Disclosure of Inside

Information
P. H. Chik
Seyfarth Shaw
July 2021
• Introduction
• What is “inside information”?
• Duty to disclose
• Safe harbours
• Sanctions and compensation

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Introduction

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 Introduction (1) – Principal laws, regulations and guidelines (1)

• Principal laws, regulations and guidelines

o Ss.307A to 307ZA of Part XIVA of the Securities and Futures Ordinance (SFO)
▪ effective from 1 Jan 2013
o Market consultations and guidelines on disclosure of inside information
▪ Securities and Futures Commission (SFC)
❑ Consultation Paper (March 2010) and Consultation Conclusions (Feb 2011)
❑ Guidelines on Disclosure of Inside Information June 2012 (Disclosure Guidelines)
▪ Financial Services and Treasury Bureau
❑ Consultation Paper (March 2010) and Consultation Conclusions (Feb 2011)
▪ The Exchange
❑ Consultation Paper (Aug 2012) and Conclusions (November 2012)

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 Introduction (2) – Principal laws, regulations and guidelines (2)

o Other major guidelines：

SFC:
▪ Corporate Regulation Newsletter (discontinued)
❑ Issue no. 1 (July 2014); Issue no. 2 (April 2015) and Issue no. 3 (March 2016)
▪ SFC Regulatory Bulletin published by the SFC
▪ FAQ on Disclosure of Inside Information, 9 Jan 2014 (SFC’s website: Published resources – FAQs –
Listings & takeovers – Disclosure of inside information)

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 Introduction (3) – Principal laws, regulations and guidelines (3)

o Market Misconduct Tribunal (MMT) Reports

▪ AcrossAsia Limited ▪ Asia Telemedia (Sanctions)(Mar

▪ Mayer Holdings 2021)
▪ CMBC Capital (Feb 2021)
▪ Yorkey Optical
▪ Fujikon Industrial
▪ Magic Holdings (March 2020)
▪ Health and Happiness (Feb 2021)

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 Introduction (4) – Summary of disclosure of inside information

• Specific information • Officer has knowledge or

• Not generally known ought reasonably to have
• Materially affect the price knowledge

Known to the
Inside
corporation
Information

• Listed company • As soon as reasonably

Duties Disclose as soon as practicable
• Officer
reasonably •
– Reckless or negligent Holding
– Failed to take reasonable practicable announcement, if
measures further time required
• Safe harbours

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 Introduction (5) – Reasonable disclosure and confidentiality measures
• Importance of reasonable disclosure
measures
o To comply with the disclosure obligations
o To avoid liabilities of the listed issuer and
its officers
• Reasonable disclosure measures include
disclosure systems and monitoring
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• Importance of reasonable confidentiality
measures and safeguards
o Safe harbours - temporary non-
disclosure for inside information,
including transaction subject to
negotiation and trade secrets
o Obligations to disclose, once leaked
• Reasonable measures include
confidentiality measures, systems and
monitoring
What is “inside information”?

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 What is “inside information”? (1) - Definition (1)

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 What is “inside information”? (2) - Definition (2)

• “Inside information” means specific information that: (s. 307A(1))

a) is about
the corporation
Examples: key suppliers or clients; business prospects; information affecting entire sector e.g.,
increases in waste disposal costs etc; but not market movement consumer survey results
a shareholder or officer of the corporation; or
the listed securities of the corporation or their derivatives; and
b) is not generally known to the persons who are accustomed or would likely to deal in the listed
securities of the corporation
c) but would if generally known to them, likely to materially affect the price of the listed securities

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 What is “inside information”? (3) – Definition (3)

• The 3 elements of “inside information”:

Element 1: the information must be specific；
Element 2: it must not be generally known to the persons who are accustomed or would likely to
deal in the securities; and
Element 3: if generally known to them, would likely to materially affect the share price

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 What is “inside information”? (4) – “Specific” information (1)

