The latest Process Review Panel Report sheds light on current SFC practices in handling enforcement cases, inspections and complaints.
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In 2013, Hong Kong introduced a statutory regime for the disclosure of material non-public price sensitive information (“MNPI”) by Hong Kong Stock Exchange listed companies. The regime imposes personal liability on officers of such companies, with directors and chief executive officers potentially facing fines of up to HK$8 million, if their companies fail to properly disclose MNPI in a timely manner.
This guide is the 1st of a 3 part series. In this guide, we provide an overview of the new legislation and offer suggestions on determining whether information is MNPI and if so, when and how to disclose it to ensure compliance.
In the 2nd guide of this series, "Inside Information and the Market Misconduct Tribunal: A Guide to Defending SFC Enforcement Action", we discuss how to defend against SFC enforcement action alleging a failure to properly handle MNPI.
In the 3rd guide of this series, "Market Misconduct Tribunal: A Guide to Penalties and Other Consequences for Misuse of Insider Information", we discuss in greater detail the penalties for breaches of regulatory requirements in relation to the mis-handling of MNPI.
Table of Contents
The Securities and Futures (Amendment) Ordinance 2012 (“Disclosure of Inside Information Amendment Ordinance”) introduced a statutory regime mandating that Hong Kong Stock Exchange listed companies disclose inside information. This legislation, which is accompanied by guidelines (“Guidelines on Disclosure of Inside Information”) issued by the Securities and Futures Commission (“SFC”), took effect on January 1, 2013.
The new regime for the disclosure of inside information largely overtakes the MNPI disclosure requirements under the Hong Kong Stock Exchange Listing Rules. Before this new regime, under the Hong Kong Stock Exchange Listing Rules, a listed company had a duty to keep the Hong Kong Stock Exchange and its shareholders informed as soon as reasonably practicable of any information relating to the company which (i) was necessary to enable them and the public to appraise the company’s position, (ii) was necessary to avoid the establishment of a false market in its securities, or (iii) might be reasonably expected materially to affect market activity in and the price of its securities.
The obligations in (i) and (iii) to disclose MNPI have now been replaced by the new MNPI disclosure provisions of the Securities and Futures Ordinance (“SFO”) brought into force by the Disclosure of Inside Information Amendment Ordinance. The SFC now has sole jurisdiction over the enforcement of these MNPI disclosure provisions. The Hong Kong Stock Exchange will not undertake any investigation as to whether a listed company has discharged its statutory MNPI disclosure obligations but will retain a right to discipline if there is on the same facts also breach of other obligations under the Hong Kong Stock Exchange Listing Rules.
As a result of this new statutory MNPI disclosure regime, officers of Hong Kong Stock Exchange listed companies now face an array of possible sanctions, both civil and criminal, for failing to properly disclose MNPI. It is therefore incumbent upon such listed companies and their officers to establish policies and procedures for the handling of MNPI to ensure compliance.
The new disclosure regime establishes obligations for Hong Kong Stock Exchange listed companies to make disclosure of MNPI and for their officers personally to ensure that disclosure takes place properly.
At the heart of the new disclosure regime is the definition of “inside information”. This term determines what constitutes MNPI for regulatory purposes and therefore what needs to be disclosed and when.
For companies, the regime provides that, unless exempted, a Hong Kong Stock Exchange listed company must, as soon as reasonably practicable after any inside information has come to its knowledge, disclose that information to the public.
The new legislation broadly adopts the existing definition of inside information (previously known as “relevant information”) from the market misconduct regime. As a result, “inside information” means, in relation to a Hong Kong Stock Exchange listed company, specific information that meets all of the following 3 conditions:
Relevant – The information must be about the company, a shareholder or officer of the company or the listed securities of the company or their derivatives.
Non-Public – The information must not be generally known to persons who are accustomed or would be likely to deal in the listed securities of the company.
