2020.11.26 WU, Lei、 XIAO, Xian
The Securities Law and the CSRC regulations stipulate prohibitions on activities utilizing insider information of an A-share listed company (“Company” or “Listed Company”) for insider trading. Insider information is one of the fundamental elements of insider trading, without which the relevant trading activities should not constitute insider trading. To provide fund managers with clearer guidance and assist fund managers’ compliance team to identify insider information, below we summarize the major categories of insider information prescribed by laws and regulations.
Pursuant to Article 52 of the Securities Law, insider information shall refer to non-public information that involves “operating” and “finance” of the issuer or having significant impact on the market price of the issuer’s securities. The Securities Law, the Administrative Measures for Information Disclosure of Listed Companies (“Administrative Measures”) and the rules of both the Shanghai Stock Exchange (SSE) and the Shenzhen Stock Exchange (SZSE) enumerate the categories of insider information in detail. The Securities Law and the Administrative Measures also authorize, in the form of miscellaneous clauses, the CSRC to further specify the categories of information which shall be disclosed by a Listed Company and therefore shall constitute insider information before it is disclosed to public.
Based on our observations of the law enforcement practices of the CSRC, insider information relating to a Listed Company shall mainly include the following categories:
Major financial information relating to a Listed Company shall constitute a typical category of insider information. According to the Securities Law, the Administrative Measures, the rules of both SSE and SZSE and the law enforcement practices of the CSRC, financial information relating to a Listed Company that may constitute insider information shall include:
(1) Relevant financial data in the annual report, quarterly report and other periodic reports of the Company;
(2) Relevant financial data in performance preannouncement, performance bulletin and the restatement of the performance preannouncement of the Company;
(3) Profit distribution plan of the Company;
(4) Major changes in the Company’s performance, especially incurrence of serious deficits or serious losses, or incurrence of major debts or large claims and defaults on repayment of large debts which are due;
(5) Major revenue or losses of the Company’s controlling subsidiaries or equity participation companies, which cast significant impact on the performance of the Company;
(6) Receiving additional revenue such as large government subsidies that may have a significant impact on the Company’s assets, liabilities, equity interests or operational achievements;
(7) Changes in accounting policies and accounting estimates;
(8) Any false or untrue statement in the disclosed financial information, or any failure to disclose in accordance with regulations, which shall be corrected.
Insider information may be generated in a capital increase, capital reduction or stock incentive of a Listed Company. Pursuant to Article 52 and Article 80, Paragraph 2, Item (9) of the Securities Law and Article 30, Paragraph 2, Item (9) and (13) of the Administrative Measures, information relating to capital increase and capital reduction of a Listed Company shall constitute insider information. In the law enforcement practices of the CSRC, insider information relating to capital increase of a Listed Company mainly includes information of public offering of shares or non-public offering of shares. Insider trading cases involving non-public offering of Listed Company are relatively common. Among all types of insider trading cases penalized by the CSRC in the past ten years, approximately 8% of such cases arise from non-public offering of Listed Companies.
In addition, information relating to stock incentive of a Listed Company may also constitute insider information. The Administrative Measures stipulates that “stock incentive” of a Listed Company shall constitute major information that shall be disclosed in an interim public announcement. The CSRC, in a couple of sanctioned cases determined that “stock incentive” shall be considered inside information for falling into the scope of “other major information that the CSRC deems as having a significant impact on the trading price of shares.”
In addition to financial information, a large amount of insider information may be generated in the operation of a Listed Company. According to laws, regulations, the rules of both SSE and SZSE and the law enforcement practices of the CSRC, the following information generated in the operation and management of a Listed Company may constitute insider information:
(1) Major information in relation to operation or business of a Company, i.e. significant change in the operational guidelines and business scope of the Company; significant change in external conditions of the Company’s business operations; the suspension of the primary business or all business of the Company or the Company’s acquisition of important business qualifications, etc.;
(2) Transactions relating to a Company’s major asset restructuring, meeting the standards prescribed in the Administrative Measures for Major Asset Restructuring of Listed Companies;
(3) Entering into significant contracts or making significant investments, namely, transactions which trigger the public disclosure requirements stipulated by the rules of both SSE and SZSE;
(4) Providing a major guarantee or engaging in related-party transactions which may have significant impact on the Company’s assets, liabilities, equity interests and operational achievements, namely, guarantee and related-party transactions that trigger the public disclosure requirements stipulated by the rules of both SSE and SZSE;
(5) Major information relating to the Company’s existence, such as decisions on mergers, divisions, dissolutions and applications for bankruptcy, or being in bankruptcy proceedings or ordered to close down pursuant to laws, etc.;
(6) Major litigation or arbitration involving the Company, or resolution of the general meeting of shareholders or the board of directors is revoked or declared to be invalid in accordance with laws.
