30 April, 2018
On April 13, 2018, the Shanghai Stock Exchange and the Shenzhen Stock Exchange respectively announced their Guidelines on Information Disclosure for Takeover and Change of Shareholding in Listed Companies (Consultation Paper) (collectively, “Draft Guidelines”) to solicit public comments.
The primary purpose of the Draft Guidelines is to improve investor protection and enhance market risk prevention, which is directed against three types of violations that have appeared on the A-share market, including (i) quickly buying and selling stocks by taking advantage of capital and information, which causes abnormal volatility in stock prices, (ii) using highly leveraged funds for buying stocks while the leverage bears a mismatched repayment term therefor, which creates big, hidden dangers in the stable operation of the listed companies in the future, and (iii) circumventing the duty of information disclosure by hiding the identity of shareholders acting in concert or abusing their voting powers by proxy.
Up till now, the main rule and regulation governing information disclosures for changes of shareholding in listed companies has been the Administrative Measures for Takeover of Listed Companies (“Takeover Measures”).
The Takeover Measures require that, with respect to a securities transaction conducted through the exchanges or through a transfer agreement, a duty of information disclosure shall be triggered where the investor and its persons acting in concert therewith jointly own the rights and interests of the relevant stocks that account for 5% of the issued shares of a listed company, or for every increase or decrease of 5% after reaching 5%.
The Draft Guidelines detail and strengthen the specifications of the duties of information disclosure provided in the Takeover Measures, i.e., they have set out specific circumstances that may trigger the disclosure obligation from various angles, as well as addressed the requirements on “look-through disclosure”, determination of disclosure obligors as well as aggregation of holdings for asset management products, despite of some minor differences between the two Exchanges’ Draft Guidelines.
Below we have outlined certain key points of the Draft Guidelines for further discussion.
I. Intervals that Trigger Disclosure Obligations and Look-through Disclosure Under Certain Circumstances
Among the circumstances where an investor shall perform its filing obligation for change of shareholding set out in the Draft Guidelines, we believe the following are particularly noteworthy:
| Investor / Ownership Threshold | Duty to Disclose | Requirement on Disclosure by “Look-through” |
|---|---|---|
| 5% or more, every increase or decrease of 1% |
Yes, but trading is not required to be suspended before or after disclosure |
Not applicable |
|
Less than 5%, but the investor has become the largest shareholder or de facto controller of the listed company |
Yes, and it shall clearly state the purpose, source of funding for the change of ownership, as well as whether there is any plan for increases within next 6 months |
Applicable Scope of application: partnership enterprises or asset management products except for public funds Application of “look-through”: all the way up to the ultimate investor and its source of capital |
|
The difference between the shareholding of the investor and the largest shareholder of the listed company is 5% or less, and the shareholdings of both parties have attained 10% |
II. Clarifying Criteria on Determining the Ownership for AMPs and the Principle of Aggregation
One material change in the Draft Guidelines is, according to the logic drawn for the determination of “ownership interest” by the Measures, to specify that the manager of an asset management product (including private funds, “AMP”) holding stocks of a listed company shall be deemed holding the ownership interest of such stocks. To be specific, if the manager of an AMP can exercise the voting right of the stocks held by such AMP, it shall be the obligor to perform the duty of information disclosure and all AMPs holding the stocks of such listed company managed by the same manager shall be calculated aggregately. If, according to the agreement or due to any other reason, that manager cannot actually exercise the voting right of the stocks held by the AMP, it shall disclose the relevant party that in fact controls the voting right, and such relevant party shall be responsible to undertake the duty of information disclosure, and all stocks held by such AMP and stocks held by such party in the same listed company shall be calculated aggregately. The investors which are exempted from the above aggregation requirement are: social security funds, pension funds, enterprise annuities and public funds.
III. Regulating Concerted Action Agreements and Proxy Agreements
The Draft Guidelines also provide that a validity term shall be specified in a concerted action agreement or proxy agreement for voting rights. Even in case of an early termination of any such agreement, the relevant investor shall continuously be bound by the obligations during the originally agreed validity term. After the relevant agreement expires, the investor is also required to perform the undertakings made by it. Additionally, for exercising a voting right by proxy, the relevant entrusting party and proxy shall be deemed to be acting in concert.
Our Observations
The release of the Draft Guidelines is another demonstration of implementing the principle of “regulation by look through”, which reflects the basic policy orientation of strengthening financial supervision and preventing financial risks. In particular, the determination criteria by “look through” as well as aggregation of holdings for AMPs stipulated in the Draft Guidelines will have a significant impact on the information disclosure compliance for the private fund industry. We will continue to monitor the Draft Guidelines as they are finalized and will share future updates and observations with our valued clients.
For further information, please contact:
Natasha (Qing) Xie, Partner, Jun He
xieq@junhe.com
