III. CORPORATE GOVERNANCE REQUIREMENTS
- Compliance Adviser
An issuer is required to retain a compliance adviser for the period commencing on the date of listing and ending on the publication of its financial results for the second full financial year after listing (Rule 6A.19). A compliance adviser must be either a corporation licensed or authorised institution registered to advise on corporate finance matters under the Securities and Futures Ordinance. It must also be licensed or registered to undertake sponsor work. A compliance adviser must act impartially but is not required to be independent of the issuer. An issuer is not obliged to appoint as its compliance adviser the same firm that acted as the sponsor of its initial public offering.
Issuers are required to consult with, and if necessary, seek advice from their compliance advisers on a timely basis in the following 4 situations:
- before publication of any regulatory announcement, circular or financial report;
- where a notifiable or connected transaction is contemplated;
- where the issuer proposes to use the IPO proceeds differently to the manner detailed in the listing document or where the issuer’s business activities, developments or results deviate from any forecast, estimate or other information in the listing document; and
- where the Exchange makes an inquiry of the issuer under Rule 17.11 regarding unusual movements in the price or trading volume of its securities (Rule 6A.23).
The Exchange may also require an issuer to appoint a compliance adviser at any other time after the second full financial year after listing, for example if the issuer has breached the Listing Rules (Rule 6A.20). In this case the Exchange will specify the period of appointment and the circumstances in which the compliance adviser must be consulted.
- Independent Non-executive Directors
Every issuer must ensure that, at all times, its board of directors includes at least 3 independent non-executive directors (INEDs). At least one INED must have appropriate professional qualifications or accounting or related financial management expertise (Rule 5.05). Rule 5.05A further requires at least one third of an issuer’s board of directors to be INEDs. Each INED must confirm his independence in accordance with the guidelines under Rule 5.09 to the Exchange at the time of submission of his declaration, undertaking and acknowledgement.
- Audit committee
Every issuer must establish an audit committee comprising non-executive directors only and a minimum of 3 members, at least one of whom is an INED with appropriate professional qualifications or accounting or related financial management expertise (Rule 5.28). The majority of the committee members must be INEDs of the issuer. The audit committee must be chaired by an INED. The duties of the audit committee are set out in the Corporate Governance Code and include:
- reviewing the issuer’s annual report and accounts, half-year report and quarterly reports before submission to the board ;
- reviewing the issuer’s financial controls, internal control and risk management systems; and
- reviewing and reporting to the board on the adequacy of the resources, staff qualifications and experience, training programmes and budget of the issuer’s accounting and financial reporting function.
Should the listed issuer choose to deviate from the Code Provision requirements, it will be required to include an explanation in its Corporate Governance Report.
- Remuneration Committee
Every issuer must establish a remuneration committee chaired by an independent non-executive director and comprising a majority of independent non-executive directors with terms of reference. Issuers must publish an announcement containing the relevant details and reasons if they fail to meet these requirements.
- Compliance Officer
Every GEM listed issuer must ensure that, at all times, one of its executive directors assumes responsibility for acting as the issuer’s compliance officer (Rule 5.19). The compliance officer’s responsibilities must include, as a minimum, the following matters:
- advising on and assisting the board of directors of the issuer in implementing procedures to ensure that the issuer complies with the GEM Listing Rules and other relevant laws and regulations applicable to the issuer; and
- responding promptly and efficiently to all enquiries directed at him by the Exchange.
- Corporate Governance Code
The Corporate Governance Code contains two levels of recommendations: the code provisions and recommended best practices. Issuers are expected to comply with, but can choose to deviate from, the code provisions. They must however disclose whether the code provisions have been complied with, and give considered reasons for any deviations, in their half-year reports and in the corporate governance report which is required to be included in their annual reports.
IV. CONTINUING OBLIGATIONS
The principal continuing obligations of GEM listed issuers are summarised below.
- Disclosure of Inside Information under Part XIVA Securities and Futures Ordinance (“SFO”)
Listed issuers are under an obligation to disclose price sensitive information (called “inside information”) under Part XIVA of the SFO. Guidance on this obligation is provided in the SFC’s Guidelines on Disclosure of Inside Information (“SFC Guidelines”).4
Meaning of Inside Information
“Inside information” is defined in Section 307A SFO as:
“specific information that:
- is about:
- the corporation;
- a shareholder or officer of the corporation; or
- the listed securities of the corporation or their derivatives;
- is not generally known to the persons who are accustomed or would be likely to deal in the listed securities of the corporation but would if generally known to them be likely to materially affect the price of the listed securities.
