VI. DISCLOSURE OF PRICE SENSITIVE INFORMATION
The statutory regime governing listed corporations’ (“corporations”) disclosure of price sensitive information (referred to in the legislation as “inside information“) is set out in Part XIVA of the Securities and Futures Ordinance (“SFO”) which came into effect on 1 January 2013. The SFC has published Guidelines on Disclosure of Inside Information (“SFC Guidelines”) to assist corporations to comply with the disclosure obligation.
The regime creates a statutory obligation on corporations to disclose inside information to the public, as soon as reasonably practicable after inside information has come to their knowledge. Breaches of the disclosure requirement are dealt with by the Market Misconduct Tribunal (“MMT”) which can impose a number of civil sanctions including a maximum fine of HK$8 million on the corporation and on its directors and chief executive in certain circumstances. The SFC can institute proceedings directly before the MMT to enforce the disclosure requirement.
1. Key elements of the regime
Key elements of the regime include:
- The application of an objective test in determining whether information is “inside information” – whether a reasonable person, acting as an officer of the corporation, would consider that the information is inside information in relation to the corporation;
- An obligation on a corporation to disclose “inside information” as soon as reasonably practicable after it comes to the knowledge of the corporation (i.e. after the information has, or ought reasonably to have, come to the knowledge of an officer of the corporation in the course of performing functions as an officer of the corporation);
- An obligation on the directors and officers of a corporation to take all reasonable measures to ensure that proper safeguards exist to prevent the corporation breaching the statutory disclosure requirement;
- For directors and officers of a corporation to be individually liable for the corporation’s breach of the statutory disclosure obligation, if they are in breach of the obligation referred to above or if the corporation’s breach is a result of any intentional, reckless or negligent conduct or failure to ensure proper safeguards on their part;
- The provision of safe harbours for legitimate circumstances where non-disclosure or late disclosure is permitted;
- The SFC can rely on its powers under the SFO to investigate suspected breaches and to institute proceedings directly before the MMT;
- The MMT can impose a range of civil sanctions, including a fine of up to HK$8 million on the corporation, a director or chief executive of the corporation and disqualification of a director or officer for up to 5 years; and
- A corporation or officer found to have breached the statutory disclosure requirement may be liable to pay compensation to any person who has suffered financial loss as a result of the breach (provided it is fair, just and reasonable that it/he should do so).
2. Definition of inside information
The regime uses the term “inside information” to refer to price sensitive information which a corporation must disclose. “Inside information” is defined in Section 307A SFO as:
specific information that:
- is about:
- the corporation;
- a shareholder or officer of the corporation; or
- the listed securities of the corporation or their derivatives; and
- is not generally known to the persons who are accustomed or would be likely to deal in the listed securities of the corporation but would if generally known to them be likely to materially affect the price of the listed securities.
The inside information which a corporation is required to disclose is the same information that is prohibited from being used for dealing in the securities of the corporation under the Hong Kong insider dealing regime in Parts XIII and XIV of the SFO.
An objective test should be applied in considering whether a piece of information is inside information. The test is whether a reasonable person, acting as an officer of the corporation, would consider that the information is inside information in relation to the corporation.
Key elements of the definition
The three key elements of the definition are that:
- the information must be specific;
- the information must not be generally known to that segment of the market which deals or which would likely deal in the corporation’s securities; and
- the information would, if generally known be likely to have a material effect on the price of the corporation’s securities.
The SFC Guidelines provide guidance as to how these terms have been interpreted by the MMT in the past.
Specificity of information
- The information must be capable of being identified, defined and unequivocally expressed
Information regarding a corporation’s affairs will be sufficiently specific if “it carries with it such particulars as to a transaction, 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 understood”.
- The information need not be precise
Information may be specific even though the particulars or details are not precisely known. For example, information that a corporation is in financial difficulty or proposes to conduct a share placing would be regarded as specific even if the details are not known.
- Information on a transaction that is only contemplated or under negotiation (and not yet subject to a final agreement (formal or informal) can be specific information
- To constitute specific information, a proposal should be beyond the stage of a vague exchange of ideas or a “fishing expedition”. If negotiations or contracts have occurred, there should be a substantial commercial reality to the negotiations which should be at the stage where the parties intend to negotiate with a realistic view to achieving an identifiable goal.
- Mere rumours, vague hopes or worries, wishful thinking and unsubstantiated conjecture are not specific information.
“Not generally known”
The SFC Guidelines note that rumours, media speculation and market expectation about an event or circumstances of a corporation cannot be equated with information which is generally known to the market. There is a clear distinction between the market having actual knowledge of a hard fact which has been properly disclosed by the corporation and speculation or expectation as to an event or circumstances which will require proof.
