Securities & Futures Commission of Hong Kong

Duties of substantial shareholders

 2.1 What is meant by an “interest” in shares? 

2.1.1 Substantial shareholders only have to disclose their interests in “shares in the relevant share capital” of a listed corporation – not all types of shares. Shares that are “shares in the relevant share capital” are shares of a class that carry a right to vote in all circumstances at general meetings of a listed corporation. They also include unissued shares which, if issued, would have such rights.

2.1.2 You will have an “interest” in shares for the purposes of Part XV if you have an interest of any kind whatsoever in the shares (s.322(2)). For example :

  • (i) If your name is listed in the register of members maintained by a corporation.
  • (ii) If the shares are held for you by another person such as your stockbroker, a custodian, a trustee or a nominee (e.g. in the Central Clearing and Settlement System (“CCASS”) or with HKSCC Nominees Limited, the CCASS depository).
  • (iii) If you are deemed by Part XV to be interested in the shares (see paragraph 2.2 below).
  • (iv) If you enter into a contract (for example if you hold, write or issue financial instruments including equity derivatives) that gives you a right to shares, or to a payment in the event of a change in the price of shares (see paragraph 2.3 below).
  • (v) If you hold shares as security.
  • (vi) If you are entitled to exercise rights attaching to the shares or control their exercise e.g. voting rights.

2.1.3 You have an interest in shares for the purposes of Part XV even if your right to the shares is conditional. For example, if on 3 April 2003 you agreed to buy 5% of a listed corporation’s shares, subject to approval by the shareholders of the listed corporation at a meeting on 15 April 2003, you will be taken to have an interest in the shares on 3 April 2003. Any restraints or restrictions on the exercise of rights to shares are also ignored. It is also irrelevant whether the condition has a reasonable chance of being met or whether you or the seller can influence the outcome of the condition. You will cease to be interested in the shares on 15 April 2003 if the shareholders do not approve the resolution. You must then file a notice stating that you ceased to be interested in 5% of the shares of the listed corporation.

Time of acquiring/ceasing to have an interest in shares

2.1.4 There is an important difference in the point at which the buyer of shares acquires an interest in the shares and seller ceases to have an interest in the same shares. The buyer acquires an interest when he contracts with the seller to buy the shares. However, the seller normally only ceases to have an interest in the shares 2 or 3 days later, on the settlement day - the point when he transfers the shares to the buyer (see also paragraph 4.1.4).  Accordingly, the date that each party must notify the Stock Exchange (and the listed corporation concerned) will often be 2 or 3 days apart. The distinction is particularly important in the case of contracts made off-exchange when the difference between the date of the contract and the date of completion may be several months.

 2.2 What are deemed interests? 

2.2.1 In calculating the total number of shares in which you are interested you must include any interests, and derivative interests, in shares of the same listed corporation that any of the following persons and trusts have :

  • (i) Your spouse and any child of yours under the age of 18. For example, if you hold 5% of the shares of a listed corporation and your husband holds 1% each of you is deemed to be interested in 6%. If your husband then buys a further 1% both you and your husband must file a notice as you each are now interested in 7% of the shares of the listed corporation as a result of the purchase.
  • (ii) A corporation which you control (a corporation is a “controlled corporation” if you control, directly or indirectly, one-third or more of the voting power at general meetings of the corporation, or if the corporation or its directors are accustomed to act in accordance with your directions).
  • (iii) A trust, if you are a trustee of the trust (other than a trust where you are a bare trustee i.e. where you have no powers or duties except to transfer the shares according to the directions of the beneficial owner).
  • (iv) A discretionary trust, if you are the “founder” of the trust (e.g. you had the trust set up or put assets into it – see paragraph 2.2.4), and can influence how the trustee exercises his discretion.
  • (v) A trust of which you are a beneficiary (discretionary interests may be ignored);
  • (vi) All persons who have agreed to act in concert to acquire interests in shares in the listed corporation, if you are a party to the agreement (the rules are complicated and legal advice should be sought).

2.2.2 You must also count as your short position any short positions that such persons and trusts have. This may create a short position (if you do not have a short position already) or increase the size of your short position.

2.2.3 Where two or more persons are interested in the same shares they must each make separate disclosures of their interests. For example, if you control A Ltd. which holds 6% of the shares of a listed corporation and A Ltd. buys a further 1% then you, your spouse and A Ltd. should all file separate notices.

2.2.4 A trust company or corporation that is a trustee has the same duty of disclosure as a trustee who is an individual.

2.2.5 The term “founder” in relation to a discretionary trust is defined very broadly (see s.308). It includes a person who has:

  • (i) provided, or undertaken to provide, shares or other property for the purpose of the trust;
  • (ii) entered into a reciprocal arrangement or understanding with another person leading to the creation of the trust, or
  • (iii) procured another person (e.g. a solicitor) to create the trust,

and -

  • (a) whose consent is required as a condition of any trustee exercising his discretion in connection with the trust property; or
  • (b) in accordance with whose wishes any trustee is :
    • (A) accustomed, or
    • (B) would be expected to act.

2.2.6 A person is a founder even though the property is provided indirectly or the trust is created indirectly. Also it does not matter that the arrangements, understanding, requirement to obtain consent, or wishes referred to are not legally enforceable.

2.2.7 Accordingly, if the trustees of a discretionary trust are directly interested in shares of a listed corporation, or are taken to be interested in such shares by the application of the aggregation rules in s.316(2), then the founder of the discretionary trust is also taken to be interested in all such shares.

 2.3 What are derivative interests and “underlying shares”? 

2.3.1 The term “equity derivatives” is given an extended meaning in Part XV in order to ensure that all interests and short positions (see below) in shares of a listed corporation are disclosed. The term includes any -

  • (i) contract giving a person rights, options or interests in, or in respect of, the underlying shares; and
  • (ii) contract whose settlement amount is calculated wholly or partly by reference to the price or value, or a change in the price or value, of the underlying shares or any rights, options or interests in the underlying shares.

2.3.2 Hence financial instruments such as options, warrants, convertible bonds, ADRs and stock futures are all covered by the term “equity derivatives”. Depending on the particular derivative you hold you may have rights to acquire shares, rights to require another person to buy shares, or a right to a sum of money depending on the price of certain shares.  The shares that may be delivered to you, or by you, or are used to determine the price or value of the derivatives are called the “underlying shares” of the equity derivatives.

2.3.3 For example, in the case of an issue of :

  • “European Style Cash Settled Call Warrants 2001-2002 relating to ordinary shares of HK$10.00 each in XYZ Ltd. issued by ABC Investment Bank”, the “underlying shares” are ordinary shares of HK$10.00 each in XYZ Ltd.

2.3.4 If you hold, write or issue financial instruments such as derivatives you will be taken to be interested in the underlying shares and these interests must be added to your other interests to determine your disclosure obligations. However, if the transaction in derivatives was between members of a wholly owned group of companies no duty of disclosure would arise (see s.2.12.9).

2.3.5 When filing a DI notice you are required to disclose your interest in shares of listed corporations - not interests in instruments creating those interests. Hence the details should relate to the underlying shares. For example, if 100 ADRs are worth 150 shares you should disclose an interest in 150 shares not 100 ADRs.

Public offers

2.3.6 The underwriter of a public offer of shares will have an interest in the shares which are to be offered even though they are unissued. Depending upon the terms of the underwriting agreement each member of the underwriting syndicate may be taken to be interested in all shares to be issued or a defined number of shares. However, on an initial public offer, the interest will not be notifiable until the corporation concerned has any of its securities listed on the Stock Exchange (see paragraph 1.4.1) as it will not be a “listed corporation” until that point. If the underwriter has an option to require the original shareholders to sell more shares than originally planned if the offering is over-subscribed (known as an “over allotment option” or a “greenshoe option”) this option will be an equity derivative and the underwriter(s) must disclose their long positions under this option on listing of the corporation. The original shareholders will also have to disclose the short position which arises on creation of the option. Disclosures are also required when the option is exercised or expires.

2.3.7 An “over allotment option” or a “greenshoe option” are usually coupled with a securities borrowing and lending agreement (“SBL agreement”) under which the original shareholders agree to lend shares to the underwriter(s). The duties of the borrower and the lender of shares if the corporation is already listed are examined in paragraph 2.13 but, if the SBL agreement is entered into before shares in the corporation are listed, a duty of disclosure arises at the point the the corporation becomes listed (see s.310(2)(a)). It should be noted that the exemption for wholly owned subsidiaries and their holding companies is not available when a duty of disclosure arises under s.310(2)(a) (see paragraph 2.12.9.1)

2.3.8 When completing a disclosure form you are asked to give further information in respect of derivative interests. In particular, you are asked to select a code describing the derivatives. The codes that apply to derivatives are set out in Table 4 of the directions and instructions for completing each form. If the derivatives are listed or traded on the Stock Exchange or the Futures Exchange you should choose code 401 or 402 depending on whether the derivatives are physically settled (i.e. shares are delivered on exercise of the derivative) or cash settled (cash is paid on exercise). If the derivatives are not listed then code 403 or 404 should be used. All warrants currently listed on the Stock Exchange are cash settled.

 2.4 What are meant by the terms “long position” and “short position”? 

2.4.1 You have a “long position” if you have an interest in shares, including interests through holding, writing or issuing financial instruments under which, for example :

  • (i) you have a right to take the underlying shares;
  • (ii) you are under an obligation to take the underlying shares;
  • (iii) you have a right to receive money if the price of the underlying shares increases; or
  • (iv) you have a right to avoid or reduce a loss if the price of the underlying shares increases.

2.4.2 The term “short position” is generally used in connection with a person who holds, writes or issues financial instruments such as equity derivatives. However, it is also used in the context of the position of the borrower under a securities borrowing and lending agreement who will have both a long and a short position when he borrows shares. You have a “short position” if you :

  • (i) borrow shares under a securities borrowing and lending agreement (see further paragraph 2.13.2 below), or
  • (ii) hold, write or issue financial instruments under which, for example:
    • (a) you have a right to require another person to take the underlying shares;
    • (b) you are under an obligation to deliver the underlying shares;
    • (c) you have a right to receive money if the price of the underlying shares declines; or
    • (d) you have a right to avoid a loss if the price of the underlying shares declines.

2.4.3 We take the view that when a listed company allots shares or issues an instrument under which it agrees to allot shares, or grants an option over its own shares, it is not taking a position in its own shares, short or long, it is simply issuing or agreeing to issue the shares. If the listed company does not have a short position then the controller of the listed corporation is not deemed to have a short position under s.316.

