Disclosure of Interests under the Securities and Futures Ordinance | Part 2

Any change in the nature of an interest that has already been notified must be disclosed. The SFO takes a broad view of what constitutes a change in the nature of an interest. This includes any change in a person’s title to shares (legal or equitable) or any change in their interest in the underlying shares of equity derivatives upon the exercise of rights (whether by or against them).

Common Situations Requiring Notification

• The exercise of rights (by or against a person) under options and other derivatives;
• The lending of shares under a securities borrowing and lending agreement (unless the Securities Borrowing and Lending Exemption applies);
• The giving of shares as security to another person.

Situations That Do NOT Constitute a Change in Nature of Interest

• A purchaser taking delivery of shares where they had already disclosed the equitable interest arising from the contract to buy;
• A change in the terms of equity derivatives resulting from a change in the number of underlying shares in issue;
• The exercise of rights to subscribe for shares or delivery of shares under a rights issue;
• A “qualified lender” obtaining a security interest in shares (see Exempt Security Interests below);
• Transfer of shares between wholly-owned subsidiaries of a holding company (see Wholly Owned Group Exemption below).

What Constitutes an Interest in Shares?

The definition of an “interest in shares” under the SFO is very broad. Please refer to Schedule 3 for the full list of situations.

Buying and Selling Shares

A buyer acquires an interest in shares at the time they contract to buy and must notify within 3 business days of the contract.

A seller, however, only ceases to have an interest when they actually transfer the shares to the buyer. Notification of cessation is therefore required within 3 business days of the actual transfer.

Deemed Interests

In certain circumstances, the interests (including short positions) of other parties must be aggregated with a person’s own interests when calculating disclosure obligations.

Family and Controlled Company Interests

The interests of a person’s spouse and children under 18 are attributed to them. A person is also deemed interested in shares held by any company they “control” (i.e., they control, directly or indirectly, one-third or more of the voting power at general meetings, or the company/directors habitually act according to their directions).

Trusts

A trustee must aggregate the interests of the trust (except for a bare trustee). A beneficiary must generally include the trust’s interests, although the interest of a beneficiary under a discretionary trust is disregarded unless they are also a director or a “founder” of the trust.

Founders of Discretionary Trusts

The SFO attributes the interests of a discretionary trust to its “founder”. The definition of “founder” is broad and includes anyone who procured the creation of the trust and whose consent is required for trustee decisions or whose wishes the trustee habitually follows.

Concert Party Agreements

The SFO strengthens rules on concert party agreements. Where persons agree to acquire shares and coordinate how voting or disposal rights are exercised, each party must include the others’ interests when determining whether the 5% threshold is met.

This is further extended to situations where a controlling person (30%+ voting power) or director provides a loan on the understanding it will be used to acquire shares in the company.

Cessation of Interests

A person ceases to have an interest in shares if they:

• Deliver shares pursuant to a sale contract, call option, or put option;
• Allow rights to subscribe for or call for shares to lapse, or assign such rights;
• Allow an obligation to take shares to lapse, or assign that obligation;
• Receive money or avoid/reduce a loss on the assignment or settlement of cash-settled equity derivatives.