As a growing number of listed companies seek to revamp their creditor-debtor relationships through bankruptcy, prior listing rules at both Shanghai and Shenzhen stock exchanges have become inadequate for guiding bankruptcy-related operations.
Partner
Jingtian & Gongcheng
On 31 March 2022, both exchanges respectively released the Self-regulatory Guideline – Bankruptcy and Reorganisation, which are highly similar and will be analysed in this article as one. The guidelines mainly set out rules in the aspects of information disclosure, reorganisation investment, and equity trade for listed companies in the process of bankruptcy.
The guidelines should apply to all listed companies carrying out bankruptcy. For companies going through pre-reorganisation, or where the bankruptcy of any controlling shareholder, largest shareholder, subsidiary or investee of the listed company threatens to materially affect the value of its securities, the guidelines should also be referred to.
INFORMATION DISCLOSURE
On the basis of the listing rules of both stock exchanges on information disclosure, the guidelines expressly list creditors, administrators and reorganisation investors as the obligors of information disclosure.
Three forms of information disclosure were emphasised under the guidelines – regular report, provisional report, and announcement as required by the Enterprise Bankruptcy Law. In an administrator-led bankruptcy, regular reports should be issued after written confirmation by an administrator, while provisional reports should be issued by an administrator affixed with its seal.
In an administrator-supervised bankruptcy, information should be disclosed per regulations by the board of directors, board of supervisors and senior management, while administrators are responsible for timely informing them of related matters and supervising the implementation.
Information disclosure can be triggered by:
(1) rulings, decisions or announcements made by courts, including those supporting the applicant’s withdrawal of bankruptcy application; acceptance or non-acceptance of the application; the appointment of an administrator; convening of the first creditors’ meeting; continuing or ceasing operation based on the administrator’s decision before the first creditors’ meeting, or creditors’ decision at the meeting; transition from pre-reorganisation to reorganisation, or a shift in the bankruptcy procedure (e.g. declaring bankruptcy after reorganisation fails); approval of the draft reorganisation plan or settlement agreement after approval at the creditors’ meeting; compulsory approval of the draft reorganisation plan as per application of the listed company or the administrator; the expiry of the supervision period; or the completion of the reorganisation plan or settlement agreement.
(2) Various bankruptcy-related applications, including where the board of directors applies to a court for carrying out bankruptcy, or an application from another party for the company’s bankruptcy; the listed company raises an objection to the creditors’ bankruptcy application; the applicant withdraws the application before it is accepted by a court; the listed company or administrator applies for compulsory approval of the draft reorganisation plan.
(3) Developments that materially affect the interests in shares of the listed company, including open solicitation of reorganisation investors, or determination of an investor by the administrator via selection and negotiation; submitting the draft reorganisation plan or settlement agreement to the creditors’ meeting for review; the creditors’ meeting or capital contributor group voting against the draft reorganisation plan or settlement agreement, and on matters regarding second voting or compulsory approval; conversion of property, which becomes disclosable when the conversion plan attains relevant standards under the listing rules; the full text of equity adjustment plans and operation plans, as well as those requiring separate disclosure; or inability to carry out the reorganisation plan or settlement agreement.
REORGANISATION INVESTMENT
Other than via open solicitation, listed companies, after disclosing reason and rationality, may identify reorganisation investors by having the administrators identify candidates and negotiate with them.
In terms of converting capital reserves into shares, the guidelines provide that the price of the transferred shares may be lower than 80% of the closing share price on the day of signing the investment agreement, or the most recent trading day. Listed companies, however, should nevertheless engage financial advisers for their professional opinion.
The guidelines shed light on the vote percentage and abstention requirements for voting on equity adjustments. Adjustments to equity of contributors and other matters crucial to shareholders’ rights must be approved by attending contributors representing more than two-thirds of the voting rights. If the introduced investor is a related party to the company’s controlling shareholder, actual controller, or any shareholder with more than 5% of shareholding, director, supervisor or senior management, such personnel should abstain from voting.
EQUITY TRADE
When going through bankruptcy, listed companies should strive to avoid trade suspension. Applications may be made to the stock exchange if suspension is imperative, which in principle should not last longer than two trading days, extendable to five if necessary.
Where the reorganisation plan triggers the obligation of mandatory solicitation, and does not constitute any scenario under the Regulations on the Takeover of Listed Companies that exempts solicitation, the listed company should timely issue invitations.
If the reorganisation investor becomes the controlling shareholder or actual controller of the listed company after acquiring the shares, they should undertake not to transfer their shares within 36 months from the acquisition. The controlling shareholder or actual controller, even unchanged, should undertake to not transfer their shares within 36 months from the completion of the reorganisation plan. For the shares obtained through reorganisation, the 36-month restriction period begins with the date of obtaining such shares.
Upon completion of the reorganisation plan, if the listed company does not have any controlling shareholder or actual controller, the largest shareholder should likewise commit to a 36-month restriction period. Other reorganisation investors should undertake to not transfer their shares within 12 months of obtaining such shares.
Wang Zhenxiang is a partner at Jingtian & Gongcheng
Room 3001, Area A, China Resources Tower
No.1366 Qianjiang Road, Hangzhou 311500, China
Tel: +86 571 8992 6523
Fax: +86 571 8992 6501
E-mail: wang.zhenxiang@jingtian.com