 2.5 How many shares am I taken to be interested in if I hold equity derivatives? 

2.5.1 The number of shares in which you are taken to be interested, or have a short position, if you hold, write or issue financial instruments such as equity derivatives is for example :

  • (i) the number of shares that may have to be delivered to you, or by you, on the exercise of rights under the derivatives;
  • (ii) the number of shares by reference to which the amount payable under the derivatives is derived or determined; or
  • (iii) (in the case of stock futures contracts) the contract multiplier times the number of contracts you hold.

2.5.2 If any party to a derivative can choose whether to settle in cash or by delivery then paragraph 2.5.1 (i) should be used to work out the number of shares in which you are interested. If it is not possible to determine the number of shares in which you are taken to be interested (or have a short position) at the date when you first acquire an interest in the underlying shares through an equity derivative then you need not file a notice. However, you should file a notice when you first become aware of the number of shares that will be delivered to you/will be required to be delivered by you. For example, if the number of shares that you will receive under an equity derivative is determined by the price of the shares on a given date in the future (and there is no minimum or maximum number that you are bound to get) then no duty of disclosure arises on entering into the derivative. Once the number of shares that you will receive is known a duty of disclosure arises. If the derivative specifies a
minimum then disclose the minimum figure. If the derivative specifies only a maximum then disclose the maximum figure. If the derivative specifies both a maximum and a minimum then disclose the figure which is most appropriate.

2.5.3 Continuing the example in paragraph 2.3.3 - assume that every 10 European Style Cash Settled Call Warrants 2001-2002 give the warrant holder the right to receive the cash equivalent of the average of the closing prices of one ordinary share in XYZ Ltd on the 5 business days on which quotations are available immediately preceding the exercise date minus the exercise price. If you hold 10,000,000 warrants, you will taken to be interested in 1,000,000 shares.

 2.6 How and when do I calculate the percentage figure of my interest? 

How many shares am I interested in ?

2.6.1 Firstly, you should add up all the shares of the listed corporation concerned (of the same class) in which you are interested in or are deemed to be interested in (see paragraphs 2.1 to 2.5). If you have bought and sold several blocks of shares on the same day you cannot normally deduct the number of shares that you sold from the shares that you bought to determine the number of shares in which you are interested at the end of that day.

The reason for this is that you acquire an interest in shares when you contract to buy them but you only cease to have an interest in shares when you complete the sale (by transferring the shares to the purchaser).

2.6.2 Hence a person who is interested in 6.1% of the shares of a listed corporation cannot avoid his disclosure obligations by buying 1% in the morning and selling 0.2% in the afternoon. He will end the day with an interest in 7.1% and his interest will only drop down to 6.9% when he completes the sale 2 days later (see also paragraph 4.1.4). If you have lent shares you should still include them in the total unless your right to require the return of the shares has been extinguished.

No netting-off between long and short positions

2.6.3.1 You cannot net off any short position that you have against your long position. The percentage figure of each must be calculated separately. This principle applies equally to multiple option strategies as to other transactions e.g. a straddle, which is a combination of put and call options, gives rise to both a long and a short position and is potentially discloseable as 2 separate transactions. Similarly, when parties in the derivatives market enter into squaring transactions (economically identical but opposite transactions) to close out
trades these give rise to a duty of disclosure.

2.6.3.2 For a structured derivative (i.e. a single transaction) involving a combination of option positions over the same lot of shares, you can either report the long and short positions by adding individual option positions together or report the effective long and short positions of the structured derivative. Long and short positions should be not netted off against each other. A digital option can be counted as 1 share.

Time of calculation percentage figure

2.6.4 From a practical standpoint, the percentage figure of your interest in shares (and your short position) can normally be determined by reference to the shares in which you are interested at the close of trading on the Stock Exchange at the end of any trading day. However, this should not be viewed as an endorsement to window dressing practices with the intention of adjusting the end of day position to avoid disclosure.

Standard situation (long positions in shares)

2.6.5 You should use the following formula to determine the percentage figure of your interest in shares in a listed corporation –

                   the total number of shares in which you are interested
                      _______________________________________             x  100
       number of shares of the listed corporation of the same class in issue

2.6.6 The number of shares of the listed corporation in issue can be found on the HKEx web site http://www.hkex.com.hk under “Companies/Securities profile” by entering the name or stock code of the listed corporation concerned. To work out the percentage level of your interest you simply round down the percentage figure of your interest to the next whole number. The date for calculating this percentage is the date of the occurrence of the relevant event (see paragraph 2.7) and the total number of shares in which you are interested,
and the number of shares of the listed corporation in issue, should be determined on that day.

2.6.7 Please note that the denominator (the number of shares below the line) is not increased simply because there are a number of financial instruments such as options, warrants, convertible bonds issued in respect of unissued shares of the same class in issue. 

2.6.8 In the forms you are asked to round the percentage figure of your interest to 2 decimal places. This is because a higher level of accuracy is of little interest to investors. However, you do not need to round the percentage figure of your interest to 2 decimal places when working out whether you have to file a notice. Hence if you are interested in 4.99999% of a listed corporation you do not have to round this to 5.00% and thereby come under a disclosure obligation.

Different classes of shares and “H” shares

2.6.9 If there are more than one classes of shares issued by the listed corporation concerned, the percentage figure of the shares in which you are interested should be calculated as a proportion of the number of issued shares of the class in which you are interested taken separately from other classes. Whether shares are divided into different classes is a question of fact. However, differences in rights of shareholders will normally
mean that shares are of different classes. Hence interests in “H” shares or “foreign shares” of a PRC company listed on the Stock Exchange (which have different rights to “A” or “domestic” shares) should be calculated as a proportion of the number of issued “H” shares separately from the number of issued “A” shares. For the avoidance of doubt we should add that interests in shares, and interests in the underlying shares of equity derivatives, should only be added together if the shares are of the same class.

Short positions

2.6.10 To work out whether you have a short position of 1% or more of the shares in a listed corporation you use a similar formula –

        the total number of shares in which you have a short position
                __________________________________________             x  100
   number of shares of the listed corporation of the same class in issue

Groups of corporations

2.6.11 If two corporations in a wholly owned group are both interested in the same shares the ultimate holding company should not aggregate both interests to calculate the percentage level of its interest as this would be double counting – transactions between corporations which are both members of the same group of companies do not increase or reduce the number of shares that the ultimate holding company must report.

2.6.12 There may be a change in the nature of a corporation’s interest as a result of transactions between corporations which are both members of the same group of companies.  Under s.313(13)(v) there is normally no change in the nature of a holding company’s interest in shares due to intra-group transfers between wholly owned corporations. However this provision does not apply to holding companies where the corporations in question are not wholly owned.

 2.7 When do I have to give a notice? 

2.7.1 You only have to file a notice on the occurrence of certain events - called “relevant events” (see s. 308 of the SFO). Relevant events include :

  • (i) When you first become interested in 5% or more of the shares of a listed corporation (i.e. when you first acquire a notifiable interest).
  • (ii) When your interest drops below 5% (i.e. you cease to have a notifiable interest).
  • (iii) When there is an increase or decrease in the percentage figure of your holding that results in your interest crossing over a whole percentage number which is above 5% (e.g. your interest increases from 6.8% to 7.1% - crossing over 7%). 
  • (iv) When you have a notifiable interest and the nature of your interest in the shares changes ( e.g. on exercise of an option).
  • (v) When you have a notifiable interest and you come to have, or cease to have, a short position of more than 1% (e.g. you are already interested in 6.8% of the shares of a listed corporation and take a short position of 1.9%).
  • (vi) When you have a notifiable interest and there is an increase or decrease in the percentage figure of your short position that results in your short position crossing over a whole percentage number which is above 1%. (e.g. you are already interested in 6.8% of the shares of a listed corporation and increase your short position from 1.9% to 2.1%).
  • (vii) If you have an interest in 5% or more of the shares of a corporation that is being listed, shares of a class that is being listed, or shares of a class which are being given full voting rights.
  • (viii) On commencement of the SFO, if you have an interest in 5% or more of the shares of a listed corporation, or if you have you have a notifiable interest and a short position of 1% or more, which has not previously been disclosed.
  • (ix) If the 5% threshold is reduced (and you have a notifiable interest immediately after the reduction) or the 1 % threshold for short positions is reduced (and you have a notifiable interest and a short position that is notifiable immediately after the reduction).


2.7.2 A notification of relevant events (vii) to (ix) is referred to as an “Initial Notification”. In the case of an Initial Notification the time allowed for filing a notice is 10 business days as opposed to 3 business days in the case of the other relevant events.

2.7.3 Relevant event (iv) may not always give rise to a duty to give a notification. The change in the nature of your interest is not required to be reported if the percentage level of your interest that has not changed, and the percentage level of your interest at the last notification given by you are both the same. For example, if you have an interest in 5.6% of the shares of a listed corporation and lend 0.5% the percentage level of your interest that has not changed is 5.0% (i.e. 5.6% less 0.5% equals a percentage figure of 5.1% which is then rounded down to a percentage level of 5.0%) and no notification need be made. However, if you have an interest in 5.6% of the shares of a listed corporation and lend 1.0% the percentage level of your interest that has not changed is 4.0% (i.e. a percentage figure of 4.6% rounded down to a percentage level of 4.0%) and a notification must be made.

2.7.4 However a duty of disclosure may also arise in a range of other situations - principally where aggregation provisions, or exemptions, cease to apply e.g. where a person is taken to be interested in shares in which a controlled corporation is interested and the corporation ceases to be a controlled corporation (see s.316(6)); and where subsidiary covered by the group exemption ceases to be a wholly owned subsidiary (see s.313(11)). See also paragraph 2.12.9 below.

Duties of disclosure resulting from Share Repurchases or Placements

2.7.5 A duty of disclosure may also arise due to actions taken by others. For example, if the listed corporation concerned bought back shares and as a result the number of shares in issue reduced which leads to the percentage level of your interest increasing, you would come under a duty of disclosure. On the question of the timing of the disclosure, a notice should be filed within 3 business days of the date that the shares are cancelled. They will be cancelled immediately following completion of the share repurchase. However, as will
be seen below (paragraph 4.1) the time allowed for reporting the change will only run from the date that you became aware of the facts that lead to the change in the percentage level of your interest.