Element 1: “Specific” information

“Specific” information means:
o Purposes of this provision
▪ To identify information which provides information advantage to person in possession of the
inside information
▪ Exclude rumours, vague hopes, suspicions, conjecture or speculation etc
o Information capable of being identified, defined and unequivocally expressed :
▪ It allows that individual event, transaction or matter to be identified and its nature to be
described or understood and a conclusion to be drawn as to its possible effect
▪ Must be based on existing facts or circumstances, otherwise not possible to assess the likely
effect on share market price if not based on existing facts
▪ The information does not need to indicate the extent to which the price would or might be
affected

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 What is “inside information”? (5) – “Specific” information (2)

o The information need not be precise – information not “precise” or lack of precision or details
does not prevent the information from being specific
Case study 1 – Is the following information specific?
▪ “Our company had not had a particularly good year and was experiencing the same poor
performance as many companies in that sector.”
▪ “Our profits are in excess of expectation.”
▪ “Our profits are substantially lower than the previous year.”
Case study 2
▪ “Our company is engaged in a takeover negotiation.”
▪ “Our company is engaged in a takeover negotiation, but I cannot tell you anything about the
proposed bid price, timing of offer, contractual terms etc.”

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 What is “inside information”? (6) – “Specific” information (3)

o The information can become inside information at a highly preliminary stage

o Information is not “specific”, if it is a vague exchange of ideas or mere exploratory testing of
waters (‘fishing expedition’)
Case study 3: Is the information in each of the following stages “specific” ?
▪ The issuer has engaged a financial adviser to search for potential takeover targets or to
approach a designated target.
▪ The issuer has identified a potential target, Company X, and has approached Company X and
exchanged certain basic information on a confidential basis with a view to exploring the
possibility of a merger. There is no certainty that any negotiations may start.
▪ The issuer is engaged in negotiations with Company X, which appears to be quite willing to
consider any preliminary proposals by the issuer. Due diligence has started, but no offer has
been made.

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 What is “inside information”? (7) – “Specific” information (4)

o The information need not be certain – actual occurrence could be subject to contingencies -- not
required to foresee that the transaction will “probably” or “likely” come to fruition
o It is enough if the information indicates circumstances or an event which may reasonably be
expected to come into existence or occur
Case study 4
▪ “Our company is engaged in a takeover negotiation but there is the possibility of it not going
ahead or not proceeding at the expected price.”
o The information could be an intermediate steps in a protracted process
Case study 5
▪ The company has received one report of potential illegality within its organization as a result
of a whistle-blowing procedure.
Note: Such information may not be sufficiently specific to be inside information or without any
material corroboration of its truth or accuracy. If at a later stage, corroboration evidence
becomes available, the information may become specific to warrant an announcement.

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 What is “inside information”? (8) – “Specific” information (5)

o Inaccurate information is still capable of being specific information

Case study 6
▪ If the price of the takeover turned out to be $1.5 rather than $2 per share, the inaccuracy should
not mean that the information is not inside information

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 What is “inside information”? (9) – “Specific” information (6)

Case study 7: Which of the following is “specific” information?

▪ A company disposes of an investment at a significant gain over the previous book valuation
which materially increases the profits for the year
▪ Market valuation of a listed investment held, not previously disclosed, increases enough to
materially affect projected profits for the period
▪ Company A proposes to raise funds without deciding on the fundraising method, which may
be by means of a placing, rights issue, open offers or other alternative methods, but is quite
certain as to the size, purpose and use of the fund that need to be raised. In such circumstances,
is the proposal to raise funds specific information?
▪ (Insider dealing) Mr. P was a chartered accountant who as a result of his employment was aware
that one of his firm’s clients was considering a takeover of another company at a large premium

At a social event, Mr. P mentioned that he was working on a bid (without giving the name) and
certain details, such as the target’s business, its PE ratio, current share price etc.. Is the
information “specific information” ?

