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Insider Trading Policy
FIRST CHINA PHARMACEUTICAL GROUP, INC.
To: Officers, Directors and other designated Employees of First China Pharmaceutical Group, Inc.
Re: Insider Trading Policy of First China Pharmaceutical Group, Inc.
Date: October 15, 2010
Attached to this letter is a copy of the policy of First China Pharmaceutical Group, Inc. (the “Company”) regarding “insider trading.” Before you review these materials, I would like to address some developments in insider trading law that require us to strengthen our insider trading policy and to be even more vigilant in our compliance efforts.
In recent years, the United States Congress has enacted legislation that vastly increases the penalties, and the persons potentially subject to these penalties, for insider trading or tipping information to others. The legislation accomplished the following:
1. For Individuals who trade on inside information (or tip information to others):
- A civil penalty of up to three times the profit gained or loss avoided;
- A criminal fine (no matter how small the profit) of up to $5 million; and
- A jail term of up to twenty years.
2. For the Company (as well as possibly any “controlling persons”) that fails to take appropriate steps to prevent illegal trading:
- A civil penalty of the greater of $1 million or three times the profit gained or loss avoided as a result of the employee’s violation; and
- A criminal penalty of up to $25 million. These criminal penalties are in addition to civil penalties.
Express statutory accountability for insider trading violations of employees has been created for so-called “controlling persons,” a term which includes corporations, directors, officers, supervisors and the relatives of such individuals.
In addition, the Securities and Exchange Commission (the “SEC”) has been given substantial additional enforcement powers, including the authority to obtain administrative money penalties and civil injunctions and to bar securities law violators from serving as directors or officers of public companies.
In view of the seriousness of insider trading violations, I am asking you to carefully review the attached policy statement. You should also understand that you are responsible for advising employees under your supervision of the rules governing their conduct with respect to undisclosed material information.
This Policy Statement governs the activities of the Company and its subsidiaries. Upon inquiry, the Company’s Chief Executive Officer will inform all controlling persons when the “trading window” is open. Under no circumstances should you trade during the trading window if you have material information which has not been disclosed to the general public. If you have any questions about this policy or insider trading laws generally or about the timing of any transaction in the Company’s securities, I urge you to consult with me or our outside counsel.
Mr. Zhen Jiang Wang
Chief Executive Officer
FIRST CHINA PHARMACEUTICAL GROUP, INC.
INSIDER TRADING POLICY
As adopted on October 15, 2010
THE NEED FOR AN INSIDER TRADING POLICY
The purchase or sale of securities while possessing Material Nonpublic Information (as defined herein) or the selective disclosure of such information to others who may trade is prohibited by United States federal and state laws. As an essential part of your work, many of you have access to Material Nonpublic Information about First China Pharmaceutical Group, Inc. and its subsidiaries (collectively the “Company”) or about the Company’s business (including information about other companies with which the Company does or may do business).
The Company has adopted this Insider Trading Policy (“Policy”) to avoid even the appearance of improper conduct on the part of any Company employee (not just so-called insiders). All Company employees have worked hard over the years to establish a reputation for integrity and ethical conduct. This Policy is designed to further the reputation of the Company and each employee for integrity and good corporate citizenship.
APPLICABILITY OF POLICY
This Policy applies to all transactions in the Company’s securities, including common stock, options for common stock and any other securities the Company may issue from time to time, such as preferred stock, warrants and convertible debentures, as well as to derivative securities relating to the Company’s stock, whether or not issued by the Company, such as exchange-traded options. It applies to all officers of the Company, all members of the Company’s Board of Directors, and all employees of, and consultants and contractors to, the Company and its subsidiaries, who receive or have access to Material Nonpublic Information regarding the Company. This group of people, members of their immediate families, and members of their households are sometimes referred to in this Policy as “Insiders.” This Policy also applies to any person who receives Material Nonpublic Information from any Insider. Any person who possesses Material Nonpublic Information regarding the Company is an Insider for so long as the information is not publicly known. Any employee can be an Insider from time to time, and would at those times be subject to this Policy.
It is the policy of the Company to oppose the unauthorized disclosure of any nonpublic information acquired in the work-place and the misuse of Material Nonpublic Information in securities trading.