When Inside Information must be Disclosed
A corporation must disclose inside information to the public as soon as reasonably practicable after any inside information has come to its knowledge (section 307B(1) SFO). Inside information has come to the corporation’s knowledge if:
- the inside information has, or ought reasonably to have, come to the knowledge of an officer of the corporation in the course of performing functions as an officer of the corporation; and
- a reasonable person, acting as an officer of the corporation, would consider that the information is inside information in relation to the corporation (section 307B(2) SFO).
In determining whether information is discloseable as “inside information”, the test is an objective one – i.e. would a “reasonable officer”, based on his knowledge of all relevant facts and circumstances at the relevant time, consider the information to be inside information. Corporations must therefore have effective systems and procedures in place to ensure that any material information which comes to the knowledge of any of their officers is promptly identified and escalated to the board to determine whether it needs to be disclosed.
According to the SFC Guidelines, “as soon as reasonably practicable” means that the corporation should immediately take all steps that are necessary in the circumstances to disclose the information to the public. The necessary steps that the corporation should immediately take before the publication of an announcement may include: ascertaining sufficient details; internal assessment of the matter and its likely impact; seeking professional advice where required and verification of the facts (paragraph 40 of the SFC Guidelines).
The corporation must ensure that the information is kept strictly confidential until it is publicly disclosed. If the corporation believes that the required degree of confidentiality cannot be maintained or that there may have been a breach of confidentiality, it should immediately disclose the information to the public (paragraph 41 of the SFC Guidelines). The SFC Guidelines also raise the possibility of a corporation issuing a “holding announcement” to give the corporation time to clarify the details and likely impact of an event before issuing a full announcement.
Manner of Disclosure
Inside information should be disclosed by publication of an announcement through the electronic publication system operated by the Exchange. Where a corporation is listed on more than one stock exchange, it should ensure that inside information is disclosed to the public in Hong Kong at the same time as it is released to the overseas markets. If inside information is released to an overseas market while the Hong Kong market is closed, the corporation should issue an announcement in Hong Kong before the Hong Kong market opens for trading.
Where an issuer applies to the SFC for a waiver from the disclosure requirements of Part XIVA of the SFO, it must send a copy of the application to the Exchange and on receiving the SFC’s decision, must copy that to the Exchange (GEM Rule 17.10(2)(b)).
Safe Harbours that allow Non-disclosure of Inside Information
Section 307D SFO provides four safe harbours to permit corporations to not disclose or delay disclosing inside information. These are where:
- disclosure would breach an order by a Hong Kong court or any provisions of other Hong Kong statutes;
- the information relates to an incomplete proposal or negotiation;
- the information is a trade secret; and
- the Government’s Exchange Fund or a Central Bank provides liquidity support to the corporation.
The safe harbours at (2) to (4) above are only available if:
- the corporation takes reasonable precautions for preserving the confidentiality of the information; and
- the confidentiality of the information is preserved.
Knowledge of inside information of a corporation must therefore be restricted to those who need to have access to it and any recipients of the information must be made aware that the information is confidential and of their obligations to maintain confidentiality. If confidentiality is lost or the information is leaked, the safe harbour will cease to be available and the corporation must disclose the inside information as soon as practicable.
Sanctions for Breach of Obligation to Disclose Inside Information
A corporation which breaches the obligation to disclose inside information may be fined up to HK$8 million. The officers of a corporation are also under an obligation to ensure that proper safeguards exist to prevent the corporation’s breach of the inside information disclosure requirement (section 307G(1)). Although an officer’s breach of that provision is not actionable of itself, an officer will be regarded as having breached the inside information disclosure obligation if the listed corporation has breached such obligation and either:
- the breach resulted from the officer’s intentional, reckless or negligent conduct; or
- the officer has not taken all reasonable measures to ensure that proper safeguards exist to prevent the breach (section 307G(2) SFO).
An officer found to have breached the inside information disclosure provision may also be fined up to HK$8 million. The Market Misconduct Tribunal may also impose a number of other sanctions on officers, such as an order disqualifying the person from being a director or offer of a corporation for up to five years and an order to pay the costs of the SFC investigation.
