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17 January, 2018
“No profit motive” defence successfully used in insider dealing case: Two former executives of Asia Telemedia Limited successfully relied on the “no profit motive” defence in an insider dealing case. It was held that if the accused can establish on a balance of probabilities that although he was knowingly in possession of price sensitive information, that was not a factor inducing him to deal, then he is not an insider dealer. For the defence to succeed, it is not sufficient to establish that the price sensitive information was only a subsidiary motivating factor, it must be established it was not in any way a causative factor. Read more…
PRC state-owned entities may not invoke Crown immunity when carrying out commercial activities: In TNB Fuel Services Bhd v China National Coal Group Corporation, the Court of First Instance ruled that a PRC state-owned entity could not invoke crown immunity when undertaking commercial activities. Read more…
HK$15m fine handed out for sponsor failures: The SFC reprimanded and fined BOCOM International (Asia) Limited HK$15m for failures to discharge its duties as the sponsor of China Huinong Capital Group Limited, a provider of short-term loans to small- and medium-sized enterprises and individuals. The SFC found that BOCOM had breached the Code of Conduct by failing to perform due diligence in relation to some of these loans which were guaranteed by Huinong’s connected persons. The information had not been included in the draft prospectus of Huinong. The Exchange returned Huinong’s listing application on the ground that the disclosure of information was not complete in all material respects to enable a reasonable investor to make a fully-informed investment decision in breach of Rule 9.03(3) of the Listing Rules.
Licensed corporations became subject to the new Manager in Charge governance regime: The SFC’s new governance regime, the MICR, came into force in April, with papers for existing licensed entities needing to be filed by July. The regime required identification and notification to the SFC of the particulars of the senior management of the licensed corporation’s business, capturing both front line and mid/back-office functions. The new measures emphasise the SFC’s continued focus on individual accountability of senior management.
Financial Institutions (Resolution) Ordinance came into effect: FIRO, together with the Financial Institutions (Resolution) (Protected Arrangements) Regulation, came into effect on 7 July. The Ordinance established a regime for the orderly resolution of financial institutions in the banking sector and systemically important financial institutions in the insurance and securities and futures sectors, as well as certain financial market infrastructures in Hong Kong. Further rules are required to be made to implement certain requirements in the Ordinance (for example, the requirement to include any contractual recognition of bail-in language in the terms and conditions of a contract creating a liability owed by a within scope financial institution).
Bond Connect launched in July: The Bond Connect programme was launched on 3 July. Northbound trading began first, with Southbound trading expected to be explored at a later stage. The Bond Connect programme adds to the current modes of access to the China Interbank Bond Market, such as the Qualified Foreign Institutional Investors (QFII) scheme, the RMB Qualified Foreign Institutional Investor (RQFII) scheme and the direct access scheme for foreign institutional investors (FII), by introducing a more streamlined way to trade and hold onshore bonds in the CIBM for foreign investors. Read more…
Tougher rules on the delisting of issuers with prolonged suspensions: The Exchange has issued a consultation paper seeking comments on proposals which will give the Exchange more power and a robust process to delist an issuer with prolonged suspensions. The proposal, if adopted, will give the Exchange additional powers to cancel the listing of an issuer with a prescribed period of continuous suspension. The Exchange is seeking opinions on whether the prescribed period should be 12, 18 or 24 months. Read more…
Exchange to tighten its grip on highly dilutive capital raising structures: The Exchange has published the Consultation Paper on Capital Raisings by Listed Issuers, revealing the long-anticipated tightening of regulations on highly dilutive capital raising structures about which corporate governance advocates have been flagging concerns. It is interesting to note that the regulators do not consider putting such structures to the vote of independent minority shareholders, or withholding the granting of whitewash waivers in cases where share issuances would result in a change of control, as effective methods to address their concerns. Rather, they propose to impose a ban on highly dilutive capital raisings, subject to limited exceptions. Read more…
MMT finds no market misconduct in CITIC publishing the no material adverse change statement: After six years of investigation and over nine weeks of tribunal hearing, the Market Misconduct Tribunal concluded that CITIC Limited and its then top executives did not commit market misconduct for including a “no material adverse change” statement in a “business as usual” transaction circular in 2008, even though at the time they were aware of potentially substantial mark-to-market losses arising from currency hedging contracts. While the executives in this case have been found not guilty, the same set of facts, were they to have occurred today, may have produced a different outcome, with the SFC focusing instead on seeking to establish that the “inside information” disclosure laws had not been strictly adhered to. Read more…
Conclusions on proposed enhancement to listing regulation: The SFC and the Exchange have decided not to act on several of the key original proposals, most notably dropping the proposal to establish a new Listing Regulatory Committee and derogating the Listing Committee to the role of an advisor to the originally proposed Listing Policy and Regulatory Committees. There were a lot of debates and commentaries in the market, questioning the effectiveness and logic behind those proposals. Instead, the SFC said it would use existing powers to enhance its influence over listing matters. Read more…
Second year of enforcing the Competition Ordinance: Hong Kong saw a number of solid developments in its second year of competition law enforcement. The Competition Commission continued to flex its investigatory muscles. Importantly, the Commission brought the first two cases to the Competition Tribunal. In the first case, five IT companies allegedly rigged a tender issued by a social services organisation; in the second case, 10 construction and engineering companies allegedly fixed prices and divided the market for decoration work in a public housing estate. The Commission also completed its study into the city’s auto-fuel market, which made several recommendations to increase competition in the market. In August, the Commission issued its first block exemption order for vessel sharing agreements in the liner shipping industry, whilst rejecting the industry’s application for an exemption for vessel discussion agreements. The second year of law enforcement also saw the Commission gain a new senior management, with Mr Brent Snyder, former Deputy Assistant Attorney General in the Antitrust Division of the US DOJ, taking the helm as CEO of the Commission.
