The Shanghai Stock Exchange (SSE) published the "SSE Implementation Guide to Connected Transactions of Listed Companies" today for further standardization of listed companies' connected transactions. Based on a collection of provisions on connected transactions in existing rules, the Guide details the requirements for decision-making and disclosure processes of listed companies' connected transactions with a view to a more comprehensive supervision in the backdrop of a partially looser restriction. Concerning the significant connected transactions of listed companies' assets purchases at a high premium (of over 100%) from related parties, the Guide spells out stricter requirements for disclosure and decision-making processes.
Generally speaking, the Guide is featured by four characteristics. First of all, it is a collection of provisions on connected transactions stipulated in existing rules. At present, the connected transactions disclosed in listed companies' special announcements are subject to the "SSE Stock Listing Rules", while those disclosed in non-financial and financial parts of periodic reports are pursuant to the "Rules No. 2 on Content and Format of Information Disclosure by Companies Publicly Issuing Securities -- Content and Format of Annual Reports" and the "Accounting Standard for Business Enterprises No. 36 -- Related Party Disclosure", respectively. By gathering the above stipulations related to connected transactions, the Guide provides listed companies with "one-stop" guidance to fulfillment of decision-making process and disclosure obligation for connected transactions.
In the second place, it details processes. Based on a series of existing rules, the Guide elaborates on the disclosure and decision-making processes. Take the disclosure of pricing in listed companies' related transactions for example. The Guide suggests various ways of pricing by using, for reference, tax authority's relevant stipulations on pricing in connected transactions. Furthermore, it nails down the online filing system of information of listed companies' related parties required by the listing rules, and secures, both institutionally and technically, the accountability and traceability in supervision and its desirable implementation with the regular update requirement.
Thirdly, it lifts restrictions a little bit. To conform to the trend of regulatory rules convergence, the Guide, learning from relevant stipulations on connected transactions in the listing rules of the Stock Exchange of Hong Kong Ltd. (SEHK), clarifies the conditions for exemption in connected transactions with an aim to a lower supervision cost. To be specific, under the following four conditions, companies can apply to the bourse for exempting from discussion and disclosure of the transactions in a way that the connected transactions are required. First, the pricing in the daily connected transaction is pursuant to the state regulations. Second, a natural person holds the position of independent director at the listed company and other legal entity and organization concurrently. Third, the interest rate of the financial assistance provided by related party for the listed company is not higher than the benchmark interest rate of loan stipulated by the People's Bank of China and the listed company provides no mortgage or guarantee for the assistance. Fourth, the transaction involves a state secret, or a business secret which is recognized by the bourse and whose disclosure would severely jeopardize the listed company's interests.
Finally, it indicates a tougher supervision. Based on summarization of lessens learnt from practical supervision, the Guide regularizes the experience and expects to perfect the existing rules and strengthen the regulatory effectiveness. Specifically, regarding the significant connected transactions of listed companies' assets purchase at a high premium (of over 100%) from related parties, the Guide, referring to relevant regulations on assets reorganization, tightens the requirements for disclosure and decision-making processes, including provision of online voting and other conveniences for holders of floating shares; provision of profit prediction report on target assets in connected transaction; disclosure of the discrepancy between the actual profit and the predicted one as well as the special audit opinion from the accountant and establishment with related party of the clause of compensation for performance, if the assets a listed company intends to acquire are appraised and priced with the discounted cash flow technique; and explicit comment at the shareholders' meeting by connected transaction control committee or audit committee.
Besides, it fills the blind spots in regulatory rules by defining the scope of related parties and the types of connected transactions. In terms of the scope of related parties, with an eye on the phenomenon that the major business of some listed company is undertaken by its holding subsidiary, the Guide, learning from relevant stipulations in the SEHK listing rules, includes the shareholders holding over 10% equity of the holding subsidiary which has an importance influence on the listed company as the related parties. As for the types of connected transactions, some listed companies transfer, in a disguise form, improper benefits to their related parties through such transactions as provision of financial assistance or guarantee for the company, in which it and its related party jointly invest, in a proportion higher than its shareholding or investment one, or abjuration of the right of capital increase according to shareholding proportion or the preemptive right when the company, in which it and its related party jointly invest, increases the capital. The Guide explicitly lists the above transactions as related transactions.
It is also said in the Guide that the duties of control and daily management of listed companies' connected transactions shall be assumed by the audit committee or the connected transaction control committee under the directorate, which shall be entitled to review and comment on the daily management of information about related parties and the significant connected transactions.
The introduction of the Guide, a lighthouse for disclosure and decision-making processes in the standardization of listed companies' connected transactions, benefits transparency in connected transactions to some extent, and curbs and prevents the improper ones, thus improving listed companies' corporate governance and quality, according to industry insiders.