No.1 April 2003
*****
Disclosure of Interests under the Securities and Futures Ordinance *****
Exemptions
There are a number of exemptions and interests which may be
disregarded. These are very detailed, hence the following is
limited to a brief outline only of the principal exemptions and
disregards.
Basket_Derivatives
Basket derivatives over the shares of at least 5 companies
listed on a 'specified' stock exchange are disregarded provided
that no one share accounts for over 30% of the value of the
total basket. The percentage figure is calculated at the time of
issue of the derivatives.
De_Minimis_Change_Exemption_on_Acquisition_or_Disposal
A person who acquires an interest in shares or ceases to be
interested in shares resulting in his interest crossing over a
percentage level, will be exempted from disclosing the new
interest if:
* (i) the percentage level of his interest is the same as,
or less than, the percentage level of his interest stated
in the 'Last Notification' given by him; and
(ii) the difference between the percentage figure of his
interest disclosed in his 'Last Notification' and the
percentagefigureof his interest at_all_times after such
notification, is less than 0.5%.
'Percentage level' in (i) above means the percentage figure
rounded down (if not a whole number) to the next whole number.
'Percentage figure' in (ii) above, however, means the actual
(unrounded) percentage figure.
The 'Last Notification' must be a notice given under s313(1)c,
that is notice of a change in the percentage level of a person's
interest above 5%. Hence a notification given on commencement of
the SFO, on first crossing the 5% threshold or of a change in
the nature of an interest will not qualify as a 'Last
Notification'.
This exemption will not therefore apply if the percentage level
of a person's interest has increased since his Last Notification
or if at any time after such notification his percentage
interest differed by 0.5% or more from the percentage figure of
his interest stated in that notification.
De_Minimis_Change_Exemption_(short_positions)
A similar exemption is available for minor changes in short
positions.
De_Minimis_Change_Exemption_on_Change_in_the_Nature_of_Interests
There is no duty of disclosure where:
(i) the 'percentage level' (ie. the rounded down figure as
explained above) of a person's unchanged interest (ie.
disregarding the part in which his interest has changed) is the
same as the percentage level of his interest in the last notice
(this notice is not restricted to notices of change in the
percentage level of an interest) given by him; or
(ii) the percentage level of a person's unchanged interest has
crossed over a percentage level if:
* (a) the percentage level of his unchanged interest is the
same as or less than the percentage level of his interest
given in the 'Last Notification' by him (ie. a notice
under s313(c) of a change in the level of a person's
interest above 5%); and
(b) the difference between the percentage figure (ie. the
actual unrounded figure as noted above) of his unchanged
interest and the percentage figure disclosed in the Last
Notification has been less than 0.5% at all times since
the giving of that notification.
The SFC's Outline of Part XV of the SFO contains detailed
examples illustrating the workings of the de minimis exemptions.
Exempt_Security_Interests
An interest in shares is not required to be disclosed if it
qualifies as an 'exempt security interest' ie. if it is held by
a 'qualified lender' by way of security only for a transaction
entered into in the ordinary course of his business. A
'qualified lender' is defined to include an authorised financial
institution, an authorised insurance company, an exchange
participant of a recognised exchange company and an intermediary
licensed to deal in securities or margin financing. The term
also now includes overseas institutions authorised to carry on
business as a bank, insurance company or activities which, in
the opinion of the SFC, are equivalent to the regulated
activities of intermediaries in countries recognised by the SFC.
An interest will no longer qualify as an 'exempt security
interest' if the qualified lender becomes entitled to exercise
voting rights of the relevant shares due to default by the
person who gave the security, and shows an intention or takes
any step to exercise or control the exercise of those voting
rights. Similarly, an interest will cease to be an 'exempt
security interest' if the power of sale becomes exercisable and
the qualified lender or its agent offers for sale all or any of
the shares. In either case, the qualified lender is regarded as
having acquired an interest in the shares and is obliged to
disclose his interest.
Wholly_Owned_Group_Exemption
A wholly owned subsidiary is not required to notify an interest
if its ultimate holding company has given notice of its interest
in the relevant shares.
Further, transactions between wholly owned subsidiaries of the
same group do not give rise to a duty of disclosure since the
number of shares in which the ultimate parent is interested or
has a short position and the nature of its interest remains the
same. Hence transfers of shares of a listed company, the grant
and taking of options over such shares and the issue of warrants
between wholly owned subsidiaries of the same group do not give
rise to a duty of disclosure.
A duty of disclosure will arise if any relevant subsidiary
ceases to be wholly owned, even if only 1% of its shares are
sold to a third party.
Bonus_and_Rights_Issue_Exemption
When there is a rights issue shareholders become interested in
the unissued shares covered by the issue. In calculating their
percentage interest the following formula should be used:
____________________________________________________________
|nominal_value_of_shares_(including_unissued_shares)in_which |
| the_shareholder_is_interested X 100 |
| nominal value of shares of the listed company of the same |
| class in issue+ nominal value of shares to be issued on |
|___________completion_of_the_bonus/rights_issue_*___________|
* This is the only situation where the denominator is increased
to take account of unissued shares.
