Insider Dealing

Insider Dealing

Insider Dealing 1400 788 Hauzen

Insider dealing in Hong Kong is a criminal offence and also constitutes a civil offence as a form of market misconduct. The relevant legislation sets out what constitutes insider dealing, as well as providing for a number of statutory defences.

General

Insider dealing laws were first introduced into Hong Kong in 1978. An insider dealing tribunal was set up with a High Court judge and two lay members. With the introduction of the Securities and Futures Ordinance (Cap 571) (SFO) in 2003, a dual civil and criminal regime now exists. Insider dealing is pursued through the Market Misconduct Tribunal (MMT) for the civil regime and in the criminal courts. Criminal proceedings are initiated by the Securities and Futures Commission (SFC) with the consent of the Secretary for Justice. Proceedings will not be instituted against a person before the MMT if criminal proceedings have been brought and are pending or the matter cannot be prosecuted again. Similarly, criminal proceedings will not be brought against a person if MMT proceedings are pending or the matter cannot be instituted again.

References:
Section 252(1) of the Securities and Futures Ordinance (Cap 571) (SFO)
SFO, s 283
SFO, s 307

When does insider dealing take place?

There are six circumstances where insider dealing takes place:

  • A person with inside information deals in the shares of a company he is connected to
    A connected person (insider) has information they know to be ‘inside’ information and deals in the securities of a listed corporation, their derivatives, or those of a related corporation; or counsels or procures another person to deal in those securities or their derivatives knowing or having reasonable cause to believe that the other person will deal in them.
    References:
    SFO, s 270(1)(a)
    SFO, s 291(1)(a)
  • During a takeover offer, a bidder deals in the target shares
    A takeover offeror, knowing information about a takeover offer (including that an offer is contemplated or no longer contemplated) which constitutes ‘inside information’, deals in the securities of the listed corporation, their derivatives or those of a related corporation otherwise than for the purpose of the takeover; or counsels or procures another person to deal in those securities or their derivatives for such a purpose.
    References:
    SFO, s 270(1)(b)
    SFO, s 291(2)
    A takeover offer is defined as an offer made to all the holders of the shares in a corporation to acquire the shares or a specific proportion of them, or to all holders of a particular class of shares to acquire the shares of the class or a specified proportion of them.
    Reference: SFO, sch 1
  • A person connected with a company leaks inside information
    An insider with information they know is inside information discloses the information directly or indirectly to another person knowing or having reasonable cause to believe that the other person will use the information to deal, or to counsel or procure another person to deal in the listed securities of the corporation, its derivatives, or those of a related corporation.
    References:
    SFO, s 270(1)(c)
    SFO, s 291(3)
  • A bidder in takeover leaks information
    A takeover offeror, knowing information about the takeover offer is inside information, discloses the information directly or indirectly to another person, knowing or having reasonable cause to believe that the other person will use the information to deal, or to counsel or procure another person to deal in the listed securities of the corporation, its derivatives, or those of a related corporation.
    References:
    SFO, s 270(1)(d)
    SFO, s 291(4)
  • A person tipped off by an insider deals in securities
    A person, with information they know to be inside information which they have received directly or indirectly from a person he knows is an insider, and whom he knows or has reasonable cause to believe received the information as the result of being connected to the corporation in question, deals or counsels or procures another person to deal in the listed securities of the corporation, its derivatives, or those of a related corporation.
    References:
    SFO, s 270(1)(e)
    SFO, s 291(5)
  • A recipient of inside information about takeover then deals in target shares
    A person with information about a takeover offer who knows it is inside information which they received directly or indirectly from a person whom he knows, or has reasonable cause to believe, is a takeover offeror deals, or counsels or procures another person to deal in the listed securities of the corporation, its derivatives, or those of a related corporation.
    References:
    SFO, s 270(1)(f)
    SFO, s 291(6)
Definitions

Inside information
This is specific information about a corporation, a shareholder or officer, or the listed securities of the corporation or their derivatives, which is not generally known to the persons who are accustomed or would be likely to deal in the listed securities of a corporation but would if it were generally known to likely materially affect the share price.

 Reference: SFO, s 245

Note that under a 2013 amendment to the SFO, there is a general obligation of disclosure of price sensitive, or ‘inside’ information by listed corporations. Further guidance as to what may constitute inside information has been published by the SFC.

Dealing in securities
A person does this whether he acts as principal or agent, and agreeing to deal or buying and selling the right to deal is also included.

Reference: SFO, sch 1

Person connected with a corporation
Such an ‘insider’ has access to information about a company because of his relationship with it. Such an individual is connected with a corporation if he is:

  • a director or employee of it (or a related corporation)
  • a substantial shareholder
  • his position may give him access to insider information
  • he has access to inside information through his connection to another corporation if the information relates to a transaction
  • he was connected with the corporation through the above within six months of the relevant dealing

References:
SFO, s 247
SFO, s 287

Defences

There are a number of statutory exceptions aimed at permitting dealings where insiders have not exploited inside information:

  • the proper purpose defence applying to acquisition of qualification shares, acting in good faith performance of underwriting agreements and acting in good faith as liquidators, receiver or trustee in bankruptcy.
    Reference: SFO, s 271(1)
  • the Chinese Wall defence, applicable where there has been a segregation of decision-making where the person who took the decision did not have the inside information at that time and had not received advice from those in possession of such information.
    Reference: SFO, s 271(2)
  • the non-profit making or loss avoidance defence
    Reference: SFO, s 271(3)
  • the innocent agent defence, applicable to nominees or agents who deal only on an execution basis
    Reference: SFO, s 271(4)
  • the common information defence, applicable in off-market transactions
    Reference: SFO, s 271(5)
  • the defence of dealings with persons known to be connected
    Reference: SFO, ss 271(6)-(7)
  • the market information and facilitation defence
    Reference: SFO, s 271(8)
  • the trustee and personal representative defence
    Reference: SFO, s 272
  • the defence of a right to subscribe defence
    Reference: SFO, s 273
Penalties

Insider dealers face three types of penalty: criminal, civil and administrative.

Criminal
Insider dealers face a maximum penalty of HK$10 million and 10 years imprisonment.

References: SFO, s 303(1)

Civil
A person who has committed insider dealing is liable to pay compensation by way of damages to any other person who sustained a pecuniary loss as a result of the misconduct. The court may also impose injunctions in addition to or in substitution for damages.

References: SFO, ss 281 and 281(6)

Administrative
The SFC can apply to appoint administrators, take out an interim injunction to restrain disposition of property, and take out an injunction for a future financial penalty and the disgorgement of profits.

Reference: SFO, s 213

The Market Misconduct Tribunal

The MMT is chaired by a judge who is assisted by two lay members. It is inquisitorial in nature. The Financial Secretary may institute proceedings following a report by the SFC or a referral from the Secretary for Justice. The MMT makes its findings on the civil standard of proof, ie the balance of probabilities. At the end of an inquiry it may impose the following sanctions: a disqualification order, a cold shoulder, a cease and desist order, a disgorgement order, as well as ordering an individual to pay the Government and SFC costs, and referring the matter to a disciplinary body for further action.


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