In the past few months, the A-share market in China has seen a gradual recovery, leading to a surge in the instances of "cornering" or significant share acquisitions of various publicly listed companiesAccording to the data provided by Tonghuashun iFinD, between 2022 and 2024, there were reported instances of such cornering events as follows: 85 cases in 2022, 49 in 2023, and 71 in 2024. For context, a cornering event occurs when an investor purchases 5% or more of a company's shares from the secondary market, marking a noteworthy influence over the company's governanceIndustry insiders suggest that this uptick in share acquisitions could bolster market confidence and encourage firms, especially those being cornered, to enhance their corporate governance practicesHowever, the situation is not without its complications; instances of irregular cornering—particularly those involving anonymous buyers or short-term trading strategies—have severely disrupted market order and posed challenges to long-term market stability.

The question arises: why are there so many instances of irregular cornering behavior? A seasoned director from an A-share company provided insight, attributing this phenomenon to the recovering secondary market conditionsThe main players in these cornering events include insurance funds, industrial capital, private equity, and individual investors, many of whom are primarily motivated by financial investment returnsThe companies that are often targeted generally display characteristics such as weak performance, healthy cash flow, small market capitalization, and potential for transformationWith the market outlook improving and regulatory bodies promoting mergers and acquisitions, many investors are leveraging cornering tactics to secure substantial stakes, often based on anticipation of restructuring activities.

Moreover, it has become commonplace for entities and individual investors to utilize multiple accounts for their cornering attempts

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Unfortunately, this practice can lead to violations of regulations, as many are not fully versed in the complexities of the rules governing these transactionsThe lack of serious penalties for instances of excessive cornering has also contributed to complacency, encouraging some investors to operate on the edge of regulatory boundaries without fear of repercussions.

Additionally, controlling the exact number of shares acquired through multiple accounts can be dauntingA report released by Xinguang Consulting in their "Red Book of Equity Changes in Listed Companies 2024" indicates that, during exchanges through stock exchanges, shareholders must disclose an equity change report upon reaching a 5% threshold or whenever their holdings increase or decrease by 5%. Achieving this precise control can be exceptionally challenging in real-time trading conditionsFor instance, consider a company with a total share capital of 400 millionAccording to regulations, a shareholder must halt any further purchases and disclose a simplified equity change report upon reaching 20 million shares (5% of the total); however, fluctuations in market conditions typically find shareholders acquiring somewhere between 20 million and slightly more (i.e., 20,000,000 to 20,020,000 shares).

From a practical standpoint, it has been observed that cornering parties often end up holding shares around 5.01% or 5.02%, exceeding the anticipated boundary slightly, which typically does not attract regulatory scrutiny as stated by Liu Wei, a partner from Daguang Consulting specializing in compliance research regarding listed companiesThis, coupled with the volatile nature of stock prices, makes it exponentially more difficult to manage multiple accounts and coordinate timely purchases, frequently resulting in transgressions such as excessive cornering.

Liu Wei also suggested that regulatory agencies may have adopted a lenient approach this year towards multiple cases of irregular cornering due to a protective stance toward the market

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While the tolerance for infractions has climbed, it is crucial, from a long-term perspective of fostering a high-quality capital market, to strike a balance between leniency and strict monitoringRegulatory authorities should be stringent in their oversight of severe violations related to excessive cornering (above 5.03%), short-term trading, and anonymous cornering practices.

An analysis conducted by this journalist has uncovered 22 cases of irregular cornering actions, in which companies such as Huase Group, Farsen, Fuan Environmental Protection, Gaolan Co., and SuperMap Software faced regulatory measures due to these violationsNotably, the sanctions employed were primarily administrative in nature and lacked strident derivatives.

There is a compelling case to further regulate cornering behaviors to create a healthier market environment.

In recent years, there have been successful regulatory practices aimed at managing cornering behaviorOne noteworthy example is the “Baowan War” in 2015, a protracted conflict over control of the real estate giant VankeThis battle saw various capital entities—such as China Resources, Baoneng, Anbang, and Evergrande—join forces and employ a series of takeover and counter-takeover tactics over the span of four yearsNotably, the intervention by regulatory authorities was crucial in curbing an escalation that would have harmed numerous stakeholders and ensured market order, demonstrating a significant achievement in market regulation.

As China embarks on a transformative journey towards modernization, the capital market is simultaneously transitioning towards high-quality developmentIt is widely recognized that a high-quality capital market requires robust legal frameworks as its foundationIndustry experts have proposed several recommendations to better regulate cornering practicesFirstly, there should be a concerted effort to enhance legal awareness and education regarding the rules of cornering transactions across diverse stakeholder groups

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