“Major debt crisis” Matter that May Trigger a Change in the Controlling Right of a Company Shall be Regarded as Insider
2022.10.19 view:

——Jiang et al. vs. China Securities Regulatory Commission Xiamen Office and China Securities Regulatory Commission on the Confiscation of Illegal Gains, Fines, and Administrative Reconsideration

[Principle of Adjudication]

Securities regulatory institutions may determine in accordance with laws whether non-public information that has a significant impact on a listed company falls within the scope of insider information. Before disclosure to the public, the major debt crisis of the controlling shareholder of a listed company constitutes insider information that has a significant impact on the market price of the issuers securities.

[Implications]

Insider trading violates the principles of openness, fairness and impartiality of the securities market, seriously disrupts market trading order, interferes with market functions and infringes the legitimate rights and interests of investors. Currently, insider information is becoming more and more complicated in its sources and diversified in its transmission channels. Clarifying the determination rules and applicable standards of insider information through judicial adjudications is conducive to cracking down on insider trading in accordance with the law. This case determines that non-public “major debt crisis” matters of the controlling shareholder are insider information. Such a decision is of great significance. First, the securities regulatory institution has the authority to determine based on the law that “non-public information that has a significant impact on the market price of an issuer’s securities” is insider information in accordance with the definition of insider information in Paragraph 1 of Article 52 of the Securities Law of the Peoples Republic of China. Second, the controlling shareholder of the listed company in this case faces a major debt crisis, which may influence the change of control of the listed company if such a crisis cannot be properly resolved. The change of control of a company reflects the actual controller’s determination and confidence in the future development of a company, and it is the information that can affect the expectations of investors and has a significant impact on the price of the issuers securities market. Therefore, any “major debt crisis” matter that may trigger a change of control of a company shall be regulated as insider information prior to its disclosure in accordance with the law.

[Basic Facts]

In June 2020, China Securities Regulatory Commission Xiamen Office (hereinafter referred to as “CSRC Xiamen Office”) made the sued penalty decision. It determined that: X holding group is the controlling shareholder of a listed chemical company, and holds in total more than 30% of the shares of a listed environmental company through direct and indirect shareholding. In April 2018, the holding group faced a debt crisis because of its failure in issuing RMB 1.2 billion of Super-short-term-commercial-paper. On May 2, 2018, the environmental company and the chemical company published announcements at the same time, saying that the holding group had a significant uncertainty that has a substantial impact on the company and the stock trading was suspended from the day of the announcement. On May 3 and 4, 2018, the chemical company and the environmental company respectively published announcements, stating that the control of the company may change if the holding group was unable to properly handle its debt repayment. During the sensitive period of insider information, Jiang attended the companys management meetings and learned insider information, and Zhu had contact with relevant insiders who had access to insider information. During that period, Jiang operated the securities account of her husband “Zhou” to sell shares of the environmental company, cashed out over RMB 8.15 million and avoided a loss of over RMB 3.36 million. Zhu operated the securities accounts of “Xiang” and “Qiu” to sell shares of the environmental company, cashed out over RMB 11.37 million and avoided a loss of over RMB 4.72 million. Jiang and Zhu jointly operated the securities account of “Xuan” to sell shares of the chemical company based on insider information, cashed out over RMB 11.91 million and avoided a loss of over RMB 680,000. The CSRC Xiamen Office held that Jiang and Zhu committed insider trading, and decided to confiscate Jiangs illegal income of over RMB 3.91 million, and impose a fine of over RMB 11.2 million; to confiscate Zhus illegal income of over RMB 4.86 million and impose a fine of over RMB 5 million. Jiang and Zhu refused to accept the penalty decision involved in this lawsuit and applied to the China Securities Regulatory Commission for administrative reconsideration. The China Securities Regulatory Commission sustained the decision upon review. Jiang and Zhu refused to accept the result and filed a lawsuit with the Primary Peoples Court of Xicheng District of Beijing Municipality, requesting revocation of the penalty decision and the decision of reconsideration against which the lawsuit is filed. The Primary People’s Court of Xicheng District of Beijing Municipality entered a judgment to dismiss the claims of Jiang and Zhu after trial. Jiang and Zhu still refused to accept the judgment and appealed to the Beijing Financial Court. Upon trial, for the CSRC Xiamen Offices determination that the “major debt crisis” matter with the possibility of triggering a change of control of the environmental company and the chemical company shall be regarded as insider information before its disclosure in accordance with the law, the Beijing Financial Court held that such determination had a corresponding factual and legal basis. The first and second items of the penalty decision against which the lawsuit is filed are appropriate and should be upheld; the third item of the penalty decision against which the lawsuit is filed determines that Jiang and Zhu jointly traded the shares of “XX Chemical” based on insider information is insufficient in evidence and shall be revoked according to the law. Accordingly, a judgment is entered to revoke the judgment of the first instance, the third item of the penalty decision and the reconsideration decision against which the lawsuit is filed, and other claims of Jiang and Zhu were dismissed.

[Judge Comments]

Insider trading is a typical securities-related illegal activity. In July 2021, the General Office of the CPC Central Committee and the General Office of the State Council released the Opinions on Strictly Cracking Down on Illegal Securities Activities in Accordance with the Law. The Beijing Financial Court organized policy interpretation promptly via “Rongguang Lecture” platform. Through the lecture, I felt deeper the CPC Central Committee’s resolute attitude of zero tolerance towards securities-related illegal activities. It also inspired me to study and consider how to implement the requirements of the document in the handling of specific cases and exert the judicial safeguard function in cracking down on illegal securities activities in accordance with the law. Through the adjudication of this case, the court supports the securities regulatory institution’s decision in accordance with the law that non-public information having a significant impact on a listed company is insider information, so as to maintain the order of a healthy capital market.

[Expert Comments]

Expert: Wang Xixin, Professor, Law School, Peking University

The purchase and sale of securities by insiders based on insider information violate the principles of openness, fairness and impartiality of the securities market, seriously interfere with the normal functioning of the securities market and infringe investors’ legitimate rights and interests. However, in the practice of securities market regulation, how to determine “insider information” is a relatively complicated problem. In addition to statutory circumstances, there are still circumstances where regulatory institutions may determine inside information based on their judgment and discretion. In judicial trial practice, courts shall not only conduct a strict review of regulatory institutions’ power to decide what is “insider information” to prevent abuse of such power, but also make a substantive judgment on its impact on the securities market and the principle of fairness, etc., according to the nature of the information. This case is of great significance as it reflects the Beijing Financial Court’s comprehensive application of legal and financial expertise, and its ability to make accurate judgments on “insider information”.