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China – The Brand New Enterprise Information Public Disclosure System: More Transparency or Less?

22 September, 2014

 

 

After circulating a draft regulation for public consultation this April, China’s State Council has finally published the Interim Regulations on the Public Disclosure of Enterprise Information (企 业 信 息 公 示 暂 行 条 例 , “Enterprise Information Disclosure Regulation“) on 7 August 2014 in its final form. It will come into effect on 1 October 2014.


Legislative Background


The purpose of the Enterprise Information Disclosure Regulation is three-fold.
Based on the Q&A session between the Chinese government authorities and the media, the Enterprise Information Disclosure Regulation was promulgated to support reforms to the company registration system in China (which reforms were announced by Premier Li Keqiang in late October 2013 and the Minister of the Administration of Industry and Commerce, Mr Zhang Mao, in November 2013). Such reforms include the establishment of an annual reporting system to replace the annual inspection system that involved laborious submissions to various government departments. The enterprise’s audited financial statements were among the documents required to be submitted.


The Enterprise Information Disclosure Regulation also reinforces the Chinese government’s development of a new style of governmental regulation based on “relaxed entry requirements, strict supervision” ( 宽 进 严 管 )”, whereby enterprise information will be monitored through a new public disclosure system (“New Public Disclosure System“). Key examples of “strict supervision” through the new disclosure requirements are: (i) companies will be subject to random audits by the Administrations of Industry and Commerce (“AICs”) and non-compliant companies will be placed on a “blacklist” on the New Public Disclosure System which the public can see; and (ii) companies on the “blacklist” may be subject to measures imposed by various government authorities during the processes of government procurements, invitation to bid or tendering for projects, granting state-owned land, awarding honorary titles and so forth; and (iii) the public will be able to supervise the disclosure of enterprise information by making a report of fraudulent information.


Lastly, the Enterprise Information Disclosure Regulation is a milestone in the establishment of a national social credit system. For the first time, the public will be able to access important enterprise information related to the creditworthiness of an enterprise through the New Public Disclosure System such as registration information relating to chattel mortgages and equity pledges, and information relating to administrative penalties imposed by the AICs. We explain below what types of additional information will be available under the new system and what will no longer be accessible by the public.


“Enterprise Information” And Carve Outs


Enterprise information, as defined under the Enterprise Information Disclosure Regulation, is information that is generated by an enterprise during the course of its production and operational activities, and information generated by the government authorities when performing their functions and duties which can reflect an enterprise’s circumstances (“Enterprise Information“).


Although Enterprise Information must generally be disclosed, certain exceptions apply: (i) if Enterprise Information relates to State secrets, national security or public interest, for which the approval from the competent authorities shall be obtained in advance; or (ii) if it concerns the enterprise’s trade secrets or personal privacy matters, a department of a local People’s Government at the county level or above proposing the disclosure of such information must obtain approval from the competent authority at a higher level prior to the disclosure of such information. Such exceptions are not surprising, given that state secrets, trade secrets and personal information have historically been protected and have often been the classic pitfalls for many seeking to obtain data within China.


The AICs, government authorities other than the AICs (“Other Government Authorities“) and the enterprises themselves bear the obligation to disclose Enterprise Information. Each is discussed in turn below.


Enterprise Information To Be Disclosed By The AICs


The AICs, through the performance of their functions and duties, shall make public the following enterprise information on the New Public Disclosure System within 20 business days from the generation of such information:


1. registration and record-filing information;
2. registration information relating to chattel mortgages;
3. registration information relating to equity pledges;
4. information relating to administrative penalties (will be disclosed to the public for a period of five years); and
5. other information required to be made public pursuant to law.

Enterprise Information To Be Disclosed By Other Government Authorities


Enterprise Information that shall be publicly disclosed by the Other Government Authorities generally includes:


1. information about the granting, modification or extension of administrative permits;
2. information about administrative penalties; and
3. other information required to be made public pursuant to law.


However, Other Government Authorities are given an option to disclose the above Enterprise Information through the New Public Disclosure System, or through other systems. So far we have not seen any Other Government Authorities having disclosed Enterprise Information through the New Public Disclosure System and we question whether such discretion given to the Other Government Authorities will simply mean a delay in performing their disclosure obligations and to disclose once they have made a decision on which system to publish the information. If the disclosure of Enterprise Information is made by Other Government Authorities through other systems, the relevant government authority and the AICs are required to interconnect and share such Enterprise Information but it remains to be seen how and when such interconnection and sharing of Enterprise Information will be achieved.


