SSE Reports on Dealing with SSE-listed Companies’ Violations in Information Disclosure in 2019

In 2019, the Shanghai Stock Exchange (SSE) earnestly implemented the requirements of the Party Central Committee and the State Council for the reform and development of the capital market and the unified deployments of the China Securities Regulatory Commission (CSRC), focused on the primary goal of improving the quality of the listed companies, followed the principle of “achieving effectiveness by streamlining and refining administration” to make every effort in dealing with the violations in information disclosure, further tightened the responsibilities of the “key minorities” such as directors, supervisors and executives as well as major shareholders and actual controllers of the listed companies, and urged the listed companies and relevant responsible persons to keep in mind the “four awes (stand in awe of market, rule of law, expertise and investors)” and defend the “four bottom lines (not disclose fake information, not engage in insider trading, not manipulate stock prices and not harm the interests of listed companies)”. By punishing all kinds of market irregularities, cracking down on violations, maintaining the order of information disclosure, and protecting the interests of small and medium-sized investors, the SSE has strived to build a sound market environment.

Adhering to continuous regulation and earnestly performing the self-regulation duties. In 2019, in response to the information disclosure violations, the SSE imposed 40 cases of public condemnation, 103 cases of criticism notices, and 106 cases of regulatory concern decisions, up by 25%, 63% and 33% year-on-year respectively. Disciplinary actions and regulatory concerns involved a total of 110 listed companies, 533 directors, supervisors and executives, and 39 employees of intermediaries.

Adhering to classified supervision, and focusing on irregular companies and risky companies. For the violations of companies with major risks such as ST Furen Group Pharmaceutical Co., Ltd. and *ST Shanghai Zhongyida Co., Ltd., the SSE conducted serious investigations and imposed the top punishments of public announcement to be unqualified for senior management at listed companies and public condemnation on the companies and the companies’ major officials, so as to respond to the market concerns. For the four companies which had been delisted from the market: Hareon Solar Technology Co., Ltd., Dalian Dafu Enterprises Holdings Co., Ltd., and Beijing Huaye Capital Holdings Co., Ltd., the SSE dealt with the relevant violations in a timely manner so as to properly control the exit of the market.

Sticking to precise regulation, and seriously investigating violations of the bottom lines. When dealing with the cases, the SSE focused more on the cases involving the “key minorities”, especially the major cases of serious violations triggering the bottom lines such as the controlling shareholders and actual controllers occupying the interests of the listed companies, and severely punished the main persons liable by publicly announcing 25 persons in 15 cases to be unqualified for senor management at listed companies, up by 114% and 14% year-on-year respectively. Particularly, two persons liable with extremely serious violations were publicly announced to be unqualified for the posts of director, supervisor and executive at listed companies for life. The SSE took different disciplinary actions against other persons liable depending on the circumstances for the purpose of warning and education.

Attaching importance to both regulation and service, and stepping up compliance training for the listed companies and the “key minorities”. In 2019, nearly 20 disciplinary action and compliance training sessions were held to interpret the laws and rules and make analysis on the basis of cases. The SSE timely conveyed the regulatory stances, and urged the companies to improve governance, regulate operations and enhance business management.

Specifically, in 2019, the SSE mainly investigated and dealt with the following six kinds of violations.

The first kind of violations was the behaviors of misappropriating the interests of listed companies such as capital occupation and illegal guarantees. In recent years, as the listed companies are in the face of complicated internal and external conditions of operation, some controlling shareholders and actual controllers have managed to touch the "bottom line" of encroaching on the interests of listed companies through the means such as capital occupation and illegal guarantees. While intensifying the regulation before and during the process, the SSE seriously held accountable the "key minorities" who infringed on the companies’ interests, forming a regulatory deterrent. During the year, 22 major cases of capital occupation and illegal guarantees were handled, including 13 cases involving public condemnation and public announcement on disqualification for senior management at listed companies, up by 120% and 333% respectively year-on-year. Typical cases include ST Furen Group Pharmaceutical Co., Ltd. having a huge amount of funds occupied by controlling shareholders and related parties; the actual controller of ST Antong Holdings Co., Ltd. bypassed the company's internal procedures and transferred and lent the funds of its subsidiaries to related parties. The aforementioned companies had warnings against other risks imposed on their stocks because of failing to rectify the violations in a timely manner, and were both publicly condemned, with their actual controllers publicly announced to be unsuitable to serve as director, supervisor or executive at listed companies for more than five years.

