SSE Reports on Addressing Information Disclosure Violations of Listed Companies in 2020

In 2020, the Shanghai Stock Exchange (SSE) earnestly implemented the tasks and requirements for comprehensively strengthening the reforms of the capital market, focused on promoting the primary goal of improving the quality of listed companies, followed the work guideline of "building the system, non-intervention, and zero tolerance", and fulfilled the front-line regulatory responsibilities under the guidance of the new securities law, punishing violations and tightening the market discipline. In the year, we publicly released the implementation criteria for disciplinary actions, improved the rules for identifying violations, further elaborated the disciplinary actions, clarified the red line for the regulation, provided guidance for regulated operations, propelled the enhancement of corporate governance, maintained market order, protected the rights and interests of small and medium-sized investors, and institutionally provide for the improvement of the quality of listed companies and the stable and healthy development of the capital market.

In 2020, the SSE issued a total of 43 public condemnations, an increase of 7.5% year-on-year; 47 people were publicly identified as being unsuitable to serve as director, supervisor or senior executive of a listed company, an increase of 88% year-on-year. Specifically, a total of 6 persons responsible for serious and malignant violations were publicly identified as not suitable to take the position of director, supervisor or senior executive of a listed company for life. A total of 110 criticism notices were delivered, a year-on-year increase of 6.8%, and 122 letters of regulatory concern were issued, a year-on-year increase of 15.09%. A total of 132 listed companies were involved in the disciplinary actions or regulatory concerns, up by 20% year-on-year; a total of 556 directors, supervisors and senior executives were punished, a year-on-year increase of 4.32%; and a total of 90 controlling shareholders or de facto controllers were penalized, a year-on-year increase of 26.76%. In response to the violations by intermediary agencies and their employees, the SSE penalized 8 institutions, up by 100%, and 39 people, the same number as in the previous year.

The division of responsibilities for violations is necessary for disciplinary action, as it is an important measure to implement targeted regulation and improve the effectiveness of regulation and discipline enforcement, as well as a task and requirement put forward by the State Council in the Opinions on Further Improving the Quality of Listed Companies. In 2020, according to the requirements for categorized regulation and targeted regulation, the SSE carried out the disciplinary actions on the SSE-listed companies by following the guideline of "combining leniency and strictness", focusing on discerning the responsibilities of the listed company, the responsibilities of the shareholders, and the personal responsibilities of directors, supervisors, and senior executives, using appropriate levels of penalty, striving to achieve justice in individual cases and fairness among similar cases, actively responding to market concerns, reflecting the actual developments of the market, and maintaining stability in regulation and discipline enforcement.

1. Distinguish the types of cases and focus on dealing with the substantive violations that were serious in nature and malign in influence.

The SSE adhered to the principle of "achieving effectiveness through streamlined and targeted regulation", distinguished the properties and characteristics of different violations, and paid special attention to serious violations that caused public outcries in the market, harmed the interests of investors and disrupted the order of the securities market.

First, the SSE stuck to the "zero tolerance" principle in dealing with violations in disclosure of financial information such as financial fraud. Financial information directly reflects the production and operation conditions of a listed company. The violations in disclosure of financial information are a "tumor" in the securities market, as they seriously damage the legitimate rights and interests of investors, and shake the foundation of integrity in the market. In 2020, the SSE implemented the requirement of "zero tolerance" by handling nearly 20 related cases, with public condemnation and public identification imposed in 9 cases of serious violations such as financial fraud. For example, ST Kangmei Pharmaceutical Co., Ltd. inflated its operating income and monetary funds for three consecutive years, with the amount involved at nearly RMB20 billion, so big as to be rare in history; the restructuring target of Changyuan Group Ltd. falsified its performance for two consecutive years, directly leading to changes in the company's profit and loss. The aforementioned companies were publicly condemned, with public identification imposed on those with major responsibilities.

