INTRODUCTION
The Securities and Futures Ordinance ('SFO') which came
into force on 1 April 2003 has broadened considerably
the previous regime governing the disclosure of interests
in the shares and debentures of Hong Kong listed companies
with a view to enhancing transparency in the Hong Kong
market.
The SFC has issued an outline most recently revised on
6 August 2003 (the 'SFC Outline'), which summarises the
relevant provisions and contains detailed examples of
how they work. The following is intended as a summary
of the new regime as it affects substantial shareholders
and directors and chief executives of listed companies.
A. DISCLOSURE BY SUBSTANTIAL SHAREHOLDERS
As under the previous regime, the SFO requires disclosure
when a person acquires or ceases to have a notifiable
interest and when there is a change in the percentage
level (ie. the figure rounded down to the next
whole number) of his interest.
1. REDUCTION OF SUBSTANTIAL SHAREHOLDING THRESHOLD
The SFO reduces the threshold for disclosure from 10%
to 5% of a Hong Kong listed company's issued voting share
capital. Where there are more than one class of listed
shares, the percentage of each class is taken separately.
2. WHEN IS NOTIFICATION REQUIRED?
2.1 Notifications – Shortening of Notification
Period
Section 310(1) requires notification to be made on the
occurrence of the relevant events set out in Section 313
which can be summarised as follows:
- when a person first becomes interested in 5% or more
of the shares of a listed company (ie. when he first
acquires a notifiable interest) (Section 313(1)(a));
- when a person's interest drops below 5% (ie. he ceases
to have a notifiable interest) (Section 313(1)(b));
- when there is an increase or decrease in the percentage
level (ie. the figure rounded down to the next
whole number) of a person's holding above 5% (eg. his
interest increases from 6.8% to 7.1% – so the percentage
level increases from 6% to 7%) (Section 313(1)(c));
- when a person has a notifiable interest (ie. 5%)
and the nature of his interest in the shares changes
(eg. on exercise of an option) (Section 313(1)(d));
- when a person has a notifiable interest and he comes
to have, or ceases to have, a short position of more
than 1% (eg. he is already interested in 6.5% of the
shares of a listed company and takes a short position
of 1.7%) (Sections 313(4)(a) and (b)); and
- when a person has a notifiable interest and there
is an increase or decrease in the percentage level
of his short position (eg. he is already interested
in 6.8% of the shares of a listed company and increases
his short position from 1.7% to 2.2%) (Section 313(4)(c)).
The SFO shortens the notification period for such events
from 5 days to 3 business days after the date of the relevant
event. If a person is not aware of the relevant event
when it occurs, the 3 day limit runs from the date on
which he is aware of its occurrence (ie. the date on which
he is aware of the facts which constitute the relevant
event (eg. a buy-back of shares) and not the date
he realises he has a notifiable interest). A 'business
day' is defined to mean a day other than a public
holiday or a day on which a gale or black rain storm warning
is in force. It therefore includes Saturdays but not Sundays.
2.2 Initial Notifications
An 'Initial Notification' does not refer to a notice
given on initially crossing the 5% threshold. Instead
it refers to a notice required to be given in the following
circumstances:
- where a person has 5% or more of the shares of a
company which is being listed (Section 310(2)(a));
- where a person has 5% or more of shares of a class
which is being listed or given full voting rights (Section
310(2)(b));
- if a person had a notifiable interest when the SFO
came into effect which had not already been disclosed
under the previous regime; and
- if a person has a notifiable interest on either the
5% threshold or 1% threshold for short positions being
reduced (Section 310(3)).
Under Section 325(2) the time limit for Initial Notifications
only is 10 business days after the relevant event or,
if later, the date on which the person concerned is aware
of the relevant event (ie. is aware of the facts which
constitute the event).
Interests discloseable on the commencement of the SFO
were required to be filed on or before 14 April 2003.
Please see Schedule 1 for a list of interests which became
discloseable upon the SFO coming into force. Any interest
already disclosed under the previous regime was not required
to be notified on commencement of the SFO.
