The rules on identifying related parties on the Main Board, ChiNext and the New Third Board

Introduction: to protect the lawful rights and interests of investors and prevent a listed company from dressing up its accounts, shifting profit or transferring benefit, the verification of related parties has always been one of the matters to which intermediaries attend most closely in a due diligence investigation of a company listing or being quoted on a different board. In this article Minton's lawyers set out how a related party is identified according to the board on which the company lists or is quoted.

1. The rules for identifying a related party

2. Verifying related parties

In practice, when a company lists on the Main Board or ChiNext or is quoted on the New Third Board, the regulators verify and determine related parties by the principle that substance prevails over form, and intermediaries accordingly carry out verification over a comparatively wide range. Verification on the Main Board and ChiNext is extremely strict, while that for the New Third Board is appropriately relaxed by reference to the standards applied on the other two.

The regulators review a company's related parties strictly for two main reasons: first, to determine whether the company's business is independent and whether its principal business has core competitiveness; second, to determine whether the company has related-party transactions and whether those transactions are compliant and fair. The regulators' starting point is in every case the protection of investors' interests, so that a company does not present financial statements that rely excessively on related-party transactions and so lead investors to make the wrong judgment in dealing.

In reviewing related parties and related-party transactions, intermediaries chiefly attend to the following:

1. Checking information on shareholders and on directors, supervisors and senior officers

Intermediaries check the information on the company's shareholders, actual controller, directors, supervisors and senior officers and on their close relatives, and determine under the listing or quotation rules whether the company has a related party.

2. Checking the company's major suppliers and customers

Intermediaries check information on the company's major suppliers and customers, and so determine whether the company has related-party transactions by determining whether those suppliers and customers are related parties.

3. Checking the company's large transactions

Intermediaries check the company's large transactions and review the basic information on the counterparty, to determine whether the counterparty is a related party, and whether a large transaction between them involves a transfer of benefit or harm to the company's rights and interests.

4. Whether a related-party transaction is compliant

If the company already has a related-party transaction, the intermediaries must check whether it went through the company's decision-making procedure, whether its pricing accords with fair market value, whether it has been fully performed, and whether the parties are in dispute.

In listing practice, related parties and related-party transactions are the focus of verification by both intermediaries and regulators. The author suggests that a company should first of all avoid related-party transactions as far as possible, strengthen the independence of its business and raise its core competitiveness. Secondly, it should lay down rules for the review of related-party transactions, regularise the decision-making procedure for them, and disclose information about them properly, so regularising its conduct in such transactions.