Listed companies have faced growing scrutiny in recent years of their information disclosure, as well as increasingly prominent criminal risks for violations, especially with the issue of Several Opinions of the Supreme People’s Court on Providing Judicial Guarantees for the Reform of ChiNext, and the Pilot Adoption of a Registration-based IPO System, and the Opinions on Strictly Cracking Down on Illegal Securities Activities in accordance with the Law.
The China Securities Regulatory Commission (CSRC) handled 740 cases in 2020, up by 34% year-on-year, including 353 new cases (282 accepted as registered cases) and 74 major cases. There were 84 new cases on illegal information disclosure (including 33 concerning financial fraud), 51 of market manipulation and 66 of insider trading (including 28 concerning mergers and reorganisations). There were 116 cases transferred or reported to law enforcement departments throughout 2020, doubling from the previous year and a significant increase from the 19 cases transferred from 2016 to 2018. For listed companies, the importance of criminal compliance in information disclosure cannot be overstated.
China has four levels of legal provisions regulating the information disclosure of listed companies: the Criminal Law, specifically provisions on illegal disclosure or concealment of material facts under article 161 and insider trading, leak of inside information, and trading by using undisclosed information under article 180; relevant provisions under the amendments to the Criminal Law; non-criminal regulations such as the Securities Law, the Law on Certified Public Accountants and the Rules for Determining Administrative Liabilities for Illegal Information Disclosure, which must have basis in criminal law provisions to be effectively carried out; and legislative or judicial interpretations on the application of such laws by the NPC Standing Committee, the SPC and the Supreme People’s Procuratorate (SPP).
Criminal compliance risks
Judging from the cases transferred by the CSRC to law enforcers, and the typical cases jointly released by the SPP and the commission, criminal compliance risks incurred from illegal information disclosure generally come down to either illegal disclosure or concealment of material facts, or insider trading or leak of inside information.
Illegal disclosure or concealment of material facts. Companies or enterprises responsible for information disclosure provide financial or accounting reports containing false information or concealing material facts to the shareholders and the public, or fail to make due disclosure as required, to the detriment of shareholders’ and others’ interests. Typically, such companies issue false information in their financial statements, or omit material information such as external guarantees or related party transactions.
The penalties for such crimes are relatively severe, with violators subject to a maximum of five years of imprisonment and/or a fine. In cases of a unit crime, apart from a fine to the entity, executives or other personnel directly responsible, such as those in charge of the company or its finances, will be further penalised.
Insider trading or leaking of inside information. This refers to serious circumstances where personnel, or entities with access to, or having illegally obtained, inside information on securities or futures, deal in or leak the information before the issue of the instruments or public disclosure of any information regarding the transaction of such securities or futures or affecting their price. Typically, such personnel or entities have access to or have illegally obtained sensitive inside information, and prematurely deal in such securities, advise others to do so, or leak inside information.
Based on past cases, violators are more likely to be allowed probation if they turn themselves in, surrender the illegal earnings or settle penalties quickly. The crime is primarily directed to either the beneficiary of inside information, or the “helpful” provider of such information.
Listed companies should:
- Focus on internal controls and raising awareness, by optimising their shareholding and governance structures, specifying the functions and rules of procedure of the board of directors, board of supervisors and shareholders’ general meeting. Training should be provided to substantial shareholders, de facto controllers, management, board secretaries, accountants and other relevant personnel to raise awareness in preventing risks in information disclosure.
- Form cordial relationships with investors, competitors and news media, in order to handle any such events in an appropriate manner.
- In cases of illegal disclosure, companies should conduct a thorough self-inspection and submit a written report to the regulators. If the CSRC decides to investigate, companies should co-operate with the whole risk disposal process.
- Engage professional advisory agencies and legal experts on securities compliance to provide expertise and support.
- Purchase liability insurance to reasonably control and shift such risks.
Liu Huaying is a partner at Grandway Law Offices
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