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Listed company guide to inside information

Listed company guide to inside information

III. THE MODEL CODE FOR SECURITIES TRANSACTIONS BY DIRECTORS OF LISTED ISSUERS (“MODEL CODE”)

Listed companies are required to adopt rules governing dealings by directors in their listed securities on terms no less stringent than the terms set out in the Model Code in Appendix 10 of the Main Board Rules. All directors of a listed issuer are required to comply with the Model Code (or the Company’s own code) and a breach of the requirements of the Model Code will amount to a breach of the Listing Rules.

  1. Absolute Prohibition

    The Model Code provides that a director of a listed issuer must not deal in the securities of the company:

    1. at any time when he is in possession of inside information in relation to those securities, or if clearance to deal has not been given (Model Code Rule A.1);
    2. on the publication date of the company’s financial results;
    3. during the period of 60 days preceding the publication date of the annual results or, if shorter, the period from the end of the relevant financial year up to the publication date of the results (Model Code Rule A.3(a)(i)); and
    4. during the period of 30 days preceding the publication date of the quarterly results (if any) and half-year results or, if shorter, the period from the end of the relevant quarterly or half-year period up to the publication date of the results (Model Code Rule A.3(a)(ii)).

    A listed issuer must give advance notice to the Exchange of the commencement date of each blackout period under (c) and (d) above.

    Further, a director of a listed issuer must not deal in its securities if he is in possession of inside information in relation to those securities by virtue of his position as a director of another listed issuer (Model Code Rule A.2). The restrictions on dealings in the Model Code apply equally to dealings by directors’ spouses and children under the age of 18 and to any dealings in which they are deemed to be interested for the purposes of Part XV of the SFO (Model Code Rule A.6). These would include, for example, dealings by a director’s controlled corporation or a trust of which a director is a trustee or beneficiary.

    It is also a Code Provision under the Corporate Governance Code set out in Appendix 14 to the Listing Rules, that the board should establish written guidelines no less exacting than the Model Code provisions for relevant employees in respect of dealings in the listed issuer. Relevant employees include employees and directors of the listed issuer, its subsidiaries and holding company(ies) who, because of their office or employment, are likely to possess inside information in relation to the issuer or its securities (Code Provision A.6.4). Where an issuer does not comply with this Code Provision, it must give considered reasons for its non-compliance in its corporate governance report.

  2. Duty of Notification

    A listed issuer is required by the Model Code to establish a procedure whereby a director is required to provide written notification to the chairman or a director (other than himself) designated by the board and to receive a dated written acknowledgement before dealing in any securities of the listed issuer. A response to a request for clearance to deal must be given to the relevant director within 5 business days and the clearance to deal must be valid for no more than 5 business days of clearance being received. The issuer must also maintain a written record of notifications given by directors, acknowledgements of such notifications and the written responses given.

IV. INSIDER DEALING UNDER THE SECURITIES AND FUTURES ORDINANCE

Insider dealing is both a civil and criminal offence under the SFO.

  1. What is Insider Dealing?

    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.

    Sections 270 and 291 of the SFO set out seven occasions on which insider dealing in relation to a listed company occurs.

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

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

      • deals in the listed company’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 company also occurs when a person who is contemplating or has contemplated making a take-over offer for the listed company and knows that the information that the offer is contemplated or is no longer contemplated is inside information:

      • deals in the listed company’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 listed company leaks inside information about that listed company – Sections 270(1)(c) and 291(3)

      Insider dealing in relation to a listed company also occurs when a person connected with a listed company has information which he knows is inside information in relation to the listed company 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 listed company’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 company 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 listed company’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 listed company 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 listed company deals in shares of that listed company – Sections 271(1)(e) and 291(5)

      Insider dealing in relation to a listed company also occurs when a person has information which he knows is inside information in relation to a listed company which he received, directly or indirectly, from a person whom he knows is connected with the listed company and whom he knows or has reasonable cause to believe held the information as a result of being so connected:

      • deals in the listed company’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 company, information to that effect which he knows is inside information in relation to the listed company and:

      • deals in the listed company’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 company 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 listed company’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 listed company’s listed securities or their derivatives or in those of a related corporation outside Hong Kong on an overseas stock market.
  2. 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 company’, insider dealing in an IPO grey market is not covered. The market manipulation provisions 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. Listed company

      The definition of “listed company” includes the large number of companies which are listed in Hong Kong but incorporated abroad.

