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Disclosure of interests under the Securities and Futures Ordinance

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Disclosure of interests under the Securities and Futures Ordinance

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9. DEEMED INTERESTS

There are a number of circumstances where the interests and derivative interests (including short positions) of others in a listed company’s shares must be added to a person’s own interest in calculating the number of shares in which they are interested.

9.1. Family and Controlled Company Interests (Section 316)

Interests of a person’s spouse and children under 18 are attributable to him.

Also, a person will be deemed to be interested in the interests of any company which he “controls” (i.e. a company of which he controls, either directly or indirectly, one third or more of the voting power at general meetings or if the company or its directors are accustomed to act in accordance with that person’s directions).

9.2. Limited Liability Partnerships

The SFC Outline confirms that the SFC regards a limited liability partnership as a company for the purposes of Part XV. Hence interests in shares held by a limited liability partnership should be disclosed by the general partner as interests in shares of a controlled corporation (rather than as joint interests of each partner).

9.3. Trusts

The interests of a trust of which a person is a trustee must also be aggregated with his own interests (with the exception of a trust of which he is a bare trustee (i.e. his only powers or duties are to transfer the underlying shares according to the directions of the beneficial owner – see paragraph 12.7 below).

A beneficiary of a trust must include the interests of the trust in calculating his own interest (Section 322(4)(a)). The interest of a beneficiary under a discretionary trust is however disregarded (Section 323(1)(a)(iii) provided that he is not also a director of the relevant listed company or a “founder” of the trust (see paragraph 9.4 below).

9.4. “Founders” of Discretionary Trusts

The interests of a “discretionary trust” are attributed to the “founder” of such trust (Section 322(4)(b)). The term “founder” is very widely defined and essentially will catch anyone who has procured the creation of the trust and (i) whose consent is a condition of a trustee’s exercise of his discretion or (ii) in accordance with whose wishes a trustee is accustomed or expected to act (whether, in either case, legally enforceable or not).

9.5. Concert Party Agreements (Section 317)

In essence, the provisions apply where two or more persons agree to acquire shares in a target company and the agreement dictates the manner in which any one or more of the parties may exercise the rights attached to those shares or dispose of them. Each party to the agreement must include the interests of all other parties to the agreement in determining whether they together hold 5% or more of the listed company. If so, each party will be considered to be a substantial shareholder whose interests must be disclosed.

The provisions also cover any arrangement whereby a “controlling person” or director of a listed company makes a loan to a person on the understanding that the money will be used to acquire interests in shares in that company and shares are in fact acquired. A “controlling person” for these purposes is any person who, either alone or with associates, controls at least 30% of the voting power at general meetings, can nominate any of its directors or veto or modify any resolution of a general meeting.

The effect of this is to create an irrebutable presumption that the loan or funding will be provided pursuant to an agreement dictating how the borrower may deal with his shares.

There is an exemption where a “controlling person” or director makes the loan in the ordinary course of his business as a “qualified lender” (as defined under paragraph 12.4 below).

Where 2 or more persons are interested in the same shares they must each make separate disclosure of their interests. Hence if X controls Y Ltd. which holds 6% of a listed company and Y Limited acquires a further 1%, then X, his spouse and Y Limited must each file a separate notice.

10. DISCLOSURE OBLIGATIONS RESULTING FROM SHARE REPURCHASES AND PLACEMENTS

Disclosure obligations may also arise from actions taken by others. For example, if a listed company buys back shares thereby reducing the number of shares in issue, an increase in the percentage level of the interests of the remaining shareholders will be discloseable.

Conversely, in the case of a placement and top‑up, where new shares are issued to a major shareholder to replace the shares he has placed with a third party, the number of shares in issue increases. The consequent reduction in the percentage level of the interests of the other shareholders will then be discloseable.

In both cases, the 3 business day time limit for disclosure runs only from the date the person concerned became aware of the facts that led to the change in the level of his interest i.e. the date on which he became aware that the number of issued shares had reduced/increased.

11. CESSATION OF INTERESTS (SECTION 322(10))

A person is regarded as having ceased to be interested in shares if:

  1. he delivers them to another person (or to his order) pursuant to a contract for sale, in fulfilment of his obligations under a call option, or on exercising his rights under a put option;
  2. his right to subscribe for or call for the delivery of shares lapses or he assigns such right to another;
  3. his obligation to take shares lapses or he assigns that obligation to another;
  4. he receives an amount from another person, or avoids or reduces a loss, on the assignment or settlement of any cash settled equity derivatives.

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Posted on

2015-01-23