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Perspective | Research on Issues Related to the Mandatory Execution of Restricted Shares for Directors, Supervisors, and Senior Executives of Listed Companies

Published:

2025-01-07

With the continuous development of our country's capital market and the increasing number of enforcement cases, the situation involving the compulsory enforcement of shares held by directors, supervisors, and senior management of listed companies is also on the rise. However, due to the special nature of listed company stocks and the unique circumstances of multiple regulations, whether the restricted shares held by directors, supervisors, and senior management can be enforced has become a gray area in judicial practice. Based on this, we have sorted out the relevant regulations regarding the compulsory enforcement of restricted shares held by directors, supervisors, and senior management of listed companies for your reference.

With the continuous development of China's capital market and the increasing number of enforcement cases, the situation involving the compulsory enforcement of shares held by directors, supervisors, and senior management of listed companies is also on the rise. However, due to the special nature of listed company stocks and the unique circumstances of multiple regulations, whether the restricted shares held by directors, supervisors, and senior management can be enforced has become a gray area in judicial practice. Based on this, we have sorted out the relevant regulations on the compulsory enforcement of restricted shares held by directors, supervisors, and senior management for your reference:

1. Relevant regulations on the restriction of shares held by directors, supervisors, and senior management of listed companies

With the transformation of limited liability companies into joint-stock companies and their successful listing on the capital market, they face multiple regulatory systems. In addition to complying with basic legal provisions such as the Company Law, they must also adhere to the relevant regulations of the China Securities Regulatory Commission and the exchanges. The relevant regulations concerning the restrictions on shares held by directors, supervisors, and senior management of listed companies are mainly as follows:

2. Relevant regulations and operational ideas of different courts regarding the compulsory enforcement of restricted shares held by directors, supervisors, and senior management

As mentioned above, there are various restrictions on the shares held by directors, supervisors, and senior management of listed companies. Therefore, during the enforcement process, whether the restricted shares held by directors, supervisors, and senior management can be enforced varies among different courts, leading to different operational methods, which we mainly summarize as follows:

A. Relevant regulations of the Supreme People's Court

On January 10, 2000, the Supreme People's Court issued a reply regarding the enforcement of shares held by promoters of joint-stock companies in response to a request from the Fujian High Court. It stated: "The provision in Article 147 of the Company Law that promoters' shares cannot be transferred within three years is a restriction on the promoters' autonomy to transfer their equity, aimed at preventing promoters from speculating for profit through the establishment of a company, thereby harming the interests of other shareholders. There is no such issue in compulsory enforcement by the people's court. The relevant companies and departments holding the promoter's shares should assist the people's court in handling the transfer registration procedures. To protect the interests of creditors, the time for the transfer of shares should be counted from the date the people's court delivers the ruling and the notice of assistance in enforcement to the relevant units. The transferee of the shares should inherit the status of the promoter and bear the responsibilities of the promoter." This regulation considers the provision in the Company Law regarding the prohibition of transferring shares by promoters as a restriction on the promoters' autonomy to transfer their equity. However, it does not explicitly state whether the restricted shares held by directors, supervisors, and senior management can be enforced.

B. Relevant regulations of the Beijing High People's Court

The "Beijing Court Enforcement Work Norms" implemented on January 1, 2014, stipulates in Article 390: "[Enforcement of shares held by promoters of joint-stock companies] If the person being enforced holds shares in the company as a promoter, the people's court can enforce the transfer of those shares, not subject to the restriction in Article 142 of the Company Law of the People's Republic of China that 'shares held by promoters of the company cannot be transferred within one year from the date of establishment of the company.' Relevant units should handle the transfer registration procedures according to the ruling and notice of assistance in enforcement issued by the people's court." Although the then-effective Article 142 of the Company Law stipulated that "directors, supervisors, and senior management should declare their shares held in the company and changes thereof to the company, and during their term of office, the shares transferred in a year shall not exceed 25% of the total shares held; shares held cannot be transferred within one year from the date of listing of the company's stock. After leaving office, they cannot transfer their shares held in the company within six months. The company's articles of association may impose other restrictive provisions on the transfer of shares held by directors, supervisors, and senior management," this article clearly pertains to the enforcement of shares held by promoters, similar to the aforementioned Supreme Court regulation, and does not explicitly state whether the restricted shares held by directors, supervisors, and senior management can be enforced.

