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Disclosure of Beneficial Owners of Counterparties in Corporate Transactions

  • Asia
  • Hong Kong
  • Corporate


The Rules Governing the Securities on The Stock Exchange of Hong Kong Limited (the “Listing Rules”) impose certain disclosure obligations on listed issuers when they engage in different types of corporate transactions. However, it has been noticed that some issuers may have failed to disclose sufficient details, particularly on the identities of the counterparties and their beneficial owners to such transactions. As a result, the Securities and Futures Commission (the “SFC”) and The Stock Exchange of Hong Kong Limited (the “Stock Exchange”) published a series of materials to provide guidance and clarification in this area.

The rules and guidance from the Stock Exchange

Due to recent revisions to the Listing Rules which became effective on 1 October 2019, listed issuers are required to disclose in both announcements and circulars, among other things, the identities of the parties to a connected transaction as well as of their ultimate beneficial owner(s).1 Similarly for notifiable transactions, although the specific wording of the amended Rule 14.58(2)2 of the Listing Rules only requires disclosure of the identity of the counterparty to the transaction, the Stock Exchange explained in its subsequently released Frequently Asked Questions3 that this rule merely sets out the “minimum disclosure requirements” and listed issuers must also be following the general principle under Rule 2.13 of the Listing Rules, i.e. disclose information which would enable shareholders and investors to make an informed assessment of the transaction and this includes the identity of the counterparty’s ultimate beneficial owner. The importance of the Rule 2.13 principle was again stressed by the Stock Exchange in the first issue of the “Listed Issuer Regulation Newsletter”4 (the “Newsletter”), stating that listed issuers must provide information which is meaningful, accurate and complete in all material respects, and as Rule 14.58(2) of the Listing Rules merely sets out the prescribed requirements for notifiable transactions, disclosure of the identity of beneficial owners, particularly where the counterparties are investment holding vehicles, is “highly encourage[d]”.

Guidance from the SFC

In line with the Stock Exchange, the stance of the SFC, as reflected in the “Statement on the Disclosure of Actual Controllers or Beneficial Owners of Counterparties to a Transaction” (the “Statement”),5 is also for listed issuers to disclose all the information of a transaction which would enable public investors to make an informed assessment of the particular issuer and its activities. The relevant announcements and documentation must not contain any materially false, incomplete or misleading information about the transaction, a contravention of which may mean investors would not be able to make an informed assessment, and the SFC may use its discretionary powers under the Securities and Futures (Stock Market Listing) Rules (Chapter 571V of the laws of Hong Kong) (the “SMLR”) to step in. An example given in the Statement is the use of “circular definitions” in announcements where the borrowers were defined as “the borrower under the loan agreement, being an individual and an independent third party” or “the customer of the lender”. These have been proven to be meaningless and unhelpful towards an investor’s assessment of the issuer’s activities.

Complementing the Listing Rules and the Stock Exchange, the SFC would only exempt issuers from disclosing the actual controllers or beneficial owners of the counterparties if they are reasonably satisfied that disclosure of these parties is not necessary for the investors to make an informed assessment of the issuer or its activities, assets and liabilities or financial position.

Disclosure of controllers or beneficial owners

Below are the types of transactions and circumstances cited in the Statement and the Newsletter which would require the identities of the controllers or beneficial owners of the counterparties to be disclosed as they may be material information for investors.

Acquisitions, disposals, capital injections and joint ventures

Whenever a listed issuer acquires or disposes of interests6 in target companies, forms joint ventures or injects capital into new companies, the identities of the controllers or beneficial owners of the counterparties must be disclosed. This will equip investors with more information on the background, experience, resources or strategy of the parties involved in order to make an informed assessment on the issuer’s activities. The SFC noted that this information may also be material if the controller or beneficial owner is a prominent business or political figure or entity, or a person who has close business dealings with the issuer, its controller shareholder(s) or management.

The counterparty’s role and relationship

Where there will be continuing relationships with the counterparty after the transaction such as in the case of joint venture partners, the Stock Exchange would consider the identity of the beneficial owners material for investors. Additionally, further information would be required if the counterparty was the founder or key management, and played a meaningful role in the historical financial performance of the acquisition targets.

Money lending

In money lending transactions, which are becoming increasingly prevalent, where the amount of a loan or a series of related loans is material and the borrower is a privately held entity which is not generally known to the market, the listed issuer should identify the controllers or beneficial owners of the borrower. Details of these persons, including their background and financial standing, would be useful for shareholders when assessing the issuer’s activities.

Issuance of shares, convertible bonds and options

Under the provisions on private placements of new shares and issuances of convertible bonds in the Listing Rules, the names of the allottees must be disclosed if there are less than six allottees in a particular transaction. In these circumstances, merely disclosing the names of the corporate vehicles would be inadequate.

In relation to share issuances, the Statement draws special attention to section 3 of the SMLR which applies to applications for the listing of shares issued by listed issuers. This is particularly critical for a company when preparing for announcements, circulars and other related documents as the section specifically requires disclosure of “such particulars and information which, having regard to the particular nature of the applicant and the securities, is necessary to enable an investor to make an informed assessment of the activities, assets and liabilities and financial position, of the applicant at the time of the application and its profits and losses and of the rights attaching to the securities”. If such requirements are not complied with, the SFC may use its powers prescribed by the SMLR7 to obtain further information or to object to the listing. The Stock Exchange further requires disclosure of the beneficial owners if the subscriber will hold a material interest in the listed issuer or play a strategic role in the listed company after the subscription.

Stock Options

The Listing Rules require listed issuers to publish an announcement as soon as possible upon the granting of stock options. The relevant announcement must contain full details of the grantees and accordingly, it would not be acceptable if a listed company only states that the options were granted to unnamed “eligible participants” which is defined broadly (for example to include any director, employee, consultant, professional, customer, supplier, agent, partner or adviser or contractor of the issuer). The SFC further indicated that the number of options granted to each recipient should also be disclosed.

Private funds and similar arrangements

Proprietary transactions conducted by issuers often involve the use of private fund structures, with the issuer or a connected person thereof acting as the fund manager, and the announcements of some of these transactions have been published as if they were ordinary course investments with minimal disclosure of the details. The SFC expressed its concerns in the Statement that most of these arrangements had no conventional commercial rationale or were unduly convoluted and they may have been entered into for undisclosed reasons. In situations where there are materially false, incomplete or misleading information published, the SFC may direct a suspension in dealing of the relevant issuer’s securities under section 8(1)(a) of the SMLR. It is therefore imperative that listed issuers are not using private fund structures, discretionary accounts or complex arrangements with a view to obfuscating the nature of the transaction and its risks, or avoiding or contravening any laws and regulations.8


As we have seen, the SFC and the Stock Exchange have continuously implemented measures to tackle market misconduct in various ways. The recent guidance materials serve as a noteworthy reminder to companies in respect of their disclosure obligations as well as the SFC’s powers to intervene in certain circumstances. While listed issuers should ensure that all the relevant rules are adhered to, they should also bear in mind the general disclosure principle that all information which are necessary for shareholders and investors to make an informed assessment about their activities or financial position should be disclosed appropriately.