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Nov 18 Legal Update

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HKEX reviewed 2017 annual reports + ESG reporting guidance

(i)  HKEX published “Analysis of Corporate Governance Practice Disclosure in June and Dec year-end 2017 and March year-end 2018 Annual Reports”, reviewing issuers’ compliance with the Corporate Governance Code (“CG Code”) and Corporate Governance Report.  (Click: full report, press release, letter to issuers).

It reminded issuers on the new CG Code and related Listing Rules requirements (effective Jan 2019), including diversity, independent director nomination process, independence criteria, “no over-boarding” (Click: our July 18 update).

This annual report review focused on similar areas, including disclosure on diversity; work done by board committees. Greater transparency is stressed, which should in turn enhance accountability and board effectiveness.

What you should know:

  • The findings are similar to the last reviews; high rate of compliance with the Corporate Governance Code Provisions (“CPs”), which are subject to the “comply or explain” regime
  • Area with lowest compliance rate: separation of the roles of chairman and chief executive
    — Explanation of deviation should address “governance issue of leadership’s checks and balances” (para 51)

Corporate Governance Report
(Listing Rules Appendix 14: Corporate Governance Report – “Mandatory Disclosure Practices” (“MDR”))

  • Focus: quality of disclosure
  • Diversity disclosure (from para 37) (MDR L. (d) (ii))
    Progress in implementing diversity policy
    “Measurable objectives”
    Milestones and progress
  • Disclosure on work done by board committees (from para 31) (MDR L. (d))
     Key committees: audit, remuneration, nomination and corporate governance function
    “No boilerplates”
    Roles and responsibilities of each committee
    Narrative of work done during the year (“informative summary” encouraged)
  • Training (para 28) (MDR I(i))
    — Not only make broad statements; should specify how each director (by name) has satisfied the training requirements


What you should do/watch out for:

  • Non-compliance of CPs without giving “considered reasons” amounts to a breach of Listing Rules!
  • Identified improvement areas closely relate to revised CG Code, effective Jan 2019
  • Holistic approach: as you start preparing your 2018 annual report, the new CG Code requirements and the identified improvement areas should be considered together


(ii) HKEX published “How to prepare an ESG report?” guide (with toolkit), and updated FAQs on ESG-related Listing Rules. (Click here: press release; letter to issuers)

Environmental risks (including climate change-related risks) were stressed; also referencing recent international climate-related disclosure recommendations. The issuer’s ESG strategy and governance structure; as well as some common pitfalls in ESG reporting were highlighted.

HKEX plans to review its ESG reporting framework, with a view to consulting the market around mid-2019.

Also important for your 2018 annual reporting planning!

What you should know:

  • The step-by-step guide include sections on “the board and ESG working group”, “stakeholder engagement”, “materiality assessment”, and (P.12) “writing the ESG report”
  • Climate-change risks: recommendations of the Taskforce on Climate-related Financial Disclosures (“TCFD Recommendations”) referenced (P.3)
  • Some common pitfalls in ESG reporting highlighted
    — “Compliance with relevant laws and regulations that have a significant impact” (P.14)
    (i) No broad brush statement
    (ii) Specify the relevant law; potential impact; compliance steps
    (iii) Example given
  • FAQ updated with technical references, including for climate change risks

What you should do:

  • As you start preparing your 2018 ESG report, the above Guide should be considered
  • Also note improvement areas identified in HKEX’s report on its review of issuers’ first ESG reporting (Click: our May 18 legal update)



Also in this issue


SFC commenced proceedings in the Market Misconduct Tribunal (“MMT”) against Health and Happiness (H&H) International Holdings Ltd. for failing to disclose inside information as soon as reasonably practicable. (Click here: press release; MMT notice)

Key issue is material deterioration of financial performance should have been apparent from internal management accounts.

What you should know/watch out for:

  • Nature: delay in disclosure — material deterioration in performance
  • Monthly management accounts relevant: deterioration should have been apparent by the fifth month of the interim period
  • Being specific information regarding the company; price sensitive and not generally known to the public at the material time
  • Chronology:
    (23 July 2015): issued profit warning; revenue and profit for the six months ended 30 June 2015 expected to decrease by approximately 11 % and 36 % respectively
    Share price dropped by over 21% after announcement
    — (Mid-June): consolidated management accounts for the first five months of 2015 available; significant decrease in revenue (13.7%) and the net profit (28.9%)
    — (Around 23 June): such management information became known to company and Chairman (also being CEO, executive director)
  • Such officer alleged to be in breach for reckless or negligent conduct causing alleged breach by company
  • (Click: our April 2016 legal update on a similar case, Yorkey)


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