Enterprise Information To Be Disclosed By Enterprises Themselves


The Enterprise Information Disclosure Regulation requires enterprises to disclose relevant Enterprise Information through the New Public Disclosure System under two circumstances:


1. at the submission of its annual report (see below list of 7 items) for the previous year to the competent AIC within the period between January 1 and June 30 each year; and
2. certain other Enterprise Information (see below list of 6 items) within 20 business days from the generation of such information.
The Enterprise Information that shall be included in the annual report includes:
1. mailing address, postal code, contact numbers, email addresses and other information;
2. information relating to the existence of the enterprise: the commencement of operations, suspension, liquidation and the like;
3. information relating to the investment in and establishment of other enterprises, and the acquisition of equity interests;
4. in the case of limited liability companies or joint stock companies, the subscribed capital contributions and paid-in capital contributions by shareholders or promoters, capital contribution schedule and method of contribution and other information;
5. information on changes in equity interests, such as equity transfers among shareholders in the case of limited liability companies;
6. the enterprise’s website or name of online store, website address and other information relating to online operations; and
7. number of employees, total assets, total liabilities, guarantees provided to outside parties, total shareholders’ equity, total operating revenue, revenue generated from the enterprise’s principal business, gross profit, net profit and total tax payable.


While it is mandatory to disclose the first six items listed above, the enterprise may elect whether to make information under item 7 above public. Note that citizens, legal persons or other organizations may request information which the enterprise has not made public, albeit subject to the consent of the enterprise.

 

In addition to the annual report submission requirement, the following Enterprise Information shall also be disclosed within 20 business days of its generation:


1. the subscribed capital contributions and paid-in capital contributions by shareholders (in the case of limited liability companies) or promoters (in the case of joint stock companies), capital contribution schedule and method of contribution and other information;
2. information on changes in equity interests, such as equity transfers among shareholders in the case of limited liability companies;
3. information relating to administrative permits obtained and any modifications or extensions thereof;
4. intellectual property pledge registration information;
5. information on administrative penalties received; and
6. other information required to be made public pursuant to law.


If the AIC discovers that any enterprise fails to perform its public disclosure obligations discussed in the preceding paragraphs, it shall order such enterprise to perform its obligations within a specified time limit, failure of which the enterprise shall be recorded in the List of Irregular Businesses (see section IV below) and if the circumstances are serious, certain penalties may follow, although there is no explicit specification of what type of penalties would apply.


The Enterprise Information Disclosure Regulation is silent on whether enterprises shall submit Enterprise Information to the local AICs for such information to be disclosed through the New Public Disclosure System or whether the enterprises will be able to upload information directly onto the New Public Disclosure System. It appears from our review of the national New Public Disclosure System (as further discussed below) that such uploading cannot be done by the enterprises themselves. However, some local-level disclosure systems such as Beijing’s allow the enterprises themselves to upload.


Launching The New Public Disclosure System


The New Public Disclosure System at the national level was launched around 1 March 2014 by the State AIC. It is an online enquiry system where the public can access a centralized website (http://gsxt.saic.gov.cn) to obtain Enterprise Information uploaded by government authorities. Searches can be made by selecting the locality where the enterprise is registered and typing in the name of the enterprise. Currently it appears that only the State AIC and the local AICs have uploaded Enterprise Information over the national New Public Disclosure System. Other Government Authorities have not. The New Public Disclosure System at the local level will need to be established by each local AIC. Beijing was the first to set up such a local online system; a dozen provinces and municipalities directly under the central government have followed suit.


Random Audit Scheme


The Enterprise Information Disclosure Regulation also provides that the State AIC and the AICs at the level of provincial, autonomous region or municipality directly under the central government shall organize and carry out random audits and review the information disclosed by enterprises. To further implement the random audits, the State AIC promulgated the Interim Measures on Random Audit of Disclosed Enterprise Information (企业 公示信息抽查暂行办法, “Random Audit Measures“), which will also become effective on October 1, 2014, setting out detailed procedures of such scheme. The number of randomly selected enterprises shall include at least 3% of the total enterprises within the relevant jurisdiction.


A random audit shall be conducted by the AIC every year after the annual report disclosure period. AICs’ random audit on disclosed Enterprise Information may take the form of a written review, on-site inspection, online monitoring and so forth. Enterprises may be requested to provide its accounting books and accounts, audited reports, administrative permits, decisions of administrative penalties, evidence of the right to use the premises and so forth. Apart from random audits, the AIC has the authority to audit an enterprise that it suspects has reported false information.


If an enterprise is found as not having fulfilled its obligation to disclose its Enterprise Information truthfully and accurately, the relevant AIC will put it on the list of irregular businesses. 


