The purpose of this note is to outline the duties and obligations of the directors of a company listed on the Growth Enterprise Market (“GEM”) of the Hong Kong Stock Exchange (“HKEx” or the “Exchange”).
I. THE MAJOR SOURCES OF DIRECTORS’ OBLIGATIONS
The continuing duties and obligations of the directors of the Company are derived from Hong Kong laws, the laws of the Company’s jurisdiction of incorporation (if it is not a Hong Kong company) and non-statutory regulations and contract, including the following:
- applicable Hong Kong legislation, including the Companies Ordinance and the Securities and Futures Ordinance of Hong Kong (the “SFO”);
- the Rules Governing the Listing of Securities on the Growth Enterprise Market of The Stock Exchange of Hong Kong Limited (the “GEM Rules”);
- the Code on Takeovers and Mergers and the Code on Share Buy-backs (the “Takeovers Code”);
- the Declaration and Undertaking (Form A of Appendix 6 to the GEM Rules) which each director of a company listed on the GEM is required to lodge with the Exchange; and
- the Companies Registry’s Guide on Directors’ Duties.
II. DIRECTORS’ DUTIES
1. Obligation to ensure compliance with the Listing Rules
A listed issuer undertakes in its application for listing to comply with the Listing Rules once its securities are listed on the Exchange. Under GEM Rule 17.03, the directors of a listed issuer are collectively and individually responsible for ensuring that the listed issuer complies fully with the requirements of the GEM Rules. The directors of a company listed on the GEM are required to file with the Exchange a Declaration, Undertaking and Acknowledgement in the form of Form A of Appendix 6 to the GEM Rules (or Form B of Appendix 6 to the GEM Rules for PRC companies).
In Form A of Appendix 6 to the GEM Rules, a director undertakes to:
- comply to the best of his ability with the GEM Rules and use his best endeavours to ensure that the listed issuer complies with the GEM Rules;
- comply to the best of his ability, and use his best endeavours to ensure the listed issuer’s compliance, with the requirements of the Companies Ordinance, the SFO, the Takeovers Code, the Code on Share Buy-backs and all other relevant securities laws and regulations from time to time in force in Hong Kong; and
- cooperate in any investigation conducted by the Listing Division and/or the GEM Listing Committee of the Exchange.
Any director who breaches any of the above undertakings will be subject to sanctions prescribed by the GEM Rules.
2. Directors’ fiduciary duties and duties of skill, care and diligence
The GEM Rules require directors, both collectively and individually, to fulfil fiduciary duties and duties of skill, care and diligence to a standard at least commensurate with the standard established by Hong Kong law (GEM Rule 5.01). According to GEM Rule 5.01, this means that every director must, in the performance of his duties as a director:
- act honestly and in good faith in the interests of the company as a whole;
- act for a proper purpose;
- be answerable to the listed issuer for the application or misapplication of its assets;
- avoid actual and potential conflicts of interest and duty;
- disclose fully and fairly his interests in contracts with the listed issuer; and
- apply such degree of skill, care and diligence as may reasonably be expected of a person of his knowledge and experience and holding his office within the listed issuer.
These duties are summarised in the Companies Registry’s Guide on Directors’ Duties (attached at Annex A). Directors are required to comply with that guide and failure to do so may constitute a breach of the Listing Rules (paragraph 2.8 of Guidance Letter HKEx-GL62-13).
Statutory duty of skill, care and diligence under new Companies Ordinance
The new Companies Ordinance (Cap. 622) which came into effect on 3 March 2014 codified directors’ duty of skill, care and diligence referred to in (f) above in section 465(1). The standard of skill, care and diligence expected of directors under paragraph (f) was considered too low since it used a subjective test. The standard expected was the degree of skill, care and diligence which can be reasonably expected from a person with the particular director’s knowledge and experience.
Section 465(2) adopts a mixed objective and subjective test. The standard of care, skill and diligence required is that which would be exercised by a reasonably diligent person with:
- the general knowledge, skill and experience that may reasonably be expected of a person carrying out the functions carried out by the director in relation to the company (the objective test); and
- the general knowledge, skill and experience that the director has (the subjective test).
While section 465(2) of the Companies Ordinance does not apply directly to the directors of non-Hong Kong companies (i.e. companies incorporated outside Hong Kong), the directors of a non-Hong Kong company which is listed on the Exchange must comply with it since they are required by GEM Rule 5.01 to exercise duties of skill, care and diligence to the standard set by Hong Kong law.
The standard is higher than previously since the objective test in Section 465(2)(a) is a minimum standard and cannot be adjusted downwards to accommodate a person who is incapable of attaining the basic standard of what is reasonably expected of a reasonably diligent person carrying out the same function. The subjective test means that where a person has been appointed as a director because he has some special skill, knowledge or experience (for example an accountant), a higher standard of care, skill and diligence will be required of that director compared to directors without such special skill, knowledge or experience.
III. CONSEQUENCES OF NON-COMPLIANCE WITH THE GEM RULES
Under GEM Rule 3.10, if a director breaches any of the GEM Rules, the Exchange may respond with disciplinary procedures including but not limited to:
- issuing a private reprimand;
- issuing a public statement which involves criticism;
- issuing a public censure;
- reporting the offender’s conduct to a regulatory authority (for example the Securities and Futures Commission (the “SFC”)) or to an overseas regulatory authority;
- requiring a breach to be rectified or other remedial action taken within a stipulated period;
- in the case of wilful or persistent failure by a director of a issuer to discharge his responsibilities under the GEM Rules, state publicly that in the Exchange’s opinion the retention of office by the director is prejudicial to the interest of investors and, in the event that a director remains in office following the public statement, suspend or cancel the listing of the issuer’s securities; and
- taking or refraining from taking such other action as the Exchange thinks fit.
