Charltons’ Regulatory and Securities practice advises on the complex continuing obligations under the Hong Kong Listing Rules and the Securities and Futures Ordinance (SFO). The firm has in-depth up-to-date knowledge of the requirements, including:
- corporate governance standards
- restrictions on directors’ dealings in securities
- controls on connected party transactions
- requirements for major acquisitions and disposals (i.e. notifiable transactions)
- conditions for further equity and debt issues
- on-going disclosure requirements for price-sensitive, financial and other information
A new statutory regime under the SFO for the disclosure of price sensitive information (called “inside information” in the SFO), took effect on 1 January 2013. Breach of the obligation carries a fine of HK$8 million for listed companies and, in some circumstances, their directors.
In advising listed companies on specific transactions, Charltons will advise on Hong Kong Listing Rules and general regulatory compliance. It also provides training to the boards of companies intending to list on their continuing obligations post-listing and keeps clients up-to-date on changes to their regulatory and compliance obligations.
Under Part XIVA of the Securities and Futures Ordinance (Cap. 571 of the Laws of Hong Kong) (“SFO”), a listed company is required to disclose any inside information to the public as soon as practicable (usually by way of announcement) unless the information falls within any of the safe harbours specified in the SFO. Such requirements are briefly described below:
The concept of inside information
Definition of inside information
Section 307A(1) of the Securities and Futures Ordinance (“SFO”) defines “inside information”, in relation to a listed corporation, as specific information that:
- is about, the corporation; a shareholder or officer of the corporation; or the listed securities of the corporation or their derivatives; and
- is not generally known to the persons who are accustomed or would be likely to deal in the listed securities of the corporation but would if generally known to them be likely to materially affect the price of the listed securities.
Three key elements of inside information
There are three key elements comprised in the concept of inside information. They are:
- the information about the particular corporation must be specific;
- the information must not be generally known to that segment of the market which deals or which would likely deal in the corporation’s securities; and
- the information would, if so known be likely to have a material effect on the price of the corporation’s securities.
Information that would be likely to cause a mere fluctuation or a slight change in price would not be sufficient.
Examples of possible inside information
The Guidelines on Disclosure of Inside Information (“Guidelines”) published by the Securities and Futures Commission (“SFC”) sets out certain common examples of possible inside information concerning a corporation, including, among others:
- changes in performance, or the expectation of the performance;
- changes in financial condition;
- changes in control and control agreements;
- changes in directors;
- legal disputes and proceedings;
- revocation or cancellation of credit lines by one or more banks;
- changes in value of assets (including advances, loans, debts or other forms of financial assistance);
- reduction of real properties’ values;
- receiving acquisition bids for relevant assets; and
- changes in expected earnings or losses.
However, the SFC states that the list of examples should not be treated as definitive in terms of meaning that the information in question, if disclosed, will have a material price effect. Every case turns on its own facts.
Disclosure of inside information
A listed corporation is required to disclose any inside information to the public “as soon as reasonably practicable” unless the information falls within any of the safe harbours as provided in the SFO. Before the information is fully disclosed to the public, the corporation should ensure that the information is kept strictly confidential. Where it is believed that confidentiality cannot be maintained or that confidentiality may have been breached, the corporation should immediately disclose the information to the public.
The Guidelines further clarifies that if a corporation needs time to clarify the details of, and the impact arising from, an event or a set of circumstances before it is in a position to issue a full announcement to inform the public, the listed corporation should consider issuing a “holding announcement” which:
- details as much of the subject matter as possible; and
- sets out the reasons why a fuller announcement cannot be made.
A full announcement should be made as soon as reasonably practicable.
If confidentiality has not been maintained and the corporation cannot make a full announcement or a holding announcement, the corporation should consider applying for a suspension of trading of its securities until disclosure can be made.
In order to strike an appropriate balance between requiring timely disclosure of inside information and preventing premature disclosure which might prejudice a corporation’s legitimate interests, section 307D of the SFO provides for safe harbours which exempt a corporation from disclosing inside information under specified circumstances. Except for safe harbour A, corporations may only rely on the safe harbours if they have taken reasonble precautions to preserve the confidentiality of the inside information and the inside information has not been leaked.
Safe harbour A: When disclosure would breach an order by a Hong Kong court or any provisions of other Hong Kong statutes
This grants a safe harbour to corporations if they are prohibited from disclosing inside information under a Hong Kong court order or any Hong Kong statute.
Safe harbour B: When the information relates to an incomplete proposal or negotiation
The Guidelines provides the following examples:
- when a contract is being negotiated but has not been finalised;
- when a corporation decides to sell a major holding in another corporation;
- when a corporation is negotiating a share placing with a financial institution; or
- when a corporation is negotiating the provision of financing with a creditor.
The safe harbour does not however allow the corporation to withhold disclosure of any material change in its financial position or performance which led to the funding negotiations and, to the extent that this is inside information, should be the subject of an announcement.
Safe harbour C: When the information is a trade secret
The Guidelines provide that a trade secret generally refers to proprietary information owned by a corporation:
- used in a trade or business of the corporation;
- which is confidential (i.e. not already in the public domain);
- which, if disclosed to a competitor, would be liable to cause real or significant harm to the corporation’s business interests; and
- the circulation of which is confined to a limited number of persons on a need-to-know basis.
Safe harbour D: when the Government’s Exchange Fund or a Central Bank provides liquidity support to the corporation
The entity receiving the liquidity support is normally a banking institution which may be registered in or outside Hong Kong.
Safe harbour E: when disclosure is waived by the SFC
The SFC is empowered under section 307E(1) of the SFO to grant waivers where the disclosure of inside information in Hong Kong would be prohibited under a court order or legislation of another jurisdiction or would contravene a restriction imposed by a law enforcement agency or government authority in another jurisdiction. The SFC will grant waivers on a case-by-case basis and may attach conditions.
The Guidelines provide that generally the mere knowledge of the content of draft annual or interim accounts prior to their publication or internal management accounts would not be specific information. However, knowledge of substantial losses or profits made by a corporation even though the precise magnitude is not yet clear would be specific information and accordingly may be inside information. To constitute inside information, the difference between the results which the market might predict and the results the directors or officers know must be significant.
Breach of obligations and ways to prevent breach
The officers of an issuer may face sanctions by the Market Misconduct Tribunal and/ or civil liability if the issuer breaches the statutory inside information disclosure obligation.
The Guidelines provide some examples of measures which an issuer may consider adopting to prevent a breach of a disclosure requirement, including, among others:
- establish controls for monitoring business and corporate developments and events so that any potential inside information is promptly identified and escalated.
- establish periodic financial reporting procedures so that key financial and operating data is identified and escalated in a structured and timely manner.
- maintain and regularly review a sensitivity list identifying factors or developments which are likely to give rise to the emergence of inside information.
- authorise one or more officer(s) or an internal committee to be notified of any potential inside information and to escalate any such information to the attention of the board.
- maintain an audit trail of meetings and discussions concerning the assessment of inside information.
- restrict access to inside information to a limited number of employees on a need-to-know basis. Ensure employees who are in possession of inside information are fully conversant with their obligations to preserve confidentiality.
When in doubt, the SFC should be consulted.