Golden Dragon's delayed profit warning and the chairman's share sale
Golden Dragon Materials Ltd is a Main Board issuer with a 31 December financial year-end. On 3 November, its finance director discovers that a customer representing 35% of trade receivables has entered liquidation, and that a covenant breach on a HK$600 million syndicated loan is likely. The board meets on 8 November and decides to seek a waiver from lenders. The company continues negotiations and does not announce anything until 27 November, when it issues a profit warning. During the period, the chairman sells 1.5 million shares on 20 November. The company's internal policy says 'announcements are made after board approval and lender consent'. The SFC and SEHK review the matter. The company argues that the information was incomplete because the waiver negotiations were ongoing and that disclosure would have harmed the negotiations.
1. Has Golden Dragon breached the inside information disclosure requirement? Address the 'incomplete negotiations' argument.
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A breach is likely. Under Part XIVA of the SFO, a listed corporation must disclose inside information as soon as reasonably practicable after it comes to the attention of the board, or would have come to the attention of a reasonable person in the board's position. The customer liquidation and likely loan covenant breach were specific, not generally known and likely to affect the share price materially. The board knew by 8 November, yet announced only on 27 November. The 'incomplete negotiations' argument does not fit the core fact: the customer default was known, not merely a rumoured negotiation. A safe harbour for incomplete proposals or negotiations may apply only in limited circumstances, with conditions on confidentiality and prejudice; it is not a general licence to delay bad news while seeking a lender waiver. The internal policy requiring lender consent before announcement is inconsistent with the statutory duty. The company should have announced promptly, with appropriate caveats.
2. What are the consequences of the chairman's share sale on 20 November?
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The sale is a serious red flag. The chairman knew about the customer default, the likely covenant breach and the board's discussions. If he sold while in possession of inside information, that is insider dealing under the SFO, whether or not he knew the exact announcement date. He may also have breached his directors' duties and the Listing Rules' Model Code for securities transactions by directors, which requires clearance and prohibits dealing when in possession of inside information. The company's blackout policy and clearance procedures should have prevented the sale. The SFC can pursue the chairman personally and may criticise the company's controls. The sale also undermines the company's credibility in arguing that it was trying to protect negotiations. The board should investigate, preserve records, consider disclosure to the SFC and SEHK, and review whether other directors or employees traded.
3. What internal controls should the board have had in place for inside information?
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The board should have a written inside-information policy that defines inside information, identifies a designated person or committee, and requires immediate escalation to the board. It should maintain a confidential log, a restricted list and a dealing blackout policy, with pre-clearance for directors and relevant employees. The policy should require prompt assessment of whether disclosure is required, with legal and compliance input, and should not make announcement conditional on lender or third-party consent. It should also cover selective disclosure, media handling, and record-keeping. Directors need training on Part XIVA and the Model Code. When a crisis occurs, the board should meet quickly, document its assessment, and announce as soon as reasonably practicable, using caveats where facts are still developing. The existing policy - 'after board approval and lender consent' - reverses the statutory test and should be rewritten.