In determining whether information that is the subject of media comments or analysts’ reports or carried by news service providers is considered to be generally known, the corporation should consider the accuracy, completeness and reliability of the information disseminated and not only how widely the information has been disseminated. Where the information disseminated is incomplete or there are material omissions or there are doubts as to its bona fides, the information cannot be regarded as generally known and the corporation is required to make full disclosure.
“Likely to have a material effect on the price of the listed securities”
Whether inside information is likely to materially affect the price of a corporation’s securities is judged based on whether the inside information would influence persons who are accustomed to or would be likely to deal in the corporation’s shares, in deciding whether or not to buy or sell such shares. The test is necessarily a hypothetical one since it must be applied at the time the information becomes available.
The SFC Guidelines contain a non-exhaustive list of events or circumstances where a corporation should consider whether a disclosure obligation arises.
3. Timing of disclosure
A corporation must disclose inside information to the public as soon as reasonably practicable after any inside information has come to its knowledge (section 307B(1) SFO). Inside information has come to the corporation’s knowledge if:
- the inside information has, or ought reasonably to have, come to the knowledge of an officer of the corporation in the course of performing functions as an officer of the corporation; and
- a reasonable person, acting as an officer of the corporation, would consider that the information is inside information in relation to the corporation (section 307B(2) SFO).
Corporations must therefore ensure that they have effective systems and procedures in place to ensure that any material information which comes to the knowledge of any of their officers is promptly identified and escalated to the board to determine whether it needs to be disclosed.
Meaning of “as soon as reasonably practicable”
According to the SFC Guidelines, “as soon as reasonably practicable” means that the corporation should immediately take all steps that are necessary in the circumstances to disclose the information to the public. The necessary steps that the corporation should take immediately before the publication of an announcement may include: ascertaining sufficient details; internal assessment of the matter and its likely impact; seeking professional advice where required and verification of the facts (paragraph 40 of the SFC Guidelines).
The corporation must ensure that the information is kept strictly confidential until it is publicly disclosed. If the corporation believes that the required degree of confidentiality cannot be maintained or that there may have been a breach of confidentiality, it should immediately disclose the information to the public (paragraph 41 of the SFC Guidelines). The SFC Guidelines also raise the possibility of a corporation issuing a “holding announcement” to give the corporation time to clarify the details and likely impact of an event before issuing a full announcement.
The definition of “officer”
Under the SFO, an officer is a director, manager, secretary or any other person involved in a corporation’s management. In the context of the inside information disclosure regime, a “manager” generally connotes a person who, under the immediate authority of the board, is charged with management responsibility affecting the whole or a substantial part of the corporation. A secretary refers to a company secretary. The information which must be disclosed is restricted to that which becomes known in situations where the officer is acting in the capacity of an officer.
4. Manner of disclosure
Inside information must be disclosed by way of publication of an announcement on the websites of the Exchange and the listed corporation in accordance with Listing Rule 2.07(C)(this is required by Listing Rule 13.09(2)(a)). Publication on the Exchange’s website fulfils the requirement of section 307C(1) SFO that disclosure of inside information must be made in a manner that can provide for equal, timely and effective access by the public to the information disclosed (by virtue of Section 307C(2) SFO).
The SFC Guidelines provide that corporations can use additional means to disseminate inside information such as press releases issued through news or wire services, press conferences in Hong Kong and/or posting an announcement on their own websites. These must be additional to announcing the information on Exchange’s website as they would not themselves satisfy the requirements of section 307C(1) SFO.
If a corporation is listed on more than one stock exchange, the inside information must be disclosed to the public in Hong Kong at the same time as it is released to the overseas markets. If inside information is released to an overseas market while the Hong Kong market is closed, the corporation should issue an announcement in Hong Kong before the Hong Kong market opens for trading. If necessary, the corporation can request a suspension of trading in its securities pending issue of the announcement in Hong Kong.
The information contained in an announcement of inside information must be complete and accurate in all material respects and not be misleading or deceptive (whether by omission or otherwise).
5. The safe harbours
Section 307D SFO provides four safe harbours to permit corporations to not disclose or delay disclosing inside information. Except for Safe Harbour A, corporations may only rely on the safe harbours if they have taken reasonable precautions to preserve the confidentiality of the inside information and the inside information has not been leaked.
Safe Harbour A: When disclosure would breach an order by a Hong Kong court or any provisions of other Hong Kong statutes
This grants a safe harbour to corporations if they are prohibited from disclosing inside information under a Hong Kong court order or any Hong Kong statute.
Safe Harbour B: When the information relates to an incomplete proposal or negotiation
The SFC Guidelines give the following examples:
- when a contract is being negotiated but has not been finalised;
- when a corporation decides to sell a major holding in another corporation;
- when a corporation is negotiating a share placing with a financial institution; or
- when a corporation is negotiating the provision of financing with a creditor.
