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Nov/Dec 21 Legal Update

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HKEX consultation conclusions on corporate governance & directors’ guide

HKEX published consultation conclusions on enhancements to the Corporate Governance Code and Corporate Governance Report. (Press release; full document)

Most proposals are adopted EXCEPT these notable modifications:

  • (NOT adopted) independent shareholder approval of re-election of independent director (“INED”) serving more than 9 years
    — But if all INEDs have serve more than 9 years, a new INED be appointed during financial year commencing on or after 1 Jan 2023
  • (Modified) mandatory nomination committee: can be chaired by board chairman (or INED, as proposed)
  • (Modified) diversity — setting of targets at board level (not workforce level, as proposed)

The revisions are effective from financial year commencing on or after 1 Jan 2022, save for some areas (see below: new INED appointment if all INEDs serve 9 years; or “single gender boards”).

In terms of the technical approach, the revisions introduce new/upgrade “Code Provisions” (“CP”; subject to “comply or explain”), “Recommended Best Practices” (“RBP”; which are voluntary). Some Code Provisions are upgraded to Listing Rules. For enhancing disclosure, there are new “Mandatory Disclosure Requirements” (“MDR”; disclosed under corporate governance reports).

HKEX also published an updated Corporate Governance Guide for Boards and Directors (“HKEX directors’ guide”), providing useful guidance. E.g. on new areas like culture, anti-corruption. These are referenced below.

Key revisions include:

  • Corporate culture
     (New CP A.1.1) stresses the board’s roles
    (i) Establish company’s purpose, values, and strategy, and satisfy that these and its culture are aligned
    (ii) All directors must act with integrity, lead by example, and promote the desired culture
    (iii) Culture should instil and continually reinforce across the organisation values of “acting lawfully, ethically and responsibly”

    HKEX directors’ guide
    (i) Addresses roles of the board as well as management (P.9)
    (ii) List of questions for the board (P.11)
    (iii) Disclosure (e.g. vision, values, strategy, alongside culture how all these affect the business model, purpose, and board evaluation) (P.12)
    (iv) Related theme and disclosure (e.g. board evaluation)

  • Whistleblowing and anti-corruption policies
    — (New CP D.2.6) Whistle-blowing policy and systems: to be monitored by the audit committee or a designated committee comprising of a majority of INEDs
    — (New CP  D.2.7) Policies/systems to support anti-corruption laws/regulations
    — HKEX directors’ guide: key elements of such policies; disclosure (P.13)
  • Board independence, refreshment and succession planning
    — (Modified proposal) INED(s) serving more than 9 years:
    (i) (New CP B.2.3) Additional disclosure for re-election: why such INED still independent (i.e. factors considered, process and the board/ nomination committee’s discussion in arriving at such determination)
    (ii) (New CP B.2.4) If all INEDs served more than 9 years, (a) disclose their respective length of tenure on a named basis, (b) (during financial year commencing on or after 1 Jan 2023 ) appoint a new INED 

    (i) (New CP) Mechanisms in place, to ensure independent views are available to the board, and annual review of its effectiveness
    (ii) (Upgraded to Rule; modified proposal) mandatory nomination committee, chaired by either board chairman or INED; comprising a majority of INEDs
    (iii) (New Rule) disclosure of directors’ attendance at general meetings in poll results announcements
    (iv) (New RBP) generally should not grant equity-based remuneration to INEDs, for objectivity and independence

  • Diversity
    — Single gender board not considered a diverse board
    — (New MDR) set and disclose mandatory numerical targets and timelines for achieving gender diversity at board level
    — (New MDR) set and disclose gender ratio at workforce level (including senior management); any plans or measurable objectives for achieving gender diversity; or mitigating factors making this more challenging/less relevant
    — (New CP) boards required to review progress of diversity policy annually
    Transitional arrangements for single gender boards: to appoint at least one director of the absent gender by 31 Dec 2024
    — HKEX directors’ guide : guidance on disclosure (P.22);  including the use of a board skills matrix (P.23)
  • Communications with shareholders
    — (Upgraded to MDR) disclosure on shareholders communication policy, and annual review of its effectiveness
    —  Two-way communication: dissemination of information to shareholders; solicit feedback
  • ESG
    — New introductory paragraph added to the Code, elaborating on linkage between corporate governance and ESG
    — ESG report to be published at the same time as annual reports (i.e. within 4 months of year-end, instead of 5 months for ESG reports now)
  • Re-arrange order of the Code for a better flow
    No substantive changes

