On 4 May 2012, the Securities and Futures (Amendment) Ordinance 2012 (“Amendment Ordinance”) was gazetted, following the government’s consultation conclusions in February 2011 (please see our e-bulletin dated 18 March 2011 about the consultation). The Amendment Ordinance creates a new Part XIVA of the Securities and Futures Ordinance (“SFO”), under which a corporation listed on the Hong Kong Stock Exchange (“SEHK”) is under a statutory obligation to disclose inside information to the public as soon as reasonably practicable. Any breach of that obligation would expose the listed corporation and/or its officer(s) to the risk of civil sanctions, as well as liability to compensate those who have suffered pecuniary losses as a result of the breach. The statutory disclosure regime will take effect on 1 January 2013.
Part XIVA should be read in conjunction with the revised draft Guidelines on Disclosure of Inside Information (June 2011) (“draft Guidelines”), which were published by the Securities and Futures Commission (“SFC”) to help listed corporations to comply with their Part XIVA disclosure obligations. The draft Guidelines will be finalised and gazetted in due course, and are also expected to take effect on 1 January 2013.
The key disclosure obligation
Under Part XIVA of the SFO, a listed corporation must disclose any “inside information” to the public as soon as reasonably practicable once the information has “come to its knowledge”, unless one of the prescribed safe harbours applies. A listed corporation would also be in breach of the disclosure obligation if any information disclosed by it is false or misleading as to a material fact or through the omission of a material fact, and that its officer knows (or ought reasonably to have known) that, or is reckless/ negligent as to whether, the information disclosed is false or misleading.
What is “inside information”?
The definition of “inside definition” is the same as the definition of “relevant information” under the SFO’s insider dealing regime. It is “specific information”:
- about a listed corporation, the corporation’s shareholder or officer, or the corporation’s listed securities or their derivatives
- that is not generally known to those who are accustomed or would be likely to deal in the corporation’s listed securities but would, if generally known to them be likely to materially affect the price of the listed securities.
The draft Guidelines further elaborate on the meaning of the terms “specific”, “not generally known”, and “material effect on the price”, closely following rulings by the Insider Dealing Tribunal and Market Misconduct Tribunal (“MMT”) over the years.
When should a listed corporation disclose inside information?
Inside information would be considered as having come to a listed corporation’s knowledge if:
- the information has, or ought reasonably to have, come to the knowledge of an “officer” of the corporation in the course of performing his/her functions as an officer; and
- a reasonable person, acting as an officer of the corporation, would consider that the information is inside information.
An “officer” is defined as a “director, manager or secretary of, or any other person involved in the management of the corporation” under the SFO. Note that in refusing to define “officer” in a more restrictive way, the government indicated in the consultation paper that its intention is to “catch directors and high-level individuals responsible for managing the listed corporation, not middle management or low-ranked staff”, and that “the person’s actual responsibilities are more important than the person’s formal title”.
Although not defined in the Amendment Ordinance, the SFC’s draft Guidelines provide that “as soon as reasonably practicable” means that “the corporation should immediately take all steps that are necessary in the circumstances to disclose the information to the public.” Such “necessary steps” prior to the issue of a public announcement may include ascertaining and verifying the facts, making an internal assessment of the matter and its likely impact, and seeking professional advice.
How should a listed corporation disclose inside information?
Disclosure must be made in a manner that can provide for equal, timely and effective access by the public. Although not described as the only permissible method of disclosure, the Amendment Ordinance provides that a listed corporation complies with its disclosure obligation if it disseminates inside information through the electronic publication system operated by SEHK. As the SFC has also stated in its draft Guidelines that it would “expect a corporation to use this channel for dissemination of inside information”, listed corporations should aim to satisfy that expectation.
When non-disclosure might be permissible: safe harbours
The Amendment Ordinance provides five safe harbours, under which a listed corporation is not required publicly to disclose otherwise discloseable inside information:
- if the disclosure is prohibited under, or would constitute a breach of a court order or an enactment. The SFC’s draft Guidelines state that this means an order made by a Hong Kong court or any provisions of Hong Kong’s statutes. (For foreign court orders/legislation, the SFC may consider a waiver of the disclosure requirement if compliance would constitute a breach of a foreign court order/legislation – see below);
- if the information concerns an incomplete proposal or negotiation;
- if the information is a trade secret;
- if the information relates to the provision of liquidity support from the Exchange Fund, or an institution which performs the functions of a central bank to the listed corporation/its group companies; or
- if the SFC has waived the disclosure requirement. The SFC may grant specific waivers if the disclosure would contravene foreign legislation/a foreign court order/a restriction imposed by a foreign law enforcement agency or a foreign government authority.
