Determining price sensitive information during trading suspension
Introduction
Listed companies are under a continuing obligation under the Securities and Futures Ordinance (Cap. 571) (“SFO”) to disclose inside information to the public as soon as reasonably practicable after the relevant information has come to its knowledge.
Inside information refers to specific information not generally known to the persons who are accustomed or would be likely to deal in the listed securities of the corporation (i.e. the investing public) which, if generally known to them, is likely to materially affect the price of the listed securities (i.e. price sensitive).
A listed company is still under the continuing obligation to disclose inside information even during a period of suspension. However, the practical difficulties are that during the suspension period, it is hard to determine the scope of the “persons who are accustomed or would be likely to deal in the listed securities of the corporation”, and the price sensitivity of the information. The recent decision by the Market Misconduct Tribunal (“MMT”) which found that a listed company, Mayer Holdings Limited (“Mayer”) and nine of its former senior executives had failed their disclosure obligations under the SFO may shed some light on the issues above.
Background fact
Between April and November 2011, the share price of Mayer fell from HK$0.48 by around 75-80%. Trading was suspended between 22 November 2011 and 6 January 2012. Trading resumed for a day on 6 January 2012 closing at HK$0.123. At the request of Mayer, the trading of its shares was suspended again on 9 January 2012, which was only resumed on 21 November 2018.
Mayer was required to have its 2011 accounts audited and the audit report published by March 2012. However, on 16 February 2012, Mayer’s then auditors resigned. To complete the audit, Mayer appointed Grant Thornton Hong Kong Limited (“GT”) as its auditors on 29 February 2012.
During the preparation for the audit report, GT identified three potential problematic transactions (“Outstanding Issues”). GT repeatedly asked for information about the Outstanding Issues from Mayer, its board of directors and its audit committee but received no meaningful response. On 23 August 2012, GT indicated in writing that they would issue a qualified audit report because the Outstanding Issues remained unresolved. However, this likewise did not result in any meaningful response from Mayer. On 27 December 2012, GT formally sent a resignation letter to Mayer.
However, it was not until 23 January 2013 that an announcement concerning GT’s resignation was published.
Procedural history
First hearing by MMT
In March 2016, the Securities and Futures Commission (“SFC”) instituted proceedings in the MMT against Mayer, alleging that it had breached its obligation under the SFO to timely disclose inside information, which included:
1. the resignation of GT on 27 December 2012;
2. the fact that GT had indicated it would issue a qualified audit report of the Outstanding Issues if they were not resolved;
3. the fact that GT considered the commercial transactions in the Outstanding Issues questionable and the prepayment by Mayer’s subsidiaries lacked commercial sense.
(Collectively, “Subject Information”)
It was argued that there were various post-suspension events that took place before the events that constituted the Subject Information could have led the price of Mayer’s shares to fall had the trading of Mayer’s shares not been suspended. Accordingly, the disclosure of the Inside Information may not have a material effect on the price of Mayer’s shares as the market had absorbed the effect of those post-suspension events.
However, the MMT decided that no regard should be paid to the effect of those post-suspension events on the pre-suspension share price of Mayer and accordingly, ruled that the Subject Information constituted inside information and found that Mayer had failed disclosure obligation under the SFO.
Overruling by the Court of Appeal
On appeal to the Court of Appeal (“CA”), the SFC argued, citing s.307A(3) SFO, that for the purpose of part XIVA SFO (part relating to disclosure obligation), “securities listed on a recognized stock market are to continue to be regarded as listed during any period of suspension of dealings in those securities on that market” and therefore, a listed company should be regarded as continuously dealing at the pre-suspension price despite the fact of suspension of dealing.
The CA disagreed with the SFC’s interpretation of s.307A(3) SFO. It held that the plain and ordinary meaning of s.307A(3) SFO was to made it clear that Part XIVA would apply to a listed company even though dealing in its shares had been suspended. There was nothing in the language of s.307A(3) to justify treating the status of “listed” and the activity of “dealing” as synonymous in all respects, so as to require the issue of materiality to be determined on an admittedly false factual premise of trading.
In considering whether a piece of information is price sensitive, the CA held that all relevant circumstances of the company at the time the information was made available to that company and its directors have to be considered. To consider only the impact of the information on the pre-suspension price, and to reject outright that suspension could have had an effect on the pre-suspension price, was to turn a blind eye to these important events which would have affected the price at the time the information fell to be considered.
On the basis of the above, the CA allowed the appeal and remitted the matter to the MMT to consider whether the Subject Information would be price sensitive after taking into account the post-suspension events.
2nd hearing by MMT
In the hearing, the SFC and MMT were of the view that whether the Subject Information was price sensitive had to be decided on the basis of the pre-suspension price. That means the MMT had to exclude the effect of the suspension itself and the post-suspension events on Mayer’s share price before determining if the disclosure of the Subject Information would affect Mayer’s share price at the time when the information had come to Mayer’s knowledge. The expert evidence given by SFC was expressly given on this “trading assumption”.
After the clarification given in the CA’s judgment, experts were invited to consider first the effect of the post-suspension events on the share price of Mayer before considering if the disclosure of the Subject Information would materially affect the share price of Mayer. In the 2nd hearing, the MMT ultimately found that (i) the post-suspension events would not have any material impact on the share price of Mayer while (ii) the disclosure of the Subject Information would materially affect the share price of Mayer.
Is the Subject Information “inside information”?
The main dispute in this case is in the price sensitivity of the Subject Information.
MMT observed that the significance of GT’s resignation is that the auditors felt the need to resign rather than to issue a qualified audit opinion as originally contemplated by GT in August 2012. It shows that the auditors’ concern had become so great that they no longer felt professionally safe in being associated with the audit given the questionable nature of the Outstanding Issues and the lack of willingness from the Board of Directors of Mayer to cooperate or provide information.
The reasons given by GT in its resignation letter would cause investors to wonder whether Mayer’s management was being deliberately obstructive with a view to concealing matters from the auditors. It may lead investors to worry that Mayer could lose a significant amount of money in the future because the integrity of Mayer’s management was questionable. The questionable natures of the Outstanding Issues would only add to the suspicion in investors’ minds in respect of the integrity of Mayer’s management and whether it could be trusted to act in the best interests of the company.
More worryingly, the undisclosed Subject Information raised as a real possibility that the management may be looting the company. Adopting a common sense approach, the MMT is satisfied that the undisclosed Subject Information would have been to increase the anxiety of existing shareholders in respect of Mayer’s prospects. This heightened anxiety may prompt more shareholders to consider selling their shares at whatever price they could get for them, even if that meant a price below the pre-suspension price.
On the basis of the above, the MMT found that the Subject Information would likely affect the share price of Mayer and was thus price-sensitive such that the Subject Information came within the definition of “inside information”.
Conclusion of MMT
Mayer does not dispute that the Inside Information has come to its knowledge and that the disclosure was not made as soon as reasonably practicable. Therefore, the MMT found that Mayer was in breach of its disclosure obligation under the SFO.
Takeaways
Even during the period of suspension of trading of securities, listed companies are still obliged to timely disclose any inside information. Post-suspension events can constitute inside information and remains subject to disclosure.
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Important: The law and procedure on this subject are very specialised and complicated. This article is just a very general outline for reference and cannot be relied upon as legal advice in any individual case. If any advice or assistance is needed, please contact our solicitors. |
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Published by ONC Lawyers © 2023 |
