12. 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.
12.1 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.
12.2 De Minimis Change Exemption on Change
in Long or Short Positions (Sections 313(7) and (9))
The exemption applies so that an increase or decrease
in a person's holding or short position which results
in his interest crossing over a percentage level above
5% (in the case of a holding) or 1% (in the case of a
short position) will not be discloseable if:
- 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
- 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, in the case of a holding,
be a notice given under Section 313(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'. In the case of a short position, the 'Last
Notification' must be a notice given under Section 313(4)(c),
that is notice of a change in the percentage level of
a person's short position above 1%.
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.
12.3 De Minimis Change Exemption on Change
in the Nature of Interests (Section 313(8))
There is no duty of disclosure where:
- 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
- the percentage level of a person's unchanged interest
has crossed over a percentage level if:
- 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 Section 313(c) of a change in the level
of a person's interest above 5%); and
- 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 contains detailed examples
illustrating the workings of the de minimis exemptions.
12.4 Exempt Security Interests (Section 323(6))
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 (Section 323(6)). Further, the creation
of the security interest in favour of a 'qualified lender'
will not result in a change in the nature of the holder's
interest in those shares (Section 313(13)).
A 'qualified lender' is defined under Section 308 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.
As to when a qualified lender is taken to hold an interest
in shares 'by way of security only', a distinction is
drawn between the creation of a security interest in,
and a transfer of title to, shares. If a person has a
right to return equivalent shares and may deal with the
shares transferred to him as if they are his own in the
meantime, this is a transfer of title and not the creation
of a security interest.
Under Section 323(7) 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.
12.5 Wholly Owned Group Exemption (Section
313(10))
A wholly owned subsidiary is not required to notify an
interest in certain circumstances if its ultimate
holding company has given notice of its interest in the
relevant shares. The certain circumstances in which wholly
owned subsidiaries are exempted are those where the disclosure
obligation arises under Sections 313(1) or (4) (as set
out in paragraph 2.1 above). Significantly, the wholly
owned group exemption is not available on the making of
an 'Initial Notification' under Sections 310(2) and (3)
(ie. notice given when the SFO came into force, when an
interest is held in shares in a company which is being
listed or when a notifiable interest is acquired on a
reduction of the 5% threshold or 1% theshold for short
positions is reduced (see paragraph 2.2 above). Hence,
if a wholly owned subsidiary holds an interest of 5% or
more in the shares of another company at the time that
other company becomes listed, it cannot rely on the wholly
owned group exemption: instead both the wholly owned subsidiary
and its holding company will be obliged to separately
disclose the interest in the shares held by the subsidiary.
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.
12.6 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 (Section 314(2)):
* 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.
The underwriter of the rights issue will acquire an interest
in all rights shares that he agrees to take up if they
are not taken up by shareholders. The underwriter will
then need to file notice of cessation of his interest
in the number of rights shares taken up by shareholders
on completion of the rights issue.
12.7 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 (Section 323(3))
The interests of corporate custodians carrying on a business
of holding securities in custody for others 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.
12.8 Disaggregated Group Interests (Section
316(5))
More importantly, the SFO removes the obligation of a
holding company to aggregate the interests of controlled
companies (see paragraph 9.1 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
and any 'related corporations' (ie. companies within the
same group or under the same majority control (Section
3 of Schedule 1)).
This exemption is available for the fund management industry
only. It does not entitle family members whose interests
in the shares of 'family controlled' listed companies
are held by trustees to disaggregate such interests. A
trustee of a trust does not have 'customers' and will
probably not be 'carrying on a business' as an investment
manager, custodian or trustee. The terms 'investment manager'
and 'trustee' are specifically defined in Section 316(7).
12.9 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 (other than substantial
shareholders who are also directors), '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.
12.10 Collective Investment Schemes (Section
323(1)(c))
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 (Section 323(5)).
12.11 Intermediary Exemption (Section 323(1)(i))
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.
12.12 Further Exemptions
- 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.
- 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.
13. INFORMATION TO BE DISCLOSED (SECTION 326)
The SFO removes the previous requirement for substantial
shareholders to disclose particulars of registered shareholders
and changes in those particulars. Instead, it introduces
more structured notification forms to facilitate disclosure.
Among the details to be disclosed by a substantial shareholder
are the following:
- In the case of corporate substantial shareholders,
the name and address of any person in accordance with
whose directions it, or its directors are accustomed
or obliged to act, except where it is listed in Hong
Kong or on a specified stock exchange or is the wholly
owned subsidiary of any such listed company.
- In the case of subsequent disclosures of long positions
in shares disclosure is required of the highest price
and average price per share paid or received in an on-exchange
transaction. In off-exchange transactions the highest
and average consideration per share and nature of the
consideration must be disclosed. If no price or consideration
has been paid or received, this should be stated. Transactions
in equity derivatives do not require details of price
or consideration.
- In the case of equity derivatives, details as to
whether they are listed or unlisted, cash or physically
settled, and details of the underlying shares.
14. TIMING OF NOTICE
Notices should be filed with the Stock Exchange and the
relevant listed company at the same time or one immediately
following the other (Section 324(2)). The previous requirement
for notice to be given to the Stock Exchange first has
been removed.
15. FORMS TO BE USED
There are 6 separate forms to be used for notification
of interests under the SFO. These are:
- Form 1 �C Individual Substantial Shareholder Notice
- Form 2 �C Corporate Substantial Shareholder Notice
- Form 3A �C Director's/Chief Executive's Notice of
Interests in Shares of a Listed Company
- Form 3B �C Director's/Chief Executive's Notice of
Interests in Shares of Associated Corporation
- Form 3C �C Director's/Chief Executive's Notice of
Interests in Debentures of Listed Company
- Form 3D �C Director's/Chief Executive's Notice of
Interests in Debentures of Associated Company
The forms and notes thereto can be downloaded in Chinese
and English from the Hong Kong Exchange and Clearing Limited
web?site or the SFC website.
The forms can be printed out and completed manually.
Alternatively they are available in Microsoft Excel format
and can be completed offline using the Excel programme.
Directors who are also Substantial Shareholders
must use Form 3A (annexed hereto) instead of
Form 1 to disclose interests in shares of a listed company
of which they are directors.
If an event gives rise to separate disclosure obligations
in each capacity (as director and substantial shareholder),
both obligations can be fulfilled by filing Form 3A. For
example, if a person has a 5.9% interest in the shares
of a listed company and acquires a further 0.2%, he must
file a notice as a director (who must disclose all transactions)
and as a substantial shareholder because his interest
has crossed a percentage level.
16. PENALTIES FOR FAILURE TO DISCLOSE (SECTION
328)
Failure to make disclosure within the time limits required
by the SFO or the making of a statement which is false
or misleading in any material particular constitutes a
criminal offence carrying a maximum fine of $100,000 or
maximum prison sentence of 2 years for each offence. Members
and officers of a company can also be personally liable
for the offences of a company. The Financial Secretary
may further impose restrictions on the transfer of the
shares of any person convicted of an offence.