    4. a person connected with a listed company

      A “person connected with a listed company” is someone who is on the inside track who has access to information about a listed company 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 listed company if:

      1. he is a director or employee of that listed company or a related corporation;
      2. he is a substantial shareholder (i.e. has an interest in 5% or more of the company’s issued voting shares) in the listed company or a related corporation;
      3. his position may reasonably be expected to give him access to inside information concerning the listed company by reason of:
        1. a professional or business relationship existing between himself (or his employer or a listed company of which he is a director or a firm of which he is a partner) and that listed company, a related corporation or an officer or substantial shareholder in either company; or
        2. his being a director, employee or partner of a substantial shareholder of the listed company 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 listed company where that information relates to a transaction (actual or contemplated) involving both listed companies 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 listed company within the meaning of a, b, c or d above at any time within 6 months preceding any relevant dealing.

        A listed company is connected with another listed company 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 listed company 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 listed company will be deemed to be connected with that listed company.

    5. Inside information

      The definition of “Inside information” is the same as for the purposes of the disclosure requirement under Part XIVA, i.e.

      specific information that:

      1. is about:
        1. the listed company;
        2. a shareholder or officer of the listed company; or
        3. the listed securities of the listed company or their derivatives; and
      2. is not generally known to the persons who are accustomed or would be likely to deal in the listed securities of the listed company but would if generally known to them be likely to materially affect the price of the listed securities.

      Inside information could include information about changes in a listed company’s shareholders or officers and about rights attaching to listed securities and derivatives over those securities.

    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.

  3. 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 listed company;
      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 listed company:
      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 listed company 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 listed company’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 listed company 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 listed company.

      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 listed company.

      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 company 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 listed company’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.

  4. Effects of Insider Dealing and other Forms of Market Misconduct

    THE MARKET MISCONDUCT TRIBUNAL (“MMT”)

    Proceedings of the MMT

    The SFC may institute proceedings before the MMT if it appears to the SFC that insider dealing has or may have taken place. The MMT makes its findings on the civil standard of proof. It needs therefore to be satisfied that a person has engaged in insider dealing on the balance of probabilities (rather than beyond reasonable doubt which is the criminal standard of proof).

    Orders of the MMT

    At the end of any proceedings the MMT may under subsection 257(1) impose the following sanctions on any person found to have committed insider dealing:

    1. a disqualification order– that a person shall not, without the leave of the Court of First Instance, be or continue to be a director, liquidator, or receiver or manager of the property or business, of a listed company or any other specified listed company or in any way, whether directly or indirectly, be concerned or take part in the management of a listed company or other specified listed company for up to 5 years;
    2. a cold shoulder order – that a person shall not, without the leave of the Court of First Instance, in Hong Kong, directly or indirectly, deal in any securities, futures contract or leveraged foreign exchange contract, or an interest in any of them or a collective investment scheme for up to 5 years;
    3. a cease and desist order – that the person must not again engage in any specified form of market misconduct;
    4. a disgorgement order – that the person pay to the Government an amount up to the amount of any profit gained or loss avoided as a result of the market misconduct;
    5. Government costs order – that the person pay to the Government its costs and expenses in relation to the proceedings and any investigation;
    6. SFC costs order – that the person pay the SFC’s costs and expenses in relation to any investigation; and
    7. disciplinary referral order – that any body which may take disciplinary action against the person as one of its members be recommended to take such action against him.
  5. Criminal Liability

    Insider dealing is also a criminal offence under Part XIV of the SFO.

    Penalties

    The maximum criminal sanctions are 10 years’ imprisonment and a fine of up to HK$10 million. In addition, the court may make disqualification, cold shoulder and disciplinary referral orders.

    No double jeopardy

    A person will not be subject to the “double jeopardy” of both civil proceedings under Part XIII and criminal proceedings under Part XIV for the same conduct. The SFO provides that a person who has been subject to criminal proceedings under Part XIV may not be subject to MMT proceedings if those proceedings are still pending or if no further criminal prosecution could be brought against that person again under Part XIV in respect of the same conduct and vice versa (sections 283 and 307).

  6. Civil Liability – Private right of action

    The SFO provides a private right of civil action against any person who has committed market misconduct, which includes insider dealing, in favour of anyone who has suffered a pecuniary loss as a result, unless it is fair, just and reasonable that the perpetrator should not be liable (sections 281 and 305).

