A new reporting and disclosure system was introduced which applies to all companies operating in China. The system was based on a set of regulations and rules, including the Interim Regulations on Public Disclosure of Enterprise Information, the Interim Measures for the Administration of the Directory of Enterprises with Abnormal Operations, the Interim Measures for Random Inspection of Information Publicly Disclosed by Enterprises and the Interim Provisions on the Public Disclosure of Information regarding Administrative Penalties Imposed by the Administration for Industry and Commerce (“New Rules”) taking effect as of October 1, 2014. It aims at bringing a more “market oriented” approach to regulate business activities in the corporate field and is widely reported as another steady step taken by the new government to reform and create more driving force for this constantly growing economy. For quite a long period of time, the company registration authority, namely the Administration for Industry and Commerce (“AIC”), has been sticking to the so-called “annual inspection” system under which all companies were required to submit complicated formalities including financial statements in order to pass annual inspection. This old system imposed quite some burden plus costs on companies while providing little value to parties conducting business with the company, since all submitted formalities and information are only available to the AIC and not easily available to the public. As of October 1, 2014, this old system has been replaced by a more light-weighted but more efficient system as introduced by the New Rules. Under the new system, all companies – including foreign investment companies – are only required to submit and disclose to the public an annual report via a centralized platform called “Enterprise Credit Information Public Disclosure System” (“Disclosure and Credit System”, in Chinese 全国企业信用信息公 示系统 which anyone can access at http://gsxt.saic.gov.cn/). Compared to the old system, information to be disclosed under the annual report is more focused on the good standing of the company, which may be less cumbersome but also raises new challenges. Below are some highlights of the requirements under this new system which all foreign companies having operations in China need to take note of. Regular Annual Disclosure To submit annual reports, companies must log onto the Disclosure and Credit System to complete some forms prescribed by the AIC. Most of the content under the annual reports will be made available to the public via the Disclosure and Credit System. The annual report for 2013 shall be submitted before June 30, 2015 (but companies set up after 2013 do not need to submit the annual report for 2013). Starting from 2015, the annual report for the preceding year shall be submitted between January 1 and June 30 of the NEWS ALERT NOVEMBER 2014 2 current year. Compulsory elements to be included under an annual report are outlined in the table below, which are divided into two categories, namely those to be disclosed to the public on a compulsory basis and those on a voluntary basis: Public Disclosure a Must 1) contact information 2) operational status 3) equity investment 4) capital subscribed and contributed; contribution time and method of capital contributions 5) shareholding change (for limited liability companies) 6) company website and (if applicable) name of online stores and URL link Note: items 1, 2 and 6 shall be updated as at the time of submission, while the other items shall be as per the status of the last day of a given calendar year. Public Disclosure an Option 7) number of employees 8) total assets and liabilities 9) security provided to third parties 10) total equity under balance sheet 11) turnover including that from primary business 12) gross and net profits 13) amount of taxes paid For the information for which public disclosure is not a must, a company may further choose if it wants such information to be made available to the public upon request. Real-time Disclosure According to the New Rules, as of October 1, 2014 the following information must be disclosed to the public via the Disclosure and Credit System within twenty working days from occurrence of the respective event: 1) any change to capital subscription or contribution, including amount, timing and method of contribution; changes taking place between March 1, 2014 and September 30, 2014 shall be disclosed by December 31, 2014, and changes after that period shall all be subject to the twenty-working-day disclosure NEWS ALERT NOVEMBER 2014 3 deadline 2) equity ratio change of a limited liability company 3) change of status of any administrative licenses at hand 4) pledge of intellectual property rights 5) any administrative punishment imposed 6) other information which shall be disclosed to the public according to law As can be seen from the above, these events normally will have a substantial impact on the good standing of a company and are more important for business partners in the evaluation of the creditworthiness of a company. So far, what information falls into the scope of disclosure as required by law (item 6 above) remains unclear, but such other information apparently need not be filed according to existing practice in the major big cities like Beijing, Shanghai and Guangzhou. The AIC is legally obliged to keep an eye on the occurrence of these events and shall order a disclosure if any disclosure as per the above legal requirements is omitted. Legal Consequence of Non-Compliance with Disclosure Requirements