The Stock Exchange of Hong Kong

(i) Published its Review of Disclosure in Issuers’ Annual reports to Monitor Rule Compliance Report 2015.

What you should know:

• SEHK identified improvement areas for disclosure, particularly in “Continuing Connected Transactions”, “MD&A”, disclosure of actual use of proceeds in fund raising, “contractual arrangements” (adopted by relevant issuers in light of foreign ownership restrictions (e.g. in PRC))
• On “Continuing Connected Transactions”, identified improvement areas include independent directors’ annual review process, involvement of internal audit, reports of management and auditors
• On MD+A, some suggested improvement areas in fact fall under the new “business review” requirements. e.g. disclosure regarding “compliance with laws and regulations”, “relationship with key customers”

Click here for our summary and suggested management actions

What you should do/watch out for:

All issuers should consider the identified improvement areas, and adopt them in (i) preparing the 2015 annual report, and (ii) the forthcoming independent directors’ annual review process as regards “continuing connected transactions”.

(ii) Enforcement action: The Listing Committee censures New Sports Group Limited and censures or criticizes the relevant directors for breaching Listing Rules

What you should know:

• This is quite a blatant case involving concealment of loans by the company to its ultimate controlling shareholder, which was initiated by some executive directors
• The company is found in breach of Listing Rules regarding “advance to an entity” (Chapter 13), “notifiable transactions” (Chapter 14) given the size of the loans; “connected transactions” (Chapter 14A). Those directors actively involved were censured
• However, non-executive directors who had no knowledge of the advances were also criticized — for failing to ensure adequate internal control procedures in relation to the approval of the loans and compliance with the Listing Rules, hence breaching their Directors’ Undertakings to SEHK

What you should do/watch out for:

Directors’ duties represent a recurring theme in the SEHK’s enforcement actions.  In addition to liability directly related to the transactions, directors may also be liable for breach of their Undertaking for failing to ensure adequate internal controls procedures.

The Securities and Futures Commission (“SFC”)

Enforcement action: SFC successfully used a new tool (s. 300 of the Securities and Futures Ordinance, “SFO”) to combat insider trading in respect of securities listed overseas

What you should know:

• This Court of First Instance case involves a solicitor seconded to a bank to work on a takeover offer for a company listed in Taiwan. She and her friends made use of the insider information, bought shares in the offeree company, and made a profit
• The insider trading provisions in the SFO are subject to a jurisdictional limitation (i.e. shares must be listed in Hong Kong)
• The court found them guilty of s.300 which prohibits the use of “fraudulent or deceptive schemes in transactions involving securities”

Click here for a summary by a specialist law firm

What you should do/watch out for:

The SFC is active in its enforcement actions, including being prepared to resort to “new” tools.

Competition law

What you should know:

The Competition Commission issued a consultation paper on the application made by the Hong Kong Liner Shipper Association (on behalf of carriers operating through Hong Kong) for a “block exemption”.

What you should do/watch out for:

Companies should monitor developments, including enforcement actions by the Commission in this area.

Contracts (Rights of Third Parties) Ordinance became effective on 1 January 2016

What you should know:

• The new law amends the common law position of “privity of contract”, so that third parties to a contract may, in certain circumstances, benefit from a contract or enforce its terms under the ordinance
• It only applies to contracts entered into after Jan 1 2016, and does not have retrospective effect

What you should do/watch out for:

Where it is not intended to confer benefits of a contract to third parties, companies should consider inserting an exclusion clause.

Click here for a summary by a law firm, sharing the UK expereince and an overview of the  broad issues to be considered in reviewing your company’s contracts.