Liabilities and compliance tips for information disclosure

By Chen Zhuoling, Starrise Law Firm
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The securities regulatory field has established a new norm of cracking down on and preventing information disclosure violations. The China Securities Regulatory Commission (CSRC) emphasises a focus on key cases of illegal information disclosure, taking strong measures to punish violations, maintaining a steadfast zero tolerance approach and ensuring that administrative enforcement is effective. In the article “Strictly Crack Down on Fraudulent Issuance, Financial Fabrication, and Other Illegal Information Disclosure Acts in Accordance with the Law”, published on 4 February 2024, the CSRC states that it had handled 397 cases of illegal information disclosure by listed companies in the past three years, a nearly 20% year-on-year increase. In the same three-year period, it imposed administrative penalties in 523 cases, with 1,932 individuals held responsible, imposed market bans on 168 individuals, and referred 116 cases to public security authorities for suspected criminal offences, firmly eliminating risks and promoting healthy competition.

Legal liabilities

Chen Zhuoling, Starrise Law Firm
Chen Zhuoling
Associate
Starrise Law Firm

According to relevant regulations such as the Criminal Law, the Securities Law, the Measures for the Administration of the Registration of Initial Public Offerings of Stocks, the Measures for the Administration of Information Disclosure by Listed Companies, the Measures for the Administration of Information Disclosure by Non-Listed Public Companies, and the Rules for the Administrative Determination of Administrative Liabilities for Information Disclosure Violations, the legal liabilities and other adverse consequences of information disclosure can be summarised as follows:

Forms of violations. Issuers, listed companies, controlling shareholders, actual controllers and acquirers are under scrutiny for failing to disclose required information or providing securities issuance documents and periodic reports, interim reports and other information disclosure materials with false records, misleading statements or significant omissions.

Types of liabilities. (1) Civil liability, namely the issuer’s controlling shareholders, actual controllers, directors, supervisors, officers (DSOs), and other directly responsible personnel, along with sponsors and underwriting securities firms and their directly responsible individuals, are required to assume joint and several liability for compensation with the issuer, unless they can prove they are not at fault; (2) administrative liabilities, with the directly responsible individuals being subject to administrative penalties, including rectification orders, warnings, fines or regulatory measures such as regulatory talks, issuance of warning letters, orders for public explanations, orders for periodic reports, orders to suspend or terminate mergers and acquisitions, and market bans; and (3) criminal liabilities, covering offences such as securities fraud and violations of disclosure or non-disclosure of important information. For corporate entities, they may face fines, while the managers and other individuals directly responsible may face imprisonment or detention, and could also be subjected to fines.

Other adverse consequences. Restrictions on initial public offerings or listings, limitations on fundraising and forced delisting.

Causes of violations

(1) Companies not establishing a securities compliance management system, leading to the absences of a systematic compliance framework, a scientific compliance organisational structure, executable compliance operating mechanisms and a strong culture of compliance in information disclosure.

(2) Issues that, within corporate governance mechanisms, inadvertently encourage abuse of power and illegal interference in the management of the company by controlling shareholders or actual controllers.

(3) DSOs who should act as internal whistleblowers to restrain violations in information disclosure lack compliance awareness or have insufficient understanding of the risks of illegal information disclosure, resulting in their own sanctioning.

Compliance tips

In the current environment of strict regulation, companies and their DSOs can take the following steps to identify blind spots related to information disclosure in corporate governance and implement targeted compliance measures to prevent risks:

Give high importance to information disclosure compliance and accelerate the establishment of a securities compliance management system. Companies should build a top-down compliance organisational structure at the decision-making, management and execution levels and clearly delineate responsibilities among the board of directors, the compliance management department and various business units, ensuring that information disclosure not only complies with laws and regulations but also meets investors’ information needs. Companies can enhance their information disclosure compliance through training, establishment and enforcement of policies and procedures, and continuous improvement.

Focus on the critical few and strengthen awareness of information disclosure risks. Companies should pay special attention to the “critical few” in information disclosure compliance, such as controlling shareholders, actual controllers and DSOs. Those people, as the company’s leadership, should be knowledgeable about legal requirements and regulatory policies, strictly adhere to compliance standards and firmly avoid intentional violations. Companies should also establish effective internal monitoring mechanisms, conducting regular and in-depth reviews and audits of the critical few to ensure effective control of internal compliance risks.

Broaden communication and co-operation channels and leverage external expertise. As the registration-based system reform enters a more challenging phase, companies should actively expand their external communication channels. First, companies should maintain good communication with regulatory authorities to stay informed about the latest regulatory policies in the securities field and understand the regulatory intent behind the policies. Second, they should establish partnerships with securities compliance lawyers to assess and review company information disclosure practices, promptly identifying potential issues in the disclosure process.

Take prompt and effective measures when information disclosure violations occur or may occur. Companies can employ various measures, including but not limited to the following responses: initiating a rapid reporting process to promptly inform relevant personnel on discovering risks of non-compliant information disclosure, enhancing communication with regulatory authorities, and promptly addressing any potential issues; making effective use of interim announcements to minimise the likelihood of direct administrative penalties; and remaining highly vigilant about the possibility of administrative penalties escalating into criminal charges, including bolstering the ability to respond to criminal risks following administrative penalties, promptly engaging professional lawyers, formulating appropriate legal strategies, and effectively managing the scope of risk impact.

Chen Zhuoling is an associate at Starrise Law Firm chenzhuoling@xinglailaw.com

Starrise law firm logo30 Beixingqiao Toutiao Alley
Dongcheng District
Beijing 100007, China
Tel: +86 10 6401 1566
E-mail: chenzhuoling@xinglailaw.com
www.xinglai.com

 

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