It is the obligation of the companies to ensure the accuracy and timeliness of the information disclosed to the public. Any incorrect information shall be corrected in time. This also includes any incorrectness spotted by the public, including any “whistleblowers” (e.g. a competitor or somebody from the inside who wants to cause troubles), which may be reported to the AIC, and the AIC is obliged to verify and take actions in case of any reporting in this regard. For the information publicly disclosed via an annual report, the correction shall be done by June 30 of the current year and shall also be disclosed to the public together with the disclosed incorrect information. The publicly disclosed information will be subject to scrutiny not only by anybody in the marketplace, but also by the AIC on its own initiative. AIC will conduct its verification of randomly selected targets, and according to its rules at least 3% of all companies shall be chosen for checking. The verification may take various forms such as review of written materials, on-site visits or online monitoring. In case of a site visit, the visited company will be required to present necessary documents to AIC officials who may invite witnesses and will fill out an inspection form as a record which needs to be countersigned by the legal representative (or the person in charge) or marked with the company seal. The result of verification will also be made publicly available via the Disclosure and Credit System. A remarkable development brought by the New Rules is that now a close connection is established between compliance with disclosure requirements and the creditworthiness of a company. The AIC NEWS ALERT NOVEMBER 2014 4 introduced two lists, a watch list named “List of Abnormal Operations” and a red list named “List of Serious Breaches of Law”. Companies committing any of the infringements mentioned below will first be put on the watch list: 1) failure to submit annual reports within the statutory deadline 2) failure to publish information subject to real-time disclosure requirements 3) suppression of information which shall be disclosed or disclosure of fraudulent information 4) failure to be contacted according to the contact details provided A company will further be moved into the red list if it fails to submit annual reports for three consecutive years. The inclusion into either of these lists will adversely affect the creditworthiness of the company and its senior management, e.g.: in the next three years, its legal representative (or person in charge) will be prohibited from taking up the same function in other companies companies on the lists will only have a restricted chance or no chance at all of participating in government procurement projects, tendering and bidding projects, land grant projects and the granting of incentives such as honorary awards It is reported that the Chinese government is in the process of expanding the Disclosure and Credit System to further include and share information from the other governmental authorities. This will make it easier for the public to evaluate the good standing of a company, but will also make a company more exposed and vulnerable to any non-compliance whatsoever. More importantly, potential administrative and criminal liabilities are not excluded by an inclusion in the watch list and/or red list, in particular in case of serious violations. Useful Hints Legal implications under this new system arise under two aspects. On the one hand, it is no doubt a big step forward to create a more business- friendly and transparent environment for all market participants, in particular considering the fact that the absence of a credit ranking system in the past has made it a tricky and challenging task for foreign companies to conduct a credit check on their Chinese counterparts before a transaction. On the other hand, this system creates new challenges and compliance requirements for those foreign companies which already operate in China. Though the general trend is towards greater transparency and market regulation in a way similar to that in the West, foreign companies operating in China will still need to reserve resources and take actions to adapt to the changes brought by this new NEWS ALERT NOVEMBER 2014 5 system. From a practitioner’s perspective, we would strongly recommend the following to our clients: • Get familiarized with the new requirements as soon as possible; in particular, interact with the local AIC to get their guidance since local practice to roll out this system appears to be different from location to location (which is not uncommon in China). • Get your legal counsel involved to review the internal structure and make any necessary adjustments to adapt to the new compliance requirements. • Train staff and assign a special task force and allocate resources to take care of the disclosure requirements. • Build up a system to properly document all actions and measures taken, and prepare a contingency plan for any potential unconscious breach of the New Rules. • Make good use of the transparency brought by this new system (e.g. collecting information on your competitors or business partners). Contact and additional information Dr. Michael Tan Senior Counsel, Shanghai +86 (0) 21 6247 7247 Email email@example.com Yang CUI Associate, Shanghai +86 (0) 21 6247 7247 Email firstname.lastname@example.org www.taylorwessing.com THIS PUBLICATION IS INTENDED FOR GENERAL PUBLIC GUIDANCE AND TO HIGHLIGHT ISSUES. IT IS NOT INTENDED TO APPLY TO SPECIFIC CIRCUMSTANCES OR TO CONSTITUTE LEGAL ADVICE.