Article 9 of the "Interpretation of the Supreme People's Court on the Application of the Guarantee System Related to the Civil Code of the People's Republic of China" (hereinafter referred to as the "Judicial Interpretation of the New Guarantee System"), which came into effect on January 1, 2021, establishes the rule of "announcement before guarantee" for external guarantees by listed companies. In the era of the Civil Code, there have been significant changes in the policies and regulations governing external guarantees provided by listed companies, as well as in the judicial thinking of the courts. Compared with previous relevant regulations, the review obligations that creditors should bear when accepting guarantees provided by listed companies have undergone significant changes. In addition to reviewing the effective resolutions of the shareholders' meeting or the board of directors of the listed company, the counterpart is also obligated to review the guarantee information publicly disclosed by the listed company. Otherwise, the external guarantee provided by the listed company may be deemed ineffective against it. This article gives a detailed introduction to the procedures and effectiveness determination of external guarantees by listed companies.

 

1、 Internal Procedures for External Guarantees by Listed Companies

 

Due to the large number of public investors involved in a listed company, compared to ordinary companies, it has the characteristics of publicity. If the controlling shareholders or actual controllers of a listed company provide external guarantees through violation of regulations by the listed company, and in disguised form encroach on the property of the listed company, it will seriously harm the interests of small and medium-sized investors and creditors of the company, and even disrupt the order of the securities market. Therefore, China's laws and regulations have special provisions for the provision of external guarantees by listed companies, which are much stricter in terms of effectiveness than those of general closed companies. The external guarantees of listed companies have special internal decision-making procedures to control the risks of external guarantees by listed companies.

 

（1） General decision-making process requirements for external guarantees of the company:

 

The resolution of the board of directors or shareholders' meeting or shareholders' meeting shall be decided in accordance with the provisions of the articles of association of the company, and the provisions on the guarantee limit in the articles of association shall be observed.

 

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Article 16 of the Company Law: Where a company invests in other enterprises or provides guarantees for others, a resolution shall be adopted by the board of directors or shareholders' meeting or shareholders' meeting in accordance with the provisions of the company's articles of association; "Where the articles of association stipulate limits on the total amount of investment or guarantee and the amount of individual investment or guarantee, they shall not exceed the prescribed limits.".

 

"Where a company provides guarantees to its shareholders or actual controllers, a resolution must be passed by the shareholders' meeting or shareholders' general meeting.".

 

The shareholders specified in the preceding paragraph or the shareholders controlled by the actual controller specified in the preceding paragraph shall not participate in the voting on the matters specified in the preceding paragraph. The vote shall be passed by more than half of the voting rights held by other shareholders present at the meeting.

 

（2） Special decision-making procedures for external guarantees of listed companies:

 

The articles of association of a listed company should specify the decision-making body for the company's external guarantees. In addition to the five types of external guarantees explicitly listed in the Company Law and the Notice on Regulating the External Guarantees of Listed Companies, which must be reviewed and approved by the shareholders' meeting, the external guarantees of listed companies can be reviewed and approved by the board of directors or the shareholders' meeting according to the articles of association; At the same time, external guarantees that should be approved by the shareholders' meeting of a listed company must be reviewed and approved by the board of directors before being submitted to the shareholders' meeting for approval.

 

In addition, when the shareholders' meeting is considering a guarantee proposal for shareholders, actual controllers, and related parties, the shareholder or shareholders controlled by the actual controller shall not participate in the voting, which shall be passed by more than half of the voting rights held by other shareholders attending the shareholders' meeting; External guarantees that should be approved by the board of directors must be reviewed and approved by more than two-thirds of the directors present at the board of directors, and a resolution must be made.

 

Finally, when providing external guarantees, a listed company must require the other party to provide counter guarantees, and the provider of counter guarantees should have actual bearing capacity.

 

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1. Article 121 of the Company Law: If a listed company purchases or sells significant assets or guarantees an amount exceeding 30% of the total assets of the company within one year, a resolution shall be made by the shareholders' meeting and approved by more than two-thirds of the voting rights held by the shareholders attending the meeting.

