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Disclosure of interests under the Securities and Futures Ordinance

Disclosure of interests under the Securities and Futures Ordinance

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12.6. Bonus and Rights Issue Exemption

When there is a rights issue shareholders become interested in the unissued shares covered by the issue. In calculating their percentage interest the following formula should be used (Section 314(2)):

nominal value of shares (including unissued shares)

in which the shareholder is interested

x 100

nominal value of shares of the listed company of the same class in issue

+ nominal value of shares to be issued on completion of the bonus/rights issue *

* This is the only situation where the denominator is increased to take account of unissued shares.

Shareholders of listed companies who take up rights under qualifying bonus and rights issues (and whose percentage interest therefore remains unchanged) are not required to make any disclosure whereas shareholders who do not take up their rights (and whose percentage interest therefore changes) will have to make disclosure.

If a shareholder sells his rights, both he and the buyer must make disclosure if their interests cross a percentage level.

A rights issue is defined to include the offer by a listed company of its shares to holders of its issued shares at a certain date (other than to shareholders whose address is in a place where such an offer is not allowed under local law) in proportion to the number of shares held by them at that date. A rights issue does not however cover an offer or issue of shares in lieu of a cash dividend.

The underwriter of the rights issue will acquire an interest in all rights shares that he agrees to take up if they are not taken up by shareholders. The underwriter will then need to file notice of cessation of his interest in the number of rights shares taken up by shareholders on completion of the rights issue.

12.7. Investment Managers, Custodians and Trustees

The exemption previously available to local SFC registered investment managers and trust companies is removed. The following exemptions may however be relied on:

Bare Trustee Exemption

A narrow exemption is retained for bare trustees i.e. a trustee who is only entitled to deal with the interest in accordance with the instructions of the beneficiary.

Exempt Custodian Interest (Section 323(3))

The interests of corporate custodians carrying on a business of holding securities in custody for others need not be disclosed provided that the custodian has no authority to exercise discretion in dealing in the shares or exercising the rights attached to those shares.

12.8. Disaggregated Group Interests (Section 316(5))

More importantly, the SFO removes the obligation of a holding company to aggregate the interests of controlled companies (see paragraph 9.1 above) who are investment managers, custodians or trustees whose interest in the shares arises solely from their obligation or entitlement to invest in, manage, deal in or hold interests in those shares on behalf of customers in their ordinary course of business as such. For the exemption to apply the controlled company must exercise any rights to vote in respect of the shares and any power to invest in, manage, deal in or hold the shares, independently of its controlling company and any “related corporations” (i.e. companies within the same group or under the same majority control (Section 3 of Schedule 1)).

This exemption is available for the fund management industry only. It does not entitle family members whose interests in the shares of “family controlled” listed companies are held by trustees to disaggregate such interests. A trustee of a trust does not have “customers” and will probably not be “carrying on a business” as an investment manager, custodian or trustee. The terms “investment manager” and “trustee” are specifically defined in Section 316(7).

12.9. Securities Borrowing and Lending Exemption

The Securities and Futures (Disclosure of Interests – Securities Borrowing and Lending) Rules (“SBL Rules”) simplify the regime for disclosure of securities borrowing and lending for substantial shareholders (other than substantial shareholders who are also directors), “approved lending agents” and “regulated persons”.

Substantial Shareholders

Substantial Shareholders are exempted from disclosing changes in the nature of their interest arising on the lending and return of shares provided that they lend shares through an “approved lending agent” (see below) who holds the shares as their agent for the sole purpose of lending shares and the shares are lent using a specified form of agreement. In essence, this is an agreement providing for the borrower to provide collateral exceeding the value of the shares lent. The value of the collateral is marked to market and the lender can require return of the shares at any time.

Approved Lending Agents

Companies approved by the SFC as “Approved Lending Agents” (“ALAs”) holding 5% or more of the shares of a listed company will only be required to disclose changes in the percentage level of its “lending pool” of shares in that listed company. Hence if shares are added to or removed from the lending pool, a disclosure obligation will arise. ALA’s are exempted from any disclosure requirements arising when shares are lent from or returned to their lending pool.

Regulated Persons

Interests in shares borrowed by “regulated persons” (i.e. companies licensed to deal in securities and overseas brokers in recognised jurisdictions), that merely act as a conduit (i.e. they borrow and on‑lend the shares within 5 business days) are disregarded. On the return of shares to the regulated person, it may either return them to the ultimate lender or lend them to another borrower. Provided this is done within 5 business days, the regulated person’s interest is disregarded. Regulated persons can still rely on this exemption if it transfers shares to a related company provided that the related company on‑lends the shares within 5 business days after they were acquired by the regulated person.

Both ALAs and regulated persons are required to keep records of their transactions in the shares.

12.10. Collective Investment Schemes (Section 323(1)(c))

The interests of holders, trustees and custodians of collective investment schemes authorised by the SFC, certain pension and provident funds schemes and qualified overseas schemes are not required to be disclosed.

A “qualified overseas scheme” means a collective investment scheme, pension scheme or provident fund scheme established in a country recognised by the SFC. It will not include a scheme which is not run as a business, has less than 100 holders or where less than 50 persons hold 75% or more of the interests in it (Section 323(5)).

12.11. Intermediary Exemption (Section 323(1)(i))

The SFO provides an exemption for an intermediary (e.g. a dealer or broker) licensed or registered for dealing in securities who acquires interests in shares as agent for his client. The exemption only applies if (i) the interest is acquired for (and from) someone who is not a related company of the intermediary and (ii) the interest is held by the intermediary for not more than 3 business days.

A similar exemption applies to intermediaries whose interests arise under exchange traded stock futures or stock options contracts.

12.12. Further Exemptions

  1. Dual listings: a company may apply to the SFC for exemption from the provisions of Part XV if it is listed on an overseas exchange and certain other criteria are met.
  2. Structured products: the issuer of structured products may apply to the SFC for an exemption from Part XV. The main conditions to be satisfied are that the company’s shares are not listed in Hong Kong, it does not intend to raise publicly traded equity capital in Hong Kong and only the structured products will be listed in Hong Kong. It is the substantial shareholders and directors of the issuer of the structured products who are able to claim the exemption. The issuer and holders of the equity derivatives must still include interests in the underlying shares of those derivatives in determining their disclosure obligations.


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