Part IV: Illegal Operation by Market Subject
Case 1: Stock Right Transfer Requires Disclosure, Don’t Be An Illegal Nominal Holder
Source: China Securities Regulatory Commission www.csrc.gov.cn
The stock is the title of ownership issued by a company. When a shareholder has bought shares with money, he becomes a shareholder of the company, and it is very simple that everybody buying shares is a shareholder. However, in the securities market, there are always some persons who have bought shares with money, but they don’t want others to know they are shareholders of a company. So the shares held on behalf of others come into being, although there are diversified reasons for this kind of shares, but the purpose is the same: the actual fund contributor is not willing to make his identity public. But the truth will come to light sooner or later, when acting as a nominal holder, it was said that “only Heaven knows, earth knows, you know and I know”, finally truth will be discovered sooner or later. Both the actual holder and nominal holder will definitely lose, which cannot be cured by any medicine.
Listed company xx ever disclosed a public notice which said that company A wanted to accept transfer of a portion of the shares of listed company xx held by shareholder B, accounting for more than 5% of the total equity capital, and the transfer procedure of the stock right would be completed after three months. In these three months, company A and company C signed the Agreement on Nominal Holding of Shares. According to this agreement, both parties agreed that company C bought the shares of listed company xx with actual investment and enjoyed the associated investment interests, this portion of shares was held by Company A on behalf of company C, company C would have 95% and company A would have 5% of the earnings generated in the period of this nominal holding after deduction of the associated costs and taxes, company C, as the actual fund contributor of these shares held by company A on behalf of company C, enjoyed the rights and interests of an actual shareholder and was entitled to acquire the associated investment earnings, and company A must exercise the shareholder’s right by abiding by the will of company C.
At this point, the nominal holding relationship was established. Later, everything went on smoothly for some time, and the nominal holding relationship was covered completely and known by nobody. After about one year later, this listed company started to pop up a series of various bull news intensively, so its share price rose steeply. In this case, company C sold some of the shares, and made investment earnings of more than RMB 300 million Yuan in less than 4 months. At this time, company A was flustered and thought that such accurate reductions were mostly because of insider transactions, and in case things came to light at some time, it might be penalized instead. So company A hurried to get rid of its liability, prosecuted and reported the case, at this time, the nominal holding relationship came to light.
What company C wanted to do was to cover the insider transaction by nominal holding of the shares, nevertheless, it never believed that there would be a day on which this transaction might be definitely divulged. Company A really did a good thing to prosecute company C, but it could hardly escape from punishment. Furthermore, through further investigation, it was found out that the board chairman of listed company xx was connected to company C, and knew the nominal holding relationship. Because company A, company C and listed company xx had not disclosed the nominal holding agreement as well as its relevant contents, China Securities Regulatory Commission imposed administrative penalties on these three companies as well as the relevant persons involved.
As it can be seen from this case, it is not easy if wanting to be invisible in the capital market. What are important in the capital market are equity, justice and openness. There is no dark area under the sunlight. A good luck will not come if wanting to make money in the capital market by finding somebody else to provide shielding. If wanting to take part in the activities in the capital market, any investor must abide by the capital game rules, disclose anything that should be disclosed and must not do anything that should not do. Regardless of the listed company or shareholder, if a thing must be disclosed according to the provisions, the subject becomes the information disclosure obligor, and shall make disclosure timely and equally, and make sure that the information is true, accurate and complete. Don’t have a fluke mind for anything. To do things frankly will make the business lasting.
This article is excerpted from “Risk Warning and Prevention for Investors” - Cases of “Protecting Investors • Know Rules, Identify Risks - Stock Right Transfer Requires Disclosure, Don’t Be An Illegal Nominal Holder” published on the official website of China Securities Regulatory Commission.