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Nov/Dec 20 Legal Update

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(i) HKEX review: corporate governance disclosure

HKEX published its latest review of issuers’ corporate governance reports for financial year ended between Jan to Dec 2019.  (Press release; full report)

It focuses on (i) re-election of independent non-executive directors (“INEDs”) who served more than nine years, (ii) election of overboarding INEDs (i.e. holding their 7th or more directorship), and (iii) board diversity, nomination of and selection criteria for directors.

In terms of the “technical” compliance with the relevant Code Provisions, there is a high degree and improving compliance. One of the “least complied” areas is the separation of chairman and chief executive roles.

In its press release, HKEX stressed that a strong independent element, INED’s availability/ time commitment and board diversity are all crucial to an effective board. The report suggests improvement areas in these themes.

It is noteworthy that HKEX is currently conducting a review of the corporate governance framework and expects to put forward proposals for public consultation.

What you should know:

  • Long-serving INEDs (para 29, P.7)
    Some common explanations rejected
    E.g. cite satisfying Rule 3.13 independence criteria; which do not address mindset issues
    Should balance the benefit of having long-serving INEDs
    Against their ability to stay independent, and the necessity of board refreshment / succession planning
    Should demonstrate the rigour and transparency of the nomination process
    — E.g. from identifying candidates; how they can bring fresh perspectives despite long tenure; how succession planning ensured; and the board’s evaluation
  • “Overboarding” (para 36, P.8)
    Some common explanations rejected
    E.g. citing good attendance (but INEDs should be fully engaged, both inside and outside the boardroom)
    Should provide details of the board’s assessment, including balancing various factors
  • Board diversity (para 46, P.10)
    Should set “measurable objectives” so that shareholders can track progress
    Information on development of a diverse pipeline for succession
    E.g. programmes to prepare selected employees for senior management/board positions

What you should do:

  • Your forthcoming corporate governance report — note HKEX specific disclosure suggestions summarised above
  • In anticipation of HKEX’s forthcoming consultation proposals, should note its continuing focus on board independence, INED time commitment, and board diversity


(ii)  HKEX’s latest Listed Issuer Regulation Newsletter covers various themes relevant to listed issuers, e.g. further guidance on the disclosure of counterparties in transactions. In particular, it addresses planning for the upcoming financial year-end amidst Covid-19.

There is a useful reminder of various planning aspects (P.7), including audit committee, communications with auditors and valuers, and disclosure in annual reports.

What you should know/do:

  • Audit committee
    Review internal control on financial reporting systems to ensure adequacy
    Proactively discuss with management/auditors the plan for the upcoming audit
    Ensure sufficient resources: both issuer and auditors
  • Audit planning process
    — Discuss with auditors as to significant accounting matters
  • Engage professional parties (e.g. valuers) at the earliest instance; discuss plans + timetable
  • Special points for companies anticipating audit issues
  • Covid 19 disclosure in annual reports
    Qualitative disclosures: effect on operations; risks for future performance
    Quantitative: financial impact
    Liquidity positions, working capital sufficiency, capital commitments
    Actions: e.g. cost control, funding and business plans



Other Stories


(i)  The Competition Commission filed a case in the Competition Tribunal against Linde GmbH and a group company, for “abusing its substantial degree of market power” in the HK medical gases supply market to the detriment of competition in the (“downstream”) medical gas pipeline system maintenance market. (Press release)

This is the first case brought under the “Second Conduct” rule, as regards abuse of substantial market power.

It is alleged that (between Oct 15 and Jan18) Linde ceased/ limited supply of medical gases, which are essential inputs, to the only other medical gas maintenance service provider. E.g. by denying supply of medical gases, imposition of arbitrary/unreasonable terms so that the provider could not compete/perform such maintenance contracts. These harmed competition and affected the interest of the consumers, which are mostly public hospitals in HK.

What you should watch out for:

  • “Second Conduct Rule” means — businesses with a substantial degree of market power abuse that power to prevent, restrict or distort competition in Hong Kong
  • Previous cases concern the “First Conduct Rule” (parties “acting together with an agreement, and/or engaged in a concerted practice”)
  • Case triggered by a public complaint, which channel is encouraged by the Competition Commission


(i)  New HKEX case on notifiable transactions

HKEX’s Listing Committee criticised Wai Chi Holdings Company Limited, for breach of Listing Rule “notifiable transactions” announcement/shareholder approval requirements; and an executive director (who approved the transactions without board knowledge) for breach of directors’ undertaking.  (Press release)

It involved the subscription of 5 “wealth management products” (namely index or asset linked deposits) between Sept and Dec 2018. The total amount involved was around HK$153m, being 9.8 % of the company total assets as at 2018 year-end.

These were NOT pure time deposits. They were classified as “financial assets at fair value through profit or loss” in the company’s 2018 annual results, not as “bank balances and cash”.

A majority of these investments constituted a discloseable transaction. Additionally, when aggregated, subscriptions made in Dec 2018 constituted a “major transaction”, for which shareholder approval was needed. The other subscriptions made in Sept 2018 in aggregate constituted a “discloseable transaction”.

What you should know/watch out for:

  • Broad interpretation of “transactions” (Chapter 14)
  • HKEX cited its guidance materials on the acquisition of wealth management products
    — E.g. its Enforcement Newsletter, July 2018
  • Application of “aggregation” principle


(ii) HKEX published its Enforcement Bulletin, featuring articles relevant to Listing Rule compliance and updates on its enforcement work. (Report)

This issue addresses director onboarding and continuing education, and highlights some enforcement cases during 2020.

Some notable cases involving breach of directors’ duties, namely in acquisitions (Asia Resources case/ Jan 20; Champion Technology case/ Apr 2020, loan transactions (Kong Sun case/ May 2020) were also addressed in our previous legal updates.


(iii) HKEX published a FAQ on calculation of adjustments in stock options in light of corporate transactions like rights issue. The overriding Listing Rule principle is that no adjustments to the exercise price or number of shares should be made to the advantage of scheme participants without specific prior shareholder approval. It gave an example on adjustment calculations for a rights issue.


(iv) HKEX published consultation conclusions on proposals to introduce a paperless listing and subscription regime, online display of documents and a reduction of the types of documents on display. (Press release; full report)

Our focus is on listed issuers’ continuing obligations; relevant proposals as summarised below:

Firstly, the current requirement for certain documents to be put on physical display will be replaced with a requirement for those documents to be published online. i.e. on HKEX’s and the issuer’s website. (e.g. relevant contracts andvaluation reports for “notifiable/connected transactions”)

Secondly, types of documents that are mandatory to put on display for “notifiable transactions” and “connected transactions” will be reduced. (e.g. no longer required: all material contracts entered into during the past 2 years, not directly related to the transactions).

These proposals will become effective on 4 Oct 2021.


(v) SFC launched a consultation on proposals to introduce investor identification for the securities market in Hong Kong. (Press release; full document)

As proposed, licensed corporations and registered institutions would submit clients’ names and identity document information to a data repository. This will allow SFC to identify investors who place securities orders. The proposed investor identification measures aim to make SFC’s market supervision more robust and promote investor confidence which is essential for HK as a premier international financial centre.


(vi) The Office of the Privacy Commissioner for Personal Data issued 3 Guidance Notes under the series “Protecting Personal Data under Work-from-Home Arrangements”.
Press release)

They provide practical advice to (1) employers; (2) employees; and (3) users of video conferencing software, to enhance data security and the protection of personal data privacy.


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