CSRC lays down the law on insider trading
December 07, 2012 | BY
clpstaff &clp articles &Mergers and acquisitions involving material asset reorganisation will be subject to greater scrutiny under new Regulations, which will increase due diligence costs for businesses in China
On November 6, the China Securities Regulatory Commission (CSRC) issued the Tentative Provisions on Strengthening the Regulation of Unusual Share Transactions in Connection with Material Asset Reorganisation of Listed Companies(中国证券监督管理委员会关于加强与上市公司重大资产重组相关股票异常交易监管的暂行规定), which become effective on December 17 2012.
The Provisions come exactly two years after the State Council and other regulatory bodies jointly issued an Opinion on Combating and Safeguarding against Insider Trading in the Capital Markets in Accordance with the Law (国务院办公厅转发证监会等部门关于依法打击和防控资本市场内幕交易意见的通知).
The Provisions formalise many of the points in the Opinion on how to combat insider trading. Guo Shuqing, the previous chairman of the CSRC, also placed great emphasis on tackling insider trading.
“The CSRC has put a lot of energy and attention on insider trading, which damages people's confidence in the market and the Commission is taking action to restore people's confidence,” said Bian Hao, a lawyer at Haiwen & Partners in Beijing.
Many investors are sceptical of the securities market as they believe insider trading is commonplace. It particularly affects the material assets reorganisation of listed companies because of price sensitivity issues.
“Typically, when planning a material assets reorganisation the parties will try to limit the number of people who have access to confidential information because any leakage, whether intentionally or not, will have an adverse effect on the transaction” said Bian.
The impact of the Regulations will be felt on mergers and acquisitions because the consequences are harsh. For example, the CSRC can terminate the examination process if the transaction of the listed company, the transaction counterparty that accounts for 20% or more of the transaction amount, or their controlling shareholder, de facto controller or controlled organisation, is found to have been involved in insider trading (Article 12).
While the CSRC has specific regulations governing material asset reorganisation, the latest Regulations are unique because they clearly provide that if there is insider trading related to the material assets reorganisation by the companies involved, the transaction will be adversely affected.
“This also includes lawyers or financial advisors involved in the transactions, as they will need to be replaced if they are found to be involved in cases of insider trading,” said Bian. Only after they have been replaced will the CSRC start to review the transaction.
This means that the cost of doing transactions will increase. Lawyers and financial advisors will need to do more due diligence, especially if there are discrepancies after the stock exchange's review as lawyers will need to further investigate to find out if there are cases of insider trading.
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