In the recent Court of First Instance (CFI) decision in Securities and Futures Commission v Lam Fai Man, HCMA 465/2015, 8 December 2015, the Court makes it clear that merely delegating or assigning the task of disclosure to another person (in this case a stockbroker), without more, will not constitute a defence for non-compliance with the disclosure of interest requirements under Part XV of the Securities and Futures Ordinance (SFO).  To invoke the “reasonable excuse” defence, there has to be exceptional circumstances. The Court did recognise that there could be circumstances where it could be argued that there was a reasonable excuse for failure to perform the duty of disclosure, such as illness of the shareholder or where he has taken reasonable care and steps or carried out due diligence to avoid the failure to make disclosure. The lesson to be learnt from this case is that substantial shareholders should get themselves familiar with the disclosure requirements so that they can comply with the rules. If they rely on others to arrange disclosure for them, they have to ensure that their agents are very familiar with and comply with the rules. Otherwise, the liability will fall on the substantial shareholder.

Part XV of the SFO provides a regime for the disclosure of interests in securities of substantial shareholders of listed companies. The objective of the regime is to enhance transparency for investors as to who owns or controls listed corporations so that they have current and complete information to enable them to make informed investment decisions. A substantial shareholder with more than 5% of voting shares in a listed company is required to give notice to the Stock Exchange of Hong Kong Ltd (SEHK) and to the listed company itself when he acquires an interest in or ceases to be interested in the voting shares of the listed company. Failure to make such disclosure without reasonable excuse is a criminal offence.

The disclosure must be made within three business days after the date on which the relevant event occurred, if the substantial shareholder “knows” of the transaction. Alternatively, disclosure must be made within three business days after the date on which the occurrence of the relevant event “comes to his knowledge”. The latter would cater for a situation where the substantial shareholder sells or acquires shares through an agent, such as a stockbroker.

In this case, on one occasion Lam Fai Man (Lam) a substantial shareholder of Victory Group Ltd (Victory) had sold a number of shares in Victory and on another occasion had acquired a number of shares in Victory. On both occasions, a stockbroker, Mak, handled the transactions on Lam’s behalf. Although Mak, notified the SEHK of the two transactions, he failed to notify Victory because of a misunderstanding of what the law required. Lam was convicted by the Magistrates’ court of failing to disclose the transactions to Victory and fined HK$6,000 on each of the two summonses. 

On appeal against conviction to the CFI, Lam argued that his delegation of the duty of disclosure to Mak amounted to a reasonable excuse for non-compliance with the disclosure requirements and that since Mak was an experienced, professional broker and had resources to find out what the disclosure duties were from his in-house legal department, it was reasonable for him to have relied on Mak to make the necessary disclosures. The CFI disagreed, dismissed Lam’s appeal and held as follows:-

  1. Although it is envisaged under section 321 of the SFO that a substantial shareholder may authorise an agent to acquire or dispose of his interests on his behalf, that section also imposes a duty on the substantial shareholder to secure his agent’s notification to him of any changes in his notifiable interest. This reinforces the obligation on the substantial shareholder to perform the duty of disclosure by making sure that he is aware of any change of interest, whether effected by him or his agent. The legal obligation of disclosure under Part XV is on the substantial shareholder and the responsibility for its performance falls squarely on and remains with the substantial shareholder, even if he delegates the task of performing it to another.  
  2. Accordingly, reliance on a professional to perform the duty of disclosure for a substantial shareholder will not ordinarily provide a reasonable excuse if the professional fails to perform the duty out of carelessness or negligence. The obligation is on the substantial shareholder, if relying on another, to ensure that it is done and that it is done properly in accordance with legal requirements and he bears the consequences if his agent fails to perform the duty as required by law.  
  3. It is incumbent on a substantial shareholder of a listed company to know and understand the duty of disclosure and notification imposed on him under the SFO and ignorance of the law is neither a defence nor an excuse.  
  4. There was no evidence that Lam had made any effort to know and understand the nature and requirements of the duties imposed on him under the SFO and nor did he take any steps to ensure Mak knew and understood them. He had failed to exercise due diligence in ensuring that Mak knew the nature and requirements of the duties of disclosure and had complied with them. Simply instructing an agent to do whatever is necessary in the agent’s mind is not a reasonable excuse.