When preparing to list a company with a previous Securities and Futures Commission (“SFC”) investigation record, lawyers, on the one hand, owe a duty to the Stock Exchange of Hong Kong (“SEHK”) and the public to conduct proper due diligence before recommending a company for listing; to this end, a certain degree of disclosure of previous investigations may be necessary. On the other hand, lawyers also owe a duty of secrecy to the SFC and are bound by the secrecy obligations under the Securities and Futures Ordinance (Cap. 571) (“SFO”). This article explores how lawyers can balance these competing obligations when preparing to list a client with previous SFC investigation history or record.
Public interest dictates that thorough and proper due diligence be conducted by a sponsor to an applicant proposing to be listed in the SEHK. During this process, a sponsor often requires disclosure by the prospective listing applicant of all information, correspondences, records and notices relating to any investigations conducted by the SFC on the company. This article explores the applicability of the secrecy provisions under s. 378 of the SFO to such circumstances. In particular, with reference to the legislative intent and background of s. 378 of the SFO, this article will first analyse whether a listing applicant can disclose any investigation documents to its sponsor under the exception in s. 378(2)(c), and then whether that sponsor can subsequently disclose any such documents to its legal advisors and the SEHK under the exception in s.378(7).
The Applicability of s. 378 to a Listing Applicant
The duty of preserving secrecy under s. 378 applies to “a specified person”, the definition of which is found in subsection (15) to mean:
(a) the Commission; (b) any person who is or was a member, an employee, or a consultant, agent or adviser, of the Commission; or (c) any person who is or was – (i) a person appointed under any of the relevant provisions; (ii) a person performing any function under or carrying into effect any of the relevant provisions; or (iii) a person assisting any other person in the performance of any function under or in carrying into effect any of the relevant provisions.
“Relevant provisions” is defined in Schedule 1 of the SFO to mean the provisions of, inter alia, the SFO or Parts II and XII of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32) insofar as those Parts relate, directly or indirectly, to the performance of functions relating to prospectuses.
Is the listing applicant considered a “specified person” under s. 378? The starting position is that a company is a legal person in the eyes of the law. Moreover, in complying with an SFC notice relating to any investigation, the listing applicant has performed an act as a “specified person” by “assisting any other person in the performance of any function under or in carrying into effect any of the relevant provisions”. The secrecy obligation under SFO s. 378 is thus prima facie applicable to a listing applicant.
Disclosure to the Sponsor
The next issue then is the applicability of any exceptions under s. 378(2). Notably, s. 378(2)(c) provides that s. 378(1) does not apply to “the disclosure of information for the purpose of seeking advice from, or giving advice by, counsel or a solicitor or other professional adviser acting or proposing to act in a professional capacity in connection with any matter arising under any of the relevant provisions” (emphasis added).
In short, the exception in s. 378(2)(c) only applies if the following three conditions are met:
- a professional adviser is acting in a professional capacity;
- disclosure is for the purpose of seeking advice from the professional adviser or the giving of advice by that professional adviser; and
- the advice concerns a matter arising under the relevant provisions.
Prior to analysing the foregoing conditions, a preliminary consideration is whether s.378(2)(c) even applies to circumstances as the present, where disclosure is for the purposes of seeking advice for commercial ends and not for legal proceedings/litigation.
According to Li CJ in HKSAR v Cheung Kwun Yin (2009) 12 HKCFAR 568 at –, this is a matter that requires statutory interpretation. The SFC has clarified the policy intent behind s. 378 in two LegCo papers (eg, CB(1)531/06-07(01) at p. 3 and CB(1)1476/06-07(04)), in which it stated that the secrecy obligation under s. 378 exists as a safeguard: (i) of the public interest that the SFC should not be compromised in its operations and the pursuit of its regulatory objectives by the leakage of confidential information; (ii) of the right of all persons; (iii) of the integrity of the market; among others.
In light of the foregoing purpose, it would appear that in cases of ambiguity, the exceptions to s. 378 (then s. 366 of the SFO) are to be “carefully guarded” and interpreted narrowly, so that “the exceptions should be restricted to those persons who have a clear reason to know” (see “Areas of concern raised by members during discussions on Securities and Futures Bill and Banking (Amendment) Bill 2000” (29 May 2001)).
Specifically, as regards s. 378(2)(c), this exception was added as an amendment in the Securities and Futures (Amendment) Bill 2000 to fill a gap in the original provision, which “[did] not adequately address the needs of the persons prescribed in clause 366(11) to disclose information for exercising their legitimate rights, such as to seek legal or other professional advice or to utilize the information in a related legal proceedings” (see Paper No. 14/01 (25 May 2001) by the Bills Committee on the Securities and Futures Bill and Banking (Amendment) Bill 2000, Part XVI Miscellaneous). In particular, “this amendment reflects our proposals … that a person should not be prohibited from disclosing information for the purpose of exercising legitimate rights. Paragraph (ba) makes explicit that the secrecy provisions would not prevent any person from seeking professional advice, whether from lawyers or others” (see Paper No. CSA14/01 at n. 2).
