Timely disclosure by listed corporations of important, price sensitive corporate information (“PSI”) has long been recognised as one of the main pillars of market transparency and investor protection in Hong Kong. Accordingly, the Stock Exchange of Hong Kong’s (“HKSE”) Listing Rules include a continuing requirement for listed corporations to disclose such information. If a listed corporation fails to do so, the corporation and its directors will be exposed to potential disciplinary action from the HKSE.
However, the HKSE can only impose disciplinary sanctions such as a public censure or, for very serious breaches, a suspension of trading or cancellation of the company’s listing on the HKSE. This lack of “regulatory teeth” has been a concern to the market, not least because a number of overseas jurisdictions have placed similar disclosure obligations into statute, under which stiffer penalties can be levied for a breach.
The matter has been on the Hong Kong government’s radar for some time. The government released its first consultation paper on the issues in October 2003. A second consultation paper was issued in March 2010, together with a consultation paper by the Securities and Futures Commission (“SFC”) on a set of draft “Guidelines on Disclosure of Inside Information”, which are intended as a practical guide for listed corporations and their officers on how the new rules are intended to apply.
On 11 February 2011, the Financial Services and Treasury Bureau and the SFC published their respective consultation conclusions.
The practical effect of the proposals is that the core part of the general disclosure obligation currently in Rule 13.09(1) of the Main Board Listing Rules and Rule 17.10(3) of the GEM Listing Rules will be turned into law under a new section of the Securities and Futures Ordinance (“SFO”). All existing HKSE guidelines on PSI will be replaced by the SFC’s new Guidelines.
When implemented, the new statutory rules will impose considerable responsibility on directors and other officers of Hong Kong-listed corporations. A breach may result in civil penalties for the corporation as well as its relevant officers. While a breach of the SFC’s Guidelines will not in itself be a breach of the law, the SFC will take it into account in considering whether the statutory requirements have been complied with.
The key disclosure obligation
Under the proposals, after “inside information” (see below) has come to a listed corporation’s knowledge, the corporation must disclose that information to the public “as soon as reasonably practicable” unless one of the prescribed safe harbours (see below) applies.
In determining whether disclosure has been made “as soon as reasonably practicable”, the SFC will likely take into account the specific circumstances of each case (for example, whether facts need to be verified and/or professional advice obtained). The SFC’s Guidelines are expected to make it clear that a listed corporation may take appropriate steps, such as ascertaining details, and conducting internal assessments and due diligence, before making an announcement.
When will inside information come to a listed corporation’s knowledge?
A listed corporation will be deemed to possess inside information if one of its “officers” has (or ought reasonably to have) knowledge of the information in the course of performing his/her functions as an officer.
Under the proposals, the term “officer” has the same meaning as under the SFO (ie, a director, manager, secretary or any other person involved in the management of the corporation). In response to market concerns that the definition of “officer” may be too broad, the government has indicated that its intention is to “catch directors and high-level individuals responsible for managing the listed corporation, not middle management or low-ranked staff”.
What is “inside information”?
Under the proposals, the definition of “relevant information” under the SFO’s insider dealing regime will be adopted. In short, it is “specific information” about a corporation, its shareholder(s) or officer(s), or its listed securities or their derivatives, that is not generally known to those who are accustomed or 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.
Listed corporations are expected to consider objectively and reasonably all relevant matters when assessing whether a particular piece of information falls within that definition.
The SFC’s draft Guidelines explain that, in assessing whether a piece of information is likely to have a material price effect, a listed corporation should also assess whether it is likely that the information would influence an ordinary reasonable investor in his/her investment decision.
The definition of “relevant information”, the meaning of “generally known” and what constitutes “material” price effect have been assessed in numerous past cases, particularly before the Insider Dealing Tribunal and the tribunal that replaced it, the Market Misconduct Tribunal (“MMT”). Accordingly, those cases provide a potentially rich source of guidance.
Method of disclosure
The proposals envisage that disclosure may be made by disseminating information through the Electronic Publication System operated by the Hong Kong Exchanges and Clearing Limited (the “HKEx-EPS”), to ensure equal, timely and effective access by the public.
Although the HKEx-EPS is not intended to be the exclusive means of permissible disclosure, the consultation conclusions make it clear that alternative methods – for example, through a press release, a press conference, or an announcement on the listed corporation’s website – may not of themselves be sufficient to satisfy the obligation of providing equal, timely and effective access by the public.
When might non-disclosure be permissible?
The draft legislation provides for four “safe harbours” which exempt a corporation from the requirement to disclose otherwise discloseable inside information. In summary, these are:
- where disclosure would constitute a breach of an order of a Hong Kong court or any provision(s) of a Hong Kong statute (this will not apply to court orders and laws/regulations outside Hong Kong, although the SFC will consider waiver applications in relation to such foreign court orders/ laws – see below);
- where the information relates to an incomplete proposal or negotiation;
- where the information is a “trade secret” (generally, this means confidential, proprietary information owned by a corporation used in a trade or business of the corporation which, if disclosed to a competitor, might cause real or significant harm to the corporation); or
- where the information concerns the provision of liquidity support to the corporation by the Exchange Fund, a central bank, or other monetary authorities which perform the functions of a central bank.
