Proposed Listing Rule Changes Reflecting New CO Financial Information Disclosure Requirements
The Stock Exchange of Hong Kong (the Exchange) has published a consultation paper (see archive) on proposed amendments to the Listing Rules to reflect changes in the requirements for disclosure of financial information and other changes under the new Companies Ordinance (Cap 622) (New Companies Ordinance) which came into effect on 3 March 2014. The proposed Rule changes are set out in the appendices to the consultation paper. The Exchange has stated that none of the proposed amendments are the result of any policy shift. Responses to the consultation were required to be submitted to the Exchange by 24 October 2014.
1. Amendments in relation to Disclosure of Financial Information
1.1 Changes resulting from the new Companies Ordinance
When the New Companies Ordinance took effect on 3 March 2014, the previous Companies Ordinance became the Companies (Winding Up and Miscellaneous Provisions) Ordinance (CWUMPO) (Cap. 32), which retains only the prospectus regime in Parts II and XII and the insolvency and winding-up regime. All other provisions of the old Companies Ordinance (Old CO) were repealed and corresponding updated provisions are now contained in the New Companies Ordinance.
The Exchange now proposes to amend paragraph 28 of Appendix 16 to the Main Board Listing Rules (and the equivalent in the Listing Rules of the Growth Enterprise Market) to make them consistent with the requirements under the New Companies Ordinance regime.
New Companies Ordinance Disclosure Requirements
The Tenth Schedule and section 129A of the Old CO have been replaced by Schedule 4 of the New Companies Ordinance. While the Old CO regime specified all the financial disclosure requirements in its tenth schedule, the New Companies Ordinance refers to the disclosure requirements under Hong Kong Financial Reporting Standards (HKFRS) and additional requirements stated in Schedule 4. Schedule 4 includes:
a requirement for financial statements to disclose the aggregate amount of outstanding loans made during the financial year to eligible employees to enable them to buy shares in the company;
a requirement that, if a group produces consolidated financial statements, the notes thereto must include the holding company’s statement of financial position for the financial year and a note disclosing the movement in the holding company’s reserves;
a requirement that, if a company is a subsidiary of another company at the end of the financial year, it must disclose the parent company’s name and country of incorporation (or the address of its principal place of business if it is not a corporation);
a requirement that financial statements must state whether they were prepared in accordance with the applicable accounting standards and, if not, the particulars of, and reasons for, any material departure from those standards; and
the requirement for financial statements to state (under a separate heading) the amount of remuneration of the auditor;
Requirements for Directors’ Reports and other Disclosures Regarding Directors
The requirements for directors’ reports which were previously set out in section 129D of the Old CO are now reflected in the New Companies Ordinance at sections 383 and 388 to 391 and Schedule 5 (“Contents of Directors’ Report: Business Review”), the Companies (Directors’ Report) Regulation and the Companies (Disclosure of Information about Benefits of Directors) Regulation.
Most of section 129D’s disclosure requirements have been carried forward to the New Companies Ordinance. The following additional requirements were introduced in the New Companies Ordinance regime to enhance corporate governance and transparency:
a requirement for a new business review section in all directors’ reports which must comply with the requirements set out in Schedule 5 of the New Companies Ordinance;
a requirement that the names of all group directors must be disclosed in consolidated directors’ reports, and disclosure must be made up to the date of approval of the report;
a requirement to disclose significant transactions, arrangements or contracts entered into by the company in which a director has a material interest, in the financial statements; and
new disclosure requirements in respect of permitted indemnity provisions, equity-linked agreements and reasons for a director resigning or not seeking re-appointment.
It is proposed that Listing Rules A16.52(v), A16.52(vi) and A16.52(vii), which require a description of the company’s principal risks and uncertainties, environmental policies and performance, compliance with laws and regulations and an account of the company’s key relationships with employees, customers and suppliers, should be repealed as they are already satisfied by the inclusion of a business review in the directors’ report in accordance with Schedule 5 of the New Companies Ordinance.
