Reproduced with permission from World Securities Law Report, null, 06/12/2015. Copyright 姝 2015 by The Bureau
of National Affairs, Inc. (800-372-1033) http://www.bna.com
VOLUME 21, NUMBER 6 >>> JUNE 2015
China’s New Corporate Disclosure Requirements:
Potential U.S. and U.K. Anti-Corruption
Compliance Implications
By Amy L. Sommers, Cecillia Dai and Aqua Huang, of
K&L Gates LLP, Shanghai.
In 2014, China adopted regulations intended to update and streamline company periodic reporting obligations. The regulations include a new obligation for
compulsory interim disclosure of penalties imposed by
PRC regulators that has implications for companies’
wider disclosure and compliance regimes.
The State Council of the People’s Republic of China
promulgated the Interim Regulation on the Public Disclosure of Enterprise Information (Interim Regulation) in August 2014. The Interim Regulation, together with a series of implementing rules (New
Rules)1 issued by the State Administration for Industry and Commerce (SAIC), the PRC government
agency charged with regulating business enterprises,
took effect on October 1, 2014. Together, they had the
effect of reforming the previous laborious annual inspection system by introducing a new set of reporting
and disclosure requirements. Aiming to reduce tedious
formalities and increase transparency, all the requirements specified in the Interim Regulation, as well as
the New Rules, apply to all enterprises incorporated in
China, including foreign-invested enterprises (FIEs).
China’s new corporate disclosure requirements
include a new obligation for compulsory interim
disclosure of penalties imposed by PRC regulators
that has implications for companies’ wider
disclosure and compliance regimes.
This article explains in detail the what, when, and how
of enterprise disclosure, including how to keep off the
SAIC blacklists.
Enterprises’ Compulsory Disclosure
Obligations
Through both annual reports and real-time disclosure,
the Interim Regulation requires enterprises to disclose
certain enterprise information in the Enterprise Credit
and Information Public Disclosure System (Disclosure
System), which is a publicly accessible online system
available at http://gsxt.saic.gov.cn/.
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2
What May Be Easier? Annual Reporting
Under the Interim Regulation, between January 1 and
June 30 of each year, enterprises will submit an annual
report to the relevant local SAIC counterpart in the locality where the enterprise is registered (collectively,
AIC). This company-prepared submission replaces the
previous AIC annual inspection regime2 and provides a
new focus on post-registration supervision.
Respecting the submitting enterprise, the annual report
must contain the following information with respect to
the relevant enterprise:
1. contact information, including mailing address,
postal/zip code, contact numbers, e-mail addresses, etc.;
monitor such real-time disclosure and will demand correction by enterprises failing to make timely disclosure.
Information requiring disclosure includes:
1. changes of capital subscription or contribution, including amount, schedule, and method of contribution;
2. equity change information, such as equity transfer in
a limited liability company;
3. information on the granting, change, and renewal of
administrative permits or licenses;
4. intellectual property rights pledge registration information;
5. information on administrative penalties received; or
2. operational status information: commencement of operations, whether in suspension, in liquidation, etc.;
6. other information required to be disclosed according
to law.5
3. investment information: investment in establishing
other enterprises, acquisition of equity interests in other
enterprises;
Item 5 is particularly noteworthy, because one of the key
pieces of legislation the AIC is charged with enforcing is
the Anti-Unfair Competition Law, which addresses various kinds of impermissible competitive conduct, including commercial bribery. In recent years, the AIC has
been extremely active, both nationally and at the local
level, in conducting enforcement actions involving allegations of commercial bribery.
4. subscribed capital contributions and paid-in capital
contributions by shareholders, capital contribution
schedule and method of contribution, and other information in the case of limited liability companies or joint
stock companies;
5. information on changes in equity interests, such as equity transfers in the case of limited liability companies;
Implications for Anti-Corruption Rules in Other
Jurisdictions
6. online website information or the name of an online
store, website address, and other information relating to
online operations (if applicable); and
Because of the degree to which China’s economy retains
strong elements of state ownership, kickback schemes
that are viewed as involving ‘‘commercial bribery’’ under
PRC law could potentially implicate the U.S. Foreign
Corrupt Practices Act (FCPA) and relevant U.K. antibribery legislation and practice.
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.3
While disclosure of all the information under items 1 to
6 is mandatory, enterprises are entitled to select whether
to disclose the information under item 7. If an individual or another enterprise would like access to the information about an enterprise described in item 7, they
may request the relevant enterprise to disclose such information, and the decision whether to do so is subject
to such enterprise’s consent.
It is worth noting that financial statements are no longer required in order to complete the annual reporting
procedure,4 which represents great progress and a reduction in administrative burden as compared with the
previous annual inspection system described above.
What May Be More Challenging? Real-Time
Disclosure
In addition to the annual regular disclosure, enterprises
are also required to disclose or update through the Disclosure System information that may affect their good
standing or creditworthiness within 20 days after such information becomes available.
