Consultation Conclusions on Proposed Amendments to the Listing Rules Relating to Corporate Governance Issues
This is one of the priority areas identified in the Corporate Governance Action Plan announced by the Secretary for Financial Services and the Treasury.
In January 2002, HKEx issued a consultation paper – “Consultation Paper on Proposed Amendments to the Listing Rules Relating to Corporate Governance Issues”. This Consultation Paper looks at corporate governance requirements from the perspective of the Listing Rules. The consultation was part of HKEx’s ongoing efforts to strengthen the corporate governance practices of issuers in Hong Kong and ensuring Hong Kong’s standards are in line with the best current international practices, in light of its particular circumstances.
The HKEx has stated that the majority of the proposals will be adopted or adopted with modifications, and drafting of the revised Main Board and GEM Rules based on the consultation conclusions is now in progress. Included in the action agenda are amendments to the Listing Rules and the Code of Best Practice; completion of the streamlining of the listing process; and improvements to the initial and continuing listing requirements and de-listing procedures. The proposed rule changes do not include a requirement for quarterly reporting. However, it is proposed that a Code of Best Practice be adopted and that each company should be required to have at least three independent directors.
The HKEx’s efforts have been complemented by moves to strengthen the statutory obligations on listed companies through the introduction of revised standards in the SFO, in particular the enhanced regime for disclosure of interests in securities and the requirement for dual filing. HKEx’s efforts have also been complemented by proposals from the Standing Committee on Company Law Reform, including proposals for a statutory requirement for connected transactions to be approved by disinterested shareholders, a derivative right of action and the strengthening of the unfair prejudice remedy.
The HKEx recognised that there have been global developments in corporate governance since the consultation process began in January 2002 and the new policies arising from the consultation conclusions are a partial response to the prevailing issues.
There were 167 responses to the consultation, including submissions from issuers, market practitioners and a variety of organisations. Respondents generally supported most of the
Minimum number of independent non-executive directors
The HKEx will amend the Main Board and GEM Rules to require issuers to appoint at least three independent nonexecutive directors (INEDs), as a move towards its long-term aim to increase the number of INEDs on the board. In addition, the HKEx will recommend as a good practice in the revised Code of Best Practice that INEDs comprise at least one-third of the board, with the one-third rounded down when it is not a whole number. There will be a one-year transitional period for issuers to comply with the new INED requirement, and the requirement will be reviewed two or three years after implementation.
Issuers will be required to inform the Exchange and publish an announcement immediately if the number of its INEDs falls below the minimum requirement. Issuers will be required to appoint a sufficient number of INEDs to meet the minimum requirement under the Rules within three months after the number of INEDs has fallen below the minimum number required.
The existing Main Board and GEM Rules set out the basic principles for determining independence of INEDs. The HKEx will include more guidance to assist issuers in assessing independence of INEDs. To ensure that INEDs are able to properly discharge their responsibility to provide an objective view on the assessment of issuers’ financial statements and participate in the audit committee, the HKEx will amend the rules to require
issuers to appoint at least one INED who has appropriate professional qualifications or experience in financial matters.
Code of Best Practice
The HKEx will adopt a balanced and disclosure-based approach to regulate board practices of issuers. The Code of Best Practice will contain two tiers of recommendations. The first tier will contain minimum standards of board practices. The second tier will be the recommended good practices serving as guidelines for issuers’ reference. Issuers will be required to include a report on corporate governance in their annual reports and disclose information relating to
their corporate governance practices in the report. They will also be required to disclose any deviation from the minimum standards in their report on corporate governance.
The HKEx believes the proposed rule changes will strengthen its existing rules and Code of Best Practice, particularly from the perspective of protecting shareholders’ rights, advancing board practices and increasing the transparency of issuers. The HKEx also believes the strengthening of the Rules is an ongoing process and will continue to review the Rules from time to time to ensure they are in line with the best current market practices and international standards. In promoting high standards of corporate governance, the HKEx can assist by setting the minimum standards of board practices in the Rules and Code of Best Practice. However, the HKEx is of the view that the ultimate success of the Rules changes will depend upon the full support and commitment from issuers and directors.
Securities and Futures Ordinance
The SFO, which came into force on 1 April 2003, was one of the five priorities detailed in the Corporate Governance Action Plan. Significant areas of changes brought about by the SFO are notably the following:
- corporate disclosure enhancements embodied in Part XV – the time limit for disclosure of dealings has been reduced from five days to three business days and the percentage disclosure limit for substantial shareholders has been reduced from 10% to 5%.
- The scope of investigations into listed companies conducted by the SFC has been widened considerably. The SFC can now more effectively enquire into corporate misconduct which prejudices shareholders’ interests.
- The market misconduct provisions of the SFO establish civil and criminal liability for six separate market misconduct offences including the provision of false and misleading information inducing securities transactions. There are also now private rights of action for investors to bring an action against listed companies or their responsible officers to seek compensation for losses caused by false or misleading communications by listed companies or market misconduct.
- The new “dual filing” regime for listing applications and ongoing disclosures, partnered with the HKEx, introduced through changes to subsidiary legislation, will strengthen disclosure standards, since misleading and false disclosure can give rise to both civil and criminal consequences. The SFC has been working closely with the HKEx to ensure that the system operates efficiently and effectively.
- additional powers to be given to the SFC to obtain documents and seek explanations from parties closely related to a listed company under investigation.
- the establishment of the Market Misconduct Tribunal as a civil tribunal to deal with all types of market misconduct and not just insider dealing as was previously the case.
- exemption from civil liability for auditors who report fraud or misconduct committed by listed companies to the SFC.
Three months after the SFO regime commenced in Hong Kong, the SFC announced that it would take a tough stance against dishonest non-compliance with Part XV. In a press release, the SFO stated that from 1 July 2003, its prosecution efforts on Part XV will focus on (in order of priority):
- non-disclosure of interests;
- false or misleading disclosure; and
- late disclosure (which could also amount to non-disclosure).