Market rumour: a revised approach
What should listed companies do if they find themselves subject to market commentaries or rumours which may require a halt of trading in their securities? Hong Kong Exchanges and Clearing Ltd has published new guidance outlining its revised approach to such situations.
In recent years some listed issuers have, from time to time, become subjects of market commentaries or rumours involving allegations of fraud, material accounting or corporate governance irregularities. These allegations were made by market commentators or research firms and have caused, or could have caused, intense price pressure in the issuer’s listed securities.
In April this year, Hong Kong Exchanges and Clearing Ltd (the Exchange) published a guidance letter (GL87-16) outlining a revised approach by the Exchange which allows listed issuers that have applied for a trading halt due to market rumours and commentaries to resume trading in their securities if they can address such allegations with a clarification announcement (for example a denial of the allegations). The guidance letter also sets out the issuers’ obligations in handling such allegations.
‘The guidance letter sets out the Exchange’s revised approach to handling issuers subject to allegations. Our revised approach is closer to the regulatory approaches of other markets and has the effect of keeping any necessary trading halt to the minimum consistent with our general approach to trading halts,’ said David Graham, the Exchange’s Chief Regulatory Officer and Head of Listing.
‘In the interest of maintaining the reputation and efficiency of our market, we review our rules and practices from time to time to ensure that they have addressed developments in the market,’ Graham added.
Issuer’s actions to address false or disorderly market concerns
Where there are allegations circulating in the market regarding an issuer, the Exchange may be concerned that the allegations may disrupt orderly share trading. Under these circumstances the Exchange may make an enquiry under the listing rules (see Main Board Rule 13.10 and GEM Rule 17.11). If the allegations have, or are likely to have, an effect on the issuer’s share price such that, in the view of the Exchange, there is, or there is likely to be, a false or disorderly market in the listed issuer’s securities, the issuer must make a clarification announcement promptly.
The listed issuer’s obligation to issue a clarification announcement to prevent the possible development of a false or disorderly market exists whether or not the Exchange makes enquiries.
The issuer must apply for a trading halt if it cannot promptly publish the clarification announcement to prevent the possible development of a false or disorderly market. The duration of any trading halt should be for the shortest possible period. If trading is halted, the issuer must ensure trading resumes as soon as practicable following publication of a clarification announcement (see Main Board Rule 6.05 and GEM Rule 9.09).
The clarification announcement serves to inform the market. It should make reference to the allegations and inform the market about the issuer’s position regarding each allegation so as to avoid a false or disorderly market. To the extent possible, the clarification announcement should also contain particulars to address, or to refute, the allegations. The issuer should also disclose any inside information required to be disclosed under Part XIVA of the Securities and Futures Ordinance (SFO) where applicable, or an appropriate negative statement.
The Exchange would not normally pre-vet the clarification announcement and would expect such announcement to be made as soon as practicable by the issuer such that the duration of any necessary trading halt is kept to the minimum.
Save for exceptional circumstances, the Exchange would expect share trading to resume (if it was halted) following publication of a clarification announcement. If the Exchange believes that the announcement would not address the concerns on false or disorderly market, it may require the issuer to provide further information and halt trading pending further clarification. This may be the case where, for example, the clarification announcement contains information materially inconsistent with other published documents, or contains information which creates market confusion so as to raise the Exchange’s concerns about the possible development of a false or disorderly market in the trading of the shares.
Continuing reviews or investigations
Following publication of the clarification announcement, the Exchange may continue to follow up with the issuer on any further disclosures, reviews or investigations it considers necessary on matters that have arisen out of the allegations. Depending on the nature, gravity and credibility of the allegations, the Exchange may require the issuer to provide further information to support its denials of allegations, to review or conduct investigations into the claims and documents purportedly reviewed or used to support the allegations.
The Exchange takes follow-up action to require an issuer to demonstrate that its responses to allegations are supported and the basis for that support and that it has in place internal controls and risk management measures to safeguard its assets, and financial and reporting controls to promote reporting that is timely and materially accurate. Where appropriate, the issuer is expected to identify and correct any weaknesses in its internal controls, and adopt good corporate governance practices to address the inconsistent information identified in the allegations.
In the absence of a material development that raises concerns about trading in an orderly manner, the Exchange’s follow-up action should normally not affect the trading of the issuer’s securities. Where the follow-up action reveals that any issuer announcement or document was materially inaccurate or misleading, or that there are serious concerns about the issuer’s compliance with the listing rules, the Exchange may suspend the issuer’s share trading pending further clarification. Where appropriate, the Exchange may make a referral to an appropriate law enforcement agency, such as the Securities and Futures Commission (SFC) for consideration of action under the law, for example the SFO.
The Exchange’s guidance letter makes it clear that listed issuers should always maintain appropriate and effective risk management and internal control systems to safeguard their assets and monitor their operations.
The guidance letter can be found on the the Exchange’s website: www.hkex.com.hk.
See also the Exchange’s guidance letter (GL83-15) for principles and best practices in applying for trading halts.
Listed issuers should also refer to the ‘Guidelines on Disclosure of Inside Information’ published by the Securities and Futures Commission (SFC) for guidance on discharging their obligations to announce inside information under Part XIVA of the SFO.