Company secretaries have been in the frontline of the battle to advise on compliance with Hong Kong’s inside information disclosure regime and this month they share with CSj some of the experience they have gained.
Compliance challenges don’t come much harder than the inside information disclosure regime currently in force in Hong Kong. Under the new requirements brought in on 1 January this year by the Securities and Futures (Amendment) Ordinance of 2012, a listed company, unless exempted by one of the safe harbours, must as soon as reasonably practicable after any inside information has come to its knowledge, disclose that information to the public.
That may seem straightforward enough, but the first hurdle companies have encountered in their compliance programmes has been the tricky question of defining inside information. What is and what isn’t inside information often requires a difficult judgement call by directors. Moreover, the consequences of getting this judgement call wrong are serious – directors face potential personal liability to the tune of a HK$8 million fine for breaches of the amended Securities and Futures Ordinance (SFO), disqualification and follow-on civil liabilities for damages, amongst other consequences. If all of that is not enough, this is one decision which directors cannot outsource to external advisers.
Small wonder then that the services of company secretaries have been more than ever in demand in Hong Kong since the beginning of this year. Company secretaries have been closely involved in:
• establishing procedures for monitoring and escalating potential inside information to the board
• advising the board on the obligations for disclosure
• ensuring that undisclosed inside information is kept confidential
• reviewing publicly available information and information disclosed to analysts, the media or in conference calls to determine whether confidentiality has been breached, and
• maintaining channels of communication with outside advisers and regulatory bodies.
The SFC has urged companies to ensure that they have effective internal controls to ensure that inside information is identified and escalated to the board to determine whether it triggers a disclosure obligation under the SFO. Boards must debate and arrive at a consensus before making a disclosure.
In the case of split opinions, the role of the company secretary could be pivotal. Should the company secretary uphold the majority rule not to disclose despite the objections of a minority? Can
the dissenting minority be insulated from liability?
‘When a company considers whether a piece of information is price sensitive, it needs to forecast the influence to the share price when the information is published,’ says Ken Chan, a member of the HKICS Professional Development Committee. ‘But that forecast is quite subjective and based on personal perception, knowledge and experience. One may think a piece of information, based on the forecast of share price movement, counts as price-sensitive information, but others may not.’
What to disclose
The HK$8 million dollar question in executive offices and boardrooms in Hong Kong is how to define inside information. This term is used in the legislation because the provisions are concerned with information that is known to an officer, or ‘insider’, of a company but not generally known to the market. The definition of ‘inside information’ in Part XIVA of the SFO is the same as that of ‘relevant information’ used in section 245 in Part XIII of the SFO in connection with insider dealing.
To fall under this definition, the information:
- must concern the listed company, a shareholder or an officer of the listed company, or the listed securities or their derivatives, and
- must not be known to the public likely to deal with the listed company’s securities, but would, if known to them, be likely to materially affect the price of the listed securities.
Further complicating the picture is the fact that, even where information matches the above criteria for inside information, a disclosure obligation is not inevitable since it may come under one of the safe harbours outlined in the SFO. Basically there are three categories of disclosure exemption in the SFO:
1. A 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.
2. The SFC may, on an application by a listed company, waive a disclosure requirement 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.
3. A 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.
It is important to point out that, to qualify for the above exemptions, the company must keep the information confidential. Since no enforcement cases have yet been brought before the Market Misconduct Tribunal, it is too early to know whether the safe habours will prove effective in protecting listed companies in practice. The broad consensus appears to be satisfaction with the safe harbours provided. Hong Kong listed companies are not looking for more exemptions.
When to disclose
The SFO requires companies to disclose inside information ‘as soon as reasonably practicable’, but there has been some confusion about what this means in practice. For example, can a company delay disclosure while working on rectification measures, or while waiting for the board to confirm the relevant inside information announcement? Can a company delay disclosure to check the accuracy of the figures to be cited in the inside information announcement?
These questions received a clear ‘no’ from the SFC at the Institute’s latest Annual Corporate and Regulatory Update (ACRU) seminar held in May this year. Jennifer Lee, Director of Corporate Finance, SFC, clarified that the obligation to disclose is triggered as soon ccompanies become aware of any inside information not exempted by one of the safe harbours. She said that, so long as the figures within the inside information announcement are reasonably accurate, publication should not be delayed to get an exact figure. Moreover, if a company wants its board to approve an inside information announcement, it should get the necessary written resolution.
Check your D&O policy
Mark Johnson, Asia Head, Herbert Smith Freehills, points out that the new inside information disclosure regime has not substantially raised price-sensitive information disclosure standards in Hong Kong. ‘Fundamentally, the obligation on directors is pretty much the same as before; what has changed are the sanctions if they get it wrong,’ he says.
The question of the personal liability of directors has been another area company secretaries need to consider. This is not only because they generally handle directors’ D&O cover, but also because they are themselves explicitly included in the liability net – though they are not liable to the HK$8 million fine which may be imposed on directors, along with other sanctions like disqualifications to serve as director for up to five years and follow-on civil consequences.
According to Part 1 Schedule 1 of the SFO, an ‘officer’, in relation to a corporation, means ‘a director, manager or secretary of, or any other person involved in the management of, the corporation’. The SFC’s Guidelines on Disclosure of Inside Information confirm that ‘secretary’ here means ‘company secretary’ as described in the Companies Ordinance.