3. DISCLOSURE OF INTERESTS IN EQUITY DERIVATIVES
Under the previous regime, the disclosure requirements
applied only to physically settled derivatives. The SFO
extends the disclosure obligations of substantial shareholders
to interests in the unissued shares of
listed companies which, if issued, would carry the right
to vote and also to cash settled derivatives.
Hence, interests in the 'underlying shares' of all equity
derivatives (whether issued or unissued) are discloseable,
including interests in options, subscription warrants,
convertible bonds, ADRs and stock futures.
A holder, writer or issuer of equity derivatives will
be taken to have a long position in the underlying shares
and must add these to his other interests in determining
his disclosure obligations if:
- he has a right to take the underlying shares;
- he has an obligation to take the underlying shares;
or
- he has a right to receive money or to avoid or reduce
a loss, if the price of the underlying shares increases,
before or on a certain date or within a certain period
(whether the right or obligation is conditional or absolute)
(Section 322(8)).
4. DISCLOSURE OF SHORT POSITIONS
The SFO extends the disclosure obligations of substantial
shareholders to cover 'short positions'. Under Section
308 a person is regarded as having a short position in
shares if he:
- holds, writes or issues financial instruments under
which:
- he can require another person to take the underlying
shares;
- he is obliged to deliver the underlying shares;
or
- he has a right to receive money or to avoid or
reduce a loss if the price of the underlying shares
declines,
before or on a certain date or within a certain period
(whether the right or obligation is conditional or absolute);
or
- he borrows shares under a securities borrowing and
lending agreement.
Hence the writing of a call option, holding of a put
option and stock borrowings will be discloseable. However
a person (not being a director) with a short position
will only be required to disclose it if he already has
a 5% interest in a class of a listed company's voting
share capital ie. he must be a substantial shareholder
before he has a duty to disclose a short position (Section
313(4)). Further the short position must be at least 1%.
Thereafter, as with long positions, a change in the short
position will only require disclosure if it results in
the short position crossing a percentage level or in the
person ceasing to have a short position of at least 1%
(Sections 313(4)(b) and (c)).
Short positions cannot be netted off against long positions
and the percentage figures for short and long positions
must be calculated and notified separately.
4.1 Options
The SFC Outline confirms that the SFC takes the view
that when a listed company allots shares or issues an
instrument under which it agrees to allot shares, or grants
an option over its own shares, it is
not taking a position in its own shares, short or long,
but is simply issuing or agreeing to issue the shares.
Hence there is no disclosure obligation for the company.
Likewise, since the listed company is not taken to have
a short position, a controller of the company will not
be deemed to have a short position under the deeming provisions
of the SFO and no disclosure is required. This view would
appear to be at odds with a strict interpretation of the
legislation and its wide definition of the term 'short
position'. It therefore seems likely that this view has
been adopted more on the basis of the spirit of the legislation
whose focus is primarily on the disclosure of positions
held in other listed companies.
The holder of an option or other right to receive shares
will however acquire a long position in the shares which
must be disclosed.
Where a company grants an option over the shares of another
listed company, then it is taking a short position which
must be disclosed if the former company already holds
a 5% interest and the short position amounts to 1% or
more.
Note also that where a listed company grants an option
over its own shares or debentures to a chief executive
or director of that company, it is required to record
details of the grant in its register of the interests
of directors and chief executives (as described under
Section C below).
5. HOW MANY SHARES IS A PERSON TAKEN TO BE INTERESTED
IN IN THE CASE OF EQUITY DERIVATIVES?
Holders, writers and issuers of equity derivatives are
taken to be interested in, or have a short position in,
the number of shares to be delivered, or by reference
to which the amount payable is derived or (in the case
of stock futures only) the relevant contract multiplier
(Section 322(12)).
6. CALCULATION OF A PERSON'S INTEREST
Long Positions
The percentage figure of an interest in shares
should be determined using the following formula:
| nominal
value of shares in which a person is interested *
x 100
nominal value of the issued shares of the listed company
of the same class |
Short Positions
To calculate whether a short position constitutes 1%
or more, a similar formula can be used:
| nominal
value of shares in which a person has a short position
* x 100
nominal value of the issued shares of the listed
company of the same class |
* Note that this will include all issued
shares and shares underlying equity derivatives
whether issued or unissued.