Trading on Material Nonpublic Information - No director, officer or employee of, or consultant or contractor to, the Company, and no member of the immediate family or household of any such person, shall engage in any transaction involving a purchase or sale of the Company’s securities, including any offer to purchase or offer to sell, during any period commencing with the date that he or she possesses Material Nonpublic Information concerning the Company, and ending at the beginning of the Trading Day following the date of public disclosure of that information, or at such time as such nonpublic information is no longer material. As used herein, the term “Trading Day” shall mean a day on which national stock exchanges and the Nasdaq Stock Market (“Nasdaq”) are open for trading. A “Trading Day” begins at the time trading begins on such day. This restriction on trading does not apply to transactions made under a trading plan adopted pursuant to Securities and Exchange Commission Rule 10b5-1(c) (17 C.F.R. § 240.10b5-1(c)) (“Rule 10b5-1(c)”) and approved in writing by the Company (an “approved Rule 10b5-1 trading plan”), as further detailed herein.
Tipping - No Insider shall disclose (“tip”) Material Nonpublic Information to any other person (including family members) where such information may be used by such person to his or her profit by trading in the securities of companies to which such information relates, nor shall such Insider or related person make recommendations or express opinions on the basis of Material Nonpublic Information as to trading in the Company’s securities. Accordingly, any person subject to this Policy, whether or not aware of Material Nonpublic Information, should refrain from recommending that persons buy, sell, or hold Company Securities or participate in Internet or on-line bulletin boards or chat rooms that discuss Company Securities, should not respond to inquiries from outsiders and should refer all such inquiries in writing to the Chief Executive Officer or corporate officer designated to respond to such inquiries.
Confidentiality of Nonpublic Information - Nonpublic Information relating to the Company is the property of the Company and the unauthorized disclosure of such information is forbidden. In the event any officer, director or employee of the Company receives any inquiry from outside the Company, such as a stock analyst, for information (particularly financial results and/or projections) that may be Material Nonpublic Information, the inquiry should be referred to the Company’s counsel, who is responsible for coordinating and overseeing the release of such information to the investing public, analysts and others in compliance with applicable laws and regulations.
APPLICABILITY OF POLICY TO INSIDE INFORMATION REGARDING OTHER COMPANIES
This Policy and the guidelines described herein also apply to Material Nonpublic Information relating to other companies, including the Company’s vendors and suppliers (“Business Partners”), when that information is obtained in the course of employment with, or the performance of services on behalf of, the Company. Civil and criminal penalties, and termination of employment, may result from trading on inside information regarding the Company’s Business Partners. All officers, directors, employees, consultants and contractors should treat Material Nonpublic Information about the Company’s Business Partners with the same care required with respect to information related directly to the Company.
DEFINITION OF MATERIAL NON PUBLIC INFORMATION & INSIDER
Materiality - Insider trading restrictions come into play only if the information you possess is “material.” Materiality, however, involves a relatively low threshold. Information is generally regarded as “material” if it has market significance, that is, if its public dissemination is likely to affect the market price of securities, or if it otherwise is information that a reasonable investor would want to know before making an investment decision. Either positive or negative information may be material.
Information dealing with the following subjects is reasonably likely to be found material in particular situations:
- significant changes in the Company’s prospects;
- significant write-downs in assets or increases in reserves;
- developments regarding significant litigation or government agency investigations;
- liquidity problems;
- changes in earnings estimates or unusual gains or losses in major operations;
- major changes in management;
- changes in dividends;
- extraordinary borrowings;
- award or loss of a significant contract;
- changes in debt ratings;
- proposals, plans or agreements, even if preliminary in nature, involving mergers, acquisitions, divestitures, recapitalizations, strategic alliances, licensing arrangements, or purchases or sales of substantial assets;
- public offerings; and
- pending statistical reports (such as, consumer price index, money supply and retail figures, or interest rate developments).
Material information is not limited to historical facts but may also include projections and forecasts. With respect to a future event, such as a merger, acquisition or introduction of a new product, the point at which negotiations or product development are determined to be material is determined by balancing the probability that the event will occur against the magnitude of the effect the event would have on a company’s operations or stock price should it occur. Thus, information concerning an event that would have a large effect on stock price, such as a merger, may be material even if the possibility that the event will occur is relatively small. When in doubt about whether particular non-public information is material, presume it is material. If you are unsure whether information is material, you should consult the Company’s counsel before making any decision to disclose such information (other than to persons who need to know it) or to trade in or recommend securities to which that information relates.
