Disclosure of Interests under the Securities and Futures Ordinance

Exemptions

There are a number of exemptions and interests which may be disregarded. These are very detailed, hence the following is limited to a brief outline only of the principal exemptions and disregards.

Basket Derivatives

Basket derivatives over the shares of at least 5 companies listed on a 'specified' stock exchange are disregarded provided that no one share accounts for over 30% of the value of the total basket. The percentage figure is calculated at the time of issue of the derivatives.

De Minimis Change Exemption on Acquisition or Disposal

A person who acquires an interest in shares or ceases to be interested in shares resulting in his interest crossing over a percentage level, will be exempted from disclosing the new interest if:

(i) the percentage level of his interest is the same as, or less than, the percentage level of his interest stated in the 'Last Notification' given by him; and

(ii) the difference between the percentage figure of his interest disclosed in his 'Last Notification' and the percentage figure of his interest at all times after such notification, is less than 0.5%.

'Percentage level' in (i) above means the percentage figure rounded down (if not a whole number) to the next whole number. 'Percentage figure' in (ii) above, however, means the actual (unrounded) percentage figure.

The 'Last Notification' must be a notice given under s313(1)c, that is notice of a change in the percentage level of a person's interest above 5%. Hence a notification given on commencement of the SFO, on first crossing the 5% threshold or of a change in the nature of an interest will not qualify as a 'Last Notification'.

This exemption will not therefore apply if the percentage level of a person's interest has increased since his Last Notification or if at any time after such notification his percentage interest differed by 0.5% or more from the percentage figure of his interest stated in that notification.

De Minimis Change Exemption (short positions)

A similar exemption is available for minor changes in short positions.

De Minimis Change Exemption on Change in the Nature of Interests

There is no duty of disclosure where:

(i) the 'percentage level' (ie. the rounded down figure as explained above) of a person's unchanged interest (ie. disregarding the part in which his interest has changed) is the same as the percentage level of his interest in the last notice (this notice is not restricted to notices of change in the percentage level of an interest) given by him; or

(ii) the percentage level of a person's unchanged interest has crossed over a percentage level if:

(a) the percentage level of his unchanged interest is the same as or less than the percentage level of his interest given in the 'Last Notification' by him (ie. a notice under s313(c) of a change in the level of a person's interest above 5%); and

(b) the difference between the percentage figure (ie. the actual unrounded figure as noted above) of his unchanged interest and the percentage figure disclosed in the Last Notification has been less than 0.5% at all times since the giving of that notification.

The SFC's Outline of Part XV of the SFO contains detailed examples illustrating the workings of the de minimis exemptions.

Exempt Security Interests

An interest in shares is not required to be disclosed if it qualifies as an 'exempt security interest' ie. if it is held by a 'qualified lender' by way of security only for a transaction entered into in the ordinary course of his business. A 'qualified lender' is defined to include an authorised financial institution, an authorised insurance company, an exchange participant of a recognised exchange company and an intermediary licensed to deal in securities or margin financing. The term also now includes overseas institutions authorised to carry on business as a bank, insurance company or activities which, in the opinion of the SFC, are equivalent to the regulated activities of intermediaries in countries recognised by the SFC.

An interest will no longer qualify as an 'exempt security interest' if the qualified lender becomes entitled to exercise voting rights of the relevant shares due to default by the person who gave the security, and shows an intention or takes any step to exercise or control the exercise of those voting rights. Similarly, an interest will cease to be an 'exempt security interest' if the power of sale becomes exercisable and the qualified lender or its agent offers for sale all or any of the shares. In either case, the qualified lender is regarded as having acquired an interest in the shares and is obliged to disclose his interest.

Wholly Owned Group Exemption

A wholly owned subsidiary is not required to notify an interest if its ultimate holding company has given notice of its interest in the relevant shares.

Further, transactions between wholly owned subsidiaries of the same group do not give rise to a duty of disclosure since the number of shares in which the ultimate parent is interested or has a short position and the nature of its interest remains the same. Hence transfers of shares of a listed company, the grant and taking of options over such shares and the issue of warrants between wholly owned subsidiaries of the same group do not give rise to a duty of disclosure.

A duty of disclosure will arise if any relevant subsidiary ceases to be wholly owned, even if only 1% of its shares are sold to a third party.

Bonus and Rights Issue Exemption

When there is a rights issue shareholders become interested in the unissued shares covered by the issue. In calculating their percentage interest the following formula should be used:

nominal value of shares (including unissued shares)in which the shareholder is interested X 100 nominal value of shares of the listed company of the same class in issue+ nominal value of shares to be issued on completion of the bonus/rights issue *

* This is the only situation where the denominator is increased to take account of unissued shares.

Shareholders of listed companies who take up rights under qualifying bonus and rights issues (and whose percentage interest therefore remains unchanged) are not required to make any disclosure whereas shareholders who do not take up their rights (and whose percentage interest therefore changes) will have to make disclosure.