Safe harbours (2) to (4) are available to a listed corporation if that corporation has taken reasonable steps to preserve the confidentiality of the inside information, and confidentiality has in fact been preserved. However, if confidentiality cannot be preserved and safe harbour (1) does not apply, disclosure should be made.
Of course, there may be circumstances where a corporation might not be aware that confidentiality has not been maintained. For example, a third party may have compromised confidentiality. In those circumstances, the corporation may have a defence if it can prove that it took reasonable measures to monitor confidentiality and it made disclosure as soon as reasonably practicable after it became aware of a leakage.
In addition to the four prescribed safe harbours, the SFC may grant specific waivers from disclosure if such disclosure is prohibited by legislation, a court order, a law enforcement authority or a government authority outside Hong Kong. The SFC may also make rules under the SFO to provide additional safe harbours in light of changing market circumstances.
Under the proposals, every officer of a listed corporation will be under a non-delegable duty to take all reasonable measures from time to time to ensure that “proper safeguards” exist to prevent the corporation from breaching a disclosure requirement.
If a listed corporation breaches a disclosure requirement, each of its officers could potentially be held personally responsible, if his/her intentional, reckless or negligent conduct has led to the breach, or if he/she has failed to take “all reasonable measures” to prevent such a breach.
The SFC draft Guidelines explain that although a listed corporation may appoint a designated committee to handle disclosure-related matters, the ultimate responsibility of ensuring the corporation complies with the relevant disclosure obligations lies with its officers.
The SFC is expected to issue further guidance in the form of FAQs on practical steps that a listed corporation may take in developing appropriate procedures to manage its disclosure obligations.
Enforcement and penalties
The SFC will be responsible for enforcing the statutory regime, and will conduct investigations into suspected breaches, either upon referral from the HKSE, or upon detection at its own initiative. The SFC’s existing powers under sections 213 and 214 of the SFO, including the power to apply to court for an injunction or a disqualification order, will remain available to the SFC.
However, the SFC will not commence proceedings under section 214 if the MMT concludes that no breach of a relevant disclosure obligation has occurred.
Whilst the HKSE would pass cases of non-disclosure under the new regime to the SFC for investigation and enforcement, it may continue to investigate and take enforcement action in respect of non-disclosure in other contexts under the Listing Rules (for example, in relation to financial reporting and notifiable/connected transactions).
If, following an investigation, the SFC finds sufficient evidence of breach, it may institute proceedings directly before the MMT.
After a finding of breach, the MMT may impose the following civil penalties on the corporation, and its officers whose conduct contributed to the breach:
- a fine of up to HK$8 million on the listed corporation and/or each of its directors;
- disqualification of a director or an officer for up to five years;
- a “cold shoulder” order on a director or an officer (such an order operates to deprive the person of access to market facilities) for up to five years;
- a “cease and desist” order on the corporation, a director or an officer (such an order would compel the recipient not to breach the statutory disclosure requirements);
- a disciplinary referral to any professional body; and/or
- a costs order.
Mimicking some of the remedial measures that the HKSE’s Listing Committee often imposes, the MMT may also make “such order as is necessary to ensure that the corporation takes appropriate action to prevent a similar breach” in the future. This could, for example, include ordering an officer to undergo relevant training, or ordering a corporation to appoint an independent professional adviser to review and advise on its compliance procedures.
Any person who has suffered a pecuniary loss as a result of a breach of a relevant disclosure requirement will be able to rely on the MMT’s findings in civil proceedings to seek compensation from those responsible for the breach.
A Securities and Futures (Amendment) Bill is expected to be introduced to the Legislative Council in the 2010/2011 legislative session. The SFC is expected to publish a final version of its Guidelines once the legislation has been settled.
The current proposals are not as stringent as those which were previously proposed in 2003 – for example, the current proposals do not seek to criminalise non-disclosure. However, it is clear that Hong Kong’s securities market regulators are intent on trying to ensure that Hong Kong’s listed corporations keep their investors and the market properly apprised of important corporate information in a timely manner.
In preparation for this new regime, it will be prudent for listed corporations and their officers to assess the corporation’s existing systems and procedures for disclosure to ensure compliance with the new rules. Such systems and procedures should ensure that any material information about the corporation which comes to the knowledge of one or more of the corporation’s officers is promptly identified, assessed and escalated for the attention of the Board of directors, so that the Board can make an informed assessment about disclosure.
The Board will in many cases have to make a difficult judgement call. To assist listed corporations in complying with the new rules, the SFC has promised to provide an informal consultation service for two years, starting one month before the commencement of the rules. The success of that service will depend, in part, on the market’s willingness to use it; and that will in turn be influenced by the quality of the guidance given.