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Insider dealing under the Securities and Futures Ordinance

DEFINITIONS

  1. Securities
    “Securities” is widely defined to mean:

    1. shares, stocks, debentures, loan stocks, funds, bonds or notes of, or issued by, or which it is reasonably foreseeable will be issued by, a body, whether incorporated or unincorporated, or a government or municipal government authority;
    2. rights, options or interests (whether described as units or otherwise) in, or in respect of, any of the foregoing;
    3. certificates of interest or participation in, temporary or interim certificates for, receipts for, or warrants to subscribe for or purchase, any of the foregoing;
    4. interests, rights or property, whether in the form of an instrument or otherwise, commonly known as securities; or
    5. interests, rights or property, whether or not in the form of an instrument, which the Financial Secretary has specified by notice in the Gazette is to be regarded as a “security”.
  2. Listed securities
    Securities listed on the Hong Kong Stock Exchange at the time of the dealing in question. The definition of ‘listed securities’ include:

    • issued unlisted securities provided that, at the time of the insider dealing, it is reasonably foreseeable that they will be listed and they are subsequently in fact listed; and
    • unissued securities provided that, at the time of the insider dealing, it is reasonably foreseeable that they will be issued and listed and they are subsequently in fact issued and listed.

    This is intended to catch “grey market” dealings prior to a secondary issue of securities. As insider dealing can only occur in relation to a ‘listed corporation’, insider dealing in an IPO grey market is not covered. The market manipulation provisions of the Securities and Futures Ordinance may however apply to such trading to the extent that it affects post listing prices and trading.

    Securities are treated as listed notwithstanding that dealings in them may have been suspended.

  3. Corporation
    The definition of “corporation” includes the large number of companies which are listed in Hong Kong but incorporated abroad.
  4. a person connected with a corporation

    A “person connected with a corporation” is someone who is on the inside track who has access to information about a corporation by reason of his relationship with it. He is commonly called an “insider”.

    Under sections 247 and 287 of the SFO, an individual is connected with a corporation if:

    1. he is a director or employee of that corporation or a related corporation;
    2. he is a substantial shareholder (i.e. has an interest in 5% or more of the issued voting share capital) in the corporation or a related corporation*;
    3. his position may reasonably be expected to give him access to inside information concerning the corporation by reason of:
      • a professional or business relationship existing between himself (or his employer or a corporation of which he is a director or a firm of which he is a partner) and that corporation, a related corporation or an officer or substantial shareholder in either corporation; or
      • his being a director, employee or partner of a substantial shareholder of the corporation or a related corporation; or
    4. he has access to inside information by virtue of being connected (within the meaning of a, b or c above) with another corporation where that information relates to a transaction (actual or contemplated) involving both corporations or involving one of them and the listed securities of the other or their derivatives, or to the fact that such transaction is no longer contemplated; or
    5. he was connected with the corporation within the meaning of a, b, c or d above at any time within 6 months preceding any relevant dealing.

    * The definition of substantial shareholder refers to a holder of an interest of 5% or more of the company’s issued voting share capital

    A corporation is connected with another corporation if any of its directors or employees are so connected. A director is defined to include shadow directors, that is, persons in accordance with whose instructions the directors of the corporation are accustomed or obliged to act.

    Under sections 248 and 288, any public officer or member or employee of certain bodies who in his capacity as such obtains inside information about a corporation will be deemed to be connected with that corporation.

  5. Inside information

    “Inside information”1 in relation to a corporation means specific information about:

    1. the corporation;
    2. a shareholder or officer of the corporation; or
    3. the listed securities of the corporation or their derivatives,

    which is not generally known to the persons who are accustomed or would be likely to deal in the listed securities of the corporation but which would, if it were generally known to them, be likely to materially affect the price of the listed securities.

    Inside information of Hong Kong-listed companies could include information about changes in a corporation’s shareholders or officers and about rights attaching to listed securities and derivatives over those securities.

    1. Determining whether information is “specific”:
      In Firstone International Holdings Ltd, Chinese Estates Holdings Ltd, Gilbert Holdings Ltd2, the IDT has adopted the following test:
      “We have… … directed ourselves that information concerning a company’s affairs is sufficiently specific if it carries with it such particulars as to a transaction, the event or matter or proposed transaction, event or matter, so as to allow that transaction, event or matter, to be identified and its nature to be coherently described and understood.”

      • “Specific information” is contrasted with mere rumour, vague hopes and worries, and with unsubstantiated conjecture.
      • It does not need to be precise. In Chinese Estates, the Tribunal said:
        • “Information is not rendered general, as opposed to specific, merely because the information is broad and allows room, even substantial room, for particulars.”
    2. “Inside information” must be information:“which would if it were generally know to [the wider investing public to] be likely to materially affect the price of the listed securities” [s 245(1)]
      • The information must be price sensitive. It is not sufficient that the information should simply affect the price of the securities.
      • The effect must be material. In Chinese Estates:
        • “Thus information that would be likely to cause a mere fluctuation or a slight change in price would not be sufficient; there must be the likelihood of change of significant degree in any given circumstances that amount to a material change.”
  6. Dealing in securities
    Under section 249 of the SFO a person deals, whether he acts as principal or agent. Agreeing to deal and buying or selling the right to deal will also be dealings under the SFO.
  7. “related corporation”
    For the purposes of the SFO:

    1. Two or more corporations are regarded as related corporations of each other if one of them is:
      1. the holding company of the other;
      2. a subsidiary of the other; and
      3. a subsidiary of the holding company of the other;
    2. when an individual:
      1. controls the composition of the board of directors of one or more corporations;
      2. controls more than half of the voting power at general meetings of one or more corporations; or
      3. holds more than half of the issued share capital (excluding any part which carries no right to participate beyond a specified amount on a distribution of either profits or capital) of one or more corporations,

    each of the corporations referred to in paragraphs 1 to 3, and each of their subsidiaries, are regarded as related corporations of each other.

