17 June, 2015
In its recent Corporate Regulation Newsletter, the SFC highlighted a number of concerns regarding disclosures by listed companies, including:
Previously Disclosed Profit Information
The SFC noted an increase in media interest in the “quality” of newly listed companies, with a number of the companies issuing profit warning announcements shortly after listing stating that “significant listing costs” were among the main reasons for the profit decline. The SFC, noting that information on listing costs is required to be published in the company’s prospectus, considers the information already known to the public, and thus not required to be repeated.
Specific New Information
Similarly, the SFC commented that an announcement repeating information, which in the prospectus is detailed, unambiguous and quantifiable, is rarely required under the Securities and Futures Ordinance (SFO). However, this would not apply to some of the general comments in a prospectus, such as disclosures in the risk factor section, if a specific risk materializes and disclosure of that fact would have a material effect on the company’s share price.
One-Off Events
The SFC noted that there have been instances of confusion caused by the repetition of information in announcements described as profit warnings or alerts. For example, the absence of a one-off gain is commonly cited as a reason for a decline in profits compared to the prior year. The SFC considers that, by definition, one-off, extraordinary, discontinued or other similarly described items are not expected to reoccur, and therefore the fact that they did not reoccur normally would not be considered inside information.
Repeating Disclosures.
The SFC commented that, if a specific event already has been made known to the public, there is no statutory requirement to refer to or disclose such information again under the SFO. In some instances, if the repeated disclosures were sufficiently vague or unclear, they might cause some investors to think that there were two separate events, and the company may be regarded as having made a misleading announcement.
Inside Information Not Directly Related To Specific Event
The SFC remarked that there are circumstances other than those relating to a specific transaction or event that may give rise to the creation of inside information and specifically referred to trading performance as an example. Determination of when information regarding a company’s trading performance needs to be disclosed pursuant to the inside information requirements of the SFO requires a judgment call to be made by management. According to the SFC, management generally must consider at least the following factors when making its determination:
- Certainty. In general, the company should provide precise figures for expected long-term earnings; however, this does not mean that the company needs to know the level of profit for a period to the nearest dollar before deciding whether it constitutes inside information. The company also should assess carefully whether an apparent change in results is merely short-term or indicative of a longer-term trend.
- Expectations. The company should consider how results match expectations. Under normal circumstances, if trading profits for the period were substantially lower than the previous period, this very likely would constitute inside information; however, if the company already has sufficiently disclosed to investors that such an outcome is expected due to loss of a significant contract, then it is much less likely to be inside information.
- Materiality. Simply because one month’s trading results are higher than expected might not be sufficient to justify an announcement; however if that month’s sales figures are of particular importance (e.g., December sales or holiday sessions that contribute a significant portion of the company’s annual trading results) and the trading performance in that month can mean the difference between a good year and a bad year, then a trading update would be warranted.
For further information, please contact:
Christopher Betts, Partner, Skadden
christopher.betts@skadden.com
Edward Lam, Partner, Skadden
edward.lam@skadden.com
Alec Tracy, Partner, Skadden
alec.tracy@skadden.com
Will Cai, Partner, Skadden
will.cai@skadden.com
