Insider dealing – s. 271(3) defence that purpose of dealing did not include securing profit by “using relevant information” – “using” in s. 271(3) did not cover withholding or non-disclosure of relevant information
R1 was the Executive Director and Financial Director of C, a Hong Kong listed company, and R2 was its company secretary. C was insolvent due to a long-standing debt owed to X, who served various statutory demands on C between October 2002 and April 2006, but had been generally open to negotiations on repayment of the debt. In February 2007, X assigned the debt to G for HK$25 million (the “Assignment”). C was informed of the Assignment and G demanded repayment. In April 2007, C received a statutory demand from G, demanding payment of HK$70,270,491 (the “Statutory Demand”). At that time, the Assignment and the Statutory Demand were known to Rs but not to the market. Between February 2007 and June 2007, C’s shares were riding on a speculative wave of “small cap” stocks not supported by any realistic fundamentals and its price surged from HK$0.20 on 1 February 2017 to a peak of HK$0.97 on 29 May 2007 and HK$0.83 on 6 June 2007 before trading was suspended. R1 sold 6 million shares in C in late May 2007, and R2 sold a total of 10 million shares in C between February 2007 and June 2007, both resulting in profits. On 6 June 2007, G served a petition to wind up C. The SFC commenced proceedings against, inter alia, Rs for insider dealing. The Market Misconduct Tribunal (the “Tribunal”) found that while the Assignment and the Statutory Demand taken together constituted relevant information and Rs knew that they were relevant information under the Securities and Futures Ordinance (Cap. 571) (the “Ordinance”), no market misconduct was identified in respect of Rs. It was held that the defence under the then s. 271(3) of the Ordinance was applicable as their motivating factor was to profit from an unexpected speculative boom in the share price and their exercise of the share options was not in any way coloured by the price-sensitive information in their possession. The SFC appealed to the Court of Appeal. At the relevant time in 2007, s. 271(3) of the Ordinance provided that “A person shall not be regarded as having engaged in market misconduct by reason of an insider dealing taking place through his dealing in … listed securities or derivatives … if he establishes that the purpose for which he dealt … in the listed securities or derivatives in question … was not, or, where there was more than one purpose … did not include, the purpose of securing or increasing a profit … whether for himself or another, by using relevant information.”
Held, dismissing the appeal, that:
- The word “using” in the then s. 271(3) should not be construed as covering withholding or non-disclosure of relevant information. This would equate “use” of price-sensitive information with the “possession” of it and render the statutory defence in s. 271(3) otiose. If any senior executive who had such information would be deemed to have withheld information which he knew would significantly impact on the share price, regardless of the reason and whether it was the executive that caused the information not to be released to the public, so that there would always be a mischievous purpose in any dealing, the statutory defence would be illusory. Further, it was not necessary to strain the meaning of “use” to import the obligation of disclosure under r. 13.09 and related provisions of the Listing Rules in 2007, which were now codified into Part XIVA of the Ordinance.
- The suggestion that Rs knowingly and directly contributed to the maintenance of a falsely inflated share price of C by withholding or causing C to withhold price sensitive information and that they knowingly profited from the falsely inflated share price necessarily meant they were “using the relevant information” when they dealt in the shares, was not advanced by the SFC before the Tribunal. It was an issue of mixed law and fact, and there was no relevant finding of fact by the Tribunal to support this argument. Procedural fairness would require that a person who was the subject of an inquiry should know the factual and legal bases which formed part of the SFC’s case, so that he would have a full opportunity to address the pertinent issues in evidence and make meaningful submissions.