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Legal Update

Listing Rules Changes to Strengthen the False Market Avoidance Requirements

12 December 2012
Mayer Brown JSM Legal Update

Quick Read

Hong Kong Exchanges and Clearing Limited (HKEx) published its "Consultation Conclusions on Rule Changes Consequential on the Enactment of the Securities and Futures (Amendment) Ordinance 2012" (Consultation Conclusions) on 30 November 2012 in response to the consultation paper published on 3 August 2012.

Pursuant to the Consultation Conclusions, the corresponding amendments to the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (Listing Rules), including the new Rule 13.09 together with the consequential amendments, take effect from 1 January 2013.

The new Rule 13.09 together with the consequential amendments are a result of the new statutory price sensitive/inside information disclosure regime (New Disclosure Regime) under the Securities and Futures Ordinance (SFO) which also takes effect on 1 January 2013.

New Rule 13.09 and the Consequential Amendments

In short, the new Rule 13.09 together with the consequential amendments focus on false market situations and impose obligations on listed companies to avoid establishment of a false market (False Market Avoidance Regime). That is, a listed company will be expressly required under the Listing Rules:

  • to issue an announcement to avoid the establishment of a false market in its listed securities;
  • to contact HKEx as soon as reasonably practicable if it believes that there is likely to be a false market in its listed securities;
  • to respond to enquiries from HKEx promptly;
  • to issue a standard negative confirmation announcement (if required by HKEx);
  • to enquire reasonably before making such an announcement;
  • to apply for a trading halt or trading suspension under specified circumstances;
  • to preserve confidentiality; and
  • not to disclose information unfairly.

HKEx vs. SFC

The False Market Avoidance Regime will be administered by HKEx while the New Disclosure Regime will be administered by SFC. The guiding principles in relation to the division of roles between HKEx and SFC are:

  • SFC will have sole jurisdiction over the enforcement of the New Disclosure Regime under the SFO. Enforcement of the law must take priority over that of the Listing Rules.
  • A listed company will not be subject to enforcement action by SFC and HKEx at the same time concerning the same set of facts. If SFC decides to initiate proceedings regarding a possible breach under the SFO, HKEx will NOT pursue any possible breach under the Listing Rules arising out of the same set of facts. HKEx will only consider taking disciplinary action for any possible breach under the Listing Rules if SFC has decided that it is not appropriate to purse the matter under the SFO.

False Market Avoidance Regime vs. New Disclosure Regime

In most cases, disclosure of inside information can clear a false market and therefore compliance with the New Disclosure Regime means compliance with the False Market Avoidance Regime. Also, in theory, if a disclosure of inside information is exempted under the New Disclosure Regime, the listed company should not be required to disclose such inside information under the False Market Avoidance Regime.

However, there could easily be situations where compliance with the New Disclosure Regime is not automatic compliance with the False Market Avoidance Regime. While a New Disclosure Regime safe harbour may justify a delay in announcing inside information, a false market can still be present for reasons other than leakage. In such circumstances, a clarification announcement (which can hint at the existence of safe harboured inside information) or trading halt/suspension will be required. How this line is to be drawn can be difficult and remains to be seen in practice.

Although there is no such express requirement under the False Market Avoidance Regime, keeping an eye on market news and the potential leakage of inside information is essential for listed companies to comply with the new requirements.

For more details in relation to the New Disclosure Regime, please refer our previous Legal Updates:

You may download copies of the Consultation Conclusions via the link below:

http://www.hkex.com.hk/eng/newsconsul/mktconsul/Documents/cp201208cc.pdf

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