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Two notable enforcement cases

 
(i) HKEX criticizes Yashili International Holdings Limited for repeated breaches of the Listing Rules, and raised concerns on internal controls. (Click: Press release).

The case relates to delay in announcing  7 “connected transactions” (“CTs”) during Jan-Aug 2017. The issuer previously received two “caution letters” (in 2014, 2017) of similar breaches.

There were no evidence as to (i) intentional/wilful concealment; (ii) the transactions not on normal, commercial and arms-length terms; and (iii) benefits for any board members.

It was highlighted that issuers committing repeated breaches should expect appropriate regulatory action. Directors should take active steps to avoid such repeated breaches. The lack of adequate internal controls was stressed.

Similar messages were also communicated in HKEX’s latest enforcement newsletter. (Click: our Aug 19 Legal Update)

This case also cited useful measures for monitoring “connected transactions”.

What you should know:

• Delay in announcing 7 transactions; over 6-8 months in some cases

• Some transactions, when aggregated, would have required independent shareholder approval

• Some cases involved subsidiaries

• Measures for monitoring connected transactions/aggregation
  — Keep a list of connected persons
  — Identify CTs/Continuing CTs potentially subject to aggregation rules
  — Determine if the transactions gave rise to any Listing Rule implications
  — Monitor reporting of CTs at subsidiary level
  — (If necessary) escalate to board and/or senior management for consideration
  — Consult HKEX or professional advisers
  — Training and/or written procedural manual to those responsible for reporting CTs

What you should watch out for:

• Repeated breaches likely to lead to regulatory actions

• Assess adequacy of your internal controls system against the measures cited

• Directors’ duties to avoid breaches, including for internal controls

(ii) SFC obtains disqualification order against former executive director of Life Healthcare Group Limited, for a period of 6 years. (Click: Press release).

The defendant director did not benefit from the misconduct, and admitted that she had little experience/expertise in managing financial matters of the company and had relied on the other executive directors.

What you should know:

• Relevant misconduct
  — Signed documents pledging company assets for loans ($98m), without making enquiries
  — Approved grant of stock options, without enquiring grantees’ financial ability to pay
  — Signed attendance sheets of board meetings approving an overseas acquisition by a subsidiary; subsequently found to involve undisclosed related persons

• Breach of directors’ duties
  Exercise reasonable care and diligence in the management of the company, to act in good faith and in its best interests, and to implement a sound and prudent system of financial control to minimise the risk of misappropriation of  assets

What you should watch out for:

• The high standard expected in directors’ duties, including making the necessary enquires

• Directors’ duties being an enforcement focus

Also in this issue

Regulators

This Update in PDF