This article is from the South China Morning Post, 16-Nov-1998, regarding our correspondence with the SFC on the Government's market intervention.

Investor urges prosecution of Government
16 November 1998

Note: We have made minor amendments to the following article to correct missing words where absolutely necessary to make sense. Also it should be noted that, contrary to what almost every article in the press says, the Government did not acquire more than 10% of the votes in Swire Pacific. Swire Pacific is unusual in having two classes of voting shares, "A" and "B". Each share has one vote, but 5 B-shares are equivalent to one A-share in equity, so the B-shares are more powerful in voting terms. The government acquired more than 10% of the lower-voting A-shares which, unlike the B-shares, are in the Hang Seng Index, but did not acquire more than 10% of the total votes. Also note that, as the Takeover Code is not law, breaches of the code cannot in themselves be prosecuted, only sanctioned.

Enoch Yiu

A private investor has urged the Securities and Futures Commission to prosecute the SAR Government for breaching the Takeover and Mergers Code.

David Webb claims the Government breached Section 33 of the Hong Kong Takeovers Code by not disclosing it had stakes exceeding 10 per cent in three locally listed companies.

Last month, the Government announced it acquired stakes in Swire Pacific, New World Development and Cheung Kong during its market intervention in August.

The code states that "following an acquisition of shares . . . a person must disclose that acquisition and his holding to the company not later than 9.00 a.m. on the dealing day following the date of the acquisition . . . if as a result of the acquisition he comes to hold... shares... representing 10 per cent or more of the voting rights in a company". The Takeovers Code exempts a person from disclosure "if he notifies his interest in a holding in compliance with the Securities (Disclosure of Interests) Ordinance" within the same time limit.

Mr Webb said the Government did not follow the ordinance, claiming it was exempt according to Section 66 of the Interpretation and General Clauses Ordinance.

Mr Webb said: "The beauty of the code is that it does not have the force of law, therefore nobody can claim exemption from it under the law.

"Any other investor in such a breach might expect a public censure or reprimand."

SFC chairman Andrew Sheng said the Government was exempt from the Takeovers Code and that the commission would not take any action against it.

"The Takeovers Code is derived from the law. The SAR Government is exempted from the law. It is also exempt from the code as well," he said.

Mr Webb said SFC senior director Barbara Shiu had sent him a written answer explaining the commission's position.

"The Government is not bound by the SFCO (Securities and Futures Ordinance)," Mr Webb reported Ms Shiu saying.

Her letter continued: "There will be considerable difficulty in arguing that the Government should be bound by a code gazetted under the SFCO when it is not bound by that ordinance itself."

Mr Webb rejected the SFC's view.

"The Takeovers Code is a voluntary code representing standards of commercial conduct and behaviour considered acceptable," he said.

"What I am saying is that the Government (like everyone) is not bound by the code, but it chose not to abide by the code.

"It [the Government] breached the code the SFC should consider appropriate sanction.

"Under Section 11 of the SFC Ordinance, the government can direct the SFC not to take any action. But that would be a conflict of interest, wouldn't it?"

He said the SFC, as the securities watchdog, should fulfil its duty to ensure everybody abided by all ordinances and codes or it would not be possible to "safeguard the interest of the persons dealing in securities".

"The interests of pedestrians and motorists would not be safeguarded if Government drivers had exemption from drink-driving laws," he said.

"The purpose of such laws is to protect all persons. The SAR Government should be bound by them and the same applies to the securities laws."

© South China Morning Post

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