 

2. Article 2 of the "Notice on Several Issues Concerning Regulating Capital Transactions between Listed Companies and Related Parties and External Guarantees by Listed Companies" (revised in 2017): Strictly Control the External Guarantee Risk of Listed Companies

 

All directors of a listed company should prudently treat and strictly control the debt risks arising from external guarantees, and bear joint and several liability for losses arising from illegal or improper external guarantees in accordance with the law. Controlling shareholders and other related parties shall not force listed companies to provide guarantees to others.

 

A listed company's external guarantee shall comply with the following provisions:

 

（1） A listed company shall not provide guarantees to its controlling shareholders, other related parties, any unincorporated entity or individual holding less than 50% of the shares of the company.

 

（2） The total amount of external guarantees provided by a listed company shall not exceed 50% of the net assets in the consolidated accounting statements of the latest accounting year.

 

（3） The Articles of Association of a listed company shall stipulate the approval procedures for external guarantees and the credit standards of the guaranteed objects. External guarantees shall be signed and agreed by more than two-thirds of all members of the board of directors or approved by the shareholders' meeting; It is not allowed to directly or indirectly provide debt guarantee for the guaranteed object with an asset liability ratio exceeding 70%.

 

（4） A listed company's external guarantee must require the other party to provide counter guarantee, and the counter guarantee provider should have actual bearing capacity.

 

（5） A listed company must strictly comply with the relevant provisions of the Listing Rules and the Articles of Association, conscientiously fulfill its obligation to disclose information on external guarantees, and must truthfully provide all external guarantees of the company to certified public accountants in accordance with the regulations.

 

（6） The independent directors of a listed company shall, in their annual reports, provide a special explanation of the cumulative and current external guarantees of the listed company, as well as the implementation of the above provisions, and express independent opinions.

 

3. Article 1 of the Notice on Regulating the External Guarantee Behavior of Listed Companies (ZJF [2005] No. 120 of China Securities Regulatory Commission and China Banking Regulatory Commission) regulates the external guarantee behavior of listed companies and strictly controls the external guarantee risks of listed companies

 

（1） A listed company's external guarantee must be reviewed by the board of directors or shareholders' meeting.

 

（2） The Articles of Association of a listed company should clarify the authority of the shareholders' meeting and the board of directors to approve external guarantees, as well as the accountability system for violating the approval authority and review procedures.

 

（3） External guarantees that should be approved by the shareholders' meeting must be reviewed and approved by the board of directors before being submitted to the shareholders' meeting for approval. External guarantees that must be approved by the shareholders' meeting include, but are not limited to, the following situations:

 

Any guarantee provided after the total amount of external guarantees provided by the listed company and its controlling subsidiaries exceeds 50% of the latest audited net assets;

 

2. Guarantees provided to guarantee objects with an asset liability ratio exceeding 70%;

 

3. Guarantees with a single guarantee amount exceeding 10% of the latest audited net assets;

 

4. Guarantees provided to shareholders, actual controllers, and their related parties.

 

When the General Meeting of Shareholders reviews the guarantee proposal provided for shareholders, actual controllers, and their related parties, the shareholder or shareholders controlled by the actual controller shall not participate in the voting, which shall be passed by more than half of the voting rights held by other shareholders attending the General Meeting of Shareholders.

 

（4） External guarantees that should be approved by the board of directors must be reviewed and approved by more than two-thirds of the directors present at the board of directors, and a resolution must be made.

 

（5） The external guarantees approved by the board of directors or shareholders' meeting of a listed company must be promptly disclosed in the information disclosure newspapers designated by the CSRC. The contents of the disclosure include the resolutions of the board of directors or shareholders' meeting, the total amount of external guarantees provided by the listed company and its controlling subsidiaries as of the information disclosure date, and the total amount of guarantees provided by the listed company to its controlling subsidiaries.

 

（6） When handling loan guarantee business, a listed company shall submit materials such as the Articles of Association, original resolutions of the board of directors or shareholders' meeting on the guarantee matters, and designated newspapers and periodicals that publish information on the guarantee matters to banking financial institutions.