Non-public Information - Insider trading prohibitions come into play only when you possess information that is material and “non-public.” The fact that information has been disclosed to a few members of the public does not make it public for insider trading purposes. To be “public” the information must have been disseminated in a manner designed to reach investors generally, and the investors must be given the opportunity to absorb the information. Even after public disclosure of information about the Company, you must wait until the close of business on the second Trading Day after the information was publicly disclosed before you can treat the information as public.
Non-public information may include:
- information available to a select group of analysts or brokers or institutional investors;
- undisclosed facts that are the subject of rumors, even if the rumors are widely circulated; and
- information that has been entrusted to the Company on a confidential basis until a public announcement of the information has been made and enough time has elapsed for the market to respond to a public announcement of the information (normally two or three days).
As with questions of materiality, if you are not sure whether information is considered public, you should either consult with the Company’s counsel or assume that the information is “non-public” and treat it as confidential.
Insider - An Insider includes any person who possesses Material Nonpublic Information. Directors, officers, employees, independent contractors and those persons in a special relationship with the Company (i.e., its auditors, consultants or attorneys), including members of their immediate families and members of their households, are most often insiders. A person may retain his/her insider status for up to ninety (90) days or more after leaving the Company.
POTENTIAL CRIMINAL AND CIVIL LIABILITY AND/OR DISCIPLINARY ACTION
Liability for Insider Trading - Pursuant to United States federal and state securities laws, insiders may be subject to criminal and civil fines and penalties as well as imprisonment for engaging in transactions in the Company’s securities at a time when they have knowledge of Material Nonpublic Information regarding the Company.
Liability for Tipping - Insiders may also be liable for improper transactions by any person (commonly referred to as a “tippee”) to whom they have disclosed Material Nonpublic Information regarding the Company or to whom they have made recommendations or expressed opinions on the basis of such information as to trading in the Company’s securities. The Securities and Exchange Commission (the “SEC”) has imposed large penalties even when the disclosing person did not profit from the trading. The SEC, the stock exchanges and the National Association of Securities Dealers, Inc. use sophisticated electronic surveillance techniques to uncover insider trading.
Possible Disciplinary Actions - Employees of the Company who violate this Policy shall also be subject to disciplinary action by the Company, which may include ineligibility for future participation in the Company’s equity incentive plans or termination of employment.
Company Liability - Although responsibility for compliance with this policy and liability for non-compliance are primarily personal to the individuals involved, violations may result in civil and criminal liability for the Company.
TRADING GUIDELINES AND REQUIREMENTS
Trading During Window Periods
Investment by Company employees in the Company’s securities is encouraged. The most appropriate periods to buy or sell the Company’s securities are the periods beginning on the third business day following the release of quarterly or annual financial results and ending on the eighth week thereafter (so-called “window periods”). In general, these are the periods when there should be the least amount of inside information about the Company that is unavailable to the investing public. It is permissible to trade at other times. However, you may not buy or sell the Company’s securities even during window periods if you are in possession of Material Nonpublic Information.
Black Out Periods
The Company may determine that trading in the Company’s securities is inappropriate at any time and may impose a “black out period” where trading is prohibited or restricted on all or a selected group of employees even during an otherwise permitted window period. The Company will make specific announcements to affected employees regarding black out periods as and when necessary.
Pre-Clearance of Trades By Directors, Officers and Certain Other Personnel
In order to assist in preventing inadvertent violations, to insure compliance with timely reporting and to avoid even the appearance of an improper transaction (which could result, for example, where an officer engages in a trade while unaware of a pending major development), the following procedures must be followed by all directors, officers, all persons reporting directly to the officers, and by other employees who may have access to Material Nonpublic Information.
All transactions involving Company securities (acquisitions, dispositions, transfers, etc.) by any member of the above-mentioned groups must be pre-cleared by the Company. Specifically, if you contemplate a transaction, you should contact the Company’s Chief Executive Officer in advance. If the Company’s Chief Executive Officer is not available, contact the Company’s legal counsel. This requirement does not apply to stock option exercises or other periodic or regular savings plan or deferred compensation plan purchases. However, it would cover market sales of option stock following the exercise of the options (“cashless exercise” or “same day sales”). Each proposed transaction will be evaluated to determine if it raises insider trading concerns or other concerns under the United States federal or state securities laws and regulations. Any advice will relate solely to the restraints imposed by law and will not constitute advice regarding the investment aspects of any transactions. In addition, if pre-clearance is denied, the fact of such denial is confidential and may not be disclosed by the person requesting such pre-clearance.