- is about:
- Obligation to Announce Information Necessary to Avoid a False Market and Responding to Exchange Enquiries
If in the view of the Exchange there is or is likely to be a false market in an issuer’s securities, the issuer must, as soon as reasonably practicable after consultation with the Exchange, announce the information necessary to avoid a false market in its securities (Rule 17.10(1)).
This obligation exists whether or not the Exchange makes enquiries under Rule 17.11. A note to Rule 17.10(1) also states that if an issuer believes that there is likely to be a false market in its listed securities, it must contact the Exchange as soon as reasonably practicable.
Where the Exchange makes enquiries under Rule 17.11 concerning unusual movements in the price or trading volume of its listed securities, the possible development of a false market in its securities or any other matter, the issuer must respond promptly by:
- providing to the Exchange and, if requested by the Exchange, announcing, any information relevant to the subject matter of the enquiries which is available to it, so as to inform the market or to clarify the situation; or
- if, and only if, the directors of the issuer, having made such enquiry with respect to the issuer as may be reasonable in the circumstances, are not aware of any matter or development that is or may be relevant to the unusual trading movement of its listed securities, or information necessary to avoid a false market, or any inside information which needs to be disclosed under Part XIVA SFO, and if requested by the Exchange, make an announcement containing a statement to that effect.
- Financial Reporting
Not less than 21 days before the date of the listed issuer’s annual general meeting and not more than 3 months after the financial period ended, a listed issuer must send to all of its members and every other holder of its listed securities, a copy of either (i) the directors’ report and its annual accounts and, if the issuer prepares group accounts, the group accounts, together with a copy of the auditors’ report or (ii) its summary financial report. 1 copy of the English and Chinese versions of these documents must be sent to the Exchange at the same time as they are sent to shareholders. All of these documents must either be in English accompanied by a Chinese translation, or in Chinese accompanied by an English translation. If the issuer is late in issuing its directors’ report and accounts, the Exchange may suspend dealings in or cancel the listing of the securities of the issuer.
The issuer must also publish a preliminary announcement of its annual results, which has been agreed with its auditors, on the next business day after approval by the board and, in any event, within 3 months of the financial year end.
Chapter 18 also requires issuers to prepare half-year or summary half-year reports for the first 6 months of each financial year and quarterly reports in respect of each of the first 3 and 9 month periods of each financial year, within 45 days of the end of each period.
Issuers must publish preliminary announcements of their half-year and quarterly results, in each case on the business day following their approval by the board and no later than 45 days after the period end.
The annual and half-year reports published during the 2 financial years following listing must contain a detailed statement regarding actual business progress, as measured against the original Statement of Business Objectives (as set out in the listing document).
- Maintenance of Public Float
The prescribed minimum percentage of listed securities required to be held by the public must be complied with at all times (Rule 11.23(7)). If an issuer becomes aware that the number of its listed securities which are held by the public has fallen below the prescribed minimum percentage, it must immediately inform the Exchange and publish an announcement and seek to resume compliance as soon as is practicable (Rules 17.36 and 17.37).
The Exchange has the right to suspend trading or cancel the listing where the Exchange considers that there are insufficient securities in the hands of the public (Rule 17.37).
Issuers are required to include a statement of sufficiency of public float in their annual reports (Rule 17.38A).
- Fundamental change in the nature of the business (Rules 19.88 and 19.89)
In the first 12 months after dealings in an issuer’s securities commence on GEM, an issuer is prohibited from entering into any transaction or arrangement which would result in a fundamental change to its principal business activities or those of its group. The Exchange may grant a waiver of this prohibition if the circumstances are exceptional and the transaction or arrangement is approved by the shareholders in general meeting by a resolution on which any controlling shareholder (or if there are no controlling shareholders, any chief executive or directors (other than INEDs) of the listed issuer) and their respective associates are required to abstain from voting in favour. Shareholders with a material interest in the transaction and their associates are also required to abstain from voting on the transaction.
- Restrictions on Disposals by Controlling Shareholders following Listing
The Listing Rules impose restrictions on the disposal of securities by a controlling shareholder following a company’s new listing. Any person shown by the listing document to be a controlling shareholder of the issuer at the time of listing must not:
- dispose of, or enter into any agreement to dispose of, or create any options, rights, interests or encumbrances in respect of, any shares which the listing document shows to be beneficially owned by him in the period commencing on the date on which disclosure of the shareholding is made in the listing document and ending 12 months from the date on which dealings in the securities of the new applicant commence on the Exchange; or
- dispose of, or enter into any agreement to dispose of, or create any options, rights, interests or encumbrances in respect of, any shares which the listing document shows to be beneficially owned by him if such disposal would result in him ceasing to be a controlling shareholder in the period of 12 months commencing on the date on which the period referred to in (i) above expires (Rule 13.16(A)).