 

（7） The external guarantees provided by the controlling subsidiaries of a listed company shall be implemented in accordance with the above provisions. The controlling subsidiary of a listed company shall promptly notify the listed company to fulfill its relevant information disclosure obligations after the resolution is made by its board of directors or shareholders' meeting.

 

2、 External Procedures for External Guarantees by Listed Companies

 

If a listed company provides external guarantees, it shall promptly disclose them in the information disclosure newspapers designated by the China Securities Regulatory Commission after the internal resolution, including the resolutions of the board of directors or shareholders' meeting, the total amount of external guarantees provided by the listed company and its controlling subsidiaries as of the information disclosure date, and the total amount of guarantees provided by the listed company to its controlling subsidiaries. In addition, when handling loan guarantee business, a listed company should submit materials such as the Articles of Association, the original resolution of the board of directors or shareholders' meeting on the guarantee matter, and the designated newspapers and periodicals that publish information on the guarantee matter to the banking financial institution.

 

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1. Article 80 of the Securities Law:

 

"When a major event occurs that may have a significant impact on the stock trading prices of listed companies or companies whose stocks are traded on other national securities trading venues approved by the State Council, and investors have not yet become aware of it, the company shall immediately submit an interim report on the major event to the securities regulatory authority under the State Council and the securities exchange, and make a public announcement, stating the cause of the event," Current status and possible legal consequences.

 

The major events mentioned in the preceding paragraph include:... (3) The company enters into important contracts, provides significant guarantees, or engages in related party transactions, which may have a significant impact on the company's assets, liabilities, rights, and operating results

 

2. Article 81 of the Securities Law: When a major event occurs that may have a significant impact on the trading price of listed company bonds, and investors are not yet aware of it, the company shall immediately submit an interim report on the major event to the securities regulatory authority under the State Council and the stock exchange, and make a public announcement, explaining the cause of the event, its current status, and possible legal consequences.

 

The major events mentioned in the preceding paragraph include:

 

（5） The company's new borrowings or external guarantees exceed 20% of its net assets at the end of the previous year

 

3. Article 2 (5) of the "Notice on Several Issues Concerning Regulating Financial Transactions between Listed Companies and Related Parties and External Guarantees by Listed Companies" (revised in 2017): Listed companies must strictly comply with the relevant provisions of the "Listing Rules" and the "Articles of Association", conscientiously perform their obligation to disclose information on external guarantees, and must truthfully provide all external guarantees of the company to certified public accountants in accordance with the regulations.

 

3、 The Effectiveness and Legal Consequences of External Guarantees by Listed Companies

 

A listed company's external guarantee requires not only a resolution by the board of directors or shareholders' meeting in accordance with Article 16 of the Company Law, but also a public disclosure of the content of the resolution. If the creditor signs a guarantee contract with the listed company based on the disclosed information, the guarantee is valid, and the listed company assumes the guarantee liability. "However, if the creditor does not sign a guarantee contract based on the publicly disclosed external guarantee information of the listed company, the guarantee contract shall not have any effect on the listed company, and the company shall neither bear the guarantee liability nor bear any other liability for compensation.".

 

Liu Guixiang, a deputy ministerial full-time member of the Judicial Committee of the Supreme People's Court, pointed out in response to reporters' questions on the "Interpretation of the Guarantee System" that in order to solve the problem of listed companies' ultra vires representatives disrupting market order and infringing the interests of small and medium-sized investors, and fully implement the provisions of the law on information disclosure of listed companies, the "Interpretation of the Guarantee System" has special provisions for listed companies to provide guarantees to the outside world. From this, it can be seen that if a listed company provides external guarantees, the determination of their effectiveness is much stricter than that of ordinary closed companies: for example, when the guarantee contract does not have any effect on the company, ordinary companies do not bear the guarantee liability, but they must bear a certain amount of compensation liability. The listed company does not assume any responsibility in the event that the guarantee contract has no effect on it.