List Of Irregular Businesses And The Blacklist


List Of Irregular Businesses


The Enterprise Information Disclosure Regulation provides that an enterprise failing to fulfil its relevant disclosure obligations thereunder shall be put on the list of irregular businesses by AICs at the county level or higher (“List of Irregular Businesses“). The State AIC further promulgated the Interim Measures on the Administration of Irregular Businesses List which will also become effective on October 1, 2014 (企业经营异 常 名 录 管 理 暂 行 办 法 , “Irregular Business List Measures“), setting out further details on regulating such list.


Based on these two pieces of legislation, enterprises to be placed on the List of Irregular Businesses are those which:


1. fail to disclose its annual report within the required period;
2. fail to disclose other required information within the extended period as instructed by the AICs;
3. disclose information which conceals the truth or provide false information; or
4. cannot be reached via its registered domicile or business premises.


With respect to item (4), the AIC appears to be targeting those companies which do not operate out of their registered address. In certain places such as the Shanghai Free Trade Zone, “phantom” offices which can only be used to register the address of a company but cannot actually be used by the company itself abound. It will be interesting to see whether the AICs will be monitoring such phantom offices and placing companies with phantom offices on the List of Irregular Businesses.


An enterprise which has already been put on the List of Irregular Businesses can, within 3 years from the date of such listing, apply to have its name removed from the list if it has rectified its breach of the disclosure obligations. So there is an opportunity of redemption for businesses that change course and become compliant.


The Blacklist


If an enterprise has not rectified its breach of the disclosure obligations for three consecutive years, it will be put on the list of seriously non-compliant enterprises (“Blacklist“) and disclosed to the public via the New Public Disclosure System.
The legal representative or person in charge of an enterprise that has been put on the Blacklist must not serve as the legal representative or person in charge of another enterprise for a period of three years. If an enterprise which has already been put on the Blacklist has continuously fulfilled its disclosure obligations within 5 years from being listed, it will be removed from the Blacklist. Again, there is an opportunity of redemption if placed on this more serious Blacklist although the track record of compliant conduct is considerably longer.


Sanctions For Being On The List Of Irregular Businesses Or The Blacklist


The Enterprise Information Disclosure Regulation provides that the local People’s governments at the county level or higher and the relevant agencies thereof shall establish a sound credit restraint mechanism where an enterprise on the List of Irregular Businesses or the Blacklist shall be restricted or banned from participating in government procurement programs, bidding or tendering for projects, state-owned land use rights grants, awards of honorary titles and so forth. It remains to be seen whether such credit restraint mechanisms will be built and used by the local government authorities.


Public Supervision of False Enterprise Information


The Enterprise Information Disclosure Regulation further provides that a government authority or an enterprise, upon discovering any inaccuracies in the information already made public, shall make corrections in a timely manner. Also, corrections to an enterprise’s annual report must be completed prior to June 30 of each year.


For the first time, the general public (citizens, legal persons or other organizations) is given an opportunity to participate in the supervision of the Enterprise Information disclosed through the New Public Disclosure System. The public may report any inaccurate or false Enterprise Information to the AIC, who shall within 20 business days of receipt of the report investigate, take appropriate actions and notify the informant in writing of the results of such actions. Counterparties to transactions and competitors are among those who would have a real interest in monitoring the truthfulness of the disclosed Enterprise Information.


More Transparency In China?


Depending on the level of government department support and cooperation, the disclosure requirements under the Enterprise Information Disclosure Regulation have the potential to bring about profound changes to the level of transparency of information relation to companies operating in China. At a minimum, registration information relating to chattel mortgages and equity pledges, and information relating to administrative penalties imposed by the AICs will be available to the public. It is worth noting, however, financial statements will no longer be accessible from the AICs – not just because they are no longer releasing the information, but simply because they are not a part of the annual reporting requirements and will soon be relics of the old annual inspection system. Despite the efforts to create a New Public Disclosure System, one has to wonder whether the parallel transition from the annual inspection system to an annual reporting system will mean greater access to information.

 

Hogan Lovells

 

For further information, please contact:

 

Andrew McGinty, Partner, Hogan Lovells

andrew.mcginty@hoganlovells.com

 

Jun Wei, Partner, Hogan Lovells

jun.wei@hoganlovells.com

 

Philip Cheng, Partner, Hogan Lovells

philip.cheng@hoganlovells.com

 

Sherry Y. Gong, Hogan Lovells

yingzi.gong@hoganlovells.com
 
Maggie Shen, Hogan Lovells
maggie.shen@hoganlovells.com
 

Hogan Lovells Corporate/M&A Practice Profile in China

 

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