Second, the SSE was strict in investigating and penalizing violations such as capital occupation and failure to promptly settle illegal guarantees. In recent years, capital occupation, illegal guarantee and other cases of hollowing out listed companies have occurred from time to time, seriously damaging the interests of the companies and the investors. Maintaining a tough stance in terms of disciplinary actions, the SSE dealt with nearly 30 cases of capital occupation and illegal guarantee during the year; there were 18 cases involving public condemnation and public identification, a year-on-year increase of 38.46%. For example, *ST Chunghsin Technology Group Co., Ltd. transferred funds to its controlling shareholder and related parties through suppliers, resulting in capital occupation of RMB1.007 billion; *ST Gansu Gangtai Holding (Group) Co., Ltd. provided 21 illegal guarantees for its controlling shareholder and related parties with a total amount of RMB5.6 billion; and *ST Pengqi Technology Development Co., Ltd. saw its de facto controller and related parties occupy RMB750 million of the company's funds, and use the company to provide illegal guarantees worth RMB1.575 billion for their loans. The abovementioned cases were of a serious nature, and the stocks of the companies received other risk alerts due to failure in timely settlement. The aforementioned companies were publicly condemned, with public identification imposed on the "critical few" such as the de facto controllers.

Third, the SSE stringently penalized violations related to regular reports such as failure to disclose annual reports on schedule. As the annual report is a collective reflection of a company's financial status and operating results in the past year, it is the statutory obligation of listed companies and all directors, supervisors and senior executives to make effective efforts in the preparation, review and disclosure of the annual report and ensure that the annual report is disclosed in a truthful, accurate, complete, timely and fair manner. In 2020, the SSE strictly investigated and punished three companies, namely, *ST Xinjiang Yilu Wanyuan Industrial Investment Holding Co., Ltd., *ST Zhejiang Huge Leaf Co., Ltd., and Guangdong Rongtai Industry Co., Ltd., for failing to disclose annual reports on schedule, as the companies and the related directors, supervisors and senior executives were publicly condemned; and as some directors of *ST Harbin Churin Group Jointstock Co., Ltd. failed to fulfill their obligations of reviewing and disclosing the annual report, and the directors and supervisors of *ST China United Travel Co., Ltd. arbitrarily expressed "inability to ensure the authenticity" of the company's annual report, corresponding penalties were imposed on the directors and supervisors involved.

Fourth, the SSE continued to hold accountable those responsible for violations in information disclosure concerning transfer of control right or major asset restructuring. The change in the control right of a listed company is of great importance. In response to the information disclosure violations involved, the SSE continued to enhance accountability tracking, and handled a total of 8 cases of such violations throughout the year. For example, as the de facto controller of JDM Jingda Machine (Ningbo) Co., Ltd. planned the forward transfer of control right during the sales limit period, both parties of the transaction were publicly condemned; the largest shareholder of Guangdong Meiyan Jixiang Hydropower Co., Ltd. had clearly claimed to seek control of the company, but later quietly implemented a clearance-style shareholding reduction, and eventually was publicly condemned. Regarding the violations caused by the after-effect of reorganizations with high valuation, high goodwill and high performance commitment, such as unfulfilled performance commitments, loss of control of subsidiaries, and evasion of performance compensation obligations, the SSE continued to take action according to the rules, with 6 cases involved. For example, as *ST Shenzhen Geoway Co., Ltd. lost control of the assets acquired at a high price, and the counterparty of Sunyard System Engineering Co., Ltd. failed to fulfill the performance compensation commitment, disciplinary action was given to the companies and the counterparties in both cases.

Fifth, the SSE timely addressed the dishonest conduct of failing to implement buyback plans or honor the commitment of increasing shareholding. Buyback plans and the commitment of increasing shareholding send a positive signal to the market, which forms the trust interests for the investors. With regard to the parties that fail to fulfill the commitment and lose credibility in the market, the SSE dealt with 11 and 9 cases of relevant violations respectively in the year, and took measures based on the rate of actual fulfillment after comprehensively considering the circumstances such as the time limit allowed for buyback and the funding arrangements for the buyback. For example, ST Sinovel Wind Group Co., Ltd. disclosed a "hyped" buyback plan worth RMB50 million even when it was short of funds and obviously not capable of the buyback, and as a result, the company and its chairman of the board of directors were publicly condemned.

