July 21 Legal Update
Top stories
New HKEX enforcement policy
HKEX published revised Enforcement Policy Statement and Enforcement Sanctions Statement, which have come into effect. In addition to the press release, HKEX’s latest Enforcement Bulletin also elaborates on the new statements.
By way of background, the Enforcement Bulletin noted that there was a notable rise in disciplinary cases during 1H 2021.
The Enforcement Policy Statement sets out HKEX’s latest enforcement priorities, namely the 3 concepts of responsibility, controls and culture, and cooperation. HKEX takes a broader approach, and these priority concepts will replace the enforcement themes in place since 2017. It is also important to note that “culture” goes beyond controls.
The press release explains that the new priorities reflect HKEX’s focus on individuals, and the critical importance of proactivity and vigilance. Having both the right attitude and framework towards Listing Rule compliance is essential for good corporate governance.
The Sanctions Statement sets out the general principles and factors in determining sanctions. It has been updated to reflect the new enforcement policy, and revised disciplinary regime (effective from 3 July 2021; read our May legal update). For instance, the list of factors (P.1, para 6) elaborates on some new enforcement priorities, notably culture, controls, and cooperation.
What you should know:
New Enforcement Priorities
- “Responsibility”
— Directors’ primary responsibility (under companies’ law, Listing Rules, HKEX Directors’ Undertaking)
— Collective and individual responsibility (executive + non-executive directors)
— Non-executive directors (including independent directors) must take an active interest and follow up anything untoward
— Despite “delegation”, directors have a continuing supervisory role
— Professional advice – should apply an enquiring mind using own wisdom, experience and independent judgement
— Senior management also responsible
- Controls and culture
— (As a minimum) adequate and effective internal controls + risk management
— Regular review of such systems
— “Culture”: attitude towards compliance + corporate governance
— E.g. HKEX will consider if directors/ staff are informed, competent, and kept up to date via ongoing training and professional development
— Directors, senior management, and those with a responsibility for compliance should keep abreast of Listing Rules changes through regular training
— Regular director briefings on business/operations
— Expect documentary evidence of steps taken to discharge (individual/corporate) duties
- Cooperation
What you should do/watch out for:
- Update your board and senior management on the developments
- Directors’ duties
— Reinforces themes of taking an “active interest” in company; continuing supervisory role despite “delegation”; apply an “enquiring mind” re: professional advice
- Senior management responsibility
- Internal controls + risk management systems
— Assess your compliance-related systems
— E.g. regular updates
- Culture
— Beyond adequate controls (which are a minimum only)
— Implement necessary actions e.g. regular briefings/training on Listing Rule changes to directors/ senior management/ those responsible for compliance
- Keep documentary evidence of steps in place
- Co-operate in investigations
- While the 3 new enforcement priorities reflect a broader HKEX approach, ensuring compliance with specific procedural requirements (e.g. “notifiable and “connected transactions”) remain important
Also in this issue
Regulators
Listing decision on Longrun Tea Group Limited and its current directors. (Press release; Statement of Disciplinary Action)
Two named executive directors (“EDs”) procured the company’s subsidiary to enter into a loan agreement with a borrower (around RMB 140m), without informing the two boards. Loan proceeds were transferred to a supplier ownedby the 2 EDs. The loan constituted a major and connected transaction. The company failed to comply with the procedural requirements (announcement; independent shareholder approval, etc.).
The directors failed to ensure the company had an adequate and effective internal controls system to procure its Listing Rule compliance regarding the loan, and to protect the interests of the company and its shareholders. There were also findings of inaccuracy and delay in relation to the company’s financial results.
HKEX also made a public statement that in its opinion, by reason of the two EDs’ persistent and/or wilful failure to discharge their responsibilities under the Listing Rules, their “retention of office is prejudicial to the interests of investors”. (Note: “persistent and/or wilful failure” is no longer required under the new disciplinary regime for this sanction).
What you should know/watch out for:
Breaches by all directors
- No effective system in place for the senior management to declare their material interests in transactions with the group
- (For audit purposes) auditors advised the audit committee and/or the board to undertake a forensic investigation
— instead of “agreed-upon-procedures” (“AUP”)
— to involve the auditors in settling the scope
- The company only engaged consultants to perform AUP, without involving the auditors in settling its scope.
Legislation
The Competition Commission published an Advisory Bulletin to advise on the potential risks under the Competition Ordinance related to the membership admission criteria and procedures of trade associations. FQ+As were also issued. (Press release)
The bulletin applies to all trade, sporting, professional and industry associations or bodies and their members in Hong Kong. Where membership of a trade association is an essential pre-condition for competing in a market, exclusion from membership can significantly impact an undertaking’s effectiveness as a competitor.
The Commission’s Guideline on the First Conduct Rule sets out that the rules for admission to membership should be:transparent; proportionate; non-discriminatory; based on objective standards; and subject to appeal.
The FQ+As are useful and provide some scenarios to illustrate these principles.
The Commission calls on all trade associations to actively review their admission practices in accordance with the guidance and to make changes where needed to ensure compliance with the Ordinance.