Three Areas of Consideration for China-based Companies: Disclosure Rules Raise the Stakes in U.S.-China Conflict

According to recent reporting, the Chinese government is asking companies to abide by the age-old advice: “If you don’t have something nice to say, don’t say anything at all.” Reuters disclosed on July 24 that Beijing is threatening to pull regulatory approval for companies seeking to list on foreign securities exchanges if they use what is deemed to be overly harsh language in public filings about the risks of operating in China. Unnamed sources told Reuters that in a meeting last month with lawyers in China, regulators requested that they “refrain from including negative descriptions of China’s policies or its business and legal environment in companies’ listing prospectuses.”

The directive from Chinese authorities appears to be at loggerheads with guidance issued days earlier by the U.S. Securities and Exchange Commission. The SEC Division of Corporation Finance (CorpFin) on July 17 published a sample comment letter detailing what kinds of information it may seek from companies based in China or those that have most of their operations inside the country’s borders. “The Division continues to believe that companies should provide more prominent, specific, and tailored disclosures about China-specific matters so that investors have the material information they need to make informed investment and voting decisions,” the guidance noted.

CorpFin highlighted three specific areas of importance for China-based companies to consider.

Obligations under the Holding Foreign Companies Accountable Act (HFCAA)

The HFCAA lays out a series of requirements for companies “with financial statements audited by an auditor located in a foreign jurisdiction where the PCAOB has determined it is unable to inspect or investigate completely because of a position taken by a foreign authority.” Companies that fall under the HFCAA rules must disclose:

• The percentage of shares of company stock owned by foreign government entities;
• whether foreign government entities have a financial interest in the company;
• the identities of Chinese Communist Party officials on the company’s board of directors; and
• whether the company’s organizing document contains a CCP charter.

Among the feedback related to the HFCAA, the sample letter indicates the SEC may ask issuers for supplementary information regarding efforts to verify that their board members aren’t CCP officials.

Risks posed by Chinese government intervention

The SEC also said it will continue to look for more information from China-based companies on the impact of government intervention on their operations. In this case, the agency appears to be asking for insight into the possibilities of government influence outside of the more direct lines to company management. “We remind companies that there are other ways in which a government or any person can exercise control over a company beyond appointing members to the board or having formal powers under the company’s organizational documents,” the agency noted.

Uyghur Forced Labor Prevention Act (UFLPA)

The UFLPA took effect in 2022 to punish the CCP for its ongoing crackdown on Uyghur Muslims and ethnic minorities in the Xinjiang region. The legislation prohibits importing goods from the region to the U.S. That includes goods manufactured in part from the region. Essentially, the new guidance from the SEC wants companies to explain the implications of the UFLPA for their businesses.

It probably isn’t a coincidence that Beijing is raising a fuss about disclosing risks at the same time the U.S. is pressuring China-based companies to be more forthcoming about them. Now, we just wait and see what happens when one side of the superpower rivalry inevitably acts against a company for disclosing too much – or not enough.