2.7.6 It is common in Hong Kong for there to be a “placement” and a related “top-up”. The major shareholder places a block of shares with a third party and then the listed corporation issues the same number of new shares to the major shareholder. This leads to a dilution of the interests of other shareholders in the listed corporation. If as a result of a placement and top up, the percentage level of your interest reduces you will come under a duty of disclosure. The disclosure obligation arises from the date that the shares are issued. This would normally be on the date of allotment. However, as will be seen below (paragraph 4.1) the time allowed for reporting the change will only run from the date that you became aware of the facts that lead to the change in the percentage level of your interest i.e. the date that you became aware that the number of shares in issue had increased.

2.7.7 As the disclosure obligation arising following a share repurchase, or placement, does not arise from your having bought or sold any shares (or there being a change in the nature of any shares that you hold) you need only complete column 1 of the box entitled “Details of relevant event” (e.g. Box 14 of Form 1). You need not state in this box the capacity in which you held any shares, the number “bought/sold or involved” or the
consideration. 

Changes in the percentage level of a short position

2.7.8 In relation to paragraphs 2.7.1 (v) and (vi) you should note that you only have to make a disclosure as a result of your short position passing through the 1% percentage level or a higher percentage level if you also have a notifiable interest (i.e. a 5% long position).  You are not required to make a disclosure if there is a change in the percentage level of your short position but do not have a “notifiable interest”. Hence if your short position rises from 5% to 6% but you still only have a 3% long position you will not be required to file a DI
notice.

 2.8 Do I have any disclosure obligations on commencement of the SFO? 

2.8.1 If you are a shareholder of a listed corporation you will have a separate duty of disclosure on commencement of the SFO, if you have an interest in 5% or more of the shares of a listed corporation, which has not previously been disclosed under the repealed S(DI)O. It does not matter whether you have a direct interest in the shares or whether you are deemed to be interested in the shares (see paragraphs 2.1 to 2.5), if the interest has not previously been disclosed, you must disclose that interest on commencement.

2.8.2 If you are a shareholder of a listed corporation you will have a duty of disclosure on commencement of the SFO, if you have an interest in 5% or more of the shares of a listed corporation and you have a short position of 1% or more.

2.8.3 The biggest group of persons affected are persons who have an interest between 5% and 10% of the voting shares of a listed corporation. However, persons with interests of 10% or more and either :

  • (i) a short position of 1% or more; or
  • (ii) an interest in shares as a result of holding writing or issuing cash settled derivatives,

must also make a disclosure on commencement.

2.8.4 In addition some concert party arrangements may result in a new disclosure obligation and interests which should have been disclosed under the S(DI)O, but have not been disclosed, will also be caught (see paragraph 5.3). Persons that have an interest in unissued shares were not previously required to disclose these interests and they must be disclosed on commencement. Another interest that would be discloseable is the interest of the "founder" of a discretionary trust. If you are the founder of a discretionary trust (e.g. you had
the trust set up or put assets into it), and you can influence how the trustee exercises his discretion then on commencement of the SFO you are taken to have an interest that will not have previously been disclosed under the S(DI)O. Accordingly, that interest must be disclosed on commencement.

2.8.5 However commencement does not change the nature of your interest so there is no duty to notify a change in the nature of your interest that arose after the last notice was filed under the S(DI)O but before the commencement of the SFO.

2.8.6 If you have a duty to make a disclosure on commencement the notice should be filed on or before 14 April 2003. The date of the “relevant event” will be stated on the form as 1 - 4 – 2003. You will leave blank the next Box “Date when the substantial shareholder became aware of the relevant event/interest in the shares (if later).” You need only complete column 2 of the Box entitled “Details of the relevant event”.

2.8.7 If you are required to make a disclosure on commencement of the SFO (an “Initial Notification”) you are not required to state the number of shares bought/sold/or involved, or the price/consideration that you paid. This is because you did not acquire an interest in, cease to have an interest in, or change the nature of your interest in any shares at the time of the “relevant event” – the commencement of the SFO.

Interaction with wholly owned group exemption on commencement

2.8.8 A corporation that is wholly owned subsidiary does not qualify for the Wholly owned group exemption (see paragraph 2.12.9) on commencement (it only applies to duties arising in the circumstances set out in s.313(1) and (4) not 313(2)) and it must make a disclosure if it has an interest in shares that has not previously been disclosed under the S(DI)O. Hence if you are a corporation in a group and you, or a corporation that you control,
is interested in between 5% and 10% of the shares of a listed corporation, or if you have a notifiable interest and a short position in such shares, you must (each) file a notice before 14 April 2003.

Interaction with repealed S(DI)O

2.8.9 The Commission is of the view that a person who has acquired an interest or ceased to be interested in shares of a listed company, in the period 26 to 31 March 2003 should file a notice in accordance with the provisions of the S(DI)O. Provided the notice is filed within the period of 5 days next following the day on which the duty arises under the S(DI)O (i.e. between 1 and 5 April 2003 depending upon the date that the interest was
acquired/disposed of) the person will not have to file a separate notice under Part XV of the SFO. Notices filed outside the period of 5 days allowed for filing under the S(DI)O will not have been disclosed in accordance with the S(DI)O and must be notified under Part XV.

 2.9 What is meant by “the nature of your interest in the shares changes”? 

2.9.1 If “the nature of a person’s interest is not the same” before and after the relevant time a person comes under a duty of disclosure (see s.313(1)(d)). The term “nature of a persons interest is not the same” is generally paraphrased to “change in nature of an interest”. The situations in which there is a change in the nature of an interest are very broad. For example there will be a change in the nature of a person’s interest in shares when there is a change in the nature of his title to shares, when any of his interests, whether legal or equitable, change and when his interest in shares which are the underlying shares of equity derivatives change on the exercise by him, or against him, of rights under the equity derivatives (see s. 313(13)).

2.9.2 The most common situations in which there will be a change in the nature of a person’s interest in shares will be :

  • (i) When a person exercises rights under derivatives;
  • (ii) When a person has rights under derivatives exercised against him;
  • (iii) When a person lends shares under a securities borrowing and lending agreement (see paragraph 2.13.3 below); and
  • (iv) When a person gives shares to another person as security.

2.9.3 For example, if you have a right under a call option to require Mr. X to sell you 1,000,000 shares, you will have an interest in 1,000,000 shares. This interest is also a contingent interest. When you exercise your rights your contingent interest will become an immediate right to the delivery of the 1,000,000 shares – this is a change in the nature of your interest. The exercise of the rights also creates a binding obligation to deliver the shares to you causing a change in the nature of Mr. X’s interest in the shares.

2.9.4 Similarly, if you have a right to require Mr. X to buy 2,000,000 shares under a put option, Mr. X will have a contingent interest in the 2,000,000 shares. When you exercise your rights to require Mr. X to take 2,000,000 shares, Mr. X no longer has a contingent interest in the shares but is under an immediate obligation to take delivery of the shares. This is a change in the nature of his interest. The exercise of the rights creates a binding obligation to deliver the shares to Mr. X thus causing a change in the nature of your interest in the shares.

2.9.5 There are also five circumstances in which there is taken to be no change in the nature of a person’s interest (see. s. 313(13)) and a further circumstance is set out in s.5 of the Securities and Futures (Disclosure of Interests – Exclusions) Regulation (L.N. 229 of 2002) (“the Exclusions Regulation”). There is taken to be no change in the nature of a person’s interest in shares :

  • (i) For a purchaser of shares on delivery of shares to him (if he has disclosed the acquisition of the equitable interest when he contracted to buy the shares).
  • (ii) For a vendor of shares on entering into a contract for sale if the sale is required to be completed within 4 days on which the Stock Exchange is open for business (see s.5 of the Exclusions Regulation).
  • (iii) For a substantial shareholder on exercise of rights to subscribe for shares granted to him as part of a rights issue, and delivery of the shares to him on completion of the rights issue.
  • (iv) For a holding company, if the change in nature of the interest is due to the acquisition of an interest in those shares by its wholly owned subsidiary from another wholly owned subsidiary.
  • (v) For a holder of derivatives, due to a change in the terms on which rights under equity derivatives may be exercised because of a change in the number of underlying shares in issue.
  • (vi) For a substantial shareholder, where a “qualified lender” (see paragraph 2.12.16) comes to have an interest in the shares by way of security.

2.9.6 If a contract for the sale shares is not required to be completed within the period of 4 days mentioned in paragraph 2.9.5 (ii) you must file a notice within 3 business days of the date of the contract for sale (for the change in the nature of your interest – for substantial shareholders use code 117 “other”) and file a second notice within 3 business days of delivery of the shares (when you cease to be interested in those shares). We take the view that if a vendor of shares is not required to file a notice for the reasons mentioned in paragraph 2.9.5 (ii) then a person who is taken to have that interest (i.e. the vendor’s holding company or spouse) is also not required to file a notice.

2.9.7 As a result of the exemption mentioned in paragraph 2.9.5 (vi) pledging of shares to a qualified lender “by way of security” will not need to be reported. However, if any interest other than a security interest is taken by the qualified lender, the grant of that interest would have to be reported by both the substantial shareholder and the qualified lender (see also paragraph 2.12.16). If a substantial shareholder pledges or charges shares he should use code 117 (“other”) to describe the relevant event. The person taking a security interest should
use code 101 or 103 to describe the relevant event and code 203 to describe the capacity in which it acquired the interest.

 2.10 What price/consideration must I disclose and how do I calculate this? 

2.10.1 In the DI forms you are asked for details of the relevant event. This is the event that triggers the Notice. The details that you must give relate to the shares bought/sold or involved at the time of the relevant event – not the shares which you already had. Where the relevant event is prompted by a transaction that forms part of a series of transactions effected on the same day, the details of the relevant event that you give should relate to all
shares in which you acquired an interest, ceased to have an interest or the nature of your interest changed on that day as a result of that series of transactions.

Sales and purchases of shares

2.10.2 If an on-exchange transaction prompts disclosure the highest price per share and the average price per share must be disclosed. Similarly, in the case of an off-exchange transaction the average consideration per share and the nature of the consideration given or received must be stated. An acquisition or disposal is made “On-Exchange” when the transaction took place in the ordinary course of trading on a recognized exchange and “Off-Exchange” covers all other transactions.

2.10.3 If you have entered into a single transaction that takes you through a percentage level the highest price and average price will be the same. However, if you are an individual or a fund manager that has entered into a number of transactions during any trading day you will need to calculate the average price. The average price/the average consideration per share paid or received is determined by dividing the total amount paid/received for the shares bought or sold by the number of shares bought or sold. A table of various types of
consideration and appropriate codes appears in the Notes to each form. If no price or consideration has been paid or received the price or consideration should be stated as “NIL”.

