Changes to information disclosure rules in China’s security market
Ning Zhu, Gang Hu, Guangzhe Xu, and Min Lin of Chance Bridge consider the impact of the revised Chinese Securities Law on voluntary and mandatory disclosure, liability for offences, and cross-border entities
Strengthened information disclosure obligations
The revised Securities Law of the People 's Republic of China passed by the 15th Session of the Standing Committee of the 13th National People's Congress on December 28 2019. It was implemented with effect from March 1 2020.
The revised Securities Law systematically revised and improved the securities offering approval system, which changed from The Approval System to The Registration System. This entailed formal and substantive changes to the information disclosure rules for securities offerings under the rules.
Before 2020, information disclosure was a section in Chapter 3 of the Securities Law, but the revised Chapter 5 of the Securities Law sets out the information disclosure rules in an entire chapter.
Under the changed rules, the securities regulatory authority shall examine whether relevant materials submitted by an applicant comply with the information disclosure requirements, and whether the applicant fulfils the information disclosure obligation, instead of making a substantive examination on application materials for a securities offering.
Definition of “Information Disclosure Obligor”
The revised Securities Law introduces the concept of “information disclosure obligors”, which includes, in addition to the securities issuers, "other information disclosure obligors stipulated by laws, administrative regulations and the securities regulatory authority of the State Council". As with securities issuers, other information disclosure obligors are required to meet information disclosure obligationspursuant to the law. Information disclosed by information disclosure obligors must be true, accurate and complete.
The revised Securities Law adopts the provisions quoted above, which means that if other laws or regulations impose information disclosure obligation on entities other than the issuers, these entities also fall under the obligation of information disclosure in the securities offering. This disclosure of information is required to comply with relevant provisions of the Securities Law on information disclosure.
However, the current "Administrative Measures on Information Disclosure by Listed Companies", "Rules for the Determination of Administrative Liabilities for Information Disclosure-related Offences" and other laws and regulations usually define the "information disclosure obligors" with enumerative and miscellaneous clauses. In this way, the scope of the information disclosure obligors is relatively broad. Whether a legal entity falls within the scope of "information disclosure obligors" usually needs to be judged on legal value.
Overall, the revised Securities Law expands the scope of disclosure obligors, making other disclosure obligors subject to disclosure obligations to the same extent as securities issuers.
Establishment of the voluntary information disclosure system
Information disclosure obligations can be mandatory or voluntary, according to whether the contents of the disclosure fall within the scope of mandatory norms of information disclosure rules. In the past, voluntary information disclosure was scattered in relevant specifications or guidelines on the continuous information disclosure by securities issuers. Under this regime, persons with the obligation of information disclosure were encouraged to volunteer certain company information, either for the investors or to enable further analysis of the content.
Article 84 of the revised Securities Law states that, in addition to the information required to be disclosed by law, information disclosure obligors may voluntarily disclose information which relates to value judgement and investors’ decision-making, but such information shall not contradict the information that is required to be disclosed by law, and shall not mislead investors.
The provisions formally establish a voluntary information disclosure system at the legal level, and frame a top-level design from the level of legal norms. They also strictly distinguish the scope of voluntary information disclosure from "disclosure pursuant to the law", making it clear that the two are in an either-or relationship.
Based on the continuous information disclosure rules in securities offering, there are several scattered regulations on the voluntary information disclosure. For example, the voluntary information disclosure items indicated in regular announcements of listed companies include:
"The relevant matters may be listed in year-by-year comparison, data tables or other ways for business operation information and financial report data, so as to enhance the understanding of investors";
"Encourage companies to disclose the key performance indicators used by the management in the operation and management activities";
"Encourage companies to separately disclose the names and sales amount to the top five clients and the names and purchases amount to the top five suppliers, as well as whether or not they are affiliated with the Listed Company";
"Encourage companies to take the initiative to disclose their efforts in fulfilling social responsibility based on the characteristics of the industry";
"Encourage companies to voluntarily disclose relevant information that is conducive to ecological protection, pollution prevention and control, and the implementation of environmental responsibilities"; and
"Companies should look ahead... quantitative analysis is encouraged... ".
Voluntary information disclosures such as these generally include a company's operation and industrial operation information, key performance indicators, information on customers and suppliers, analysis of financial indicators such as operation capability, performance of social responsibilities, environmental protection responsibilities, and so on.
At present, there are no special provisions on voluntary information disclosure. Both mandatory and voluntary information disclosure fall within the scope of information disclosure and follow the general provisions on information disclosure.
Information shall be disclosed in a truthful, accurate, and complete manner, and the perpetrator of any information disclosure-related offence shall also be subject to liability for the offence. Therefore, in practice, the more information is disclosed, the more likely an offence will occur.
