Last week, the Hong Kong Stock Exchange issued a reminder letter to listed issuers as to their obligation to make timely disclosures to the market of price sensitive information. The letter contains important information as to the Stock Exchange's expectations of companies when it comes to disclosure and gives helpful guidance on interpretation of the Listing Rules.
In the current economic climate, decisions as to whether any disclosure might be needed have become increasingly difficult for directors. All directors and senior management should make sure they are familiar with the Listing Rules' disclosure regime (Main Board Rule 13.09 and GEM Rule 17.10) and with this latest guidance to ensure the continuous disclosure standards required by the Listing Rules and expected by the Stock Exchange are met.
Part of the focus of the guidance note is on ensuring companies have in place adequate internal controls to identify potentially price sensitive information and to bring it to the attention of the board in a timely manner for consideration in the context of disclosure. The Stock Exchange has produced a checklist for directors to assist in reviewing the adequacy of the issuer's procedures and systems relating to its price sensitive disclosure obligation.
Click here for a copy of the guidance letter and checklist. The key points are summarised in this e-bulletin.
Reminder of the basic disclosure obligations for price sensitive information
The guidance letter sets out a reminder of the basic disclosure obligations:
- Issuers must keep the Stock Exchange and their members informed as soon as reasonably practicable of any information related to the group which is necessary to appraise the position of the group, avoid establishing a false market or which might reasonably be expected to materially affect market activity and the price of securities
- Timing is critical, with the overriding principle being that an announcement should be made as soon as the potentially price sensitive information is the subject of a decision about whether it is price sensitive in the prevailing market conditions. In assessing this, regard should be had to market sensitivities which may increase in periods of market volatility and uncertainty
- Responsibility for compliance rests with the "controlling mind" of the issuer – effectively the directors and any members of senior management to whom responsibility has been delegated.
Internal procedures and controls to identify potentially price sensitive information
Issuers are encouraged to create and maintain written internal controls to identify potentially price sensitive information and ensure that it is passed to the board for consideration as to whether it needs to be disclosed.
In particular, a board must ensure periodic financial reporting procedures are in place. These should enable financial and operational data to be available for board appraisal and determination as to whether there have been any material changes in the financial condition or performance which requires disclosure. As a minimum, management accounts should be available to the board shortly after the month end.
An issuer should have a pre-arranged vetting and authorisation process for announcements. Issuers need to balance the requirement to make any announcement in a timely manner with the need to ensure due care is taken as to the content such that it is accurate and clear. The Stock Exchange notes that the inability to hold a board meeting to review information or consider an announcement is not a valid reason for delaying the release of price sensitive information.
Guidance on some tricky areas
The Stock Exchange has given some guidance as to its expectations in relation to some tricky areas where directors might have difficulties determining if disclosure is required. In summary, these are:
- Information coming to light during preparation of periodic financial information – in short, if material information emerges which is price sensitive it should be announced immediately and not delayed until the financial results are issued
- Information arising out of negotiating a transaction or fund raising exercise – again any price sensitive information coming to light during the due diligence should be announced immediately. This is distinct from the disclosure of the transaction itself which may still be confidential and not yet subject to a disclosure obligation
- Legitimate delay in disclosure - this may be available in certain circumstances, for instance where delay is necessary to prevent prejudicing negotiations (subject to ensuring strict confidentiality is maintained) or where it might be too premature to make a disclosure. In such circumstance, issuers need to have an up-to-date draft of an announcement ready for release at the appropriate time to avoid delay in disclosure if there is a leak or once meaningful information becomes available
- Internal developments - unexpected events indicating potential problems with the business or operations should be investigated immediately to determine whether an announcement is required with consideration given to a "holding announcement" if more time is needed to get complete information. Suspension may also be required pending further announcement
- External developments – generally disclosure is not required in relation to external information in the public domain (e.g. market prices of commodities, tax changes or exchange rates) unless there is a particular impact on the issuer. Careful consideration should be given to whether market conditions may trigger a disclosure obligation, for example due to exposure to futures contracts or hedging arrangements
- Market rumour – no negative statement is normally required to deny unfounded rumours. If a denial is to be made, it should generally be by way of a formal announcement to ensure equality of information to the market. The Stock Exchange will expect a full justification of an issuer's proposed course of action in dealing with enquiries related to market rumour. Issuers should not mislead the Stock Exchange in dealing with such enquiries.
Undoubtedly in times of market and economic uncertainty, decisions as to whether an announcement obligation has arisen will be difficult, particularly if the news is negative. It will require careful analysis based on a variety of factors which will differ from company to company and between industry sectors.
Directors must ensure that they fully understand the disclosure regime and that satisfactory internal procedures are in place to deal with the timely release of price sensitive information. The Stock Exchange has indicated that a clear and rigorous compliance system will be a factor in assisting directors not directly involved in handling a particular situation to establish a defence to allegations of breaches of the Listing Rules or their obligations.