2.10.4 If you are a financial institution conducting a wide range of transactions on any day you should isolate the transaction, or series of transactions, that gave rise to the duty of disclosure. You should then disclose the highest price per share and the average price paid or received (the average consideration per share and the nature of the consideration for offexchange trades) for that transaction(s). The term “series of transactions” means transactions of the same type e.g. a order to buy 2,000,000 shares for the “house position” that is executed in 20 trades in one day. If the trades are executed both on-exchange and off-exchange then the average price/highest price average consideration/nature of consideration must all be given.

Transactions where no consideration need be stated

2.10.5 If the transaction that prompts disclosure is :

  • (i) a change in the nature of your interest in shares (e.g. a securities borrowing and lending transaction);
  • (ii) a transaction in derivatives; or
  • (iii) a change in a short position,

the highest price per share and the average price per share (average amount and nature of the
consideration for off-exchange trades) need not be disclosed.

Example

2.10.6 We have set out below an example of how to complete Box 14 of Form 1.  Assume that you already own 4,500,000 shares in the listed corporation or 4.5% of the shares in issue. On 31st December 2003 you purchased (through the Stock Exchange) 400,000 shares for HK$800,000 and 100,000 shares for HK$210,000 (all shares to be held beneficially) increasing your total shareholding to 5%. As the two transactions are a series of transactions on the same date the details of the relevant event that you give in Box 14 should relate to the purchase of 500,000 shares (the order for 400,000 shares plus the order for 100,000 shares). You should complete Box 14 in the following manner. The Codes to be used are described in the directions and instructions for completing each form.

14. Details of relevant event

   Relevant event code describing
circumstances
( see Table 1) 
Code describing
capacity in which shares
was held (see Table 2) 
Number of
shares bought/
sold or
involved
Currency On Exchange  Off Exchange
 Before
relevant
event
After
relevant
event
   

Highest
price per
share
 Average
price per
share
 Average
consideration
per share

Consideration
Code (see
Table 3)
Long
position
101    201  500,000  HKD  2.10 2.02  0  
Short
position
            

 2.11 What is meant by the “capacity” in which I hold shares? 

2.11.1 You will see in the last example that you are asked to state the “capacity” in which you held the interest in shares before or after the relevant event. The term “capacity” describes the type of interest that you have in shares – whether your interest is beneficial (i.e. the shares are held for your own benefit) or whether you have an interest as an investment manager managing a fund, or you have an interest because you hold the shares as a trustee for someone else. In the Notes to the prescribed forms there is a table which sets out all of the
common types of capacities and you are asked to choose the capacity in which you are interested in shares, and enter an appropriate code on the form.

The capacity in which you held the shares that gave rise to the relevant event

2.11.2 Firstly, in the box entitled “Details of relevant event” you are asked to state the capacity in which you were acting when you bought or sold the shares which gave rise to the duty to file a notice (or there was a change in the nature of your interest). If you sold shares, the capacity relates to the capacity in which you held the shares that were sold i.e. you should complete the column labeled “Before the relevant event”. If you purchased shares you should complete the column labeled “After the relevant event”. If there was a change in the nature of your interest you should complete both.

2.11.3 Normally, a single transaction will take your interest from, say, 5.9% to 6.1% and it is the capacity in which you acted in relation to that single transaction that must be disclosed. However, if you are a financial institution conducting a range of transactions on any day you should isolate the transaction, or series of transactions, that gave rise to the duty of disclosure and enter the capacity in which you acted in that transaction or series of
transactions. Hence, if you are acting in multiple capacities on any one day you should identify the series of transactions that gave rise to the disclosure obligation. If your asset management division purchased 10,000,000 shares in one day in 10 trades, and your trading desk borrowed 5,000,000 shares the same day in 5 transactions then you would identify whether the 10,000,000 series of transactions or the 5,000,000 series of transactions prompted the disclosure obligation and then choose capacity code 202 or 201 accordingly.

The capacity in which you held all of the shares in which you were interested.

2.11.4 In a separate box on the form labeled “Capacity in which interests in Box [ ] are held”, you are asked to state the capacity in which you held all of the shares in which you had an interest (a short position) immediately after the relevant event. You may, for example, hold 80% of the shares beneficially and the rest on trust. In this case you would enter the code for beneficial owner on one line and the code for “trustee” on the next row and then give the number of shares held in each capacity in the next column. If you hold a single block of
shares in more than one capacity you should select the code which you think best describes your circumstances.

 2.12 Exemptions and interests that are disregarded 

2.12.1 A number of exemptions have been created where it was felt that disclosure would be of little informational value to investors. Hence several exemptions remove the obligation to disclose small changes in interests in shares while others suspend the duty where there is duplication in reporting of interests. As the exemptions are sometimes very detailed they will not be examined at length in this outline and the following is merely a brief summary of the principal exemptions and disregards (listed in the order in which the statutory provision appears in the SFO). You should seek legal advice if you are unsure whether one of these exemptions may apply to you. Voluntary disclosures may be made under Part XV and you will not incur any penalty if you fail to claim an exemption/disregard that you are eligible for.

2.12.2 Most exemptions do not apply to a short position that you hold because of the nature of a short position. Only the exemptions mentioned in paragraphs 2.12.3, 2.12.4, 2.12.5, 2.12.7, 2.12.8, 2.12.9 and 2.12.11 apply to short positions. The SFC has power to exempt persons from all or any of the provisions of Part XV but it can only do so after having regard to the guidelines published after consultation with the Financial Secretary (see s.309(1)). The Guidelines published under s.309(1) only contemplate an exemption being granted in 2 types of case. These are briefly outlined in paragraph 2.12.4 and 2.12.5 and the Guidelines themselves are posted on the Part XV page of our web site. The SFC will not entertain applications for exemption in other cases.

2.12.3 Basket of shares.

2.12.3.1 Derivatives that derive their value from a basket of shares in several listed companies may be exempt. Shares of at least 5 listed corporations must be in the basket and no one share should account for over 30% of the value of the entire basket (see s.308(5)).

2.12.3.2 It has been argued that units in unit trust fall within the definition of “equity derivatives” and that they are therefore eligible for the exemption for derivatives that derive their value from a basket of shares. We do not agree. The exemption in s.308(5) does not extend to unit trusts.

2.12.4 Dual listings.

2.12.4.1 A corporation may apply to the SFC for exemption of that corporation, and others in relation to the corporation, from the provisions of Part XV, if it is listed on an overseas exchange and certain criteria are satisfied. For some corporations, either already listed or seeking a listing, the principal share trading market in their securities exists or will exist on a stock exchange other than Hong Kong. In some cases either no share trading or only nominal trading will take place on the Stock Exchange. In other cases the corporate insiders of such corporations will be subject to statutory disclosure of interest obligations in another jurisdiction that are comparable to those of Part XV. Requiring compliance by these corporate insiders with Part XV may result in additional costs without contributing to an informed market for the shares of the relevant corporation. (See s.309(1) and the Guidelines published under s.309(1)).

2.12.5 Issuers of structured products.

2.12.5.1 A corporation issuing structured products may apply to the SFC for exemption of that corporation, and others in relation to the corporation, from the provisions of Part XV if certain conditions are satisfied. The principal conditions are that the corporation’s shares are not listed in Hong Kong, the corporation has not raised and does not propose to raise publicly traded equity capital in Hong Kong, and that only the structured products will be listed in Hong Kong (See s.309(1) and the Guidelines published under s.309(1)). It is the substantial shareholders and directors of the corporation issuing the structured product (the “issuer”) that are exempt from disclosing their interests in shares and debentures of the issuer. The issuer and holders of the equity derivatives must still count the underlying shares of the equity derivatives in determining their disclosure obligations.

2.12.6 De minimis exemption (acquisitions and disposals). (See s.313(7)).

2.12.6.1 Where a person acquires an interest in shares, or ceases to be interested in shares, and as a result his interest crosses over a percentage level, the person will still not need to disclose the new interest if :

  • (i) the percentage level of his interest is the same as, or less than, the percentage level of his interest in the “last notification” given by him; and
  • (ii) the difference between the percentage figure of his interest disclosed in the “last notification” given by him and the percentage figure of his interest at all times thereafter, is less than 0.5% of the issued share capital (of the same class) of the listed corporation concerned.

2.12.6.2 The “last notification” must be a notification under s.313(1)(c) i.e. due to a change in the percentage level of your interest above 5%. An initial notification (crossing the 5% threshold) and a notification of a change in the nature of your interest do not qualify as a “last notification”.

2.12.6.3 The de minimis exemption is best explained with the assistance of an example.  In the following bar chart each bar represents the purchase or sale of an interest in shares of a listed corporation. The figures shown represent the percentage figure of your interest. The letters below each column represent whether the transaction is notifiable or exempt. N = Notifiable; E = Exempt ; NN = Not Notifiable. The reference to a percentage level refer to e.g. the level 6% or 7%. The term “percentage figure” refers to the actual percentage that you hold e.g. 6.1%, 5.7%.

  • (1) You buy 6.1% of a listed corporation. This is not a “last notification” as it was not made under s.313(1)(c).
  • (2) You sell 0.3% and the percentage figure of your interest passes though the 6% level. This is notifiable as the previous notice is an initial notification which is not counted as a “last notification”.
  • (3) You buy 0.4% passing through the 6% level. This is notifiable. It does not qualify for the de minimis exception because the percentage level of your interest after the transaction is not “the same as or lower” than your previous interest. This is a notification under s.313(1)(c) and qualifies as being a “Last notification” if the next transaction qualifies for the de minimis exemption.
  • (4) You sell 0.3%. This is exempt. All the conditions for the de minimis exemption are present.
  • (5) You buy 0.7%. This is exempt. All the conditions for the de minimis exemption are present. Even though you purchased more than 0.5% the percentage figure of you interest after the transaction is within 0.5% of the“Last Notification” i.e. 6.2%.
  • (6) You sell 0.8%. This is exempt. All the conditions for the de minimis exemption are present. Even though you sold more than 0.5% the percentage figure of you interest after the transaction is within 0.5% of the “Last Notification” i.e. 6.2%.
  • (7) You sell 0.2%. This is not notifiable because the percentage figure of your interest has not passed through a percentage level. None of the circumstances giving rise to a duty of disclosure listed in s.313(1) apply. The de minimis exemption does not create a reporting obligation if you stray outside the band of less than 0.5% from the “last notification”. However, the de minimis exemption is no longer available thereafter until there is a further notice filed under s.313(1)(c).
  • (8) You buy 0.7%, passing through the 6% level. This is notifiable because the percentage figure of your interest passes though a whole percentage level. It does not qualify for the de minimis exception because the percentage figure of your interest after the previous transaction was not “at all times” within 0.5% of the percentage figure given in the “last notification”. The difference between the percentage figure of the previous transaction and the “last notification” (5.6% and 6.2%) is 0.6%.


