"Blackout Period"

Recently front-page advertisements have been taken out in the local papers protesting against a change in HK’s Stock Exchange rules which came into effect on 1 January 2009. Over 200 listed companies have signed a letter protesting this rule change that in their opinion will undermine the viability of Hong Kong’s market making it easier for unwarranted hostile takeovers, corporate exits, reduction in stock market liquidity and exodus of management talent.

Under the old rules directors and managers of listed companies were allowed to trade shares in their companies until a month before results are announced. The problem is that listed companies are allowed three months after the end of the period to report half-year results, and four months for the year-end. This meant that they were able to trade on information that was not publicly available between the end of the reporting period and the start of the “black out period” i.e. for two months before the interim results were reported, and three months for the final results.

In theory, the Listing Rules also require companies to announce meaningful events as soon as practicable, and the SFC does have the power to investigate insider dealing. But such disclosure is still problematic and after the fact. For example, recently Citic Pacific only disclosed news of a $2 billion currency loss six weeks after the fact was known to the directors.

Under the new rules which were originally promulgated in January 2008, directors and managers are not allowed to trade shares in their companies until after the results are announced. Therefore, if the companies continue to make full use of the 3 month interim reporting period and the four months final reporting period, directors and managers are barred from trading for a total of seven months.

In the US, financial results are reported quarterly and must be disclosed within 40 days of a quarter-end and 60 days of a year-end. Thus, if a listed company in HK can announce interim results within 40 days and final results within 60 days (using the US as rule as an example), the total “black out” period is only 100 days and not 7 months.

The problem, of course, is that auditors have to co-operate and the auditors would like to have as much time as possible after the year end before giving the company a clean bill of health because of their own scheduling. Also, companies may sometimes need more time after the year end to work with the auditors on the results.

On December 30th, the Stock Exchange announced that it would delay introduction of the new regime until April 1st. Opponents to the proposals hope the delay will become permanent.

Corporate governance advocates would like to introduce more frequent reporting to increase transparency, and to ban insider trading until important information has been publicly announced to level the playing field.