April 22 Legal Update
Top stories
Directors’ duties
HKEX censures Hsin Chong Group Holdings Limited (now delisted) and named former executive director (“ED”), criticises other named former EDs and non- executive directors, also directs directors to attend training on Listing Rules compliance. (Announcement; Statement of Disciplinary Action)
In light of former ED’s wilful failure to discharge his responsibilities, HKEX also imposes a “Prejudice to Investors’ Interest Statement” on him.
Between Aug and Dec 2016, the company entered into “sale and leaseback” (and renovation services) agreements to acquire properties from companies related to former ED and paid RMB376.5 m. It was found that there was no apparent commercial rationale. E.g. company contractually bound to transfer the properties back to sellers for RMB100, upon expiry of an 8-year lease term.
The agreements were subsequently terminated, with the sum paid thereafter treated as loans (still outstanding as at the company’s latest published annual report).
The transactions were discloseable and connected transactions under the Listing Rules, and approved by former ED. The company failed to comply with requirements including timely announcement.
The other directors were not aware of the transactions until they were discovered by the external auditors (which subsequently issued a disclaimer audit opinion).
The company admitted that it had no internal controls regarding (inter alia) Rule compliance in respect of notifiable/connected transactions, approval/reporting of transactions, and avoidance of conflict of interest.
What you should know:
HKEX announcement specifically states EACH director’s responsibility:
- Implement appropriate control and risk management framework
- Take an active interest in company operations and use of financial assets
Internal controls deficiencies include:
- Safeguard assets
- Identify/report material transactions
- Process significant payments
- Listing Rule compliance
Also in this issue
Regulators
(i) The Hong Kong Chartered Governance Institute (formerly HK Institute of Chartered Secretaries) issued an updated guidance on conducting AGM in light of covid conditions.
Since the publication of its guidance in March, the government has relaxed some social distancing measures. The updated guidance sets out a useful list of questions for listed companies to consider, in assessing if changes in AGM format would be needed.
(Background: HKEX’s Guide on General Meetings, section 2.3:“Meetings should be held at a place and a time convenient to the largest possible number of shareholders to attend. Issuers should consider the use of technology (e.g. webcast, video conference) to maximise shareholder participation…”),FAQ (see our Feb 22 update).
(ii) ESG: new HKEX resources for diversity and ESG disclosure
HKEX launched a new diversity repository, and introduced an “ESG in Practice” section to its ESG Academy (website). (Press Release)
The new “Board Diversity & Inclusion in Focus” repository contains useful information on the board of directors( e.g.by age, gender and years of tenure) of all issuers (also listed by industry sector), Hang Seng Index constituents, as well as individual issuers.
The new “ESG in Practice” section provides examples of exemplary ESG practices amongst listed issuers.
Legislation
(iii) Privacy Commissioner issued a report on “Comparison of Privacy Settings of Social Media”. (Press Release, Report (Chinese only))It reviewed the top ten most commonly used social media platforms in Hong Kong, including Facebook, Facebook Messenger, Instagram, LINE, LinkedIn, Skype, Twitter, WeChat, WhatsApp and YouTube.
The review results reflect that all platforms reviewed collect a wide variety of personal data (12-19 types). Their performance in terms of privacy function was compared (e.g. provision of end-to-end encryption, retention of users’ credit card data).
These findings are useful for companies’ review of their use of corporate social media platforms, and corporate social media policy.