Inside information disclosure
In the second Q&A in our ‘Get the FAQs’ series, the Securities and Futures Commission answers questions relating to inside information disclosure raised by attendees at this year’s Annual Corporate and Regulatory Update.
Q: For inside information, foresight is necessary but hindsight is 20:20 vision. Do you have any practical advice to help company secretaries to do their jobs and make such judgements?
A: The determination of inside information is a matter of judgement given all the available facts and circumstances at the material times. The Securities and Futures Commission (SFC) has produced its Guidelines on Disclosure of Inside Information. These can be found on the SFC website (www.sfc.hk – Regulatory Functions/Listings and Takeovers/ Corporate Disclosure).
They provide useful advice and examples that will assist in the process of determining whether the company has inside information. In particular, Paragraph 27 makes it clear that the test of whether the information is likely to affect the price has to be applied as at the time the information was available.
Q: The determination of price-sensitive information is difficult. When should fair value changes proposed by auditors be announced?
A: The determination of inside information is a matter of judgement given all the available facts and circumstances. If a year-end adjustment to the accounts is being proposed by the auditor this may be inside information when it is sufficiently certain to be reflected in the accounts and is of sufficient significance to amount to information that is likely to have a material effect on the price of the company’s securities when made public.
Q: Can you confirm that there is a ‘materiality’ test to be imposed with regard to price-sensitive information disclosures – meaning that one has to consider whether the information is likely to have a ‘material’ impact on the share price?
A: Under Section 307B of the Securities and Futures Ordinance, a listed company must disclose inside information to the public as soon as reasonably practicable. Inside information is defined as non-public information that concerns the company, its officers or its securities and if it were made public would have a material effect on the price of its listed securities. C
learly not every piece of non-public information that concerns the company would have a material effect on the price of its listed securities. It depends a lot on the nature and quality of the information. The cancellation of a single regular supply contract for a company with many such contracts may not be inside information. If that contract previously produced 50% of yearly sales then it almost certainly would be inside information – even if the sales staff hoped to sign a new contract with another customer shortly.
Useful guidance on the question of how the test of whether information is likely to have a material effect on the price of the listed securities can be found in Paragraph 23 to 29 of the Guidelines on Disclosure of Inside Information.
Q: If a potential connected transaction is going to happen with a connected listed company in the PRC, but no terms or agreement has yet been signed. Does the Hong Kong listed company need to make the announcement in line with the listed company in the PRC?
A: If the transaction is inside information for the Hong Kong listed company, then the obligation to disclose the inside information arises immediately, but it may fall within the safe harbour set out in Section 307D of the Securities and Futures Ordinance. If the information concerns an incomplete proposal or negotiation, then it will fall within the safe harbour on the basis that the company has taken all reasonable precautions for preserving the confidentiality of the information and the confidentiality has been preserved. If the PRC listed company were to make details of the transaction public, then confidentiality would no longer be preserved and so the Hong Kong listed company should make its own announcement as the safe harbour is no longer available.
The question refers to the transaction as being a connected transaction. Various listing rules relate to connected transactions (as defined in the listing rules) and so those rules would need to be considered as well.
Q: Disclosure of pricing policy in detail as required by the Stock Exchange may lead to the leakage of the confidential, commercial tactics of listed issuers to competitors. How should these issues be balanced?
A: It would not be usual for the disclosure of detailed pricing strategies to be required on an ongoing basis. Detailed pricing strategies will relatively rarely fall within the definition of inside information. One of the statutory exemptions from disclosure of inside information set out in Section 307D of the Securities and Futures Ordinance relates to trade secrets and this may be applicable.
In connection with an IPO or further capital raising, the prospectus may be required to include a description of the pricing policies adopted by the company. This would be an important indicator of strategic direction for the company and forms part of the information that investors would need to make an informed decision about whether or not to invest in the shares of the company.
Q: Will the safe harbours in the Securities and Futures Ordinance include the consideration of ‘state secrets’ such as those defined in the PRC?
