Statutory Obligation for Hong Kong-Listed Corporations to Disclose Price Sensitive Information Becoming Effective on January 1, 2013 SUMMARY With effect from January 1, 2013, Hong Kong will implement a statutory disclosure regime requiring Hong Kong-listed corporations to disclose price sensitive or inside information. Such regime will have the force of law and failure to make timely disclosures may attract civil sanctions, including a fine of up to HK$8 million, and liabilities to pay compensation to third parties under civil actions. BACKGROUND The timely disclosure of inside information in an equal manner to the public has always underpinned the maintenance of a fair and informed market. Prior to the enactment of the Securities and Futures (Amendment) Ordinance 2012 gazetted on May 4, 2012, which amends the Securities and Futures Ordinance (Cap. 571 of the Laws of Hong Kong) (the SFO ), the requirement for Hong Kong-listed corporations to disclose price sensitive information was set out as a rule under Rule 13.09 of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the Listing Rules ) 1. There is, however, no statutory backing to the disclosure requirements as the Listing Rules lack the force of law. Under the new regime, the disclosure requirement will become a legal obligation and the Hong Kong Securities and Futures Commission (the SFC ) can take actions against Hong Kong-listed corporations for failure to timely disclose price sensitive information as a breach of law. THE OBLIGATION Under the new law, a Hong Kong-listed corporation (whether primary or secondary listed) must disclose inside or price sensitive information as soon as reasonably practicable after such information has come to its knowledge. New York Washington, D.C. Los Angeles Palo Alto London Paris Frankfurt Tokyo Hong Kong Beijing Melbourne Sydney www.sullcrom.com
For this purpose, as soon as reasonably practicable means the corporation needs to take all steps necessary in the circumstances to disclose the information to the public. For example, the corporation should immediately take steps such as ascertaining sufficient details, verification of facts, internal assessment of the matter and its likely impact, seeking professional advice where required and consider consulting the SFC. Before making the disclosure, the corporation has to ensure that the information is kept confidential. The disclosure must be made in a manner that can provide equal, timely and effective access by the public, such as being disseminated through the Hong Kong Stock Exchange electronic publication system. If a Hong Kong-listed corporation breaches these disclosure requirements, an officer (meaning a director, manager or secretary of, or any other person involved in the management of, the corporation) will also be in breach if: (a) the corporation s breach is a result of his or her intentional, reckless or negligent conduct; or (b) he or she has not taken all reasonable measures to ensure that proper safeguards exist to prevent the breach. WHAT IS INSIDE INFORMATION? The concept of relevant information, currently used under the insider dealing regime in the SFO, will be used to define the new term inside information. In relation to a Hong Kong-listed corporation, inside information means specific information that: (a) is about: (i) the corporation; (ii) a shareholder or officer of the corporation; or (iii) the listed securities of the corporation or their derivatives; and (b) 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. SAFE HARBOURS FROM DISCLOSURE The new disclosure regime has also specified the safe harbours available (which were previously unclear under the Listing Rules). These safe harbours are: (a) information prohibited from being disclosed by a Hong Kong court or under Hong Kong legislation 2 ; -2-
(b) information concerning an incomplete proposal or negotiation (such as a contract being negotiated but not finalised); (c) information that is a trade secret (such as inventions, manufacturing processes or customer lists); and (d) in very rare circumstances when the need to maintain and safeguard financial stability overrides the benefit of making public a given piece of information (for example, the provision of liquidity support by the Government or central banks to listed banking institutions during a financial crisis). The use of safe harbours (b) to (d) is subject to the pre-conditions that the Hong Kong-listed corporation takes reasonable precautions to preserve confidentiality and that confidentiality is in fact maintained. If the inside information is leaked, the corporation must make a disclosure as soon as reasonably practicable. If more time is needed before a full announcement can be issued, the corporation should consider issuing a holding announcement, failing which the corporation should consider applying for a suspension of trading in its securities until disclosure can be made. Further guidance on each of the above safe harbours can be found in the revised draft Guidelines on Disclosure of Inside Information published by the SFC in February 2011 (the SFC Guidelines ). ENFORCEMENT The SFC will enforce the statutory disclosure regime with its existing investigatory powers and, if it appears that a breach has or may have taken place, it may institute proceedings before the Market Misconduct Tribunal (the MMT ). CIVIL SANCTIONS The MMT may impose the following civil sanctions on Hong Kong-listed corporations and their officers: (a) disqualification of the officer from being a director or otherwise involved in the management of a listed corporation for up to five years; (b) a cold shoulder order on the officer depriving such officer access to market facilities for up to five years; (c) a cease and desist order on the listed corporation or officer (i.e., an order not to breach the statutory disclosure requirements again); (d) a regulatory fine up to HK$8 million on the listed corporation, each of the directors and/or the chief executive, respectively; (e) a recommendation to any body of which the officer is a member to take disciplinary action against him; -3-
