HKEx Issues New Guidance Letter on Trading Halts and Inside Information Disclosure

The Stock Exchange of Hong Kong (the HKEx) has provided new guidance on trading halts and the disclosure of inside information. Trading halts are necessary where a listed issuer needs to announce Inside Information to the public. According to Part XIVA of the Securities and Futures Ordinance (SFO), Inside Information is information that is not generally known to people likely to deal in the securities of the listed issuer and that is likely to affect its price materially. Trading halts are therefore implemented to allow and time to disclose Inside Information to the public for the protection of investors and the maintenance of a fair market. Guidance Letter GL83-15 (the Guidance Letter) includes information on:

• requesting trading halts;

• avoiding and minimising trading halts; and

• keeping the market informed during trading halts;

Requesting Trading Halts

Under Main Board Listing Rule 13.10A (Growth Enterprise Market (GEM) Listing Rule 17.11A), Listed issuers must apply for trading halts for their listed securities under the following circumstances if an announcement cannot be made promptly:

• they have information that must be disclosed in order to avoid a false market in their listed securities;

• they believe that they have Inside Information that must be disclosed; or

• they believe that Inside Information has been leaked or is reasonably likely to have been leaked.

Leakage of Inside Information may occur during business negotiations or proposals that have not yet been finalised. The preservation of confidentiality of information is commonly used as a safe harbour (under the SFO) from disclosing Inside Information. In such situations, listed issuers should take measures to preserve the confidentiality of material information, including the execution of confidentiality undertakings and the use of code names in draft documents. However, if there is reasonable concern of such information being leaked or practical difficulty in maintaining confidentiality, the HKEx may require a trading halt to be requested.

Listed issuers should monitor price and volume movements of listed securities as well as news media to detect possible leakages of Inside Information. The HKEx does so routinely and may make relevant enquiries of listed issuers. have authorised representatives that can be contacted at all times to confirm whether the directors of the company are aware of anything that:

• may be relevant to unusual trading movement of the company's listed securities;

• might cause a false market in the company's listed securities; or

• constitutes Inside Information, which should be disclosed.

Generally, listed issuers do not need to respond to rumours, speculations or other market comments. However, if any such publicity is likely to create a false market in the company's listed securities, a clarification announcement (and trading halt, if necessary) may be required.

In all cases, listed issuers must assess promptly whether it has an obligation under the SFO to disclose Inside Information, and have an appropriate delegation of authority in place so that disclosures can be made in a timely manner and trading halts can be requested promptly for this purpose, if necessary. Requests for trading halts must be supported with reasons for the HKEx's consideration. Dual- or multiple-listed issuers, as well as A-share and H-share issuers should, as far as practicable, disseminate information in their different markets simultaneously.

The decision trees included in the Guidance Letter illustrate how to decide whether a trading halt is appropriate when possible leakage of Inside Information is discovered before the market opens and during trading hours.

Avoiding and Minimising Trading Halts

Although trading halts are meant to protect investors and help maintain a fair market in listed securities, they disrupt the operation of a continuous market nonetheless. Under Main Board Listing Rule 6.05 (GEM Listing Rule 9.09), listed issuers must ensure that trading in their listed securities resumes as soon as possible after a trading halt has been implemented. Usually, resumption of trading occurs in the trading window immediately following the listed issuer's publication of material information. Sometimes, the HKEx might impose certain conditions before trading in the securities of the listed issuer may resume.

The Guidance Letter sets out steps that listed issuers should take to avoid necessitating the implementation of trading halts and to reduce the length of trading halts that are implemented. They are as follows:

• make announcements containing Inside Information outside trading hours, not during trading hours;

• sign significant agreements outside trading hours and prepare the relevant announcements ahead of time so that they can be released immediately after signing;

• before the signing of significant agreements, consult the HKEx early on in relation to announcements of complex or controversial issues, or announcements that require pre-vetting;

• expedite the announcement of transactions or other Inside Information by using plain language and avoiding lengthy disclosures; and

• publish transactions announcements of transactions as soon as possible, even if the transaction itself is delayed (for example, by further negotiation or changes in the terms of the agreement).

Keeping the Market Informed during a Trading Halt

Once a trading halt is in effect, the listed issuer must announce the reason for the trading halt as soon as possible, including the subject of the transaction and the applicable Listing Rule classifications. Inside Information must be disclosed as soon as reasonably practicable. If the trading halt will unavoidably become a trading suspension, the listed issuer must continue to publish periodic updates or "holding announcements" on its progress towards trading resumption.