Practical points for compulsory execution of listed company stocks

During compulsory execution, the people’s court may legally inquire, freeze and sell stock assets held by the subject person, pursuant to article 249 of China’s Civil Procedure Law.

However, in judicial practice, the disposal scope, pricing standards and disposal methods of listed company stocks held by those subject to compulsory execution are not exactly the same.

In this article, the author summarises practical points for such execution.

Q: How to determine the competent court for execution on stocks?

A: Whether resolving disputes through litigation, arbitration or notarisation, the “location of to-be-executed property” is an important criterion for determining the competent court for compulsory execution.

The Supreme People’s Court (SPC) Reply on Whether a Court can obtain Jurisdiction based on the Location of the Property Where the Company’s Securities are Registered and Settled from the Enforcement Bureau states: “The domicile of the issuer should be deemed as the place where such property is located.”

Therefore, when stocks are assets available for compulsory execution, the applicant for execution should determine the competent court based on the listed company’s domicile, rather than the location of the China Securities Depository and Clearing Corporation (CSDC), or stock custodian.

Q: How to determine the amount or scope of stocks that should be frozen by the court?

A: The Provisions for the People’s Courts to Seal up, Distrain and Freeze Properties in Civil Enforcement clearly state: “The people’s court shall not seal up, distrain or freeze properties in an obviously excessive amount.”

The Opinions on Further Intensifying the Ideal of Enforcement with Goodwill and Politeness in the Enforcement Work and the Opinions on Further Regulating People’s Courts’ Freezing of Pledged Stocks of Listed Companies stipulate that the value of frozen stocks shall be up to the amount satisfying the determined claims. Share value shall be determined reasonably within a fluctuation range of not more than 20% based on the previous trading day’s closing price immediately before freezing.

The Guiding Opinions on Optimising the Legal Environment to Promote the Development and Growth of the Private Economy, implemented on 25 September 2023, stipulates: “It is strictly prohibited to seal up, distrain or freeze properties in excess of authority, scope, amount, and time limit.”

Hence, expressions in the SPC provisions or documents may differ regarding the amount or scope of freezing stock and property. Courts also differ in understanding and practice.

Accordingly, for the investigation and control of stock property of the person subject to execution, applicants should communicate with the enforcing court to safeguard their legitimate rights and interests in a legal and favourable way.

Q: How to determine the reference and starting prices when disposing of listed company stocks through online judicial auctions?

A: Listed company stocks are classified into unrestricted tradable shares, restricted tradable shares, and non-tradable shares. In judicial practice, the pricing methods for different types of stocks vary, and courts may have different pricing methods for the same type of stocks.

Unrestricted tradable shares do not require valuation thanks to their transparent trading prices. For example, the Shenzhen Intermediate People’s Court (SIPC) and the Shanghai Financial Court (SFC) stipulate 90% of the average closing price of 20 trading days prior to the auction date (or bidding date) as the reference price for disposal, or determining the auction reserve price.

Restricted tradable shares, which aren’t quoted and sold on the secondary stock market, may be priced through commissioned appraisal. The SIPC stipulates that the disposal price can be determined through negotiation, online inquiries, or commissioned appraisal. The SFC, however, stipulates that the disposal reserve price shall not be lower than 70% of the appraisal price.

However, note that some courts may adjust the starting price of stocks set in the original notice before the auction date, while others do not. Potential bidders are advised to scrutinise the court’s auction notice for prudent bidding offers.

Q: Any restrictions on the compulsory execution of stocks held by listed companies’ major shareholders and other entities?

A: According to the Several Provisions on the Shareholding Reduction by the Shareholders, Directors, Supervisors, and Senior Executives of Listed Companies – and implementing measures by the Shanghai and Shenzhen Stock Exchanges – major shareholders and specific shareholders are not allowed to reduce their holdings by more than 1% and 2% of the listed company’s total share capital, respectively, through centralised bidding or block trading within 90 consecutive days. The court is also subject to these restrictions when disposing of stocks through the secondary market.

On 26 September 2023, the Shanghai and Shenzhen Stock Exchanges issued the Notice on Matters Concerning Regulating Shareholding Reductions, clarifying that if a listed company stock trades below the offering price or book value – or in the past three years the listed company has distributed no cash dividend, or distributed cash dividends cumulatively less than 30% of its average annual net profit for the past three years – a controlling shareholder or actual controller shall not reduce its shareholding in the company at the secondary market. However, this restriction does not apply to stocks registered for pledge or served as collateral in securities margin trading before 27 August 2023.

It is advisable that the applicant obtains accurate information on whether there is any restriction on reducing holdings under the person subject to execution; determine the optimal and efficient plan for disposing of stocks; and propose reasonable suggestions to the enforcing court.

Q: How are taxes and fees borne after a successful online judicial auction of listed company stocks?

A: Article 30 of the Provisions on Several Issues concerning Online Judicial Sale by People’s Courts stipulates that “taxes and fees resulting from the online judicial auction itself shall be borne by the corresponding entity following relevant laws and administrative regulations”.

According to the CSDC rules, when transferring auctioned stocks the corresponding entity shall pay the “non-trade transfer fee” and “non-trade transfer stamp duty.”

However, regarding tax payment and transfer problems, the CSDC Shanghai Branch and Shenzhen Branch differ in rules: the CSDC Shanghai requires full tax payment before transfer procedures; the CSDC Shenzhen stipulates that if the competent authority does not submit the tax payment certificate and requests forced deduction, “it shall specify in the notice for assistance in execution and other legal instruments that the court will urge the parties to fulfil their tax obligations”.

In summary, for rational decisions and tax preparation, the applicant and potential bidders are advised to learn beforehand about the requirements on taxes and fee payments regarding transferring auctioned stocks.

Zhou Han is a partner at AnJie Broad