Price Sensitive – If generally known to persons who are accustomed or would be likely to deal in the securities of the listed company, the information must be likely to materially affect the price of those securities.
In practice, what constitutes inside information is often a difficult question of judgment. Information which may constitute inside information in one context may not constitute inside information in a different context. For example, a HK$50 million transaction may be significant for one listed company but may be insignificant for another substantially larger listed company.
Equally, information may be of an uncertain nature and its materiality therefore difficult to ascertain. Reasonable men may differ as to whether any specific piece of information may, by itself or in conjunction with other information, be likely to affect the price of a company’s securities in a material way. For example, where a Hong Kong Stock Exchange listed company is in discussions about a possible transaction, the extent to which those discussions have progressed will be critical in determining whether information about that possible transaction constitutes inside information. There is no bright line test as to when the discussions will have progressed far enough to constitute inside information.
The SFC has issued guidance as to what constitutes inside information and when and how it is to be disclosed in its Guidelines on Disclosure of Inside Information. Whilst such guidance is helpful in evaluating the SFC’s position and such guidance is admissible in court, it will not bind a Hong Kong court. Thus, in the end, in the event of any doubt as to what constitutes inside information, it will almost always be beneficial to seek independent professional advice. This is particularly so given that, as discussed below, (i) the new MNPI disclosure regime is not triggered unless a reasonable person would consider that the information in question is inside information, and (ii) the failure to seek such advice may be regarded as negligent, thus exposing officers to potential personal liability.
It is unclear to what extent a listed company’s financial position may constitute inside information ahead of the release of its financial results.
Take for example a Hong Kong Stock Exchange listed company whose financial year ends on December 31. By mid-January, the company may have a fairly good idea of its financial results for the previous financial year but the financial results will not be finalized until an audit is completed. The audit itself may not be completed until March.
Does information as to the financial results as set out in the management accounts constitute inside information? At least to the extent that the financial results may differ markedly from market expectations, it may be argued that such information may constitute inside information, otherwise a person would be permitted to trade on the basis of this information. If this is correct, then under the new MNPI disclosure regime, a listed company must disclose the deviation, possibly in the form of management guidance, even before the financial results have been audited.
This is consistent with the SFC’s own guidance in its Guidelines on Disclosure of Inside Information where they state:
Generally the mere knowledge of the content of draft annual or interim accounts prior to their publication or internal management accounts would not be specific information. However, knowledge of substantial losses or profits made by a corporation even though the precise magnitude is not yet clear would be specific information and accordingly may be inside information. The facts and figures in every case will be different and every case turns on its own facts. To constitute inside information the difference between the results which the market might predict and the results the directors or officers know must be significant.
As set out above, the new MNPI disclosure regime is triggered only when inside information has come to the knowledge of a listed company. In this regard, inside information has come to the knowledge of a listed company if 2 conditions are satisfied, namely:
Officer Knowledge – The information has, or ought reasonably to have, come to the knowledge of an officer of the company in the course of performing functions as an officer of the company. Significantly, liability may follow if an officer “ought reasonably” to have known about the information and thus, it is no defence to deny actual knowledge.
Objective Test – A reasonable person, acting as an officer of the company, would consider that the information is inside information in relation to the company. As a result of this condition, it seems that a good faith determination that information is not inside information does not discharge liability for breach of the new MNPI disclosure regime if it is subsequently held that such information was inside information.
It is not clear under the SFO who might qualify as an “officer” for the purpose of the new disclosure regime. The SFO does provide that an officer will include a director, manager or secretary or any other person involved in the management of a Hong Kong Stock Exchange listed company but does not go on to define a “manager” or a “person involved in the management of a listed company”. In an attempt to clarify, the SFC has suggested in its Guidelines on Disclosure of Inside Information that a “manager” will normally refer to a person under the immediate authority of the board who is charged with management responsibility affecting the whole of the corporation or a substantial part of the corporation.
Broadly, at present, there are 3 categories of exemption from the requirement to disclose inside information. All these exemptions will apply on a case by case basis.