The second kind of violations involved the companies with “high levels of valuation, goodwill and commitment to performance” failing to fulfill the commitment to performance after the reorganization. With the commitment periods for the earlier reorganizations characterized by the “high levels of valuation, goodwill and commitment to performance” coming to an end, the "after-effects" of some transactions gradually emerged. As the underlying assets did not perform well, or the counterparties did not fulfill their compensation obligations, some companies lost control of the target companies. What's worse, in order to avoid compensation, a small number of counterparties carried out some bad behaviors such as financial fraud. In the year, the SSE focused on investigating and dealing with related cases of violations and vigorously safeguarded the market environment for mergers and acquisitions and reorganizations. The SSE dealt with 13 cases and 143 market participants throughout the year. Among the typical cases, for example, the counterparty of Henan Huanghe Whirlwind Co., Ltd. in the restructuring transaction was publicly condemned because of failing to objectively disclose the performance forecast for the underlying assets, failing to ensure the disclosure of real performance by the reorganization target and making the target company out of control. As the reorganization target of Guizhou Salvage Pharmaceutical Co., Ltd. inflated the operating income and the net profit in order to "fulfill" the commitment to performance, the counterparty was publicly condemned.

The third kind of violations was failing to fulfill the commitment to shareholding increase. The investors pay close attention to the plans for increasing shareholding released by the major shareholders and the directors, supervisors and executives, which indicate their intrinsic recognition of the increases in the company’s valuation and convey some positive expectations to the market. In practice, there were the violations of some entities failing to increase their holdings as promised. In order to regulate the commitment behaviors of relevant entities and prevent insiders from pushing up the stock prices through the "fake" plans for shareholding increase, the SSE dealt with 12 cases of violations by major shareholders and 5 cases of violations by directors, supervisors and executives. Among the typical cases, the actual controller of Guangzhou Yuetai Group Co., Ltd., the controlling shareholder of Shan Dong Jiang Quan Industry Co., Ltd. and the second largest shareholder of Cultural Investment Holdings Co., Ltd. were publicly condemned as they failed to increase any shareholdings at the end of the commitment periods after announcing the plans for large amounts of shareholding increase.

In the fourth kind of violations, the share repurchase was not implemented as planned. Share repurchase is an important way for listed companies to reward investors. A company's disclosure and implementation of the repurchase plan will release positive signals to the market, and conduce to the stabilization of the company's stock price. After the promulgation of the detailed rules for share repurchase, quite a few companies have disclosed their repurchase plans, and more than 90% of them have completed their repurchase commitments. However, a small number of companies left the market after “breaking their promises” at the end of the repurchase periods. In order to punish the dishonest behaviors and supervise the companies’ fulfillment of commitments, the SSE promptly initiated the handling of the violation cases of more than 10 listed companies such as Kingfa Sci. & Tech. Co., Ltd. failing to implement their repurchase plans, and publicly condemned a small number of companies such as Beijing Huaye Capital Holdings Co., Ltd. had been delisted for the serious cases.

The fifth kind of violations included financial fraud and failure to disclose the information as scheduled. Periodic reports are the main medium reflecting the operating results of a listed company and the key information for the investors to make investment decisions. Cracking down on financial fraud and failure to disclose annual reports on schedule had always been the important tasks for the SSE to improve the overall quality of the companies’ information disclosure. In the year, 14 cases of such violations were handled, an increase of 133% year-on-year, and public condemnation was issued in 10 of the cases, involving 141 persons liable. Among the typical cases, Sunny Loan Top Co., Ltd. and *ST Hubei Yangfang Holding Co., Ltd. were publicly criticized for inflating their operating incomes and profits in the annual reports by improperly confirming the investment incomes and exaggerating the sales proceeds respectively. *ST Shanghai Zhongyida Co., Ltd. and *ST Xinjiang Yilu Wanyuan Industrial Investment Holding Co., Ltd. had the companies and their relevant directors, supervisors and executives publicly condemned for failing to disclose the annual reports on schedule.

In the sixth kind of violations, some intermediary agencies were not diligent and responsible enough. Securities intermediaries are an important part of the securities market ecology, and play an important role of inspection, verification and professional supervision in improving the governance of the capital market. In order to urge the intermediary agencies to strictly perform the duties as "gatekeepers", in the year, the SSE dealt with a total of 13 related cases, involving 4 intermediaries in financial consulting, accounting and evaluation, and 39 related sponsors liable, up by 33.33% and 387.5% year-on-year respectively. Among the typical cases, the annual audit accountant of the Beijing Huaye Capital Holdings Co., Ltd. which had been delisted had a notice of criticism circulated for failing to audit and verify the company's debt investment business in large amounts strictly in accordance with the practice standards. The evaluation agency and appraisers of *ST Jiangsu Protruly Vision Technology Group Co., Ltd. were publicly condemned for the apparent violation of practice standards in the evaluation activities during the company's reorganization, the inaccurate contents in the evaluation report, and the major omissions in the working papers.

In 2019, the SSE continued to regulate the disciplinary actions, improve the timeliness, promote the open regulation, and enhance the regulatory credibility. Going forward, the SSE will fully implement the requirements of the new “Securities Law”, focus on the primary goal of improving the quality of listed companies, give full play to the role of self-regulation in the accountability system market-wide, further enhance the connection between self-regulation and administrative supervision, maintain the regulatory concentration, form the regulatory synergy, perform self-regulatory duties in accordance with laws and rules, work together to make the regulatory enforcement more efficient, effectively protect the legitimate rights and interests of investors, and contribute to the creation of a sound ecology in the capital market.