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 What is “inside information”? (11) – “Not generally known” (1)

Element 2: “not generally known”

– “not generally known to the persons who are accustomed or would likely to deal in the listed
securities of the corporation” means：
o Information is not generally known to the “market” i.e., the information has not fully impounded
into the price
o “Market” means those persons who are accustomed or would be likely to deal in the listed
securities of the issuer
▪ The same type of information may have different impacts on companies with different types of
investors (for example, speculative investors as opposed to long-term investors)
▪ “Known” or “knowledge” is defined with reference to knowledge of those accustomed or would
likely to deal in the listed securities, not general or reasonable investors
▪ For disclosure purpose: Information is generally made ‘known’ by announcement on the
Exchange (s. 307C(2)); For inside dealing purpose: Information could be made known by
different means
▪ Rumours, speculation, market expectation or leaked information - even though widely reported,
is not information “generally known” to the market

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 What is “inside information”? (13) – “Not generally known” (3)

Case study 8: not generally known

▪ Information made available to a number of analysts during a conference call with the company’s
financial director. Does posting a full transcript of the call on the company’s website make the
information generally ‘known’ ?
▪ Information circulating widely among professionals or widely spread rumours or speculation
in the media – Is such information generally known?
▪ Information derived from information which has been made public – e.g., a unique and
valuable insight based on analysis and research of generally available information
▪ Information published in A share market, but not yet published through HK Exchange

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 What is “inside information”? (14) – “Materially affect the price” (1)

Element 3: materially affect the price

• “would, if generally known to them, likely to materially affect the price of the listed securities”
means:
o The information is likely to have a material effect on the price (compare: EU, Market Abuse
Regulations (MAR), Art. 7(1) & (4) , “significant effect”)
▪ 2 elements:
❑ Investment decision: whether the information is such as would influence persons who are
accustomed or would likely to deal in the shares, in deciding whether to buy or sell the
shares
❑ Price sensitivity: a change in the price of sufficient degree to amount to a material
change

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 What is “inside information”? (15) – “Materially affect the price” (2)

o Investment decision: “materiality” or “materially affect the price” depends:

▪ Whether the information is such as would influence persons who are accustomed or would
likely to deal in the shares, in deciding whether to buy or sell the shares (EU: Information that
a reasonable investor would be likely to use as part of the basis for investment decisions)
▪ An objective standard based on those who are accustomed or would likely to deal in the
securities (different from a “reasonable investor” standard – EU “reasonable investor” standard,
Art. 7(1) & (4) of MAR)
▪ Note:
❑ HK test of materiality: whether information influencing investors in making investment
decision
❑ US test of materiality: the information need not be such that a reasonable investor would
necessarily change his investment decision based on the information, as long as a reasonable
investor would have viewed it as significantly altering the total mix of information
available

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 What is “inside information”? (16) – “Materially affect the price” (3)

o Price sensitivity: a change in the price of sufficient degree to amount to a material change
▪ Not a mere fluctuation or slight change in price
Note:
❑ Information can be important but only generates comment on the corporation without
material impact on price – not inside information
❑ Question: Why “price” only ? “Price” only may not include impact on “value” – the intrinsic
value of something may not be fully reflected in its price; the value of something could
increase without its price changing materially
▪ ‘Likely’ means ‘more likely than not’ or ‘may well’ (not the same as ‘a mere possibility’) that
the price will be affected materially

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 What is “inside information”? (17) – “Materially affect the price” (4)

▪ Effect on price depends on the listed securities and individual circumstances; no fixed
thresholds or quantitative criteria for a price movement to be determined as material; the
following factors should be considered:
❑ the anticipated magnitude of the event in the context of the totality of the corporation’s
activity
❑ the relevance of the information as a main determinant of the share price
❑ the reliability of the source
❑ market variables that affect share price, such as prices, returns, volatilities, liquidity, price
relationships among securities, volume, supply, demand etc.
▪ Actual magnitude of share price movement after disclosure is not conclusive
❑ Other factors may have an effect on the share price at the relevant time
❑ There may have been material price movements before the disclosure