A Hong Kong Stock Exchange listed company is not required to disclose inside information if and so long as the disclosure is prohibited under or would contravene a restriction imposed by Hong Kong legislation or an order of a Hong Kong court. In this regard, a mere contractual restriction on disclosure would seem insufficient to invoke exemption as such a restriction would not originate from Hong Kong legislation; however, to the extent that such a restriction were enforced by a Hong Kong court through an injunction, it would seem sufficient to invoke exemption.
The SFC may, on an application by a Hong Kong Stock Exchange listed company, waive a requirement to disclose inside information if disclosure is prohibited under or would contravene any restriction imposed by legislation outside of Hong Kong or any order of a court outside Hong Kong or would contravene any restriction imposed by any law enforcement agency or other government authority outside of Hong Kong. Unlike the exemption for inside information the disclosure of which is prohibited by Hong Kong law, the exemption for disclosure of inside information on the basis of a foreign law restriction only applies if the SFC agrees to waive the disclosure requirement.
A Hong Kong Stock Exchange listed company is not required to disclose inside information if the information concerns an incomplete proposal or negotiation or the information is a trade secret. However, to qualify for exemption:
the company must take reasonable precautions to keep the inside information confidential, and
confidentiality must in fact be kept.
If confidentiality is breached, a Hong Kong Stock Exchange listed company must as soon as reasonably practicable after it becomes aware of the breach, disclose the inside information. In this case, it will not be liable if, despite the breach, it had taken reasonable measures to maintain confidentiality.
A Hong Kong Stock Exchange listed company may, without breaching confidentiality, disclose the inside information to a person who requires the information to perform his functions and who is under a duty to keep the information confidential (e.g. a legal adviser).
Whilst the SFC has the power to create further exemptions in consultation with the Financial Secretary, at present, it may be that the MNPI disclosure regime is overly rigid given the absence of an ad hoc power for the SFC to waive or defer disclosure of inside information subject to conditions. As the SFO will use the same definition of inside information for the purpose of both the new MNPI disclosure regime and the market misconduct regime, it effectively assumes that policy considerations dictating a prohibition of trading whilst in possession of MNPI necessarily dictate disclosure of that same information. It leaves no room for competing public policy considerations (e.g. safety or public order) which may be applicable to relax a disclosure decision but which may be inapplicable to relax a trading prohibition.
The absence of a power for the SFC to exempt disclosure of MNPI on a discretionary basis means that decisions to disclose MNPI will be based solely on a judgment as to whether information does or does not constitute inside information rather than on a judgment as to whether information should or should not be disclosed. This may pervert the meaning of inside information so that there may be cases where a person can trade on inside information in circumstances where, from a policy perspective, he should be prohibited from so doing and conversely, there may be cases where a listed company must disclose inside information where from a policy perspective such disclosure may be premature.
Where a Hong Kong Stock Exchange listed company is obliged to disclose inside information, it may do so in any manner that can provide for equal, timely and effective access by the public to that inside information.
Under the new MNPI disclosure regime, a Hong Kong Stock Exchange listed company will be deemed to have disclosed information in a manner that provides for equal, timely and effective access if it disseminates the information through the Hong Kong Stock Exchange.
Whilst on a reading of the new Disclosure of Inside Information Amendment Ordinance disclosure of inside information is not limited to dissemination through the Hong Kong Stock Exchange, the SFC has indicated in its Guidelines on Disclosure of Inside Information that it does not consider that the issuance of a press release or the dissemination of information through a press conference alone is likely to satisfy the requirement for equal, timely and effective access.
Ultimately, it seems that any manner of disclosure of inside information ought to satisfy the requirement provided that it results in the information becoming available at the same time to persons who are accustomed to or would be likely to deal in the relevant securities.
