Market misconduct & insider dealing
Market misconduct and Hong Kong insider dealing, or disclosure of price sensitive information PSI or inside information, are serious issues for Hong Kong businesses. Between 2007 and May 2012, there were 12 criminal convictions and eight civil convictions for insider dealing, and over 170 criminal convictions for other market manipulation offences. The courts have imposed a number of custodial sentences, the longest being a six-year prison term and a fine of HK$1.7 million for insider dealing. Companies and individuals need strong guidance to avoid or deal with investigations into market misconduct and insider dealing cases.
Charltons regularly advises clients in relation to Hong Kong insider dealing and market misconduct issues under the Securities and Futures Ordinance (SFO). As well as providing pre-emptive advice in specific cases and assisting companies and individuals during investigations, prosecutions and disciplinary proceedings, we also help companies to design and implement robust corporate governance structures and internal controls to reduce regulatory and compliance risk. Charltons also provides advice and training on corporate governance matters such as board composition and diversity, reporting and approval structures.
A proposed bidder in a takeover may deal in securities of the target prior to making an announcement of the offer by relying on certain exclusions from the definition of Hong Kong insider dealing under s271 of the Securities and Futures Ordinance (Cap. 571 of the Laws of Hong Kong) (“SFO”) which caters for situations where a person trades with knowledge of his own trading intentions or activities which is not known to the public. Insider dealing was previously known as disclosure of price sensitive information or PSI. This is discussed below. Hong Kong insider dealing prohibitions in the SFO relevant to takeover situations Under s.270(1)(b) and 291(2) of SFO, Hong Kong insider dealing in relation to a listed corporation occurs when a person (“proposed bidder”) who is contemplating or has contemplated making a take-over offer for the corporation and knows that the information that the offer is contemplated or is no longer contemplated is inside information:
- deals in the corporation’s listed securities or their derivatives or in those of a related corporation otherwise than for the purpose of the take-over; or
- counsels or procures another person to deal in such listed securities or derivatives otherwise than for the purpose of the take-over.
This provision is designed to stop, for instance, a director of a company which is about to launch a take-over bid from telling his friends to buy shares in the intended target in order to make a profit when the price of those shares inevitably rises. The provision is also designed to catch, say, a director of the bidder who sells short in the target when he knows (but the public does not) that the bidder is not going to increase its offer price at the end of the initial offer period but instead is to let the offer lapse. This provision does not however stop the director of the bidder from buying shares in the target (or indeed counselling or procuring others to do so) in a “dawn raid” where the sole purpose of such purchases is to facilitate the take-over itself. Under s.270(1)(d) and 291(4) of the SFO, a proposed bidder who leaks takeover information directly or indirectly to another person, knowing or having reasonable cause to believe that that other person will use the information to deal or counsel or procure another person to deal in the target’s listed securities, will also constitute insider dealing. What would not be considered “insider dealing”? To constitute Hong Kong insider dealing, the information that is to the knowledge and used by the proposed bidder for dealing must be specific and price-sensitive (i.e. likely to materially affect the price of the securities if known to those persons who are accustomed or would likely deal in the securities). The fact of a proposed takeover offer would very much likely be considered price-sensitive information (unless the information has already leaked and became known to the public as a result of an announcement or otherwise) and therefore, an assertion that the relevant information is not price-sensitive at the time of dealing may not be a good defense. The SFO sets out certain statutory exclusions from the definition of insider dealing under s. 271 and 292. The most applicable exclusion relating to dealing for a proposed bidder if he acquires shares in a target company with the knowledge that he may make a take-over offer is set out under s. 271(8) and 292(8) of the SFO. This exclusion applies in the situation where the dealing or the negotiation of such was conducted on the basis of relevant information which was market information (i.e. facts such as that there has or is to be a dealing or negotiation, quantity and price of listed securities and persons involved in the dealing) arising directly from his involvement in the dealing. This gives a defense to a person who trades with knowledge of his own trading intentions or activities and caters for a situation in which a person whose trading activities itself might be price-sensitive information. There are other exclusions under sections 271 and 292 which may also be applicable but in very limited and specific circumstances, as follows:
- if the proposed bidder is a corporation and there are effective “Chinese walls” to ring-fence information, and the relevant dealing was conducted by persons within the corporation who did not have the inside information nor received advice/communication thereof (s271(2) and 292(2) of the SFO);
- the purpose for dealing did not include the purpose of securing or increasing a profit or avoiding or reducing a loss for himself or another with the use of inside information (application of s 271(3) and 292(3) of the SFO) – it would however be very risky to rely on this exclusion as a defense as it would be difficult to proof intention, especially if the actual dealing did have the effect of increasing profit or reducing loss, particularly since the announcement of a takeover would likely be price-sensitive
- the dealing was made off-market between persons who knew or ought reasonably to have known of the inside information (application of s271(5) and 292(5) of the SFO)
*The above is only for general reference only. If you are in any doubt as to whether a dealing in a company’s shares could constitute Hong Kong insider dealing in any circumstances, separate advice should be obtained from qualified lawyers prior to dealing.