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 What is “inside information”? (18) – “Materially affect the price” (5)

o Good faith (subjective test) belief of the directors is not a defence

▪ This is an objective test for investor protection and market transparency; not based on the
subjective belief of the directors
▪ “Business judgment rule” - not be a defence for failure to disclose
o Timing of the materiality test
▪ Hypothetical test to be applied, once the information becomes available and determine how
investors would behave if the information is made known to them
▪ Question to ask: Had this information been generally known to the investing public once the
information became available, would it, at that time, have been likely to have had a material
impact on the price?
o Importance of monitoring
▪ Internal: Flow of management information is important to monitor changes in financial
performance which may trigger a disclosure
▪ External: Should have a procedure for monitoring movements in share price, market rumours
and market expectation; assessing new legal, governmental and regulatory developments and
their impacts

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 What is “inside information”? (19) – “Materially affect the price” (6)

Case study 9
▪ A major customer informed the issuer that certain parts would no longer be required to be
supplied to the customer. This represented a loss of 8% of its forecast revenue for that year. The
issuer also consulted its legal adviser who advised that it was not necessary to make an
announcement.
One of the reasons was the issuer’s expectation that, notwithstanding the loss of order, the
issuer expects that its full year forecast revenue would remain the same. The negative news
about the loss of the order was inside information.
Case study 10
▪ Issuer had an important distribution with a US distributor. In July 2008, the agreement was
varied and the effect of the variation was to significantly reduce the margins and future
payments to the issuer. No announcement was made until in late Sept 2008.
The reason for the non-disclosure was that at the time of negotiation, the issuer considered,
wrongly, that there would be opportunities over the course of the year to mitigate the negative
impact of the variation.

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 What is “inside information”? (21) – Examples

– Examples of possible inside information -- non-exhaustive and purely indicative

o Changes in performance or expectation of the performance, of the business
o Changes in financial condition
o Changes in control, takeovers and mergers
o Changes in directors
o Changes in auditors
o Restructurings, reorganizations and spin-offs
o Legal disputes and proceedings
o Revocation or cancellation of credit lines by one or more banks
o Changes in the accounting policy

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 Duty to disclose

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 Duty to disclose (1)

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 Duty to disclose (2) – “as soon as reasonably practicable”

• Duty to disclose as soon as reasonably practicable after knowledge of inside information

o Listed issuer’s duty – to disclose “as soon as reasonably practicable after any inside
information has come to its knowledge” (s. 307B(1))
▪ To disclose “as soon as reasonably practicable” after knowledge of any inside information
means: (s. 307B(1))
❑ Should immediately take all steps that are necessary in the circumstances to disclose the
information
❑ Will allow time to verify the facts, to make internal assessment, to seek professional advice
etc. as appropriate and reasonable
❑ If time required to clarify or to assess the impact arising from an event, should issue a
“holding announcement”
❑ No excuse for delay by reason of not being able to hold a board meeting urgently

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 Duty to disclose (3) – Knowledge of inside information (1)

o “Inside information has come to its knowledge” – 2 requirements:

▪ An issuer’s officers have knowledge or ought reasonably to have knowledge in the course of
performing functions as an officer; and
▪ A reasonable person, acting as an officer of the corporation, would consider the information
is inside information in relation to the corporation
o An issuer has knowledge when its officers have knowledge – the issuer has to act through its
officers
▪ Officers have knowledge when “information has, or ought reasonably to have, come to the
knowledge of an officer in the course of performing functions as an officer of the
corporation”; and (s.307B(2)(a))
▪ Examples of “ought reasonably to have knowledge”:
❑ Information that has been provided to an officer who failed to open or read the document
containing the information (e.g., failed to open the email or opened but does not read the
email or message)
❑ Information that has been deliberately kept away from the officers (e.g., not providing
monthly management accounts)