There are several benefits which derive from the Company’s pre-clearance procedures. First, the SEC imposes reporting obligations on all directors, executive officers and 10% shareholders. The pre-clearance program will help to assure timely filing by such individuals of Form 4’s under Section 16(a) of the Securities Exchange Act of 1934 (“Exchange Act”). Under Section 16(b), a Form 4 must be filed before the end of the second business day following the day on which the transaction was executed, for each non-exempt acquisition or disposition of the Company’s equity securities by a reporting person. Failure to timely file Form 4’s results in disclosure as a delinquent filing and must be reported by the Company (naming the individual) in its annual report and proxy statement filed with the SEC.
In addition, pre-clearance of all trades will also better enable the Company’s officers, directors, and 10% stockholders to avoid violations of the short-swing profit provisions of Section 16(b) of the Exchange Act. Under this rule, Insiders can be required to disgorge any profits realized from the purchase and sale (or sale and purchase) of any non-exempt equity security of the Company within a six month period. Section 16(b) imposes strict liability, and while there is no requirement of intent to violate the section, unintentional or inadvertent violations are not excused. Further, violation of Section 16(b) does not depend on the use or possession of inside information. The Company recommends that Insiders seek advice from counsel in advance of any proposed transaction in the Company’s equity securities in order to allow for a review of previously filed Form 4’s so as to avoid any potential Section 16(b) liability. Notwithstanding, the Company strongly discourages all such short-swing and short sale transactions by executive officers, directors and certain employees.
Further, while employees who are not executive officers and directors are not prohibited by law from engaging in short sales of the Company’s securities, the Company believes it is inappropriate for employees to engage in such transactions and therefore strongly discourages all employees from such activity. The Company has provided, or will provide, separate memoranda and other appropriate materials to its executive officers and directors and those identified employees regarding compliance with Section 16 and its related rules.
If you believe that you may be in possession of Material Nonpublic Information, do not disclose that information without first discussing the same with the Company’s Chief Executive Officer.
Individual Responsibility - Every officer, director and other employee, consultant and contractor has the individual responsibility to comply with this Policy against insider trading. An Insider may, from time to time, have to forego a proposed transaction in the Company’s securities even if he or she planned to make the transaction before learning of the Material Nonpublic Information and even though the Insider believes he or she may suffer an economic loss or forego anticipated profit by waiting.
TRANSACTIONS BY RELATED PERSONS
The restrictions noted herein that apply to you also apply to: (i) your family members (your spouse, minor children and anyone else living in your household); (ii) partnerships in which you are a general partner or corporations in which you are a controlling shareholder; (iii) trusts in which you are a trustee; and (iv) estates of which you are an executor (collectively, “Related Persons”). Employees are expected to be responsible for the compliance of Related Persons.
For purposes of this Policy, the Company considers that the exercise of stock options for cash under the Company’s stock option plan and/or the purchase of shares pursuant to the Company’s employee stock purchase plan, if applicable (but not the sale of any shares issued upon such exercise or purchase and not a cashless exercise (accomplished by a sale of a portion of the shares issued upon exercise of an option)) are exempt from this Policy, since the other party to these transactions is the Company itself and the price does not vary with the market, but is fixed by the terms of the option agreement or plan, as applicable. In addition, for purposes of this Policy, the Company considers that bona fide gifts of the securities of the Company are exempt from this Policy.
10b5- 1 PLANS
The Company recognizes the potential need of employees, and allows employees, to enter into Rule 10b5-1 plan arrangements with brokerage and investment firms to facilitate the trading of Company securities. These arrangements should be pre-cleared by the Company’s legal counsel and the Chief Executive Officer prior to execution to insure full compliance with Rule 10b5-1.
INQUIRIES & COMPANY ASSISTANCE
Any person who has any questions about specific transactions or as to any of the matters discussed in this Policy may obtain additional guidance from the Company’s Chief Executive Officer or legal counsel. Remember, however, the ultimate responsibility for adhering to this Policy and avoiding improper transactions rests with you. It is imperative that you use your best judgment.
Employees may be required to certify their understanding of and intent to comply with this Policy. Officers and directors and other key employees may be required to certify compliance on an annual basis.