Importance of Timely Disclosure of Inside Information by Hong Kong-Listed Companies

Since the implementation of the inside information regime in January 2013, the Securities and Futures Commission (SFC) has conducted regular reviews of corporate announcements including inside information announcements. Those announcements often relate to profit alerts or profit warnings.

Over the years, the SFC has commenced a number of proceedings in the Market Misconduct Tribunal (MMT) against listed companies for breach of obligations under the inside information regime. The MMT first made a finding of breaches of the disclosure obligations imposed on listed companies in November 2016, in the case of AcrossAsia[1]. There, the former chairman and former chief executive officer failed to disclose inside information as soon as reasonably practicable about a petition filed by AcrossAsia’s subsidiary and major creditor against AcrossAsia and a related summons[2].

In this client alert, we will look at a recent case where the SFC has again commenced proceedings in the MMT against a listed company for its failure to make timely disclosure of price-sensitive inside information.

Listed companies are reminded of the importance of ensuring compliance with the provisions of Part XIVA of the Hong Kong Securities and Futures Ordinance (Cap. 571) (SFO) as well as the relevant provisions under the listing rules relating to the general obligation of disclosure[3]. This includes disclosing inside information which has come to their knowledge as soon as reasonably practicable.

HEALTH AND HAPPINESS (H & H) INTERNATIONAL HOLDINGS

The SFC announced on Nov. 29, 2018 that it had commenced proceedings in the MMT against Health and Happiness (H&H) International Holdings Ltd (Health and Happiness) for alleged failure to disclose price sensitive information as soon as reasonably practicable back in 2015[4].

Health and Happiness was known as Biostime International Holdings Ltd (Biostime) when the alleged breach of the statutory corporate disclosure requirements occurred.

The SFC also commenced proceedings in the MMT against Mr Luo Fei (Mr Luo), Biostime’s chairman, chief executive officer and executive director for his alleged reckless or negligent conduct, in causing the alleged breach by Biostime of the provisions of the statutory corporate disclosure regime.

On July 23, 2015, Biostime issued a profit warning announcement in which it stated that the revenue and the profit of the Biostime group for the six months ended June 30, 2015 were expected to decrease by approximately 11% and 36%, respectively, as compared with the corresponding period in 2014. Following the publication of the profit warning, Biostime’s share price closed at HK$16.94 on July 24, 2015, representing a decrease of 21.6 % when compared with the previous closing price.

The SFC found that in mid-June 2015, the consolidated management accounts of the Biostime group for the first five months of 2015 revealed that both the revenue and the net profit had significantly decreased by 13.7% and 28.9%, respectively, when compared with the corresponding period in 2014. This information about the financial deterioration came to the knowledge of Biostime and Mr Luo on or around June 23, 2015. However, Biostime did not disclose such information to the public until July 23, 2015, which was one month after Biostime and Mr Luo had information about the deterioration.

The SFC took the view that the information about the financial deterioration was specific information regarding Biostime, price sensitive and not generally known to the public at the material time. Had the information been known to the investing public, it would have been likely to materially affect the share price of Biostime.

OTHER MARKET MISCONDUCT PROCEEDINGS OVER LATE DISCLOSURE OF INSIDE INFORMATION COMMERCED BY THE SFC IN 2018

The Health and Happiness case is one of three market misconducting proceedings over late disclosure of inside information so far commenced by the SFC in 2018.

In May 2018, SFC commenced MMT proceedings against Magic Holdings International Limited (Magic Holdings) and its directors for late disclosure of inside information[5]. This case related to the late disclosure of inside information regarding a potential acquisition of Magic Holdings’ shares by L’Oreal S.A. in 2013. Disclosure was made only five months after a preliminary agreement had been reached.

In April 2018, SFC commenced MMT proceedings against Fujikon Industrial Holdings Limited (Fujikon) and its senior executives for late disclosure of inside information[6]. This related to alleged late disclosure of inside information regarding the discontinuance of headphone production for one of the company’s top customers in 2014. Disclosure was made seven weeks after senior management was aware of the discontinuance.