Influenced by regulation in the past, the definition of voluntary information disclosure seen at the present time mainly focuses on the expansion and explanation of the content of mandatory information disclosure with the purpose of better explaining the content of mandatory information disclosure, and persuading and supervising the regulator of such content.
Voluntary information disclosure is a beneficial supplement to mandatory information disclosure, but shall not become an expansion of mandatory information disclosure, so that voluntary information disclosure truly becomes a beneficial measure to help solve the problem of information asymmetry in the investment market.
Emphasis on liability for information disclosure offences
The revised Securities Law expands the main party responsible for the compensation of damages suffered by securities investors from the securities issuers to those with disclosure obligations, making these parties responsible for the violations of the laws corresponding to those bearing the obligations.
The attribution principles for the joint and several liability for the damages suffered by the controlling shareholder or the actual controller of an issuer and the issuer has been changed from ‘fault liability’ to ‘presumption of fault’. That is, it is presumed that the controlling shareholder or the actual controller of the issuer is at fault for the information disclosure-related offence and shall be liable for damages, unless there is evidence to the contrary.
This change in attribution principles emphasises the liability of the issuer's controlling shareholders and actual controllers for the violation of laws, and also reinforces their information disclosure obligations. From one perspective, it is equivalent to the issuer's controlling shareholders and actual controllers being obliged to ensure the truthful disclosure of information by the issuer.
If the issuer's controlling shareholders and actual controllers fail to fulfil the obligation to supervise the truthful and accurate disclosure by the issuer, or fail to exhaust all means or methods to ensure the issuer performs their information disclosure obligations, there is no way to prove that they are not at fault for the losses of securities investors or the illegal disclosure by the issuer.
The change in attribution principles strengthens the disclosure and supervision obligations of the parties jointly held liable, and expands the scope of compensation, which can further protect the interests of investors.
Under the registration system, the intermediaries of securities offerings have, to some extent, become the ‘gatekeepers’ of the capital market. At the same time, the scope and boundary of intermediary institutions' responsibilities should be specified. This will be of great help for intermediary institutions to perform their inspection and disclosure obligations in accordance with the law.
In recent years, the China Securities Regulatory Commission (CSRC) and other departments have issued various practice and due diligence guidelines. The Supreme People's Court has also promoted the new Several Provisions in the trial of cases relating to civil compensation for false statements on the securities market, specifying the scope of due diligence and obligations of intermediary institutions.
The Amendment (XI) to the Criminal Law of the People's Republic of China, adopted at the 24th Session of the Standing Committee of the 13th National People's Congress on December 26 2020, includes the crime of "providing false supporting documents of asset assessment, accounting, audit, legal service or sponsorship, etc. that are related to the issuance of securities, and the circumstances are particularly serious".
The liability of intermediaries for information disclosure-related offences has been upgraded to criminal liability, and such measures further emphasise and consolidate the responsibilities of intermediaries.
Impact on cross-border entities under the new information disclosure rules
A series of information disclosure rules under the registration system have also had an impact on cross-border entities. For example, with respect to securities issuers outside of the territory of China, Article 78 of the revised Securities Law requires that "for securities which are issued and traded simultaneously in China and overseas, information disclosed overseas by the information disclosure obligors shall be disclosed simultaneously in China." This regulation emphasises the consistency of information disclosure obligations in domestic and overseas securities market and overseas securities market.
Meanwhile, if persons subject to information disclosure obligations disclose any information which is not mandatory in domestic information disclosure rules in the overseas securities market, this information shall also be disclosed in the Chinese market. This will expand the scope of information disclosure for cross-border issuers.
At the same time, certain information disclosure rules have also clarified the information disclosure obligations of offshore entities involved with domestic enterprises. For example, the CSRC and stock exchanges have imposed special requirements on the information disclosure of shareholders applying for initial public offering (IPO). In this case, information regarding shareholders who are involved in multi-nested companies shall be disclosed up to the ‘ultimate holder’ one by one.
However, for foreign shareholders, considering the difficulty in disclosing information, in practice, there are also situations where offshore funds invest in domestic enterprises, with a high degree of confidentiality and complexity. Therefore, the Examination and Approval Authority further stipulates that a foreign shareholder can be deemed the ‘ultimate holder’ if:
It can be properly confirmed that the investor behind the foreign shareholder is not a domestic entity; and
It can be fully verified that the subscription price of the shares of the issuer by the foreign shareholder is not a domestic entity, which means that such foreign shareholder can be fully exempted from the disclosure obligations to some extent.
In light of the special provisions applicable to cross-border entities, and in light of the special nature of such entities and the purposes of examination, the changes to the Securities Law provided more specific guidelines for information disclosure obligors to perform their duties and for intermediaries to perform their duty of care in a diligent and dutiful manner.