Part III: Illegal Information Disclosure
Case 4: Do You Know Information Disclosure Is Also Required for Change in Equity?
Source: China Securities Regulatory Commission www.csrc.gov.cn
In the securities market, information disclosure is not only the exclusive obligation of any quoted company, an investor is also required for information disclosure. Especially in the new third board market, composition of the investors is different from that in the share-A market, the investors are mainly institutions and high net worth individual investors, quoted companies are mainly medium, small and micro enterprises, most of the quoted companies are not big in equity scale, and the stock structure is single, therefore, change in the investors’ equity may easily touch the red line requiring for disclosure of the Statement of Change in Equity. We here explain how to make information disclosure for change in equity to the investors in detail with the two cases below.
On November 23, 2016, investor A sold 3450,000 shares of quoted company G by way of agreement transfer, after this transfer, his / her shareholding ratio was reduced to 49.11% from 53.91%, and he / she disclosed the statement of change in equity on the next day. On November 25 and November 28, 2016, investor A respectively bought 1000 shares and sold 3,000,000 shares of quoted company G, accounting for 0.001% and 4.38% of the total equity of quoted company G. Are the investor A’s above behaviors illegal? Let’s analyze investor A’s three stock transaction behaviors in detail:
First reduction of shares: investor A’s shareholding ratio was reduced to 49.11% from 53.91%, corresponding to reduction of 4.8%, not reaching 5%. Many investors may have questions at this point, is it required for the investor to disclose its statement of change in equity at this time? According to the Administrative Measures for Takeover of Unlisted Public Companies (hereinafter referred to as “the Takeover Measures”), when an investor as well as his / her persons acting in concert have held 10% of the issued shares of a public company (the investors shall note that, it is different from the provisions for the listed companies, for a listed company, when an information disclosure obligor of a listed company has held or controlled 5% or more of the issued shares of the listed company, or acquired 5% or more through one transaction, or in total of the issued shares of the listed company, shall prepare the Statement of Change in Shareholder’s Equity within 3 days after occurrence of the said fact), and every time the shares held by him / her are increased or decreased by 5% of the issued shares of the public company (namely, change in the shares held by him / her reaches an integral multiple of 5% every time), he / she shall make disclosure, and shall not buy / sell the shares of this public company by way of agreement transfer again in 2 days after the disclosure has been made from occurrence of this fact. The investors shall pay close attention to this sentence, “change in the shares held by him / her reaches an integral multiple of 5% every time” means that the proportion of the shares held by the investor as well as his / her persons acting in concert after change in equity, other than the shares subject to change, to the issued shares of the quoted company shall govern. Then, it can be seen from the shares the investor as well as his / her persons acting in concert after change in equity, 49.11% is less than and touches off the red line for disclosure 50% (50% is an integral multiple of 5%), so investor A met this disclosure requirement on the next day after change in shares held, namely, November 24, 2016.
Second increase: on November 25, 2016, investor A bought 1000 shares of quoted company G again by way of agreement transfer. This transaction only accounted for 0.001% of the total equity of the quoted company, but it violated the provisions regarding the time for change in equity as stipulated in the Takeover Measures, namely, investor A should not buy shares within 2 days after the disclosure from the date of the first reduction. If we set November 24, 2016, namely, the date on which investor A disclosed the change in equity as date T, then, if investor A wanted to make change in equity, he / she shall do it on date T+3, namely, November 28 (as November 27, 2016 falls on the weekend, so it shall be extended accordingly to the next working day).
Third reduction: on November 28, 2016, this investor sold 3,000,000 shares of the quoted company by way of agreement transfer, accounting for 4.38% of the total equity of the quoted company. As it can be seen from the shares held by investor A at this time, 44.731% was below the red line for disclosure, 45% (45% is an integral multiple of 5%), so the investor shall prepare and disclose the Statement of Change in Equity within 2 days, and shall not buy / sell any share of this quoted company again within 2 days after the disclosure from the date of occurrence of this fact.
For investor A’s illegal share trading behaviors, National Equities Exchange And Quotations required investor A to present the self-disciplined supervision measures which had been promised in writing according to Article 6.1 of the Business Rules of Stock Transfer System for Nationwide Medium and Small-sized Enterprises (Trial).
Besides the above illegal circumstances, some investors were punished because the items disclosed in their statements of change in equity had problems. Now we will discuss the following case.
On May 23, 2016, the board chairman S of quoted company Z repurchased 4.189 million shares of company Z held by an investment company through the trading platform of the national stock transfer system according to the Agreement placed with this investment company. On May 24, 2016, S, namely, the information disclosure obligor, disclosed the Statement of Change in Equity, but, he / she didn’t include the relevant contents of the Agreement in this statement. Board chairman S made the repurchase by covering up the contents of this Agreement, which made this behavior confusing, might give an implication that “this company may have a good development prospect” to other investors, and stimulate their interest in investment on quoted company Z, and make their mental expectations for the share price of this company. This illegal behavior violated not only the provisions stipulated in the Detailed Rules of Stock Transfer System for Nationwide Medium and Small-sized Enterprises on Information Disclosure by Quoted Companies (Trial) that the information disclosure obligor shall disclose information truly, accurately, completely and timely, and shall not make any false record, misleading statement or major omission, but also those in the Guidelines for Contents and Formats of Information Disclosure by Unlisted Public Companies No. 5 – Statement of Change in Equity, Report of Acquisition and Report of Acquisition on Offer that the information disclosure obligor shall disclose the main contents of the document such as the agreement, administrative transfer or change, or court resolution, and so on, related to the change in equity. For the above investor’s illegal behavior, China Securities Regulatory Commission took administrative supervision measures such as issuing the letter of warning and recording in the credit archives of the securities and futures market.
The above cases also alert the investors in the new third board market to carefully study the laws and regulations for the new third board, and pay close attention to the red line for disclosure and time for suspension of buying / selling when involving change in equity. Meanwhile, we should give advices to the investors who hold the fluke mind, the sword of supervision applies not only to the quoted companies, but also to the investors, if an investor doesn’t act by following the market rules, he / she will receive punishment. In the capital market, good faith is the fundamental quality, never damage one’s reputation for a minor benefit, otherwise, the gains will not cover the losses at the end.
This article is excerpted from “Risk Warning and Prevention for Investors” - Cases of “Protecting Investors • Know Rules, Identify Risks - Do You Know Information Disclosure Is Also Required for Change in Equity?” published on the official website of China Securities Regulatory Commission.