The Road to Company Listing (Part 3) - Understanding the Legal Issue Verification Methods at Different Stages
Preface
The author has previously elaborated on the understanding of corporate listing and the formation of the relevant team in a series of articles (I) and (II). To enable enterprises and the newly formed internal teams to better understand the working mechanism of the external team, and to better cooperate with the external team in conducting relevant due diligence and problem rectification work, and to enhance the overall efficiency of the listing process, the author will, in this special article, using the example of legal issue verification by the law firm, briefly describe the paths and characteristics of legal issue verification in different stages of the listing process.
Readers who have understood the entire process of corporate listing or have read the previous two special articles should already have a certain understanding of the entire process of listing or the various stages of listing. In short, the overall process of corporate listing needs to go through several core processes such as "initial due diligence, problem rectification and guidance filing, preparation of all application materials, internal review by various securities service institutions, guidance acceptance and filing, review and response to inquiries, submission for review, registration, and issuance". According to the relevant verification and information disclosure requirements of the China Securities Regulatory Commission and stock exchanges, different stages have different time requirements. For example, the preparation stage before the filing for guidance has no hard requirements; the "Stock Issuance and Listing Review Rules" of each exchange stipulate: "The exchange shall issue the first round of review inquiries within 20 working days from the date of acceptance"; and "The time for the issuer and the intermediaries to reply to the exchange's review inquiries shall not exceed 3 months (including multiple rounds), excluding the time for suspension of review, on-site inspection, on-site supervision, and supplementary/modified application documents, etc.".
Due to the different time requirements in different stages, the work pace and working methods of the issuer and the internal and external teams (the relevant definitions are detailed in the special article "Corporate Listing Road (II) - Team Formation") will undergo significant changes. And a profound and accurate understanding of the differences in working methods in different stages will play a positive role in the cooperation between the issuer and the internal and external teams, reducing the probability of work negligence due to time pressure and causing more serious consequences. The author believes that the aforementioned listing process can be roughly divided into four major stages, namely the initial filing stage, the review inquiry stage, the submission stage for review, and the registration stage. Next, the author will use the law firm as an example to briefly describe the methods and characteristics of legal issue verification in each stage.
01 Initial Filing Stage - Comprehensive Verification
Whether enterprises or intermediaries involved in corporate listing, especially A-share listing, should have heard the saying "IPO is no trivial matter". This short sentence precisely summarizes the characteristics of the verification in the initial filing stage, that is, "Everything is meticulous".
(1) Overall framework of legal issue verification and information disclosure "Everything is meticulous"
For enterprises or teams that have just started the IPO process, without sufficient experience, they are prone to have a "no idea how to start" feeling, that is, they do not know what to do first and then what to do next. But this is precisely the embodiment of the meticulousness of the issue verification in the initial filing stage of IPO. For us law firms, the overall framework of information disclosure in the IPO process is based on the provisions of "Rule 12 of the Compilation of Information Disclosure for Publicly Issued Securities - Legal Opinion and Lawyer's Work Report for Publicly Issued Securities" (hereinafter referred to as "The Compilation Rules"), that is, the directory and chapter arrangement of the "Lawyer's Work Report" and "Legal Opinion" issued by the lawyer for the initial public offering of stocks are drafted according to these provisions. According to these provisions, the "Lawyer's Work Report" and "Legal Opinion" for the initial public offering of stocks should at least include the following chapters:
(1) Approval and authorization for this issuance and listing
(2) The entity qualifications of the issuer for this issuance and listing
(3) The substantive conditions for this issuance and listing
(4) The establishment of the issuer
(5) The independence of the issuer
(6) The initiators or shareholders (actual controllers) (7) The issuer's capital stock and its evolution
(8) The issuer's business
(9) Related party transactions and competition in the same industry
(10) The issuer's major properties
(11) The issuer's major debts and credits
(12) The issuer's major asset changes and mergers and acquisitions
(13) The formulation and amendment of the issuer's articles of association
(14) The rules of procedure for the issuer's shareholders' meeting, board of directors, and supervisory board, and their proper operation
(15) The issuer's directors, supervisors, and senior management and their changes
(16) The issuer's taxes
(17) The environmental protection and product quality, technology and other standards of the issuer
(18) The use of the issuer's raised funds
(19) The business development goals of the issuer
(20) Litigation, arbitration or administrative penalties
(21) Issues related to the additional capital increase of the original privately placed company (if any)
(22) The evaluation of legal risks in the issuer's prospectus
(23) Other issues that the lawyer deems necessary to explain
According to the aforementioned regulations, the basic contents of the "Lawyer's Work Report" and "Legal Opinion" issued for the companies planning for IPO can already cover all the compliance matters of the company since its establishment, and the volume is quite large. According to the relevant professional norms for lawyers' engagement in securities business stipulated in the "Management Measures for Law Firms Engaging in Securities Legal Business" and the "Practicing Rules for Securities Legal Business of Law Firms (Trial)", in order to draft the aforementioned complex legal documents, lawyers need to conduct detailed and in-depth due diligence on the aforementioned contents during the project. Otherwise, even if the requirements of the "Compilation Rules" are met, the initial draft of the relevant documents cannot be completed. And these issues need to be verified before the first submission, so the overall framework of the legal issue verification and information disclosure during the first submission stage is "meticulous in every detail".
