Articles Business Crime & Financial Services 23rd Dec 2019

Securities and Futures Commission (“SFC”) issue statement regarding disclosure and transparency

The Securities and Futures Commission (“SFC”) has recently issued a statement reminding listed companies of their duties of disclosure and transparency, particularly when it comes to the nature and identity of their counterparties to transactions.

As part of its on-going drive to tackle market and corporate misconduct, the SFC emphasised the importance of listed issuers ensuring that their announcements, statements, circulars and other documents do not include materially false, incomplete, or misleading information regarding their counterparties.

Commenting on disclosure shortcomings it had observed in the market, the SFC noted that, in some cases, the identities of the listed issuers’ counterparties were not disclosed at all. In other instances, disclosure was limited to the names of entities, without disclosure of the controllers or beneficial owners of such entities. In yet other cases, meaningless or tautologous information was given, such as identifying borrowers simply as “the customer of the lender”.

The implications of the duty of disclosure will, the SFC appears to have acknowledged, vary, depending on the nature of the transaction and of the counterparties themselves. But in a stark warning, the SFC indicated that in serious cases, where information that is necessary for the investing public to make an informed assessment of the issuer or its activities is withheld or misrepresented, the SFC will use its powers under the Securities and Futures (Stock Market Listing) Rules (“SMLR”) to intervene. So when exactly will the disclosure of the identities of the controllers or beneficial owners of counterparties to a transaction be required?

The SFC has suggested that where listed issuers acquire or dispose of interests in companies, form joint ventures, or inject capital into a business, the identities of the actual controllers or beneficial owners of any counterparties may be important information that needs to be disclosed, since it can inform the investing public about the experience, resources and strategy of the parties. Likewise if the counterparties are prominent business or political figures, this is important information that should be disclosed.

In the case of notifiable transactions (any share transaction, discloseable transaction, major transaction, very substantial disposal, very substantial acquisition, or a transaction classified as a reverse takeover or extreme transaction) the Rules Governing the Listing of Securities on the Growth Enterprise Market of The Stock Exchange of Hong Kong Limited (“GEM Rules”) issuers are already required to disclose the identity and principal business activities of the counterparty (see GEM Rule 19.58). In this context, the statement of the SFC reinforces the requirements of the GEM Rules, by requiring the disclosure not only of an entity’s apparent identity, but also the disclosure of the controllers or beneficial owners of that entity. To this extent, the statement gives form to the general principle expressed in GEM Rule 17.56(2), that information disclosed pursuant to a notifiable transaction “must be accurate and complete in all material respects and not be misleading or deceptive”. As such, the Stock Exchange of Hong Kong Limited, in its recent inaugural Regulation Newsletter, has echoed the guidance of the SFC, stating, “we highly encourage companies to also disclose the identity of the beneficial owners, particularly where the counterparties are investment holding vehicles”.

Once again, the emphasis is on fostering the transparency and openness necessary to eliminate misconduct and illicit activities, and enhance confidence within the investing public. Whilst the statement of the SFC is simply guidance, rather than fixed rules enshrined in law, it is clear that in the future issuers will be expected to comply not only with the letter of the rules relating to disclosure, but with their spirit as well.

Paul Renteurs

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