2.12.7 De minimis exemption (short positions). This exempts substantial shareholders from disclosing small changes in their short positions in shares (see s. 313(9)). The exemption operates in a similar manner to the de minimis exemption explained in paragraph 2.12.6 above.

2.12.8 De minimis exemption (changes in the nature of an interest).

2.12.8.1 At paragraph 2.7.3 we explained that a change in the nature of your interest is not required to be reported if the percentage level of your interest that has not changed, and the percentage level of your interest at the last notification given by you are both the same (see s.313(8)(a)). For ease of reference we will call this the “same percentage level exemption”.

2.12.8.2 Section 313(8)(b) extends the de minimis exemption to situations where there is, potentially, a disclosure obligation due to a change in the nature of an interest. Here, it is necessary to look at the percentage level of the shares in which a person’s interest has not changed. Where the percentage figure of a person’s interest in shares, in which the nature of his interest has not changed, crosses over a percentage level the person need not make adisclosure if :

  • (i) the percentage level of his interest (in shares in which the nature of his interest has not changed) is the same as or less than the percentage level of his interest in the last notification given by him; and
  • (ii) the difference between the percentage figure disclosed in the last notification and the percentage figure of the shares in which his interest has not changed (at all times subsequent to the last notification) is less than 0.5% of the issued share capital (of the same class) of the listed corporation concerned.

2.12.8.3 The example below is similar to that in paragraph 2.12.6. However, when there is a change in the nature of your interest, the total number of shares in which you are interested remains fixed whilst the shares in which your interest is unchanged is shown as the dark part of each column.

2.12.8.4 In this example, assume that –

  • (1) You buy 6.1% of a listed corporation. This is an “initial notification” which is notifiable.
  • (2) You sell 0.3% and the percentage figure of your interest passes though the 6% level. This is notifiable as the previous notice is an initial notification which is not counted as a “last notification”.
  • (3) You buy 0.4% passing through the 6% level. This is notifiable. It does not qualify for the de minimis exception because the percentage level of your interest after the transaction is not “the same as or lower” than your previous interest. This is a notification under s.313(1)(c) and qualifies as being a “Lastnotification” if the next transaction qualifies for the de minimis exemption.
  • (4) You lend 0.3%. There is therefore a change in the nature of your interest in 0.3% of the shares. The percentage figure of shares in which your interest which is unchanged drops through the 6% band to 5.9%. This would normally be discloseable. However, it is exempt as all the conditions for the de minimis exemption are present.
  • (5) You buy 0.4% taking your interest to 6.6%. This is not notifiable because the percentage figure of your interest has not passed through a percentage level.
  • (6) You lend another 0.5%. There is therefore a change in the nature of your interest in 0.5% of the shares. The percentage figure of shares in which your interest is unchanged since the last notification drops through the 6% band from 6.3% to 5.8% (we use 6.3% as the starting point rather than 6.6% because there is already a change in the nature of your interest in the 0.3% which have already been lent). This loan is therefore exempt. All the conditions for the de minimis exemption are present. The percentage figure of the shares in which your interest is unchanged after the transaction is within 0.5% of the “Last Notification” i.e. 6.2%.
  • (7) You lend a further 0.2%. This transaction is notifiable as a change in the nature of your interest. This is because (1) the percentage level of the shares in which your interest is unchanged is a lower percentage level than your interest at the time of the last notification (i.e. 5% as opposed to 6% - so that the same percentage level exemption is not availables.313(8)(a)) and (2) (turning to the de minimis exemption in s.313(8)(b)) the percentage figure of your interest that is “at all times” unchanged is now more than 0.5% from the percentage figure of your interest at the last notification (i.e. 6.2%) and hence the de minimis exemption does not assist.
  • (8) The borrower returns 0.7% of the shares. However the percentage figure of the shares in which your interest is unchanged remains at 5.6%. This is because the notification at step (7) does not count as a “last notification” because it is not due to a change in the percentage level of the interest (notifiable under s.313(1)(c)). Therefore, again (1) the percentage level of the shares in which your interest is unchanged is a lower percentage level than your interest at the time of the last notification (i.e. 5% as opposed to 6% - so that the same percentage level exemption is not available s.313(8)(a)) and (2) (turning to the de minimis exemption in s.313(8)(b)) the percentage figure of your interest that is “at all times” unchanged (i.e. 5.6%) remains at more than 0.5% from the percentage figure of your interest at the last notification (i.e. 6.2%) (see 2.12.8.5 below) and hence the de minimis exemption does not assist.

2.12.8.5 Please note that for the purposes of the de minimis exemption the notification of the previous transaction (the 5.6% transaction) does not qualify as a “last notification” because it was due to a change in the nature of your interest reportable under s.313(1)(d). The de minimis exemption is not available again until you notify the percentage figure of your interest crossing a percentage level – a notification under s.313(1)(c). Even if you remained in the 5% band instead of crossing back up to 6%, further changes in the nature of your interest
which stay within the 5% band (i.e. 5% and above to just under 6%) would still have been reportable because the same percentage level exemption is not available (the percentage level of your interest at the time of the “last notification” was above 6% and not within the 5% band).

2.12.9 Wholly owned group exemption.

2.12.9.1 This exempts wholly owned subsidiaries from making any disclosures in certain circumstances if their ultimate holding company ”complies with the duty of disclosure” (see ss. 313(10) and (11) and 316(2)). The circumstances are where the duty of disclosure arises under s.313(1) or (4) – the exemption is not available on an initial disclosure. By “complies with the duty of disclosure” the SFO means that the holding company complies with the duty of disclosure - if there is a duty of disclosure. The section does not impose a duty of disclosure on the holding company where none would otherwise arise. For example if holding company A has a 0.2 % interest itself and its wholly owned subsidiary B has 5.9%, A will be taken to be interested in 6.1%. Assume that B acquires a further 0.2%, and its interest crosses the 6% percentage level to 6.1%. However A’s interest increases from 6.1% to 6.3% - his interest does not cross a percentage level. There is no duty of disclosure and hence A and B can both enjoy the group exemption with no disclosure needing to be made.

2.12.9.2 Similarly, transfers within the 100% owned group do not affect the number of shares in which the ultimate holding company is interested, or the nature of the interest of the ultimate holding company (see s.313(13(v)), and therefore do not give rise to a duty of disclosure. There is no “relevant event” to trigger a duty of disclosure as the percentage level of the holding company’s interest remains the same. If two corporations in a group are both interested in the same shares the ultimate holding company should not aggregate both interests for disclosure purposes as this would be double counting – transactions between corporations in a wholly owned group do not increase or reduce the number of shares that the ultimate holding company must report.

2.12.9.3 Hence, in a typical warrant issue, no disclosure is required when warrants are issued by one member of a wholly owned group to another member of the same group. Hedging activities within the same group also need not be disclosed. In each case these transactions between corporations in a wholly owned group do not increase or reduce the number of shares that the ultimate holding company is interested in, or has a short position in.  Simply holding unsold derivatives warrants (where a corporation in the same wholly owned group wrote or issued the warrants) therefore gives rise to no interest/short position. However, interests or short positions that arise on transactions in the derivative warrants with third parties must be disclosed. The term “third parties” would include dealings with corporations that are controlled corporations but are not members of the same wholly owned group.

2.12.9.4 A duty of disclosure arises where the subsidiary in question ceases to be a wholly owned subsidiary (see s.313(11)). In the most extreme case this would be when it left the group altogether but it would also cease to be a wholly owned subsidiary even if only 1% of its shares were sold to a third party.

2.12.9.5 For example, assume corporation A has 2 wholly owned subsidiaries B and C. B then purchases 6% of the shares of a listed corporation. The group structure would look like this :

2.12.9.6 B need not file a notice of the purchase if A files a notice (assuming the notification is not an “Initial Notification” under s.313(2) or (3)). If B then grants a call option to C over the entire 6% interest this creates a short position for B and a long position of 6% for C. The grant and taking of the option need not be notified by B or C as the transaction is between 2 members of a wholly owned group. The transaction does not need to be disclosed by A as it is still only interested in 6% of the shares of the listed corporation.

2.12.9.7 If A then sells all its shares in B to a third party (i.e. B leaves the group) B is taken to have come to have a notifiable interests and a short position and must file a notice and A must file 2 notices as it is (1) taken to have ceased to have an interest in the shares held by B and (2) also taken to have acquired an interest in 6% of the shares through the option held by C (see. s.313(11)).

2.12.9.8 The topic of how the group exemption affects the obligation to disclose changes in the nature of an interest is covered in paragraph 2.13.18 below – in the context of securities borrowing and lending where the issue principally arises. The principle is that transactions between corporations that are members of a group need not be disclosed whilst transactions between members of the group and third parties must be disclosed.

2.12.9.9 Both long and short positions resulting from transactions with third parties will give rise to a reporting obligation in the normal way if the result is that either crosses a percentage level. If one transaction between a third party and a member of the group results in a long position and another transaction results in a short position, the holding company A cannot net these off.

2.12.10 Qualifying issues.

2.12.10.1 This effectively exempts shareholders of a listed corporation who receive and take up rights under qualifying bonus and rights issues (so that the percentage level of their interest remains the same) - whilst shareholders who do not take up their rights will have to make a disclosure (see s. 314(2)).

2.12.10.2 The exemption does not extend to persons who buy rights to shares from the shareholders to whom the rights are granted. In such a case the both shareholder selling the rights and the person buying the rights must both make a disclosure (if their interests cross a percentage level).

2.12.10.3 A “rights issue” is defined in s.308(1) so as to cover offers or issues by listed corporations to all shareholders in proportion to the number of shares held by them at a given date. It covers most issues referred to as “rights issues” and “bonus issues” but not, for example, convertible bonds.

"rights issue" means an offer or issue by a listed corporation of shares in the listed corporation (whether issued or unissued) to all persons holding issued shares in the listed corporation at a certain date (other than a person whose address is in a place where such offer or issue is not permitted under the law of that place) in proportion to the number of those issued shares held by them at that date, but does not include an offer or issue of shares in the listed corporation in lieu of all or part of a cash dividend;

2.12.10.4 We take the view that if a separate prospectus is required to be filed in a jurisdiction outside Hong Kong, before the offer or issue can be extended to shareholders residing in that jurisdiction, then the offer or issue is "not permitted" under the law of that jurisdiction. Accordingly an offer or issue may still be regarded as a "rights issue" if the offer or issue is not extended to shareholders residing in such jurisdictions.