    A person will be taken to have committed market misconduct if:

    1. he has perpetrated any market misconduct;
    2. a listed company of which he is an officer perpetrated the market misconduct with his consent or connivance; or
    3. any other person committed market misconduct and he assisted or connived with that person in the perpetration of the market misconduct, knowing that such conduct constitutes or might constitute market misconduct.

    It is not necessary for there to have been a finding of market misconduct by the MMT or a criminal conviction under Part XIV before bringing civil proceedings. Findings of the MMT are however admissible in the civil proceedings as prima facie evidence that the market misconduct took place or that a person engaged in market misconduct. Further a criminal conviction constitutes conclusive evidence that the person committed the offence. The courts are able to impose injunctions in addition to or in substitution for damages.

  7. Liability of officers of a listed company

    Duty of Officers

    Section 279 of the SFO imposes a duty on all officers of a listed company to take reasonable measures to ensure that proper safeguards exist to prevent the listed company from acting in a way which would result in the listed company perpetrating any market misconduct.

    The definition of an “officer of a listed company” includes a director (including a shadow director and any person occupying the position of a director), manager or secretary of, or any other person involved in the management of, the listed company. The last category (i.e. any other person involved in management) could, in principle, catch supervisors and anyone else with management responsibilities.

    Under Section 258, where a listed company has been identified as having been engaged in market misconduct and the market misconduct is directly or indirectly attributable to a breach by any person as an officer of the listed company of the duty imposed on him under section 279, the MMT may make one or more of the orders detailed above in respect of that person even if that person has not been identified as having engaged in market misconduct himself.

    Civil Liability

    As described above, the SFO clearly provides that anyone who suffers pecuniary loss as a result of market misconduct has a right of civil action to seek compensation. As noted above, an officer of a listed company which perpetrated market misconduct is taken to have committed market misconduct himself, if the listed company perpetrated the misconduct with his consent or connivance.

    Criminal Liability

    Under section 390 of the SFO, where it is proved that an offence committed under Part XIV was aided, abetted, counselled, procured or induced by, or committed with the consent or connivance of, or attributable to the recklessness of, any officer of the listed company, or any person purporting to act in any such capacity, that person, as well as the listed company, is guilty of the offence and liable to be punished accordingly.

    PROCEEDINGS UNDER SECTION 213 SFO

    The decision of the Court of Final Appeal in the Securities and Futures Commission v Tiger Asia Management LLC (Tiger Asia) and others confirmed the power of the courts to make final orders sought by the SFC under section 213 SFO without there having been a prior finding of insider dealing or other market misconduct by either the MMT or a criminal court.

    Section 213 SFO allows the court to grant orders sought by the SFC to prevent or remedy breaches of, among others, the Securities and Futures Ordinance, including injunctions and orders requiring the person to take steps to restore the parties to a transaction to the position they were in before the transaction. Tiger Asia was a New York-based asset management company with no physical presence in Hong Kong. Tiger Asia and two of its senior officers were found to have breached the insider dealing and market manipulation provisions of the SFO in dealing in shares of two Hong Kong listed banks. The court ordered Tiger Asia and the two senior officers to pay HK$45 million to investors affected by their insider dealing.

    It is also clear from the December 2013 case of Mr. Du Jun, a former Morgan Stanley Asia managing director, that the SFC can pursue both criminal proceedings for insider dealing or other market misconduct offences and an order under section 213 SFO. Mr. Du Jun was convicted of insider dealing for which he was sentenced to six years’ imprisonment and fined HK$1.7 million. In separate section 213 proceedings in December 2013, the court granted a restoration order against Mr. Du Jun ordering him to pay HK$23.9 million to investors affected by the insider dealing. The amount ordered to be paid was intended to restore counterparties to the insider dealing transactions to their pre-transaction positions through payment of the difference between the shares on the date of the transaction (taking into account the inside information possessed by Mr. Du Jun) and the actual transaction price.

