Apr 16 Legal Update
Top stories
Disclosure of inside information: third SFC action and related HKEX developments
SFC brought action against a company and its officers for late disclosure
What you should know/watch out for:
- the third SFC action for disclosure of inside information
- nature: delay in disclosure — material deterioration in second-half (hence full-year) performance
- monthly management accounts relevant: deterioration should have been apparent by the fifth month of the interim period
- chief executive officer (and executive director), financial controller and company secretary also in breach for (i) reckless or negligent conduct causing alleged breach by company; (ii) failure to take reasonable measures to ensure proper safeguard exists
- this is an important case to understand the timing and materiality judgment involved in determining disclosure of inside information
Disclosure of inside information may have HKEX trading halt implications.
HKEX published a Guidance Letter relating to issuers’ handling of market commentaries or rumours which may lead to intense share price pressure. It reiterates that trading halts, pending the publication of a clarification statement, should be kept as short as possible. It will not pre-vet such statement but may take follow-up actions.
Along the recurring theme of maintaining an orderly market, HKEX published a Guidance Letter on bonus issue of shares. It will not normally grant approval of “large scale bonus issues of shares” (200% or more of existing shares), in light of possible share price volatilities.
Summaries and what you should do
Regulators
The Stock Exchange of Hong Kong Limited (“HKEX”)
(i) HKEX published Guidance for issuers subject to market commentaries of rumours
What you should know:
- allegations by market commentaries or research firms alleging fraud, accounting or governance irregularities have caused intense pressure on share prices
- issuers to publish a clarification statement, otherwise a trading halt is needed
- trading halt be kept as short as possible
- HKEX will not pre-vet the announcement
- HKEX may take follow-up actions after the issuance of clarification announcement
- if follow-up actions indicate irregularities, HKEX may also make a referral to SFC for enforcement under the law
- please refer to our December 15 newsletter (for HKEX’s previous guidance letter for trading halts)
What you should do/watch out for:
HKEX will no longer pre-vet the clarification statement, which should help to reduce the duration of trading halt pending statement issuance. Ultimately, to ensure a timely and accurate response to serious and hostile commentaries, issuers should have an effective internal controls system monitoring its assets, financial, and reporting controls.
Click here for our summary.
(ii) HKEX published a Guidance Letter on bonus issue of shares
What you should know/watch out for:
- there have been instances where issuers conduct large – scale bonus issues (e.g. size being multiples of its existing shares)
- under Hong Kong’s trading arrangements (for period before the bonus shares are actually allotted), these issuances may lead to share price volatility
- HKEX will not normally grant listing approval of “large scale issuances” (i.e. 200% or more of existing issued shares) save under exceptional circumstances
Click here for our summary.
The Securities and Futures Commission (“SFC”) brought action for late disclosure of inside information against a company and its officers (Press Release | Case Notice)
What you should know:
- nature: delay in disclosure—material deterioration in performance for 2 H 2012
- different from the company’s previous published statement in interim report indicating “significant growth and increasing profitability for 2 H”
- monthly management accounts relevant: deterioration should have been apparent by the fifth month of the interim period (mid-Dec 2012 or latest by mid Jan 2013)
- company did not make any disclosure till the annual results publication (Mar 2013)
- chief executive officer and executive director, financial controller and company secretary are also in breach for (i) reckless or negligent conduct causing alleged breach by company; (ii) failure to take reasonable measures to ensure proper safeguard exists
What you should do/watch out for:
- where a listed company experiences material change in its performance, management has to assess by when such a material change has occurred and is apparent. Internal management accounts are highly relevant. This case illustrates the timing and materiality issues involved in making this judgment.
Click here for our summary of this case including the timeline and material change in performance.