A: The safe harbours are those set out in the legislation (Section 307D of the Securities and Futures Ordinance). Briefly these amount to situations where:
• disclosure of the information is prohibited by Hong Kong laws or court orders
• the information relates to incomplete negotiations or proposals
• the information relates to trade secrets
• the information relates to liquidity support to banks, and
• disclosure is specifically waived by the SFC.
The SFC will consider waiving disclosure where this would constitute a contravention of a restriction imposed by:
• legislation of a place outside of Hong Kong
• a court order under the law of a place outside of Hong Kong
• a law enforcement agency of a place outside of Hong Kong, and
• a government authority of a place outside of Hong Kong in the exercise of a power conferred by the legislation of that place.
Such waivers may be granted by the SFC after consideration of an application made in writing by the listed company. A restriction of disclosure relating to state secrets might fall within one of these situations described above.
Q: In relation to the recent ruling which shifts the responsibility on discharging the burden of proof to prove state secrets, how can companies effectively deal with China documents & IPOs?
A: On the assumption that the reference is to a recent ruling relating to the case involving Ernst and Young, it is worth noting the comments by Justice Ng who said that the objection by Ernst and Young against producing the audit working papers based on state secrets is ‘a complete red herring’.
As Ashley Alder, the SFC’s Chief Executive Officer, said, ‘This case is primarily about the obligations of an accounting firm in Hong Kong to comply with requirements under Hong Kong law. The case is not about PRC law. Auditors should not withhold information that is in their possession and sought by the SFC in connection with suspected misconduct in Hong Kong’s markets’.
It would therefore be incorrect to say that, as a result of that case, the burden of proof has shifted. If information is judged to be a state secret under the state secrecy law operating in the PRC, this is likely to fall within one of the specific exemptions set out in Section 307D of the Securities and Futures Ordinance.
Q: Can the SFC publish the relevant sanctions for breaching the inside information provisions of the Securities and Futures Ordinance? These are currently difficult to find.
A: A list of civil sanctions that may be imposed by the Market Misconduct Tribunal for breaching disclosure requirements are set out in section 307N of the Securities and Futures Ordinance. They are:
• a qualification order on an officer from being a director, manager orotherwise involved in the management of a listed company for up to five years
• a ‘cold shoulder’ order on a listed company or an officer for up to five years
• a ‘cease or desist’ order on a listed company or an officer
• a fine on a listed company or a director or chief executive up to HK$8 million
• payment of costs to the government in relation to the proceedings
• payment of costs to the SFC in relation to the investigation or proceedings
• an order for a body of which an officer is a member to be recommended to take disciplinary action against the officer
• an order for a listed company to appoint an independent professional adviser to review the company’s compliance procedures or to advise the company on compliance matters, and
• an order for an officer to undergo training.
A list of enforcement actions taken by the SFC can be found on our website (www.sfc.hk – News and Announcements/ News/Enforcement News).
Many thanks to Michael Duignan, Senior Director, Corporate Finance, SFC, for his help in preparing this Q&A. Further information can be found in the SFC’s new Corporate Regulation Newsletter which can be accessed from a new link on the HKICS homepage (www.hkics.org.hk).
SIDEBAR: Further guidance
The SFC’s Guidelines on Disclosure of Inside Information are available on the SFC website (www.sfc.hk – Regulatory Functions/Listings and Takeovers/Corporate Disclosure). The SFC also provides a consultation service to the market with a view to assist listed corporations in understanding and complying with statutory disclosure provisions. Consultations generally take the form of verbal discussions. The views expressed by the SFC are preliminary and non-binding in nature.
The contact details are: Tel: (852) 2231 1009; Fax: (852) 2810 5385; Email: email@example.com; Address: Corporate Disclosure Team, Corporate Finance Division, Securities and Futures Commission, 35/F, Cheung Kong Centre, 2 Queen’s Road Central, Hong Kong.