Abstract
When implementing regulatory activities, a stock exchange may perform public functions and undertake liabilities as a public body. If a delisting decision made by the stock exchange according to its self-regulatory rules, which is within its statutory authority and approved by the China Securities Regulatory Commission, has a final and substantial effect on the interests of the party concerned, the decision shall fall within the scope of administrative litigation. As delegated legislations under the Securities Law of the People’s Republic of China and the Measures for the Administration of Stock Exchanges, the combined financial indicators for delisting under the Rules Governing the Listing of Stocks on Shanghai Stock Exchange constitute the statutory conditions for compulsory delisting for financial reasons applicable to the stocks of a listed company. It is legal for the stock exchange to issue a delisting decision against a listed company that triggers the delisting conditions under the said listing rules.
Basic Facts
The stocks of Xiamen Overseas Chinese Electronic Co., Ltd. (the “XOCECO”) were originally listed on the Shanghai Stock Exchange (the “SSE”). On April 29, 2021, the XOCECO issued its 2020 annual report, stating that during the accounting period, the operating revenue was RMB 8,505,794.08, decreased 70.09% year-on-year, and the one after deducting the revenue that is unrelated to main business and that has no commercial substance was RMB 0.
Having triggered both Sections 13.9.1 and 13.3.2 of the Rules Governing the Listing of Stocks on Shanghai Stock Exchange (revised in 2020), the XOCECO issued an Announcement on Delisting Risks and Temporary Suspension of the Company’s Stock Trading on April 29, 2021, stating that the delisting risk warning period would start on May 6, 2021 and the stocks be suspended from trading for one day on April 30, 2021.
On April 29, 2022, XOCECO, the plaintiff, issued its 2021 Annual Report, which stated that the operating revenue of the period was RMB 152,397,617.52, increased 1,691.69% year-on-year, and the one after deducting the revenue that is unrelated to main business and that has no commercial substance was RMB 133,945,619.51; the net profit was RMB -4,737,609.51 and RMB -6,237,691.17 after deducting non-recurring gain and loss. The 2021 Special Auditing Opinion issued on the same day read that RMB 133.9456 million of “Operating Revenue after Deduction” in the Operating Revenue Deduction Table of the XOCECO belonged to the “Revenue Unrelated to Main Business”, and thus should be deducted, and the operating revenue after the deduction was RMB 0.
On April 30, 2022, the SSE sent the XOCECO a Prior Notice on Proposed Delisting of XOCECO Stocks, informing that according to the 2021 Special Auditing Opinion issued by the annual report auditor, the XOCECO’s operating revenue after deduction was RMB 0, which had triggered the conditions for listing termination under Section 9.3.11 of the Rules Governing the Listing of Stocks on Shanghai Stock Exchange (revised in 2022) (the “2022 Listing Rules”), and according to Section 9.3.14 of the said listing rules, the SSE decided to delist the XOCECO’s stocks. The SSE also informed XOCECO’s right for a hearing.
On May 20, 2022, the SSE held a hearing at the XOCECO’s request. On the same day, The SSE’s listing committee gave the review opinion on agreeing to delist the stocks. On May 25, 2022, the SSE issued the Decision on Delisting of XOCECO Stocks. ([2022] No. 148) (the “Delisting Decision”), in which the SSE determined that the XOCECO had fallen within the circumstance requiring delisting under Section 9.3.11 of the 2022 Listing Rules, and upon the listing committee’s approval, decided to delist XOCECO’s stocks according to Section 9.3.14 of the said listing rules. It was also stated in the Decision that the SSE would delist the XOCECO’s stocks within 5 trading days upon expiry of the delisting arrangement period, and the XOCECO may, if dissatisfied with the Decision, apply for reconsideration within 5 trading days after the Decision is announced.
Dissatisfied with the Decision, the XOCECO filed an administrative litigation against the SSE to the Shanghai Financial Court.
Holding
On September 9, 2022, the Shanghai Financial Court rendered an administrative judgment ((2022) Hu 74 Xing Chu No. 1), dismissing the claims of the XOCECO.
Dissatisfied with the original judgment, the XOCECO appealed to the Shanghai High People’s Court.
On December 27, 2022, the Shanghai High People’s Court issued a second instance judgment ((2022) Hu Xing Zhong No. 288), dismissing the appeal and affirming the original judgment.
Reasoning
The original court opined firstly, that a stock exchange is a legally-created, key financial infrastructure and trading publicly-listed securities is a financial activity subject to state regulation. When implementing regulatory activities, a stock exchange may perform public functions and undertake liabilities as a public body. The sued Delisting Decision in this case is a product of the defendant SSE’s performance of public functions in regulating securities trading. As the defendant, a self-regulatory organization, made the sued Decision in accordance with Article 48 of the Securities Law of the People’s Republic of China, Article 64 of the Measures for the Administration of Stock Exchanges, and the 2022 Listing Rules, it should be considered an authorized administrative entity, and thus a proper defendant in administrative litigation. The Delisting Decision is a regulatory measure imposed on the plaintiff by the SEE according to the 2022 Listing Rules, which had a final and substantial effect on the plaintiff’s interests and thus is an actionable administrative act.
Secondly, the combined financial indicators for delisting under Section 9.3.2, Section 9.3.11, etc. of the 2022 Listing Rules constitute delegated legislations on compulsory delisting for financial reasons applicable to listed companies. The plaintiff, as a market participant, shall be bound by the rules; the defendant shall, as authorized by law, define the plaintiff’s financial status according to the rules. It is justified for the defendant to conclude that the XOCECO’s operating revenue in 2021, after deducting the one that is unrelated to main business or without commercial substance, was RMB 0, based on the annual reports of 2017 to 2021, the Special Auditing Opinion, the plaintiff’s replies to enquiries, and other relevant documents disclosed by the plaintiff.
Lastly, when the plaintiff re-triggered the conditions for delisting under Section 9.3.2 of the 2022 Listing Rules after its stocks had been issued a delisting risk warning, SSE, the defendant, made the sued administrative decision upon the listing committee’s approval, following due process by issuing a prior notice of decision on proposed delisting, holding a hearing at the plaintiff’s request, investigating relevant facts, and considering the plaintiff’s statements and arguments in accordance with Sections 9.3.2, 9.3.11, 9.3.13 and 9.3.14 of the said listing rules. It followed that the above procedure is legal and fair.
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