CHINA: SZSE Publish Q&A on Implementation Rules

Please see below questions:

Q1. What are the main backgrounds and objectives of the Implementing Rules?

The Implementing Rules are question-oriented and contain specific and pertinent provisions to address prominent problems such as shareholders’ evasion of share-reduction restrictions through “liquidation-like” share sales, shareholders’, directors’, supervisors’ and senior executives’ “precision reduction” by using their information dominance, “cliff-like” reduction of restricted IPO shares and private placement shares after the lock-up period, and directors’, supervisors’ and senior executives’ evasion of share sales restrictions by resigning before the expiration of their terms.

Q2: What is the scope of application of the Implementing Rules?

Corresponding to the provisions of the Regulations, article 2 of the Implementing Rules defines the scope of application.

Q3: Are there any special arrangement regarding share sales through block trading?

In addition to the restriction of share sales by not more than 1 percent of the total shares of a listed company during any period of 90 consecutive calendar days, shareholders governed by the Implementing Rules may not reduce shares by more than 2 percent of the total shares of the company through block trading during the same period pursuant to article 5 of the Implementing Rules. Reduction of shareholdings through block trading as set forth in the Implementing Rules will be accepted and handled manually by the SZSE,

Q4: Are there any specific requirement on the transferee in block trading?

To further prevent shareholders from evading the requirements of quantities and proportions reduced through “bridge reduction” in block trading, in addition to the aforesaid reasonable restriction on the transferor in block trades , the relevant transferee shall, in strict accordance with the Implementing Rules, not transfer the shares obtained within 6 months following the completion of share-transfer.

Q5: How should a shareholder conduct share-reduction by manual block transactions?

Similar to normal block trading, the shareholder, when a shareholder sells its shares through manual block transactions, the shareholder and the transferee shall separately file applications to respective depository brokerages.

Q6: How should a brokerage firm handle share-reduction through manual block transactions for its clients?

The Manual contains detailed provisions on how a member should handle share-reduction through block transactions for its clients.

Q7: What other duties must brokerage firms perform when handling share-reduction through block trading for shareholders of listed companies?

Brokerage firms shall perform the obligations of reminding, notifying and urging for their clients. Firstly, brokerage firms shall remind the client who reduces shares that the proposed share-reduction shall meet the regulatory requirements imposed by the CSRC and SZSE regarding share changes of listed companies and urge its client to stop trading, report and disclose information as required by relevant obligations. Secondly, brokerage firms shall remind the transferee that it shall be aware of and comply with the restrictive provisions on share transfer as set forth in the Implementation Rules.

Q8: Are there any provisions in the Implementation Rules that apply to share-reduction by shareholders through negotiated transfer?

The notice issued by the SZSE in January 2016 prescribed the minimum transfer proportion, lowest transfer price and continuing obligations in respect of negotiated transfer. Based on the existing provisions, the Implementation Rules contain supplementary provisions regarding new matters such as share-reduction by specific shareholders

Q9: How should a shareholder calculate its share-reduction proportions if it holds shares from various sources?

(1) Pre-IPO shares held by the shareholder;

(2) Private placement shares held by the shareholder; in the case that the shareholder holds shares that were released from lock-up periods at different time, priority will be given to the shares that were released earlier when calculating share-reduction proportions;

(3) Shares held by the shareholder that were obtained in any way other than collective auction.

Q11: Could you give some explanation on the restrictive provisions on share-reduction by directors, supervisors and senior executives who resign before the expiration of their terms?

In order to stem evasion of share-reduction restrictive provisions by directors, supervisors and senior executives through early departure, the Implementation Rules provide that any director, supervisor or senior executive who leaves office before the expiration of his term shall continue to abide by the restrictive provisions on share reduction within his term of office as determined when he took office as well as within the 6 months after the expiration of his term.

Q13: Are the specific shares that had been released from the lock-up period before the implementation of the Implementation Rules but have yet to be sold out governed by the Implementation Rules?

In order to unify regulatory standards, provide a clear market expectation, promote sound operation of the market and prevent complicated application of rules, the Implementation Rules are implemented as of the date of promulgation and all market players that conform to the relevant provisions of the Implementation Rules, i.e., 5 percent shareholders and controlling shareholders, shareholders holding specific shares, and the directors, supervisors and senior executives of listed companies, shall comply with share-reduction provisions in the Implementation Rules.
Therefore, specific shares that had been released from the lock-up period before the implementation of the Implementation Rules but have yet to be sold out are also subject to the share-reduction requirements set forth in the Implementation Rules.

Q14: Do the Implementation Rules have any restrictions on shareholders who are involved in illegal or non-compliant activities?

In order to strengthen market supervision and deter illegal and non-compliant activities, the Implementation Rules prohibit share-reduction by substantial shareholders, directors, supervisors and senior executives who are involved in illegal or non-compliant activities. More specifically, there are four types of prohibitions:
First, if a listed company or a substantial shareholder is under investigation for suspected illicit or criminal acts in securities and futures markets, the substantial shareholder is prohibited from reducing shares during the investigation period and within the 6 months following the issuance of criminal judgments or imposition of administrative penalties.

Second, directors, supervisors and senior executives under investigation for suspected illicit or criminal acts in securities and futures markets are prohibited from reducing shares during the aforesaid investigation period.
Third, substantial shareholders, directors, supervisors and senior executives are prohibited from reducing shares within the 3 months upon receiving public censures from the SZSE.

Fourth, if a listed company commits a major violation of law, thus triggering the delisting risk alert standards, its controlling shareholder, actual controller, directors, supervisors, senior executives, and their persons acting in concert are prohibited from selling shares during the period after the issuance of the relevant decision on administrative penalties or on handing over to the public security organ and before the delisting of the company or resumption of listing.

Q15: Regarding self-regulation, are there any measures in the Implementation Rules against non compliant share-reduction activities by shareholders?

Following the promulgation of the Implementation Rules, SZSE will combine ex-ante, in-the-event and ex-post means to intensify supervision of share-reduction activities and severely punish various non-compliant share-reduction activities.

SZSE will take the following measures against non-compliant share-reduction activities as appropriate:

First, SZSE will impose regulatory measures or disciplinary actions on relevant shareholders, directors, supervisors, or senior executives by issuing written warnings, circulating a notice of criticism, issuing public censures and imposing trading restrictions.

Second, SZSE will impose severe and speedy disciplinary actions against the non-compliant share-reduction activities that lead to unusual movement in stock prices, seriously affect the trading order of the market or impair the interests of investors.

Third, reporting suspected illicit or non-compliant share-reduction activities to the CSRC for investigation and punishment

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