Information relating to change in shareholding of Listed Company may also constitute insider information. According to the Securities Law, the Administrative Measures and the law enforcement practices of the CSRC, the following information relating to change in the shareholding structure of a Listed Company shall constitute insider information:
(1) Relevant plans for acquisition of a listed company, regardless the method of acquisition such as acquisition by agreement, tender offer or other lawful means;
(2) Changes of de facto controller or shareholder who holds more than 5% of the company's shares, or any significant change in their shareholding or controlling ownership;
(3) Receiving any order from the court that prohibits the Company’s controlling shareholder from transferring shares; or 5% or more of the Company’s shares held by any shareholder are pledged, frozen, judicially auctioned, placed in custody, held under trust or the voting rights attached to such shares are restricted for exercise in accordance with laws;
Besides the relevant major information relating to shareholding structure, controlling ownership, finance and operation of a Listed Company, the following information relating to Listed Companies’ directors, supervisors and senior executives may also constitute insider information:
(1) Change of director, one-third or more of supervisors or managers;
(2) Chairman of board of directors or general manager being incapable of performing his/her duties;
(3) A director, supervisor or senior executive is under investigation or subject to enforcement measures imposed by a competent authority for a suspected violation of laws or disciplines or crime.
Besides the information regarding investigation or enforcement measures imposed on directors, supervisors or senior executives for their suspected violation of laws and disciplinary rules or suspected crimes that may constitute insider information, the information relating to violation of laws and regulations by the Company or its de facto controller may also constitute insider information.
(1) The Company is under investigation by a competent authority for a suspected violation of laws and regulations or crime;
(2) The Company is subject to criminal penalty or severe administrative penalty；
(3) The Company’s controlling shareholder or de facto controller is subject to enforcement measures for a suspected crime.
According to the Securities Law and the Administrative Measures, the following information regarding a Listed Company’s de facto controller shall constitute insider information:
(1) Change of de facto controller, or significant change of its shareholding or controlling stake (see Article 4, item (2));
(2) Significant changes in business undertaken by the Company’s de facto controller or other enterprises it controls, which is identical or similar to the Company’s business.
According to the Administrative Measures, where an event occurs in a Listed Company’s controlling subsidiaries or equity participation companies, which may have significant impact on the prices of the Company’s securities and securities derivatives, the Listed Company shall perform its information disclosure obligation. In the past law enforcement of the CSRC, the CSRC has penalized several insider trading cases concerning major information of the Listed Company’s controlling subsidiaries or equity participation companies.
The current laws and regulations do not stipulate detailed circumstances of insider information related to a Listed Company’s controlling subsidiaries or equity participation companies. However, according to the Securities Law, the Administrative Measures, the rules of both SSE and SZSE and according to past law enforcement practices of the CSRC as we have observed, the following criteria can be referred to in determining whether major information involving the Listed Company’s controlling subsidiaries or equity participation companies constitutes insider information:
(1) Applying the same standard for determining insider information for the Listed Company to its subsidiaries. That is, the categorization of insider information applicable to the Listed Company shall apply to its subsidiaries, especially for the major information involving the finance and business of the subsidiaries, which may have significant impact on the financial data in consolidated financial statements or business and performance of the Listed Company;
(2) As for a company invested but not controlled by a Listed Company, focusing on the major information relating to the finance or business of such equity participation company, especially the information that may have significant impact on the business and performance of the Listed Company.
The current Securities Law (amended in 2019) introduced certain changes to the definition of “insider information” under the old Securities Law. Under Article 75 of the old Securities Law (amended in 2005), the CSRC was given the discretion to determine “other major information that has significant impact on trading prices of securities” as insider information, beyond the major information disclosed in the interim public announcement by Listed Companies defined as insider information by the old Securities Law. That means, under the provisions of the old Securities Law (amended in 2005), insider information shall include both (i) the insider information explicitly prescribed by laws and regulations and (ii) other major information identified by the CSRC as insider information. Consequently, in the Everbright Securities insider trading case (Case No. 2013-59) sanctioned according to the old Securities Law, the CSRC exercised its discretion to determine the information related to “fat finger” orders by Everbright Securities as insider information based on the criteria of “materiality” and “non-disclosure”.
The relevant provisions of the current Securities Law (amended in 2019), however, changed the provision that the CSRC has the discretion to determine “other major information that has a significant impact on the securities trading price" as insider information while providing "other matters stipulated by the securities regulatory authority under the State Council" as the miscellaneous clause for identifying insider information. Some may argue that under the current laws and regulations, only the laws and regulations can specify the categories of insider information while the CSRC no longer has any discretion to identify insider information.
It is worth noting that the provisions enumerating the categories of insider information in the Securities Law and the Administrative Measures are relatively general, and the laws, regulations and the rules of both SSE and SZSE provide a large number of detailed provisions on the major circumstances and events which shall be publicly disclosed by a Listed Company. Despite of all given complicated circumstances and events stipulated under the laws and regulations, the possibility cannot be ruled out that the CSRC may still, in certain cases, apply the standards of "materiality" and "non-public" to determine the relevant information that is not explicitly stipulated as falling into the scope of insider information.
We will continue to monitor the situation and keep our clients apprised of any important developments.