(i) SFC published its latest Corporate Regulation Newsletter giving guidance on disclosure of inside information (Click here for press release)

What you should know:

• Reminds issuer to disclose inside information to the public as soon as reasonably practicable:
  (i) Example: monthly management accounts, where there is a material difference between the results predicted by the market based on past disclosures
  (ii) Listed company directors and officers must ensure “proper safeguards” to prevent breaches
  (iii) SFC expects listed companies to provide monthly management accounts to directors “with very few exceptions”
• Reminds issuers to maintain confidentiality before making announcements:
  (i) If information is leaked, trading suspension needed
  (ii) Trading suspension be kept as short as possible
  (iii) (HKEX Guidance Letter on Trading Halts referred)—issuers should prepare an announcement in advance, ready to release during non-trading hours (Click here for our Dec 15 newsletter)
• Stresses better quality in disclosure:
  (i) Encourages issuers to publish “informative announcements” for investor decision
  (ii) Noted more companies give numbers in profit alerts (being more informative “quantitative information”)
  (iii) Examples: use of percentages which may be unclear and potentially misleading
  (iv) Example l is particularly noteworthy—where a loss is described as “a 150% decrease in profit” (For all examples–read P. 3 of newsletter)
• Reminds Listed debt issuers of obligation to comply with disclosure of inside information regime

What you should do/watch out for:

• While no “new” issues were raised, it would be useful to refresh our understanding of enforcement cases along similar themes (e.g. internal management accounts case: Click here for our April 16 newsletter)
• Should note the increasing rigour of SFC in reviewing quality of disclosure, and avoid unclear language
• For internal controls: should monitor internal management accounts for inside information disclosure purposes
• Directors to note: SFC expects monthly management accounts be provided to you

Both SFC and HKEX stress combating market misfeasance and unfair conduct to minority investors, as reflected in the following actions.

(ii) SFC’s “Enforcement Reporter” on its enforcement focus (Click here for press release)

What you should know/watch out for:

• Reflects consistent themes in a speech delivered by its new Executive Director, Enforcement (Click here for our Nov 16 update)
• Listed company-related fraud and misfeasance as top priority:
  (i) Specialist team set up
  (ii) GEM – “shell” company activities
  (iii) Close monitoring of high shareholding concentrations
• For SFC licensees:
  (i) Cyber hacking customer accounts
  (ii) Anti-money laundering
  (iii) Focus on systemic problems, where companies and groups reflect multiple failings
• SFC will “recognize and give credit for co-operation” and value disclosure of misconduct

(iii) SFC and HKEX joint press release: keeping highly dilutive rights issues and open offers under scrutiny

What you should know:

Both regulators are closely monitoring rights issues and open offers which substantially dilute the interest of non-subscribing minority shareholders

• (Listing Rule 2.03) Principle of “fair and equal treatment of all shareholders”
• Key– whether there is underlying “demonstrable commercial rationale”
• Two Listing Decisions published whereby HKEX refused to grant listing approval:
  (i) Highly dilutive and repetitive rights issues (HKEX-LD102-2016)
  (ii) Share subdivision (after a recent rights issue and share consolidation) (HKEX-LD103-2016)
• Failed to establish “demonstrable commercial rationale” in the rights issue case:
  (i) Proposed rights issue ($300m) is combined with a share consolidation (20 to 1)
  (ii) Original proposal has a 85% “dilution impact” – combined effect of offer ratio (20 rights share for 1 consolidated share), and price discount (90%)
  (iii) Completed another rights issue a few months ago (52 % undersubscribed; over 80% dilution impact)
  (iv) Unspecific use of proceeds—35% used for a specific property acquisition
  (v) Revised proposal with a 55% dilution impact; 62% proceeds for a property deal
  (vi) Resulting odd lots mean further loss to minority shareholders

What you should do/watch out for:

• There is no prescribed “dilution threshold”; HKEX adopts a case-by-case approach
• These cases should not affect genuine corporate actions. However, listed companies should be prepared to demonstrate clear and justifiable commercial rationale, and consult HKEX early

(iv) HKEX circular to listed issuers, reminding them of disclosure improvement areas in reporting

What you should know:

• In light of the annual reporting season, HKEX reminds issuers of three review reports:
  (i) Review of Disclosure in Issuer’s Annual Reports to Monitor Rule Compliance Report 2015 (Click here: our Jan 16 update)
  (ii) Financial Statements Review Programme Report 2015 (Click here: our July 16 update)
  (iii) Analysis of Corporate Governance Practice Disclosure in 2014 Annual Reports/ March year-end 2015 Annual Reports/ June year-end 2015 Annual Reports (Click for our Nov 15; May 16; Sept 16 updates)
• Improvement areas under existing requirements include:
  (i) Low compliance in specific Corporate Governance Code Provisions
  (ii) Quality of disclosure explaining deviations for “comply or explain” requirements
  (iii) Annual review of “Continuing Connected Transactions” by independent directors
  (iv) MD+A and “Business Review”

What you should do/watch out for:

• Listed companies should also note new disclosure requirements for (i) internal controls and risk management; (ii) ESG; (iii) extended auditor report

Companies (Winding Up and Miscellaneous Provisions)(Amendment) Ordinance 2016 will become effective on 13 Feb 2017. (Click here for the press release) It aims at improving and modernizing Hong Kong’s corporate winding up regime.

What you should know/watch out for:

• Main objectives: to increase protection of creditors; streamline the winding up process; and enhance integrity of the process
• Did not introduce a new corporate rescue system
• Separate proposals on a corporate rescue system being developed
• Click here for our Oct 15 newsletter