On July 17, 2023, the Securities and Exchange Commission (SEC) released new guidance on China-specific disclosure obligations for public companies. By issuing this guidance and the accompanying sample letter, the SEC is reminding companies that the agency continues to closely monitor compliance with respect to China-specific disclosures.
The SEC’s Division of Corporation Finance (the Division) issued the guidance. The Division’s role is to “ensure that investors are provided with material information in order to make informed investment decisions.”1 This includes providing interpretive guidance for companies issuing disclosures under various SEC rules to ensure that relevant information is properly conveyed to the public. This guidance builds on previous guidance documents and sample letters issued by the Division on China-related issues in recent years.2
The guidance document highlights for public companies three particular areas of China-related disclosures:
- The Holding Foreign Companies Accountable Act (HFCAA): The guidance “reminds” companies of their disclosure obligations under the HFCAA. These obligations require foreign issuers of securities to disclose the percentage of shares held by foreign government entities, whether a foreign government has a controlling financial interest with respect to the issuer, and identification of any Chinese Communist Party officials on the board of the company.3 We note that the SEC has emphasized the importance of complying with the HFCAA even though the SEC and the Public Company Accounting Oversight Board (PCAOB) reached a tentative agreement with Chinese authorities last year to allow the PCAOB to inspect audit firms based in China.
- Specificity in material risk disclosures with respect to China: The guidance urges companies to disclose “any material impacts that intervention or control by the PRC in the operations of these companies has or may have on the business value of their securities.” The guidance notes that the definition of “control” can extend beyond the ability to appoint board members or powers granted by corporate governance documents. For purposes of SEC disclosures, the term “control” means “the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract, or otherwise.”4
- Ties to the Xinjiang Uyghur Autonomous Region (XUAR): The guidance states that companies “may” be required to make disclosures related to material impacts as a result of the implementation of the Uyghur Forced Labor Prevention Act (UFLPA). The UFLPA creates a presumption that goods made in the XUAR are made with forced labor, and thus are ineligible for import into the United States. The guidance states that companies with significant ties to the XUAR may need to evaluate their disclosure requirements to see if the new law materially impacts their business.5
In addition to these three specific areas related to China-specific disclosures, the Division provided a sample letter that it may issue to companies to consider the points of emphasis described above. The sample letter poses questions seeking further information on the materials reviewed in making the disclosure and questions essentially summarizing the points above. Specifically, the sample letter suggests the inclusion of the following information in SEC disclosures:6
- For required submissions under paragraphs (a), (b)(2), and (3) of Item 9C of Form 10-K, “supplementally describe any materials” in addition to public filings “that were reviewed and . . . [identify] whether any legal opinions or third-party certifications, such as affidavits,” were relied upon as the basis for the submission.
- “Supplementally describe the steps [the company has] taken to confirm that none of the members of [its] board or the boards of [the company’s] consolidated foreign operating entities are officials of the Chinese Communist Party.” Include details such as “how the board members’ current or prior memberships on, or affiliations with, committees of the Chinese Communist Party factored into” the company’s determination, and whether third-party certifications, such as affidavits, were relied upon as the basis for the disclosure.
- Companies may not qualify assertions that their articles of incorporation do not include language derived from the PRC. Statements such as “to our best knowledge” will not suffice.
- “[D]escribe any material impact that intervention or control by the PRC government has or may have on [the company’s] business or on the value of [its] securities.” Here, “control” means “the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract, or otherwise.”
- If the company “conduct[s] a portion of [its] operations in, or appear[s] to rely on counterparties that conduct operations in, the Xinjiang Uyghur Autonomous Region,” the company should explain how its “business segments, products, lines of service, projects, or operations are impacted by the Uyghur Forced Labor Prevention Act (UFLPA)[.]”
This guidance should assist US-registered companies with significant Chinese operations in filling out SEC disclosures and identifying which areas they should prioritize when drafting these disclosures.