Such officers have liability under section 307G(2)(a) of the SFO if:
- the listed corporation is in breach of a disclosure requirement, and
- the officer’s intentional, reckless or negligent conduct resulted in the breach.
Johnson recommends that company secretaries should review all relevant D&O policies. At the moment, these do not seem to be taking the new disclosure regime into consideration. While D&O policies cannot cover the fines levied by the Market Misconduct Tribunal (this would be contrary to the principle that illegal activity cannot be covered by insurance), there is an issue as to whether the investigation and litigation fees are covered.
‘Sometimes we see situations where there are D&O policies but the company does not have parallel coverage,’ says Johnson, warning that this may expose the company to further costs in the case of Market Misconduct Tribunal action if the legal and investigative fees have to be borne by the company. ‘This is not limited to issues around price-sensitive information; in an environment of increasing regulation, company secretaries would do well to ask whether their policies have adequate coverage.’
Outsourcing is not an option
Given the difficulty of defining inside information and the personal liability directors face for breaches of the SFO, many companies have been eager to seek outside help with their compliance efforts.
The most obvious port of call is, of course, the SFC. The SFC continues to provide a consultation service to assist companies to understand how to apply the disclosure provisions and this service has been popular with issuers. The SFC confirmed in an April 2013 press release that issuers’ questions have covered a broad range of issues such as the application of safe harbours, the confidentiality requirements and the liability provisions.
Companies have also turned to outside advisers for guidance on compliance with the SFO. One respondent to this article noted that the huge personal liability directors face has led to a reluctance to take responsibility for inside information disclosure decisions – the prospect of getting a definite answer from a lawyer is therefore appealing to give legal certainty to any subsequent decision.
The SFC has been keen to emphasise, however, that companies should not rely on the SFC or external parties to give specific advice about whether a particular piece of information is inside information. Its Guidelines on Disclosure of Inside Information point out that identifying inside information will depend on the specific circumstances of the company in question. ‘Every case turns on its own facts,’ the guidelines state.
Reporting by Sebastian Bitticks, Journalist
More information on the new disclosure regime is available on the SFC website www.sfc.hk. See in particular the ‘Guidelines on Disclosure of Inside Information’ and the ‘Frequently asked questions on disclosure of inside information’. The SFC continues to provide a consultation service on the inside information disclosure provisions of the SFO.
SIDEBAR: When word gets out
The word ‘secretary’ comes from the Latin word for ‘secret’ and, as the company’s ‘keeper of secrets’, the company secretary plays a critical role in keeping information confidential. Maintaining confidentiality, however, is no easy task and company secretaries need to be prepared for the worst case scenario – what should they do when they find that their jealously guarded secret is being freely discussed in newspapers, on web forums and in the company canteen?
While generally a company is under no obligation to respond to media speculation, market rumours or analysts’ reports, the SFC’s Guidelines on Disclosure of Inside Information warn that, where inside information is involved, action is required. If a company has inside information and relies on a safe harbour to withhold disclosure subject to the preservation of confidentiality, the existence of speculation in the market might indicate that the matters intended to be kept confidential have leaked. Where the market speculation is largely accurate and the information underlying the speculation constitutes inside information, public disclosure is required.
SIDEBAR: Hong Kong’s governance scorecard
Hong Kong’s new inside information disclosure regime became effective on 1 January 2013 with the implementation of the Securities and Futures (Amendment) Ordinance of 2012. This journal began 2013 with a review of the amended SFO (see CSj, January 2013, pages 14–19), and promised to track the ordinance to get feedback on how it is received by the market and how effectively it is implemented and enforced.
So what is the picture 10 months on? A key objective of the new regime is to cultivate a ‘disclosure culture’
by listed companies and, judging by the number of inside information announcements that listed companies have made since 1 January this year, the legislation would appear to be having the desired effect. Such announcements increased by 43% during the four-month period ending 30 April 2013 compared with the same period last year.
However, the response of the market to the new inside information disclosure regime has generally been to take a ‘better safe than sorry’ approach and to publish anything that might remotely be considered inside information. We should be cautious, therefore, in interpreting the surge in inside information announcements as conclusive proof that the new regime has improved the quality of price-sensitive information disclosure in Hong Kong.
In fact, earlier this year the SFC reminded issuers of the need for quality disclosure in inside information announcements. The frequently asked questions (FAQ) section of its website reminded issuers that inside information announcements should be clear, informative and comprehensible in order to enable investors to make well-informed decisions. In particular they should:
• be factual, clear and expressed in a balanced and objective manner
• convey key messages that are clearly visible to, and readily understandable by, investors
• contain sufficient background information so that an announcement can be read without undue reference to other documents
• avoid boilerplate statements that tend to lengthen the document without providing meaningful information, and
• contain sufficient quantitative information which has come to the knowledge of the listed corporation, the omission of which may cause the information disclosed to be false or misleading under section 307B(3) of the SFO.
The frequently asked questions (FAQ) section is available at www.sfc.hk, see FAQs/ Listings & Takeovers/ Disclosure of Inside Information.