Sixth, the SSE aimed at warning and education in dealing with formal flaws in information disclosure that were not strongly vicious or harmful. In dealing with the cases in which in nature the violations were caused purely by the flaws in the form of information disclosure or the negligence in daily work, and there was no obvious subjective intention, nor major losses or strong reaction in the market objectively, the SSE took appropriate regulatory measures mainly for the purpose of warning and education. Such cases mainly included violations in small-amount stock transactions or changes in equity, daily related transactions that exceed expectations, short delay in information disclosure without substantive impact, and other violations. For example, verbal warnings were imposed on shareholders of certain companies who violated the rules in trading of shares, but did not have a major impact on the market with small quantities involved in the violations and remedial measures taken.

2. Distinguish the circumstances of individual cases and take differentiated measures after fully considering the situation of rectification and the subjectivity of fault.

For different cases of the same category, the SSE paid attention to distinguishing the levels of severity of the violations, comprehensively considered the specific subjective and objective circumstances such as the amount and proportion involved in the case, actual losses, market impact, rectification, subjective fault, etc., and adopted differentiated measures that were heavier or lighter.

First, according to the rules the SSE severely punished the violations that involved large amounts or high proportions, caused actual losses or bad market impact, or were characterized by the parties' deliberate implementation and refusal to make corrections. Such violations were mostly concentrated among risky companies with poor fundamentals, irregular internal controls, and numerous market concerns. For example, as the annual report of *ST Shanghai Fukong Interactive Entertainment Co., Ltd. was determined by the annual audit accountant as seriously violating the Accounting Standards for Business Enterprises with the adverse opinion issued, and the company did not promptly make corrections in accordance with regulatory requirements, those with major responsibilities were publicly identified as being unsuitable to serve as director, supervisor or senior executive of a listed company for life; as *ST Gansu Gangtai Holding (Group) Co., Ltd. and Meidu Energy Corporation (delisted) provided their controlling shareholders with illegal guarantees amounting to RMB5.6 billion and RMB4.1 billion respectively, and the overdue debts might cause the companies to assume huge guarantee liabilities, public identification was imposed on those with major responsibilities; as the de facto controller of *ST Eastern Gold Jade Co., Ltd. and the counterparty rashly advanced the transfer of control rights when there were major doubts about the authenticity and accuracy of the transaction, and refused to cooperate in implementing the regulatory requirements for verification, both parties in the transaction were publicly condemned. In the abovementioned cases, the subjective maliciousness of the parties was obvious, causing an abominable impact on the market.

Second, the SSE urged timely rectifications during the investigation of the cases, and fully considered the rectifications to adopt a lighter penalty or reduce the punishment for those that were active in making corrections, recovering losses and conducting disclosure in accordance with the rules. For example, in the process of dealing with the cases of capital occupation and illegal guarantee, in accordance with the principle of "law-based regulation and categorized handling", those responsible for capital occupation and illegal guarantee were given certain time limits for rectification, so as to facilitate the solving of such problems. For those who were able to quickly carry out rectification and recover the losses after the incident occurred, a lighter penalty was imposed or the punishment was reduced. For example, after discovering the capital occupation, Shanghai Milkground Food Tech Co., Ltd. recovered all the occupied funds within the time limit; *ST Chang Chun Jing Kai (Group) Co., Ltd. removed all the illegal guarantees within one month after the violation was verified. Lighter penalties were imposed subsequently for both cases. In dealing with other types of cases, those responsible in the cases were guided and urged to make rectifications or take remedial measures in a timely manner.

