17 June, 2015
The HKEx issued its third report on findings and recommendations after its review of listed companies’ annual reports and corporate communications as part of its ongoing monitoring and compliance activities. The main recommendations made by HKEx are as follows:
Fund Raisings Through Issue Of Equity/Convertible Securities And Subscription Rights
Companies conducting equity fund raisings should clearly disclose their intended use of the proceeds at the time of the fund raisings and report back to shareholders in their annual reports on how these proceeds were actually applied, including details of the application and, where applicable, a breakdown of how the funds were allocated among different uses. Companies should avoid generic descriptions where possible.
Updates On Material Changes After Acquisitions
In cases of material changes or significant asset impairments after the acquisitions of businesses, companies must (i) timely announce the material changes to the newly acquired businesses; (ii) properly make any impairment to the assets; and (iii) discuss in their annual reports the matters that gave rise to the impairment. Where the asset impairment is supported by an independent valuation, the HKEx required additional details and any subsequent changes to be disclosed. In the event that a company records material asset impairments shortly after their acquisition, the HKEx may query whether the directors had properly discharged their duties and whether disclosures had been accurate.
Results Of Performance Guarantees An Acquisitions
As part of the terms of acquisition agreements, some companies require the vendors to guarantee the performance of the acquired business. Where a performance guarantee by a connected person is not met, the Rules Governing the Listing of Securities on the Stock Exchange of Hong Kong Limited (Listing Rules) require a company to publish an announcement and disclose it in its next annual report. The HKEx believes equivalent disclosure should be made where the guarantee is provided by an independent party.
Significant Changes To Financial Performance
The Listing Rules require disclosures on the discussion and analysis of financial performance and the material factors underlying a company’s results and financial position. The HKEx recommended disclosures in (i) significant changes in revenue and/or profit margin; (ii) reliance on a small number of key customers and material changes in trade receivables; and (iii) abnormal effective tax rates or significant tax balances. The HKEx also provided a list of specific information that issuers should disclose in respect of each of these significant changes.
Adoption Of HKFRS 10/IFRS 10
These accounting standards, which were issued in 2011 and have applied to annual reports since 1 January 2013, establish new guidance on the principle of control (which is the basis for consolidation). Companies are required to disclose an assessment of the financial impact of such accounting standards on their accounts.
Biological Assets
Companies engaging in agricultural activities are subject to material risks relating to the valuation of biological assets. Where companies engaged valuers and experts to perform site inspections and prepare valuations, the HKEx recommended disclosures on the qualification of valuers/experts, their valuation methodology and assumptions, material inputs including bases and assumptions used in the valuation, and a sensitivity analysis. Where specific licenses are required to carry out the relevant agricultural activities, companies should disclose relevant details of licenses, including the type of licenses required, the expiry dates of the licenses and the application or renewal status (if applicable).
Companies Listed In 2012 And 2013
Repeating the comments of the SFC noted above, the HKEx has stated that companies publishing profit warning announcements under the inside information provisions of the SFO should ensure that the information represents material developments subsequent to the date of the prospectus that has not previously been disclosed. Furthermore, companies should disclose confirmations of their major shareholders’ compliance with any noncompetition undertakings given at the time of listing.
Periodic Disclosure Of Mining Or Petroleum Assets
Mineral companies and nonmineral companies that publicly disclose information about resources and/or reserves must give an update on resources and reserves in their annual reports. Mineral companies also must disclose details of their exploration, development and mining production activities, and a summary of expenditures incurred in such activities in their annual reports. In case of insufficient disclosures, HKEx may require companies to issue supplemental announcements.
For further information, please contact:
Christopher Betts, Partner, Skadden
christopher.betts@skadden.com
Edward Lam, Partner, Skadden
edward.lam@skadden.com
Alec Tracy, Partner, Skadden
alec.tracy@skadden.com
Will Cai, Partner, Skadden
will.cai@skadden.com
