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SZSE Issues Information Disclosure Guidance for Employee Stock Ownership Plan

Date: 2019-11-05

SZSE recently issued the Guidance No. 4 of Shenzhen Stock Exchange on Information Disclosure by Listed Companies – Employee Stock Ownership Plans (ESOP) (hereinafter referred to as the “Guidance”). It is the latest progress made by SZSE in comprehensively streamlining and integrating the system of self-discipline rules and consolidating the basic regulations of the capital market, and also an important measure to improve the quality of listed companies and release the vitality of market players.

 

Since the Guidance on Implementation of Employee Stock Ownership Plan Pilots by Listed Companies in June 2014, over 800 SZSE-listed companies have put forward an ESOP and over 600 have implemented it. Employee stock ownership has played a positive role in upgrading the corporate governance structure, improving the quality of listed companies and assisting in mixed ownership reform. However, new situations and new problems have emerged in the practice, requiring further standardization and improvement of the ESOP.

 

The Guidance, centering on information disclosure regulations, has, on the one hand, absorbed effective articles in the former Memorandum on Information Disclosure Business of Employee Stock Ownership Plan; and on the other hand, added or deleted some articles based on practice and development, optimized the system of rules and improved the effectiveness. In preparing the Guidance, SZSE, in accordance with the principle of “setting rules first”, sought advice from all SZSE-listed companies and fully absorbed reasonable advice from market players. Based on that, SZSE revised and improved the Guidance, including defining the sensitive period of information and the deadline to disclose drafts after prompt announcements are made, strengthening continuous information disclosure in annual reports, etc.

 

Dealing with new situations and new problems, and shoring up weaknesses

 

It’s found in regulation practices in recent years that ESOP can add leverage, but its risk disclosure is inadequate. Substantial shareholders are deeply engaged by providing stocks or funds, guaranteeing earnings and accepting matured stocks, but the concerted action relations are unclear. Moreover, repurchased public shares are used in ESOP, but current targeted regulations are limited. To deal with those new circumstances, the Guidance has strengthened the disclosure of information about source of funds, source of shares, involvement of relevant parties in employee stock ownership, and management mechanisms in stock ownership platforms, aiming to fully reveal risks and prevent rule-breaking operations.

 

Focusing on effective information, and doing subtraction in a moderate, orderly way

 

To balance the effect and cost of information disclosure, the Guidance, with investors’ demand as the orientation, is committed to improving the pertinence and effectiveness of information disclosure and alleviating the burden on listed companies. First, the Guidance has deleted the information disclosure requirements with high execution cost and low decision usefulness. For example, based on the realities that listed companies have difficulties in forecasting relevant arrangement one month in advance and that disposal plans change with the changes in the market situation, the Guidance has deleted the disclosure obligation of ESOP one month before its expiry and the content about the detailed disposal plan after the expiry of disclosure in the former Memorandum. Second, the Guidance has deleted repeated content involving substantive provisions in the former Memorandum and upper regulations, so as to focus on normalizing information disclosure. Third, the Guidance no longer requires listed companies to disclose ESOP abstract to reduce information redundancy.

 

Carrying out comprehensive integration and improving “whole-chain” information disclosure

 

To implement the execution standard of information disclosure among listed companies in a unified way, the Guidance has refined information disclosure requirements on all links. For the preparation link, the Guidance requires listed companies to release prompt announcements in accordance with the principle of free will and strengthen insider information management. For the review link, the Guidance has defined avoidance situations in board meeting and shareholders’ meeting. For the implementation link, the Guidance has laid down arrangements during the purchase period of underlying stocks, six months before the purchase is completed or the expiry, stock holding upon expiry, etc. and has distinguished applicable disclosure requirements for share changes and equity changes. For the termination link, the Guidance has required disclosure of information on all shares held in the company after the underweighting of ESOP is completed. The Guidance has also refined relevant requirements on disclosure of legal opinions and urges intermediaries to fulfill their responsibilities conscientiously.

 

Next, SZSE will continue to implement the key task of deepening the reform of the capital market on all sides assigned by the China Securities Regulatory Commission, follow the requirements of “Four Awe” (awe to the market, rule of law, profession and risks) and “One Resultant Force” (seeking support from all sectors of society), adhere to the market-oriented and rule-of-law-based principles. We will see it as the goal to improve the quality of listed companies, stick to the position as the regulator of information disclosure, promote concurrent implementation of information disclosure and governance of listed companies, upgrade fundamental policies, and optimize supply of rules. Also, we will put forth effort to building a system of rules that has clear structural layers and adapt to innovation demands, continue to enhance administration and regulation of the capital market based on rule of law, and strive to create a capital market system that matches the pilot demonstration area of socialism with Chinese characteristics.

It is the latest progress made by SZSE in comprehensively streamlining and integrating the system of self-discipline rules and consolidating the basic regulations of the capital market, and also an important measure to improve the quality of listed companies and release the vitality of market players.