Shareholders of listed companies who take up rights under
qualifying bonus and rights issues (and whose percentage
interest therefore remains unchanged) are not required to make
any disclosure whereas shareholders who do not take up their
rights (and whose percentage interest therefore changes) will
have to make disclosure.
If a shareholder sells his rights, both he and the buyer must
make disclosure if their interests cross a percentage level.
A rights issue is defined to include the offer by a listed
company of its shares to holders of its issued shares at a
certain date (other than to shareholders whose address is in a
place where such an offer is not allowed under local law) in
proportion to the number of shares held by them at that date. A
rights issue does not however cover an offer or issue of shares
in lieu of a cash dividend.
Investment_Managers,_Custodians_and_Trustees
The exemption previously available to local SFC registered
investment managers and trust companies is removed. The
following exemptions may however be relied on:
Bare Trustee Exemption
A narrow exemption is retained for bare trustees ie. a trustee
who is only entitled to deal with the interest in accordance
with the instructions of the beneficiary.
Exempt Custodian Interest
The interests of corporate custodians need not be disclosed
provided that the custodian has no authority to exercise
discretion in dealing in the shares or exercising the rights
attached to those shares.
Disaggregated Group Interests
More importantly, the SFO removes the obligation of a holding
company to aggregate the interests of controlled companies (see
Family and Controlled Company Interests above) who are
investment managers, custodians or trustees whose interest in
the shares arises solely from their obligation or entitlement to
invest in, manage, deal in or hold interests in those shares on
behalf of customers in their ordinary course of business as
such. For the exemption to apply the controlled company must
exercise any rights to vote in respect of the shares and any
power to invest in, manage, deal in or hold the shares,
independently of its controlling company or any other company
within the same group.
Securities_Borrowing_and_Lending_Exemption
The Securities and Futures (Disclosure of Interests - Securities
Borrowing and Lending) Rules ('SBL Rules') simplify the regime
for disclosure of securities borrowing and lending for
substantial shareholders, 'approved lending agents' and
'regulated persons'.
Substantial Shareholders
Substantial Shareholders are exempted from disclosing changes in
the nature of their interest arising on the lending and return
of shares provided that they lend shares through an 'approved
lending agent' (see below) who holds the shares as their agent
for the sole purpose of lending shares and the shares are lent
using a specified form of agreement. In essence, this is an
agreement providing for the borrower to provide collateral
exceeding the value of the shares lent. The value of the
collateral is marked to market and the lender can require return
of the shares at any time.
Approved Lending Agents
Companies approved by the SFC as 'Approved Lending Agents'
('ALAs') holding 5% or more of the shares of a listed company
will only be required to disclose changes in the percentage
level of its 'lending pool' of shares in that listed company.
Hence if shares are added to or removed from the lending pool, a
disclosure obligation will arise. ALA's are exempted from any
disclosure requirements arising when shares are lent from or
returned to their lending pool.
Regulated Persons
Interests in shares borrowed by 'regulated persons' (ie.
companies licensed to deal in securities and overseas brokers in
recognised jurisdictions), that merely act as a conduit (ie.
they borrow and on-lend the shares within 5 business days) are
disregarded. On the return of shares to the regulated person, it
may either return them to the ultimate lender or lend them to
another borrower. Provided this is done within 5 business days,
the regulated person's interest is disregarded. Regulated
persons can still rely on this exemption if it transfers shares
to a related company provided that the related company on-lends
the shares within 5 business days after they were acquired by
the regulated person.
Both ALAs and regulated persons are required to keep records of
their transactions in the shares.
Collective_Investment_Schemes
The interests of holders, trustees and custodians of collective
investment schemes authorised by the SFC, certain pension and
provident funds schemes and qualified overseas schemes are not
required to be disclosed.
A 'qualified overseas scheme' means a collective investment
scheme, pension scheme or provident fund scheme established in a
country recognised by the SFC. It will not include a scheme
which is not run as a business, has less than 100 holders or
where less than 50 persons hold 75% or more of the interests in
it.
Intermediary_Exemption
The SFO provides an exemption for an intermediary (eg. a dealer
or broker) licensed or registered for dealing in securities who
acquires interests in shares as agent for his client. The
exemption only applies if (i) the interest is acquired for (and
from) someone who is not a related company of the intermediary
and (ii) the interest is held by the intermediary for not more
than 3 business days.
A similar exemption applies to intermediaries whose interests
arise under exchange traded stock futures or stock options
contracts.
Further_Exemptions
* (i) Dual listings: a company may apply to the SFC for
exemption from the provisions of Part XV if it is listed
on an overseas exchange and certain other criteria are
met.
(ii) Structured products: the issuer of structured
products may apply to the SFC for an exemption from Part
XV. The main conditions to be satisfied are that the
company's shares are not listed in Hong Kong, it does not
intend to raise publicly traded equity capital in Hong
Kong and only the structured products will be listed in
Hong Kong. It is the substantial shareholders and
directors of the issuer of the structured products who are
able to claim the exemption. The issuer and holders of the
equity derivatives must still include interests in the
underlying shares of those derivatives in determining
their disclosure obligations.
Please note that this summary is for general information
purposes only. Specific legal advice should be sought when
appropriate.
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