The pledge of shares is a common commercial financing behavior conducted by the shareholders in using their shares. In recent years, due to a variety of factors, the high-proportion pledges by the shareholders of listed companies have been on the rise, and the resulting risks have also drawn extensive attention from the market participants. In this regard, the Shanghai Stock Exchange (SSE) have attached great importance, vigorously implemented the central authority’s guiding spirit for preventing financial risks, and in accordance with the work arrangements of the China Securities Regulatory Commission (CSRC), taken various measures for controlling the increments and reducing the stocks so as to push the companies to prevent and defuse the risks of stock pledge, achieving certain results. In order to further realize the investors’ right to know, accelerate the efforts in guarding against and steadily resolving the pledge risks, and guide the major shareholders in actively controlling the pledge proportion, the SSE has focused on the information disclosure to timely revise the “No. 46 Guidelines for Formats of Provisional Announcements -- Announcements on Shares Pledge (Freezing, Pledge Termination and Unfreezing) of Listed Companies” (the "Guidelines for Pledge Announcements" for short).
Based on making the shareholders fulfill the obligation for information disclosure, in the revision the contents of the disclosure are improved and refined to intensify the information disclosure requirements level by level for pledging shares by controlling shareholders and other matters. On one hand, the necessary right to know of the investors will be realized; on the other hand, the revision will also guide the controlling shareholders in carefully assessing their own credit status and the risks posed by pledge financing, so as to prudently carry out share pledge. In terms of the institutional arrangements, if the pledge proportion of a controlling shareholder is less than 50%, it has a relatively sufficient security cushion, and no substantial disclosure requirements are added in the revision. For the controlling shareholders with high proportions of pledge, more than 50% for example, considering that the security cushion is relatively limited, the company's stock price changes will be more sensitive, the pledge may have a greater impact on the stability of the listed company's control rights, and the investors also pay more attention, the revision, in accordance with the integrity obligation of a controlling shareholder to the listed company, sets up tiered and phased disclosure requirements, and adds necessary contents of disclosure. At the same time, for the matters such as forced liquidation or transfer of shares, and freezing, the disclosure requirements for risk alert and measures for risk prevention and control are also refined, and a “third party” verification mechanism is introduced to give play to the role of an intermediary as a “gatekeeper”.
The new "Guidelines for Pledge Announcements" mainly aims to improve the pertinence and effectiveness of the information disclosure for pledge of shares, remind the controlling shareholders to pay attention to risks and moderately grasp the size of pledge financing, urge them to focus on the main business, support the development of listed companies, effectively protect the interests of small and medium-sized shareholders, and stabilize the market expectations. In terms of the specific content, the revision mainly involves the following four aspects.
First of all, a tiered and differentiated information disclosure system of share pledge is established to tighten the requirements for controlling shareholders on the information disclosure for high-proportion pledge.
In view of the possible risks for the controlling shareholders with high-proportion pledge, the revision takes 50% and 80% pledge proportions of the controlling shareholder or the largest shareholder as the criteria for tiered pledge risks, setting differentiated disclosure requirements. If a controlling shareholder’s accumulated pledged shares account for more than 50% of the total, it is stipulated that this pledge and each subsequent pledge shall be disclosed, and the key information shall be detailed, including the circumstances of the pledged shares to be due in the short term, the source of repayment funds and the solvency of funds, etc., as well as the impacts of a high proportion of pledge on the listed company in terms of production and operation, corporate governance and fulfillment of the performance compensation obligation, etc.; if the cumulative pledge of a controlling shareholder exceeds the proportion of 80%, on the basis of fulfilling the aforementioned disclosure obligations, it is necessary to further disclose the details of the shareholders' credit, the reasons and the necessity for the high proportion of pledge, the measures for risk prevention to be taken, capital transactions with the listed company, and assessment of pledge risks, etc. The requirements for information disclosure are tightened in a tiered and targeted way, so as to guide the controlling shareholders in prudently conducting the pledge according to their own circumstances, reasonably controlling the proportion of pledge, sparing sufficient and appropriate safety cushion before pledging, and effectively making risk predictions. In addition, if a shareholder’s shares to be pledged are expected to reach the disclosure criteria, the pre-disclosure may be voluntarily carried out with reference to the new format guidelines.
Secondly, the requirement for disclosure of frozen shares is added, stipulating that the warning against the risks related to the frozen shares in a large percentage should be provided.
On the basis of the original guidelines, the revision improves the requirements for disclosing the basic information on the frozen shares, and adds the disclosure factors such as the applicant and reasons for the freezing. At the same time, considering the more significant impact of the controlling shareholder's shares that are frozen, the revision provides for higher information disclosure requirements for three circumstances such as the controlling shareholder's shares frozen by a large proportion possibly causing changes in the control of the listed company, so as to help the investors grasp the situations of the controlling shareholder’s shares freezing in a timely and multi-dimensional manner as well as the possible substantial impacts on the listed company.
Thirdly, the revision adds the requirements for information disclosure when the shares meet with the risks of forced liquidation or transfer.
On the basis of the original guidelines, it is required in the revision that when more than 5% of the shares held by the shareholder encounter the risks of liquidation and forced transfer, the factors should be disclosed, including the abilities of the relevant shareholders to perform the agreements and supplement the guarantees, whether the situation may result in changes in the company’s control or the largest shareholder, whether the situation may affect the stability of production and operation and corporate governance, etc., and the measures to be taken to defuse risks and maintain stability of the company should be specified.
Fourthly, other disclosure requirements are added when the shares are in the face of the risks of forced liquidation or transfer, and the “third party” verification mechanism is introduced.
In addition to adding the disclosure requirements for the risks of liquidation or forced transfer of more than 5% of the shares held by the shareholders, the revision has made further arrangements for the information to be disclosed when the controlling shareholder meets with the above-mentioned risks. With the “third party” verification mechanism introduced, when the controlling shareholder faces the risks of forced liquidation or transfer, it is required that the company's board of directors, board of supervisors and independent directors and the sponsors and financial consultants in the continuous supervision period should conduct the verification and express their opinions on the possible impacts of the above-mentioned risks on the listed company, so as to tighten the responsibilities of the "key minority" and the intermediaries.
Going forward, the SSE will strictly implement the new “Guidelines for Pledge Announcements”, urge the shareholders of listed companies, especially the controlling shareholders, to prudently evaluate and conduct pledges, support the controlling shareholders and relevant parties in resolving the pledge risks, and foster a good atmosphere of focusing on the main business and carrying out stable operations, so as to jointly improve the quality of listed companies.