Legal internal control in listing compliance, corporate governance

By Han Xu and Hao Jingmei, Guantao Law Firm

Listing compliance and corporate governance are often relegated to a form of financial internal control in A-share IPOs and daily operation and management of companies. But their significance and importance in laying firm foundation for effective listing and continuing operational governance should not be downplayed.

Most notably, the Measures for the Administration of Initial Public Offering and Listing of Stock, issued by the China Securities Regulatory Commission (CSRC), as well as other A-share market regulations on compliance and corporate governance for prospective issuers, all provide that, “the issuer’s internal control system shall be sound and effectively implemented to reasonably guarantee reliability of financial reports, legality of production and operation, and efficiency and effectiveness of operation”.

Therefore, in a broader sense, listing compliance and corporate governance should not only encompass effectiveness of financial internal control, but also legal internal control – in other words, the legality and compliance of corporate operations and effective implementation of legal internal control.


Generally speaking, legal internal control is embodied in the entire process of listing compliance and corporate governance.

Legal internal control in listing compliance, corporate governance
Han Xu
Guantao Law Firm
Tel: +86 13581652303

All sections and basic verification regulations under the Compilation and Reporting Rules for Information Disclosure by Companies Offering Securities to the Public No. 12, as well as the Practice Rules for Law Firms Engaged in the Initial Public Offering and Listing of Stocks, reflect requirements for the issuer’s legal compliance, the implementation of which directly reflects the effectiveness of corporate legal internal control.

However, prospective issuers should not limit their standard of legal internal control just to “no material illegal acts or administrative penalties”.

Comprehensive effectiveness of this standard should also be reflected by setting out clear legal internal control requirements in the company’s historical development, internal system establishment, department setup, independence, related party transaction, horizontal competition, asset ownership, complete qualification, business acquisition, investment, product quality, environmental protection, safe production, legal tax payment, compliant employment and other aspects.

Deficiency in any of these non-financial internal control aspects will cause not only obstacles to the company’s listing, but also increase its business risks and management or non-operating expenditure.


In practice, there have been prospective issuers failing to prudently stipulate the intellectual property clause in business contracts, leading to core IP rights compromised and attributed to other parties even when such IP rights greatly contribute to the company’s income and profit, corresponding to its main business and products.

Legal internal control in listing compliance, corporate governance
Hao Jingmei
Guantao Law Firm
Tel: +86 139 1182 3938

Such contracts may therefore adversely affect the assets and business independence of the prospective issuer.

Incidents like this occur because the contract was not prepared in accordance with the required review process, but signed and sealed after only a perfunctory oral understanding and commitment between the parties’ business personnel.

For another example, the prospective issuer may be subject to administrative penalties by customs authorities as a result of discrepancies in declared brand, quantity and category of imported and exported goods. Such incidents may partly result from mistakes made by an entrusted third party, and not subjective malice of the prospective issuer.

But false declarations, and consequential penalties, can be simply avoided by establishing systems and measures for checking and reviewing the price, quantity, brand, specifications and other contents involved in the import and export documents.

Furthermore, the daily production and operation of non-fundraising projects are often plagued by issues. These may include: failure to duly perform filing and environmental assessment procedures for fixed asset investment or technological transformation; being identified as idle land due to construction starting beyond the prescribed time limit; lease of premises without property ownership certificates for production and operation; failure to perform the filing procedure for lease contract; invalidation of key patents caused by failure to pay annual fees in time; and failure to perform authorisation or connected-transaction procedures for using the registered trademark or trade name of the actual controller.

Although these legal flaws do not often singlehandedly derail the company’s listing prospects, they do reflect a weakness in the construction and implementation of awareness in corporate legal compliance in the relevant aspects.


Nowadays, in the process of improving financial internal control, companies can establish multiple online management processes and use technical means to facilitate management.

However, online or electronic management systems directly aimed at legal internal control are still relatively lacking. More often than not, problems are identified and solved through in-depth due diligence by intermediaries and continual counseling for companies’ listing, which then translates into legal compliance awareness in various fields and aspects, instilled into the company to assist in legal internal control.

In a nutshell, firmly rooted management awareness of legal internal control lays the foundation for effective listing and corporate governance.

The risks, time stretch and financial cost of listing can only be ideally minimised by: identifying issues as early as possible; accepting intermediaries’ guidance on compliance; raising compliance awareness of management, various functional departments and executives; and simultaneously constructing and effectively implementing legal internal control systems.