It is often difficult to give any warnings regarding the criminal liability of mergers and acquisitions in the usual process of due diligence. This article aims to briefly discuss the criminal liability in mergers and acquisitions of listed companies with examples of insider trading and disclosure of insider information.
Acquisition of equity is one of the most common methods for mergers and acquisitions of listed companies. In terms of transaction structure, the acquisitions of equity can happen in different forms. In terms of effects on the stock market, any forms of equity acquisitions can lead to material fluctuations of stock prices of targeted companies, the acquirers or affiliated companies.
Before the disclosure of such transactions to the public, this kind of information, which can lead to material fluctuations on the stock market, would be considered sensitive information, or in other words, insider information. The Criminal Law classifies the deliberate release of insider information or the illicit use of insider information in the execution of securities transactions as a criminal offence. This is a breach of the legal provisions of insider trading or disclosure of insider information under article 180 of the Criminal Law.
Identification of the offence
Subject of crime. Under the provisions of paragraph 1 of article 180 of the Criminal Law, the subject of the crime of insider trading and disclosure of insider information would be the related officers with insider information and personnel who have illegally obtained such insider information. As such an accusation would be blank facts about a crime, the identification of the subject of such crime would need to take into consideration other disciplines of legal compliance.
In general, related personnel defined under the provisions of article 74 of the Securities Law, and under the provisions of item 12 of article 85 of the Regulation on the Administration of Futures Trading, and article 2 of the Interpretation of the Supreme People’s Court and the Supreme People’s Procuratorate on Several Issues Concerning the Specific Application of Law in the Handling of Criminal Cases of Engaging in Insider Trading or Leaking Insider Information, are identified as personnel with insider information. Under the provisions of article 4 of the above interpretation, such personnel should be identified as having illegally obtained insider information.
In November 2011, the China Securities Regulatory Commission issued the Provisions regarding the Compliance of Listed Companies in Managing the Registration of Personnel with Insider Information. Such registered personnel are obviously personnel with insider information according to paragraph 1 of article 180 of the Criminal Law. On the other hand, unregistered personnel with such information can also be regarded as related personnel with insider information in the sense of criminal law. Companies can also be considered as subject of crime in the same sense.
Identification range. The Criminal Law itself has not directly identified the range of insider information. The identification of the range of insider information should take reference from the Securities Law, the Regulation on the Administration of Futures Trading, and other related legal disciplines. According to article 75 of the Securities Law, insider information refers to the undisclosed information that can have a material impact on the stock prices of such companies and/or information related to the management and the financials of such companies.
For this, scholars in China often classify insider information as information with three characteristics: significance, confidentiality and relevance. Information related to the mergers and acquisitions of listed companies that could have a material impact on stock prices is certainly insider information. Intentional disclosure of information related to the merger and acquisitions of listed companies or illicit use of such information in the execution of securities trading can also be an offence of insider trading or disclosure of insider information.
Sensitive period. Insider information is time-sensitive. Once the insider information is legally disclosed, the issues of insider trading and disclosure of insider information would no longer exist. According to the judicial interpretation of the provisions, the sensitive period of insider information refers to the period from which the insider information is formed to the time when such information is disclosed.
The disclosure time is easy to define. It is the time when the insider information is disclosed on the press and websites designated by the securities and futures regulatory institutions. However, the time when the insider information is formed would be relatively difficult to define.
This article defines the formation time of insider information as early as the time when such insider information is proposed. According to the judicial interpretations, the time that marks the start of relevant proposals, plans, decisions or execution that affect the formation of insider information should be considered as the time when insider information is formed.
Although the judicial interpretation has listed proposal, planning, decision and execution of insider information all together, the process of formation of such insider information until its disclosure, which includes proposal, planning, decision and execution, are in reality four different stages. In general, the sensitive period of insider information starts from its proposal and often includes the above four stages.
Under the provisions of paragraph 1 of article 180 of the Criminal Law, the execution of insider trading and the act of disclosing insider information can lead to imprisonment or criminal detention for up to five years, or a fine of more than five times the illegal gains, if circumstances are serious. If the circumstances are especially serious, the offence can lead to five to 10 years imprisonment and a fine of double to five times the illegal gains.
According to articles 6 and 7 of the Interpretation of the Supreme People’s Court and the Supreme People’s Procuratorate on Several Issues Concerning the Specific Application of Law in the Handling of Criminal Cases of Engaging in Insider Trading or Leaking Insider Information, the judging criteria for serious and especially serious circumstances are defined with respect to the amount involved in the securities transactions, futures margin, and profits or losses avoided.
Cases of multiple insider trading transactions or deliberate disclosures of insider information, including those that may not have gone through administrative or criminal processing, should be calculated accumulatively.
Wang Hansheng is a partner and Peng Fu is an associate at East & Concord Partners
20/F Landmark Building Tower 1
8 East 3rd Ring Road North, Chaoyang District
Beijing 100004 China
电话 Tel: +86 10 6590 6639
传真 Fax: +86 10 6590 6639-9