On 6 November 2018, the China Securities Regulatory Commission (CSRC) issued the Guiding Opinions on Improving the Stock Trading Suspension and Resumption System for Listed Companies (《关于完善上市公司股票停复牌制度的指导意见》) (the Guidance), which took effect immediately. The Guidance addresses the following key areas for companies listed on Shanghai and Shenzhen Stock Exchanges (A-share companies or listed companies):
- Establishing key working principles: A-share companies should adopt a prudent, timely, staged, and confidential approach on trading suspension;
- Shortening trading suspension period and reducing the types of significant corporate matters that are eligible for trading suspension: Different types of significant corporate matters will have different arrangements;
- Enhancing the disclosure requirements: Information of significant corporate matters that leads to trading suspension should be clearly announced; and
- Requiring Shanghai and Shenzhen Stock Exchanges to specify detailed trading rules to support the tightened regulatory regime.
Implications for A-share companies
Be prudent when applying for a trading suspension
A-share companies should take a prudent approach when considering a trading suspension. In principle, stock trading suspension will likely be disapproved, except for exceptional circumstances. If an A-share company has strong reasons to apply for trading suspension, they should take measures to prevent long term suspension. The relevant stock exchange has the discretionary power to reject a trading suspension application if it considers the reasons as unjustified or inappropriate. If the maximum suspension period is exceeded, the relevant stock exchange shall, in principle, enforce compulsory resumption of trading.
In the process of negotiating and implementing significant corporate matters, an A-share company should ensure that the price-sensitive information is treated in a strictly confidential manner amongst all connected parties, intermediaries and service providers. A listed company should establish an effective internal system to manage insiders' information. A trading suspension does not discharge a listed company's confidentiality obligations. When a prolonged significant corporate matter happens, a listed company should disclose information in stages and avoid trading suspension on the ground of uncertainty.
Disclose information timely and in stages
When an A-share company applies for trading suspension pending the release of significant corporate information, the announcements, in particular the first announcement, should state clear and concrete information required by the relevant stock exchange. The content of the first announcement should include at least the nature of the significant corporate matter, subject names, party names, identities of intermediaries, suspension period and expected resumption timetable. When there is significant progress or conditions specified by the relevant stock exchange, a listed company should disclose the information timely and in stages.
In the case of material assets reorganization, CSRC specifies that the stocks of a listed company shall be suspended from trading on the date of the CSRC merger committee meeting.
CSRC specifies that, in principle, the stocks shall not be suspended during the period of bankruptcy restructuring of a listed company. Instead, the relevant stock exchange shall specify the staged information disclosure requirements and adjust the trading suspension arrangements on a case-bycase basis.
Under the Guidance, CSRC required Shanghai and Shenzhen Stock Exchanges to improve their trading rules to:
- limit the types of significant corporate matters that are eligible for trading suspension and adopt different conditions, procedures and disclosure requirements for different types of significant corporate matters;
- shorten the maximum suspension period for significant corporate matters and enforce compulsory resumption of trading if necessary;
- specify the application procedure for suspension and resumption of trading and clarify stock exchanges' discretionary power to reject such
- enhance the disclosure requirements for the suspension and resumption announcements, in particular the first announcement;
- establish mechanisms to encourage listed companies to take measures to reduce the frequency and duration of trading suspension, such as (i) devising an elimination mechanism that links the trading suspension period with component stock index; and (ii) establishing a suspension information disclosure system; and
- enforce the compulsory disclosure obligations of listed companies and report non-compliance cases to CSRC.
Actions to consider
Pending the release of the detailed trading rules from Shanghai and Shenzhen Stock Exchanges, A-share companies may want to consider (a) whether their internal compliance guidelines are in line with the principles stipulated in the Guidance and (b) whether their controlling shareholders, directors, supervisors and management team have sufficient knowledge on their compliance obligations in significant corporate matters.