Mandatory delisting standards still need to be refined, and LED companies need to proceed with caution

Recently, the China Securities Regulatory Commission issued the "Several Opinions on Reforming, Improving and Strictly Implementing the Delisting System for Listed Companies (Draft for Comments)" (hereinafter referred to as the "Delisting Opinions"), which clearly stated that "the implementation of a compulsory delisting system for companies with major violations" was proposed. In this regard, market participants believe that this is one of the biggest highlights of this "Delisting Opinions", but subsequent implementation needs to refine the specific circumstances of "major violations" and clarify its judgment standards to reduce the flexibility of law enforcement.

Past tense of major violations

Data show that since the beginning of the year, there have been a total of 53 cases of major violations of listed companies in the two cities. Judging from the types of punishments in the cases, there were 25 cases of public punishment, 8 cases of public reprimand, 15 cases of public criticism and 5 cases of internal criticism. Among them, 13 listed companies, including Qinshang Optoelectronics, Kelun Pharmaceuticals, and *ST Xiancheng, were publicly punished by the China Securities Regulatory Commission. Their violations were mainly concentrated in the failure to disclose major contracts, litigation, external guarantees and other matters in a timely manner; they also failed to disclose related transactions and related relationships as required.

Since the establishment of my country’s capital market, major illegal companies have appeared frequently, but most of them have failed to delist in time, such as Greenland and Wanfu Biotech, which were fraudulently issued and listed, and China Textile Co., Ltd., which has disclosed false financial information for many years. Currently, these companies still remain in the A-share market.

In fact, Article 55 of my country's Securities Law clearly stipulates that if a listed company commits a major illegal act, the stock exchange may decide to suspend the listing and trading of its shares, but so far no company has been delisted as a result. "Although the Securities Law includes major illegal acts by companies as one of the conditions for listing suspension, there is no corresponding statement in the subsequent Article 56 regarding the termination of listing. This means that during the implementation of the delisting system, due to insufficient clarity and specificity in enforcement standards, some listed companies with major illegal acts cannot exit the market in a timely manner, which affects the implementation effect of the delisting system." said Wu Hong, Dean of the School of Economics and Law at East China University of Political Science and Law.

The "Delisting Opinions" this time clearly implement the mandatory delisting system for companies with major violations. If a listed company has fraudulent issuance or major information disclosure violations, and is subject to administrative penalty decisions by the China Securities Regulatory Commission in accordance with the law, or is transferred to the public security organs by the China Securities Regulatory Commission in accordance with the law for suspected crimes, the stock exchange should suspend the listing and trading of its stocks.

Guo Li, a professor at Peking University Law School, said that although the number of listed companies that have been filed for irregular information disclosure has increased in recent years, not every company has been severely punished. The introduction of this "Delisting Opinion" will serve as a warning and deterrent to major illegal activities of listed companies.

Hidden illegality needs to be clarified

Generally speaking, the "Delisting Opinions" on forced delisting of companies with major violations mainly target companies with fraudulent issuances and companies with major information disclosure violations. The former mainly exists in the issuance of new shares, and the latter is a major violation of information disclosure after the company goes public.但有业内人士表示，上市公司强制退市的重大违法情形可进一步明确。

"Due to the relatively large number of fraudulent issuance companies and companies with major information disclosure violations in the market, identification and processing are easier to operate. Currently, regulatory authorities include these two types of situations within the scope of major violations, but subsequent identification of major violations can be further refined and clarified." Wu Hong said.

In his view, for example, when other stakeholders are suspected of manipulating the company's stock price, the listed company cooperates in releasing corresponding bad or good news, or during the process of major asset reorganization, the listed company is suspected of publishing misleading statements to induce investors to buy and sell the company's stocks, etc., which can be classified as major illegal disclosures.但此类违法情形隐蔽性较强，取证难度较大。 If implemented, the corresponding supporting rules and measures will need to be further clarified.

The "Delisting Opinions" also make differentiated arrangements for the two situations of fraudulent issuance and illegal disclosure of major information. If a company suspended from listing due to illegal disclosure of major information comprehensively corrects the illegal behavior within the specified time limit, promptly replaces the relevant responsible personnel, and makes appropriate arrangements for civil liability liability, its stocks can resume listing and trading. However, for companies suspended from listing due to fraudulent issuance, unless their behavior is found not to constitute fraudulent issuance, their stocks should be terminated from listing and trading within the prescribed time limit.

Guo Li said that although regulators have implemented differentiated arrangements for listed companies' fraudulent issuances and major information disclosure violations, the market outlook should further clarify the criteria for determining fraudulent issuances and major information disclosure violations, reduce the flexibility between the two, and prevent forced delisting from being in name only.

Four situations of forced delisting

The China Securities Regulatory Commission recently issued the "Several Opinions on Reforming, Improving and Strictly Implementing the Delisting System of Listed Companies (Draft for Comment)", marking the official launch of a new round of delisting system reform. The "Delisting Opinions" covers a total of 27 delisting situations for listed companies. Among them, the forced delisting of companies with major violations includes the following 4 situations:

First, if a listed company is suspended from listing due to administrative penalties imposed by the China Securities Regulatory Commission due to false records, misleading statements or major omissions in initial public offering stock applications or disclosure documents, causing issuers that do not meet the issuance conditions to defraud issuance approval, or has a substantial impact on the pricing of new shares, the stock exchange will make a decision to terminate the listing and trading of the company's stocks within one year from the date when the China Securities Regulatory Commission makes the administrative penalty decision.

Second, if a listed company’s initial public offering application or disclosure document contains false records, misleading statements or major omissions, causing an issuer that does not meet the issuance conditions to defraud the issuance approval, or has a substantial impact on the pricing of new share issuances, the company is suspected of fraudulent issuance and is transferred to the public security organs in accordance with the law and suspended from listing. Within one year from the date of the transfer decision by the China Securities Regulatory Commission, the stock exchange makes a decision to terminate the company’s stock listing and trading.

Thirdly, a listed company is subject to administrative penalties by the China Securities Regulatory Commission due to false records, misleading statements or major omissions in information disclosure documents, and is found to have constituted a major illegal act in the administrative penalty decision and is suspended from listing. Within one year from the date of the administrative penalty decision made by the China Securities Regulatory Commission, the stock exchange makes a decision to terminate the listing and trading of the company's stocks in accordance with its stock listing rules.

Fourth, if a listed company contains false records, misleading statements or major omissions in its information disclosure documents, or is suspected of illegal disclosure or non-disclosure of important information, it will be transferred to the public security organs and suspended from listing in accordance with the law. Within one year from the date of the transfer decision made by the China Securities Regulatory Commission, the stock exchange will make a decision to terminate the company's stock listing and trading in accordance with its stock listing rules.