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 Duty to disclose (4) – Knowledge of inside information (2)

▪ “in the course of performing functions as an officer of the corporation”excludes:

❑ Information known outside the course of performing functions as an “officer” of the
corporation
❑ (for a director of the issuer who is also an officer of the parent company) information
obtained while acting as an officer of the parent company
❑ Information not known to an officer, having acted reasonably and taken all reasonable
measures
o “a reasonable person, acting as an officer of the corporation, would consider the information
is inside information in relation to the corporation.” (s.307B(2)(b))
▪ Objective assessment i.e., whether the officer acting reasonably would consider the information
as inside information
▪ If a reasonable officer would not consider the information as inside information, issuer has no
obligation to disclose
▪ To be judged at the relevant time, not in hindsight

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 Duty to disclose (6) – To disclose in a timely manner

Case study 11 – Failure to disclose in a timely manner

o On 2 June, a standard announcement in response to a change in share price and trading volume.
o The 31 May management accounts available in mid-June revealed significant deterioration in financial
performance (a loss after tax of $45.9 million as compared with profit of $19.2 million last year, a decrease in
profit of 28.9%).
o The management accounts up to 30 June showed a decrease in net profit of 34.6% year-on-year.
o Financial information relating to the 5 months financial changes were sent to Chairman/CEO on or around 23
June and financial information for 6 months sent to the board for board meeting on 22 July.
o The chairman had considered the information but thought the May deterioration was a single event and it
would improve in June.
o Profit warning was issued on 23 July (a delay of 30 days from 23 June).
Answer: MMT (through admission):
o A reasonable person would have considered information in the management accounts relating to the financial
deteriorations as inside information. The issuer breached the disclosure requirements by failing to disclose as
soon as reasonably practicable. (Health and Happiness International)

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 Duty to disclose (7) – Manner of disclosure (1)

Manner of disclosure:
o Disclosure to the market as a whole to ensure equal, timely and effective access to the same
information by the public (s.307C(1))
o Disclosure through the electronic publication system operated by the Exchange is in compliance
with the disclosure requirement (s. 307C(2))
▪ Other means of communicating inside information may run the risk of uneven disclosure; less
certainty that alternative methods allow every investor to have equal and effective access at
the same time
▪ Other means of communication:
❑ Company’s website –
➢ not all investing public members closely follow the information published on a
company’s website; those keeping a close eye will have advantage over those who do not

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 Duty to disclose (8) – Manner of disclosure (2)

❑ Use of social media – Weibo, FB or Twitter to update the market

➢ registered users may receive company’s news, while other stakeholders who are not
registered will only pick up the information at a later stage
➢ information in the messages may be restricted by inbuilt restrictions e.g. the number of
characters, making the information unclear

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 Duty to disclose (9) – Manner of disclosure (3)

Case study 12
o 上海证券交易所科创板股票上市规则
5.4.3 …….. 上市公司和相关信息披露义务人确有需要的，可以在非交易时段通过新闻发布会、媒体专
访、公司网站、网络自媒体等方式对外发布应披露的信息，但公司应当于下一交易时段开始前披露相
关公告。
The above PRC listing rule allows an issuer to disseminate information, including announcement
with inside information, through social media after the end of trading hours provided that the
announcement is published through the stock exchange before the beginning of trading hours the
next morning.
Issuer X is an A+H issuer listed on a PRC domestic exchange and intends to publish an
announcement containing inside information through the social media according to the PRC listing
rules. Please advise the issuer whether there are any issues on the disclosure proposal.

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 Duty to disclose (10) – Who has the obligations to disclose?

