Listed companies are reminded to disclose actual controllers of counterparties to transactions

On 21 November 2019, the Securities and Futures Commission (SFC) issued a statement reminding listed companies to disclose actual controllers or beneficial owners of counterparties to transactions in their announcements of corporate transactions out of its concern that special purpose vehicles and other means are being used to conceal ownership and as part of wider schemes to engage in illicit activities or market misconduct. 

The SFC considers that where the identity of a counterparty is necessary for shareholders and investors to make an informed assessment of the transaction, the non-disclosure of the identities of the controllers or beneficial owners may mean that the document in question includes materially incomplete information.  The SFC may, in appropriate cases, use its statutory powers to require further information or to object to the listing of the relevant securities.

In the new publication “Listed Issuer Regulation Newsletter” released by The Stock Exchange of Hong Kong Limited (Exchange) on 22 November 2019, the Exchange also encourages listed companies to disclose the identities of counterparties’ beneficial owners, particularly where the counterparties are investment holding vehicles. 

Under the amended Main Board Rule 14.58 effective from 1 October 2019, listed companies must disclose the identity of the counterparties in notifiable transaction announcements.  In a revised series of frequently asked questions relating to notifiable transaction requirements published on 1 October 2019, the Exchange has explained that the aforesaid rule only sets out the minimum disclosure requirements and that a listed company must also observe the general principle for disclosure under Main Board Rule 2.13 and disclose information (including the identity of the counterparty’s ultimate beneficial owner) that enables shareholders and investors to make an informed assessment of the transaction.

The aforesaid guidance materials published by the SFC and the Exchange set out the following examples of circumstances where disclosure of the identities of the actual controllers or beneficial owners of a counterparty to a transaction may be necessary:

• (a) where the counterparty’s controller or beneficial owner is (i) a prominent business or political figure or entity; (ii) a person who has close business dealings with the listed company, its controlling shareholder or management; or (iii) the founder or a member of the key management who played a meaningful role in the historical financial performance of the acquisition targets; or (b) where the listed company is entering into a long term business arrangement  with the counterparty, in which case, disclosure of the identity including the background, experience, resources or strategy of the actual controller or beneficial owner may be necessary;

• in the case of a disposal, where the listed company may take back a promissory note from the counterparty;

• in the case of a subscription of the listed company’s securities (including convertible securities), where the subscriber would hold a material interest in the listed company, for example, where the subscription triggers disclosure of interests requirements under Part XV of the Securities and Futures Ordinance, or where the subscriber would play a strategic role in the listed company;

• in the case of listed issuers engaged in money lending as part of their businesses, where the amount of a single loan (or a series of related loans) is material, and the borrower is a privately held entity that is not generally known to the market, in which case, disclosure of the controllers or beneficial owners of the borrower, and their background and financial standing, may be necessary; and

• in the case of grant of stock options, disclosure stating that the stock options were granted to "eligible participants" without naming the grantees or disclosing the number of options granted to each grantee may not be sufficient as many stock option plans define "eligible participants" very broadly to include any director, employee, consultant, professional, customer, supplier, agent, partner or adviser of or contractor of the listed company.

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