Third, with regard to the "unintentional error" of the persons involved, the SSE took their subjectivity as an important factor in considering a lighter penalty. The so-called "unintentional error" is manifested as a result of inadequate understanding of the rules or errors in specific business operations. When the persons involved had no obvious subjective ill will, and did not cause actual damage or the consequences of damage were minor, the SSE appropriately adopted a lighter penalty or reduced the punishment in distinguishing the responsibilities. Related cases were concentrated in stock trading, violations in equity changes, etc. For example, as some shareholders did not disclose their plans for shareholding reduction in a timely manner because of selling their shares to liquidate pledged assets, considering that the agreement-based sales were passive in nature, only regulatory measures were taken; some shareholders of companies made operational mistakes when implementing plans for increasing or reducing shareholding, leading to short-swing trading, and as there was no obvious subjective intention, verbal warnings were imposed on them.

3. Distinguish and reasonably identify and assign the responsibilities of the listed company, the controlling shareholder, the de facto controller, and the directors, supervisors and senior executives.

In the same case, according to the scope of authority, performance of duties, awareness and participation, and other factors of those responsible, the SSE reasonably identified and assigned the responsibilities of the parties, with focus on the "critical few".

First, we separated the responsibilities between the listed company and the controlling shareholder, the de facto controller, and the directors, supervisors and senior executives. With regard to the violations mainly caused by the controlling shareholder or de facto controller abusing their control, the controlling shareholder or the de facto controller shouldered the major responsibility. If the listed company objectively found it difficult to be informed, and had no obvious faults, and if the directors, supervisors and senior executives were diligent and responsible but were still uninformed, and they actively took remedial measures, we adopted lighter penalties or lessened the punishments. For example, the controlling shareholder of Shanghai Original Advanced Compounds Co., Ltd. was publicly condemned for playing the leading role in the occupation of funds, while the company received a notice of criticism as it had relatively minor responsibilities of failing to ensure the independence of funds, and it actively took remedial measures and recovered all the occupied funds; in the case of illegal guarantees of Ningbo Zhongbai Co., Ltd., the chairman at the time took advantage of his position to bypass the company's internal control system and arbitrarily used the official seal to provide guarantees for others, and received public condemnation, while the company was less responsible despite failing to implement effective internal control over the seal management, and was active in proposing remedies after discovering the situation, so the SSE issued a notice of criticism.

Second, we made fine distinctions among the personal responsibilities of the directors, supervisors and senior executives of listed companies. We were strict in identifying the responsibilities of the directors, supervisors and senior executives who led, organized or participated in the violations, and imposed lighter penalties as appropriate on other directors, supervisors and senior executives who were unaware, unlikely to be informed, and already assiduous in performance of duty. On one hand, we separated the responsibilities of the board secretary in charge of information disclosure from that of the other directors, supervisors and senior executives who directly organized and committed the violations. For example, in the cases of capital occupation by *ST Chunghsin Technology Group Co., Ltd. and *ST Guirenniao Co., Ltd., we imposed lighter penalties on the board secretaries as it was difficult for them to detect and know about the outflow of funds, and they urged rectifications and strived to recover the funds after discovering the violations. On the other hand, we distinguished the responsibilities between the internal directors, who were directly engaged in operation and management, and the independent directors, who did not hold day-to-day positions in the company. For example, as *ST Jiangsu Hongtu High Technology Co., Ltd. was involved in the violation of failing to disclose the performance forecast and other information in a timely manner, the company and those with major responsibilities were publicly condemned. However, the independent director and convener of the audit committee received regulatory measure for the relatively minor responsibilities, as he was only responsible for the violation in the performance forecast, was unlikely to know in the process of performing his duties about the compensation agreement that caused the disparities in performance, and clearly called attention to the performance risk.

In 2021, in carrying out the regulation of the SSE-listed companies, the SSE will continue to implement the State Council's Opinions on Further Improving the Quality of Listed Companies, and the SSE's Three-year Action Plan for Promoting the Quality Improvement of SSE-Listed Companies, strengthen categorized regulation and targeted regulation, enhance the basic systems for information disclosure, corporate governance, etc., raise the awareness of compliance of the "critical few" such as controlling shareholders, de facto controllers, directors, supervisors and senior executives, guide and urge the listed companies to focus on their main businesses, stick to integrity and operate compliantly, strive to build a sound market ecosystem characterized by the survival of the fittest, and boost the high-quality development of the SSE-listed companies.