• Persons with obligations to disclose

o Obligations to disclose: (1) Listed issuer and (2) officers
▪ “Officer” means: a director, manager or secretary and any other person involved in the
management of the corporation
Note: “director” includes independent non-executive director;
▪ Secretary: company secretary or board secretary (for PRC issuers)
▪ Manager: a person who is under the immediate authority of the board charged with
management responsibility affecting the whole of the corporation or a substantial part of the
corporation
Note: “manager” includes chief executive, CEO
▪ A “person involved in the management of the corporation” includes any person who
discharges the role of a “manager”
Note: To be determined based on actual responsibilities rather than formal title; intended to
catch directors or high-level individuals responsible for management, not middle management
or low-ranking staff

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 Duty to disclose (11) – Issuer’s duty

o Listed issuer’s duty to disclose

▪ Breach, if the issuer:
❑ Failed to disclose as soon as reasonably practicable (s. 307B(1))
❑ Disclosed information which is false or misleading
▪ No breach, if the issuer, having established and maintained proper safeguards and
❑ Having considered objectively and reasonably all relevant matters, is of the view that the
information is not inside information or
❑ In circumstances that a reasonable man will not regard such information as inside
information

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 Duty to disclose (12) – Officer’s duty (1)

o Officer’s duty (s. 307G)

▪ Must take all reasonable measures to ensure proper safeguards exist
▪ Proper safeguards includes
❑ An appropriate and effective disclosure systems and procedures
❑ An appropriate internal control and reporting systems (s. 307G(1))
▪ Breach if: (s. 307G(2))
❑ he/she has actual knowledge of inside information, but his/her intentional, reckless or
negligent conduct has resulted in the breach; OR
➢ “intentional” conduct means the officer intended the corporation not to disclose
information that was required to be disclosed
➢ “reckless” conduct means the officer was aware that there was a risk that the
corporation will be in breach by not disclosing the information and it was unreasonable
for him to take the risk. “Reckless” includes delayed disclosure or disclosure to a small
group of people only

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 Duty to disclose (13) – Officer’s duty (2)

➢ “negligent” conduct means the officer failed to exercise such care, skill or foresight as a
reasonable officer in his/her situation would exercise
❑ he/she has not taken all reasonable measures from time to time to ensure existence of
proper safeguards to prevent the breach
▪ No breach/liability: if the issuer has implemented proper safeguards and:
❑ The officer acts without actual knowledge of the inside information or involvement in the
issuer’s breach; or
❑ The issuer’s breach is not caused by the officer’s intentional, reckless conduct or negligent
act or omission

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 Duty to disclose (14) – Officer’s duty (3)

o “Reasonable measures” includes, among others, the following：

▪ establish controls to monitor business and corporate developments
▪ establish periodic financial reporting procedures
▪ maintain and regularly review a sensitivity list of factors or developments
▪ authorize an officer/internal committee to be notified of any potential inside information and to
escalate any such information to the board
▪ keep records of meetings and discussions concerning the assessment of inside information
▪ implement and monitor confidentiality measures on inside information
▪ appoint an authorized person for external communication with media, analysts or investors
▪ develop procedures for dealing with analysts, media or investors and to deal with rumours and
leaks
▪ develop a disclosure policy
▪ provide training to relevant employees on disclosure policies and procedures

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 Duty to disclose (15) – Officer’s duty (4)

Case study 13 – Intentional, reckless or negligent conduct

o Facts:
▪ The issuer had been in financial difficulties and the issuer’s auditors had qualified opinions on
the issuer’s accounts and express doubts on the issuer as a going concern.
▪ Since 2002, the issuer had been indebted to a Madam Liu for a substantial amount. Previous
demands for payment had been made by Madam Liu but after the controlling shareholder
(also an ED) contacted Madam Liu, no further action was taken by Madam Liu.
▪ In Feb 2007, the issuer received a notice of assignment of debt from Madam Liu and at the
same time a demand for payment but no announcement was made. In April 2007, a statutory
demand for repayment of the debt was received by the issuer, but again no announcement
was made.
▪ Since February 2007, the share price of the issuer began to surge probably because of market
speculation that the issuer would be targeted by Chinese investors.
▪ Between February to April 2007, the Company Secretary of the issuer exercised a substantial
number of her share options and sold the shares in the market at a profit. Another ED exercised
most of his share options and sold the shares by the end of May 2007 at a profit.