There are exceptions to the above prohibitions on disposals by controlling shareholders for:
- pledges or charges of shares created in favour of an authorised financial institution (as defined in the Banking Ordinance) as security for a bona fide commercial loan;
- disposals made pursuant to a power of sale under a pledge or charge referred to at (i) above;
- disposals on the death of a controlling shareholder or in other exceptional circumstances approved by the Exchange.
Controlling shareholders must however immediately inform the issuer if they pledge or charge any of their shares in favour of an authorised institution or pursuant to a waiver granted by the Exchange during the period commencing on the date by reference to which the shareholding is disclosed in the listing document and ending 12 months from the date on which dealings commence on the Exchange (Rule 13.19).
- Restrictions on the Issue of New Shares
The Listing Rules prohibit further issues of shares or securities convertible into shares of a listed issuer, or the entering into of an agreement for such an issue, within 6 months from the date on which dealing in the issuer’s securities commence on GEM (and whether or not such issue of shares or securities will be completed within six months from the commencement of dealing) (Rule 17.29), except for:
- the issue of shares pursuant to a share option scheme under Chapter 23 of the GEM Listing Rules;
- the exercise of conversion rights attaching to warrants issued as part of the initial public offering;
- any capitalisation issue, capital reduction or consolidation or sub-division of shares;
- the issue of shares or securities pursuant to an agreement entered into before the commencement of dealing and disclosed in the issuer’s listing document; and
- the issue of shares or securities convertible into shares where the issue:
- is for the purpose of an acquisition of assets which would complement the listed issuer’s business and the acquisition does not constitute a major transaction, very substantial acquisition or reverse takeover under Chapter 19;
- does not result in a controlling shareholder of the listed issuer ceasing to be a controlling shareholder after the issue and does not result in a change in control of the listed issuer within the meaning of the Takeovers Code; and
- any transaction relating to it is made subject to shareholders’ approval where voting is by way of poll and the following persons are required to abstain from voting:
- any connected person and their associates; and
- any shareholder who has a material interest in the issue and/or the related transaction (other than an interest arising solely from a shareholding in the listed issuer); and
- the shareholders’ circular in respect of the issue and the related transaction complies with the requirement of Chapter 19 and contains such information as is necessary to enable the independent shareholders to make an informed judgment.
- Sufficient Level of Operations
A sufficient level of operations or tangible assets of sufficient value and/or intangible assets for a potential value should be demonstrated to the Exchange to ensure continued listing (17.26)
- Notifiable Transactions
The Listing Rules set out various categories of notifiable transactions, the classification of which is determined by comparing the size of a transaction with the size of the issuer proposing to enter into the transaction. The thresholds for categorising notifiable transactions under the percentage ratios are as follows:
Transaction Type Assets ratio Consideration ratio Profits ratio Revenue ratio Equity capital ratio (Note 1) Share transaction Less than 5% Discloseable transaction 5% or more but less than 25% Major transaction (disposal) 25% or more but less than 75% N/A Major transaction (acquisition) 25% or more but less than 100% Very substantial disposal 75% or more N/A Very substantial acquisition 100% or more Note 1: The equity capital ratio relates only to an acquisition (and not a disposal) by a listed issuer issuing new equity capital.
Note 2: In the case of a transaction involving both an acquisition and a disposal, the transaction will be classified by reference to the larger of the acquisition or disposal (Rule 19.24).
The table below summarises the notification, publication and shareholders’ approval requirements which will generally apply to each category of notifiable transaction:
Notification to the Exchange Announcement Circular to Shareholders Shareholders’ Approval Accountants’ Report Share transaction Yes Yes No No (Note 1) No Discloseable transaction Yes Yes No No No Major transaction Yes Yes Yes Yes (Note 2) Yes (Note 3) Very substantial disposal Yes Yes Yes Yes (Note 2) Yes (Note 5) Very substantial acquisition Yes Yes Yes Yes (Note 2) Yes (Note 4) Reverse takeover Yes Yes Yes Yes (Notes 2&6) Yes (Note 4)
Note 1: No shareholders’ approval is necessary if the consideration shares are issued under a general mandate. However, if the shares are not issued under a general mandate, the listed issuer is required, pursuant to rule 17.41(2), to obtain shareholders’ approval in general meeting prior to the issue of the consideration shares.
