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8 August, 2017
Introduction
The provisions mandating electronic filing of disclosure of interests (“DI”) notifications and reports under Part XV of the Securities and Futures Ordinance (Cap. 571) (the “SFO”) came into effect on 3 July 2017. For events triggering disclosure requirements which occur on or after 3 July 2017, substantial shareholders and corporate insiders should use the new DI forms prescribed by the Securities and Futures Commission (“SFC”) and submit them through a new online system to the Hong Kong Stock Exchange (“SEHK”).
Forms and event codes
The SFC has introduced more precise codes for the relevant events in the new DI forms. For instance, for Form 1 (Individual Substantial Shareholder Notice), under the old form there were only 17 codes of relevant events. In the new Form 1, there are 87 codes for selection.
Notably, new event codes are created for security enforcement with respect to both qualified lenders and non-qualified lenders when they have taken steps to enforce their rights in the shares they hold by way of security. A new event code is also created for voluntary disclosures and a brief description of the relevant event is required to be included in the DI form.
Margin financing transactions – inside dealing concerns on enforcement
Amongst financiers providing margin financing secured on the shares of a listed corporation, there has been concerns around whether knowledge of the default by the obligor will itself constitute insider information under the SFO. Some defences in the SFO may assist financiers, but their availability will be fact dependent. As a result, financiers may be motivated to find ways to cleanse such information and doing a Part XV filing is one possible method in doing this. However, until these latest reforms, the information contained in Part XV filings was limited and may not always include the inside information which the financier is looking to cleanse.
Part XV filing requirement
An interest in the voting shares of a listed corporation held by a qualified lender1 by way of security for a transaction entered into in its ordinary course business is exempt from disclosure. However, such an interest will cease to be exempt when, broadly speaking, (i) the qualified lender becomes entitled to exercise voting rights in the secured shares following a default by the chargor and the qualified lender has evidenced its intention to exercise the voting rights or control their exercise; or (ii) the power of sale under the security interest becomes exercisable and the qualified lender offers the secured shares (or part of them) for sale.
A Part XV filing is therefore required to be made by a qualified lender upon the occurrence of one of the events described in (i) or (ii) above if the relevant disclosure threshold (i.e. 5% of the voting shares in the listed corporation for long interests) is triggered.
Security interests which do not qualify as exempt security interests must be disclosed by the chargor and the chargee upon creation, enforcement and termination if the relevant disclosure thresholds are triggered.
Old forms vs new forms
Under the old DI forms, there was only one event code for the situation where a substantial shareholder first acquires a 5% notifiable interest, and such event code includes all acquisitions including the taking of steps to enforce rights in respect of shares held by way of security. This would typically be considered as insufficient to cleanse the inside information -e.g. the financier’s filing would not contain information on the identity of the borrower, or the fact that the borrower has defaulted.
Under the new DI forms, a new event code applies specifically to the situation where a qualified lender has taken steps to enforce its rights in the secured shares. For a lender who cannot rely on the exempt security interests provisions and needs to disclose on acquiring a security interest in the shares, there is also a new event code specifically describing this situation and another event code for use when such lender enforces its security interest in the shares. It is also possible to specify in the “Supplementary Information” section of the DI form (subject to a word limit of 500 characters) further information relating to the loan, should there be other facts which are relevant.
This disclosure of more detailed information relating to enforcement of security should allow financiers greater flexibility to cleanse inside information relating to the default of the borrower.
With respect to filings by the borrower/chargor, new event codes are created for the situation (i) where a security interest in shares is granted to or released by a non-qualified lender (such disclosure is exempt where the security is granted to or released by a qualified lender), and (ii) where steps have been taken by a chargee to enforce a security interest against a chargor, resulting in a change in nature of its interest requiring disclosure.
Some practical issues
To avoid insider dealing, any inside information must be made public prior to any dealing in the shares on the SEHK. Qualified lenders may wish to build in provisions in the finance documents to provide for a mechanism to evidence its intention to exercise the voting rights in the secured shares upon a default (so a Part XV filing requirement will arise at a time chosen by the lender). Any confidentiality provisions should also be adjusted to allow for disclosure in the Supplementary Information section of the DI form as described above.
Lenders should be aware that there may be a time lag between the filing of a Part XV disclosure and the publication of such information by the SEHK. It may be necessary to take such time lag into account when structuring the deal (for example, in determining loan-to-value ratios).
1 A qualified lender means: (i) an authorised institution under the Banking Ordinance (Cap. 155); (ii) an insurer authorised under the Insurance Companies Ordinance (Cap. 41); (iii) an exchange participant of The Stock Exchange of Hong Kong Limited; (iv) an intermediary licensed or registered for the Type 1 (dealing in securities) or Type 8 (securities margin financing) regulated activity and (v) an overseas regulated corporation recognised by the SFC for the purposes of Part XV of the SFO to carry on business as a bank, an insurance company or in an activity equivalent to the Type 1 or Type 8 regulated activity.
For further information, please contact:
Andrew Malcolm, Partner, Linklaters
andrew.malcolm@linklaters.com