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 Duty to disclose (16) – Officer’s duty (5)

▪ Both the ED and Company Secretary had knowledge of the demands for payment but thought
that the matter could be resolved, as in previous occasions, “behind closed doors” by the
controlling shareholder discussing with Madam Liu or her assignee.
▪ In June 2007, a winding-up petition was served on the issuer and when the issuer resumed
trading in October 2007, the share price dropped substantially.
Note: This was an insider dealing, not information disclosure, case.
o Question: Assuming this case is decided under Part XIVA of the SFO, will the issuer be liable
for breach of the disclosure law and whether the ED and Company Secretary be liable for
non-disclosure?
Discussions:
The ED and Company Secretary’s failure to disclose, believing that the matter will be resolved
“behind closed doors”, will probably be liable for intentional, reckless or negligent conduct
resulting in the breach by the issuer while they had actual knowledge of the inside information.
“Negligent” conduct includes failure to exercise such care, skill or foresight as a reasonable officer
in his/her situation would exercise. (SFC v Yiu Hoi Ying Charles & others)

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 Safe harbours

4
6
 Safe harbours (1)

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 Safe harbours (2)

Safe harbours principle:

o Non-disclosure or temporary non-disclosure of inside information if and so long as the issuer “takes
reasonable measures to preserve confidentiality and confidentiality of the information is
preserved”
o Scenario 1: No disclosure required (s. 307D(1))
▪ Where disclosure is prohibited under or would contravene a restriction imposed by Hong
Kong law or would breach an order made by a Hong Kong court
▪ This does not apply to non-disclosure provisions in a contract
❑ Restrictions imposed by law: s. 30 of the Prevention of Bribery Ordinance prohibits a person
from disclosing details of an investigation by ICAC, subject to certain exceptions
❑ Court order:
➢ only applicable to an order made by a Hong Kong court
➢ a waiver by the SFC is required, if the restriction is made by a court of any jurisdiction
outside Hong Kong, or imposed by a law enforcement agency or a government authority
outside Hong Kong

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 Safe harbours (3)

o Scenario 2: Temporary non-disclosure (s. 307D(2))

▪ Not required to disclose, if :
❑ the information concerns an incomplete proposal or negotiation
❑ the information is a trade secret
❑ the information concerns the provision of liquidity support for public funds in Hong Kong;
or
❑ the disclosure is waived by the SFC in compliance with any conditions which may be
imposed
▪ Safe harbour only applicable to the above 4 categories (e.g., hedging activities leading to
possible massive loss not covered)
o Examples of “incomplete proposal or negotiation”：
▪ Contract being negotiated and yet to be finalised
▪ Negotiating a share placement
▪ Pending litigation under negotiations
▪ No longer “incomplete” once a legally binding agreement is signed

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 Safe harbours (4)

o If information leaked, immediate disclosure is required, even though negotiation is incomplete:

▪ Disclose details of the incomplete negotiation to the extent known
▪ State the fact that certain information is not yet known
▪ Corporation’s own responsibility to ensure that the information disclosed is appropriate and not
misleading

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 Safe harbours (5)

o Reasonable confidentiality measures and preservation of confidentiality

▪ An issuer is not required to disclose any inside information “if and so long as the issuer takes
reasonable measures to preserve confidentiality and confidentiality of the information is
preserved” (s. 307D(2))
Examples:
❑ Use of password; restrict access on a need to know basis; drawing up and maintaining a
list of insiders; obtaining confidentiality or non-disclosure undertaking or
acknowledgement by such persons; develop procedures to deal with leaks
▪ Important to have a disclosure policy and procedures and have measures to preserve
confidentiality included in such policy (Magic Holdings, paras. 361 to 364)
o An issuer relying on any safe harbour should:
▪ Keep under review whether confidentiality is maintained
▪ Prepare a draft announcement to be ready for publication once confidentiality is lost
▪ Record the reasons for the safe harbour and the steps taken to monitor confidentiality

