On 5 February 2021, the China Securities Regulatory Commission (CSRC) issued the Guidelines for the Application of Regulatory Rules – Information Disclosure of Shareholders of Companies Applying for Initial Listing, while the Shanghai and Shenzhen stock exchanges issued notices on matters related to the implementation of these regulatory guidelines, making further provisions on verification of shareholders and information disclosure of domestic IPO companies. After the implementation of the above-mentioned provisions, the problems faced by market players – such as “prolonged lock-up period of sudden share purchase” and “difficulty in penetrating verification” – have caused heated discussion.
Compared with the previous examination policy of domestic listing, the above-mentioned regulatory guidelines and notice mainly add to and refine in several aspects.
Put forward higher verification standards for the authenticity and commercial rationality of the issuer’s changes in shareholding. According to the regulatory guidelines and the notice, the regulatory authorities require intermediaries not to simply take the commitments of relevant institutions or individuals as the verification basis for previous changes in the issuer’s shareholding, but to comprehensively verify and disclose the background and reasons, forms, agreements, transaction consideration, sources of funds and payment methods of previous shareholders’ share purchases.
The authors observe that, in practice, in order to verify the authenticity and commercial rationality of the issuer’s changes in shareholding, the regulatory authorities have gradually strengthened the examination of the account statements and payment vouchers of relevant persons. Substance outweighs form in the examination. For some issuers with unclear shareholder status, unclear considerations, insufficient account statements or vouchers of source of funds, etc., there has been repeated feedback or even forced termination in the examination.
Clarify the standards for penetration verification of the issuer’s shareholders. According to the regulatory guidelines, for the shareholder of the issuer that is a company or limited partnership with two or more tiers of shareholding structure and no actual business operations, if the transaction price of the shareholder’s shareholding is obviously abnormal, the intermediary shall check the shareholder, tier by tier, to the ultimate holder.
The “ultimate holder” refers to:
(1) domestic and foreign-listed companies, listed companies on the National Equities Exchange and Quotations and other public companies;
(2) state-owned holdings or managed entities and collectively owned companies, including industrial funds controlled by public institutions and state-owned entities;
(3) overseas government investment funds, university endowment funds, pension funds, public welfare funds and public offering asset managed products; and
(4) natural persons.
Although the above-mentioned provisions clearly take the obvious abnormal transaction price of shareholders’ shares as the premise of an intermediary’s penetration verification and information disclosure, in practice, the regulatory authorities require issuers to disclose the penetration verification status of all shareholders.
Although the share price of some shareholders of issuers is normal, the structure after penetration verification is extremely complex, involving multi-tier nesting. It is extremely difficult to communicate and obtain information with the issuer as the centre in the upward penetration verification process, and some issuers’ listing progress is even delayed.
The defining time of “sudden share purchase”, with a lock-up period of 36 months, will be extended from six to 12 months before IPO declaration, and the shareholders involved should promise not to transfer the issuer’s shares within 36 months from the date of obtaining the new shares. The implementation of the above-mentioned provisions has a great impact on the formulation of investment and exit plans for privately offered funds with pre-IPO as the main investment stage.
For the above-mentioned policy changes, combined with the relevant cases in the examination process, the authors put forward the following suggestions:
(1) Privately offered funds with domestic IPOs as the main exit route, when confirming the information of qualified investors at the fundraising stage, should communicate with investors, try their best to obtain the information of shareholders at all tiers after penetration verification, and keep the information together with other filing material of privately offered fund products.
(2) Issuers should pay full attention to the factors related to transaction authenticity and commercial rationality such as shareholder background, transaction framework and fund sources involved in previous shareholding changes, so as to avoid situations where intermediaries and regulatory authorities, after conducting penetration verifications on bank statements, find that there are substantial share price abnormalities or obvious cases of holding shares on behalf of others in the process of the issuer’s introducing new shareholders, such as “shareholders paying the consideration first and then returning the money through a third party”. At the same time, in the process of introducing new shareholders, the issuer should add a process to review the shareholders’ shareholding structure after penetration verification, and predict the feasibility of subsequent verification work.
(3) Relevant intermediaries, facing the issuer’s shareholders’ complicated shareholding structure, multi-tier nesting and other situations for which penetration verification is difficult to conduct, should actively explore new verification methods and demonstration angles. Taking the operation in practice as an example, after penetration verification, it is found that some direct shareholders of the issuer involve nearly 50 tiers of shareholding structure, and relevant information of some indirect shareholders is not directly available.
Intermediaries can try to obtain the office address, e-mail address, telephone number and other contact information of relevant companies and natural persons by means of third-party search engines and information inquiry platforms (TianYanCha.com, Qcc.com, etc.), and contact or mail letters one by one, exhausting this means of verification, to increase the possibility of obtaining relevant information. At the same time, intermediaries can demonstrate that the failure to obtain and disclose relevant information of indirect shareholders will not constitute a substantial legal obstacle to the issuer’s listing from other angles, such as the low shareholding ratio of indirect shareholders after penetration, and the shareholders of privately offered funds being non-special funds and surviving for many years.
Wang Yan is a partner and Zhou Jian is a paralegal at Grandway Law Offices
Grandway Law Offices
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