C. Relevant regulations of the Jiangsu High People's Court

On August 22, 2018, the Jiangsu High People's Court issued a response regarding the handling of difficult enforcement issues, which stated: "6. How to handle the equity (shares) of the person being enforced? ... For the enforcement of restricted circulating shares held by the person being enforced, they can first be forcibly deducted to the account of the applicant for enforcement, and then disposed of after the restricted shares are released and converted into circulating shares. During this process, the enforcement court may freeze the applicant's account as appropriate to prevent the applicant from transferring the proceeds from the sale of shares that exceed the enforcement amount, thereby harming the interests of the person being enforced." According to this response, it provides another idea for the compulsory enforcement of restricted shares held by directors, supervisors, and senior management, essentially recognizing the compulsory enforcement of restricted shares. However, the method of enforcement is not immediate auction disposal but first forcibly deducting the restricted circulating shares to the applicant's account, and then disposing of them after the restricted shares are released and converted into circulating shares.

D. Relevant regulations of the Shanghai Financial Court

On January 4, 2021, the Shanghai Financial Court issued the "Regulations on the Disposal of Listed Company Stocks in Enforcement Procedures (2021 Revision)," which states in Article 2: "The listed company stocks referred to in these regulations are the unrestricted circulating shares and restricted circulating shares publicly issued and traded by listed companies in the securities market." Article 18 states: "... For the disposal of restricted circulating shares and depositary receipts of listed companies, the judicial assistance enforcement method for bulk stocks or online judicial auction method may be chosen based on the restrictions and release conditions and the case situation." Article 23 states: "Bidders must meet the qualified investor conditions corresponding to the stocks being disposed of, and after the transaction, they must comply with the relevant regulations on the reduction and restriction of listed company stocks and fulfill the information disclosure obligations as required. If the acquired stocks are restricted shares, they must continue to comply with the restriction regulations within the remaining period." Articles 35 to 37 stipulate the situation of compensating the applicant for enforcement with a discounted value of the disposed stocks after a failed disposal. Meanwhile, Article 41 states: "... If the buyer or the applicant for enforcement who obtains the stocks through a compensation agreement disposes of the listed company stocks after the transfer of stocks, they must comply with the laws, regulations, judicial interpretations, and rules of the securities regulatory authorities, normative legal documents, and stock exchange rules regarding stock restrictions, stock reductions, and other relevant regulations." The aforementioned regulations provide detailed provisions for the compulsory enforcement and disposal of restricted shares held by directors, supervisors, and senior management. According to these regulations, the Shanghai Financial Court has taken a positive attitude towards the enforcement of restricted shares, but the buyer must comply with the relevant regulations on the reduction and restriction of listed company stocks and fulfill the information disclosure obligations as required after the transaction.

E. Relevant regulations of the Shenzhen Intermediate People's Court

The "Guidelines for the Enforcement of Listed Company Stocks by the Intermediate People's Court of Shenzhen, Guangdong Province (Trial)" effective from November 15, 2019, clearly stipulates the disposal of restricted shares held by directors, supervisors, and senior management. Article 16 states: "According to the provisions of the second paragraph of Article 141 of the Company Law of the People's Republic of China, the shares transferred by directors, supervisors, and senior management of a listed company during their term of office shall not exceed 25% of the total shares they hold in the company each year; the shares held in the company shall not be transferred within one year from the date of the company's stock listing; the above-mentioned personnel shall not transfer the shares they hold in the company within six months after leaving their position. During enforcement, inquiries can be made to the listed company, securities company, or securities registration and settlement institution regarding the available quota of the director, supervisor, or senior management. The enforcement shall be limited to the available quota. The listed company stocks within the available quota of the director, supervisor, or senior management shall be priced according to Article 14 of these guidelines." According to these guidelines, during the enforcement process, the enforcement court can inquire about the available quota of the director, supervisor, or senior management from the listed company, securities company, or securities registration and settlement institution, but can only enforce the available quota of the directors, supervisors, and senior management.

Suggestions

According to the various regulations organized by the author above, there are still certain differences in the provisions of different courts regarding whether the restricted shares of directors, supervisors, and senior management can be enforced, and there is no unified regulation. Therefore, it is hoped that the above organization by the author can provide some inspiration for everyone in the enforcement of restricted shares.

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