If the Exchange considers that the listed issuer failed in a material manner to comply with the GEM Rules, the Exchange may, under GEM Rule 9.01, suspend dealings in the issuer’s securities or cancel the listing of the issuer’s securities.
Directors should also be aware that it is a criminal offence under section 384 of the SFO to intentionally or recklessly provide any information which is false or misleading in a material particular in any public disclosure document filed with the Exchange or the SFC (this will include any document filed under the GEM Rules’ continuing disclosure obligations). The offence carries a maximum penalty of 2 years’ imprisonment and a fine of HK$1 million.
Under section 214 of the SFO, the court may make orders disqualifying a person from being a director of any corporation for up to fifteen years if he is found to be wholly or partly responsible for the misconduct of a company’s affairs. Misconduct for these purposes will include where shareholders have not been given all the information with respect to the company’s business or affairs which they might reasonably expect. In March 2010, the SFC disqualified two former executive directors of Warderly International Holdings Ltd for five years for failing to inform the company’s shareholders that the company was in a substantially depleted financial position.
IV. DIRECTORS’ LIABILITY FOR MISSTATEMENTS IN PROSPECTUS
The Listing Rules require an issuer’s directors to take full responsibility for the contents of a prospectus. The prospectus must contain a responsibility statement which states that “the directors, having made all reasonable enquiries, confirm that to the best of their knowledge and belief the information contained in this document is accurate and complete in all material respects and not misleading or deceptive, and there are no other matters the omission of which would make any statement herein or this document misleading.”
Untrue statements contained in a prospectus or the omission of material information (“misstatements”) may result in criminal and/or civil liability for the issuer’s directors. The principal areas of liability include:
- Section 342E Companies (Winding Up and Miscellaneous Provisions) Ordinance (“CWUMPO”) – imposes civil liability for prospectus misstatements on specified persons (including directors)
- Section 342F CWUMPO – imposes criminal liability for prospectus misstatements on persons who “authorized the issue of a prospectus” (which may include the directors)
- Section 108(1) SFO – imposes civil liability for making any fraudulent, reckless or negligent misrepresentation which induces others to invest money
- Sections 277 & 281 SFO – impose civil liability for disclosing false or misleading information to induce dealings in securities
- Section 391 SFO – imposes civil liability for false or misleading public communications to induce dealings in securities
- Section 107 SFO – imposes criminal liability for making any fraudulent or reckless misrepresentation to induce others to deal in securities
- Section 298 SFO – imposes criminal liability for disclosure of false or misleading information to induce dealings
- Section 384 SFO – imposes criminal liability for provision of false or misleading information in a prospectus or other document filed with the Exchange or the SFC
Liability can also arise: (i) under the Misrepresentation Ordinance or the Theft Ordinance; (ii) in tort; or (iii) under contract.
For further information, please see the attached note “Potential Liabilities under Hong Kong Law in Connection with the Publication of a Prospectus on the Listing of a Company on the Stock Exchange of Hong Kong”.
V. RESTRICTION ON DISCLOSURE OF MATERIAL INFORMATION TO ANALYSTS
The Hong Kong prospectus is the sole document by which the company sells its shares in the Hong Kong IPO.
Any other additional document by which securities are offered to the public (or members of the public) could constitute a “prospectus” under Hong Kong law, in which case:
- the prospectus content requirements will apply;
- the translation requirements will apply; and
- the registration requirement will apply.
Breach of the prospectus laws is a criminal offence.
To avoid the risk of liability, the directors and senior management of the company must ensure that no material information about the company or its securities is provided to any investment research analyst, unless the information is reasonably expected to be included in the prospectus or is publicly available.
- When assessing whether any such information is “material” information, the test that should be applied is whether the information is material to an investor in forming a valid and justifiable opinion of the company and its financial condition and profitability.
- This restriction covers any information provided to an analyst, directly or indirectly, formally or informally, in writing or verbally. It covers all communications in a meeting, during a presentation, site visit or interview, or in any other context.
It is of utmost importance that no additional material non-public information is provided to other persons, including analysts.
- In case of disclosure (whether intentional or not) to analysts, the company may be compelled to disclose the same information in the prospectus;
- Such information may not be appropriate for a prospectus and may not be verifiable.
Consequences of putting such a statement in the prospectus
The consequences of including information in the prospectus are that:
- any untrue statement (including any statement that is false, misleading or deceptive) in a prospectus may give rise to criminal and civil liability, including personal liabilities of each director and any other person who authorised the issue of the prospectus; and
- the directors must likewise take personal liability for the truthfulness, accuracy and completeness of any information the company may be compelled under the SFC rules to insert into the prospectus under the above circumstances.
The restriction covers any information provided to an analyst, directly or indirectly, formally or informally, in writing or otherwise.
The Company is strongly advised to seek the guidance and assistance of its sponsor(s), its Hong Kong legal advisers and those of the sponsor if there are any uncertainties.
VI. RESTRICTION ON FUNDAMENTAL CHANGE IN THE NATURE OF THE BUSINESS IN 12 MONTHS AFTER LISTING
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.