Legal risk: a three-step compliance strategy for listed companies

Amid the backdrop of ongoing regulatory reforms and an expanding capital market, the signals for stricter oversight continue to grow stronger. In this high-pressure environment, participants in the securities market are facing an increasing cost of non-compliance, and higher legal risks.

This, in turn, places greater demands on the compliance management systems of listed companies. In this article, the authors outline the key aspects of securities compliance in three phases: Before, during and after potential compliance issues.

Pre-event

Risk identification and prevention. Pre-event compliance strategies primarily involve establishing or refining the compliance management system while effectively implementing the compliance regime. The aim is to promote the healthy development of listed companies while minimising the risk to individuals (especially core executives), and of corporate responsibilities becoming entangled.

First, building or improving the compliance management system involves a comprehensive examination of the company’s operational processes to identify potential compliance risks at various stages. These include disclosure management, insider information management, reporting of major events, and regulations on shareholder reductions.

Next, effective risk prevention measures for identified risk points are developed in alignment with existing legal standards and regulatory requirements. For instance, in disclosure management, there is a need to strengthen the compliance management system that restricts the actions of key minorities.

Insider information management involves comprehensive protection and tracking of insider information along the entire chain, including establishing robust confidentiality management and insiders with access to insider information registration and management systems.

Establishing a well-defined, efficient process for internal reporting of major information, identifying the parties responsible for information reporting, and avoiding scenarios where the parent company faces penalties due to subsidiaries concealing information post-merger and reorganization, are paramount.

It is important to note that, in the context of administrative and criminal penalties that go hand in hand with securities cases, companies must place significant emphasis on the prevention of criminal legal risks. Specifically, they should focus on segregating the risks between the company and individuals, as well as between listed companies and their subsidiaries.

For instance, they should clearly define the responsibilities of parties involved in the preparation and review of disclosure documents, categorise document reviews, and subject major information documents with higher criminal risk to multi-stage, multi-level reviews to prevent the concentration of all criminal risks on controlling shareholders, actual controllers and senior executives.

Finally, considering the company’s operational context, they should integrate risk prevention measures into financial management, seal management, contract management and corporate governance, ensuring the effective execution of the compliance management regime and achieving systemic risk prevention.

Real-time

Proactive response and risk control. During the compliance phase, the focus is on managing securities compliance risks as they arise, such as civil compensation lawsuits stemming from false statements, receipt of regulatory penalty notices, or being subject to criminal investigations by the public security authorities.

China has established a co-ordinated mechanism that combines administrative oversight and criminal punishment for securities violations. Therefore, securities market participants, during the administrative investigation stage, should not only co-operate with the authorities, but can also engage professional lawyers early on to handle the investigation.

In the administrative investigation phase, the role of lawyers includes but is not limited to a comprehensive review of case facts, legal analysis, development of response strategies, assistance in collecting and organising evidence, application for and participation in hearings, submission of statements and defence arguments, and negotiation with regulatory bodies for administrative settlements, as well as involvement in subsequent administrative reconsiderations and administrative litigation.

Lawyers with criminal law expertise can anticipate potential criminal legal risks at this stage and proactively organise the evidence and legal opinions where the case does not meet the criteria for criminal offences, legally blocking the spread of risks and effectively preventing criminal legal risks.

After-event

Resolving criminal risks. Post-compliance efforts primarily address situations where securities market participants have been identified as having committed illegal or criminal acts. Through the construction of compliance management systems, these entities aim to secure lenient penalties.

Securities crimes are dual character, combining elements of administrative and criminal wrongdoing. Due to variations in the constituent elements of administrative violations and criminal offences, and the stricter standards of evidence in criminal proceedings, lawyers can formulate professional defence strategies and opinions based on a comprehensive review of all case evidence.

Additionally, companies can apply for third-party supervision and evaluation mechanisms to review and evaluate their compliance management systems. This review can facilitate non-prosecution, or more lenient sentencing recommendations.

As an example, the authors’ law firm acted as a third-party supervisor in Beijing’s first securities compliance case involving a company’s vice president and board secretary, who was accused of leaking insider information.

According to the Criminal Law, the individual could have faced more than three years of imprisonment. However, the company’s compliance restructuring, recognised by the court, led to a more lenient sentence, with probation as the ultimate outcome.

Beyond criminal cases, to avoid heavy administrative penalties even after a non-prosecution decision has been reached, China is also actively exploring a co-ordination mechanism for the convergence of administrative and criminal aspects of corporate compliance rectification, allowing entities under investigation to have their compliance efforts acknowledged by administrative authorities.

This recognition can serve as a crucial legal basis for administrative agencies to impose lenient penalties.

Wang Weining is a founding partner and Li Kexuan is an associate at Starrise Law Firm

30 Beixingqiao Toutiao Alley

Dongcheng District
Beijing 100007, China
Tel: +86 10 6401 1566
E-mail: wangweining@xinglailaw.com
likexuan@xinglailaw.com
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