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 Safe harbours (6)

o Potential lost of safe harbour

▪ Unexplained changes in share price or
▪ Comments appeared in media or analysts’ reports, where comments are significant and
credible with reasonably specific details
▪ Enquiries made by external parties on a potential takeover, naming the potential offeror – See
Magic Holdings MMT report
o If confidentiality is leaked, no breach if an issuer
▪ Has taken reasonable measures to monitor confidentiality and
▪ Make disclosure as soon as reasonably practicable once confidentiality is lost (s. 307D(4))

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 Safe harbours (7)

Case study 14
o Does an issuer have to disclose its financial viability in grave and imminent danger?
▪ Issuer not within the scope of insolvency law and immediate disclosure would seriously
jeopardise the interests of existing and potential shareholders
Answer:
▪ Must disclose the fact that it is in financial difficulty or its worsening financial condition (e.g.,
any material change in its financial position or performance)
▪ Safe harbour is limited to the fact or substance of the negotiations to deal with such a
situation e.g., status of negotiations for funding

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 Safe harbours (8)

Case study 15
o Could safe harbor apply to the following (where delay to disclose is likely to mislead the public)?
▪ Information materially different from the previous announcement
▪ Financial objectives not likely to be met, where such objectives had previously been
announced
▪ Information to be delayed is in contrast with market expectation, where such expectation is
based on signals sent out by the issuer to the market, such as interviews, roadshows or any
communication organized by the issuer

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 Sanctions and
compensation

55
 Sanctions and compensation (1)

• MMT can impose one or more of the following sanctions: (s. 307N)
o Up to HK$8 million fine on the issuer, director or CEO (but not officers) of the issuer
o Disqualification order of the director or officer (from being involved in the management of a listed
issuer) for up to 5 years
o “Cold shoulder” order a director or an officer (i.e. deprived of access to market facilities) for up to 5
years
o “Cease and desist” order on the issuer, director or officer (i.e. order not to breach the statutory
disclosure requirement again)
o An order that any body of which the director or officer is a member be recommended to take
disciplinary action against him/her
o Payment of costs (of civil inquiry and/or the SFC investigation)
o MMT may additionally require:
▪ Appointment of an independent professional adviser to review the issuer’s internal control
procedures on disclosure of inside information
▪ The officer to undertake a training programme approved by the SFC on compliance with Part
XIVA, directors’ duties and corporate governance

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 Sanctions and compensation (2)

Civil liability to pay compensation (S. 307Z)

o Where persons who brought civil proceedings for financial loss against issuer or officer for breach
of the disclosure obligation, issuer or officer in breach may be found liable to pay compensation to
such persons
o Issuer or officer shall not be liable to pay compensation unless it is fair, just and reasonable in the
circumstances
o MMT’s determination that a breach of disclosure obligation has taken place or identifying a person
as being in breach will be admissible in evidence in the legal proceedings brought by such person
o The courts may impose injunction in addition to or in substitution for damages

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Disclaimer

The materials of this seminar / workshop / conference are intended to provide

general information and guidance on the subject concerned. Examples and other
materials in this webinar / seminar / workshop / conference are only for illustrative
purposes and should not be relied upon for technical answers. Boardroom
Corporate Services (HK) Limited, BoardRoom Share Registrars (HK) Limited
(“BoardRoom”) and the speaker(s) take no responsibility for any errors or omissions
in, or for the loss incurred by individuals or companies due to the use of, the
materials of this webinar / seminar / workshop / conference.

No claims, action or legal proceedings in connection with this

seminar/workshop/conference brought by any individuals or companies having
reference to the materials on this webinar / seminar / workshop / conference will
be entertained by BoardRoom and the speaker(s).

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permission of BoardRoom and the speaker(s).

58
Thank you！

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