Share This:

May/June 23 Legal Update

Share This:

Top stories

HKEX Listed Issuer Newsletter; new global ISSB sustainability standards


(i) HKEX published its latest Listed Issuer Newsletter, with useful observations on disclosure of business valuations in transactions, and compliance with new Listing Rules on share schemes. It also addresses issues relating to change in auditors.

Firstly, as regards disclosure of business valuation in transactions:

(Background:  in a notifiable transaction”, issuers are required to disclose the basis for the consideration and the terms of the transaction. Under FAQ Series 7 No. 21, where the valuation of a target is a primary factor in forming the basis for the consideration or other material terms, disclosure of the valuation would need to be made in the announcement/circular).

HKEX observed that valuation disclosure in some issuer documents fell short of information  “necessary for investors to understand the underlying valuation methods and assumptions, bases for adopting them, and how the valued amount was derived”. Useful guidance and examples are given.

Secondly, as regards compliance with new rules on share schemes:

(Background:  amended rules on (a) “12-month vesting period” (unless justified; see FAQ No. 092-2022 for examples; (b) description of performance targets).

HKEX’s observed pitfalls include generic description.

What you should know/do:

HKEX observations and guidance:

Disclosure on valuation   

  • Selection of valuation methods
  • — Describe the selected valuation models and explain why they are selected, in particular why the methods were appropriate for the transactions/target company
    — E.g. use of “discounted cash flows” method to value a start-up target company
    — Should explain how it is appropriate in the absence of a historical track record to substantiate the forecasts
    More than one valuation method is used: disclose the process in analysing the values derived from different valuation methods

  • Valuation assumptions and inputs
  • — Explain these with detail and in specific terms
    — E.g. “market approach valuation”: criteria and process for selecting comparable companies; why the selected market comparables are appropriate

Compliance with new rules on share schemes    

  • Examples of generic justification
  • — E.g. (justification for shorter vesting period) “any circumstances as the board at the time of grant”: lacked specific criterion

(ii) ISSB (The International Sustainability Standards Board) issued new global standards (IFRS S1 and IFRS S2), which create a global baseline of sustainability-related disclosures. HKEX had already issued a consultation paper to revise its ESG framework aligning with this.
(See our April legal update)
Hot Trends

2023 ESG & Climate Survey
What you should note:

  • Most widely- followed ESG ratings/rankings
  • ESG team partners most with finance function
  • Enhanced disclosure: data collection as key challenge
  • Digitalisation strategy and trends

Also in this issue

(i) Notable HKEX enforcement cases

(A) (New money lending business) HKEX imposes a Director Unsuitability Statement against           4 former executive directors of Arta Techfin Corporation Limited.                                          (Announcement; Statement of Disciplinary Action)

During 9 months (Jul 2017 to Apr 2018), the company (through its wholly-owned subsidiary) significantly expanded its money lending business and granted loans in the total amount of $2.28 billion. The borrowers defaulted on the loans and significant impairment losses were incurred by the company.

HKEX was concerned as to the commercial rationale of granting such loans. All loans were unsecured, the majority of the borrowers were based in the PRC, and over 93% of the loans were paid to third party nominees. Despite the fact that the loans which matured in Jan and Mar 2018 went into default, the company continued to grant more loans.

There were limited or minimal level of discussions or considerations among the relevant directors regarding the expansion of money lending business, due diligence and credit assessments on the borrowers/loans, and monitoring of the status of the loans.

Directors must fulfil their fiduciary duties and apply a reasonable level of skill, care and diligence. They are expected to critically assess the commercial rationale for the business, and to play an active role in safeguarding the assets of the issuer.

The fact that one is not a director of the subsidiary does not absolve him / her from the collective responsibility to safeguard the assets of the group.

HKEX’s announcement states useful lessons learnt for entry/expansion of a business (summarised below).

What you should know/do:

  • Entry into or expansion of a business, particularly one which is high risk, must be properly considered by the board
  • For money lending business
  • — Proper steps to assess and manage the exposure to the issuer
    — E.g. due diligence, thorough analysis of the risks, ongoing oversight of loan portfolio
    Comprehensive records of these steps must be kept

(B) (Conflicts of interest) HKEX criticises a non-executive director of Agile Group Holdings Limited for failing to disclose his interests in his non-executive son’s competing business. (Announcement; Statement of Disciplinary Action)

Before the company was listed, each member of the founding family, including the director, undertook not to be interested or involved in any business that would likely compete with the company group.

In late 2013, the director personally provided initial funding of $180M to his son to set up his own property development business in China. Between 2014 – 19, he provided nearly $2 billion funding and financial guarantees for his son’s business. The son’s business potentially competed with that of the company. He also acted as a director of companies within his son’s group.

Throughout that time, the director did not disclose to the board his interests in, and financial support to, his son’s business. This included a failure to disclose when the company considered and ultimately entered into a release of the family members from the non-competition undertaking.

HKEX’s announcement states useful lessons learnt for conflicts of interest (summarised below).

What you should know/do:

  • Proper handling of potential conflicts of interest is a fundamental element of good corporate governance
  • Directors are under broad-ranging obligations to avoid or transparently manage even an indirect risk of conflict
  • Directors should ensure they are fully aware of the expectations on them regarding potential conflicts of interest
  • Directors should make open and early disclosure of anything which might be considered a conflict, even if the possibility of an actual conflict is considered remote

(ii) HKEX published consultation conclusions on proposed expansion of its paperless listing regime (Press release, Consultation conclusions)

(Background: for a summary of consultation proposals, see our Dec 22 legal update).

HKEX will adopt the 3 key proposals with a number of minor modifications. Most new requirements are to take effect on 31 Dec 2023 (“effective date”) , with transitional arrangements. (For details, see para 8, P.4 of consultation conclusions)

Firstly, the number of documents required to be submitted to HKEX will be reduced, with mandatory submission by electronic means. E.g. by “codifying” obligations currently contained in various undertakings (e.g. directors’ undertaking in DU Form).

Secondly, mandatory electronic dissemination of corporate communications to securities holders by listed issuers, to the extent permitted by the laws and regulations applicable to them and their constitutional documents.

If permitted by applicable laws, issuers should check if their constitutional documents contain any restriction. If so, they need to amend the same by the first annual general meeting following the effective date.

For issuers incorporated in HK, HK Companies Ordinance does not currently permit shareholders’ consent to be “implied” for receiving communications by electronic means. HKEX stated that it will work with relevant parties to consider the issue of implied consent for the corporate communications of Hong Kong-incorporated listed issuers.

However, issuers must still send “Actionable Corporate Communications” (definition refined, see below) to securities holders individually in electronic form, or (where email details not provided) by hard copy. HKEX will provide a list of items on what constitutes the same (e.g. provisional allotment letter in connection with a rights issue).

Thirdly, Listing Rule appendices will be simplified. E.g. by moving fee-related appendices to HKEX website.

What you should know:

Definition of “Actionable Corporate Communications”

  • Any corporate communication that seeks instructions from issuer’s securities holders on how they wish to exercise their rights or make an election as the issuer’s securities holders

This Update in PDF