Disclosure obligations, compliance of listed companies in M&A

By Liu Huaying and Xu Chen, Grandway Law Offices
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Since last year, listed companies involved in large-scale mergers and acquisitions (M&A) have frequently experienced after-effects, which is an issue worthy of vigilance. The M&As are often accompanied by equity adjustments, changes in assets and liabilities, or changes in profits and business.

Arising problems that can significantly affect the order of the securities market, the company itself, and the rights and interests of investors include goodwill impairment, non-compliance with performance commitments, information disclosure violations and even suspected contract fraud.


compliance of listed companies in M&A
Liu Huaying
Grandway Law Offices

Authorities such as the China Securities Regulatory Commission (CSRC) and public security agencies have been strengthening investigations of M&A of listed companies.

In 2019, the CSRC and local securities regulatory bureaus carried out special inspection activities on M&A. In 2020, the Measures for Management of Material Assets Restructuring of Listed Companies, and the Measures for the Administration of the Takeover of Listed Companies were issued, revising the disclosure obligation requirements and penalty system.

In 2022, the Supreme People’s Court and Supreme People’s Procuratorate announced plans specifically targeting financial and securities crimes through strict law enforcement measures. They intend to collaborate with the Ministry of Public Security to target wrongdoing in these industries, improve the M&A system of listed companies, and strengthen supervision throughout the entire process.


compliance of listed companies in M&A
Xu Chen
Salaried Partner
Grandway Law Offices

The business or asset situation of a fictitious company is one of the main problems exposed in the process of large-scale M&A of listed companies.

In cases such as the acquisition of Shanghai Champs Elysees Media by Guandong Media, and the acquisition of Elephant Advertising by Xinjiang Tianshan Animal Husbandry Bio-engineering, the acquired parties fraudulently obtained cash and shares from listed companies by means of fictitious contracts, and inflated deposits in the M&A. They were eventually prosecuted for contract fraud.

But even as the defrauded party, listed companies may still bear administrative, civil, criminal and other legal liabilities due to failure to fulfil their due diligence obligations in the process, resulting in information disclosure violations.


The disclosure of positive news such as M&A and restructuring will have a substantial impact on investors’ judgments. If the evaluation report, audit report and other materials disclosed by listed companies contain false information, the CSRC may issue warnings, fines and other administrative penalties.

If the amount is huge, or the social impact is large, the main responsible person of a listed company will be banned from the market from five years up to a lifetime. For example, in April 2022, the CSRC released 20 typical cases of illegal activities, of which 10 were related to improper disclosure of information by listed companies, and the M&A field was a major area of non-compliance.


Due to false positive information, the stock price can rise falsely, damaging investor interests. Minority investors can claim civil compensation from listed companies for infringing on their legal rights based on false statements.

Due to the large number of minority investors, listed companies involved in the case often bear a huge amount of compensation. For example, in the securities false statement liability dispute of Kangmei Pharmaceutical, the listed company and its direct responsible personnel were found jointly and severally liable to minority investors for total compensation of RMB2.5 billion (USD362 million).

If a listed company is knowingly aware that the counterparty has fictitious business or financial fraud in the process of an M&A, it deliberately disseminates false facts and discloses wrong information to the public, seriously harming the interests of shareholders or other investors.

Its liability may rise to the criminal level, suspected of the crime of illegal disclosure and non-disclosure of important information.


Since M&A are related to the operation and development of listed companies, the following compliance suggestions are proposed to avoid the above-mentioned problems and risks:

  1. Make substantive examination and on-site investigation the top priority of the transaction objective. In addition to basic due diligence, listed companies should focus on substantive verification of the real business situation corresponding to business contract materials, conduct on-site inspections as much as possible, review the performance of contracts, and make corresponding records.
  2. Establish a crisis response mechanism to turn crisis into opportunity. First of all, strictly control information disclosure and effectively ensure the accuracy of information disclosure. Second, if the relevant transaction information is difficult to keep confidential, or has been leaked, and stock trading fluctuates abnormally, the listed company should apply for the suspension of trading and disclose it in a timely manner to avoid insider trading and further losses for minority investors.
  3. Hire professional lawyers to establish a corporate compliance system and ensure risk isolation. First of all, each stage of an M&A should be recorded in detail, including the specific time, participants, deliberation and resolution content. At the same time, the decision-making intention and relevant responsible persons should also be identified, and a specialised compliance system should be established.

Second, listed companies should actively carry out internal compliance investigations. If compliance failure reaches the criminal stage, it will have a serious adverse effect on the listed company. Therefore, before the CSRC’s investigation, the listed company should proactively set up an internal investigation team to collect and sort out the existing evidence and form an internal investigation report.

Finally, listed companies should actively co-operate with the CSRC’s investigation, promptly provide the company’s internal compliance policies including an employee compliance manual for evidence and statements, block the possibility of criminal accusations by the unit, and strive to separate the enterprise from personal criminal liability of the main responsible person.

Liu Huaying is a partner and Xu Chen is a salaried partner at Grandway Law Offices

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