Section 161 of the Old CO has been replaced by sections 383(1)(a), (b), (c) and (f) of the New Companies Ordinance. These set out the information in relation to directors’ emoluments that must be included in the notes to the annual financial statements.
Section 161A of the Old CO has been replaced by section 9(2) of the Companies (Disclosure of Information about Benefits of Directors) Regulation. This requires that where a figure in respect of the financial year is disclosed in the notes to the financial statements, the corresponding figure from the previous year must also be disclosed in the notes.
Section 161B of the Old CO has been replaced by section 383 of the New Companies Ordinance and the Companies (Disclosure of Information about Benefits Directors) Regulation. These set out the requirements for disclosing loans, quasi-loans and credit transactions in the notes to the financial statements.
Section 162 of the Old CO has been replaced by section 536 of the New Companies Ordinance. It requires any director that has a material interest in a transaction, arrangement or contract entered into by the company (which is of significance to the company’s business) to disclose the nature of that interest to the board of directors. The requirement that such interests must be included in the notes to the financial statements is now included in Section 383 of the New Companies Ordinance.
Section 162A of the Old CO has been replaced by section 543 of the New Companies Ordinance. If a company enters into a contract where any individual, firm or body corporate undertakes the management and administration of all or any substantial part of the business of the company, section 543 then requires that the directors’ report should disclose the existence and duration of the contract and the name of any director interested in the contract.
1.2 Changes to Streamline Disclosure Requirements by reference to Hong Kong Financial Reporting Standards (HKFRS)
Currently, Chapter 4 and Appendix 16 to the Main Board Listing Rules set out the minimum financial information that an issuer needs to include in its financial statements. The Exchange proposes to remove the disclosure requirements in the Listing Rules that are already in HKFRS to avoid overlap.
In particular, the Exchange proposes to:
amend Chapter 1 of the Main Board Listing Rules to align the accounting terms used in the Listing Rules with current accounting standards;
repeal the financial disclosure requirements for financial conglomerates in Chapter 4 and Appendix 16 of the Main Board Listing Rules;
update Chapter 4 and Appendix 16 to replace references to “Financial Disclosure by Locally Incorporated Authorized Institutions” with the HKMA’s “Guideline on the Application of the Banking (Disclosure) Rules”; and
repeal Appendix 15 to the Main Board Listing Rules in relation to bank reporting (as well as any references to Appendix 15 of the Listing Rules).
1.3 Other Listing Rule Changes in relation to Disclosure of Financial Information
In order to make it clear to shareholders, investors and regulators as to whether an issuer has taken sufficient steps to inform the public of any revisions to its financial statements, the Exchange proposes to explicitly require issuers to publish an announcement of any such revisions as soon as practicable after the directors decide to revise the financial statements. The announcement should state that the financial statements are to be revised, provide reason(s) for the revision and state any financial impact of the revision. Accordingly, the Exchange proposes a new announcement headline category called “Revision of Published Financial Statements” under Appendix 24 to the Main Board Listing Rules.
Paragraph 49 of Hong Kong Accounting Standards (HKAS) 8 “Accounting Policies, Changes in Accounting Estimates and Errors”, requires a company’s financial statements to disclose any prior period adjustment. In order to ensure consistency with paragraph 49 of HKAS 8, the Exchange proposes to amend Appendix 16 to the Main Board Listing Rules to require results announcements to disclose where an issuer has made a prior period adjustment to correct a material error. Additionally, the Exchange proposes a new headline category called “Prior Period Adjustments due to Correction of Material Errors” to be created under Appendix 24 to the Main Board Listing Rules for such announcements.
Lastly, the Exchange proposes to add two notes, 6.3 and 40.3, to Appendix 16 to the Main Board Listing Rules to reference disclosure requirements that are not set out in Appendix 16 but are set out in other Listing Rules.