2.12.10.5 When there is a rights issue you will become interested in shares that have not yet been issued (the rights shares) whilst the number of shares in issue remains the same. If the formula in paragraph 2.6.5 was used the percentage figure of your interest would rise after the rights issue was approved and then reduce on completion of the rights issue. This effect was not intended. Accordingly s.314(2) provides that in the case of a rights issue you should calculate the percentage of shares in which you are interested using the following formula (see s.314(2)) –

                 the total number of shares in which you are interested
                __________________________________________             x  100
   number of shares of the listed corporation of the same class in issue
+ number of shares to be issued upon completion of the rights/bonus issue

2.12.10.6 The effect of this is that if you take up a rights issue in full the percentage level of your interest remains the same throughout the period of the rights issue and no disclosure obligation arises.

2.12.10.7 The underwriter of a rights issue will acquire an interest in all rights shares that he agrees to take in the event that the shareholders do not take up their rights. In Box 4 of the disclosure notice he should state the number of shares in issue as enlarged by the rights shares proposed to be issued. Following completion of the rights issue the underwriter should file a notice stating the number of shares that he has ceased to be interested in (the number of rights shares taken up by the shareholders).

2.12.11 The aggregation exemption.

2.12.11.1 Section 316(5) provides an exemption for the fund management industry - persons carrying on a business of managing investments or holding investments for customers whether as a custodian or a trustee – from the requirements of s.316(2) and (3). It removes the obligation on a holding company to aggregate interests of controlled corporations that are investment managers, custodians or trustees and manage their interests independently (see s.316(2)(3) and (5)). To qualify for the exemption the conditions to be satisfied are that :

  • (i) the controlled corporation is interested in those shares by reason only of its obligation or power to invest in, manage, deal in or hold interests in those shares on behalf of its customers in the ordinary course of its business as an investment manager, custodian or trustee;
  • (ii) to the extent that the controlled corporation has any right or power to vote in respect of those shares, such right or power is exercisable by the controlled corporation independently without any reference to its holding company or any company in the same group; and
  • (iii) when performing its functions as an investment manager, custodian or trustee, the power of the controlled corporation to invest in, manage, deal in or hold interests in those shares is exercised by the controlled corporation independently without any reference to its holding company or any corporation in the same group.

2.12.11.2 As the conditions necessary to qualify for this exemption are set out in the SFO it is up to the holding company seeking to take advantage of the exemption to satisfy itself that it meets the conditions set out in s.316(5). It will be a question of fact in every case whether the requirements of s.316(5) are met and continue to be met. If you are a holding company that wishes to rely upon this exemption you should keep suitable records to support your claim.

2.12.11.3 The term “investment manager” is defined in s.316(7) to mean –

  • (i) a corporation licensed or registered in Hong Kong for the regulated activity of asset management and is authorized to manage investments in securities for another person under a written agreement; or
  • (ii) a corporation which is licensed registered or exempt for asset management in a place recognized for the purposes of s.316(7) by the SFC1 and is authorized to manage investments in securities for another person under a written agreement.

1 11 countries are recognized for this purpose - Australia, France, Germany, Guernsey, Ireland, Isle of Man, Jersey, Luxembourg, Switzerland, United Kingdom and United States of America

2.12.11.4 The term “trustee” is defined in s.316(7) to mean a corporation the principal business of which is to hold property belonging to another person under the provisions of a trust deed.

2.12.11.5 A common structure for “family controlled” listed companies in Hong Kong is as follows :

2.12.11.6 An independent corporate trustee “CT1” is appointed as trustee of a discretionary trust “DT”. A unit trust “UT” is established to hold the family’s shares in a listed corporation. The units in UT are all held by CT1 for DT. The family members (F 1, F2, and F3) are discretionary beneficiaries of DT. They also control a corporation “CT2” which is the trustee of unit trust UT. Accordingly they retain the day to day control over the affairs of the listed corporation and can also control whether income should be accumulated and when and
how much income should be distributed. There are many variants on this theme but they are generally to a similar effect.

2.12.11.7 It has been suggested that F1, F2 and F3 are not interested in shares of the listed corporation because s.316(5) entitles them to disaggregate the interests of CT2. This is not correct. A trustee of a trust does not have "customers" and, in the above example, does not carry on a “business”. Accordingly F2. F2 and F3 will not be entitled to disaggregate the interests of CT2 under s.316(5). None of the provisions of s.323 (interests which are to be disregarded) apply in these circumstances. It may also be that the provisions of s.317 (agreements to acquire interests in shares) apply. Accordingly, F1 F2 and F3 should each disclose interests held by UT in the listed corporation.

2.12.11.8 Furthermore, if F (or persons with whom they had an arrangement) was previously interested in any of the shares held by UT then F will also be a "founder" of DT and will have an independent obligation to file disclosure notices (see the definition of "founder" in s.308).

2.12.12 Bare trustees.

2.12.12.1 The interest of a bare trustee is disregarded. However, to be a bare trustee the trustee must have no authority to exercise discretion in dealing in the interest in shares, or in exercising rights attached to the interest, and must deal with the interest solely in accordance with the instructions of the beneficiary. A bare trustee into whose name an absolute owner transfers shares is sometimes called a nominee. This must be distinguished from the situation where trustees vest shares in a nominee in order to facilitate share dealings. Such a person is in effect an agent of the trustees2 and must disclose his interest in the shares. A custodian trustee is not a bare trustee, as he is not a mere name or “dummy” for the trustees or for the beneficiaries3. A custodian may be entitled to take advantage of the disregard for an exempt custodian interest. The vendor of unascertained shares still retains an interest in shares prior to completion of the sale – he is not a bare trustee for the purchaser. If the purchaser does not pay the purchase price and sale is not completed the vendor has the right to sell the shares to another person – the vendor is not required to deal with the interest solely in accordance with the instructions of the purchaser and therefore cannot be holding the shares as a bare trustee4.

2 Hanbury & Martin - Modern Equity 16th ed. 72. notes 67 and 69
3 Snell’s Equity 30th ed. 124 note 42
4 Pennington, Company Law, 8th ed., 439

2.12.13 An exempt custodian interest.

2.12.13.1 If an interest in shares is held by a corporation which carries on a business of holding securities in custody for another person, whether on trust or by contract, and the corporation has no authority to exercise discretion in dealing in the interest in shares, or in exercising rights attached to the interest then that interest is disregarded (see s. 323(1)(b) and (3)).

2.12.13.2 If a bank retains a discretionary right to set off any other obligations/liabilities of a client against any securities held in custody for that client the bank will not satisfy the requirement in s.323(3)(b) that the corporation "has no authority to exercise discretion in dealing in the interest, or in exercising rights attached to the interest". Similarly, the exemption is not available if a bank retains the discretionary right to take up or retain
unclaimed or fractional dividends (cash and/or scrip). The custodian exemption is not establishing a new wide exemption for custodians. It is intended to parallel the regime for a "bare trustee" - simply extending the bare trustee exemption to custodians by contract (before the bare trustee exemption only applied to custodians who were trustees).

2.12.14 Discretionary trusts. The interest of a beneficiary of a discretionary trust in shares held by trustees of the discretionary trust is disregarded (see s. 323(1)(a)(iii)) unless he is also a director of the listed corporation concerned.

2.12.15 Collective investment schemes.

2.12.15.1 This disregards the interests in shares of a holder of a unit or a share in the scheme, a trustee or custodian of an authorised collective investment scheme, certain pension or provident fund schemes, and a qualified overseas scheme (see s. 323(1)(c) and (5)). A qualified overseas scheme must be established in a place outside Hong Kong recognized for the purposes of s.323(5) by the SFC by notice published in the Gazette5. It should be noted that the interest of the manager of the scheme is not disregarded (even if he is also a holder, trustee or custodian see s.323(4)) and his interest must still be disclosed.

5 11 countries are recognized for this purpose - Australia, France, Germany, Guernsey, Ireland, Isle of Man,
Jersey, Luxembourg, Switzerland, United Kingdom and United States of America

2.12.15.2 If a person is the holder of units in a unit trust that does not satisfy s.323(1)(c) (or the trusteee or custodian of such a unit trust) he will have to disclose an interest in all shares in which unit trust is interested. This is because the unit holder has an undivided share in the whole portfolio of the unit trust. The same applies to the holder of shares in a mutual fund corporation (and the trustee and custodian).

2.12.16 Exempt security interests.

2.12.16.1 This enlarges the previous exemption under the repealed S(DI)O that disregards an “exempt security interest”. An interest in shares is an exempt security interest if it is held by a qualified lender by way of security only for the purposes of a transaction entered into in the ordinary course of business as such a qualified lender (see s. 323(1) (f) and (6)). Under s. 308 the term "qualified lender" is defined to include an authorized financial
institution, an authorized insurance company, an exchange participant of a recognized exchange company and an intermediary licensed to deal in securities or margin financing. The term "qualified lender" does not include a person licensed just as a licensed money lender.

2.12.16.2 The term "qualified lender" also includes a person that is a corporation authorized under the law of any place outside Hong Kong to carry on business as a bank, as an insurance company, or in an activity that is in the opinion of the Commission equivalent to dealing in securities or securities margin financing and that place is recognized for the purposes of section 313(13), 317(6), 323(6) or (7) or 341(5) by the SFC6.

6 11 countries are recognized for this purpose - Australia, France, Germany, Guernsey, Ireland, Isle of Man, Jersey, Luxembourg, Switzerland, United Kingdom and United States of America

2.12.16.3 The creation of a security interest in shares in favour of a qualified lender does not to give rise to a change in the nature of the holder’s interest in those shares (see s.313(13)).

2.12.16.4 A security interest will cease to be exempt, and the qualified lender will betaken to have acquired an interest in the shares held as security in certain circumstances (see s.323(7)). For example, if the qualified lender :

  • (i) becomes entitled to exercise voting rights as a result of default and has evidenced an intention to exercise voting rights; or
  • (ii) the power of sale has become exercisable and it offers the shares for sale.

2.12.16.5 It should be noted that if the qualified lender acquires another interest in shares, other than a security interest, this interest is not disregarded. Hence if the qualified lender enforces its rights as mortgagee it will acquire an interest which is not exempt. A disclosure obligation arises. The qualified lender should use code 101 or 103 (as the case may be) to describe the relevant event and a code (other than code 203) to describe the capacity in which it acquired the interest.

