Hong Kong’s new statutory price sensitive information/inside information disclosure regime (PSI Disclosure Regime) will take effect on 1 January 2013. As part of the new regime, the Securities and Futures Commission (SFC) has gazetted its “Guidelines on Disclosure of Inside Information” (PSI Disclosure Guidelines) to assist the market to understand and comply with the new requirements. It will also take effect on 1 January 2013.
Under the PSI Disclosure Regime, we believe that three questions will most concern corporations and their officers (including directors):
- Whether a given situation or a piece of information is “inside information”?
- What a corporation should do to invoke disclosure safe harbours?
- What else should a corporation or its officers do to prevent a breach?
This legal update highlights what the PSI Disclosure Guidelines say about these three basic questions.
You can download copies of the PSI Disclosure Guidelines via the link below:
Please also refer to our previous legal update “New Statutory Price Sensitive Information Disclosure Regime to Take Effect on 1 January 2013”. Please read this legal update in conjunction with our previous legal update.
The PSI Disclosure Guidelines
The PSI Disclosure Guidelines will not have the force of law. One month before the PSI Disclosure Regime takes effect on 1 January 2013, SFC will launch a consultation service to assist corporations to understand how to comply with the disclosure obligations. The consultation service will initially last for two years and may be extended subject to review. SFC expects that most queries will relate to the application of the safe harbours. Also, SFC has made it clear that it is not in a position to judge or give advice to a corporation about whether a particular piece of information is inside information.
Whether a given situation or a piece of information is “inside information”?
THE PSI DISCLOSURE GUIDELINES PROVIDE SOME EXAMPLES
The market is presumably familiar with the concept of inside information as it adopts the definition from the insider dealing regime under the Securities and Futures Ordinance that has been in place for many years.1 By way of illustration, the PSI Disclosure Guidelines set out a non-exhaustive list of possible inside information examples. These examples mainly include:
- changes in the businesses, performance, conditions, assets and liabilities, directors and management, auditors, policies, shareholding or corporate structures and share capital of the corporation; and
- other significant events such as winding up, insolvency and legal disputes.
The PSI Disclosure Guidelines also offer some guidance on how to handle specific situations. Please refer to the Appendix at the end of this legal update.
OBJECTIVE TEST VS. SUBJECTIVE TEST
Under the PSI Disclosure Regime, a corporation needs to make disclosure when it knows (or should have known) about the “inside information”. A corporation does not act on its own and can only act on its officers’ “controlling mind”. However, it is not sufficient for the board of directors of a corporation to claim that it “thinks” a given situation or a piece of information is “inside information” or not.
“REASONABLE OFFICER” TEST
The PSI Disclosure Guidelines remind us that when deciding whether a situation or a piece of information is inside information, the “reasonable officer” test should apply. So, it is not the officers’ subjective (albeit honest) view about the situation or information that will count. Instead, an objective test applies. If a “reasonable officer” would consider the information is “inside information” based on the officer’s knowledge of all relevant facts and circumstances at the time, then the corporation should, subject to any available safe harbours, make a disclosure. This test should be applied based on the facts and circumstances at the time, not hindsight.
NO “GOOD FAITH” OR “BUSINESS JUDGEMENT” APPROACH
Market practitioners had lobbied that it should be for the officers to decide if the subject information is “inside information”, having carefully considered the circumstances (taking professional advice, where appropriate) and exercised judgement, with reasonable prudence and in good faith. However, the PSI Disclosure Regime does not adopt this “good faith” or “business judgement” approach.
What a corporation should do to invoke disclosure safe harbours?
As noted in our previous legal update “New Statutory Price Sensitive Information Disclosure Regime to Take Effect on 1 January 2013”:
- “reasonable precautions” to preserve confidentiality is a pre-requisite if corporations want to rely on disclosure safe harbours; and
- the concepts of “incomplete proposal or negotiation” and “trade secret” may need further explanation.
The PSI Disclosure Guidelines provide further guidance on these terms.
“REASONABLE PRECAUTIONS” TO PRESERVE CONFIDENTIALITY
The PSI Disclosure Guidelines reiterate the importance of preserving confidentiality and give some leak-prevention suggestions. Corporations should consider:
implementing measures to
- sign confidentiality agreements before significant negotiations;
- restrict employee access to inside information on a need-to-know basis and those who need to know understand the confidentiality obligation; and
- disseminate information via the electronic publication system operated by The Stock Exchange of Hong Kong Limited (SEHK) before any other channel.
putting in place procedures to
- deal with analysts and media (e.g. pre-vet external presentations, recording briefings and discussions and subsequent checking for inadvertent disclosures). The PSI Disclosure Guidelines remind that comments (in particular significant, specific and credible ones) about the corporation in the media or analysts’ reports might indicate that confidentiality has been lost; and
- respond to market rumours and deal with external enquiries (e.g. designating a spokesperson(s) with appropriate skills and training).
The PSI Disclosure Guidelines acknowledge that a corporation’s advisers, lenders, major shareholders, negotiation counterparties and regulators may receive inside information from the corporation provided that they understand their duty to preserve confidentiality and do so.
“INCOMPLETE PROPOSAL OR NEGOTIATION”
The PSI Disclosure Guidelines set out a few examples of incomplete proposal or negotiation which include the following situations:
- 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; and
- when a corporation is negotiating the provision of financing with a creditor.
If a corporation is in financial difficulty and is in negotiations with third parties for funding, then the safe harbour could relieve its disclosure obligation regarding the negotiations and the status of those negotiations. However, it would not permit the corporation to withhold disclosure of any material change in its financial position or performance which led to the funding negotiations. If it falls within the ambit of inside information, then it should be the subject of an announcement.
The PSI Disclosure Guidelines explain 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.
Trade secrets may concern inventions, manufacturing processes or customer lists.
What else should a corporation or its officers do to prevent a breach?
An officer of a corporation will be personally liable for the corporation’s breach of disclosure obligation if:
- the officer intends for the non-disclosure (intentional);
- the officer couldn’t care less (reckless); or
- the officer simply fails to take reasonable action to cause the corporation to comply with a disclosure requirement (negligence).
These officers are required under the PSI Disclosure Regime to take all reasonable measures to ensure that proper safeguards exist to prevent a breach of the disclosure requirement.
SUGGESTED “REASONABLE MEASURES”
The PSI Disclosure Guidelines clarify that reasonable measures include putting in place appropriate and effective systems and procedures to enable the corporation to comply with the disclosure requirements. Alongside the leak-prevention suggestions mentioned above, the PSI Disclosure Guidelines also give suggestions on systems and procedures to promote and facilitate upward reporting of sensitive matters and internal awareness of company policies:
Clck here to view table.
These suggestions are not conclusive nor exhaustive.
EXECUTIVE DIRECTORS VS. NON-EXECUTIVE DIRECTORS
The PSI Disclosure Guidelines recognise that although all directors should exercise due care, skill and diligence to fulfil their obligations under the PSI Disclosure Regime, the fact that non-executive directors are not involved in the daily operations of the corporation may result in different expectations as to what they need to do.
The board as a whole, including the non-executive directors, will be expected to be directly involved in establishing and monitoring these internal controls and reporting procedures. However, officers with an executive role may be expected to be more involved given that they are:
- to monitor the proper implementation and functioning of the systems and procedures; and
- ensure that any material deficiencies are detected and resolved promptly.
GUIDANCE ON SPECIFIC SITUATIONS
Click here to view table.