The Securities and Futures Commission (the SFC) has strengthened its oversight of insider dealing over the years.
As with the provisions governing other forms of market misconduct, insider dealing is categorised into the civil regime and the criminal regime. The respective regimes are found under SFO, Pt XIII and SFO, Pt XIV. The corresponding provisions are similar, except for the fact that the Market Misconduct Tribunal (the MMT) hears the civil cases, and the courts for the criminal.
The insider dealing provisions in SFO largely replicate the provisions under the repealed Securities (Insider Dealing) Ordinance (Cap 395)—the predecessor statute on insider dealing. The decisions of the former Insider Dealing Tribunal (the IDT) remain relevant for our interpretation of insider dealing provisions under SFO today.
References:
MMT website, MMT reports
IDT website, IDT reports
SFO, s 270 and s 291 define insider dealing under the civil and criminal regimes respectively. Insider dealing takes place under three circumstances:
- dealing or counseling another to deal on the basis of inside information
- disclosing inside information (tipping off) and
- receiving inside information and dealing or counseling another to deal (being a ‘tippee’)
Under each of the circumstances, inside information may originate from two insider sources:
- someone connected with a corporation or
- someone involved with a proposed take-over offer for a corporation
Some terms used in the aforementioned definition of insider dealing are further elucidated in the SFO as follows:
Term |
Definition |
Provision in SFO |
|
“A person connected with a corporation” |
Includes a director, employee, substantial shareholder or partner of a substantial shareholder, of the corporation or a related corporation of the corporation or any person who, within the preceding six months, had one of these relationships with the corporation. |
s. 247(1) |
|
Also includes any directors or employees of another corporation who may be regarded as connected with that other corporation. |
s.247(2) |
|
|
“Take-over offer” |
In relation to a corporation, this means an offer made to all the holders (or all the holders other than the person making the offer and his nominees) of the shares in the corporation to acquire the shares or a specified proportion of them, or to all the holders (or all the holders other than the person making the offer and his nominees) of a particular class of the shares to acquire the shares of the class or a specified proportion of them. |
Sch 1, Pt 1, s1 |
Inside information – 3 limbs
The definition of what information constitutes ‘inside information’ in relation to a corporation is elucidated in SFO, s 245 and its corresponding provision in s. 285. It can be said what constitutes inside information in relation to a corporation encompasses three ‘limbs’. The information must be:
a) specific information about the corporation, a shareholder or officer of the corporation, or the listed securities of the corporation or their derivatives;
b) not generally known to the persons who are accustomed or would be likely to deal in the listed securities of the corporation; but
c) if it were generally known to them, the information would likely materially affect the price of the listed securities.
(i) “Specific information”: The information must possesses sufficient particularity to be capable of being identified, defined and unequivocally expressed. It is not necessary that all particulars or details of the transaction, event, or matter be precisely known.
Reference: IDT website, IDT Report on Chinese Estates Holdings Limited, page 40
(ii) “Not generally known”: Once the information becomes public, it ceases to be inside information. To prevent insider dealing, listed corporations and their directors have obligations to disclose inside information under the Rules Governing the Listing of Securities on the Stock Exchange of Hong Kong Limited (the Listing Rules) and SFO, Pt XIVA.
Reference: SFC website, Appendix A of Guidelines on Disclosure of Inside Information, June 2012, page 4.
(iii) “Material effect on price”: The information must likely materially affect the price of the listed securities if it were generally known to the market. Information that would be likely to cause a mere fluctuation, or a slight change in price, is not sufficient; there must be the likelihood of change of sufficient degree to amount to a material change.
Reference: IDT website, IDT Report on Lippo China Resources Ltd, pages 19-20
Other definitions:
‘Listed securities’ and ‘Listed’: Insider dealing concerns listed securities. Listed securities include issued and unissued securities that are not listed but which, at the time of the insider dealing, it is reasonably foreseeable that the securities will be listed and which, in fact, are subsequently issued and listed. ‘Listed’ means listed on a recognised stock market, and for the purposes of this definition, securities shall continue to be regarded as listed during a period of suspension of dealings in those securities.
References:
SFO, s 245(1)
SFO, s 285(1)
Related corporation: Insider dealing covers dealings in securities or derivatives of not only one listed corporation but also those of its related corporation.
Dealing: The definition of dealing under SFO is a broad one. A person shall be regarded as dealing in listed securities or their derivatives if, whether as principal or agent, he sells, purchases, exchanges or subscribes for, or agrees to sell, purchase, exchange or subscribe for, any listed securities or their derivatives or acquires or disposes of, or agrees to acquire or dispose of, the right to sell, purchase, exchange or subscribe for, any listed securities or their derivatives.
References:
SFO, s 249
SFO, s 289
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