What you should do/watch out for:

  • Update the board and relevant teams on the revisions, after management’s assessment with proposed actions (in light of implementation timeframe), e.g. need to appoint new directors; mandatory nomination committee; corporate culture, publication time of ESG report, other gaps in policies/processes/disclosure
  • Note enhanced disclosure in corporate governance report (for report covering year commencing on or after 1 Jan 2022); consider early-adoption where appropriate



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Also in this issue


(i) HKEX’s latest Listed Issuer Regulation Newsletter covers various themes relevant to listed issuers, e.g. directors’ responsibilities when assessing transactions. HKEX explains its expectations on directors when conducting transactions.

It also reminds directors of their duties in lending transactions.

What you should do/watch out for:

  • Evaluate the benefits expected from the transaction
    — Whether conducive to implementing issuer’s strategy?
    — Consistent with issuer’s business plan and direction?
    — E.g. business in a different industry: weigh prospects of that industry against risks and issuer’s capabilities to operate the new business
  • Make due enquiries on the acquisition target
    — Size and complexity
    — Directors’ knowledge in the relevant business/ industry
    — Should consider extent of due diligence and expert advice needed
  • Critically assess the value of target (fair + reasonable?)
    — With reference to information obtained through directors’ enquiries
    — Exercise own judgment; not to overly rely on one single source or biased information
    — E.g. business valuation: need for independent assessment of the assumptions; review of business operations
  • Assess all transaction terms (reasonableness + adequacy?)
    — Settlement/payment terms
    — Guard against failure by the counterparties in fulfilling contractual obligations
    — E.g. vendor’s ability to fulfill warranties/ guarantees
    E.g. target is a new business: caution in relying on profit guarantee

(ii) ESG: further HKEX initiatives

By way of background, the (international) Task Force on Climate-Related Financial Disclosure (“TCFD”) published recommendations on climate-related financial disclosures, which are endorsed by investors generally.

Hong Kong’s Green and Sustainable Finance Cross-Agency Steering Group (of which HKEX is a member) announced in Dec 2020, that climate-related disclosures aligned with the “TCFD recommendations” will be mandatory across relevant sectors no later than 2025.

In light of this direction, HKEX recently published:

(i) (Nov 2021) a Guidance on Climate Disclosures to provide practical guidance to facilitate the process. There are useful guidance, including on the “governance” aspects, as summarized below.

(ii) (Dec 2021) a Practical Net-Zero Guide for Business for Hong Kong listed issuers, on charting their net zero carbon journey.  Through its sustainable and green exchange (STAGE) platform, it also launched a new service displaying Hong Kong-listed companies ESG metrics. (STAGE Product Repository)

The guide is a technical one that takes companies through the necessary processes to develop an appropriate net-zero pathway. The repository initiative will help provide a consolidated view of ESG ratings from different providers, facilitating investors in their investment decisions.

What you should do/watch out for:

Useful guidance on “governance” (TCFD guide)

  • Roles and responsibilities of board and management (P.7)
  • Common governance structures (P.8)
    — “Integrated” (i.e. existing board committees)
    — “Dedicated” committee approach
  • Key elements of disclosure (P.11)
    — Example of hypothetical company (P.12)



Competition Commission takes cleansing service cartel case before Competition Tribunal, against 2 companies and their named directors.  (Press release)

It is alleged that from May 2016 to Aug 2018, the companies exchanged commercially sensitive information in relation to 17 tenders (total contract sum: HK$180m) submitted to the Hong Kong Housing Authority re: cleansing services. Such conduct amounts to “price fixing”, a serious anti-competitive conduct in contravention of the First Conduct Rule of the Competition Ordinance.

What you should watch out for/do:

  • “First Conduct Rule” means — parties acting together with an agreement, and/or engaged in a concerted practice, whose object or effect is “to prevent, restrict or distort” competition in HK
  • Reinforces that “cartel actions” i.e. price fixing, market sharing, and bid-rigging, is a priority enforcement area

This Update in PDF