Note 2: Any shareholder and his associates must abstain from voting if such shareholder has a material interest in the transaction.
Note 3: For acquisitions of businesses and/or companies only. The accountants’ report is for the 3 preceding financial years on the business, company or companies being acquired (see also rule 19.67(6)).
Note 4: An accountants’ report for the 3 preceding financial years on any business, company or companies being acquired is required (see also rule 19.69(4)).
Note 5: An accountants’ report on the listed issuer’s group is required (see also rule 19.68(2)).
Note 6: Approval of the Exchange is necessary.
Exemptions for Qualified Property Acquisitions which constitute major transactions or very substantial acquisitions
Under rule 19.33A, a Qualified Property Acquisition (as defined in rule 19.04(10C)) constitutes a major transaction or very substantial acquisition is exempt from shareholders’ approval if it can meet the conditions set out thereunder.
The Qualified Issuer must publish an announcement for a Qualified Property Acquisition falling under rule 19.33A and send a circular to its shareholders.
The announcement and circular requirements under chapter 19 apply to the acquisition and the joint venture, if any, according to the transaction classification, except that the information circular need not contain a valuation report on the property under the Qualified Property Acquisition.
- Connected Transactions (Chapter 20)
The Listing Rules also seek to prevent the connected persons of listed issuers from taking advantage of their positions. Connected transactions are subject to reporting, disclosure and independent shareholders’ approval requirements. In some cases, it is also necessary to establish an independent board committee and appoint an independent financial adviser to advise shareholders as to whether the transaction is fair and reasonable and in the interests of the shareholders as a whole. There are a number of exemptions, including where the transaction falls below the following size specifications:
Based on the percentage ratios used for classifying notifiable transactions De minimis threshold for exemption from reporting, announcement and independent shareholders’ approval requirement A connected transaction on normal commercial terms where each of the percentage ratios (except the profits ratio) is:
- less than 0.1%; or
- less than 1% and the transaction is connected only because it involves a person connected at the level of the issuer’s subsidiary/ies; or
- less than 5% and the consideration is less than HK$3 million.
De minimis threshold for exemption from independent shareholders’ approval requirement A connected transaction on normal commercial terms where each of the percentage ratios (except the profits ratio) is:
- less than 5%; or
- less than 25% and the consideration is less than HK$10 million.
Exemptions for Qualified Property Acquisitions
Pursuant to rule 20.72, a Qualified Property Acquisition undertaken on a joint venture basis with a Qualified Connected Person is exempt from the independent shareholders’ approval requirements if it can meet the conditions set out thereunder.
A Qualified Issuer must publish an announcement for a Qualified Property Acquisition falling under rule 20.72 and send a circular to its shareholders.
The announcement, circular and reporting requirements under chapter 20 apply to the acquisition and the joint venture according to the transaction classification, except that the information circular need not contain a valuation report on the property under the Qualified Property Acquisition.
- Securities Transactions by Directors
Absolute prohibitions include, but are not limited to, the following provisions:
- A director must not deal in any of the securities of the listed issuer at any time when he is in possession of unpublished inside information in the relation to those securities (Rule 5.54).
- A director must not deal in the securities of a listed issuer when, by virtue of his position as a director of another listed issuer, he is in possession of unpublished inside information in the relation to those securities.
- A director must not deal in any of the securities of the listed issuer (unless the circumstances are exceptional) during the period of 60 days immediately preceding the publication date of the annual results or 30 days immediately preceding the publication date of the half-year and quarterly results or, if shorter, the period commencing from the end of year, half-year or quarter-year period or any other interim period and ending on the date of the results announcement (whether or not required under the GEM Listing Rules), a director must not deal in any securities of the issuer unless the circumstances are exceptional, for example, where a pressing financial commitment has to be met as described in rule 5.67. In any event, he must comply with the procedure in rules 5.61 and 5.62.
4 These Guidelines are available on the SFC’s website at http://en-rules.sfc.hk/net_file_store/new_rulebooks/h/k/HKSFC3527_4262_VER10.pdf