MONITORING OF CORPORATE CONDUCT OF LISTED COMPANIES INCLUDING INSIDE INFORMATION ANNOUNCEMENTS

Monitoring of corporate conduct of listed companies continues to be one of the regulatory activities conducted by the SFC to safeguard the interest of investors. Since implementation of the inside information regime in January 2013, the SFC has conducted regular reviews of corporate announcements including inside information announcements. Over the years, SFC has issued a number of updates on the trends seen in inside information disclosure by listed companies and SFC’s concerns[7]. The commencement of MMT proceedings against Health and Happiness represents SFC’s continued effort in this regard.

TIMELY DISCLOSURE OF INSIDE INFORMATION  

Listed companies are reminded of the importance of ensuring compliance with the provisions of Part XIVA of the SFO, as well as the relevant provisions under the listing rules relating to general obligation of disclosure[8].

SFC often reminds listed companies that timely and non-misleading disclosure of inside information is central to the orderly operation of the market and underpins the maintenance of a fair and informed market. When making the announcements, companies should bear in mind that the announcements should aim to help investors understand the company’s actual situation. The SFC encourages listed companies to publish informative announcements which are also clear and concise.

The SFC published Guidelines on Disclosure of Inside Information in June 2012[9] and issued an FAQ on disclosure of inside information in December 2014[10] to assist listed companies with their compliance obligations regarding disclosure of inside information under Part XIVA of the SFO.


[1] delisted since June 13, 2017, previously listed on the Growth Enterprise Market of The Stock Exchange of Hong Kong Limited with stock code: 8061
[2] “MMT ruling on AcrossAsia and enforcement efforts” in SFC, Corporate Regulation Newsletter, Issue no. 4, December 2016
[3] Rule 13.09 of the Rules governing the listing of securities on The Stock Exchange of Hong Kong Limited and rule 17.10 of the Rules governing the listing of securities on GEM of The Stock Exchange of Hong Kong Limited
[4] SFC’s notice commencing the MMT proceedings against Health and Happiness dated Nov. 16, 2018: http://www.mmt.gov.hk/eng/rulings/Health_and_Happiness_16112018_e.pdf
[5] SFC commences MMT proceedings against Magic Holdings International Limited and its directors for late disclosure of inside information, May 15, 2018
[6] SFC commences MMT proceedings against Fujikon and its senior executives for late disclosure of inside information, April 10, 2018
[7] See for example “Better quality in disclosure- use of percentages”, “Trends in inside information disclosure” and “MMT ruling on AcrossAsia and enforcement efforts” in SFC, Corporate Regulation Newsletter, Issue no. 4, December 2016 and “Disclosure matters” in SFC, Corporate Regulation Newsletter, Issue no July 1, 2014
[8] Rule 13.09 of the Rules governing the listing of securities on the Stock Exchange of Hong Kong Limited and rule 17.10 of the Rules governing the listing of securities on GEM of The Stock Exchange of Hong Kong Limited
[9] SFC, Guideline on disclosure of inside information, June 2012. These Guidelines provide examples and discuss issues on particular situations in relation to the application and operation of the provisions. They do not have the force of law.
[10] SFC, FAQ on disclosure of inside information, Dec. 8, 2014

Jurisdictions: 

Partner, King & Wood Mallesons (Hong Kong)

John Baptist specialises in corporate finance, capital markets and mergers and acquisitions law. He has practised law in the jurisdiction of Hong Kong for over a decade. His clients include Hong Kong, Chinese and multinational companies as well as leading investment banks and financial institutions.

Baptist is an expert legal advisor in equity capital markets transactions and has successfully closed over 30 IPOs and secondary offerings, with a total value of an excess of US$25 billion, including landmark IPOs such as HTSC, Bank of Communications, Haitong Securities and China Huishan Dairy. Many of these transactions were awarded “Deal of the Year” in various awards.

Prior to joining KWM Hong Kong office, John Baptist worked in other leading international law firms and investment banks. He has had the opportunity to work in Beijing, Shanghai, and London for over five years.