WHAT IS NOT INSIDER DEALING?

Defences

Under sections 271 and 292 of the SFO a person will have a defence if he can establish that he is within one of the categories set out below:

  1. the dealing, counselling or procuring was made:
    1. for the sole purpose of acquiring qualifying shares as a director or intending director of a corporation;
    2. in good faith in performance of an underwriting agreement for the listed securities or derivatives in question; or
    3. in good faith as a liquidator, receiver or trustee in bankruptcy.
  2. in the case of a corporation:
    1. there were effective arrangements in place (commonly called a “Chinese wall”) to ring-fence any inside information in the possession of any of its directors and employees; and
    2. each person who took the decision for the corporation to deal, counsel or procure a dealing in the listed securities or derivatives in question did not have the inside information at that time and had not received advice from those in possession of such information.
  3. the purpose for which a person dealt in or counselled or procured another to deal in the listed securities or their derivatives or disclosed information did not include the purpose of securing or increasing a profit or avoiding or reducing a loss, whether for himself or another, by using the inside information.
  4. the person dealt or counselled or procured another to deal in a corporation’s listed securities or their derivatives:
    1. as agent;
    2. he did not select or advise on the selection of such listed securities or derivatives; and
    3. he did not know that the person for whom he acted was connected with that corporation or had the inside information.
  5. the dealing was off-market in Hong Kong and:
    1. where a person dealt in listed securities or their derivatives, he and the other party entered into the dealing directly with each other and at the time of the dealing, the other party knew, or ought reasonably to have known, of the inside information; or
    2. where a person counselled or procured another person to deal in listed securities or their derivatives, he counselled or procured the other party to enter into the dealing directly with him and at that time the other party knew, or ought reasonably to have known, of the inside information.
  6. the person dealt in listed securities or their derivatives but did not counsel or procure the other party to deal and at the time of the dealing the other party knew, or ought reasonably to have known, that he was a person connected with the corporation.This defence operates on the assumption that people who transact with someone they know or should know is a company insider, should be on notice that the other party may be insider dealing and so make adequate inquiries with the insider before dealing with them and maybe negotiate terms as to the disclosure of inside information.
  7. the person counselled or procured another to deal in listed securities or their derivatives and establishes that:
    1. the other person did not counsel or procure the other party to the dealing to deal in the listed securities or derivatives; and
    2. at the time he counselled or procured the other person to deal, the other party to the dealing knew, or ought reasonably to have known, that the other person was a person connected with the corporation.

    This gives a defence to a person who counsels or procures a person to deal in the same circumstances as a defence is available to a person who deals under 6 above. It is really a logical extension of the defence under paragraph 6. It would, for example, protect a merchant bank who introduced a prospective purchaser to a substantial shareholder of a listed corporation who the bank thought might want to tender to divest their shareholding and advised the shareholder on the sale.

  8. the person dealt or counselled or procured another to deal in a corporation’s listed securities or their derivatives and:
    1. he acted in connection with any dealing which was under consideration or was the subject of negotiation, or in the course of series of such dealings and with a view to facilitating the accomplishment of the dealing or the series of dealing; and
    2. the inside information was market information arising directly out of his involvement in the dealing or the series of dealings.

    “Market Information” is defined to include facts such as:

    • that there has or is to be (or that there has not been or is not to be) a dealing in listed securities or their derivatives or that any such dealing is under consideration or negotiation;
    • the quantity and price (or price range) of the listed securities or their derivatives; and
    • the identity of the persons involved.

    This gives a defence to a person who trades with knowledge of his own trading intentions or activities and also to those who simply execute or facilitate a trade on his behalf. This defence caters for the situation in which a person, whose trading activities might be price-sensitive information (e.g. a substantial shareholder and therefore a connected person, increases his stake in a listed company). Without such an explicit defence a person dealing with ‘insider’ information about their own trading activities is technically insider dealing even though the Hong Kong authorities did not taken action against such conduct under the previous legislation.

  9. the dealing in question was subject to the rules of a recognised clearing house and was entered into by the clearing house with a clearing participant for the purposes of the clearing and settlement of a market transaction.

Sections 272 and 293 provide a further defence where a trustee or personal representative dealt in or counselled or procured a dealing in listed securities or their derivatives on advice obtained in good faith from an appropriate person who did not appear to him to be a person who would have been involved in insider dealing if he himself had dealt in the listed securities or their derivatives.

Sections 273 and 294 provide a defence where a person dealt in listed securities or their derivatives in the exercise of a right to subscribe for or otherwise acquire such securities or their derivatives which was granted to him or was derived from securities held by him at a time when he was not aware of any inside information.


1 s.245(1) Securities and Futures Ordinance, Cap 571

2 Decisions are available at http://www.idt.gov.hk/english/welcome.html. There are no decisions of the High Court in which this test has been challenged.

Skills

Posted on

2014-07-15