3. DISCLOSURE OF INTERESTS IN EQUITY DERIVATIVES
Disclosure obligations of substantial shareholders of Hong Kong-listed companies cover interests in the unissued shares of listed companies which, if issued, would carry the right to vote and also to cash settled derivatives. Hence, interests in the “underlying shares” of all equity derivatives (whether issued or unissued) are discloseable, including interests in options, subscription warrants, convertible bonds, ADRs and stock futures.
A holder, writer or issuer of equity derivatives will be taken to have a long position in the underlying shares and must add these to his other interests in determining his disclosure obligations if:
- he has a right to take the underlying shares;
- he has an obligation to take the underlying shares; or
- he has a right to receive money or to avoid or reduce a loss, if the price of the underlying shares increases,
before or on a certain date or within a certain period (whether the right or obligation is conditional or absolute) (Section 322(8)).
4. DISCLOSURE OF SHORT POSITIONS
The SFO disclosure obligations of substantial shareholders of Hong Kong-listed companies also cover “short positions”. Under Section 308 a person is regarded as having a short position in shares if he:
- holds, writes or issues financial instruments under which:
- he can require another person to take the underlying shares;
- he is obliged to deliver the underlying shares; or
- he has a right to receive money or to avoid or reduce a loss if the price of the underlying shares declines,
before or on a certain date or within a certain period (whether the right or obligation is conditional or absolute); or
- he borrows shares under a securities borrowing and lending agreement.
Hence the writing of a call option, holding of a put option and stock borrowings will be discloseable. However a person (not being a director) with a short position will only be required to disclose it if he already has a 5% interest in a class of a listed company’s voting share capital ie. he must be a substantial shareholder before he has a duty to disclose a short position (Section 313(4)). Further the short position must be at least 1%. Thereafter, as with long positions, a change in the short position will only require disclosure if it results in the short position crossing a percentage level or in the person ceasing to have a short position of at least 1% (Sections 313(4)(b) and (c)).
Short positions cannot be netted off against long positions and the percentage figures for short and long positions must be calculated and notified separately.
The SFC Outline confirms that the SFC takes the view that when a listed company allots shares or issues an instrument under which it agrees to allot shares, or grants an option over its own shares, it is not taking a position in its own shares, short or long, but is simply issuing or agreeing to issue the shares. Hence there is no disclosure obligation for the company. Likewise, since the listed company is not taken to have a short position, a controller of the company will not be deemed to have a short position under the deeming provisions of the SFO and no disclosure is required. This view would appear to be at odds with a strict interpretation of the legislation and its wide definition of the term “short position”. It therefore seems likely that this view has been adopted more on the basis of the spirit of the legislation whose focus is primarily on the disclosure of positions held in other listed companies.
The holder of an option or other right to receive shares will however acquire a long position in the shares which must be disclosed.
Where a company grants an option over the shares of another listed company, then it is taking a short position which must be disclosed if the former company already holds a 5% interest and the short position amounts to 1% or more.
Note also that where a listed company grants an option over its own shares or debentures to a chief executive or director of that company, it is required to record details of the grant in its register of the interests of directors and chief executives (as described under Section C below).
5. HOW MANY SHARES IS A PERSON TAKEN TO BE INTERESTED IN IN THE CASE OF EQUITY DERIVATIVES?
Holders, writers and issuers of equity derivatives are taken to be interested in, or have a short position in, the number of shares to be delivered, or by reference to which the amount payable is derived or (in the case of stock futures only) the relevant contract multiplier (Section 322(12)).