A Hong Kong Stock Exchange listed company is taken not to have complied with its disclosure obligation under the new MNPI disclosure regime if both the following conditions are met:
the company discloses information that is false or misleading as to a material fact, or is false or misleading through the omission of a material fact, and
an officer of the company knows or ought reasonably to have known that, or is reckless or negligent as to whether, the information disclosed is false or misleading as to a material fact, or is false or misleading through the omission of a material fact.
Where a Hong Kong Stock Exchange listed company needs more time to clarify its position before disclosing MNPI that may be inside information, the SFC has suggested in its Guidelines on Disclosure of Inside Information that the company should consider issuing a holding announcement which details as much of the subject matter as possible and sets out reasons why a fuller announcement cannot be made.
The requirement for equal, timely and effective access may, in practice, require that listed companies seek a suspension of trading in their securities pending the disclosure of inside information. Failure to do so may result in unequal disclosure.
Officers of Hong Kong Stock Exchange listed companies who fail to comply with disclosure obligations may bear personal liability. Under the new Disclosure of Inside Information Amendment Ordinance, every officer of a Hong Kong Stock Exchange listed company must take all reasonable measures from time to time to ensure that proper safeguards exist to prevent a breach of requirements to disclose inside information. If a listed company breaches MNPI disclosure requirements, an officer may be personally liable if (i) his intentional, reckless or negligent conduct resulted in the breach, or (ii) he failed to take all reasonable measures from time to time to ensure that proper safeguards existed to prevent breaches.
It is significant to note that an officer may bear personal liability even if he has no intention to mislead the investing public. Negligence itself will suffice if it resulted in a breach, as will a failure to take all reasonable measures to ensure that proper safeguards are in place.
The negligence standard implies that Hong Kong Stock Exchange listed companies should seek professional advice when there is any issue as to the appropriateness of the compliance program or as to whether information constitutes inside information. Failure to seek such professional advice may be regarded as a basis for a claim of negligence.
The new MNPI disclosure regime will be enforced by the SFC through the Market Misconduct Tribunal (“MMT”). Thus, the SFC will investigate and if thought fit, refer the matter to the MMT for adjudication or further investigation. Should the MMT find a breach of disclosure requirements, it may make a number of civil orders.
In the first instance, the MMT has no jurisdiction to impose criminal penalties such as imprisonment. However, where a person has been found by the MMT to have breached inside information disclosure requirements and as a result, the MMT has ordered that the person must not again breach the disclosure requirements, if the person does breach disclosure requirements again, that person will commit a criminal offence punishable on indictment by imprisonment for up to 2 years.
Of particular concern for directors and chief executives of Hong Kong Stock Exchange listed companies, the MMT may (i) disqualify the person from being a director or from otherwise being concerned or taking part in the management of a listed company or any other specified company for up to 5 years, (ii) prohibit the person from dealing in securities, futures or leveraged foreign exchange contract or any interest in them or a collective investment scheme for up to 5 years, or (iii) impose a regulatory fine of up to HK$8 million.
As alluded to above, though the Hong Kong Stock Exchange is no longer the regulator primarily responsible for disclosure of MNPI, consistent with it’s responsibility to ensure an orderly, informed and fair market, the Hong Kong Stock Exchange Listing Rules still provide that where in the view of the Hong Kong Stock Exchange, there is or likely to be a false market in a listed company’s securities, a listed company must, as soon as reasonably practicable after consultation with the Hong Kong Stock Exchange, announce the information necessary to avoid a false market in its securities.
Where a Hong Kong Stock Exchange listed company breaches this requirement or otherwise fails to give to its shareholders (or any part of them) all information with respect to its business or affairs that they might reasonably expect or has engaged in misconduct, on a petition by the SFC, a court may make certain orders including:
an order that the listed company shall sue certain persons (e.g. directors who were responsible for disclosure failures); or
an order that persons responsible for disclosure failures be disqualified from being a director or otherwise being concerned in, or taking part in, the management of a company for a period up to 15 years.
