The Stock Exchange of Hong Kong Limited (SEHK) recently published its new Guidance Note on Cooperation (Cooperation Note) and revised Enforcement Sanctions Statement (Sanctions Statement). The Cooperation Note is a brand new guidance note that stresses SEHK’s expectations regarding cooperation. It sets out examples of good cooperation with the possible benefits and examples of uncooperative conduct with the possible consequences. The revised Sanctions Statement provides additional guidance on SEHK’s expectations of parties’ reliance on third parties in the discharge of duties and a listed company’s internal controls. These follow the SEHK’s enhancements to its disciplinary powers and sanctions (see our June 2021 e-bulletin) and the previous revisions of its Enforcement Policy Statement and Sanctions Statement (see our July 2021 e-bulletin).
Key takeaways for listed companies, directors and senior management
- Listed companies, directors and senior management that are subject to SEHK’s disciplinary regime are expected to cooperate with the SEHK during its investigations and/or disciplinary actions.
- Cooperation may be recognised by reducing the sanction recommended by the Listing Division or imposed by the Listing (Review) Committee; and/or the inclusion of a cooperation statement in the SEHK’s disciplinary publication (eg news release or statement of disciplinary action).
- Cooperation will generally need to be at an exceptional level in order to constitute a mitigating factor. Mere compliance with statutory or regulatory obligations does not in itself amount to cooperation.
- In contrast, a failure to cooperate may itself be considered as a serious breach and may warrant the most severe sanctions.
Guidance Note on Cooperation
The SEHK recognises and values cooperation in its investigations and disciplinary actions. As noted in SEHK’s Enforcement Policy Statement, cooperation is one of its enforcement priorities. Further, whether a party has fully assisted and cooperated with the SEHK in its investigation or made an early decision not to contest a disciplinary case brought against it, are two of the principal factors that may be taken into account by the Listing (Review) Committee in determining an appropriate sanction.
Listed companies, directors and senior management that are subject to SEHK’s disciplinary regime are expected to cooperate with the SEHK during its investigations and/or disciplinary actions. Cooperation may be recognised by reducing the sanction recommended by the Listing Division or imposed by the Listing (Review) Committee; and/or the inclusion of a cooperation statement in the SEHK’s disciplinary publication (eg news release or statement of disciplinary action).
Cooperation will generally need to be at an exceptional level in order to constitute a mitigating factor. Mere compliance with statutory or regulatory obligations does not in itself amount to cooperation.
Cooperation with the SEHK
Examples which may be recognised by the SEHK as cooperation include:
Providing true and complete information and documents regarding the suspected breach or misconduct
- making timely arrangements to provide evidence and information;
- taking early and proactive steps to collect and preserve relevant evidence;
- giving full disclosure of all relevant information, including information which may not have been specifically requested by the SEHK; and
- assisting the procurement of relevant evidence from third parties (eg staff, service providers, and advisors).
Taking a proactive approach to prioritise and devote resources to investigate the matter and respond to the SEHK’s enquiries
- internal investigations and input sought from third parties should be done promptly to ensure timely responses to the SEHK; and
- early and proactive reporting to the SEHK of breaches or misconduct.
Early admission of breaches
- admissions of breaches should be made at an early stage and should be made in writing;
- admissions should include certain information in relation to the Rule breaches (eg identifying the relevant Listing Rules, a chronology of events, the relevant parties involved, the admission, the reasons for the breach and any remedial action taken); and
- admissions should also state whether the relevant individuals accept their responsibility and are also admitting any breaches.
Initiating settlement / accepting sanctions
- parties should seek early resolution of enforcement action by initiating settlement negotiations; and
- parties should provide early acceptance of the proposed sanctions indicated by the SEHK.
In the SEHK’s view, a submission that a breach occurred due to an error, oversight, misunderstanding, or similar, without providing further details would generally not suffice. If such reasons apply, then details should be given as the circumstances, including identifying who was mistaken etc and in what regard, how this led to the breach and whether there were any relevant internal control deficiencies.
Uncooperative conduct
In contrast, a failure to cooperate when there is a duty to do so will itself be considered by the SEHK as a serious breach and may warrant the most severe sanctions. This may also be considered as an aggravating factor by the Listing (Review) Committee when determining the appropriate sanction.
Examples of uncooperative conduct include:
- a failure to respond to the SEHK, including a failure to provide substantive responses to the SEHK’s enquiries;
- provision of inaccurate, incomplete or misleading information;
- unnecessarily prolonging the SEHK’s investigation;
- failure to attend a disciplinary hearing as requested; and
- the provision of late submissions, evidence or documents.
Legal professional privilege
The SEHK fully respects the parties’ right to legal professional privilege and assertion of this right on a bona fide basis will not be regarded as uncooperative conduct. Voluntary waiver of legal professional privilege, even on a limited basis, will be taken into consideration when the SEHK assesses the degree of cooperation provided by that party.
Revised Sanctions Statement
The Sanctions Statement sets out the general principles and factors that should generally be taken into account when considering and determining sanctions for breaches of the Listing Rules. The main revisions made to the Sanctions Statement are set out below. In particular, the SEHK’s expectations in respect of a listed issuer’s internal controls and the extent to which an individual may rely on others in the discharge of duties have been added.
- Reliance on other parties – where a party has relied on other parties (eg directors, senior management, staff members and professional advisers) in the discharge of his/her duties, the SEHK may take into account whether such reliance was reasonable in the circumstances (eg whether the relying party has continued to (i) give adequate oversight, (ii) apply professional scepticism, and (iii) exercise independent judgement).
- Internal controls – when assessing the listed company’s internal controls, the SEHK may take into account whether the internal controls were effective and robust, covering the full control environment from policies through procedures and working practices; whether the directors and staff members have the necessary skills, experience, resources and training; whether the control environment has been regularly reviewed, maintained and updated; and whether proper channels exist for concerns regarding risk or Rule compliance matters to be raised, and whether any escalated concerns are then appropriately handled.
- Passive misconduct – public sanctions may be appropriate for issuers and/or individuals where there are control environment failings (eg internal control deficiencies or insufficient oversight) for which they are responsible, even if these failings do not directly lead to any other Rule breaches or loss.
- Principle of collective and individual responsibility – whilst disciplinary sanctions will be assessed against each respondent individually, the principle of collective and individual responsibility for Rule compliance will be applied in the case of directors.
- Enhancement of the SEHK’s disciplinary powers and sanctions – the primary disciplinary sanctions available and flowchart following the enhancements in July 2021 have been incorporated in the Appendices.
Listed companies, directors, senior management and other parties that are subject to the SEHK’s disciplinary regime should ensure that they cooperate with the SEHK’s investigations and/or disciplinary actions. The guidance of examples which may be recognised as cooperation should be followed. Such cooperation may be considered as a mitigating factor and result in reduced disciplinary sanctions against the cooperating parties.
When parties are relying on or delegating their duties under the Listing Rules to third parties, they should continue to give adequate oversight, apply professional scepticism and exercise independent judgement to meet SEHK’s expectations. Listed companies should also implement adequate and effective internal controls through its internal policies and procedures, which should be regularly reviewed and updated. Proper channels should be established for raising concerns on Rule compliance matters and regular trainings should also be arranged for the directors and staff members.
For further information, please contact:
Matthew Emsley, Partner, herbert Smith Freehills
matt.emsley@hsf.com
