These provisions build upon the previous
law in Section 135(5) of the SO and Section 62(2) of the
CTO. Their aim is to prevent persons involved in market
misconduct, their associates or those they have recruited
for reward from spreading information about the effect that
market misconduct is going to have on the price of a security
or futures contract. Those involved in market misconduct
may seek to increase their profits by spreading such rumours
hoping that ordinary investors will be encouraged to buy
or sell, so pushing the price of the securities or futures
further in the direction that those involved in the market
misconduct intend.
It is a defence if a person can establish that:
- the benefit which he or his associate received, or
expected to receive, was not from a person involved
in the prohibited transaction or an associate of his;
or
- the benefit which he or his associate received, or
expected to receive, was from a person involved in the
prohibited transaction or an associate of his, but up
to (and including) the time of the disclosure, circulation
or dissemination of the information, he acted in good
faith.
These defences are intended to cover persons such as journalists
and research analysts who may innocently report market misconduct
and its effect on prices and innocently receive a benefit
for such conduct.
A 'related corporation' is defined as follows:
- 2 or more corporations are regarded as related corporations
of each other if one of them is:-
- the holding company of the other;
- a subsidiary of the other;
- a subsidiary of the holding company of the other;
- when an individual:
- controls the composition of the board of directors
of one or more corporations;
- controls more than half of the voting power at
general meetings of one or more corporations; or
- holds more than half of the issued share capital
(excluding any part which carries no right to participate
beyond a specified amount on a distribution of either
profits or capital) of one or more corporations,
each of the corporations referred to in paragraphs i to
iii, and each of their subsidiaries, are regarded as related
corporations of each other.
DISCLOSURE OF FALSE OR MISLEADING INFORMATION INDUCING
TRANSACTIONS (Sections 277 and 298)
Disclosure of false or misleading information inducing transactions
occurs when, in Hong Kong or elsewhere, a person discloses,
circulates or disseminates, or authorises or is concerned
in the disclosure, circulation or dissemination of, information
that is likely:
- to induce another person to subscribe for securities,
or deal in futures contracts, in Hong Kong;
- to induce the sale or purchase in Hong Kong of securities
by another person; or
- to maintain, increase, reduce or stabilise the price
of securities, or the price for dealing in futures contracts,
in Hong Kong,
if :
- the information is false or misleading as to a material
fact or through the omission of a material fact; and
- the person knows that, or is reckless or, for
civil market misconduct only*, negligent as to
whether, the information is false or misleading as to
a material fact or through the omission of a material
fact.
* Under Section 298, negligence will not
suffice to establish criminal liability.
Defences are available for those who unwittingly disseminate
false or misleading information in the course of their business,
which involves disseminating information received from others
and who are not in a position to check the accuracy of that
information. In summary these defences are for:
- persons operating a 'conduit' style business of issuing
or reproducing information supplied by others, such
as publishers and printers;
- persons whose business involves electronically providing
access to third party information, where the information
is wholly devised by another person, for example those
operating internet websites providing access to third
party information; and
- broadcasters of information devised wholly by another.
These defences may only be relied upon if the person did
not know that the information was materially false or misleading
at the time of disclosure. They are narrowly drafted and
will only be available in very specific circumstances. In
particular, they are only available where the information
has been devised entirely by someone else and the defendant
and his officers and employees did not in any way modify
or exercise control over the information. In the case of
paragraph b, it must also be made clear that those re-transmitting
the information have not devised it, and do not take responsibility
for or endorse its accuracy.
These provisions have significant implications for issuers
of securities (whether listed or unlisted) and their advisers.
While it must be the case that the information is likely
to have an effect (ie. induce a dealing in, or affect the
price of, securities or futures contracts) in Hong Kong,
the disclosure of information may occur anywhere. Further,
it is not necessary for the information disclosed to in
fact have such an effect. It is sufficient if the information
is
likely to have that effect. Given that negligence
as to whether the information is materially false or misleading
is sufficient to establish civil liability (and recklessness
may establish criminal liability), these provisions are
of considerable significance for roadshows, research analysts
and the imparting of information to potential investors
generally.