(f) payment of costs of the civil inquiry and/or the SFC investigation by the listed corporation or officer; (g) such order as is necessary to ensure that the listed corporation takes appropriate action to prevent a similar breach of the disclosure requirement. This includes (i) ordering an officer to undergo training; (ii) ordering a listed corporation to appoint an independent professional adviser to review its compliance procedure; and (iii) ordering a listed corporation to appoint an independent professional adviser to advise on compliance matters. CIVIL LIABILITY Any party affected by a breach of the statutory disclosure requirements by a Hong Kong-listed corporation or its officers has a statutory civil right of action to recover compensation for any pecuniary loss sustained as a result of the breach. WHAT THIS MEANS FOR YOU AND YOUR COMPANY The obligation to disclose price sensitive information contained in the Listing Rules is now given force of law in the SFO. Failure to timely disclose inside information will be a breach of law that may result in severe consequences (i.e., various civil sanctions and civil liability). Both Hong Kong-listed corporations and their officers may be liable for a breach of the statutory disclosure requirements. Previously under the Listing Rules regime, only directors of a Hong Konglisted corporation are responsible for a breach of Rule 13.09. Under the new disclosure regime, the scope of responsibility has expanded to include all officers of the corporation (which, in addition to the directors, may include the company secretary, senior management and any other person involved in the management of the corporation). It is crucial for Hong Kong-listed corporations and their officers to be able to, promptly and accurately, identify the following: whether they have any inside information; whether circumstances have evolved such that inside information has arisen; the precise nature and extent of the inside information; whether an obligation to disclose arises; -4-
whether they have taken proper safeguards to prevent a breach of the disclosure requirements; whether a safe harbour is available; and if a safe harbour is available, whether the safe harbour may be lost. In order to ensure and monitor compliance with the statutory disclosure requirements, Hong Konglisted corporations and their officers are required to take reasonable measures to devise proper safeguards to prevent a breach of the disclosure requirements. In particular, they are encouraged to consider the following: devise effective or strengthen existing reporting systems and communication channels with respect to pending and completed deals (for example, progress report on all deals should be circulated to senior management on a regular basis; if an agreement is imminent or has been reached, senior management should be alerted immediately); restrict the circulation of information on pending deals on a need-to-know basis so as to preserve its confidentiality; prepare template announcements and draft the actual announcement when a deal is close to agreement; and organize staff training on the new regime (including what constitutes inside information, the importance of keeping inside information confidential and when safe harbours are available). The SFC Guidelines contain useful guidance on this topic. Although they are still in draft form, Hong Kong-listed corporations are encouraged to refer to them in their current draft and final forms. The SFC and HKEx intend to organize training for Hong Kong-listed corporations on compliance with the statutory disclosure regime. Attendance at such training is highly recommended. SFC CONSULTATION From December 1, 2012, the SFC will provide a consultation service for an initial period of two years to help Hong Kong-listed corporations understand how to apply the disclosure provisions. The SFC envisaged that most questions will relate to the application of the safe harbours, as opposed to whether certain information is inside information, as corporations should be best placed to make that judgment. At the end of the two-year period, the SFC will review whether it is necessary to continue the service for an additional period. -5-
INVESTOR EDUCATION CENTRE The SFC will also establish an Investor Education Centre ( IEC ), as its wholly-owned subsidiary, to take up broader investor education responsibilities covering the entire financial services sector. The SFC aims to launch the IEC in the fourth quarter of 2012. * * * ENDNOTE(S) 1 Hong Kong Exchanges and Clearing Limited ( HKEx ) has proposed to remove the existing continuing disclosure obligations under the Listing Rules to the extent that they duplicate and overlap with the statutory disclosure regime under the amended SFO. 2 For information that is prohibited from being disclosed by a court or legislation outside Hong Kong, the SFC may grant a waiver upon application. Copyright Sullivan & Cromwell 2012-6-
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