No.1 April 2003
*****
Disclosure of Interests under the Securities and Futures Ordinance *****
DIRECTORS AND CHIEF EXECUTIVES
Discloseable interests
As under the previous regime the disclosure requirements for
directors and chief executives ('directors') of a listed company
are broader than for substantial shareholders requiring
disclosure of interests in any shares (not just voting shares)
or debentures of the listed company of which they are a director
and any associated company. Also as previously, there is no
disclosure threshold so that all interests must be disclosed
however small.
The principal changes introduced by the SFO are to extend
directors' disclosure obligations in respect of interests in
equity derivatives, short positions and changes in the nature of
interests in shares and debentures.
Definition_of_Associated_Company
An associated company is defined to include holding companies
and subsidiaries of the listed company, fellow subsidiaries of
the listed company's holding companies and any company in which
the listed company has an interest of more than 20% of the
nominal value of the issued shares of any class.
A company will be a subsidiary of another if the other company
controls the composition of its board of directors, controls
half the voting power at general meetings, holds more than half
of its issued share capital (excluding any part carrying no
right to participate beyond a specified amount on a distribution
of profits or capital) or is a subsidiary of a company which is
the other company's subsidiary. This definition thus makes each
company in a chain of companies a subsidiary of the ultimate
holding company.
When is Notification Required?
Disclosure_on_Commencement_of_the_SFO_-_Initial_Notification
On commencement of the SFO, a director has a duty of disclosure
in respect of any interest in the shares or debentures of a
listed company or its associated companies which has not
previously been disclosed. The principal interests falling into
this category will be:
* (i) short positions in shares;
(ii) interests in unissued shares such as options granted
to him by the listed company; and
(iii) interests in shares as a result of holding or
writing cash settled derivatives.
Additionally, some concert party arrangements and the interest
of a 'founder' of a discretionary trust (see under Substantial
Shareholders - Deemed Interests above) will result in new
disclosure obligations.
It should be noted that a substantial shareholder holding
between 5% and 10% of the shares of a listed company must
disclose this interest on commencement of the SFO even if he had
previously disclosed that interest in his capacity as director.
Interests discloseable on commencement of the SFO must be
notified on or before 14 April 2003
Further_Notifications
Thereafter directors must disclose any of the 'relevant events'
listed in Schedule 4. As for substantial shareholders, the
notification period is reduced to 3 business days.
An Initial Notification will also be required when a person has
a relevant interest at the time he becomes a director of a
listed company, a company of which he is a director becomes
listed, or a company becomes an associated company of a listed
company of which he is a director. In these limited circumstances
the period for notification is 10 business days.
Interests in Shares under Equity Derivatives
As for substantial shareholders, the SFO extends the disclosure
obligations of directors to interests in equity derivatives
which are not physically settled (ie. interests in unissued
shares such as options and interests under cash settled
derivatives). For directors this includes interests in the
shares of the listed company and its associated companies.
The circumstances in which a person will be taken to have a long
position in the underlying shares of equity derivatives and the
method of calculating the number of shares in which he is
interested are the same as for substantial shareholders.
Short Positions
Directors must disclose all short positions under equity
derivatives. A person will be taken to have a short position in
the same situations as for substantial shareholders (see above)
and the method of calculating the number of shares in which he
is interested is the same. Similarly, the SFO does not permit
the netting off of long and short positions and requires each to
be disclosed separately.
Calculation of percentage figure of directors' interests
Although the obligation of directors to disclose interests in
shares is not determined by crossing a percentage level,
directors are still required to state the percentage figure of
their interests.
Changes in the Nature of Interests
Directors are further required to disclose any change in the
nature of an interest which has previously been disclosed. The
situations in which there will be such a change are wide and
include a change in a person's title to shares or debentures,
any of his legal or equitable interest in shares or debentures
and any interest in the underlying shares of equity derivatives
on the exercise (by or against him) under such derivatives.
The exercise of rights under options and other derivatives and
the giving of shares as security (other than to a qualified
lender -see 'Substantial Shareholders - Exempt Security
Interests' for the definition of qualified lender) will, among
other things, require notification of a change in nature of a
director's interest.
There are only 3 circumstances in which there is taken to be no
change in the nature of a person's interest:
* (i) on the delivery of shares or debentures to him, if he
has previously notified his acquisition of an equitable
interest;
(ii) where there is a change in the terms on which
underlying shares are held due to a change in the number
of underlying shares; and
(iii) where a qualified lender (see above) comes to have a
security interest in the shares or debentures.
Hence, in contrast to the position for substantial shareholders,
there will be a notifiable change in the nature of a director's
interest in shares on his exercise of rights to subscribe for
and on delivery of shares under a rights issue.
Please note that this summary is for general information
purposes only. Specific legal advice should be sought when
appropriate.
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