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Insider dealing under the Securities and Futures Ordinance

INTRODUCTION

The Securities and Futures Ordinance (“SFO”) which came into effect on 1 April 2003 establishes dual civil and criminal regimes (under Parts XIII and XIV respectively) in respect of all types of Hong Kong market misconduct. “’Market misconduct” as regulated under Parts XIII and XIV comprises 6 offences: insider dealing, false trading, price rigging, disclosure of information about prohibited transactions, disclosure of false and misleading information inducing transactions and stock market manipulation.

The Hong Kong Market Misconduct Tribunal (“MMT”) extends to all types of Hong Kong market misconduct and the criminal regime covers all forms of Hong Kong market misconduct (including insider dealing) and 3 other offences under Part XIV of the Securities and Futures Ordinance.

The purpose of this memorandum is to provide an overview of the provisions of the SFO as they relate to Insider Dealing only.

WHAT IS INSIDER DEALING UNDER SECURITIES AND FUTURES ORDINANCE?

In broad terms insider dealing takes place where a person buys or sells shares in a listed company when he has inside information – that is, knowledge of certain facts about that company which the public does not have and which, if known to the public, would have an impact on the price of that company’s shares. Insider dealing, also referred to as disclosure of price sensitive information or PSI.

Sections 270 and 291 of the SFO set out seven occasions on which insider dealing in relation to a listed corporation occurs. They are as follows:

  1. Person with inside information deals in shares of a corporation with which he is connected – Sections 270(1)(a) and 291(1)(a)

    Insider dealing in relation to a listed corporation occurs when a person connected with the corporation has information which he knows is inside information in relation to that corporation and:

    • deals in the corporation’s listed securities or their derivatives or in those of a related corporation; or
    • counsels or procures another person to deal in such listed securities or derivatives, knowing or having reasonable cause to believe that the other person will deal in them.
  2. Take-over offer – bidder deals in shares of target – Sections 270(1)(b) and 291(2)
    Insider dealing in relation to a listed corporation also occurs when a person who is contemplating or has contemplated making a take-over offer for the corporation and knows that the information that the offer is contemplated or is no longer contemplated is inside information:

    • deals in the corporation’s listed securities or their derivatives or in those of a related corporation otherwise than for the purpose of the take-over; or
    • counsels or procures another person to deal in such listed securities or derivatives otherwise than for the purpose of the take-over.

    This provision is designed to stop, for instance, a director of a company which is about to launch a take-over bid from telling his friends to buy shares in the intended target in order to make a profit when the price of those shares inevitably rises. It does not stop the director of the bidder from buying shares in the target (or indeed counselling or procuring others to do so) in a “dawn raid” where the sole purpose of such purchases is to facilitate the take-over itself.

    The provision is also designed to catch, say, a director of the bidder who sells short in the target when he knows (but the public does not) that the bidder is not going to increase its offer price at the end of the initial offer period but instead is to let the offer lapse.

    “Take-over offer” is defined in Schedule 1 to the SFO.

  3. Person connected with a corporation leaks inside information about that corporation – Sections 270(1)(c) and 291(3)
    Insider dealing in relation to a listed corporation also occurs when a person connected with a listed corporation has information which he knows is inside information in relation to the corporation and discloses the information, directly or indirectly, to another person, knowing or having reasonable cause to believe that the other person will use the information to deal, or counsel or procure another person to deal, in the corporation’s listed securities or their derivatives or in those of a related corporation.

    The sub-section is designed to cover the person who deliberately leaks confidential information with a view to someone (whether it be the person to whom he has leaked the information or some other person) using that information to make a favourable deal on the Exchange.

  4. Bidder leaks take-over information – Sections 270(1)(d) and 291(4)
    Insider dealing also occurs when a person who is contemplating or has contemplated making a take-over offer for a listed corporation and knows that the information that the offer is contemplated or no longer contemplated is inside information discloses the information, directly or indirectly, to another person knowing or having reasonable cause to believe that the other person will use the information to deal, or to counsel or procure another person to deal in the corporation’s listed securities or their derivatives or in those of a related corporation.

    This applies where a person who is contemplating or has contemplated a take-over offer for another corporation leaks to another person information to the effect that he is contemplating such an offer or is no longer contemplating such an offer with a view to that other person using the information to deal in the target’s securities or to counsel or procure another to deal in them.

  5. Recipient of inside information from a person connected with a corporation deals in shares of that corporation – Sections 271(1)(e) and 291(5)
    Insider dealing in relation to a listed corporation also occurs when a person has information which he knows is inside information in relation to a listed corporation which he received, directly or indirectly, from a person whom he knows is connected with the corporation and whom he knows or has reasonable cause to believe held the information as a result of being so connected:

    • deals in the corporation’s listed securities or their derivatives or in those of a related corporation; or
    • counsels or procures another person to deal in such listed securities or derivatives.

    This catches the recipient of the leaked information who uses it either by dealing himself or by counselling or procuring someone else to deal. (The person who actually leaks the information would be caught by Sections 270(1)(c) and 291(3).)

  6. Recipient of inside information about a take-over deals in shares of the target – Sections 270(1)(f) and 291(6)
    Insider dealing also occurs when a person has received, directly or indirectly, from a person whom he knows or has reasonable cause to believe is contemplating or no longer contemplating making a take-over offer for the listed corporation, information to that effect which he knows is inside information in relation to the corporation and:

    • deals in the corporation’s listed securities or their derivatives or in those of a related corporation; or
    • counsels or procures another person to deal in such listed securities or derivatives.
  7. Person with inside information seeks to facilitate a dealing on an overseas market – Sections 270(2) and 291(7)
    Insider dealing also occurs when a person who knowingly has inside information in relation to a listed corporation in any of the circumstances set out above (i.e. in sub-section 270(1) and sub-sections 291(1)-(6)) and:

    • counsels or procures another person to deal in the corporation’s listed securities or their derivatives or in those of a related corporation, knowing or having reasonable cause to believe that the other person will deal in such listed securities or derivatives outside Hong Kong on an overseas stock market; or
    • discloses the inside information to another person knowing or having reasonable cause to believe that he or some other person will use the inside information to deal or counsel or procure another person to deal in the corporation’s listed securities or their derivatives or in those of a related corporation outside Hong Kong on an overseas stock market.
Skills

Posted on

2014-07-15