Courts consider unlawful discrimination based on sexual orientation in light of the principle of equality under the law: In two judicial review decisions (Leung Chun Kwong v Secretary for Civil Service and QT v Director of Immigration), the Court of First Instance and the Court of Appeal considered that differential treatment of a person based on his or her sexual orientation amounted to unlawful discrimination contrary to the right of equality granted by Hong Kong’s Basic Law and Bill of Rights. These public sector cases arose from the Government’s refusal to grant spousal benefits to the same-sex partner of a government employee or to grant a dependant visa to the same-sex partner of a Hong Kong employment visa holder. In both cases, the same-sex couples were legally married under the laws of a jurisdiction outside of Hong Kong.
Increase in statutory minimum wage: With effect from 1 May, the statutory minimum wage was increased to HK$34.50 per hour (an increase of HK$2 per hour from the previous rate of HK$32.50 per hour). Additionally, employers are under an obligation to keep a record of the number of hours worked in each wage period for employees who earn less than HK$14,100 per month (the monetary cap was increased from HK$13,300 per month).
Mandatory electronic filing for disclosure of interests under the SFO – effect on margin lending: From 3 July, interests which are required to be disclosed under the SFO will be submitted via an online system. This may have an impact on margin lending where a filing under Part XV of the SFO is required to be made by a qualified lender where, in relation to 5% or more of the voting shares of a listed company, (i) the qualified lender becomes entitled to vote the secured shares or (ii) the power of sale becomes exercisable. The new disclosure forms contain detailed event codes which may cleanse inside information relating to a default of a borrower. Read more…
Year to Come – Hong Kong Law in 2018
Exchange abandons proposals to segregate the current listing structure via the creation of a New Board to allow the listing of WVR companies and start-up companies, and instead will explore ring-fencing and other means of accommodation of “innovative” or WVR companies: Following a previous, unsuccessful attempt in 2014 to attract support for allowing companies with weighted voting right structures (“WVR companies”) to list in Hong Kong, the Exchange published a concept paper in June 2017 proposing the creation of a New Board to accommodate WVR companies and start-up companies in the “new economy”. Read more…
The Exchange published the conclusions to the concept paper in December 2017, announcing that it will take a strong step forward towards liberalising its listing platform, deciding to: (a) allow the listing of biotech companies that are pre-revenue and pre-profit; (b) allowing WVRs for “new economy”, “innovative” companies, subject to additional disclosures and safeguards; and (c) broaden the secondary listing regime to attract “innovative” companies which are already listed on “qualified exchanges”, including those which were previously denied this avenue due to having WVRs or a “centre of gravity” in Greater China. Read more…
Extraterritoriality of EU MiFID II product governance rules: From 3 January 2018, EEA Member States will need to apply new product governance rules under MiFID II. Although the new product governance rules only apply to MiFID Firms, non-MiFID Firms (typically, these would be the local banks and securities houses in Asia) will be indirectly impacted (i) when doing business with MiFID Firms (e.g. where financial instruments are to be sold within the EEA) or (ii) distributing financial instruments (both within and outside the EEA) manufactured by MiFID Firms. Read more…
Margin requirements on non-centrally cleared derivatives applicable to licensed corporations: Following a soft consultation with the industry in Q4 of 2017, the SFC is expected to launch a public consultation in the beginning of 2018 on margin requirements on non-centrally cleared derivatives applicable to licensed corporations. The industry has emphasised the importance of harmonisation with the HKMA’s margin rules published in January 2017 as contained in the HKMA’s Supervisory Policy Manual. It is hoped that the SFC’s rules will closely mirror the HKMA’s rules on margin requirements.
Regulations on backdoor listings and continuing listing criteria: The Exchange has conducted a holistic review of its regulation of capital raising activities by listed issuers and backdoor listings as well as its continuing listing criteria and delisting procedures. The consultation papers on capital raising activities and delisting procedures were published in 2017. Read more… The discussion of backdoor listings and continuing listing criteria and related proposals will be set out in separate consultation papers which are expected to be published in 2018.
Disclosure of beneficial ownership of Hong Kong companies: The Companies Ordinance is expected to be amended to include an obligation for companies to obtain and maintain information on beneficial ownership. The proposed legislative amendments will also include steps that companies should take to identify the beneficial owners and the types of information that should be maintained. The proposals are aimed at facilitating greater corporate transparency and follow a mutual evaluation by the Financial Action Task Force. The anticipated implementation date is 1 March 2018.
