On March 7, the Financial Association reported (by journalist Wang Haichun) that the Capital Markets "boarding first and supplementing tickets later" incident has added another typical case.

It is worth mentioning that the interval between the "boarding" and "ticket supplement" of this event lasted two years, with an amount involved reaching 3.3 billion yuan.

This incident stems from a disciplinary action statement issued by the Hong Kong Stock Exchange on March 6.

In this disciplinary action statement, the Stock Exchange publicly condemned FANTASIA Group (01777.HK), COLOUR LIFE Service Group (01778.HK), and the then management team of the company.

Those publicly condemned by the Stock Exchange include the former chairman, CEO, and Executive Director Pan Jun of FANTASIA, as well as the non-executive Director and former Executive Director Zeng Baobao, totaling nine Directors.

The reason the Stock Exchange issued this disciplinary action statement is that it believes the aforementioned two listed companies and the reprimanded management members have damaged investors' rights.

The trigger for this public condemnation arose from a significant transaction several years ago with a considerable amount.

According to an announcement from CG SERVICES on September 28, 2021, CG SERVICES' indirect wholly-owned subsidiary, Country Garden Property Hong Kong, signed an equity transfer agreement with COLOUR LIFE SERVICES, under which CG SERVICES will acquire 100% equity of the target company. The target group represents the core assets of COLOUR LIFE SERVICES, a property management and community service operator.

“After completing the acquisition, the Group will hold 100% equity of the target company and will indirectly hold 100% equity of the core asset company.” CG SERVICES stated in its announcement at that time.

According to information disclosed by the Stock Exchange, COLOUR LIFE entered into an agreement with CG SERVICES on September 28, 2021, to transfer all of the issued share capital of Neighbourhood Joy (Share Transfer Agreement). The sale price is 3.3 billion yuan, which will be paid by CG SERVICES in three installments after meeting certain conditions, namely 2.3 billion yuan (already paid by CG after signing the share transfer agreement), 0.7 billion yuan, and 0.3 billion yuan.

The Stock Exchange pointed out that at that time, FANTASIA was the controlling shareholder of COLOUR LIFE. Such a significant sale should comply with relevant regulations and be approved by the company's shareholders.

However, the development of events was unexpected.

On September 30, 2021, two days after signing the aforementioned share transfer agreement, COLOUR LIFE and CG SERVICES entered into a loan agreement, borrowing 0.7 billion yuan, which must be repaid on the next working day in Hong Kong (i.e., October 4, 2021) or earlier.

As a guarantor for the loan, COLOUR LIFE committed that CG SERVICES would have the right to demand COLOUR LIFE to transfer all of the issued share capital of Neighbourhood Joy to it upon the occurrence of specified default events. Specified default events include: if the loan is not repaid before the due date, or if FANTASIA or COLOUR LIFE has external debts in default of 10 million yuan or more (default event).

On October 4, 2021, both default events were triggered - several priority notes of FANTASIA valued at over 10 million yuan defaulted and COLOUR LIFE defaulted on the loan. Therefore, CG SERVICES exercised its rights and required COLOUR LIFE to transfer Neighbourhood Joy to it.

However, FANTASIA and COLOUR LIFE, the two listed companies, did not timely disclose the sale of Neighbourhood Joy to investors and the market. It wasn't until October 26, 2021, that the two companies published a joint announcement detailing the share transfer agreement, loan agreement, and the fact that Neighbourhood Joy had been transferred to CG SERVICES.

The companies admitted that the sale of Neighbourhood Joy constituted a very significant selling matter and that it violated the applicable announcement, circular, and shareholder approval regulations, said the Stock Exchange.

Subsequently, on March 28, 2022, the aforementioned companies issued another joint announcement, disclosing that they had entered into a supplemental agreement with CG SERVICES. The supplemental agreement clarified that COLOUR LIFE had received the first payment of 2.3 billion yuan; the second payment of 0.7 billion yuan would offset the loan, and the remaining 0.3 billion yuan would be paid by CG in two installments after certain conditions were met, including obtaining shareholder approval for the transfer of Neighbourhood Joy from FANTASIA and COLOUR LIFE.

It wasn't until July 25, 2023, nearly two years after the sale of Neighbourhood Joy, that the aforementioned companies published a circular regarding the sale. A special general meeting of shareholders was held on September 11, 2023, where the shareholders approved the share transfer agreement and the supplemental agreement.

To avoid any doubts, the Stock Exchange emphasized that the above sanctions and directives only apply to the aforementioned companies and related directors, and do not apply to any other past or present directors of the companies.

A lawyer told reporters that in this case, the transaction involved such a high amount, but the listed companies publicly condemned by the Stock Exchange and the relevant management failed to make timely and sufficient disclosures, and the relevant companies had procedural flaws.

Zhang Qi, a partner at Yingke Law Firm, pointed out that according to the Stock Exchange's Listing Rules, matters involving 'very significant sales' (where asset value accounts for more than 75%) must go through the shareholder approval process and disclosure obligations. However, the company did not complete these procedures before the trade, but attempted to remedy the procedural flaws afterwards through 'ratification.'

The company sold Neighbourhood Joy without the shareholders' knowledge and also did not obtain shareholder approval as required by the Listing Rules. Such operations may be classified as regulatory avoidance, especially when risks were not adequately disclosed, harming the shareholders' right to be informed and their decision-making power, said Zhang Qi during an interview.

Regarding this event, the Stock Exchange Listing Committee will hold a hearing on September 10, 2024, focusing on whether the actions of the aforementioned company and related Directors comply with the responsibilities outlined in the Listing Rules.

The Exchange's disciplinary action statement disclosed that Pan Jun is the only Director involved in the discussion of the loan agreement related to CG SERVICES, representing COLOUR LIFE in signing the loan agreement and deciding on COLOUR LIFE's loan default. The other relevant Directors expressed that they were not aware of the transfer of Neighborhood Fun before the Board of Directors meeting held on October 6, 2021.

Pan Jun admitted that he did not consult the company's Board of Directors before entering into the loan agreement. After signing the loan agreement, despite having the opportunity to raise this matter at the FANTASIA Board meeting held on October 4, 2021, Pan Jun continued to keep it confidential. The Stock Exchange believes that Pan Jun ignored the internal control policies applicable to the loan agreement.

As for the other relevant Directors, when they became aware of the loan agreement, the transfer of Neighborhood Fun, and Pan Jun's suspicious behavior, they did not question Pan Jun or seek further information, despite other Board members raising concerns.

The Stock Exchange concluded that due to the sale of Neighborhood Fun and the violations of the Listing Rules by the relevant companies, other related Directors also violated their duties and responsibilities under the Listing Rules.

The Stock Exchange clearly stated that the aforementioned company's relevant personnel must complete training on relevant regulatory and legal issues, including compliance with the Listing Rules, before being reappointed as Directors of listed companies on the Stock Exchange or companies that will be listed on the Stock Exchange.

Zhang Qi pointed out that the occurrence of non-compliance in the operation and governance of listed companies can lead to a crisis of market trust, exacerbating the market's distrust of relevant enterprises, especially during an industry downturn when compliance flaws may trigger a chain reaction, such as stock price fluctuations and increased financing costs.

Regarding how listed companies should expand self-governance and constraints in information disclosure, and what measures should be taken to implement more effective regulations in the industry and information disclosure system, it is deemed necessary to further strengthen the company's self-governance while improving the information disclosure system.

For example, an audit and risk committee led by independent directors could be established to conduct pre-examination of significant transactions to avoid potential risks caused by individuals leading major decisions. Zhang Qi added.