Under the Interim Regulation, the AIC is obliged to
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The FCPA does not include a voluntary disclosure obligation for offenses, but the prospect of complying with
the mandatory Disclosure System in China could present companies subject to the FCPA with a dilemma regarding how to handle the question of making parallel
disclosure to U.S. regulators.
Similarly, for businesses subject to U.K. jurisdiction, the
new disclosure requirement in China might have implications under U.K. law and practice. A U.K. register exists for corporate entities convicted of an offence in the
United Kingdom. This register can also be accessed by
the public. However, the register is not well known, and
even less well used, perhaps because of the rather cumbersome procedure for access, which involves an application under the Freedom of Information Act.
The China register may also be of use for companies defending actions in jurisdictions where there is a rule
against double jeopardy, such as in the United Kingdom.
The company may be able to point to an administrative
penalty having already been imposed in China in respect of facts that are also being investigated by, for example, U.K. authorities under their extra-territorial jurisdiction to investigate and prosecute bribery and corruption offences. However, prosecuting authorities will
likely argue that an administrative penalty is not the
same as a pre-existing criminal conviction. The stronger
COPYRIGHT 姝 2015 BY THE BUREAU OF NATIONAL AFFAIRS, INC., WASHINGTON, D.C.
WSLR
ISSN 1357-0889
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argument may be that it would not be in the public interest to punish a corporation twice.6 This is in line with
European Union case law, and aligns with the U.K. test
that there must not only be sufficient evidence to convict, but that it is also in the public interest to bring the
case.
The prospect of complying with the mandatory
Disclosure System in China could present
companies subject to the U.S. Foreign Corrupt
Practices Act with a dilemma regarding how to
handle the question of making parallel disclosure to
U.S. regulators.
Government Authorities’ Disclosure
Requirements and Supervision
The Interim Regulation and the New Rules also impose
disclosure obligations on government authorities.
Through the Disclosure System, the AIC must publish
enterprises’ basic registration and filing information,
such as enterprise name, address, registered capital,
business scope, legal representative, equity, and pledges
of movable property, as well as administrative penalties.
Other governmental authorities must disclose information relating to granting, change, and renewal of administrative permits or licenses and administrative penalties,
but may choose whether to disclose via the Disclosure
System. In other words, agencies other than the AIC may
disclose such information through their own separate
systems.
dered, 3) concealing the truth or providing false information in its disclosures, or 4) failure to be contacted via
the registered domicile or business premise information
provided by enterprises.
Within three years after being listed, an enterprise may
apply to be removed from the list of irregular operation
if it rectifies the misconduct. However, if the violation is
not corrected or lasts for three consecutive years, the enterprise will be put on a blacklist disclosed to the public
through the Disclosure System. The legal representative
or person in charge of a blacklisted enterprise may not
serve as the legal representative or person in charge of
any other enterprise for a period of three years.
Further, the Interim Regulation requires local governments and authorities to establish a sound credit restraint mechanism to restrict or ban enterprises on the
list of irregular businesses or the blacklist from government procurement programs, project bidding or tendering, state-owned land use rights, awards of honorary
titles, and so forth.
As the Interim Regulation is relatively new, as of the date
of this writing, there is no officially established credit restraint mechanism rolled out by local governments.
Conclusion and Advice
The impetus to the Disclosure System is reportedly coming from China’s national government, which is encouraging government agencies to share information
through the system.
Although it is still too early to draw conclusions as to the
true transparency of the new disclosure requirements,
one thing is for sure: Enterprises operating in China are
both facing greater compliance requirements and more
exposed to credit and/or compliance testing.
One of the New Rules’ aims is dedicated to governing
the disclosure of administrative penalties by the AIC.
Currently, Tier 1 and Tier 2 cities like Beijing, Shanghai,
Shenzhen, Xiamen, and Haikou are publishing new
penalty information on their online platforms, while
continuously uploading old punishment notice records
at the same time.7
The launch of the Disclosure System suggests that access
in China to reliable information for diligence and
credit-check purposes will be improving in the coming
years, a development to applaud. From an international
perspective, this could prove a useful tool for those wishing to conduct due diligence on a Chinese incorporated
entity.
Besides the disclosure obligation, local AICs act as the
supervisors of the disclosure and reporting process. Under the Interim Regulation and the New Rules, enterprises are requested to make reporting and disclosure
on their own initiative. The AIC will not check every disclosure by every company, but will carry out random inspection against at least 3 percent of all enterprises
within the local jurisdiction or, based on whistle-blower
reports, will conduct investigations as to the authenticity
of certain disclosures.
At the same time, the requirement to disclose administrative penalties, at a time when the AIC is actively initiating commercial bribery enforcement cases, means that
companies subject to the FCPA or U.K. law need to consider the potential implications of disclosure in China
on their stance vis-à-vis disclosure to U.S. and/or U.K.
regulators.