The SFC Guidelines note that where a corporation is in financial difficulty and is negotiating with third parties for funding, reliance on this safe harbour will mean that it will not be necessary to disclose the negotiations. The safe harbour does not however allow the corporation to withhold disclosure of any material change in its financial position or performance which led to the funding negotiations and, to the extent that this is inside information, should be the subject of an announcement.
Safe Harbour C: When the information is a trade secret
There is no statutory definition of trade secret. However the SFC Guidelines provide that a “trade secret” generally refers to proprietary information owned by a corporation:
- used in a trade or business of the corporation;
- which is confidential (i.e. not already in the public domain);
- which, if disclosed to a competitor, would be liable to cause real or significant harm to the corporation’s business interests; and
- the circulation of which is confined to a limited number of persons on a need-to-know basis.
Trade secrets may concern inventions, manufacturing processes or customer lists. However a trade secret does not cover the commercial terms and conditions of a contractual agreement or the financial information of a corporation, which cannot be regarded as proprietary information or rights owned by the corporation.
Safe Harbour D: When the government’s exchange fund or a central bank provides liquidity support to the corporation
Under this safe harbour, no disclosure is required for information concerning the provision of liquidity support from the exchange fund of the government or from an institution which performs the functions of a central bank (including one located outside Hong Kong) to the corporation or any member of its group.
Safe harbour condition of confidentiality
Except for Safe Harbour A, the safe harbours are only available if and so long as:
- the corporation takes reasonable precautions for preserving the confidentiality of the information; and
- the confidentiality of the information is preserved.
If confidentiality is lost or the information is leaked, the safe harbour will cease to be available and the corporation must disclose the inside information as soon as practicable.
If confidentiality is lost, the corporation will not be regarded as in breach of the disclosure requirement in respect of inside information if it can show that it:
- has taken reasonable measures to monitor the confidentiality of the information in question; and
- made disclosure as soon as reasonably practicable, once it became aware that the confidentiality of the information had not been preserved.
SFC’s power to grant waivers
The SFC can grant waivers where the disclosure of inside information in Hong Kong would be prohibited under a court order or legislation of another jurisdiction or would contravene a restriction imposed by a law enforcement agency or government authority in another jurisdiction (section 307E(1)SFO). The SFC will grant waivers on a case-by-case basis and may attach conditions. A corporation must copy to the Exchange any application to the SFC for a waiver from the disclosure obligation and the SFC’s decision when received.
6. Liability of officers
The officers of a corporation are required to take all reasonable measures to ensure that proper safeguards exist to prevent the corporation’s breach of the inside information disclosure requirement (section 307G(1)). Although an officer’s breach of this provision is not actionable of itself, an officer will be regarded as having breached the disclosure obligation if the listed corporation has breached such obligation and either:
- the breach resulted from the officer’s intentional, reckless or negligent conduct; or
- the officer has not taken all reasonable measures to ensure that proper safeguards exist to prevent the breach (section 307G(2) SFO).
In relation to officers’ obligation to take all reasonable measures to ensure the existence of proper safeguards, the SFC Guidelines focus on the responsibility of officers, including non-executive directors, to ensure that appropriate systems and procedures are put in place and reviewed periodically to enable the corporation to comply with the disclosure requirement. Officers with an executive role will also have a duty to oversee the proper implementation and functioning of the procedures and to ensure the detection and remedy of material deficiencies in a timely manner. The particular needs and circumstances of the listed corporation should be taken into account in establishing appropriate systems and procedures. The SFC Guidelines provide a non-exhaustive list of examples of systems and procedures which listed corporations should consider implementing.
The MMT can impose one or more of the following penalties:
- a fine of up to HK$8 million on the corporation, a director or chief executive (but not officers) of the corporation;
- disqualification of the director or officer from being a director or otherwise involved in the management of a corporation for up to five years;
- a “cold shoulder” order on the director or an officer (i.e. the person is deprived of access to market facilities for dealing in securities, futures contracts and other investments) for up to five years;
- a “cease and desist” order on the corporation, director or officer (i.e. an order not to breach the statutory disclosure requirement again);
- an order that any body of which the director or officer is a member be recommended to take disciplinary action against him: and
- payment of costs of the civil inquiry and/or the SFC investigation by the corporation, director or officer.
To try and prevent the occurrence of further breaches of the disclosure requirement, the MMT may additionally require:
- the appointment of an independent professional adviser to review the corporation’s procedures for disclosure of PSI and advise it on matters relating to compliance; and
- the officer to undertake a training programme approved by the SFC on compliance with Part XIVA SFO, directors’ duties and corporate governance.