2.12.16.6 There have been a number of queries concerning the meaning of the words "by way of security only". These words are same as those used in s.14(4)(b) of the repealed S(DI)O. The distinction between a security interest and a transfer of title to shares is explained well by Phillip Wood in Comparative Law of Security and Guarantees (see p.65) –

  • "Under traditional rules of universal application, if a party has a right to return equivalent securities and in the meantime to deal with the securities transferred to him as if they were his own, he must inevitably acquire the property in the securities and the transferor loses his property : this is an absolute transfer, not a transfer by way of security. The mortgagor loses title.
  • This reasoning has been used in the development of title finance transactions as a replacement for collateral over investment securities in order to avoid the inconveniences of mortgage law. The most common examples are stock lending and repos. The essence of the difference is that in each case the secured creditor obtains title to the securities, not a limited security interest."

2.12.17 Transient interests of dealers in securities.

2.12.17.1. There is no general exemption for intermediaries (e.g. dealers and brokers). However, the interest in shares of an intermediary, licensed or registered for dealing in securities, is disregarded where the interest is acquired by the intermediary for not more than 3 business days, as an agent only for the purposes of transactions entered into for principals of the intermediary who are not related corporations of the intermediary.

2.12.18 Interests of dealers in securities or dealers in futures contracts in exchange
contracts2.

2.12.18.1 This exemption is similar in principle to the disregard in paragraph 2.12.17. The interest in shares of an intermediary, licensed or registered for dealing in securities or dealing in futures contracts, is disregarded where the interest arises under an exchange traded stock futures contract or an exchange traded stock options contract which is acquired by the intermediary in the ordinary course of its business, pursuant to the instructions of its client and the intermediary enters into a “back-to-back contract”7 with its client on the same day. Transactions for a related corporation of the intermediary do not qualify for the exemption. ( See s.3(1)(d) of the Securities and Futures (Disclosure of Interests – Exclusions) Regulation (L.N. 229 of 2002)).

7 Defined in s.2 of the Securities and Futures (Disclosure of Interests – Exclusions) Regulation (L.N. 229 of
2002).

 2.13 Securities borrowing and lending (“SBL”) 

2.13.1 The regime for SBL transactions is different to the general disclosure regime. Again, the following is merely a brief summary.

The borrower

2.13.2 The borrower of shares is normally required to disclose the borrowing and return of shares if the  percentage figure of his interest passes through a percentage level of 5% or higher. This is because he acquires an interest in the shares when he borrows them and ceases to have an interest in the shares when he returns them to the lender. The borrower may take advantage of the de minimis exemption if the elements necessary for that exemption are satisfied. However, the initial borrowing of shares also creates a “short position” (i.e. the obligation to return the shares) for the borrower and this must be disclosed separately when he gives a notification (see the definition of “short position” in s. 308). In certain circumstances the interest of the borrower of shares may be disregarded if he is a “regulated person” (see below).

The lender

2.13.3 The position of a stock lender is more complex. The lending of stock gives rise to a duty of disclosure because there is a change in the nature of an interest in shares when they are lent and returned. A loan of 1% or more of the shares of a listed corporation by a substantial shareholder will always give rise to a disclosure obligation (unless the SBL Rules apply – see further below). A loan of less than 1% will only give rise to a disclosure obligation if after the transaction the percentage level of his interest in his other shares ( i.e. those which have not been lent) remains at the same level as at the time of the last notification given by him. For this purpose the last notification could be a notification under s. 313(1)(a), (c) or (d) (see s. 313(8)(a)).

The Securities and Futures (Disclosure of Interests - Securities Borrowing and Lending)
Rules (L.N. 219 of 2002) (“SBL Rules”)

2.13.4 If certain conditions are satisfied, the SBL Rules provide :

  • (i) an exemption for substantial shareholders (other than substantial shareholders who are directors);
  • (ii) a simplified disclosure regime for approved lending agents (“ALAs”), and their holding companies; and
  • (iii) a disregard of the interests of regulated persons in shares borrowed and lent,

in place of the disclosure obligations that may arise when there is a change in the nature of an interest in shares in a listed corporation under Part XV when they lend shares or the shares are returned to them.

Substantial shareholders

2.13.5 Substantial shareholders, who lend through an ALA, on condition that the shares are held by the ALA :

  • (i) as agent for the substantial shareholder,
  • (ii) for lending only and for no other purpose; and
  • (iii) are lent using only a specified form of agreement (i.e. a relevant agreement8 as defined),

are exempt from making disclosures of changes in the nature of their interests that result from:

  • (a) the transfer of the shares to the ALA and the return of the shares by the ALA; and
  • (b) the lending of the shares by the ALA and the return of the shares to the ALA (section 3 of the SBL Rules).

8 Briefly, a relevant agreement refers to a SBL agreement providing that the borrower of shares is required to provide collateral of a value exceeding the value of shares lent, the value of collateral is marked to market to avoid any shortfall and the lender of shares can require the return of shares at any time.

Approved lending agents (“ALA”s)

2.13.6 A corporation approved by the Commission as an ALA will be exempted from disclosure requirements when it lends shares from its “lending pool” or when shares are returned to their lending pool. If an ALA is interested in more than 5% of the shares of a listed corporation it will be a substantial shareholder and will have to disclose changes in the percentage level of its “lending pool” of shares in that listed corporation - but the amount of information required to be included in their notification has been simplified. (See the special
notes explaining the information required to be given on the last page of the Notes to Forms 1 and 2 ).

2.13.7 The simplified disclosure regime is achieved through the interaction of sections 5(3) and 5(4) of the SBL Rules and the disclosure forms. Section 5(3) provides that an approved lending agent (and its holding company) are not under a duty of disclosure in 6 circumstances. Section 5(4)(a) provides that an approved lending agent (and its holding company) are taken to have acquired an interest in the shares in 4 of the 6 circumstances (and under s.5(4)(b) are taken to have ceased to have an interest where the ALA ceases to have a subsisting right to the return of shares lent). The 2 remaining circumstances where disclosure is not required are when shares are lent from the lending pool and returned to the lending pool.

2.13.8 The effect of these provisions is that loans from the lending pool operated by an ALA, and returns of shares to the lending pool, are not required to be disclosed. However if shares are added to the lending pool or removed from the lending pool a disclosure obligation arises under s.5(4) of the SBL Rules. The disclosure forms must be completed in accordance with the Notes to the forms and these require that disclosures arising under s.5(4) of the SBL Rules are separately identified in the disclosure forms. The size of the lending pool must be disclosed and appropriate codes must be inserted when completing the form.

2.13.9 The SFC has published Guidelines on the criteria for approval of lending agents as ALAs and the conditions that ALAs must observe. These conditions prevent the ALA from lending shares, from the lending pool, to companies that are members of the same group of companies as the ALA or placing shares that it holds for those companies in the lending pool. The conditions apply regardless of whether the group member is an investment manager managing a fund for another or is borrowing shares for a third party. The term
“members of the same group” includes any person that is a controlling entity of the ALA (defined in Schedule 1 of the SFO) and any subsidiary of a controlling entity of the ALA. Equally, shares in which the ALA is interested, otherwise than as lending agent, are not eligible for the exemption. A list of corporations that have been approved as “approved lending agents” is posted on the SFC’s web site on the Part XV web page under “Securities and Futures Ordinance”.

2.13.10 The term “lending pool” in this paragraph 2.13 comprises :

  • (i) shares that the ALA holds as agent for a third party which he is authorized to lend under a lending agreement that meets the requirements of the SBL Rules; and
  • (ii) shares that have been lent by the ALA only if the right of the ALA to require the return of the shares has not been extinguished.

2.13.11 Provided that there is a suitable agreement in place, a custodian may transfer shares from its custody pool to its lending pool (to be held as agent rather than as custodian) and those shares can become “qualified shares” within the meaning of the SBL Rules.

2.13.12 An ALA will have to keep records of the transactions in accordance with the requirements set out in section 9 of the SBL Rules.

2.13.13 The simplified disclosure regime for ALAs also extends to holding companies of ALAs that are taken to be interested in shares in which an ALA is interested under section 316(2) of the SFO. Hence the holding company of an ALA is not normally required to disclose shares lent from and returned to the lending pool. Disclosure must be made if the ALA ceases to have a subsisting right to require the return of the shares that have been lent.

Regulated persons

2.13.14 Interests in shares borrowed by regulated persons (corporations licensed to deal in securities, and overseas brokers in recognized places9), that merely act as a conduit (i.e. regulated persons who borrow and on-lend the shares within 5 business days after the shares on which the interest in the shares is acquired) are to be disregarded. When the shares are returned to the regulated person it may either return them to the ultimate lender or it can lend those shares again to another borrower. Provided this is done within 5 business days the regulated person’s interest in the shares will still be disregarded. However, if you are a regulated person, the provisions of s.7 of the SBL Rules must be read carefully to ensure that they apply to the transaction in question.

9 11 countries are recognized for this purpose - Australia, France, Germany, Guernsey, Ireland, Isle of Man, Jersey, Luxembourg, Switzerland, United Kingdom and United States of America.

2.13.15 Regulated persons can choose their own method to match securities borrowing and lending transactions as long as :

  • (i) they observe the general principle that any stocks borrowed which have not been on-lent within 5 business days after the date of the borrowing must be included for disclosure purposes;
  • (ii) the methodology adopted to match SBL transactions is reduced to writing; and
  • (iii) once a methodology has been adopted to match stock borrowing and lending transactions that methodology must be applied consistently to all SBL transactions for which exemption is sought as a regulated person.


2.13.16 Regulated persons may choose not to take advantage of the exemption in which case they should count that interest for disclosure purposes. However, if a regulated person wishes to take advantage of the exemption, records must be kept as required by s.10 of the SBL Rules.

Regulated persons and related corporations

2.13.17 Regulated persons are still entitled to the benefit of the exemption if the shares are transferred to a related corporation and are used by that related corporation for lending within 5 business days after they were acquired by the regulated person. However, any holding company of the related corporation is required to aggregate the interest in the shares of the related corporation in the normal way. If the related corporation is also a regulated corporation then the interest of the relation corporation may also be disregarded (see
paragraph 2.13.22 below).

