Investors Should Highly Value Disclosure Obligations

Kong Jinqiu

Recently, the Beijing Securities Regulatory Bureau issued a decision to impose administrative penalties and record the matter in the credit file on Beijing Lohue, as it failed to disclose information and stop trading after acquiring a 5% stake in "Chao Chart Software". The author believes that private equity fund managers and investors should highly value their disclosure obligations.

Beijing Lohue is a well-known private equity firm. According to the simplified report on changes in equity interests disclosed by Chao Chart Software, Beijing Lohue continued to trade in Chao Chart Software stocks through its underlying fund products from November 26, 2021, to November 28, 2024, eventually holding a 5.26% stake.

Article 13 of the Regulations on the Administration of Public Company Mergers and Acquisitions provides that investors who hold more than 5% of the shares must report to the securities exchange within three days and announce their holdings, and may not trade in the company's shares during this period. Article 4 also stipulates that if a violation occurs, the excess shares held by the investor will be subject to restrictions on voting rights for 36 months.

The rules governing investor behavior are actually very strict. For example, if the total share capital of a listed company is not an integer number of shares, investors can hold more than 5% stake and then announce their holdings, but before that, they may continue to trade without announcing.

In the context of public company mergers and acquisitions, changes in shareholdings information are extremely important and closely watched by regulatory authorities, controlling shareholders, and other shareholders. Failing to disclose information and timely reporting can lead to reduced transaction costs, but may also pose a surprise attack on existing control holders.

The above provisions impose disciplinary measures on violators, including the loss of voting rights for an extended period, which helps maintain market fairness and protect the interests of other shareholders.

Beijing Lohue's shares exceeding 5% will be subject to restrictions on voting rights within three years. Holding slightly more than 5% stake may not have a significant impact on the company's governance structure or control, but it may still leave a record of violation and even result in the loss of voting rights for some excess shares.

Voting rights are a type of common right. Losing voting rights may not affect shareholders' dividend rights or other benefits, but it does mean that the affected shares will be unable to influence the company's governance structure and decision-making process.

Some people argue that the essence of value investing lies in being a good shareholder, where one must fully participate in the company's governance and make decisions about one's own shares. Only then can one have an impact on the listed company's major decisions and help it establish a more scientific governance mechanism.

Private equity fund managers should abide by the principles of voluntariness, fairness, and honesty in their private equity business activities, protecting investors' lawful rights and interests. Violating disclosure obligations can harm investors' interests; therefore, private equity fund managers should maintain a high level of vigilance and make informed decisions to avoid violating relevant rules.

To prevent violations, private equity fund managers must understand how to calculate shareholding ratios. According to the Regulations on the Administration of Public Company Mergers and Acquisitions, if there is no contrary evidence, a situation where multiple investment products managed by the same private equity firm are deemed to be acting in concert; therefore, the private equity firm should comprehensively grasp the shareholding information of its underlying fund products and calculate the total shareholding ratio.

To curb illegal takeovers, we can also explore further strengthening legal responsibilities, including civil liabilities. Public company mergers and acquisitions often trigger significant stock price fluctuations. Anonymous takeover behavior deprives ordinary investors of their right to know and prevents them from enjoying equal trading opportunities, allowing the relevant entities to gain improper benefits.

This column article represents only the author's personal views.