2. Other Amendments to the Listing Rules resulting from the new Companies Ordinance
2.1 Notice Periods for General Meetings
Currently, Appendices 13A and 13B of the Main Board Listing Rules are aligned with section 114(2) of the Old CO, under which companies incorporated in Bermuda or the Cayman Islands must stipulate in their articles of incorporation that:
annual general meetings (AGMs) and extraordinary general meetings (EGMs) where a special resolution is to be proposed must be convened on at least 21 days’ notice; and
extraordinary general meetings where an ordinary resolution is to be proposed must be convened on at least 14 days’ notice.
However, section 571(1) of the New Companies Ordinance has changed these requirements so that:
AGMs must be called on 21 days’ notice; and
any other general meeting may be called on 14 days’ notice irrespective of whether ordinary or special resolutions will be considered at the meeting.
Also, Appendix 13 to the Main Board Listing Rules does not reflect section 571(3) of the New Companies Ordinance, which allows companies incorporated in Hong Kong to convene general meetings on even shorter notice if it is agreed:
by all the members entitled to attend and vote at the meeting (in the case of an AGM); and
in any other case, by a majority in number of the members having the right to attend and vote at the meeting, being a majority together representing at least 95% of the total voting rights at the meeting of all the members.
The Exchange therefore proposes to amend Appendix 13 to align it with section 571(1) of the New Companies Ordinance so that Bermuda and Cayman Islands incorporated companies are required to give 21 days’ notice of an AGM whereas any other general meeting (including one to pass a special resolution) may be called on 14 days’ notice.
The Exchange is also seeking views on whether Bermuda and Cayman Island companies should be allowed to convene general meetings on shorter notice on the same terms as Hong Kong companies as set out above.
2.2 Nominal/Par Value
The New Companies Ordinance abolished the concept of nominal value (par value) for Hong Kong incorporated companies and “issued share capital” now represents the amount the company receives for issued shares. The terms “nominal value” and “issued share capital” are currently used in the Rules in the method of calculating certain percentage thresholds or changes in shareholding interests of the issuer. The Exchange proposes to reflect these changes in the Listing Rules by replacing “nominal value” or “issued share capital” with the number of, or the voting rights attached to, the issued shares as follows:
|Main Board Rule no.||Description of the current requirements||Proposed amendments|
|Restriction on size of issue or repurchase of securities|
Replace the “issued share capital” with the “number of issued shares”.
Add a note to the Rule to clarify that if the issuer conducts a share consolidation or subdivision after the approval of the mandate, the number of shares that may be issued (or repurchased) under the mandate will be adjusted accordingly.
Rights issue or open offer
Replace the “issued share capital” / “issued equity capital” with the “number of issued shares”.
|Notifiable and/or connected transactions|
Equity capital ratio
Replace the “nominal value of the issuer’s equity capital” with the “number of shares”.
Add a new note to clarify that shares issued as consideration include shares that are subject to any convertible securities or subscription rights issued as consideration.
Written shareholder approval
Revise the Rule to require the shareholder(s) to hold more than 50% of voting rights at the general meeting.
Replace the “issued share capital” with the “issued shares”.
|Independence of independent non-executive directors (INEDs), sponsors and independent financial advisers (IFAs)|
For assessing an INED’s independence
|Replace the “issued share capital” with the “number of issued shares”.|
For assessing a sponsor’s independence
|13.84(1) and (1A)||
For assessing an IFA’s independence
|8.08(1), 19B.08, App 5E||
At least 25% of the issuer’s total issued share capital must at all times be held by the public.|
Where an issuer has more than one class of securities, the total securities of the issuer held by the public at the time of listing must be at least 25% of the issuer’s total issued share capital, and the class of securities for which listing is sought must not be less than 15% of the issuer’s total issued share capital, …
|Replace the “issued share capital” with the “number of issued shares”.|
|Disclosure on changes in shareholdings|
Next day disclosure return
Replace the “issued share capital” with the “issued shares”/ “number of issued shares”
|PN5 – Note to 3.3(1) & (2), 3.4(1) & (2), 3.5(1) & (2)||
Disclosure of interests of directors, chief executives and substantial shareholders
Replace the “issued share capital” with the “issued voting shares”, which is in line with the term used in Part XV of the Securities and Futures Ordinance.
