Following the implementation of Hong Kong’s new statutory regime on inside information disclosure on 1 January 2013, the Securities and Futures Commission (SFC) observed an increase of over 40% of corporate announcements on inside information in the first three months of 2013, as compared to the same quarter of 2012. The SFC recently released certain guidelines in the form of frequently asked questions (FAQs) to advise Hong Kong-listed issuers on the application of the provisions of Part XIVA of the Securities and Futures Ordinance (SFO) and the SFC Guidelines on Disclosure of Inside Information.
Listed issuers’ and officers’ duties
The SFO expands and codifies the existing obligations of disclosure of price sensitive information by Hong Kong-listed issuers under the listing rules of Hong Kong’s stock exchange. Subject to the applicability of “safe harbours” in the SFO, listed issuers are statutorily required to disclose to the public any inside information that has come to their knowledge as soon as reasonably practicable. A listed issuer will be regarded to have knowledge of the inside information if:
- one or more of its officers knows or ought reasonably to have known that information in the course of performing functions as officers of the issuer; and
- a reasonable person, acting as an officer of the corporation, would consider that the information is inside information in relation to the issuer.
The meaning of “officer” is broadly construed. It encompasses an issuer’s directors, company secretary and managers. A person may be regarded as a manager if he or she is under the immediate authority of the board and is in charge of management responsibility affecting the whole, or a substantial part, of the issuer.
The SFC considers that it is the officers who are ultimately responsible for compliance with the issuer’s disclosure obligations. The SFO requires every officer to take all reasonable measures from time to time to ensure that proper safeguards exist to prevent a breach of the disclosure requirements. An officer would have personal liability under the SFO if the issuer fails to make due disclosures, and it is his or her intentional, reckless or negligent conduct that resulted in the issuer’s breach. Non-executive directors, who are usually not involved in the day-to-day operations of the issuer, may be liable if the board as a whole fails to establish or monitor key internal control procedures to ensure the issuer’s due compliance with the disclosure requirements.
What is inside information?
The SFO defines inside information to mean, in relation to a listed issuer, specific information that is related to (a) the issuer, (b) its shareholder or officer, or (c) its securities or their derivatives, and which is not generally known to the persons who are accustomed or would be likely to deal in the listed securities of the issuer, but would if generally known to them be likely to materially affect the price of the listed securities.
Whether any particular information will constitute inside information is dependent on its own facts and circumstances. Information that is incomplete and yet capable of allowing a matter or an event to be identified, and its nature to be coherently described and understood, may constitute specific information. The same applies even if a contemplated transaction is only at the stage of preliminary negotiation, if such transaction is more than a vague hope or wishful thinking.
An issuer should not take it for granted that any information which has been reported in the media or analysts’ reports will be regarded as generally known.
It should consider how widely the information has been and will be disseminated in the market, and whether the disseminated information is accurate and complete. If the information known to the market is not readily available to retail investors, or is incomplete or inaccurate, such information cannot be regarded as generally known.
The issuer should further assess whether the information is likely to materially affect the market price of its listed securities. The assessment will depend on various factors, such as the nature and size of the issuer, the subject matter of the information, and market conditions.
Manner and timing of disclosure
An issuer must immediately take all necessary steps to disclose any inside information through the electronic publication system of Hong Kong’s stock exchange – by way of corporate announcements – unless the information falls within the “safe harbours” under section 307D of the SFO. Before full disclosure is made, the issuer should ensure that the information is kept strictly confidential.
If confidentiality cannot be maintained, it should consider applying for a suspension of trading in its securities until disclosure can be made.
Practical concerns in making announcements
In the FAQs, the SFC makes it clear that an issuer should not use the heading of “voluntary announcement” in making inside information disclosures. Rather, it is expected to adopt a meaningful heading for the announcement, which accurately reflects the substance of the information concerned. Otherwise, the issuer will risk non-compliance with the SFO.
The inside information in the announcements should be factual, clear and expressed in a balanced and objective manner. Key messages should be clearly visible and presented in a readily understandable manner. Sufficient quantitative information that has come to the knowledge of the listed issuer should be included to ensure that the announcement is not false or misleading.
Simon Luk is a partner and the chairman of Asia practice at Winston & Strawn in Hong Kong. He can be contacted on +852 2292 2222 or by email at firstname.lastname@example.org
Fiona Tang is a solicitor at Winston & Strawn in Hong Kong. She can be contacted on +852 2292 2218 or by email at email@example.com