Disclosure of Interests under the
Securities and Futures Ordinance - Update
B. DIRECTORS AND CHIEF EXECUTIVES
1. DISCLOSEABLE INTERESTS
As under the previous regime the disclosure requirements
for directors and chief executives ('directors') of a listed
company are broader than for substantial shareholders requiring
disclosure of interests in any shares (not just voting shares)
or debentures of the listed company of which they are a
director and any associated company. Also as previously,
there is no disclosure threshold so that all interests must
be disclosed however small.
The principal changes introduced by the SFO are to extend
directors' disclosure obligations in respect of interests
in equity derivatives, short positions and changes in the
nature of interests in shares and debentures.
1.1 Definition of Associated Company
An associated company is defined to include holding companies
and subsidiaries of the listed company, fellow subsidiaries
of the listed company's holding companies and any company
in which the listed company has an interest of more than
20% of the nominal value of the issued shares of any class
A company will be a subsidiary of another if the other
company controls the composition of its board of directors,
controls half the voting power at general meetings, holds
more than half of its issued share capital (excluding any
part carrying no right to participate beyond a specified
amount on a distribution of profits or capital) or is a
subsidiary of a company which is the other company's subsidiary.
This definition thus makes each company in a chain of companies
a subsidiary of the ultimate holding company (Section 2
of Schedule 1).
2. WHEN IS NOTIFICATION REQUIRED?
2.1 Notifications �C Shortening
of Notification Period
Section 341 requires that a director of
a listed company must disclose any of the following 'relevant
- when he becomes interested in the shares or debentures
of a listed company or any associated company;
- when he ceases to be interested in such shares or
- when he enters into a contract to sell any such shares
- when he assigns any right granted to him by the listed
company to subscribe for shares or debentures of the
- when an associated company grants him rights to subscribe
for shares or debentures of that associated company,
or if he exercises or assigns such rights;
- when the nature of his interest in the shares or
debentures of the listed company or any associated company
- when he comes to have or ceases to have a short position
in the shares of a listed company or any associated
As for substantial shareholders, the notification
period is reduced to 3 business days.
2.2 Initial Notifications
An 'Initial Notification' is required in
the following circumstances:
- where a director has a notifiable interest at the
time the company becomes listed (Section 341(2)(a));
- where a director had a notifiable interest when the
SFO came into effect (Section 341(2)(b));
- where a director has a notifiable interest at the
time he becomes a director of a listed company (Section
- where a director of a listed company has a notifiable
interest in the shares of another company at the time
that company becomes an associated company of the listed
company (Section 341(2)(d)).
The period for notification in the case
of an Initial Notification is 10 business days.
On commencement of the SFO, directors of
listed companies were obliged to disclose any interest in
the shares or debentures of a listed company or its associated
companies which had not previously been disclosed. The principal
interests falling into this category were:
- short positions in shares;
- interests in unissued shares such as options granted
to a director by a listed company; and
- interests in shares as a result of holding or writing
cash settled derivatives.
Additionally, some concert party arrangements
and the interest of a 'founder' of a discretionary trust
(see under Substantial Shareholders - paragraphs 9.4 and
9.5 above) resulted in new disclosure obligations.
3. INTERESTS IN SHARES UNDER EQUITY DERIVATIVES
As for substantial shareholders, the SFO
extends the disclosure obligations of directors to interests
in equity derivatives which are not physically settled (ie.
interests in unissued shares such as options and interests
under cash settled derivatives). For directors this includes
interests in the shares of the listed company and its associated
The circumstances in which a person will
be taken to have a long position in the underlying shares
of equity derivatives and the method of calculating the
number of shares in which he is interested are the same
as for substantial shareholders.
4. SHORT POSITIONS
Directors must disclose all short
positions under equity derivatives. A person will be taken
to have a short position in the same situations as for substantial
shareholders (see paragraph 4 under Substantial Shareholders)
and the method of calculating the number of shares in which
he is interested is the same. Similarly, the SFO does not
permit the netting off of long and short positions and requires
each to be disclosed separately.
5. CALCULATION OF PERCENTAGE FIGURE
OF DIRECTORS' INTERESTS
Although the obligation of directors to
disclose interests in shares is not determined by crossing
a percentage level, directors are still required to state
the percentage figure of their interests.
6. CHANGES IN THE NATURE OF INTERESTS
Directors are further required to disclose
any change in the nature of an interest which has previously
been disclosed. The situations in which there will be such
a change are wide and include a change in a person's title
to shares or debentures, any of his legal or equitable interest
in shares or debentures and any interest in the underlying
shares of equity derivatives on the exercise (by or against
him) under such derivatives.
The exercise of rights under options and
other derivatives and the giving of shares as security (other
than to a qualified lender - see paragraph 12.4 for the
definition of qualified lender) will, among other things,
require notification of a change in nature of a director's
There are only 3 circumstances under Section
341(5) in which there is taken to be no change in the nature
of a director's interest:
- on the delivery of shares or debentures to him, if
he has previously notified his acquisition of an equitable
- where there is a change in the terms on which underlying
shares are held due to a change in the number of underlying
- where a qualified lender (see above) comes to have
a security interest in the shares or debentures.
Hence, in contrast to the position for
substantial shareholders, there will be a notifiable change
in the nature of a director's interest in shares on his
exercise of rights to subscribe for and on delivery of shares
under a rights issue.
7. DEEMED INTERESTS (SECTION 344)
A director is taken to be interested in
the interests of his spouse and minor children (not being
themselves directors of the listed company), any company
which he controls (ie. a company of which he controls the
exercise of one third of more of the voting power at general
meetings or whose directors are accustomed or obliged to
act in accordance with his directions or instructions) and
trusts. As under the previous disclosure regime, a director
must also disclose his interest under a discretionary trust.
Although directors are not required to
include the interests of a spouse or minor children who
are themselves directors and chief executives of the listed
company when disclosing their interests as a director or
chief executive, if they are also a 'substantial shareholder'
they must also disclose their interests held as such which
must include interests held by a spouse or minor
children irrespective of whether they are also directors
of the company.
The provisions relating to cessation of
interests are the same as for substantial shareholders.
The exemptions available to directors are
limited to those in respect of basket derivatives, bare
trustees and collective investment schemes, all as outlined
under Section A above.
In particular, the exemptions available
to substantial shareholders in respect of de minimis changes,
lending shares under the SBL Rules and bonus and rights
issues are not available to directors.
9. INFORMATION TO BE DISCLOSED
Where a director makes an 'Initial Notification'
he is required, in the case of an on-exchange transaction,
to disclose the highest price and the average price paid
for the interest in the 4 months preceding the date of the
relevant event prompting notification. In an off-exchange
transaction he must disclose the nature of the consideration
and the highest and average amounts of considerations paid
for the interest within the same 4 month period (Section
Subsequent notifications of acquisitions
or disposals of interests must state, in on-exchange transactions,
the highest and average price paid or received (or if no
price is paid, that fact) and in off-exchange transactions
the nature of the consideration and the highest and average
price paid or received (or if no price is paid, that fact).
The amount and nature of consideration
need not be stated in the case of 'equity derivatives'.
This does not apply to the grant to a director of equity
derivatives by a listed company or any associated company
or to the assignment of such rights in which case the price
or consideration paid or received must be disclosed.
10. PENALTIES FOR FAILURE TO DISCLOSE
Failure to make disclosure within the required
time frame or the making of false or misleading statements
constitute a criminal offence liable to the same fines and
periods of imprisonment as for substantial shareholders