Non-disclosure of inside information does not equate to insider dealing
Securities and Futures Commission v Yiu Hoi Ying Charles and Others  HKCU 1027
In a recent Court of Appeal decision, the Court dismissed an appeal brought by the Securities and Futures Commission ("SFC") against the determination of the Market Misconduct Tribunal ("MMT") and clarified the difference between "non-disclosure" and "use" of inside information in respect of the meaning of "insider dealing" in the Securities and Futures Ordinance, Cap. 571 ("SFO").
The MMT proceedings were brought by the SFC to investigate senior executives at Asia Telemedia Limited ("ATML") for an alleged breach of the insider dealing provisions contained in part XIII of the SFO. The MMT found that there was no breach of the insider dealing provisions as the senior executives were able to successfully raise a defence under s. 271(3) of the SFO, on the ground that their dealings were solely motivated by a speculative surge in the price of the company shares, and not by their knowledge of inside information.
The meaning of "use" under s. 271(3) of the SFO
The SFC's argument in the appeal was that the definition of "using inside information" in s. 271(3) should include the withholding or non-disclosure of relevant information. In the SFC's view, the senior executives should have known that if they had disclosed the inside information, the speculative surge in the price of the company shares would have been halted. By selling the shares without disclosing the information, they obtained a higher return on the shares than if they had disclosed the information. Therefore, the SFC argues, withholding inside information should have the same meaning as using inside information and the defence under s.271(3) should not apply.
The Court rejected the SFC's argument. The Court regarded the extension of the definition of "use" to "withholding" or "non-disclosure" within the meaning of s. 271(3) as a strained interpretation. Widening the definition in this way would mean that any senior executive who deals in the shares of the company whilst in possession of inside or price-sensitive information ("PSI") would be committing insider dealing, even if the deal was not motivated by his knowledge of the information. In the Court's view, this would have the effect of making the defence under s.271(3) inoperable.
The Court also noted in the judgement that since Part XIVA of the SFO already imposes an obligation to disclose PSI, there was no reason to widen the meaning of 'using' inside information to limit the scope of the s. 271(3) defence. In the Court's view, the regulatory intent to ensure the disclosure of inside information was 'fully reflected' in Part XIVA of the SFO.
The Court made a clear distinction between insider dealing and the non-disclosure of inside information. Under Part XIVA of the SFO, listed companies and their officers have a continuing obligation to disclose inside information. On the other hand, the insider dealing rules are intended to prevent those in the know from using inside information to manipulate the market.
The Court of Appeal in dismissing this case confirmed the use of the 'no profit motive' defence under section 271(3) of the SFO. However, as the MMT noted in the original decision, only in rare circumstances will a person who deals in shares of a listed company whilst in possession of inside information be able to demonstrate that his dealing was totally unconnected with any desire to make a profit or avoid a loss by using that information. It remains best practice to disclose inside information as soon as reasonably practicable and to deal only after due disclosure.
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