8. Civil liability – Private right of action
A corporation or officer found to be in breach of the statutory disclosure obligation may be found liable to pay compensation to any person who has suffered financial loss as a result of the breach in separate proceedings brought by such person under Section 307Z SFO. The corporation or officer will be liable to pay damages provided that it is fair, just and reasonable that it/he should do so. A determination by the MMT that a breach of the disclosure requirement has taken place or identifying a person as being in breach of the requirement will be admissible in evidence in any such proceedings to prove that the disclosure requirement has been breached or that the person in question has breached that requirement. The courts may also impose an injunction in addition to or in substitution for damages.
VII. LISTING RULE DISCLOSURE OBLIGATIONS
1. The role and duties of the SFC and the Exchange
The SFC is responsible for enforcement of the statutory obligation to disclose inside information. The Exchange will not give guidance on the interpretation or operation of the SFO or the SFC Guidelines. Where, however, the Exchange is aware of a possible breach of the statutory disclosure obligation, the Exchange will refer it to the SFC. The Exchange will not take any disciplinary action itself under the Rules, unless the SFC considers it inappropriate to pursue the matter under the SFO and the Exchange considers action under the Rules for a possible breach of the Rules to be appropriate. An issuer will not face enforcement action by the SFC and the Exchange at the same time, in respect of the same set of facts.
2. Obligation to avoid false market (Main Board Rule 13.09(1))
If it is the Exchange’s view that there is, or is likely to be, a false market in a listed issuer’s securities, the issuer must announce the information necessary to avoid a false market as soon as reasonably practicable after consultation with the Exchange.
An issuer is also required to contact the Exchange as soon as reasonably practicable if it believes that there is likely to be a false market in its securities.
Under Main Board Rule 13.09(2), where an issuer is required to disclose inside information under the SFO, it must simultaneously announce the information. An issuer is also required to simultaneously copy to the Exchange any application to the SFC for a waiver from the requirement to disclose inside information and to promptly copy to the Exchange the SFC’s decision whether to grant such a waiver.
3. Obligation to respond to the Exchange’s enquiry
Under Main Board Rule 13.10, if the Exchange makes an enquiry concerning unusual movements in the price or trading volume of an issuer’s listed securities, the possible development of a false market in its securities, or any other matters, an issuer will be required to respond promptly to the Exchange’s enquiries in one of the following two ways:
- provide to the Exchange and, if requested by the Exchange, announce any information relevant to the subject matter(s) of the enquiries available to it, so as to inform the market or to clarify the situation; or
- if appropriate, and if requested by the Exchange, issue a standard announcement confirming that, the directors, having made such enquiry with respect to the issuer as may be reasonable in the circumstances, are not aware of any information that is or may be relevant to the subject matter(s) of the enquiries, or of any inside information which needs to be disclosed under the SFO.
The standard form of the announcement in response to an enquiry is set out in Note 1 to Main Board Rule 13.10:
“This announcement is made at the request of The Stock Exchange of Hong Kong Limited.
We have noted [the recent increases/decreases in the price [or trading volume] of the [shares/warrants] of the Company] or [We refer to the subject matter of the Exchange’s enquiry]. Having made such enquiry with respect to the Company as is reasonable in the circumstances, we confirm that we are not aware of [any reasons for these price [or volume] movements] or of any information which must be announced to avoid a false market in the Company’s securities or of any inside information that needs to be disclosed under Part XIVA of the Securities and Futures Ordinance.
This announcement is made by the order of the Company. The Company’s Board of Directors collectively and individually accept responsibility for the accuracy of this announcement.”
Main Board Rule 13.10 states that an issuer does not need to disclose inside information under the Rules if the information is exempt from disclosure under Part XIVA SFO.
The Exchange reserves the right to direct a trading halt of an issuer’s securities if an announcement under Main Board Rule 13.10 cannot be made promptly.
4. Trading halts or suspension
Main Board Rule 13.10A requires an issuer to request a trading halt or trading suspension if an announcement cannot be made promptly in any of the following circumstances:
- where an issuer has information which must be disclosed under the Main Board Rule 13.09;
- an issuer reasonably believes that there is inside information which must be disclosed under Part XIVA SFO; or
- inside information may have been leaked where it is the subject of an application to the SFC for a waiver from compliance with the statutory disclosure obligation or where it is exempt from the statutory disclosure obligation (except if the exemption concerns disclosure prohibited by Hong Kong law or an order of a Hong Kong court).
The Exchange also has the right to direct a trading halt in an issuer’s securities where:
- there are unexplained movements in the price or trading volume of the issuer’s listed securities or where a false market for the trading of such securities has developed and the issuer’s authorised representative cannot immediately be contacted to confirm that the issuer is not aware of any matter that is relevant to the unusual price movement or trading volume or the development of a false market;
- the issuer delays in issuing an announcement in response to enquiries from the Exchange under Main Board Rule 13.10; or
- there is uneven dissemination or leakage of inside information in the market giving rise to an unusual movement in the price or trading volume of the issuer’s listed securities (Paragraph 3 of Practice Note 11).