If a shareholder sells his rights, both he and the buyer must make disclosure if their interests cross a percentage level.

A rights issue is defined to include the offer by a listed company of its shares to holders of its issued shares at a certain date (other than to shareholders whose address is in a place where such an offer is not allowed under local law) in proportion to the number of shares held by them at that date. A rights issue does not however cover an offer or issue of shares in lieu of a cash dividend.

Investment Managers, Custodians and Trustees

The exemption previously available to local SFC registered investment managers and trust companies is removed. The following exemptions may however be relied on:

Bare Trustee Exemption

A narrow exemption is retained for bare trustees ie. a trustee who is only entitled to deal with the interest in accordance with the instructions of the beneficiary.

Exempt Custodian Interest

The interests of corporate custodians need not be disclosed provided that the custodian has no authority to exercise discretion in dealing in the shares or exercising the rights attached to those shares.

Disaggregated Group Interests

More importantly, the SFO removes the obligation of a holding company to aggregate the interests of controlled companies (see Family and Controlled Company Interests above) who are investment managers, custodians or trustees whose interest in the shares arises solely from their obligation or entitlement to invest in, manage, deal in or hold interests in those shares on behalf of customers in their ordinary course of business as such. For the exemption to apply the controlled company must exercise any rights to vote in respect of the shares and any power to invest in, manage, deal in or hold the shares, independently of its controlling company or any other company within the same group.

Securities Borrowing and Lending Exemption

The Securities and Futures (Disclosure of Interests - Securities Borrowing and Lending) Rules ('SBL Rules') simplify the regime for disclosure of securities borrowing and lending for substantial shareholders, 'approved lending agents' and 'regulated persons'.

Substantial Shareholders

Substantial Shareholders are exempted from disclosing changes in the nature of their interest arising on the lending and return of shares provided that they lend shares through an 'approved lending agent' (see below) who holds the shares as their agent for the sole purpose of lending shares and the shares are lent using a specified form of agreement. In essence, this is an agreement providing for the borrower to provide collateral exceeding the value of the shares lent. The value of the collateral is marked to market and the lender can require return of the shares at any time.

Approved Lending Agents

Companies approved by the SFC as 'Approved Lending Agents' ('ALAs') holding 5% or more of the shares of a listed company will only be required to disclose changes in the percentage level of its 'lending pool' of shares in that listed company. Hence if shares are added to or removed from the lending pool, a disclosure obligation will arise. ALA's are exempted from any disclosure requirements arising when shares are lent from or returned to their lending pool.

Regulated Persons

Interests in shares borrowed by 'regulated persons' (ie. companies licensed to deal in securities and overseas brokers in recognised jurisdictions), that merely act as a conduit (ie. they borrow and on-lend the shares within 5 business days) are disregarded. On the return of shares to the regulated person, it may either return them to the ultimate lender or lend them to another borrower. Provided this is done within 5 business days, the regulated person's interest is disregarded. Regulated persons can still rely on this exemption if it transfers shares to a related company provided that the related company on-lends the shares within 5 business days after they were acquired by the regulated person.

Both ALAs and regulated persons are required to keep records of their transactions in the shares.

Collective Investment Schemes

The interests of holders, trustees and custodians of collective investment schemes authorised by the SFC, certain pension and provident funds schemes and qualified overseas schemes are not required to be disclosed.

A 'qualified overseas scheme' means a collective investment scheme, pension scheme or provident fund scheme established in a country recognised by the SFC. It will not include a scheme which is not run as a business, has less than 100 holders or where less than 50 persons hold 75% or more of the interests in it.

Intermediary Exemption

The SFO provides an exemption for an intermediary (eg. a dealer or broker) licensed or registered for dealing in securities who acquires interests in shares as agent for his client. The exemption only applies if (i) the interest is acquired for (and from) someone who is not a related company of the intermediary and (ii) the interest is held by the intermediary for not more than 3 business days.

A similar exemption applies to intermediaries whose interests arise under exchange traded stock futures or stock options contracts.

Further Exemptions

(i) Dual listings: a company may apply to the SFC for exemption from the provisions of Part XV if it is listed on an overseas exchange and certain other criteria are met.

(ii) Structured products: the issuer of structured products may apply to the SFC for an exemption from Part XV. The main conditions to be satisfied are that the company's shares are not listed in Hong Kong, it does not intend to raise publicly traded equity capital in Hong Kong and only the structured products will be listed in Hong Kong. It is the substantial shareholders and directors of the issuer of the structured products who are able to claim the exemption. The issuer and holders of the equity derivatives must still include interests in the underlying shares of those derivatives in determining their disclosure obligations.

Please note that this summary is for general information purposes only. Specific legal advice should be sought when appropriate.