Competition Ordinance: 2018 is expected to be a year of increased competition law enforcement activity. With a new war chest of HKD 200m granted by the Government and new senior management with a strong background in cartel enforcement and litigation experience, the Commission is expected to reinvigorate law enforcement policy with a strong focus on cartel activity. As the city’s first two competition law enforcement cases are set for trial in mid-and late-2018, the Tribunal is expected to hand down more decisions and explain points of law that are unclear under the Competition Ordinance. However, applications to the Commission for leniency, for decisions on exclusion or exemption or for block exemption orders are likely to remain a rarity. Only one application for a block exemption order has been made in the first two years of the Competition Ordinance.
Numerous legislative proposals to improve labour standards in Hong Kong: During 2017, the Government suggested a number of legislative proposals to improve employee welfare in Hong Kong. These
include: (i) the Employment (Amendment) Bill 2017 which seeks to remove the employer's agreement as a pre-requisite for the Labour Tribunal making a reinstatement or re-engagement order in the event of an unreasonable and unlawful dismissal by the employer; (ii) a proposal to adopt a legislative approach to implement working time regulations submitted by the Standard Working Hours Committee; (iii) a proposal to abolish the ability to offset a statutory severance/long service payment against the accrued benefits derived from the employer’s contributions to the employee’s Mandatory Provident Fund scheme; and (iv) a proposal to increase maternity and paternity benefits in Hong Kong.
New HKMA guidance on management accountability: In October 2017, the HKMA issued guidance setting out the expectations of the HKMA on management accountability at registered institutions for conducting SFC regulated activities. The guidance is similar to the manager-in-charge regime implemented by the SFC in 2017. Under the guidance, registered institutions must identify at least one fit and proper individual to be responsible for the overall management of the whole business, as well as managing each of the businesses or functions listed in paragraphs 2 to 9 of the Fourteenth Schedule to the Banking Ordinance, to the extent that such functions relate to the SFC-regulated activities for which the registered institution is registered. Registered institutions are expected to supply the required information from 16 March 2018 and the submissions should be made on or before 16 April 2018. Read more…
HKMA to develop policy proposal for minimum loss absorbing capacity requirements: Following the implementation of FIRO in 2017, the HKMA has indicated that it will continue to develop its policy proposal for prescribing minimum loss absorbing capacity requirements for authorised institutions in 2018. As part of this process, the HKMA is planning to publish a consultation paper in early 2018 which will set out the HKMA’s proposals and key questions around, amongst other things, the amount of minimum LAC different authorised institutions should be required to have, the criteria for determining eligibility for recognition as LAC and the potential impact of imposing losses on LAC on market participants. The consultation paper will shed more light on the HKMA’s specific policy objectives and proposals with respect to LAC, which are expected to be based on the general principles outlined in the Financial Stability Board’s Total Loss Absorbing Capacity standard and the European Union’s Minimum Requirements For Own Funds and Eligible Liabilities framework.
Proposed Hong Kong corporate rescue legislation and new case law on parallel schemes of arrangement: After years of discussion and consultation, the Financial Services and Treasury Bureau is preparing an amendment bill to introduce a new statutory corporate rescue procedure for Hong Kong. It expects to introduce the amendment bill into the Legislative Council in 2018. In the meantime, the Hong Kong courts have been receptive to other methods of implementing cross-border rescue remedies. In the recent case of Re Z-Obee Holdings Limited HCMP 1563/2017, the Hong Kong High Court granted an order sanctioning parallel schemes of arrangement in Hong Kong and Bermuda. This followed the appointment of provisional liquidators in both Hong Kong and Bermuda to effect the restructuring of Z-Obee Holdings Limited, a Hong Kong-listed company incorporated in Bermuda, whose laws permit such an appointment for the purpose of exploring a restructuring even where there is no evidence of jeopardy to assets of the sort required in Hong Kong following the 2006 case of Re Legend International Resorts Ltd [2006] 2 HKLRD 192.
SFC consults on refinement to the OTC derivatives regime: The SFC launched a two-month consultation in December 2017 on refinements to the OTC derivatives regime and conduct requirements for licensed corporations. The proposals are wide-ranging and cover issues from licensing to intra-group booking models, risk mitigation requirements for OTC derivatives, risk disclosures in client agreements and client clearing conduct requirements, just to name a few examples. The consultation closes on 20 February. Read more…
Changes to Fund Manager Code of Conduct: The SFC issued its Consultation Conclusions on Proposals to Enhance Management Regulation and Point-of-sale Transparency and Further Consultation on Proposed Disclosure Requirements Applicable to Discretionary Accounts in November 2017. The conclusions introduce changes to the FMCC and the Code of Conduct. These changes will become effective on 17 November and 17 August, respectively. The main changes introduced in the FMCC relate to: (i) the scope of its application; (ii) repos; (iii) custody of fund assets; (iv) liquidity risk management; and (v) leverage disclosure. The SFC also initiated a further consultation on disclosure requirements applicable to discretionary accounts.
For further information, please contact:
Andrew Malcolm, Partner, Linklaters
andrew.malcolm@linklaters.com
