(Mar. 30, 2011) On February 11, 2011, Hong Kong's Securities and Futures Commission (SFC) issued consultative conclusions on proposed amendments to its Draft Guidelines on the disclosure of price-sensitive information, i.e., insider trading. (Consultation Paper on the Draft Guidelines on Disclosure of Inside Information [with Guidelines on Disclosure of Inside Information Draft in appendix] (Mar. 2010) [hereinafter Draft Guidelines], SFC website; Consultation Conclusions on the Draft Guidelines on Disclosure of Inside Information (Feb. 2011) [hereinafter Conclusions], SFC website.)
The revised Guidelines are to be issued in conjunction with amendments to Hong Kong's Securities and Futures Ordinance (SFO) (Cap 571, Law No. 12 of 2003 (Apr. 1, 2003).) The amendments would add to the SFO new sections 101A-101G on disclosure obligations and safe harbors.
The purpose of the Guidelines is “to assist listed corporations to comply with the disclosure obligations to be enshrined in Part IIIA” of the SFO and “provide guidance on the interpretation of inside information, a new term used in the legislation to mean price sensitive information, and explain the application of safe harbours.” (Conclusions, supra, ¶2.) Failure to comply with the Guidelines would be taken into account in determining whether the requirements have been met, even though the Guidelines are not legally binding. (Hong Kong Securities and Futures Commission Issues Consultation Conclusions on Insider Dealing, BLOOMBERG LAW REPORTS (Mar. 2, 2011), Bloomberg Law online subscription database.)
On the Definition of Inside Information
According to the SFC's Draft Guidelines, the definition of inside information in the SFO, based on sections 101A(1) and 101B(1) of the proposed amendments,
is the same as that of “relevant information” used in section 245 of the SFO which applies to insider dealing. The term “relevant information” has been the subject of consistent and definitive interpretation by the tribunals in Hong Kong over many years and those decisions will continue to offer guidance as to the meaning of the new term inside information. (Draft Guidelines, supra, ¶ 13.)
Proposed section 101A is on the interpretation of a Part IIIA, on disclosure requirements for listed corporations; 101B is the requirement for listed corporations to disclose inside information. The Draft Guidelines goes on to state that the concept of inside information comprises three key elements: the information is specific; it is not generally known to the market segment that deals in or is likely to deal in the given corporation's stock, and it is likely to have a material effect on the corporation's stock price. (Id. ¶ 15.)
Highlights of Conclusions
Among some of the highlights of the Conclusions are the following, reflecting responses by the SFC to the various public comments received.
— Extension to two years of an SFC consultation service to assist listed companies with the statutory disclosure requirements, from the initially proposed period of 12 months. The SFC stressed, however, that while the purpose of the service is “to explain the key elements of the test [used] to determine when information constitutes inside information and the availability of safe harbours under certain circumstances,” the listed company itself must ultimately make the decision as to whether a piece of information constitutes inside information. (Conclusions, supra, ¶¶ 14-16; Hong Kong Securities and Futures Commission Issues Consultation Conclusions on Insider Dealing, supra.)
— Confirmation that analysts' research reports, electronic subscription news, and wire services will not automatically be treated as information that is “generally known.” While such news and wire services “are commonly available to institutional investors, these services for which a subscription is required may not necessarily be readily available to unsophisticated retail investors.” (Conclusions, supra, ¶¶ 22.) Therefore, in deciding whether information is generally known, listed companies should consider how widely the information has been disseminated, the information's accuracy and completeness, and how much reliance the market can place on the information. (Id. ¶¶ 22-25.) The SFC indicated that it would expand the Guidelines to provide further guidance on the matter of publication of information in various circumstances.
— Addition of an “investor decision” test to the “price impact” test for purposes of determining material effect. In explaining inside information, the Draft Guidelines characterize it as information “likely to cause a change in the price of the securities of sufficient degree to amount to a material change.” (Id. ¶ 26.) Based on a suggestion in a public comment and citing a decision of a Malaysian tribunal, the SFC will add to this “price impact test” an “investor decision” test, whereby “a piece of information is regarded as material if that information is likely to impact on a reasonable investor's decision in dealing in the shares.” (Id. ¶ 27). A similar approach has been adopted by the European Union, the SFC noted.
— Enhanced clarification of the term “trade secret.” According to the SFC:
In general, a trade secret refers to proprietary information owned by a listed corporation (i) used in a trade or business of the corporation; (ii) which is confidential (i.e. not in the public domain); (iii) which, if disclosed to a competitor, would be liable to cause real or significant harm to the corporation's business interests; and (iv) for which the corporation must limit dissemination. To avoid any misinterpretation, we [the SFC] will clarify in the Guidelines that a listed corporation cannot regard the commercial terms and conditions of a contractual agreement or the financial information of a company as trade secrets since these are not proprietary information or rights owned by the corporation. (Id. ¶ 63.)
— Expansion of the Guidelines to provide more details on the process by which the SFC grants a waiver from disclosure of inside information and on the appeal mechanism against such decisions, in connection with proposed amendment § 101E. (Id. ¶¶ 64-65.)
— Elaboration of safe harbors (i.e., specified situations in which a corporation is permitted to disclose inside information to certain categories of recipients prior to public disclosure). This is done, according to the draft Guidelines, “[t]o strike an appropriate balance between requiring timely disclosure of inside information and preventing premature disclosure.” (Draft Guidelines, supra, ¶ 9; Hong Kong Securities and Futures Commission Issues Consultation Conclusions on Insider Dealing, supra.) Safe harbors are set forth under the proposed article 101D, on exceptions to the disclosure requirement of article 101B.
There are three types of circumstances in which non-disclosure is permissible, according to the Draft Guidelines: (a) the corporation takes reasonable precautions for preserving the confidentiality of the information; (b) the confidentiality of the information is preserved; and (c) one or mo
re of five listed conditions applies: the disclosure is prohibited by law; the information concerns an incomplete proposal or negotiation, whose outcome may be prejudiced by premature disclosure; the information is a trade secret; the information concerns the provision of liquidity support; and/or the disclosure is waived by the SFC. (Draft Guidelines, supra, ¶ 47.)
The Conclusions state, in allowing for safe harbors, that “a listed corporation may, depending on the circumstances, disclose inside information to certain categories of recipients who require the information to perform their functions in relation to the corporation.” Therefore, the SFC “will amend the Guidelines to explain the circumstances in which, and the categories of recipients to whom, the information may be disclosed.” (Conclusions, supra, ¶ 56.)
Other Proposed Amendments to the SFO on Disclosure Requirements
Other proposed amendments to the SFO relating to disclosure requirements have to do with the manner of disclosure of information (§ 101C), the authority of the SFC to make rules to prescribe circumstances in which § 101B does not apply, and the duty of officers of listed corporations to ensure that proper safeguards exist to prevent the breach of a disclosure requirement (§ 101G). (Consultation Paper on the Proposed Statutory Codification of Certain Requirements to Disclose Price Sensitive Information by Listed Corporations (Mar. 2010), Financial Services and the Treasury Bureau website.)
The government expects to table a bill amending the SFO to codify the proposed disclosure requirements in the legislature's 2010/2011 session. The Guidelines will be revised on the basis of the Consultation Conclusions and finalized once the legislation is in place. (Conclusions, supra, ¶ 6.)