The forms require the percentage figure to be
rounded to 2 decimal places. To find the percentage
level of the interest the percentage figure
is rounded down to the next whole number.
The date for calculating the relevant percentage is the
date of occurrence of the relevant event and the number
of shares in which a person is interested and the total
number of issued shares should be determined on that day.
7. NOTIFICATION OF CHANGES IN THE NATURE OF INTERESTS
Any change in the nature of an interest already notified
is required to be disclosed under Section 313(d). The
situations in which there is considered to be such a change
are extensive and include a change in the nature of a
person's title to shares, any of the person's interest
whether legal or equitable or any of the person's interest
in the underlying shares of equity derivatives on the
exercise of rights thereunder (whether by or against him).
Common situations requiring notification of a change
in interest will include:
- the exercise of rights (by or against a person) under
options and other derivatives;
- the lending of shares under a securities borrowing
and lending agreement (unless the Securities Borrowing
and Lending Exemption applies - see paragraph 12.9 below);
and
- the giving of shares as security to another person.
There is not considered to be a change in the nature
of an interest under Section 313(13) and Section 5 of
the Securities and Futures (Disclosure of Interests -
Exclusions) Regulation:
- where a purchaser takes delivery of shares, if he
has previously disclosed his equitable interest arising
on contracting to buy the shares;
- where a vendor of shares enters into a contract for
sale, if the sale is required to be completed within
4 days on which the Stock Exchange is open for business;
- where there is a change in the terms on which rights
under equity derivatives may be exercised which results
from a change in the number of underlying shares in
issue;
- on the exercise of rights to subscribe for or on
delivery of shares under a rights issue;
- where a 'qualified lender' comes to have a security
interest in a person's shares (see paragraph 12.4 below);
and
- where the person is a holding company and the transfer
is of shares from one wholly owned subsidiary to another
(see paragraph 12.5 below).
8. WHAT CONSTITUTES AN INTEREST IN SHARES?
The definition of an 'interest in shares' is extremely
broad and includes the situations set out in Schedule
2 hereto.
8.1 Buying and Selling Shares
A buyer of shares acquires an interest in shares at the
time when he contracts to buy and therefore is required
to give notification within 3 business days of the contract.
No further notice is required when the buyer takes delivery
of the shares.
A seller of shares will normally only cease to have an
interest when he actually transfers the shares to the
buyer and is therefore required to notify the cessation
of his interest within 3 business days after the settlement
date (ie. the date of the actual transfer). If the contract
for sale of the shares provides for settlement within
4 days on which the Stock Exchange is open for business,
notification by the seller is not required on the entering
into of the contract.
If in fact a seller ceases to be interested in the shares
on the date of the contract for sale (eg. due to the operation
of the clearing system), then notice should be filed within
3 business days of the contract for sale.
If a contract for sale specifies a settlement date which
is 5 or more days on which the Stock Exchange is open
for business after the date of the contract, then 2 notices
are required: first, a notice of change in nature of the
interest which must be filed within 3 business days of
the contract and second, a notice of cessation of interest
to be filed within 3 business days of delivery of the
shares.
9. DEEMED INTERESTS
There are a number of circumstances where the interests
and derivative interests (including short positions) of
others in a listed company's shares must be added to a
person's own interest in calculating the number of shares
in which they are interested.
9.1 Family and Controlled Company Interests
(Section 316)
As under the previous legislation the interests of a
person's spouse and children under 18 are attributable
to him.
Also, as previously, a person will be deemed to be interested
in the interests of any company which he 'controls' (ie.
a company of which he controls, either directly or indirectly,
one third or more of the voting power at general meetings
or if the company or its directors are accustomed to act
in accordance with that person's directions).
