Compliance of listed companies with new regulations on external security

AAn alarming number of companies – many of them listed – have become mired in debt and even pushed to the brink of bankruptcy in recent years due to the illegal provision of external security. In order to strengthen control over listed companies providing external security, the China Securities Regulatory Commission (CSRC), together with the Ministry of Public Security, the Public Assets Supervision and Administration Commission ( SASAC) and the China Banking and Insurance Regulatory Commission (CBIRC) on November 26 released the draft for comment of the Regulatory Guidelines for Listed Companies No. 8 – Regulatory Requirements for Capital Transactions and External Collateral.

External collateral for this article refers to when businesses provide collateral to other businesses with their own credit or specific assets. In other words, it excludes any constitution of guarantee for the company’s own debt.

Approval process

Yao Xiaomin
Partner
Lantai Partners

Improve the external security approval process and establish accountability. In accordance with the Circular on the Regulation of External Security Provided by Listed Companies (Circular No. 120) issued by the CSRC and the China Banking Regulatory Commission, Article 7 of the guidelines sets high standards for internal security systems. review and accountability of listed companies.

The respective powers of the general meeting of shareholders and the board of directors to review and approve external security should be expressly defined in the articles of association. In the event of non-compliant guarantee provision, companies should be able to trace the exact person responsible, in order to prevent such incidents from being traced to the source.

External securities to be examined by the general meeting of shareholders must first be examined by the board of directors. According to article 9 of the guidelines, if the external guarantee is the subject of a decision by the board of directors, it must only be examined by the board of directors; if the external security is the subject of a resolution of the general meeting of shareholders, it must first be approved by the board of directors before being submitted for consideration by the shareholders.

The article is also in line with the provisions of Circular No. 120. Listed companies must ensure that they know whether they need a “dual approval” when providing an external guarantee. In addition, the provisions make mandatory the review of certain types of external collateral by the general meeting of shareholders, to which listed companies must pay particular attention.

Voting requirements

The voting requirements of article 9 of the guidelines relating to the examination by the general meeting of shareholders of the security interests of affiliates are in line with those of article 16 of the Companies Code. However, with regard to review by the board of directors, the guidelines clearly differ from those of the Companies Code.

Article 111 of the Companies Code provides that a resolution of the board of directors can be approved by a simple majority of the directors. The guidelines require the approval of at least two-thirds of directors at the meeting – although they do not expressly require all directors to be present. It seems clear that the legislative intent of the guidelines is to make the requirements for taking security into account more stringent. The question whether this provision can regulate the procedure of the board of directors more strictly remains to be verified in practice.

Announcement and Restrictions

Compliance of Listed Companies with New External Security Regulations Wang Yumo
Wang Yumo
Associate
Lantai Partners

In addition to requiring that external guarantees provided by listed companies be made public, Article 12 of the guidelines specifies the content of such publications, including resolutions of the board of directors or general meeting, the amount total amount of external guarantees provided by the listed company and its controlled subsidiaries, and the total amount of guarantees provided by the parent company to these units.

Listed companies should make the disclosure strictly in accordance with the prescribed content, instead of making the disclosure a mere formality. For restrictions on external collateral, the guidelines do not adopt the restrictions on the objects of external collateral by listed companies and their financial indicators provided for in the Circular on the Regulation of Capital Transactions between Listed Companies and Affiliates and on certain issues concerning external security by listed companies. (Circular No. 16).

Counter security

Whether the debtor is required to provide a counter-guarantee for the external guarantee by listed companies has been the subject of much debate. The Civil Code requires that the counter-guarantee “may” rather than “must” be provided. In practice, there is no penalty for failure to provide a counter-guarantee. Compared to Circular No. 16, which requires everyone to provide a counter-guarantee, the guidelines limit the scope of persons required to provide a counter-guarantee to controlling shareholders, effective controllers and affiliates of listed companies, which which moderately lightens the obligations of listed companies. businesses.

Security by controlled subsidiaries

Compared with Article 9 of the Interpretation of the Supreme People’s Court on the Application of the Security System in the Civil Code, Article 15 of the Guidelines directly considers the guarantee provided by controlled subsidiaries of listed companies to persons outside the scope of the consolidated statements as collateral provided by the listed companies themselves. In the future, listed companies should not only disclose the relevant resolutions of their controlled subsidiaries, but also take their own effective resolutions and disclose them accordingly, and apply stricter review and announcement procedures.

Rectification and disposal

Compared to Circular No. 16, the guidelines do not impose strict requirements on the time limit for rectifying unlawful security interests or disclosing the results of rectification. They do, however, add the disposal authority of state asset supervision and administration authorities and public security authorities with respect to unlawful security interests and further strengthen the scope and strength of the disposal, reflecting the determination of legislators to dispose of illegal securities.

In summary, the guidelines reaffirm and refine the external security requirements of listed companies and include the rectification of illegal security in the list of work to be continuously promoted. As such, they testify to the willingness of the departments concerned to regulate the provision of external collateral by listed companies.

Over time, listed companies can be expected to gradually enter the benign development stage of standardized security to ensure better realization of the interests of minority shareholders and creditors.

Yao Xiaomin is Partner and Wang Yumo is Partner at Lantai Partners

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Shirlene J. Manley