Safe harbours (2) to (5) above are available to a listed corporation only if it has taken reasonable precautions to preserve the confidentiality of the inside information, and confidentiality is in fact preserved. However, the Amendment Ordinance allows limited, selective disclosure of inside information in certain circumstances which would not be regarded as a failure to preserve confidentiality, such as when disclosure is made to a person who requires it to perform his/her functions, and who owes the corporation a duty of confidentiality. According to the SFC’s draft Guidelines, such persons may include:
- the corporation’s advisers and advisers of other persons involved in the matter in question;
- persons with whom the corporation is negotiating, or intends to negotiate, any commercial, financial or investment transaction;
- the corporation’s lenders;
- the corporation’s major shareholders; and
- any government department, statutory or regulatory authority, eg the SFC and SEHK.
In the event that confidentiality is lost and a safe harbour does not apply, a listed corporation must publicly disclose the inside information without delay.
Enforcement, proceedings and appeal
The Amendment Ordinance gives the SFC the power to investigate any suspected breach of the disclosure requirement, and to institute proceedings directly in the MMT, which will have jurisdiction to determine whether disclosure obligations have been met. The MMT’s decisions may be appealed to the Court of Appeal.
Penalties and civil liability
The MMT can impose one or more of the following orders against a person whom it finds in breach of a disclosure requirement:
- a regulatory fine of up to HK$8 million for a listed corporation, its director(s) or chief executive;
- a disqualification order for up to five years;
- a “cold shoulder” order (which will deprive the person of the ability to deal in Hong Kong in securities, futures contracts, leveraged foreign exchange contracts, or collective investment schemes) for up to five years;
- a “cease and desist” order;
- a disciplinary referral;
- a costs order; and
- any order that the MMT considers necessary to ensure that a breach of the disclosure requirement does not occur again, including an order that the listed corporation appoint an independent professional adviser to review its internal compliance procedures, or an order that an officer of the corporation attend relevant training.
In addition to the civil sanctions above, a person who is found to be in breach of the disclosure requirement may also be liable to compensate any person who has suffered pecuniary loss as a result of the breach, whether or not the loss was incurred by the person through entering into a transaction at a price affected by the breach. A person may rely on the MMT’s findings of breach as evidence in civil proceedings to seek compensation.
The SFC’s power to apply to the Court of First Instance for a remedial order under section 213 of the SFO would also be available to the SFC in relation to an investigation or proceedings under Part XIVA. The SFC may therefore apply for, amongst other things, an injunction to freeze the assets of a listed corporation and/or its officers, or an order that the corporation take steps to restore its counterparties to their pre-transaction positions. The SFC may also apply to the Court of First Instance for a disqualification order, a compensation order etc under section 214 of the SFO.
Officers’ liability and management controls
The Amendment Ordinance stipulates that every officer of a listed corporation is under an obligation to take all reasonable measures from time to time to ensure that proper safeguards are in place to prevent the corporation from breaching a disclosure requirement.
If a listed corporation breaches a disclosure requirement, each of its officers could be held personally responsible if his/her intentional, reckless or negligent conduct has led to the breach, or if he/she failed to take all reasonable measures to prevent such a breach. Such measures, according to the SFC’s draft Guidelines, include the creation and maintenance of appropriate internal control and reporting systems.
The draft Guidelines also recommend that listed corporations establish and maintain effective systems and procedures to ensure that any material information which comes to the knowledge of their officer(s) will be promptly identified, assessed and escalated for the attention of the Board of directors to enable the Board to determine whether disclosure would be necessary. It is ultimately the responsibility of the officer(s) to ensure the corporation’s compliance with its disclosure obligation.
The provisions granting the SFC power to directly institute proceedings before the MMT (including Part XIVA proceedings and proceedings for the existing six types of market misconduct under the SFO) have been in operation since 4 May 2012. The substantive disclosure provisions will take effect on 1 January 2013. The SFC has stated that this is intended to give listed corporations sufficient time to prepare themselves for compliance and to establish the necessary internal control systems. Listed corporations, and in particular their officers (who are now under a specific duty to ensure that proper safeguards exist to prevent a breach of the disclosure obligation by their corporations) should therefore critically assess their existing systems and controls to ensure that information which might amount to inside information will be escalated to the Board in a timely manner, so that the Board can consider whether a disclosure obligation is triggered. With the statutory disclosure regime in place, changes to the SEHK Listing Rules will be necessary to minimise duplication and overlap between Part XIVA and the continuing disclosure obligations under the Listing Rules (currently in Rule 13.09(1) of the Main Board Listing Rules and Rule 17.10(3) of the GEM Listing Rules). The SEHK expects to commence a public consultation on the relevant changes to the Listing Rules later this year. We will update you on the progress of that consultation, as well as the SFC’s draft Guidelines.
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