(i) SFC obtains landmark court decision for a “shadow director” and 2 executive directors (“EDs”) of Combest Holdings to make $192 m compensation to shareholders (Press release, Judgment)

(Under s. 214 of the Securities and Futures Ordinance) The court order was granted following a settlement secured by the SFC, for the trio to pay the sum to an administrator jointly appointed by SFC and the company as special dividends to independent public shareholders.

Background: EDs acted upon the shadow director’s directions and instructions to operate and manage the affairs of the company. During various times between 2016-9, they together orchestrated the acquisition of subsidiary groups (substantially overvalued by $229m); payments of fictitious loan interests and fees to entities related to the shadow director($64 m); grossly inflated company revenue artificially generated by entities related to the shadow director.

It is noteworthy that the "shadow director" was made subject to the compensation order as well.

(ii) HKEX censures New Century Healthcare Holding and 3 executive directors (“EDs”); criticises members of audit committee. (Announcement; Statement of disciplinary action)

Background: this case concerns transactions with connected person by the company.

In 2016, the company entered into a framework agreement for the provision of hospital consulting services to its connected person (related to former Chairman and CEO).

Between 2016 – 21, a substantial amount of service fees remained unsettled.  EDs repeatedly allowed delay in payment by the connected person, without reporting latter’s deteriorating financial condition and certain agreed repayment plans to the board. Such information was not disclosed to independent shareholders when their approval for renewing the framework agreement was sought.

The audit committee was aware of the situation throughout the years. Apart from expressing concerns to the board and asking it to monitor and strengthen the receivables collection process, it did not take further or adequate action to safeguard the company’s interests. Nor did it procure the company to disclose the situation in the shareholder circular or otherwise to the market in a timely manner.

What you should watch out for

Audit committee

HKEX key message:

• Audit committee members serve an important role in the board’s oversight of a listed issuer’s risk management and internal controls.  They are expected to cast an eye over the issuer’s business decisions and transactions. In particular, they should take the lead where a potential conflict of interest arises, rather than just relying on the responsible directors or representations of executive management.  They should also ensure accuracy and completeness of information in corporate communications.

Specific failures

• Question/seek more information on the financial condition of the connected person

• Raise further enquiries/follow up on the progress of the repayment plans

• Procure the board to take adequate steps to collect the receivables and safeguard company interests

(iii) SFC published consultation conclusions on the limits for three types of fees that an approved securities registrar may charge investors under the USM regime. (Press release; Consultation conclusions) (Background on consultation: our Feb 25 Update).

SFC will proceed to incorporate the fee limits in the ASR code. It also updated its dedicated USM webpage.  (For details of the final limits, see Annex 2 of the consultation conclusions paper)

In the coming months, it will continue to collaborate with HKEX and the Federation of Share Registrars to raise stakeholders’ awareness and enhance understanding of the new regime.