China’s Amendment (XI) to the Criminal Law was officially adopted on 26 December 2020. There are 47 clauses in this amendment, and the amendments to the area of securities crime involve crimes of fraudulent issuance of stocks and bonds, crimes of illegal disclosure and non-disclosure of important information, crimes of providing false certificates, and crimes of manipulating the securities and futures market.
In the process of M&A and the reorganisation of listed companies, funds, in huge amounts, are often raised through the issuance of new shares or corporate bonds. In the specific planning and implementation process of M&A and reorganisation, listed companies, as public companies, also need to undertake many more obligations of information disclosure, which will inevitably force them to face criminal risks under the amendment. These risks are reflected in the following three aspects.
Increased criminal liability
For illegal and criminal acts closely related to the M&A of listed companies – such as fraudulent issuance, illegal disclosure, and manipulation of the securities market – both the intensity and scope of punishment stipulated in Amendment (XI) to the Criminal Law are increased.
The penalties against crimes of fraud issuance and illegal disclosure get heavier.
For the crime of fraudulent issuance of stocks and bonds, the original one-level penalty of “fixed-term imprisonment of less than five years” was adjusted to two levels of penalties, with a maximum of 15 years’ imprisonment.
For the crime of illegal disclosure and non-disclosure of important information, the original one-level penalty of fixed-term imprisonment of less than three years was revised to two levels of penalties, which not only increases the upper limit of the term of imprisonment of the first-level penalty, but also increases the upper limit of the term of imprisonment of the maximum legal penalty – up to 10 years’ imprisonment.
The upper limit of property penalty for related crimes has been cancelled, and the fine has been increased. Before the amendment, the maximum fine for the crime of fraudulent issuance of stocks and bonds was “5% of the amount of illegally raised funds”, and the maximum fine for the crime of illegal disclosure and non-disclosure of important information was RMB200,000 (US$31,000). In the amendment, these are directly revised to “concurrently impose a fine”, cancelling the legislative upper limit of the fine, and leaving space for judicial interpretation and the discretion for judges.
The scope of cracking down on fraudulent issuance and market manipulation has improved.
The amendment adds to the types of securities issued fraudulently “depository receipts or other securities legally recognised by the State Council according to law”, to the original “stocks and bonds”. Three new types of manipulation of securities market are also added to clarify the criminal liability for new types of market manipulation, such as “spoofing trading”, “misleading trading” and “scalping trading”.
Liability of related personnel
It has been made clear that the controlling shareholder, the effective controller, the instigator of fraudulent issuance, and illegal disclosure actor, should bear criminal liability.
The additional corresponding provisions are attention clauses, or simple sentencing rules. Even if there is no relevant provision for the relevant acts of controlling shareholder and effective controller, the criminal liability of investigating the above-mentioned persons can also be investigated by way of investigating the “two kinds of responsible persons”, in accordance with the punishment principle of unit crime, and there is no need to add corresponding provisions separately.
This is an attempt by legislators to guide judicial practice. For securities-related illegal acts, cracking down on important and key minorities is the top priority in controlling related illegal and criminal acts. Therefore, in the process of M&A of listed companies, the “key minority” of the company must always bear in mind this “sharp sword” of the Criminal Law, pay attention to compliance management, and prevent criminal risks.
Matters needing attention in the determination of unit crime.
It is worth noting that for the crime of illegal disclosure and non-disclosure of important information, the accusation clearly shows that the subject of responsibility is the company or enterprise that has the obligation of information disclosure according to law, and it seems that the subject commits an absolute unit crime.
However, according to the punishment principle of unit crime in the Criminal Law, since the clause does not stipulate the punishment on the unit, the unit suspected of illegal disclosure of information cannot be investigated for the criminal liability of this crime. Such a provision is based on the fact that listed companies involve multiple stakeholders, and the punishment on the units involved would cause double damage to minority shareholders.
Imposing heavier punishment
With the gradual strengthening of the supervision on the securities market, the prudence obligations of intermediaries undertaking asset assessment, capital verification and recommendation with guarantee should be increased accordingly. This amendment expands the scope of the subject of crime by clearly including the sponsors and other personnel.
The amendment also increases the penalties against such crimes. If securities intermediaries provide false assessment, certification and other documents, the maximum penalty will be increased from the original five years’ imprisonment to 10 years. The handling of previous bribery circumstances is also changed from aggravating circumstances to one felony punishment, so in terms of crime liability, the “intermediaries” in the securities market can be equally treated with the real acting subjects in the market. This further shows China’s determination to strengthen its supervision on the securities market and severely crack down on illegal and criminal acts in the market.
With the rapid development of the social economy and capital market, crimes related to securities and futures are also on the rise. Especially in the M&A and reorganisation of listed companies, fraudulent issuance of securities, illegal disclosure and non-disclosure of information may constitute criminal crimes, and the criminal liability has become more severe. The directors, supervisors and senior executives of listed companies, as well as service personnel of intermediaries, should improve their level of understanding, firmly establish risk awareness, pay attention to compliance management, and avoid mistakenly committing criminal offences.
Du Lianjun is a partner and Chu Zhilin is an associate at East & Concord Partners
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