(2) Verification methods and means "meticulous in every detail"
As mentioned above, although the "Compilation Rules" have clearly stipulated the information disclosure framework, the author still used the phrase "at least include". Because the "Compilation Rules" set aside the pocket chapter "(23) Other issues that the lawyer deems necessary to explain" when setting the chapters, but which contents belong to "other issues that the lawyer deems necessary to explain" was not clearly stipulated in the "Compilation Rules" and other relevant regulations. Only it was stipulated that "if not explicitly required by this rule, but have a significant impact on the issuance and listing, the lawyer shall express legal opinions". This gives lawyers in the legal issue verification process higher requirements. The handling lawyers and their teams need to judge by themselves which contents still need to be disclosed. To fully grasp and understand every detail of the enterprise, the handling lawyers must exhaust all the possible and achievable verification means in each legal issue verification process, to "see from all directions and listen from all sides", and have a clear impression of any "traces" learned during the project handling process, at least having an impression, so as to truly screen out all possible legal issues or potential risks, and then determine which matters need to be disclosed and which have been rectified and can be not disclosed, but the verification process must be reflected in the notes. Here, the author gives two examples of the process and means of verification when the author conducted verification during the first submission stage, for everyone to understand the verification methods and means of "meticulous in every detail" at this stage:
1. During the initial on-site due diligence of the IPO of a certain enterprise, the issuer provided the property and land ownership certificates and construction in progress certificates. At that time, some municipal government service halls did not have the service of retrieving all the real estate information under the name of the enterprise, so during the due diligence process, the author repeatedly confirmed the accuracy and completeness of the materials provided by the issuer, and received affirmative responses from the issuer. However, on a certain morning, during the journey when the company arranged a vehicle to pick up our team to the issuer's office, I saw a construction site from the car. There, a sign on the site that flashed by seemed to have the name of the issuer on it. After communicating with the issuer, it was confirmed that the issuer had left out a long-uncompleted construction project that was still under construction. The project's construction application and corresponding land ownership certificates were forgotten to be provided to us. Therefore, I completed a gap-filling and deficiency-checking of one investigation through "enjoying the scenery during the commute".
2. During the IPO process of a certain enterprise, I needed to verify the issuer's entity qualifications and independence. Based on the available information, the issuer had a large historical associated party. From the equity structure and corporate governance structure, there was no longer any associated relationship. However, during the subsequent communication with the historical associated party and related work, I discovered that the contact person's phone number and email were the contact information used for business registration by one of the issuer's subsidiaries. But after verification, their labor relationship and social security and provident fund contributions were all at the historical associated party, and nominally, there was no relationship with the issuer anymore. Through this clue, I further checked the issuer's employee roster and other materials, confirming that there was still a certain situation of personnel confusion between the two companies, which had a significant adverse impact on the issuer's independence. Under my guidance, the issuer completed the rectification of the independence issue and ultimately did not have a substantive impact on its listing.
From the case situation, it can be seen that since the initial filing stage is the only stage in the listing process without time restrictions, therefore, in the case of sufficient time, the external team will, based on their own practical operation experience, do their best to help the issuer discover more issues that affect the listing process and assist the issuer in rectification. Perhaps this process is not easy, but only by accurately exposing and rectifying the relevant problems can it truly play a positive role for the enterprise's listing, rather than "submitting with a disease" and resulting in listing failure or even more serious consequences. Therefore, the initial filing stage needs to truly achieve "comprehensive verification" and "meticulous attention to every detail".