Legal Consequences of Violations
Failure to fulfill the reporting and disclosure obligations
imposed under the new system can result in penalties.
Under the Interim Regulation and the New Rules, an
enterprise will be placed on a ‘‘list of irregular operation’’ for 1) failure timely to submit annual reports, 2)
failure to make corrections of real-time disclosure as orWORLD SECURITIES LAW REPORT
ISSN 1357-0889
NOTES
1
The New Rules include the following regulations issued by the SAIC
on August 19, 2014: 1) Interim Measures for Random Inspection of
Information Published by Enterprises; 2) Interim Measures for the Administration of the List of Enterprises with Irregular Operations; 3) Interim Provisions on the Public Disclosure of Information regarding
Administrative Sanctions Imposed by the Administration for Industry
and Commerce; 4) Interim Measures for Annual Reporting by Individual Entrepreneurs; and 5) Interim Measures for the Publication of
the Annual Reports of Special Farmers’ Cooperatives.
2
In the past, all enterprises (including FIEs) were required to be annually inspected by the AIC. The annual inspection, which sometimes
Bloomberg BNA
06/15
4
included a physical inspection by AIC personnel at the company’s
premises, aimed at assessing whether each enterprise was validly established and duly operated in compliance with PRC law. To complete the
previous annual inspection process, FIEs had to submit a broad range
of materials and documents (including audited financial statements).
Preparation of the materials for the annual inspection could be time
consuming. After reviewing the complete application documents, the
AIC would affix inspection chops on the duplicate of an enterprise’s
business license. A company that failed to pass an annual inspection
would be ordered to correct its non-compliance within a specified
time. Failure to make corrections could result in penalties that could
include revocation of the enterprise’s business license.
3
Information under items 1, 2, and 6 shall be the most updated as at
the time of submission, while information under other items could be
consistent with the status on the last day of the preceding year.
4
Although the submission of the annual audited financials is no longer the statutory requirement, enterprises may still need annual financial audit for internal management and other business consideration.
5
It is unclear what information may fall under item 6. The practice in
Shanghai and Beijing is that there is no need to file the other information unless expressly required by other law. In general, there is no such
requirement in practice at present.
6
Query whether the decision by multiple jurisdictions in major anticorruption enforcement actions brought in the last decade to pursue
prosecutions against the same company for the same conduct (such as
in the actions brought against Siemens and BAE Systems) may suggest
that enforcement authorities are not adverse to multiple prosecutions
when the subject matter may involve corruption.
7
Taking Shanghai as an example, the Shanghai AIC has set up a special system on its official website to publish administrative penalties imposed by the Shanghai AIC. The system provides the full text of penalty notices and is available at http://www.sgs.gov.cn/shaic/
punish!getList.action.
The text of the Interim Regulation on the Public Disclosure of
Enterprise Information is available, in Chinese, at http://
www.saic.gov.cn/ywdt/gsyw/zjyw/xxb/201408/t20140824_
147840.html.
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The text of the Interim Measures for Random Inspection of
Information Published by Enterprises is available, in Chinese,
at http://www.saic.gov.cn/zwgk/zyfb/zjl/xxzx/201408/
t20140827_147919.html.
The text of the Interim Measures for the Administration of the
List of Enterprises with Irregular Operations is available, in
Chinese, at http://www.saic.gov.cn/zwgk/zyfb/zjl/xxzx/
201408/t20140827_147920.html.
The text of the Interim Provisions on the Public Disclosure of
Information regarding Administrative Sanctions Imposed by
the Administration for Industry and Commerce is available, in Chinese, at http://www.saic.gov.cn/zwgk/zyfb/zjl/
xxzx/201408/t20140827_147924.html.
The text of the Interim Measures for Annual Reporting by
Individual Entrepreneurs is available, in Chinese, at http://
www.saic.gov.cn/zcfg/xzgzjgfxwj/xxb/201408/t20140827_
147927.html.
The text of the Interim Measures for the Publication of the
Annual Reports of Special Farmers’ Cooperatives is available,
in Chinese, at http://www.saic.gov.cn/zcfg/xzgzjgfxwj/xxb/
201408/t20140827_147928.html.
Amy L. Sommers is a Partner and Cecillia Dai and Aqua
Huang are Associates at K&L Gates LLP, Shanghai. They may
be contacted at amy.sommers@klgates.com, cecillia.dai@
klgates.com and aqua.huang@klgates.com.
The authors wish to thank their U.K. anti-corruption compliance colleagues Christine Braamskamp and Laura Atherton,
at K&L Gates LLP, London, for their contributions respecting
the implications of the New Rules for corporate entities subject to jurisdiction in the United Kingdom.
COPYRIGHT 姝 2015 BY THE BUREAU OF NATIONAL AFFAIRS, INC., WASHINGTON, D.C.
WSLR
ISSN 1357-0889