MANDATORY COMPANY INFORMATION DISCLOSURE
Aug. to Nov. 2014 China Bulletin

On October 1, 2014, the Provisional Rules on Enterprise Information Disclosure (see English Translation) came into effect. They implement the Plan on the Reform of the Registered Capital Registration System and build on the changes to the registered capital contribution system in the revised Company Law (see Feb-June China Bulletin). Subsidiaries of foreign companies in China must comply with them. They institute systematic national rules for disclosure of corporate information, replace the time-consuming enterprise annual inspection with an annual report, and require public disclosure of information through an online system. While very helpful, the Rules do not require disclosure of key information, such as audited reports, that was available to anyone requesting it through a Chinese-qualified attorney as recently as three years ago.

The Rules require all companies in China to submit a report through the enterprise credit information disclosure system (“Disclosure System” – see Website) to the relevant administration for industry and commerce (“AIC”) and the public by June 30th of each year. The report must include:

  1. the company’s contact information;
  2. status (commencement, closure, liquidation, etc.);
  3. establishment or purchase of other companies;
  4. equity – subscribed and paid-in capital;
  5. shareholders transfers of equity; and
  6. website and online business information.

The Rules permit but do not require a company to publicly disclose the number of its employees, assets, liabilities, owner’s equity, revenue, profits and taxes.

Additionally, they require a company to disclose the following events through the Disclosure System within 20 working days of their occurrence:

  1. subscription/remittance of capital contributions and related information;
  2. transfers of equity of limited liability company;
  3. acquiring or other changes regarding administrative licenses;
  4. pledges of its equity; and
  5. administrative penalties.

AICs must disclose the following through the Disclosure System within 20 working days of being submitted or registered:

  1. information submitted by the company to the administration for the record;
  2. chattel mortgage registrations;
  3. equity pledge registrations; and
  4. administrative penalties.

Other agencies must disclose the following through the Disclosure System:

  1. information on changes in administrative licenses for the company; and
  2. administrative penalties.

The Rules include mechanisms for the reporting company, the relevant agency or third parties to report inaccurate information, and for the AIC to randomly select and investigate reported information or to investigate the information in response to a report by a third party. If the company fails to comply with its obligations to disclose under the Rules, discloses inaccurate information or fails to comply with agency orders, the AIC may:

  1. list the company in an operational abnormalities blacklist;
  2. publicly disclose the situation through the Disclosure System;
  3. impose an administrative penalty; or
  4. if the company does not carry out its public disclosure obligations for three years, include it in a serious violation blacklist.

The rules also provide for the disclosing company to be civilly liable for any harm caused to third parties and criminally liable if the failure to disclose constitutes a crime.

A key driver behind the Rules is China’s desire to establish a national credit information disclosure system based on annual reports and disclosure. The reports are readily available to the public in order to enhance transparency and facilitate commercial transactions that require due diligence or more cursory checks of a company’s record. The Rules also reduce the administrative burden on companies by eliminating the time-consuming annual inspection.

However, the Rules do not provide for access to AIC records that were formally available. Those records included audited reports and original company registration, amendment and related documents filed with the AICs that, in the sometimes opaque information environment in China, provided helpful information about a company’s activities and financial situation. In contrast, the Rules state that disclosure of most detailed financial information – assets, liabilities, revenue, profits and taxes – is optional. Audited financial statements are no longer filed and available.

In summary, the Rules institute a much-needed public disclosure and monitoring system for certain corporate information. Companies established in China should prepare and submit the required annual reports, and be prepared to report in real time substantial changes in their status, as noted above, in order to avoid being blacklisted or having a penalty imposed. On the other hand, the information disclosed may be of only limited value, particularly for non-listed companies that do not otherwise disclose their financial information.

Questions? Please contact Allan Marson at china.desk@ishimarulaw.com or +1 408-738-0592 #719 for a complimentary consultation.