Interaction of the SBL Rules and the exemption for corporations in groups

2.13.18 As has been mentioned in paragraph 2.9, a holding company, is not required to file a notice if there is a change in nature of its interest in shares which is due to the acquisition of an interest in those shares by one of its wholly owned subsidiaries from another wholly owned subsidiary. In the following example corporation A has 2 wholly owned subsidiaries B and C. If B lends shares to C there is no disclosure obligation as the loan is
between members of a wholly owned group of companies. However, if C lends the shares to a third party outside the group, the normal rules apply – there is a change in the nature of the interest of B and C in the shares which must be disclosed by the holding company A.


2.13.19 The conditions attaching to approval of an ALA mean that corporations that are members of a group can lend through another member of the group that is an ALA - but the shares so lend do not qualify for an exemption under the SBL Rules. In the example above, if B lends shares to C (who is an ALA) there is no disclosure obligation as the loan is between members of a wholly owned group of companies. However, when the shares are lent by C to a third party, there is a change in the nature of C’s interest in the shares which must be disclosed by the holding company A (and, if C were not a wholly owned subsidiary, C would
also have to file a notice).

2.13.20 Equally, corporations that are members of a group can lend through another member of the group that is a “regulated person” within the meaning of the SBL Rules - but the group exemption is not available in respect of the transfer of shares to the related corporation (that is a regulated person). This is because the interest in shares of the regulated person is disregarded under s.7(1) of the SBL Rules. As a result the holding company of the regulated person is not taken to be interested in those shares under s.316(2) at the relevant
time and therefore the conditions in s.313(10) which must be met in order to attract the group exemption for those shares are not met.

2.13.21 The position is different if both members of the group are regulated persons and each member of the group uses the shares for a prescribed purpose. Continuing from the example in paragraph 2.13.18, if B has borrowed shares from a third party and lends them to C who lends them to a third party (within 5 business days of B borrowing them) then the interests (and short positions) of both B and C are disregarded (see. S.7 of the SBL Rules).

2.13.22 However, if the shares are lent to another member of the group who uses them
to settle a short sale the position is as follows :

  Third Party Lender  Corp. B    Corp. C Corp. D  Holding Company A   Third Party
Buyer
Day 0   L10  -   -  -  -  -
 Day 1

 L 

Disclose change in

 -   -  -  Interest of Corp. B is disregarded and
therefore holding company A is not
 -
 

nature of interest

      deemed to have an interest.  
Day 2 L - - - Interest of Corp. C is disregarded. -
Day 3

L10

- - L
S
Corp. D is a regulated person but the shares are not intended to be used for a prescribed purpose. Corp A must
disclose Long and Short (of Corp. D)
-
Day 4 L L
S
L
S
L
S
Corp. D enters into a contract for sale.
It is a regulated person but the shares
are used for a purpose other than a
prescribed purpose. B and C are taken
to have acquired an interest and a short position.
L
Day 6 L L
S
L
S

S
Corp D completes the sale by transferring the shares to third party.
Corp A must disclose disposal of 6%
and retention of 6% Short position
L

10 The letter “L” stands for Long position and “S” for Short position.

Day 1

2.13.23 In the example in paragraph 2.13.22, assume that Corporation B borrowed 6% of the shares of a listed corporation. The third party lender will have to make a disclosure because there is a change in the nature of his interest. Corporation B is not acting as an approved lending agent so s.3 of the SBL Rules does not apply to exempt the third party lender from filing a notice. Corporation B it intends to on lend the shares within 5 business days and accordingly its interest is provisionally disregarded under s.7 of the SBL Rules. As
Corporation B’s interest is disregarded the holding company is not taken to have an interest in the 6% under s.316.

Day 2

2.13.24 Corporation B lends the shares to corporation C, a related corporation that is also a regulated person. Corporation C intends to on lend the shares within 5 business days and accordingly its interest is also provisionally disregarded under s.7 of the SBL Rules. As Corporation C’s interest is disregarded the holding company is again not taken to have an interest in the 6% under s.316.

Day 3

2.13.25 On day 3, the shares were borrowed by Corporation D so that it could sell short. This was not a “prescribed purpose” so that Corporation D’s interest was not disregarded under s.7(1)(a) of the SBL Rules. As Corporation D’s interest is not disregarded the holding company is now taken to have an interest in the 6% under s.316. Accordingly Corporation A must file a notice (within 3 business days of day 3) disclosing that it has
acquired a long position of 6% and a short position of 6%. Corporation D will be shown in Box 22 of Form 2 as having a long and a short position of 6%.

Day 4

2.13.26 Under s.7(3) when the shares are used for a purpose otherwise than a prescribed purpose Corporations B and C are taken to have acquired an interest in the shares.   In this case the shares are being held to settle a short sale. This is not a “prescribed purpose”. As Corporations B and C are taken to have acquired an interest in the shares, the holding company is now taken to have an interest in the 6% that each of B and C had under s.316. However, as has been mentioned in paragraph 2.12.9.2, if two corporations in a group are both interested in the same shares the ultimate holding company should not count both interests as this would be double counting. Holding Company A is therefore not required to file a further notice.

Day 6

2.13.27 Corporation D completes the sale and accordingly ceases to have a long position. Corporation A must file a notice (within 3 business days of day 4) disclosing that it has ceased to have a long position of 6% but that it still has a short position of 6%. Interests of wholly owned subsidiaries under transactions with other wholly owned subsidiaries do not increase or reduce the interests (or short positions) of the group as a whole and need not be disclosed in calculating the total number of shares in which the holding company A is interested in or in completing Box 22. Accordingly the long position of B, C’s long and short position and D’s short position need not be disclosed in Box 22. Only B’s short position (the obligation to return the shares to the third party lender) need to be disclosed in Box 22.


 2.14 Controlled corporations 

2.14.1 In paragraph 2.2 we explained that in calculating the total number of shares in which you are interested you must include any interests, and derivative interests, in shares of the same listed corporation that a controlled corporation has. If you have an interest in the shares because you control a chain of corporations and the corporation at the bottom of the chain has 6% of the shares of a listed corporation then each corporation in the chain is taken to be interested in 6%. The ultimate holding company is not taken to be interested in 60%
because there are 10 corporations in the chain. Equally, the percentage interest is not halved if the percentage level of control is only 50%.

2.14.2 If you have an interest in the shares because you control a chain of corporations you are required to state in the prescribed forms the name of each controlled corporation in the chain in sequence starting with the top corporation and ending with the lowest corporation in the chain that has an interest in the shares of the listed corporation concerned. At each link in the chain you must state the percentage of shares that each controlled corporation controls in the corporation immediately below it (i.e. not the effective control that you have in the corporation at that level).

2.14.3 For example corporation A owns 51% of subsidiary B which in turn owns 35% of a corporation C. C thenpurchases 6% of the shares of a listed corporation. The group structure would look like this :

2.14.5 In this example, A and B are not wholly owned therefore each of A, B and C must file a notice. A’s notice will state that the notice is being filed because a controlled corporation (C) purchased 6% of the shares of the listed corporation. It will also state that B is a controlled corporation and that it controls 51% of B, and that B controls 35% of C.

2.14.6 A, B and C are all only interested in 6% of the shares in the listed corporation and this is the percentage that they must disclose in the form. A is not required to disclose an interest of 12% (i.e.2 x 6%) because each of B and C are interested in 6% - the number and proportion of shares in which the ultimate holding company has an interest does not enlarge as the number of companies in the chain increases. Equally A’s interest is not reduced to 1.04% (i.e. 6% x 35% x 51%) because it controls only 51% of the shares in B and B only controls 35% of the shares in C - the number and proportion of shares in which the ultimate holding company has an interest does not reduce as the number of companies in the chain increases.

2.14.7 If B and C were wholly owned corporations, the fact that they were controlled corporations with interests in shares of the listed corporation concerned should still be stated in the forms. The fact that they need not themselves file a notice does not exempt the holding company from disclosing their interests.

Limited Liability Partnership

2.14.8 We regard a limited liability partnership as a corporation for the purposes of Part XV and interests in shares held by a limited liability partnership should be disclosed by the general partner as interests in shares of a controlled corporation (rather than joint interests discloseable by each partner). The general partner of a limited partnership equates to the "controlling shareholder" having de facto control even though its shareholding in the limited liability partnership may be less than one third. The general partner will usually be a
corporation who should make disclosure stating the name and address of the limited liability partnership in Box 22 of Form 2; its own name in column 3 of Box 22 and the percentage it holds in the limited liability partnership in column 4 (e.g.1%).

 2.15 Special features for notices filed by corporations 

2.15.1 If you are a corporation that that is filing a notice you must specify the name and address of any person in accordance with whose directions you, or your directors are accustomed or obliged to act. You are excepted from this requirement if you are listed in Hong Kong, the wholly owned subsidiary of a listed corporation, a corporation listed on a “specified stock exchange” or a wholly owned subsidiary of such a listed corporation. The list of specified stock exchanges is in Part 3 of Schedule 1 to the SFO.

2.15.2 The term “any person in accordance with whose directions it, or its directors are accustomed or obliged to act” would require disclosure of the name and address of the ultimate holding company, and intermediate holding companies, and its immediate controlling company/shareholder(s). Aside from its plain meaning, as a rule of thumb we take the view that this would include a person who :

  • (i) is entitled to exercise or control the exercise of not less than 33 % of the voting power at general meetings of the corporation;
  • (ii) has the right to nominate any of the directors of the corporation; or
  • (iii) has an interest in shares carrying the right to :
    • (a) veto any resolution; or
    • (b) amend, modify, limit or add conditions to any resolution, at general meetings of the corporation.

Percentage figure to be inserted in Box 26 of Form 2

2.15.3 In Box 26 of Form 2 a controlled corporation must state the name the name and address of the person or persons whose directions it follows. This would normally be the ultimate holding company in a group of corporations, or a series of corporations, and the controlling shareholder of the ultimate holding company. However, with a single corporation the person whose directions it follows may be a single director or a person who is not even a director. The percentage that must be stated in Box 26 is the percentage of shares in the controlled corporation that person(s) is interested.

2.15.4 Continuing the example in paragraph 2.14.3, assume that C is filing a notice disclosing that it has bought 6% of a listed corporation. If holding company A is the controller who sets the voting policy on the shares in the listed corporation then A’s name would appear in Box 26 and the percentage in the last column would be 51%. C is not required to do a calculation and state that A has an effective shareholding in C of 17.85% (i.e. 35% x 51%). If B also gives it directions C should state, in the next row of Box 26, that its immediate controlling company is B and the percentage shareholding is 35%. If A is the one that really issues directions and B just conveys them to C then only A’s name need be mentioned.

3.3301 s