9.2 Limited Liability Partnerships
The SFC Outline confirms that the SFC regards a limited
liability partnership as a company for the purposes of
Part XV. Hence interests in shares held by a limited liability
partnership should be disclosed by the general partner
as interests in shares of a controlled corporation (rather
than as joint interests of each partner).
9.3 Trusts
The interests of a trust of which a person is a trustee
must also be aggregated with his own interests (with the
exception of a trust of which he is a bare trustee (ie.
his only powers or duties are to transfer the underlying
shares according to the directions of the beneficial owner
- see paragraph 12.7 below).
A beneficiary of a trust must include the interests of
the trust in calculating his own interest (Section 322(4)(a)).
The interest of a beneficiary under a discretionary trust
is however disregarded (Section 323(1)(a)(iii) provided
that he is not also a director of the relevant listed
company or a 'founder' of the trust (see paragraph 9.4
below).
9.4 'Founders' of Discretionary Trusts
The SFO has introduced new provisions so that the interests
of a 'discretionary trust' will be attributed to the 'founder'
of such trust (Section 322(4)(b)). The term 'founder'
is very widely defined and essentially will catch anyone
who has procured the creation of the trust and (i) whose
consent is a condition of a trustee's exercise of his
discretion or (ii) in accordance with whose wishes a trustee
is accustomed or expected to act (whether, in either case,
legally enforceable or not).
9.5 Concert Party Agreements (Section 317)
The SFO broadens the previous provisions relating to
concert party agreements. In essence, those provisions
apply where two or more persons agree to acquire shares
in a target company and the agreement dictates the manner
in which any one or more of the parties may exercise the
rights attached to those shares or dispose of them. Each
party to the agreement must include the interests of all
other parties to the agreement in determining whether
they together hold 5% or more of the listed company. If
so, each party will be considered to be a substantial
shareholder whose interests must be disclosed.
Under the SFO those provisions are extended to any arrangement
whereby a 'controlling person' or director of a listed
company makes a loan to a person on the understanding
that the money will be used to acquire interests in shares
in that company and shares are in fact acquired. A 'controlling
person' for these purposes is any person who, either alone
or with associates, controls at least 30% of the voting
power at general meetings, can nominate any of its directors
or veto or modify any resolution of a general meeting.
The effect of extending the provisions to the borrower
and controlling shareholder is to create an irrebutable
presumption that the loan or funding will be provided
pursuant to an agreement dictating how the borrower may
deal with his shares.
There is an exemption where a 'controlling person' or
director makes the loan in the ordinary course of his
business as a 'qualified lender' (as defined under paragraph
12.4 below).
Where 2 or more persons are interested in the same shares
they must each make separate disclosure of their interests.
Hence if X controls Y Ltd. which holds 6% of a listed
company and Y Limited acquires a further 1%, then X, his
spouse and Y Limited must each file a separate notice.
10. DISCLOSURE OBLIGATIONS RESULTING FROM SHARE
REPURCHASES AND PLACEMENTS
Disclosure obligations may also arise from actions taken
by others. For example, if a listed company buys back
shares thereby reducing the number of shares in issue,
an increase in the percentage level of the interests of
the remaining shareholders will be discloseable.
Conversely, in the case of a placement and top-up, where
new shares are issued to a major shareholder to replace
the shares he has placed with a third party, the number
of shares in issue increases. The consequent reduction
in the percentage level of the interests of the other
shareholders will then be discloseable.
In both cases, the 3 business day time limit for disclosure
runs only from the date the person concerned became aware
of the facts that led to the change in the level of his
interest ie. the date on which he became aware that the
number of issued shares had reduced/increased.
11. CESSATION OF INTERESTS (SECTION 322(10))
A person is regarded as having ceased to be interested
in shares if:
- he delivers them to another person (or to his order)
pursuant to a contract for sale, in fulfilment of his
obligations under a call option, or on exercising his
rights under a put option;
- his right to subscribe for or call for the delivery
of shares lapses or he assigns such right to another;
- his obligation to take shares lapses or he assigns
that obligation to another;
- he receives an amount from another person, or avoids
or reduces a loss, on the assignment or settlement of
any cash settled equity derivatives.