2.3 Company Seal
Since the New Companies Ordinance makes it optional for Hong Kong incorporated issuers to have a company seal, the Exchange proposes to amend paragraph 2(1) of Appendix 3 to the Main Board Listing Rules so that Hong Kong companies without a seal may state in their articles of association that “certificates for capital must be executed under signature of appropriate officials with statutory authority”.
The Exchange proposes to repeal the rule that requires share warrants to bearer issued by Hong Kong incorporated issuers to be under seal, as the New Companies Ordinance has removed their ability to issue them. The Exchange also proposes to remove all references to the memorandum of Hong Kong issuers in the Listing Rules, as the New Companies Ordinance no longer requires Hong Kong issuers to have one.
2.5 Definition of “Holding Company”
The current definition of “holding company” in the Listing Rules refers to the Old CO’s definition of the same, and is linked to the Listing Rules’ definition of “subsidiary”, which has a wider scope than the Old CO’s definition of “subsidiary”. To maintain the status quo despite the enactment of the New Companies Ordinance, the Exchange proposes to:
change the Listing Rules’ definition of “holding company” by setting out the meaning (i.e. a holding company, in relation to a company, means another company of which it is a subsidiary) in the Rule instead of referring to the New Companies Ordinance; and
retain the current definition of “subsidiary” in the Listing Rules, but with amendments to update the reference to “subsidiary undertaking” under the New Companies Ordinance.
Under the Listing Rules, issuers may not charge more than HK$200 to replace share certificates that are less than HK$20,000 in value. The Exchange proposes to amend Main Board Listing Rule 13.60(5) and Appendix 7 to increase the threshold value from HK$20,000 to HK$200,000 in order to be consistent with the HK$200,000 threshold stated in the New Companies Ordinance.
3. Minor and Housekeeping Amendments
Lastly, the Exchange also proposes the following minor and housekeeping amendments:
amending Main Board Listing Rule 13.45(1) to require announcements of board decisions on any dividend or other distribution to include and state the expected payment date of that distribution;
amending Main Board Listing Rule 5.03 to clarify that a property valuation is required for the circular of any connected transaction that involves an acquisition or disposal of any property interest or property company;
amending Main Board Listing Rules 14.66(8) and 14A.70(15) so that listed issuers are no longer required to disclose information on competing interests of directors of the listed issuer’s subsidiaries and their close associates in transaction circulars;
adding a new GEM Listing Rule 17.49A as a counterpart to Main Board Listing Rule 13.50 to require a suspension of trading of the securities of listed issuers that fail to publish their financial results announcements;
changing all references to the Securities and Futures Commission’s (SFC) Code on Share Repurchases to its current name, the Code on Share Buy-backs;
defining the terms, “Code on Share Buy-backs” and “Share Buy-backs Code” to mean the SFC’s Code on Share Buy-backs;
defining the terms “Code on Takeovers and Mergers” and “Takeovers Code” to mean the SFC’s Code on Takeovers and Mergers;
amending Main Board Listing Rule 15A.29 to refer to Rule 5 of the Code on Share Buy-backs instead of Rule 10 of the Code on Share Repurchases;
amending Main Board Listing Rules 19.05(2), 19.30(2) and 19A.13(2) to require process agents for overseas and Mainland listed issuers to provide their contact emails instead of a telex and removing all references to “telex” in Practice Note 1 to the Main Board Listing Rules;
removing the address, telephone and fax numbers of the Listing Division in Practice Note 1 to the Main Board Listing Rules so that “informing the Exchange” would mean delivery of the relevant information regardless of method;
amending Main Board Listing Rule 9.11(20) to clarify that a new listing applicant’s articles of association must comply with the requirements under Appendix 3 to the Main Board Listing Rules; and
creating a new GEM Listing Rule 17.26A to require periodic announcements to be published by suspended GEM listed issuers.