V. APPLYING FOR TRADING HALTS

The Stock Exchange’s guidance on applying for trading halts pending the disclosure of material information is set out in Guidance Letter HKEx-GL83-15 (the Guidance Letter) which was published in December 2015. The Guidance Letter provides information on:

  • requesting trading halts;
  • avoiding and minimising trading halts; and
  • keeping the market informed during trading halts.
  1. Requesting Trading Halts

    As already discussed, under Main Board Listing Rule 13.10A, a listed issuer must apply for a trading halt for its listed securities, if it cannot announce the matter promptly, in the following circumstances:

    • it has information which, in the opinion of the Exchange, must be disclosed in order to avoid a false market in its listed securities;
    • it believes that there is Inside Information that must be disclosed under Part XIVA SFO; or
    • it believes that Inside Information which is within one of the Safe Harbours or in respect of which a waiver application has been made, has been leaked or is reasonably likely to have been leaked.

    In these circumstances, the issuer is required to apply for a trading halt as soon as is reasonably practicable.

    The Exchange will generally only agree to a trading halt if there is reasonable concern that Inside Information may be leaked or there is practical difficulty in maintaining confidentiality.

  2. Responding to the Exchange’s Enquiries

    The Exchange routinely monitors share price and volume movements and reviews media coverage to detect possible leakages of Inside Information and to prevent the possible development of a false or unfair market. Listed issuers’ authorised representatives must be contactable at all times and in a position to answer enquiries from the Exchange on any unusual share price and volume movements and media news. They need to be able to confirm whether the directors are aware of any matter or development that is or may be relevant to the unusual trading movement, or information necessary to avoid a false market, or any inside information which is discloseable under Part XIVA of the SFO, and if so to provide details.

    Listed issuers which are involved in confidential business negotiations should also monitor their share price and volume movements as well as news media to detect possible leakages of Inside Information.

    In response to any enquiries from the Exchange regarding a listed issuer’s unusual share price and volume movements and/or media coverage, the issuer must promptly and carefully assess whether it has an obligation under the SFO to disclose Inside Information. A listed issuer should have in place an appropriate delegation of authority to allow for timely release of information to the Exchange and, where appropriate, to the public by publication of an announcement. Such delegation should enable the authorized representatives to timely request a trading halt pending publication of an announcement.

  3. Handling Specific Market Speculations and Negative Publicity

    Where a listed issuer is the subject of specific rumours, speculation or negative publicity, its directors should promptly assess whether a disclosure obligation arises under the SFO and the Listing Rules. Generally, listed issuers do not need to respond to rumours, speculations or other market comments. However, if any such market comment has or is likely to have, an effect on the issuer’s share price/volume such that there may potentially be a false market in the company’s listed securities, the Exchange may require the issue of a clarification announcement. If the issuer cannot make such announcement promptly, the Exchange may require it to request a trading halt pending the clarification.

    Listed issuers therefore need to have procedures to actively monitor their share price and any news, comments or reports relating to them circulated in the market. Directors should have a proper understanding of the issuer’s business, financial position and prospects and there should be an effective system for them to continuously monitor developments so they respond quickly and accurately to enquiries by the Exchange, and where necessary, publish announcements to correct or prevent a false market.

  4. Avoiding and Minimising Trading Halts

    The Exchange expects listed issuers to plan their affairs so that a trading halt can be avoided or, if it is unavoidable, the trading halt is kept as short as possible. Main Board Listing Rule 6.05 requires listed issuers to ensure that trading in their listed securities resumes as soon as practicable following the publication of an announcement or when the reasons for the trading halt cease to apply.

    Under the Listing Rules, announcements containing inside information can only be published outside trading hours. The Exchange therefore recommends that significant agreements should only be signed outside trading hours and that relevant announcements are prepared in advance so that they can be released immediately after signing.

    Where announcements need to be pre-vetted and cleared by the Exchange under Listing Rule 13.52(2), clearance should be sought before the agreements are signed so that they can be announced immediately afterwards.

    Where trading is halted pending an announcement of a transaction, the issuer should publish the transaction announcement and resume trading as soon as possible. If there is a development during the trading halt (e.g. further negotiation that may materially change the terms of the agreement), the issuer should not continue the trading halt pending the outcome of the negotiation. The issuer is still required to publish the transaction announcement and to resume trading as soon as possible.