02 Review and Inquiry Stage - Targeted Verification
Unlike the initial filing stage, in the review and inquiry stage, after the securities exchange accepts the filing materials, based on the disclosed information in the materials, combined with relevant listing review key points and other review experience of enterprises in the same industry, the review team will raise targeted review questions to the issuer and its intermediaries, requiring the issuer and intermediaries to complete the relevant supplementary verification within the prescribed time and submit the reply in written form to the securities exchange. Compared with the initial filing stage, the problem verification in this stage is significantly more targeted. If the initial filing stage is compared to "a comprehensive examination", the feedback and reply stage is more like "targeted treatment".
If the issuer chose an experienced external team, theoretically, before the initial filing stage, the external team had already communicated with the issuer regarding the relevant legal issues of the issuer and how the rectification or disclosure of each issue would affect the issuer's listing process. Therefore, the possibility of encountering problems that the external team or the issuer had no anticipation for or had not paid attention to in the initial filing stage is relatively small. The questions raised by the securities exchange's reviewers are more concentrated on: ① issues mentioned in the filing documents but not fully explained or verified; ② issues in the filing documents that only describe facts but do not provide clear verification opinions; ③ matters that the "Compilation Rules" do not explicitly require to be disclosed but the reviewers believe should be supplemented and disclosed; ④ matters that the reviewers believe need to be further detailed and disclosed, etc. Therefore, ideally, the verification of issues during the review and inquiry stage should be based on the verification methods that have already been used in the initial submission stage, and further refined in a targeted manner. According to practical experience, the author believes that the targeted nature of the legal issue verification in this stage mainly manifests in the following aspects:
(1) A large number of face-to-face interviews are used as verification methods
Based on the author's practical experience, in order to complete the inquiry responses more efficiently within a limited time, the author, as the handling lawyer, will first adopt a large number of face-to-face interview forms for supplementary verification, and retain the interview records signed and confirmed by the interviewees as the verification basis for the records. Because for the Bore diameter of legal issues， the factual statements made by the handling lawyer regarding a certain legal issue need to occupy a large proportion， only by clearly describing the problem can it be further combined with relevant regulations to conduct an accurate legal analysis， thereby demonstrating the effectiveness/Rationality of the problem rectification and expressing precise legal opinions. Face-to-face interviews are the most rapid and direct means to understand the background， reasons， and true thoughts of the party concerned regarding the problem， and for issues such as historical equity transfer and equity holding by proxy， generally only the party concerned is most familiar with the specific circumstances at that time. Therefore， in this stage， face-to-face interviews and the retention of written interview records are one of the main verification methods， with the most direct， focused， and clear characteristics. However， at the same time， affected by the expression Bore diameter of the interviewees， this verification method also has certain flaws in terms of authenticity and accuracy. Therefore， in addition to interviews， more direct evidence is also needed to directly prove the content described.
(2) The requirements for the collection of records are more direct and precise
In addition to interviews， the targeted nature of the issue verification in this stage is also reflected in the requirements for the collection of records. The records are the basis for external teams to express verification opinions. In the litigation context， the so-called records are evidence materials. In the requirements for records in this stage， the demand for "direct evidence" is far greater than the accumulation of some "indirect evidence".
During the initial submission stage， for the verification of a certain issue and the basis for expressing opinions， due to the relatively sufficient time， the issuer and the external team have sufficient time to discover and rectify related issues， and since the review personnel have not yet intervened， the disclosure of the issuer and the external team is based on relevant listing regulations rather than in the form of questions and answers. Therefore， for some issues， the description is often more macroscopic， and the basis and for expressing opinions are also more broad， basically meeting the basic requirements of the law. However， after review by the review personnel， they will propose further disclosure requirements based on the information disclosure content in the initial submission stage. Therefore， the verification opinions expressed in this stage will be more focused and precise. In the inquiry responses， "not directly stating the words" is a big taboo. In order to directly reply to the inquiry opinions， to avoid complicating simple questions or failing to express clear verification opinions due to insufficient verification， the issuer needs to coordinate relevant personnel to provide the most direct evidence materials in this stage， rather than providing a pile of records that can only be vaguely confirmed from the side in the form of bottom materials.
