Disclosure of interests of share charge under HK securities law

By Philip Wong, Gallant Solicitors & Notaries
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Consequent to the effect of globalization, multinational trade transactions have created demand for cross-border financing, and the situation of foreign banks accepting Hong Kong listed securities as loan security has become commonplace.

This article explores the current regulatory and disclosure regime in Hong Kong, where shares of Hong Kong listed companies are charged to foreign banks as loan security.

Philip WongPartnerGallant Solicitors and Notaries
Philip Wong
Partner
Gallant Solicitors and Notaries

Current regulatory regime

Substantial shareholders, directors and chief executives of listed companies are required, under part XV of the Securities and Futures Ordinance (SFO) (chapter 571 of the Laws of Hong Kong), to give notice upon the occurrence of certain events affecting perceptions of the value of the listed companies.

Pursuant to the SFO, interests in shares include holding shares as security. Hence, when a person or corporation obtains a charge over shares of a listed company as loan security, and such security exceeds a certain percentage, there is an obligation to make a statutory disclosure.

Disclosure of interests

A relevant triggering event for disclosure would be the obtaining of 5% or more shares in a Hong Kong listed company for the first time. There is also a continuing disclosure obligation to notify, inter alia, a drop in interest to below 5%, or an increase or decrease in the percentage figure of shareholding crossing over a whole percentage number, or a change in nature of interest in shares. When more than one class of shares is issued by the same listed company, the percentage of each class will be calculated separately.

Deemed interest

Foreign banks should take note of the concept of deemed interest under the SFO. Any person or corporation that is entitled to exercise or control the exercise of one-third or more of the voting power of a corporate interest holder will be deemed to have the same interest as the interest holder, and hence that person or corporation will be subject to the same disclosure requirements. Therefore, parent and holding companies of foreign banks accepting share charge over listed securities should also beware of their duty of disclosure.

Exempt interest

Under the SFO, a party may be exempted from disclosure if it holds interest in shares by way of security only for the purposes of a transaction entered into in the ordinary course of its business as a qualified lender.

“Qualified lender” is statutorily defined to include: (1) authorized financial institutions; (2) exchange participants of a recognized exchange company; and (3) corporations authorized under the law of an overseas country recognized by the Securities and Futures Commission (SFC) under certain circumstances to carry on business as a bank (SFC recognized banking corporations).

Each of these categories will be further elaborated upon below.

The exemption ceases to be applicable when, in general: (1) the qualified lender becomes entitled to exercise voting rights in the shares following a default by the security provider, and has evidenced its intention or taken any step to exercise the voting rights; or (2) the power of sale under the share charge becomes exercisable and the qualified lender offers any part of the shares for sale.

Authorized financial institutions. This category comprises banks, restricted licence banks and deposit-taking companies authorized and regulated under the Banking Ordinance. Lists of such entities are updated by the Hong Kong Monetary Authority and posted on its website.

Exchange participants of a recognized exchange company. Only two companies are deemed to be “recognized exchange companies” under the SFO, namely SEHK (the Stock Exchange of Hong Kong) and Hong Kong Futures Exchange. As such, this exemption does not apply to a foreign bank.

Overseas jurisdictions recognized. Concerning SFC Recognized Banking Corporations, the SFC currently only accepts authorization from a list of 11 countries. The People’s Republic of China is not on the list. Banks established outside the said list of countries cannot benefit from the exemption.

Compliance with SFO. If none of the exemptions apply, prescribed disclosure forms must be filed within three business days after the day on which the relevant triggering event occurs. Failure to comply is a criminal offence and may result in a maximum fine of HK$100,000 (US$12,800) or maximum imprisonment of two years.

Conclusion

It should be noted that information disclosed under the statutory regime is publicly accessible through the SEHK portal. However, if the lender is a qualified lender, until the exemption of disclosure ceases, the charge over the listed securities will not appear on the SEHK portal, although the same may be accessible by conducting a company search on the security provider.

Philip Wong is a partner at Gallant Solicitors and Notaries in Hong Kong

Gallant Solicitors & Notaries
5/F, Jardine House, Connaught Place
Central, Hong Kong
www.gallantho.com

Contact details:

Tel: +852 2526 3336

Fax: +852 2845 9294

Email: philipwong@gallantho.com