Background
On 7 August 2020, The Stock Exchange of Hong Kong Limited (the “Exchange”) published a consultation paper as to its proposal to review the Rules Governnig the Listing of Securities on the Exchange (the “Listing Rules”) relating to disciplinary powers and sanctions (the “Disciplinary Regime”). On 20 May 2021, the Exchange issued the Consultation Conclusions to the consultation exercise (the “Consultation Conclusions”). The new amendments aim at augmenting the range of reputational sanctions available and ensuring that disciplinary action can be brought against a broader range of individuals, including members of senior management, if they cause or knowingly participate in a contravention of the Listing Rules. The revised Listing Rules have taken effect from 3 July 2021. Set out below are some of the major changes to the Listing Rules.
Identifying New Relevant Parties and Defining Senior Management
The Exchange has added new classes of the relevant parties who may be subject to disciplinary actions and sanctions under Rule 2A.09 of the Listing Rules and Rule 3.10 of the GEM Listing Rules (the “Relevant Parties”). A definition of “Senior Management” has also been added to bring clarity.
| New Classes of
“Relevant Parties” |
The following new classes have been included as Relevant Parties:
(a) employees of professional advisers of listed issuers and their subsidiaries as a Relevant Party under the Listing Rules; (b) guarantors of structured products; (c) guarantors for an issue of debt securities; and (d) parties who give an undertaking to, or enter into an agreement with, the Exchange as Relevant Parties under the Listing Rules. |
| Definition of “Senior Management” | The new Rule 2A.09(2)(c) of the Listing Rules (Rule 3.10(2)(b) for GEM Listing Rules) defines “senior management” to include any person:
(a) occupying the position of chief executive, supervisor, company secretary, chief operating officer or chief financial officer, by whatever name called; (b) performing managerial functions under the directors’ immediate authority; or (c) referred to as senior management in the listed issuer’s corporate communication or any other publications on the Exchange’s website or on the listed issuer’s website. |
Amendments relating to a PII Statement
One of the existing sanctions under the previous Listing Rules is to issue a public statement that the retention of office by the director is prejudicial to the interests of investors (a “PII Statement”).
The new amendments extend the Exchange’s power to issue PII Statements by abolishing the high threshold of establishing “wilful” or “persistent” failure by a director to discharge his responsibilities under the Listing Rules. Under the new Listing Rules, a PII Statement can be made where the Exchange is satisfied that the individual’s occupying of office “may cause prejudice” to the interests of investors. With the removal of the “wilful” or “persistent” threshold, the Exchange is afforded greater flexibility to attach appropriate sanction to the misconduct.
PII Statement can now be issued against wider classes of individuals. With the new amendments, not only the directors of a listed issuer but also the senior management of the relevant listed issuer and even the director or senior management of any of its subsidiaries can be the subjects of a PII Statement. Further, the Exchange clarifies that a PII Statement can be made whether or not the individual continues in office at the time the PII Statement is made.
Enhancingfollow-on actions after making of a PII Statement
In case of more serious misconduct, the Exchange may direct follow-on actions at the same time a PII Statement is made. To further the effectiveness of a PII Statement, where an individual continues to be a director or senior management of the named listed issuer after a PII Statement has been made against him, the Exchange can order denial of facilities of the market to that listed issuer for a specified period. If there are significant problems in a listed issuer’s internal controls, this sanction may be imposed until the completion of an internal control review from a external professional adviser and the implementation of adequate and effective internal controls to ensure the compliance of the Listing Rules. The “wilful” or “persistent” threshold for ordering the denial of facilities of the market is also removed.
In addition, the Exchange requires named listed issuer to include a reference to the PII Statement in all its announcements and corporate communications unless and until the individual subject to a PII Statement with follow-on action is no longer its director or senior management member.
Extending Disclosure in Listing Documents and Annual Reports
The scope of disclosure on public sanctions towards senior management and directors is extended to the listing applicants’ listing documents and listed issuers’ annual reports to include full particulars of any public sanctions made against their directors or members of senior management (current and/or proposed) by statutory or regulatory authorities. The new scope of disclosure increases market transparency and makes the information more readily available to the public.
Introducing the Director Unsuitability Statement
Director Unsuitability Statement is introduced for the most egregious or severe cases of misconduct. Where a director fails to discharge his responsibility under the Listing Rules in a serious manner or repeatedly, the Exchange has the power to publicly state that the director is unsuitable to occupy a position as director or within senior management of a named listed issuer or its subsidiaries. The rules on follow-on actions, disclosure, and publication requirements apply equally to the Director Unsuitability Statement.
Imposing Secondary Liability
The rule changes allow the Exchange to impose sanctions on the Relevant Parties which have caused by action or omission or knowingly participated in a contravention of the Listing Rules. In particular, company secretaries, who are considered members of senior management, as well as professional advisers to the listed issuers, are also subject to secondary liability. The Exchange, however, made a note to clarify two matters. First, the imposition of secondary liability on solicitors and certified public accountants in private practice only covers circumstances that are agreed between the Exchange and the professional regulatory bodies. Second, the Exchange will take into account whether the party has knowingly or recklessly facilitated or participated in a breach of the Listing Rules or any undertaking given or any agreement with the Exchange when determining the secondary liability of the “Relevant Parties”.
Obligation to provide complete, accurate and up-to-date information
The rule binds a party which is providing information to the Exchange regarding a matter or interacting with the Exchange, whether proactively or in response to an enquiry. It obligates the party to provide information that is as complete, accurate and up-to-date as possible.
Minor Rule Amendments
Other minor rule amendments have also been introduced:
1. Extending the ban on professional advisers to cover banning of representation of any or a specified party;
2. Placing an obligation on professional advisers to use all reasonable efforts to ensure that their clients understand and are advised as to the scope of and their obligations under the Listing Rules when acting in connection with Listing Rules matters on which they are instructed to advise. Professional advisers should also refrain from knowingly provide information to the Exchange which is false or misleading in a material particular;
3. Using “business day” as the benchmark for counting the periods for filing review applications, and for requesting or providing written reasons for decisions;
4. Requiring all review applications to be served on the Secretary to the Listing Committee or the Secretary to the Listing Review Committee;
5. Counting the period for filing review applications from the date of issue of the decision or the written reasons;
6. Counting the period for requesting written reasons from the date of issue of the decision; and
7. Counting the period for providing written reasons from the date of receipt of the request.
Please contact our Partner Mr. Rodney Teoh for any enquiries or further information.
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