Hong Kong Court Clarifies the Meaning of “Insider Dealing” in SFC v. Yiu Hoi Ying Charles and Others


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On 29 January 2014, the SFC commenced proceedings in the Market Misconduct Tribunal (“MMT”) against the former chairman of Asia TeleMedia Limited (“ATML”) and three former executives for alleged insider dealing in the securities of ATML between February and June 2007.

The SFC’s proceedings alleged that the senior officers of ATML had dealt in securities while withholding or not disclosing information which was price sensitive to the shares of ATML, by selling shares in ATML. This information relates to a winding up petition that was served on ATML, alleging ATML’s indebtedness. At that time, ATML had more liabilities than assets and enforcement of the
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debt would make the company insolvent. During the time of dealing, ATML’s shares were riding on a speculative wave of “small cap” stocks which were not supported by any realistic fundamentals, causing the share price to surge. The speculative event of the share sale as well as the state of the financial markets would later become crucial as an effective defence for the senior officers of ATML pursuant to the statutory defence provisions in the Ordinance.

On 26 November 2015, the MMT decided that the senior officers of ATML had not engaged in insider dealing in the shares of ATML. The MMT held that the trades were not caused by the price sensitive information and upheld the statutory defence in section 271(3) of the Securities and Futures Ordinance (“Ordinance”). The MMT found that the senior officers’ motivating intention was to profit from the speculative rise in ATML’s share price and their decision was not affected by the price-sensitive information in their possession.

This led the SFC to appeal the MMT’s findings in the Court of Appeal, which was dismissed on 28 April 2017. On 24 August 2017, the Court of Appeal in the case of (2017) HKCU 1027 also dismissed the SFC’s leave application to the Court of Final Appeal against the MMT decision, and in doing so, clarified the scope of the defence in section 271(3) of the Ordinance.

What Does This Mean for Listed Companies and Their Officers?

Some of the key questions that listed companies and their officers will have to satisfy themselves are :-

1. Whether in the situation faced, the relevant information is “inside information”?
2. In what circumstances can the listed company be exempted from disclosure?
3. What pre-emptive or pro-active measure can the listed company or its officers put in place or implement to prevent a breach?

Listed companies and their officers should therefore review their existing procedures when dealing with price-sensitive information and also understand the following important points :-

(a) Obligation to Disclose Remains

Despite the outcome of the ATML case, listed companies remain obliged to disclose and disseminate price-sensitive information to the public as soon as possible following receipt of that information. Listed companies should also be aware that the omission of a material fact or disclosing false or misleading information is considered as a failure to disclose. As such, listed companies and its officers must take all reasonable measures to ensure proper safeguards are in place to prevent breaching their disclosure obligations.

(b) Each and Every Case Is Different

SFC will still assess each and every case on the merits depending on the factual situation. As such, the statutory defence may not be available in every situation, and the onus will be on company directors to show that they did not use the price-sensitive information or profited from their trading. The decision in the ATML case was based on a very narrow set of facts and circumstances and the outcome may be different in a future case.

(c) SFC Disclosure Guidelines

Listed companies should also seek guidance from the SFC’s Guidelines on Disclosure of Inside Information (“PSI Disclosure Guidelines”) to assist in the understanding and compliance of the rules.

The PSI Disclosure Guidelines provides a set of non-exhaustive examples which includes “changes in businesses, performance, conditions, assets and liabilities, directors and management, auditors, policies, shareholding or corporate structures and share capital of the corporation” and “other significant events such as winding up, insolvency and legal disputes”.

Under the PSI Disclosure Guidelines, in determining whether the piece of information is “inside information”, the “reasonable officer” test should apply. This means that an objective test will determine whether the information is “inside information”, based on the officer’s knowledge of all the relevant facts and circumstances at the time and whether the disclosure in those circumstances will be necessary or appropriate.

(d) Strengthen Existing Internal Controls and Systems

Listed companies should immediately review their internal control procedures and employees manual to ensure compliance with their disclosure obligations in respect of the price-sensitive information. Other measures include restricting employee access to inside information on a need to know basis and maintaining a proper recording of the flow of information in case it is needed in future legal proceedings. Listed companies and their officers should also seek legal advice in particular when the statutory defence will be used, or when in receipt of a statutory demand or court documents. Staff and officers should be provided with regular training so there is an awareness of a need to seek legal advice from external counsel or reporting to senior management (e.g. upward reporting of sensitive matters) in relation to any disclosure obligations.

AUTHOR: Angela Wang & Co

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Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.

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