Although exceptions to what is now s. 378 were intended to be construed narrowly in cases of ambiguity, it would appear from the above that the legislative intent of s. 378(2)(c) was not for it to be confined to legal proceedings only, but was intended to include all situations where a person sought to exercise his/her legitimate rights by seeking professional advice, “whether from lawyers or others”. Indeed, this interpretation does not go against the overriding objectives of s. 378, one of which is to safeguard the rights of all individuals (to seek professional advice) and the integrity of the financial market in Hong Kong (which can only be safeguarded if the professional advisor has access to relevant materials).
By reason of the foregoing conclusion, whether the listing applicant can disclose any investigation documents to its sponsor would thus turn on its fulfilment of the three conditions pertaining to s.378(2)(c), as identified earlier.
The first condition depends on whether the sponsor can be construed as a “professional adviser” acting in a professional capacity. This condition is evidently met in light of s. 17.2 and s.17(b) of the Code of Conduct for Persons Licensed by or Registered with the SFC (the “Code of Conduct”), which provide that “a sponsor also advises and guides the listing applicant as to the Listing Rules and other relevant regulatory requirements” (emphasis added).
As to the second and third conditions, (ie, whether the disclosure of investigation documents can be said to be for the purpose of seeking advice from the sponsor), this will necessarily depend on the individual facts of each case. That said, a listing applicant should only disclose investigation documents if such disclosure enables the sponsor to render advice within the scope delineated in s.17.3–17.4 of the Code of Conduct. Notably, the sponsor owes the listing applicant, the SEHK and the public:
- A duty to do reasonable due diligence to gain a sound understanding of the (i) history and background, business and performance, financial condition and prospects, operations and structure, procedures and systems of the listing applicant; and (ii) the personal and business backgrounds of the directors, key senior managers and (where applicable) controlling shareholders of the listing applicant.
- A duty to resolve fundamental compliance issues by ensuring that the directors of the listing applicant collectively have the experience, qualifications and competence to manage the listing applicant’s business and comply with the Listing Rules, and individually have the experience, qualifications and competence to perform their individual roles, including an understanding of their obligations and those of the listing applicant as an issuer under the Listing Rules and other legal and regulatory requirements relevant to their role.
- A duty to ensure that the listing applicant is suitable for listing and that its listing is not contrary to the interest of the investing public or to the public interest.
For the sake of completeness, it should be added that if a listing applicant decides to disclose certain documents relating to SFC investigations to its sponsor, the sponsor can subsequently disclose such documents to its legal advisors pursuant to the exception under s. 378(7). However, any such disclosure must be for the purpose of seeking advice from the lawyers in a professional capacity in connection with the matter arising under the relevant provisions (ie, in relation to the IPO of the listing applicant).
Disclosure to the SEHK
As to whether s. 378(7) also permits the sponsor to subsequently disclose to SEHK the documents disclosed to it by a listing applicant, a relevant question is whether the SEHK could be regarded as acting in the capacity as a “professional adviser” such that s. 378(7)(iii) can apply. By reason of the following, it would appear that the SEHK cannot be so construed.
It is noteworthy that the SEHK’s role is regulatory rather than advisory. The SEHK describes its functions as (a) establishing and promulgating rules (the “Listing Rules”) prescribing listing requirements for listing applicants and listed issuers; and (b) fairly and impartially administering the Listing Rules (see SEHK, “Outline of the current roles of the Exchange and the SFC in Listing Regulation” (31 March 2005), at https://www.hkex.com.hk/eng/rulesreg/regdoc/hkexrole.htm). In particular, the SEHK has distinctly referred to itself as being the “primary point of contact for all listing applicants and their advisers”.
In this regard, using listing in the SEHK Growth Enterprise Market (“GEM”) as an example, the SEHK states that “prospective issuers, and in particular new applicants, are encouraged (through their Sponsors, where applicable) to contact the Listing Division to seek informal and confidential guidance as to the eligibility of a proposed application for listing at the earliest possible opportunity” (see GEM Listing Rules s.3.08). Such “informal and confidential guidance” cannot in any way be construed to be “professional”, and more importantly, provides a stark contrast to the clear provisions on the advice a Sponsor is expected to give, as stipulated in the SFC Code of Conduct.
Further, it is also apparent from the Listing Rules that the SEHK takes no responsibility for the contents of any documents published by the listing applicant (see GEM Listing Rules s. 2.19).
Accordingly, it seems evident that the SEHK’s functions are regulatory and cannot be construed to be a professional adviser acting in professional capacity under SFO s. 378(7)(iii) or any other provisions in s. 378. Any disclosure to the SEHK would thus require consent from the SFC.
By reason of the above, a listing applicant may be able to disclose certain SFC investigation documents to its sponsor under s. 378(2)(c) of the SFO if those documents relate to the scope of professional advice the sponsor has a duty to give. Section 378(7) then allows the sponsor to subsequently disclose any such documents to its lawyers pursuant to s. 378(7). However, as the SEHK cannot be construed as a “professional advisor” under s. 378(7), any disclosure to it by the sponsor would require the consent of the SFC.