In the second edition of the Corporate Regulation Newsletter, an SFC publication informing market participants on disclosure matters, focus was placed on the importance of proper disclosure of inside information by listing applicants and listed companies. The newsletter, which was published on 29 April 2015, draws on recent examples and describes some of the factors to be considered when determining if information needs to be disclosed. The latest issue focussed on:
- previously disclosed inside information;
- disclosure of information generated by internal developments and investment portfolio performance; and
- dual filing regime: customer identities and IPO incentive schemes.
Previously Disclosed Inside Information
The current statutory regime on disclosure of inside information came into effect on 1 January 2013, under which listed companies are required to disclose inside information to the public in a timely manner. For information which had been previously disclosed, the following points were highlighted by the SFC:
- An announcement to repeat previously disclosed information is not necessary and may even cause confusion. If a company feels that such anannouncement is necessary, then it must clarify the extent to which the information differs from previously published information. If there have been significant changes in facts and circumstances since the issue of the prospectus, then an inside information announcement is warranted.
- When considering specific new information, particularly relating to more general disclosures previously made in the prospectus, the company needs to consider whether the new information would have a material effect on share price and whether an inside information announcement should be made. Vague references in a prospectus to a possible future event do not fulfil the disclosure obligation if such an event occurs.
- Absence of one-off gains would not normally be considered as inside information as by definition, one-off, extraordinary, discontinued or similarly described items are not expected to re-occur. Where a company seeks to highlight the absence of a one-off event which has the effect of masking the impact of other factors in its financial performance, then this may be regarded as a misleading statement.
- Repeating events (for example, repeating profit alerts in year-end reports) can be confusing, especially if the announcements were vague or unclear, as investors may think that they were separate transactions resulting in gains. In such cases, the company may be regarded as having made a misleading announcement.
Inside Information Generated By Internal Developments
Aside from the definition of “inside information” under the SFO and in the SFC’s Guidelines on Disclosure of Inside Information, there are other circumstances which give rise to the creation of inside information. While it is not possible to provide an exhaustive list on what constitutes inside information, guidance is provided on what companies would, at the very least, need to consider:
- Certainty – while companies are cautious about providing precise figures for expected long term earnings, it doesn’t mean that the company needs to know the precise profit level for a period before deciding whether the trading performance amounts to inside information. Care should be taken to assess if a change in results is merely a short-term effect or may be indicative of a longer-term trend;
- Expectations – consideration should be given to how results match market expectations. Substantially lower trading profits for a period would likely be inside information, but if investors had already been warned of this expected outcome and the reasons for it, then it is less likely to be inside information; and
- Materiality – not all unexpected results will justify an announcement but if the figures are seasonal or event dependent (e.g. Christmas sales), then this type of single-month figure may be significant enough to warrant a trading update.
These three aspects may also be relevant when considering whether disclosures should be made in connection with investment gains or losses on investment portfolios and further guidance and examples are provided in the newsletter.
Dual filing regime In the dual filing regime section, the SFC reinforces the obligation on sponsors to conduct reasonable due diligence to ascertain the accuracy of information disclosed in listing documents. It also looks at a couple of disclosure related issues:
- identities of major customers in a listing document – the newsletter clarifies that if this information is not disclosed in the listing document, then it must not be included in any marketing communication provided to analysts or investors; and
- IPO incentive schemes – any incentive scheme that may unduly influence an investor’s investment decision will likely be scrutinised by the SFC, and where there are significant concerns on a scheme’s influence, the SFC may use its powers under Rule 6 of the Securities and Futures (Stock Market Listing) Rules (Cap.571V) to object to the listing. Early consultation with the Hong Kong Stock Exchange and the SFC is encouraged.
The first edition of the Corporate Regulation Newsletter, which was issued on 9 July 2014, can be found here.
For further information, please contact:
Jamie Barr, Partner, Hogan Lovells
jamie.barr@hoganlovells.com
Tim Fletcher, Partner, Hogan Lovells
tim.fletcher@hoganlovells.com
Terence Lau, Partner, Hogan Lovells
terence.lau@hoganlovells.com
Mark Parsons, Partner, Hogan Lovells
mark.parsons@hoganlovells.com
Nelson Tang, Partner, Hogan Lovells
nelson.tang@hoganlovells.com
Thomas Tarala, Partner, Hogan Lovells
thomas.tarala@hoganlovells.com
Steven Tran, Partner, Hogan Lovells
steven.tran@hoganlovells.com
