprises and the 5G were sought after successively in the market. Out of the motivation of improper market value management, some listed companies used the above-mentioned hot themes and concepts to publish announcements with false contents, misleading investors, causing stock price fluctuations and affecting the order of the securities market. In the first half of the year, while strengthening the in-process regulation over the concept scalping, the SSE took disciplinary actions in 4 cases of concept scalping, having maintained the market stability. Among the typical cases, ST Jilin Chengcheng Group Co., Ltd. was publicly condemned as it disclosed the investment of huge funds in setting up a sub-subsidiary engaged in scientific research and still refused to timely disclose that the sub-subsidiary was actually involved in the leasing business despite the regulatory urges; the regulatory attention measure was taken for Zhejiang Furun Co., Ltd., Ningbo Yunsheng Co., Ltd. and CIG Shanghai Co., Ltd., as they announced the matters such as the investment in the companies on the SSE STAR Market and the 5G-related businesses on the SSE E Interaction Platform, but the information was not disclosed in an accurate, objective and cautious manner.
The fifth type included the violations of the intermediaries that did not perform their duties in a diligent manner. As an important line of defense for the capital market governance, the intermediaries should diligently perform their duties and prudently fulfill their legal obligations such as inspection and verification as well as professional supervision. The SSE timely investigated and dealt with as well as strictly cracked down on the intermediaries’ violations in diligence, so as to urge them to effectively take their responsibilities and play the role of "gatekeepers". In the first half of the year, disciplinary actions were taken against a total of 6 sponsors in the financial advisory projects for major asset restructuring and 2 annual audit accountants. Among the typical cases, the sponsor of the reorganization project at Ningxia Xinri Hengli Steel Wire Rope Co., Ltd. had a notice of criticism circulated for failing to prudently evaluate, design reasonable plans and issue reliable professional opinions during the reorganization process, as well as being unable to urge the relevant parties to fulfill their obligations of performance compensation as agreed; the annual audit accountant for Guizhou Salvage Pharmaceutical Co., Ltd. had a notice of criticism circulated for failing to identify and correct major errors in the underlying assets of the reorganization and the company's financial report during the audit.
The sixth type included the behaviors of using or managing the raised funds in an unregulated way. The non-compliance management and use of raised funds is one of the main manifestations of the irregular operation of listed companies, and may also pose hidden dangers of loss to the investors' interests. In the first half of the year, the SSE timely investigated and dealt with 2 cases of irregular use of raised funds, so as to urge the companies to regulate the deposit and utilization of raised funds and ensure the smooth operation of the investment projects financed by raised funds. Among the typical cases, *ST Harbin Churin Group Jointstock Co., Ltd. received the disciplinary punishment for failing to promptly return the raised funds to the special account as well as disclosing inaccurate information; Chongqing Sokon Industry Group Co., Ltd. received the regulatory attention for replacing the pre-invested self-raised funds with the raised funds and failing to follow the decision-making procedures and fulfill the obligation of information disclosure.
In summary, in the first half of 2019, the SSE seriously investigated and dealt with all kinds of violations, effectively safeguarded the interests of small and medium-sized investors, and further purified the environment of the capital market, with the order of information disclosure maintained. Going forward, the SSE will, in accordance with the arrangements and requirements of the China Securities Regulatory Commission (CSRC), strive to enhance the deterrence of self-regulatory measures, improve the accuracy and effectiveness of regulation, increase the costs of violations for the listed companies, and push and urge the listed companies to return to their main businesses, focus on operations, and work hard to improve quality. At the same time, the SSE will continue to strengthen beforehand prevention and in-process regulation, integrate the regulation in the service, step up the service through training, microlecture, Q&A on regulation and other means, and reduce unintentional violations of the listed companies.