Disclosure of Interests under the Securities and Futures Ordinance - Update

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.

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 (Section 308).

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 (Section 2 of Schedule 1).

Section 341 requires that a director of a listed company must disclose any of the following 'relevant events':

when he becomes interested in the shares or debentures of a listed company or any associated company;

when he ceases to be interested in such shares or debentures;

when he enters into a contract to sell any such shares or debentures;

when he assigns any right granted to him by the listed company to subscribe for shares or debentures of the listed company;

when an associated company grants him rights to subscribe for shares or debentures of that associated company, or if he exercises or assigns such rights;

when the nature of his interest in the shares or debentures of the listed company or any associated company changes; and

when he comes to have or ceases to have a short position in the shares of a listed company or any associated company.

As for substantial shareholders, the notification period is reduced to 3 business days.

where a director has a notifiable interest at the time the company becomes listed (Section 341(2)(a));

where a director had a notifiable interest when the SFO came into effect (Section 341(2)(b));

where a director has a notifiable interest at the time he becomes a director of a listed company (Section 341(2)(c)); and

where a director of a listed company has a notifiable interest in the shares of another company at the time that company becomes an associated company of the listed company (Section 341(2)(d)).

The period for notification in the case of an Initial Notification is 10 business days.

On commencement of the SFO, directors of listed companies were obliged to disclose any interest in the shares or debentures of a listed company or its associated companies which had not previously been disclosed. The principal interests falling into this category were:

short positions in shares;

interests in unissued shares such as options granted to a director by a listed company; and

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 - paragraphs 9.4 and 9.5 above) resulted in new disclosure obligations.

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.

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 paragraph 4 under Substantial Shareholders) 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.

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.

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 paragraph 12.4 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 under Section 341(5) in which there is taken to be no change in the nature of a director's interest:

on the delivery of shares or debentures to him, if he has previously notified his acquisition of an equitable interest;

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
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.

A director is taken to be interested in the interests of his spouse and minor children (not being themselves directors of the listed company), any company which he controls (ie. a company of which he controls the exercise of one third of more of the voting power at general meetings or whose directors are accustomed or obliged to act in accordance with his directions or instructions) and trusts. As under the previous disclosure regime, a director must also disclose his interest under a discretionary trust.

Although directors are not required to include the interests of a spouse or minor children who are themselves directors and chief executives of the listed company when disclosing their interests as a director or chief executive, if they are also a 'substantial shareholder' they must also disclose their interests held as such which must include interests held by a spouse or minor children irrespective of whether they are also directors of the company.

The provisions relating to cessation of interests are the same as for substantial shareholders.

The exemptions available to directors are limited to those in respect of basket derivatives, bare trustees and collective investment schemes, all as outlined under Section A above.

In particular, the exemptions available to substantial shareholders in respect of de minimis changes, lending shares under the SBL Rules and bonus and rights issues are not available to directors.

Where a director makes an 'Initial Notification' he is required, in the case of an on-exchange transaction, to disclose the highest price and the average price paid for the interest in the 4 months preceding the date of the relevant event prompting notification. In an off-exchange transaction he must disclose the nature of the consideration and the highest and average amounts of considerations paid for the interest within the same 4 month period (Section 349(4).

Subsequent notifications of acquisitions or disposals of interests must state, in on-exchange transactions, the highest and average price paid or received (or if no price is paid, that fact) and in off-exchange transactions the nature of the consideration and the highest and average price paid or received (or if no price is paid, that fact).

The amount and nature of consideration need not be stated in the case of 'equity derivatives'. This does not apply to the grant to a director of equity derivatives by a listed company or any associated company or to the assignment of such rights in which case the price or consideration paid or received must be disclosed.

Failure to make disclosure within the required time frame or the making of false or misleading statements constitute a criminal offence liable to the same fines and periods of imprisonment as for substantial shareholders (Section 351).