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Jul 18 Legal Update

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Revised HKEX Corporate Governance Code

HKEX published its consultation conclusions on “Review of the Corporate Governance Code And Related Listing Rules”, and a “Guidance for Boards and Directors”.  (Click: full report, press release; Directors’ Guide).

The “over-boarding” provisions have attracted most media attention.  However, it is only one aspect of HKEX’s overall focus to strengthen the accountability of the board and the nomination committee on director election (including independent directors or “INEDs”). Independence criteria, board diversity, and the general rigour in the nomination process are strengthened. Dividend policy transparency is also enhanced.

The new rules will be effective from 1 Jan, 2019.  Technically, these are to be achieved by revising the CG Code, or upgrading some Code Provisions (“CP”) into Listing Rules (“Rules”).

Relevant guidance contained in the Directors’ Guide (which is not part of the Listing Rules), are summarised below. In addition, it covers directors’ duties, risk management / internal controls, company secretaries’ roles (for external service providers in particular), and special considerations for weighted voting rights issuers.
What you should know:

  • INEDs (over-boarding and time commitment) (paras 34-51 of report)

    — (Revise CP A.5.5) For electing INED who holds his 7th (or more) listed company directorship, the company circular to shareholders should give reasons why he would still be able to devote sufficient time to the board

    Directors’ Guide: factors to assess if a nominee may be over-boarded (para 2.17)

  • INEDs (enhanced independence criteria) (paras 78-121)

    Cooling off periods:
    (i) (Revise Rule 3.13(3)) For former professional advisors – extend from 1 to 2 years
    (ii) (Revise CP C.3.2) For a former partner of auditor to become its audit committee member – extend from 1 to 2 years
    (iii) (Revise Rule 3.13(4)) Material interests in its business activities in the past year: introduce 1-year cooling off period

    — (New) Add a note under the independence criteria rule, that these criteria “should apply” to an INED’s “immediate family” (i.e. spouse, his (or spouse’s) child or step-child, natural or adopted, under 18) in assessing independence

    — (New “Recommended Best Practice”) Disclose in corporate governance report (“CG Report”), an INED’s cross directorships or significant links with other directors

  • Board diversity (paras 53-68 of report)

    — Upgrade CP (A.5.6) to a Rule, requiring issuers to have a diversity policy and disclose the policy / a summary in the CG Report

    — (Revise CP A.5.5) More disclosure, in circular to shareholders accompanying the resolution to elect the director:
    (i) The process used for identifying the nominee
    (ii) The perspectives, skills and experience he is expected to bring to the board
    (iii) How he would contribute to diversity of the board

  • (New) Disclose nomination policy in CG Report, which should set out the board’s consideration of Code Principle (A.3) (i.e. a board should have a balance of skills, experience, and diversity of perspectives) (paras 122-129)

    Directors’ Guide: considerations in developing a nomination policy (para 3.9) and a diversity policy (para 4.9). “Board skills matrix” (para 4.10-2) is also referenced as a tool to assess diversity

  • (Revise CP A.2.7) INEDs should meet annually with the Chairman, in the absence of the other directors, giving feedback (paras 138-143)
  • (New) Disclose dividend policy in the annual report (paras 144-149)

What you should do/watch out for:

  • Management:
    — Immediate action: inform your directors on the rule changes, and forward to them the Directors’ Guide

    — Assess impact on your board, nomination committee, board policies/processes(e.g. nomination policy and process, diversity policy), disclosure (annual report/CG report, AGM circular on director election)

  • Nomination Committee: rule changes will result in greater demand on it and the board, for ensuring the balance of skills of directors, enhanced independence criteria, and diversity
  • INEDs: assess impact of rule changes on you


Also in this issue


(i) HKEX published its Enforcement Newsletter,covering 1H 2018.

The theme is the roles and responsibilities of non-executive/independent directors. HKEX observed that firstly, there has been “too much reliance on management”; secondly, that some directors do not appear to understand the importance of their role.

There are useful examples and elaboration on these observations!

“Compliance highlights” section features a useful case for “notifiable transactions” (Chapter 14) interpretation.

The enforcement cases cited are principally blatant breaches of Listing Rules and related internal controls failures; or failing to co-operate with HKEX.

What you should know/watch out for:

On Directors’ duties:

  • (Common defence) “I relied on executive directors”

    HKEX reminder:
    — Executive and non-executive directors have the same level of duties under the Listing Rules
    “Level of reasonable care, skill and diligence” — combined objective (i.e. a “hypothetical reasonably diligent person”), and subjective tests (i.e. director with greater personal knowledge must meet higher standards. E.g. a qualified accountant as an audit committee member)
    — Take a “diligent and intelligent interest” in issuer’s affairs and information provided
    Apply an “enquiring mind” to their responsibilities: not “box ticking or spell checking exercise”
    — May delegate; but does not absolve directors from responsibilities
  • (Common defence) “No reason for us to suspect anything was wrong”

    HKEX reminder:
    — Independent judgment needed
    — Seek additional information if needed
    — Must familiarise themselves with the company’s business
    — Challenge other directors, regardless of how dominant they are
    — E.g. in disciplinary hearings,
    will consider if a director has demonstrated their own independent judgment, e.g. by raising questions of executive management/ professionals; including obtaining independent/ professional advice, or other positive steps to make own enquiries


“Compliance highlights” section (interpretation of “transaction” under Chapter 14)

  • Case: issuer subscribed for “wealth management products” by banks
  • Misunderstood Chapter 14, that products with low redemption risks are similar to cash and deposits
  • In fact, such subscription amounts to a “transaction”
  • Failed to meet Chapter 14 procedural requirements


(ii) SFC announced consultation conclusions on amendments to the Codes on Takeovers and Mergers and Share Buy-backs.  After gazetting, they became effective on 13 July. (Click: press release; consultation conclusions)

These include raising the independent shareholder approval threshold for “whitewash waivers” (regarding the obligation to make a “general offer” after a “change in control”), from a simple majority to 75 %.  This aims to combat attempts to manufacture “shell companies”, by circumventing the general offer obligation.

The Takeovers Panel is also empowered to require compensation to be paid to shareholders who have suffered as a result of a breach of the Codes.


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