 

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1. Article 9 of the Judicial Interpretation of the New Guarantee System:

 

"If a counterpart enters into a guarantee contract with a listed company based on information publicly disclosed by the listed company regarding the guarantee matters that have been approved by the board of directors or shareholders' meeting, and the counterpart claims that the guarantee contract is effective for the listed company, and the listed company bears the guarantee liability, the people's court shall support it.".

 

"If the counterpart fails to enter into a guarantee contract with a listed company based on the publicly disclosed information on the guarantee matters that have been approved by the board of directors or shareholders' meeting, and the listed company claims that the guarantee contract is not effective against it, and that it does not bear the guarantee liability or compensation liability, the people's court shall support it.".

 

The provisions of the preceding two paragraphs shall apply to guarantee contracts concluded between the counterpart and a controlling subsidiary of a listed company that has been publicly disclosed, or between the counterpart and a company whose shares are traded on other national securities exchanges approved by the State Council.

 

2. "Minutes of the National Conference on Civil and Commercial Trial Work of Courts" ("Nine People's Minutes")

 

Article 22 [Guarantee Provided by a Listed Company to Others] A guarantee contract entered into by a creditor based on information publicly disclosed by a listed company regarding guarantee matters that have been approved by a resolution of the board of directors or shareholders' meeting shall be recognized as valid by the people's court.

 

4、 In the era of civil code, the countermeasures that creditors should adopt when accepting guarantees from listed companies

 

After the "Nine People's Minutes" and "Judicial Interpretation of the New Guarantee System" come into effect and are implemented, investors or managers who are creditors should more strictly perform their duty of prudent review. Emphasis should be placed on whether the listed company providing the guarantee or its disclosed controlling subsidiary has issued a guarantee resolution announcement, and has passed resolutions of the shareholders' meeting and the board of directors. Otherwise, there may be a risk that even if a guarantee contract is signed, the listed company cannot be required to bear the guarantee liability and compensation liability. To this end, creditors should be reminded to conduct the following prudent review when accepting guarantees from listed companies.

 

（1） "The Civil Code and the Judicial Interpretation of the New Guarantee System impose stricter requirements on the review system for creditors to accept guarantees provided by listed companies. Therefore, after January 1, 2021, when a debtor requests a listed company to provide guarantees for its debts, creditors should exercise caution and make loans to the debtor only after the listed company as the guarantor has disclosed information.", And regard the disclosure of relevant information by the listed company as a necessary condition for the completion of the guarantee matters.

 

（2） Paragraph 3 of Article 9 of the Judicial Interpretation of the New Guarantee System expands the scope of application for external guarantees by listed companies. When reviewing the identity of a guarantor, even if the guarantor itself is not a listed company, creditors need to comprehensively search whether the guarantor is a controlling subsidiary of a listed company. If the answer is yes, the creditor should urge the parent company of the guarantor, That is, the listed company itself conducts complete information disclosure to avoid disputes over the effectiveness of the guarantee in the future.

 

（3） In addition to reviewing the expected announcement of the guarantee amount, creditors should also carefully review the continuous disclosure announcement made by the guarantor on the guarantee matters, and require the listed company to announce the guarantee matters one by one to avoid the risk that the debt has exceeded the guarantee amount of the listed company.

 

Conclusion:

 

The "Judicial Interpretation of the New Guarantee System" seems to increase the obligation of creditors receiving guarantees from listed companies to exercise due diligence, but in essence, it reflects the judicial tendency of the Supreme Court to focus on protecting small and medium-sized investors in the event of violation of guarantees by listed companies. Once a listed company makes a public announcement, it will be subject to supervision by relevant investors throughout the society, making it almost impossible for it to make effective decisions without making effective decisions, Misrepresent that it has made a decision. Therefore, in the long run, this regulation also forces listed companies to conduct external guarantees in accordance with legal and effective procedures, and will effectively guide creditors to actively urge listed companies to comply with the resolution and disclosure procedures according to law. This is a positive signal for both the capital market and small and medium-sized investors.

 

(This article is translated by software translator for reference only.)