Quite apart from the new MNPI disclosure regime introduced by the Disclosure of Inside Information Amendment Ordinance, Hong Kong Stock Exchange listed companies and their officers may be held to account for failing to disclose or improperly disclosing inside information under current provisions of the SFO.
Broadly, it is both an offence and a civil wrong under the market misconduct regime for a person to disclose, circulate or disseminate (or to authorize or be concerned in the disclosure, circulation or dissemination of) information that is likely to induce a person to deal in securities or to maintain, increase, or reduce the price of securities if the information is false or misleading.
In this regard, information will be false or misleading if it is false or misleading as to a material fact, or is false or misleading through the omission of a material fact. However, the person will only be liable on a criminal basis if he knows that, or is reckless as to whether, the information is false or misleading. He may be liable on a civil basis on any of the basis on which he may be criminally liable or on the basis that he is negligent as to whether the information is false or misleading.
A person commits an offence if (i) he provides to the SFC or the Hong Kong Stock Exchange any record or document which is false or misleading in a material particular, (ii) he knows that, or is reckless as to whether, the record or document is false or misleading in a material particular, and (iii) he has been warned by the SFC or the Hong Kong Stock Exchange that the provision of a false or misleading record would constitute an offence. In this context, as the new statutory disclosure regime requires MNPI which constitutes inside information as defined to be disclosed, to the extent that a press announcement by a listed company may be false or misleading in a material particular, the listed company may be criminally liable if the requisite warning has been given.
In this regard, where a listed company commits this offence, an officer of the company may bear personal criminal liability if (i) the offence is attributable to the recklessness of the officer, (ii) the offence was committed with the consent of the officer, or (iii) the offence was counselled or induced by the officer.
In light of the MNPI disclosure regime under the SFO, it is perhaps timely for Hong Kong Stock Exchange listed companies to review their policies and procedures in conjunction with legal counsel specialized in the MNIP regulatory framework to ensure compliance with requirements for the proper and timely disclosure of inside information. Appropriate policies and procedures will, amongst other things, enable a listed company to demonstrate that it has in place reasonable precautions to preserve confidentiality of inside information which is not yet ripe for disclosure and to enable officers of a listed company to demonstrate that they have put in place proper safeguards to ensure disclosure as required. A failure in either of these regards may mean that a listed company will be unable to withhold disclosure of confidential information relating to a proposal or negotiation that has not yet reached fruition or that an officer may be more likely to be personally liable for a breach of a disclosure requirement.
The Disclosure of Inside Information Amendment Ordinance does not spell out what policies and procedures are required. The references to “reasonable measures” and “proper safeguards” are vague. We suggest a formal written statement setting out the terms of a compliance program, staff training to ensure knowledge of the program and program content broadly as follows:
Governance Structure for Disclosure. This may, for example, include establishing (i) a disclosure committee to determine whether information constitutes inside information and what information will be disclosed, (ii) procedures for monitoring and escalating information which may constitute inside information to the disclosure committee, and (iii) procedures for seeking advice from legal advisers and regulatory bodies as the case may be to determine whether information constitutes inside information.
Disclosure Methodology. Policies and procedures may, for example, include (i) designating one or more spokespersons conversant with regulatory requirements to control the flow, quality and consistency of inside information being disclosed, whether written or verbal, and (ii) developing protocols for the release of information to vet the accuracy of information to be disclosed and to ensure timely and equal access by the investing public. These protocols should address how spokespersons should deal with rumours, analyst reports, conference calls and media requests for inside information.
Security and Confidentiality. Policies and procedures (i) to ensure that inside information which is not disclosed is kept confidential, (ii) to review publicly available information and information disclosed to analysts, the media or in conference calls to determine whether confidentiality has been breached, and (iii) to disclose inside information where confidentiality has been breached.
Record Keeping. Policies and procedures should be adopted to ensure that disclosure committee decisions are defensible and that there is no misunderstanding as to what has been disclosed and when.
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