LEGISLATIVE HISTORY
From the Insider Dealing Tribunal to parallel civil and criminal liability
Hong Kong's prohibition of insider dealing has a legislative history extending back to the 1970s. Under the former regime, insider dealing was addressed civilly through the Insider Dealing Tribunal and was not itself a criminal offence.
The Securities and Futures Ordinance (Cap. 571) (SFO) came into operation on 1 April 2003. It preserved a civil market-misconduct route under section 270 while making insider dealing a criminal offence under section 291. The Market Misconduct Tribunal replaced and expanded upon the former tribunal framework.
THE THREE CORE FACETS OF INSIDER DEALING
Dealing, procuring and disclosing inside information
Under both the criminal track (Section 291) and the civil track (Section 270), insider dealing is triggered when a person connected to a listed corporation possesses information they know to be inside information and engages in one of three classic prohibited behaviors:
Direct or indirect dealing
A connected person who has information which they know is inside information deals, or counsels or procures another person to deal, in the listed corporation's securities or their derivatives.
Counselling or procuring
An insider encourages, counsels or procures another person to deal while knowing or having reasonable cause to believe that the other person will deal in the relevant securities or derivatives.
Disclosure or tipping
An insider discloses inside information directly or indirectly, knowing or having reasonable cause to believe that the recipient will use it to deal, or to counsel or procure another person to deal.
STATUTORY ELEMENTS OF PROOF
Who is a connected person?
Section 287 defines when a person is connected with a corporation for the insider-dealing provisions. The statutory categories focus on whether a position, shareholding or relationship gives access, or may reasonably be expected to give access, to inside information.
Directors and employees
A director or employee of the listed corporation or a related corporation may be connected. The statutory look-back also captures a person who occupied the relevant position during the preceding six months.
Substantial shareholders
A person with an interest in 5% or more of the corporation's issued voting shares may fall within the statutory substantial-shareholder category, subject to the detailed interest and attribution provisions.
Professional and business relationships
A person may be connected because a professional or business relationship gives, or may reasonably be expected to give, access to inside information. This may include auditors, lawyers, financial advisers and other service providers.
Privileged official capacity
Separate provisions address information obtained by public officers and members or employees of specified public or statutory bodies in a privileged capacity. The applicable route depends on how the information was obtained.
INSIDE INFORMATION
Specific, non-public and price-sensitive information
The modern statutory expression is "inside information"; earlier legislation used the term "relevant information". The information must satisfy all three requirements below.
Specific information
The information must be specific. Rumour, general speculation or vague market gossip will not ordinarily satisfy this requirement, although information may be specific even when every detail is not yet settled.
Not generally known
The information must not be generally known to the persons who are accustomed, or would be likely, to deal in the listed corporation's securities.
Material price effect
If generally known, the information must be likely materially to affect the price of the listed securities. Examples may include a takeover, an unexpected material profit or loss, a major restructuring or significant regulatory action.
ENFORCEMENT: CIVIL AND CRIMINAL TRACKS
The forum determines the procedure and available consequences
The civil and criminal provisions address corresponding insider-dealing conduct, but the tribunal, standard of proof and available sanctions are materially different.
Civil route — section 270
Proceedings are determined by the Market Misconduct Tribunal on the civil standard of proof, applied with regard to the seriousness of the allegation. The MMT cannot imprison a person, but may make profit-disgorgement, cold-shoulder, cease-and-desist, disqualification and costs orders.
Criminal route — section 291
A criminal prosecution must prove the offence beyond reasonable doubt. On conviction upon indictment, insider dealing carries a maximum penalty of ten years' imprisonment and a fine of HK$10 million.
HOW MCS CAN ASSIST
Early analysis of the information, relationship and trading evidence
An insider-dealing investigation may require detailed reconstruction of corporate events, information flows, communications, account activity and the timing of market announcements. MCS can advise individuals, listed corporations, officers, employees and professional advisers during SFC enquiries, interviews and compulsory information requests.
We can assess whether the information was sufficiently specific, non-public and price-sensitive, examine the alleged connection or chain of disclosure, identify applicable statutory defences and represent clients in Market Misconduct Tribunal proceedings, disciplinary action and criminal proceedings.