As a growing number of listed companies seek to reorganize their creditor-debtor relationships through bankruptcy, pre-listing rules on the Shanghai and Shenzhen stock exchanges have become inadequate to guide bankruptcy-related operations.
On March 31, 2022, the two exchanges respectively published the Self-Regulatory Directive – Bankruptcy and Reorganization, which are very similar and will be analyzed in this article as one. The guidelines mainly set out rules on information disclosure, reorganization investment and share exchange aspects for bankrupt listed companies.
The guidelines should apply to all listed companies in bankruptcy. For companies in the pre-reorganization phase, or where the bankruptcy of any majority shareholder, principal shareholder, subsidiary or investee of the listed company threatens to materially affect the value of its securities, the guidelines should also be consulted.
DISCLOSURE OF INFORMATION
Based on the two exchanges’ listing rules for disclosure of information, the guidelines specifically list creditors, directors and reorganization investors as debtors for disclosure of information.
Three forms of information disclosure have been highlighted in the guidelines – regular report, interim report and announcement, as required by corporate bankruptcy law. In a bankruptcy led by an administrator, regular reports must be issued after written confirmation by an administrator, while interim reports must be issued by an administrator under his seal.
In a director-supervised bankruptcy, information must be disclosed in accordance with regulations by the board of directors, the supervisory board and senior management, while the directors are responsible for informing them in a timely manner of related matters and supervising Implementation.
Disclosure of information can be triggered by:
(1) judgments, decisions or announcements rendered by the courts, including those supporting the withdrawal of the plaintiff’s bankruptcy petition; the acceptance or non-acceptance of the application; the appointment of an administrator; convening of the first meeting of creditors; continue or cease operation according to the decision of the administrator before the first meeting of creditors or the decision of the creditors during the meeting; transition from the pre-reorganization to the reorganization, or a change in the bankruptcy procedure (for example, filing for bankruptcy after the failure of the reorganization); approval of the draft reorganization plan or settlement agreement after approval at the meeting of creditors; mandatory approval of the draft reorganization plan at the request of the listed company or the administrator; expiry of the monitoring period; or the completion of the reorganization plan or settlement agreement.
(2) Various bankruptcy-related claims, including when the board of directors petitions a court to enforce the bankruptcy, or a petition from another party for the bankruptcy of the company; the listed company opposes the creditors’ application for bankruptcy; the plaintiff withdraws his claim before it is accepted by a court; the listed company or the administrator requests the mandatory approval of the draft reorganization plan.
(3) Developments that materially affect interests in the shares of the listed company, including open solicitation of reorganization investors, or the determination of an investor by the director through screening and negotiation; submit the draft plan of reorganization or settlement agreement to the meeting of creditors for consideration; the vote of the meeting of creditors or of the group of capital contributors against the draft plan of reorganization or settlement agreement, and on matters of a second vote or of mandatory approval; property conversion, which becomes discloseable when the conversion plan meets the relevant standards under the listing rules; the full text of equity adjustment plans and operating plans, as well as those requiring separate disclosure; or the inability to execute the plan of reorganization or the settlement agreement.
Other than by open solicitation, listed companies, after disclosing their reason and rationale, can identify reorganization investors by asking directors to identify candidates and negotiate with them.
As regards the conversion of capital reserves into shares, the guidelines provide that the price of the shares transferred may be less than 80% of the closing price of the share on the day of the signing of the investment contract or the last day of stock Exchange. Listed companies, however, should nevertheless engage financial advisors for their professional advice.
The guidelines highlight the voting percentage and abstention requirements for voting on equity adjustments. Adjustments to contributors’ equity and other issues critical to shareholder rights must be approved by present contributors representing more than two-thirds of the voting rights. If the investor presented is a party related to the majority shareholder of the company, the effective controller or any shareholder holding more than 5% of the shares, director, supervisor or senior officer, such personnel must abstain from voting.
In the event of bankruptcy, listed companies must endeavor to avoid the suspension of trading. Requests can be made to the stock exchange if the suspension is imperative, which should in principle not last more than two trading days, extendable to five if necessary.
When the reorganization plan triggers the mandatory solicitation requirement and does not constitute a scenario within the meaning of the Takeover Regulation which exempts solicitation, the listed company must issue invitations in a timely manner.
If the reorganization investor becomes the controlling shareholder or the effective controller of the listed company after the acquisition of the shares, he must undertake not to transfer his shares within 36 months of the acquisition. The controlling shareholder or effective controller, even unchanged, must undertake not to sell their shares within 36 months of the completion of the reorganization plan. For shares obtained by reorganization, the restriction period of 36 months runs from the date of obtaining these shares.
At the end of the reorganization plan, if the listed company has no controlling shareholder or effective controller, the most important shareholder should also commit to a restriction period of 36 months. The other investors in the reorganization must undertake not to transfer their shares within 12 months of obtaining these shares.
Wang Zhenxiang is a partner at Jingtian & Gongcheng
Room 3001, Area A, China Resources Tower
No.1366 Qianjiang Road, Hangzhou 311500, China
Tel: +86 571 8992 6523
Fax: +86 571 8992 6501
Email: [email protected]