  5. Keeping the Market Informed during a Trading Halt

    Once a trading halt is in effect, the listed issuer must announce the reason for the trading halt as soon as possible. For example “Trading in the shares of Issuer A … has been halted … pending the release of an announcement containing inside information …”. To make the announcement meaningful, the Exchange requires issuers to disclose details, such as the subject of the transaction and the applicable Listing Rule classifications. e.g. ” trading in the shares of Issuer A … has been halted … pending the release of an announcement about a further issuance of equity securities amounting to 5% of Issuer A’s existing issued shares which would constitute a connected transaction for the purpose of the Listing Rules and Inside Information for the purpose of the SFO…”.

    If a trading suspension is unavoidable and it will take significant time to prepare and release the relevant material information, issuers should publish periodic updates or “holding announcements” on their progress towards trading resumption.

    It should be remembered, however, that inside information must be disclosed as soon as reasonably practicable. This obligation exists whether or not trading is suspended.

  6. Administrative Matters

    Where a trading halt is to be applied for, a written request should be made:

    • before 9.00 am for a trading halt in the morning trading session; and
    • before 1.00 pm for a trading halt in the afternoon session.

    Requests for a trading halt must be supported with reasons.

    Resumption of trading will generally take place from the next immediate trading window following publication of material information by the listed issuer. In certain cases, the Exchange may impose conditions to be met before trading resumes.

VI. DEALING WITH ALLEGATIONS THAT MAY REQUIRE A TRADING HALT

In April 2016, the Stock Exchange published a new guidance letter HKEx-GL87-16 for listed issuers subject to rumours or market commentaries making allegations of fraud, material accounting or corporate governance irregularities (together allegations) that may require a trading halt. The guidance letter provides guidance to issuers subject to such allegations and their obligations in handling such matters.

  1. Issuers’ Actions

    When there are allegations circulating in the market in relation to a listed issuer and the Exchange considers that the allegations have resulted, or are likely to result, in the development of a false market in the issuer’s securities, the Exchange may make an enquiry under Main Board Rule 13.10. The issuer must then either: (i) promptly issue a clarification announcement denying the allegation(s); or (ii) apply for a trading halt if a clarification announcement cannot be promptly issued to avoid the development of a false or disorderly market. If a trading halt is applied for, its duration should be as short as possible: the issuer is required to publish a clarification announcement as soon as practicable in order to resume trading.1 It should be noted that an issuer has an obligation to issue a clarification announcement to prevent the development of a false or disorderly market, whether or not the Exchange makes an enquiry, under MB Rule 13.10.

    A clarification announcement should refer to the allegations and explain the issuer’s position regarding each allegation in order to avoid a false or disorderly market. If possible, the clarification announcement should also contain particulars to address, or to refute, the allegations. The issuer must also disclose any inside information required to be disclosed under Part XIVA of the Securities and Futures Ordinance where applicable, or an appropriate negative statement.

    To minimise the duration of the trading halt, the Exchange will generally not pre-vet the clarification announcement and will expect it to be published as soon as practicable. The Exchange will normally expect share trading to resume (if it was halted) after publication of the clarification announcement. In the event that the clarification announcement does not address the concerns as to the development of a false or disorderly market, the Exchange may require the issuer to provide further information and halt trading pending further clarification. This may be required where the clarification announcement contains information which materially contradicts the issuer’s other published documents, or provides information which creates market confusion which raises the Exchange’s concerns about the possible development of a false or disorderly market.

JUNE 2016

This note is provided for information purposes only and does not constitute legal advice. Specific advice should be sought in relation to any particular situation. This note has been prepared based on the laws and regulations in force at the date of this note which may be subsequently amended, modified, re-enacted, restated or replaced.


1 MB Rule 6.05 / GEM Rule 9.09.

Disclosure of Inside Information Obligations

Hong Kong Listing Rule Disclosure Obligations for Listed Companies

Parts XIII and XIV SFO on inside information

Trading halts pending disclosure of inside information

Hong Kong Market Misconduct Tribunal on insider dealing

Obligation to avoid a false market in Hong Kong

Obligation to respond to the Exchange’s enquiry on inside information

Duty of an officer in relation to inside information

Hong Kong MMT proceedings and orders under s275(1) SFO

Definition of Insider Dealing Sections 270 and 291 SFO

No double jeopardy of Criminal Liability and civil liability insider dealing
Hong Kong civil liability private right of action against insider dealing
Defences for insider dealing in Hong Kong
Guidance Letter HKEx-GL83-55
How to deal with false market rumours in Hong Kong

Skills

Posted on

2016-06-03