25 August 2020
The Hong Kong Stock Exchange has issued a consultation paper on proposals to enhance its disciplinary powers and the sanctions available to it. Under the proposals, the Stock Exchange is seeking greater flexibility to deal with different situations, with stronger response options, in particular in taking action against individuals. The Stock Exchange is proposing to lower the threshold for taking certain disciplinary action and expanding its available sanctions to enable it to respond in a more graduated way depending on the seriousness of the breach. The deadline for responding to the consultation paper is 9 October 2020. In this bulletin, we summarise the key proposals. |
Lowered thresholds for issuing statements about directors and denying market facilities The Stock Exchange is proposing lowering the threshold for taking certain disciplinary action. Currently, its power to issue a public statement to the effect that a director continuing to remain in office is prejudicial to the interests of investors (PII Statement) can only be exercised where there has been wilful or persistent failure by the director to discharge his responsibilities under the Listing Rules. The Stock Exchange is proposing to remove this threshold as it faces evidential difficulties in establishing that an action has been wilful. This change will provide greater flexibility to the Stock Exchange in being able to issue PII Statements against directors where warranted, without the need to show that the director’s conduct has been wilful or persistent. In the consultation paper, the Stock Exchange makes it clear that whether a PII Statement is issued will, as currently, still depend on the facts and circumstances of the individual case and the particular conduct, having regard to the Stock Exchange’s Enforcement Policy Statement and Sanctions Statement. The same threshold also currently applies in respect of a listed issuer if the Stock Exchange is seeking to deny the facilities of the market to the company. Again, by removing the need to establish that the listed issuer has wilfully or persistently failed to discharge its responsibilities, the Stock Exchange will have broader scope to impose this sanction. In addition, the Stock Exchange is proposing that where it seeks to deny the facilities of the market to listed issuers, this can be either for a specified time (as currently) or until specified conditions are fulfilled, enabling the Stock Exchange to tailor its sanctions to the specific conduct.
PII Statements revised and extended to senior management (which is to be defined) Currently PII Statements reflect that the Stock Exchange considers that a director remaining in office is prejudicial to investors. Under the new proposals, the PII Statement would reflect a lesser standard that, in the opinion of the Stock Exchange, the director staying in office may cause prejudice to the interests of investors. The consultation paper also proposes that PII Statements could be extended and issued in relation to the conduct of senior management of a listed company or its subsidiaries. A new definition of senior management is proposed to provide certainty as to those who will be subject to the Stock Exchange’s disciplinary powers. It includes, for instance, those in named positions of CEO, CFO, COO, company secretary and supervisor. However, it also catches a person who performs managerial functions under the directors’ immediate authority and anyone referred to as senior management in the company’s corporate communications. Enhanced follow-on actions where PII Statement made The Stock Exchange is seeking to enhance its powers where a PII Statement has been made and the director or member of senior management remains in their position. In these circumstances, the Stock Exchange can currently suspend or withdraw the listed issuer’s listing but has tended not to exercise this power. It is seeking additional follow-on powers to give it more graduated responses which are aimed at being a deterrent against misconduct. The proposed changes include the ability to deny the facilities of the market to the relevant listed issuer, as well as requiring the listed issuer to refer to the PII Statement in all announcements and communications until the person ceases to be a director or senior manager (as the case may be). Sanctions against directors will also need to be disclosed in the company’s listing documents and annual reports. New director unsuitability statement For more serious cases of misconduct where there is a serious or repeated failure by a director to discharge his responsibilities, the Stock Exchange is proposing a new sanction which would enable it to issue a public statement that, in its opinion, the director is unsuitable to be a director or member of senior management of a listed company. This is a more strongly worded statement than a PII Statement to enable the Stock Exchange to raise serious concerns about the suitability of a director remaining in office or being in a senior management role. It is intended to be used where the conduct is particularly egregious or in more severe cases. The follow-on actions that apply to PII Statements, including the announcement and disclosure requirements, would also apply to such director unsuitability statements. Whilst similar to the PII Statement, the Stock Exchange considers that introducing the director unsuitability statement will enhance its options when dealing with misconduct and enable it to differentiate and highlight to the market the more serious cases. New secondary liability for relevant parties The Stock Exchange is also proposing introducing secondary liability for specified related parties who have “caused by action or omission or knowingly participated in a contravention of the Listing Rules”. Relevant parties are to be broadly defined and would include directors and senior management, substantial shareholders, professional advisers and their employees, authorised representatives, supervisors and a guarantor of an issuer in the case of a guaranteed issue of debt securities or structured products (this is a newly added category). It also extends to any party who gives an undertaking or enters into an agreement with the Stock Exchange (again a new category). This could include, for example, an offeror in a mandatory general offer where an undertaking is given to ensure that the public float is maintained after the close of the offer. The ability to impose secondary liability will enable the Stock Exchange to take disciplinary action against a broader group of persons who have participated in the rule breach, whilst recognising that primary responsibility for compliance will remain with the listed issuer and its directors. Other proposed changes The Stock Exchange is also proposing a number of minor rule amendments and housekeeping amendments. For instance, currently the Stock Exchange issues private reprimands but is seeking to be able to publish the substance of these disciplinary proceedings (without naming the parties). This is aimed at raising greater market awareness and will have an educational benefit. As regards professional advisers (which includes financial advisers and independent financial advisers, solicitors, accountants and other professionals), the Stock Exchange is seeking to be able to extend its current powers which enable it to ban such advisers from representing a particular entity. Under the proposals, a ban could be extended to representation of any entity (rather than just the specified entity) and in relation to any matter coming before the Listing Division or Listing Committee. This will have much more serious consequences for the professional adviser concerned. |
The Stock Exchange is seeking to adjust its disciplinary powers as a means of improving corporate governance and ensuring rule compliance with a view to maintaining the integrity of the Hong Kong market. The Stock Exchange also aims to ensure that the regime in Hong Kong aligns with international best practice. The consultation comes at a time when the Singapore Exchange Regulation is also consulting on proposals to enhance the enforcement framework and whistleblowing regime for Singapore-listed companies. This indicates a desire by regulators around the region to ensure their enforcement frameworks are effective. |
For further information, please contact:
Tommy Tong, Partner, Herbert Smith Freehills
tommy.tong@hsf.com