To more intuitively understand the "targeted verification" situation mentioned in the above text， the author， based on the situations encountered in the successful cases handled by himself， presents the differences in information disclosure methods and verification methods in the initial submission stage and the inquiry response stage through specific issues：
1. Case background According to the "Securities Law of the People's Republic of China", the "Regulations on the Registration of Initial Public Offerings of Stocks", and the listing rules of each stock exchange and other relevant regulations, the proposed companies should maintain financial independence, including independence in terms of funds, financial personnel, and account books, etc. The controlling shareholder of the proposed company A is a certain enterprise legal person B Company. The financial department of Company A consists of 5 people, among whom Cashier is one of them. During the reporting period， there was a situation where was also engaged in financial work for the controlling shareholder B Company， and during the first period of the reporting period， there was a situation where the controlling shareholder paid salaries to him. After an external team conducted a due diligence investigation， this issue was discovered and rectification was completed during the reporting period.
2. Information Disclosure Standards during the Initial Submission Phase
According to the "Reporting Rules"， the independence of the issuer is disclosed in the "Section (V) Independence of the Issuer" of the "Lawyer's Work Report"， and the disclosure is as follows：
During the reporting period, one of the company's financial personnel, C, also held the position of a financial personnel at the controlling shareholder B Company. From January 20XX to December 20XX, C received salary income from B Company simultaneously. Based on the company's provided C's labor contract, the salary statements during the reporting period, screenshots of the relevant financial OA approval process provided by B Company, the company's written explanations, and after the lawyer's interview with the company's actual controller and C, the reason for C's previous employment at B Company was that at that time, the company had not yet initiated the listing-related work, and B Company, as a holding platform, did not engage in specific business operations, and the overall financial work content was relatively limited. Therefore, the company's actual controller requested C to handle financial work for B Company, and based on his work content, B Company issued him some salary. Since January 20XX, the company officially entered the listing assistance period and has rectified this issue. B Company has hired professional financial personnel since January 20XX and no longer requires C to perform any related work for B Company, nor does it issue salary to him in any form.
The lawyer has verified that, given the relatively short period during which C held the position of a financial personnel at B Company during the reporting period and that he no longer continues to work for B Company since January 20XX, the relevant rectification work has been completed. Therefore, the situation where the company shared a financial personnel with the controlling shareholder during the reporting period has a relatively minor impact on the company's overall financial independence and has not had a significant adverse impact on this issuance. In summary, the lawyer has verified that the company has financial independence.
3. Inquiry Questions
After review, the reviewers raised the following requirements: Please combine C's work history, the situation of receiving salary from B Company, the specific work contents he performed in B Company and the company, explain the specific reasons and background for C to concurrently handle financial work for the company and B Company during the reporting period, and explain whether his concurrent work situation affected the independence of the company and its eligibility for this issuance. Please have the sponsor institution and the company's lawyer provide clear verification opinions and explain the verification basis and methods.
4. Inquiry Response Format
(1) C's Work History
After the lawyer's interview with C, his work history is as follows:
(2) The salary payment situation of C at Company B
Based on the relevant vouchers and salary slips and other financial documents provided by Company B regarding the salary payments to C, the specific situation of Company B's salary payments to C during the reporting period is as follows: ……
(3) The financial work performed by C at the issuer and Company B
Based on the screenshots of financial OA approval provided by the issuer and Company B during the reporting period, and after the lawyers of this firm interviewed the issuer's actual controller and C, it was found that during the reporting period, C only handled some financial work for Company B and received Company B's salary from December 20XX to January 20XX. The details are as follows:
(4) The background and reasons for C's having held a part-time financial position at Company B
After interviewing the issuer's controlling shareholder and C, and obtaining the issuer's written confirmation, the reason why C had handled some financial tasks for Company B was.
(5) C's having held a part-time financial position at Company B did not have a significant adverse impact on the issuer's independence.
