There are a number of exemptions and interests which may be disregarded. These are very detailed, hence the following is limited to a brief outline only of the principal exemptions and disregards.
12.1. Basket Derivatives
Basket derivatives over the shares of at least 5 companies listed on a “specified” stock exchange are disregarded provided that no one share accounts for over 30% of the value of the total basket. The percentage figure is calculated at the time of issue of the derivatives.
12.2. De Minimis Change Exemption on Change in Long or Short Positions (Sections 313(7) and (9))
The exemption applies so that an increase or decrease in a person’s holding or short position which results in his interest crossing over a percentage level above 5% (in the case of a holding) or 1% (in the case of a short position) will not be discloseable if:
- the percentage level of his interest is the same as, or less than, the percentage level of his interest stated in the “Last Notification” given by him; and
- the difference between the percentage figure of his interest disclosed in his “Last Notification” and the percentage figure of his interest at all times after such notification, is less than 0.5%.
“Percentage level” in (i) above means the percentage figure rounded down (if not a whole number) to the next whole number. “Percentage figure” in (ii) above, however, means the actual (unrounded) percentage figure.
The “Last Notification” must, in the case of a holding, be a notice given under Section 313(1)(c) that is notice of a change in the percentage level of a person’s interest above 5%. Hence a notification given on commencement of the SFO, on first crossing the 5% threshold or of a change in the nature of an interest will not qualify as a “Last Notification”. In the case of a short position, the “Last Notification” must be a notice given under Section 313(4)(c), that is notice of a change in the percentage level of a person’s short position above 1%.
This exemption will not therefore apply if the percentage level of a person’s interest has increased since his Last Notification or if at any time after such notification his percentage interest differed by 0.5% or more from the percentage figure of his interest stated in that notification.
12.3. De Minimis Change Exemption on Change in the Nature of Interests (Section 313(8))
There is no duty of disclosure where:
- the “percentage level” (i.e. the rounded down figure as explained above) of a person’s unchanged interest (i.e. disregarding the part in which his interest has changed) is the same as the percentage level of his interest in the last notice (this notice is not restricted to notices of change in the percentage level of an interest) given by him; or
- the percentage level of a person’s unchanged interest has crossed over a percentage level if:
- the percentage level of his unchanged interest is the same as or less than the percentage level of his interest given in the “Last Notification” by him (i.e. a notice under Section 313(c) of a change in the level of a person’s interest above 5%); and
- the difference between the percentage figure (i.e. the actual unrounded figure as noted above) of his unchanged interest and the percentage figure disclosed in the Last Notification has been less than 0.5% at all times since the giving of that notification.
The SFC’s Outline of Part XV contains detailed examples illustrating the workings of the de minimis exemptions.
12.4. Exempt Security Interests (Section 323(6))
An interest in shares is not required to be disclosed if it qualifies as an “exempt security interest” i.e. if it is held by a “qualified lender by way of security only” for a transaction entered into in the ordinary course of his business (Section 323(6)). Further, the creation of the security interest in favour of a “qualified lender” will not result in a change in the nature of the holder’s interest in those shares (Section 313(13)).
A “qualified lender” is defined under Section 308 to include an authorised financial institution, an authorised insurance company, an exchange participant of a recognised exchange company and an intermediary licensed to deal in securities or margin financing. The term also now includes overseas institutions authorised to carry on business as a bank, insurance company or activities which, in the opinion of the SFC, are equivalent to the regulated activities of intermediaries in countries recognised by the SFC.
As to when a qualified lender is taken to hold an interest in shares “by way of security only”, a distinction is drawn between the creation of a security interest in, and a transfer of title to, shares. If a person has a right to return equivalent shares and may deal with the shares transferred to him as if they are his own in the meantime, this is a transfer of title and not the creation of a security interest.
Under Section 323(7) an interest will no longer qualify as an “exempt security interest” if the qualified lender becomes entitled to exercise voting rights of the relevant shares due to default by the person who gave the security, and shows an intention or takes any step to exercise or control the exercise of those voting rights. Similarly, an interest will cease to be an “exempt security interest” if the power of sale becomes exercisable and the qualified lender or its agent offers for sale all or any of the shares. In either case, the qualified lender is regarded as having acquired an interest in the shares and is obliged to disclose his interest.
12.5. Wholly Owned Group Exemption (Section 313(10))
A wholly owned subsidiary is not required to notify an interest in certain circumstances if its ultimate holding company has given notice of its interest in the relevant shares. The certain circumstances in which wholly owned subsidiaries are exempted are those where the disclosure obligation arises under Sections 313(1) or (4) (as set out in paragraph 2.1 above). Significantly, the wholly owned group exemption is not available on the making of an “Initial Notification” under Sections 310(2) and (3) (i.e. notice given when the SFO came into force, when an interest is held in shares in a company which is being listed or when a notifiable interest is acquired on a reduction of the 5% threshold or 1% threshold for short positions is reduced (see paragraph 2.2 above). Hence, if a wholly owned subsidiary holds an interest of 5% or more in the shares of another company at the time that other company becomes listed, it cannot rely on the wholly owned group exemption: instead both the wholly owned subsidiary and its holding company will be obliged to separately disclose the interest in the shares held by the subsidiary.
Further, transactions between wholly owned subsidiaries of the same group do not give rise to a duty of disclosure since the number of shares in which the ultimate parent is interested or has a short position and the nature of its interest remains the same. Hence transfers of shares of a listed company, the grant and taking of options over such shares and the issue of warrants between wholly owned subsidiaries of the same group do not give rise to a duty of disclosure.
A duty of disclosure will arise if any relevant subsidiary ceases to be wholly owned, even if only 1% of its shares are sold to a third party.