Hong Kong: Changes To Hong Kong's False Market Avoidance Regime Impact Issuers And Guarantors Of Listed Debt Securities

Last Updated: 31 December 2012
Article by Phill Smith and Joshua A. H. Ng

Keywords: Hong Kong, false market avoidance regime, listed debt securities 

With effect from 1 January 2013, Listing Rule 37.47 of the Rules governing the Listing of Securities (the "Listing Rules") on the Hong Kong Stock Exchange (the "Exchange") requires issuers and guarantors to:

  • issue an announcement to avoid the establishment of a false market in its listed debt securities;
  • contact the Exchange as soon as is reasonably practicable if it believes that there is likely to be a false market in its listed debt securities;
  • issue an announcement immediately on information which may have a material effect on its ability to meet its obligations under the listed debt securities; and
  • apply for a trading halt or trading suspension of its listed debt securities under specified circumstances.

New Listing Rule 37.47

The amendments to Chapter 37 of the Listing Rules are as follows:

Listing Rule 37.47 obliges an issuer to announce immediately, after consultation with the Exchange, any information which is necessary to avoid a false market in its listed debt securities where in the view of the Exchange there is, or there is likely to be, a false market in its listed debt securities. If an issuer believes that there is likely to be a false market in its listed debt securities, it must contact the Exchange as soon as is reasonably practicable. Listing Rule 37.47A states that if the listed debt securities are guaranteed, the guarantor must immediately announce any information which may have a material effect on its ability to meet the obligations under the debt securities.

Listing Rule 37.47B provides that where an issuer is required to disclose inside information under the Securities and Futures Ordinance (SFO), it must also simultaneously announce the information. Also, an issuer must simultaneously copy to the Exchange any application to the Securities and Futures Commission (SFC) for a waiver from disclosure under the SFC (see below), and promptly, upon being notified of the SFC's decision, copy it to the Exchange.

Listing Rule 37.47C provides that an issuer must, as soon as is reasonably practicable, apply for a trading halt or a trading suspension where there is information under rule 37.47 or rule 37.47A, or inside information which must be disclosed under the SFO (see below), or inside information which is the subject matter of an application to the SFC for a waiver but its confidentiality has been lost, and the information cannot be announced promptly.

Part XIVA of the Securities and Futures Ordinance

Under the new Part XIVA of the SFO, inside information is information about a listed corporation, a shareholder or officer of the listed corporation or the listed securities of the corporation, which is required to be disclosed if it is not generally known to 'the persons' who are accustomed, or would be likely, to deal in the listed securities of the corporation, but which would, if generally known to those persons, be likely to affect, materially, the price of the listed securities.

A listed issuer is permitted to withhold disclosure of inside information in specified circumstances:

  • Disclosure is not required if and so long as it is prohibited under law or court order.
  • Disclosure is not required if and so long as all of the following conditions apply:
    • reasonable precautions have been taken by the listed issuer to preserve confidentiality of the information;
    • confidentiality of the information is preserved;
    • one or more of the following is applicable:

a. the information concerns an incomplete proposal or negotiation;

b. the information is a trade secret;

c. the information concerns the provision of liquidity support from the Exchange Fund established by the Exchange Fund Ordinance or from an institution which performs the functions of a central bank;

d. disclosure is waived by SFC.

Every officer of a listed issuer must take all reasonable measures from time to time to ensure that proper safeguards exist to prevent breach of disclosure requirements.

The SFC is empowered to institute disclosure proceedings in the Market Misconduct Tribunal (MMT) if it appears to the SFC that a breach of a disclosure requirement has or may have taken place.

A listed issuer and any officer that is judged to be in breach of a disclosure requirement by the MMT would be subject to civil sanctions.

Impact on Issuers and Guarantors

In the context of listed debt securities, 'the persons' are professional investors, as listed debt securities may only be offered to professional investors and, in any event, listed debt securities may only be traded on the Exchange in a board lot size of at least HK$500,000 (or its equivalent).

Professional investors are able to access various sources of market information such as Bloomberg and Reuters in addition to announcements made on the website of the Exchange by companies whose shares are listed on the Exchange.

The disclosure obligation under Chapter 37 and the SFO in relation to listed debt securities only requires the issuer (and any guarantor in respect of those listed debt securities) to make an announcement of information when it is specific information not generally known to professional investors, and which would, if known to them, be likely to affect materially the price of such listed debt securities.

It may well be that a different view on the disclosure will be taken by issuers of listed shares given that the price of listed debt securities is typically less sensitive to rumours and published announcements than the price of listed shares.

Issuers of listed debt securities whose shares are also listed on the Exchange and who are already in compliance with the disclosure obligation with respect to its listed shares are not expected to make any additional announcement of the same information to holders of its listed debt securities because such information is already generally available.

Similarly, issuers of debt securities whose shares are listed on another stock exchange and who have already announced all relevant information which has become available via sources such as Bloomberg and Reuters are not expected to make any additional announcement of the same information to holders of its listed debt securities because such information is already generally available.

However, issuers of listed debt securities whose shares are not listed on any stock exchange will be required to assess whether they have to disclose information not generally known to professional investors and which would, if known to them, be likely to affect materially the price of listed debt securities.

In this regard, issuers of listed debt securities pursuant to medium-term note programmes may be able to take the view that their most recent financial statements need not be the subject of an announcement either because they would be unlikely to affect materially the price of listed debt securities or because they are incorporated by reference in the offering circular in respect of the programme, copies of which are available from the issuer or any of the paying agents upon request.

Originally published on December 20, 2012

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© Copyright 2012. The Mayer Brown Practices. All rights reserved.

This article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein. Please also read the JSM legal publications Disclaimer.

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