(6) Basis for Verification and Verification Methods
In response to the matters described above, our lawyers conducted the following verifications:
① Conducted interviews with the issuer's controlling shareholders and obtained the signed interview records to confirm the reasons and background for the controlling shareholders' request for C to handle some financial work for Co
② Conducted interviews with C and obtained the signed interview records to confirm C's work history, the reasons and background for handling some financial work for Company B, the salary received by C in Company B, and the current actual job position and job content;
③ Obtained the payment vouchers and salary slips of Company B for the period when it paid wages to C, to confirm the specific wage payment situation and amount of Company B for C;
④ Obtained the current valid labor contract signed by C and the issuer, as well as the payment vouchers and social security and housing provident fund payment receipts issued by the issuer for him, to confirm the existence of a formal labor relationship between C and the issuer;
(7) Conclusion Opinion
Based on the above, our lawyers, after verification, believe that, given that C worked part-time for Company B for a relatively short period of time during the reporting period and the issuer has completed the rectification of this issue during the reporting period, the fact that C worked part-time for Company B during the reporting period does not affect the independence of the issuer or its qualification for this issuance.
According to the aforementioned analysis and combined with relevant practical cases, it should be able to intuitively reflect the significant differences in the verification paths of legal issues between the initial submission stage and the inquiry response stage. Therefore, in order to more efficiently enter the capital market, as a listed company and the internal team, for the verification and information disclosure requirements of different stages by the external team, one should understand and fully cooperate.
03 Submission Stage - "Rapid 24 Hours"
After several rounds of review inquiries and responses, the stock exchange will announce the submission meeting time of a project on its official website about one week before the official submission. The announcement includes the session number of the submission meeting, the name of the issuer under review during the submission meeting, and the names of the committee members. Usually, within 48 hours before the official submission, the committee members will review the updated submission documents of the project and raise the key issues they have noticed before the submission meeting. The issuer and the external team need to form a written response within 24 hours after receiving the translation of the issues raised by the reviewer and submit it to the reviewer for the committee members to understand their concerns and solution ideas before the official submission. Therefore, the issues in the submission stage will be the most focused, and since the overall response time is generally no more than 24 hours, it is impossible to conduct large-scale supplementary verification at this stage. Based on the author's practical operation experience, the basis for expressing opinions in this stage basically comes from the verification and supplementary verification in the initial submission stage and the review inquiry stage. If the committee members raise issues different from the reviewer's focus during this stage, they should require the issuer to supplement the most direct supporting materials to prove or explain the committee members' questions, such as obtaining bank statements, payment vouchers, etc. for transactions, obtaining agreements, payment receipts, etc. for transactions, and obtaining interviews from the parties involved to explain the reasons and background. In addition, after completing the response to the submission issues and before the submission meeting, the external team needs to provide relevant training and drills for the representatives of the submission meeting, training relevant personnel to reply to the committee members' on-site questions directly and clearly. Therefore, this stage is the most time-constrained stage, and for the coordination and alignment of the issuer and the internal and external teams, as well as the efficiency and physical and mental strength requirements of the entire listing team, it is very demanding. After the review meeting organized by the stock exchange passes, the issuer and the external team should promptly prepare the registration draft of the application documents and submit them to the China Securities Regulatory Commission for registration. During the registration stage, the China Securities Regulatory Commission will, based on the review meeting results, further raise the issues it is concerned about (depending on the project, there may be no other concerns), but the overall response time is much more generous compared to the review meeting stage. Therefore, during this stage, the work mechanism of the issuer and the internal and external teams is basically the same as that in the review inquiry stage. After the reply to the registration questions is submitted, if the China Securities Regulatory Commission has no further concerns, it will officially issue the registration approval document. The issuer can start the relevant issuance work after obtaining the registration approval document. Therefore, the author believes that the registration stage is the real "last step" in the entire listing process. Before obtaining the registration approval document, the issuer should still, according to the requirements of the external team, cooperate with relevant supplementary verification and provide relevant supporting documents, and cannot assume that the listing entity work has been completed just because the project has passed the review. There have been numerous cases of IPO review termination in the registration stage in the market so far.
05 Conclusion
As a practicing lawyer in the capital market, the author has hosted or participated in many A-share and Hong Kong-listed IPO projects. During the cooperation with the issuer and other internal and external teams, the author has encountered various problems. The author personally believes that identifying problems is not terrifying. As long as the issuer and the internal and external teams cooperate closely and complete the relevant rectifications as required, the listing efficiency of the issuer can be maximally improved. Therefore, the author hopes that through this article, the potential listed companies or companies with the need to connect with the capital market can understand the work mechanism of the external team at different stages, be able to accurately meet the work requirements of the external team at relevant key points, and be well prepared to deal with various difficulties. Only in this way can your company achieve the goal of landing on the capital market as soon as possible.
