31-05-2019

4. Recommendations. 4.6 Regulators

C 4.6.1 SEHK to develop use of existing disciplinary power

Step required
SEHK to develop use of existing disciplinary powers. under MBLR 2A.09(10) and MBLR 6.04.

Recommendation level
Compelling.

Topic addressed
The SEHK's disciplinary powers are considered to have problems as regards their real effectiveness.

Details of recommendation
1.The SEHK use its power under LR2A.09(10) to require issuers to «take, or refrain from taking, such other action as it thinks fit» to establish more effective disciplinary solutions that can work proactively.
2.The SEHK use its power to impose resumption conditions on suspended issuers to establish more effective disciplinary solutions that can work proactively.
3.In both cases, issuers can be required to take steps that address specific CG shortcomings. This can be combined with the SEHK's power under MBLR2A.09(6), which enables it to specify remedial action for breaches.
4.For example, a more immediate reputational liability could be imposed on issuers and individual directors by requiring a statement as to what measures will be undertaken to ensure non-recurrence of a breach, or similar breaches, and to again report on their implementation within a defined period.

Attendant considerations
As these powers are ostensibly quite wide, their scope of use is open to further investigation.
The use of the powers must remain within the scope of the contractual relationship between the issuer and the SEHK.

Jurisdiction references
Hong Kong (Panel on Takeovers and Mergers).

Section 3 reference
3.7.3 Enforcement agencies.
See also:
3.7.1 Impact of regulatory design.

A 4.6.2 SFC to develop use of conditions when exercising existing SMLR powers

Step required
The SFC to expand use of existing powers under sections 6(3)(b) and 9(4) of the SMLR to impose conditions.

Recommendation level
Advocate.

Topic addressed
The topic of increasing the powers of the SFC in relation to listed companies is not a new one, and has attracted a high level of resistance in the past in part due to the legislative changes required.

Details of recommendation
1.The SFC to use its existing powers under the SMLR to impose conditions on listing applicants and listed issuers that address specific CG shortcomings.
2.The conditions to be more aligned with catalyzing improvements to CG standards - referred hereafter as «Catalyzing Conditions».

Attendant considerations
The use of a Catalyzing Condition must be premised on a CG shortcoming or failure and be consistent with the empowering SMLR section.
The potential range and use of Catalyzing Conditions requires further detailed examination.
What precursors might be required before the SFC might use Catalyzing Conditions requires further detailed examination.
Caution required to ensure Catalyzing Conditions do not result in rewriting the listing rules for some issuers so as to create a uneven playing field

Jurisdiction references
UK (LR 1.4.1 R).
(However, see Recommendation C4.6.1 «SEHK to develop use of existing disciplinary power» reference to Hong Kong Takeovers Panel.)

Section 3 reference
3.7.3 Enforcement agencies.

A 4.6.3** Calibrate SFC's powers under the SMLR

Step required
Amend SMLR.

Recommendation level
Support.

Topic addressed
Breach of the listing rules (and CG Code) in general are only enforceable by the SEHK, however, the sanctions available to the SEHK are weak and do not include the ability to impose a fine.
On the other hand, the SFC's enforcement powers only arise if there has been serious corporate wrongdoing. This leaves an enforcement gap.
Previous attempts to give SFC an administrative fining power over issuers has failed.
To explore the alternative kinds of power that could be given to the SFC by the legislature that may be more commercially acceptable.
To propose a power that sits within its existing powers that may be a commercial «win-win-win» for the issuer, its shareholders and the market as compared to suspension.

Details of recommendation
1.The SMLR is amended to give the SFC the power to impose, in lieu of suspension and subject to prior consultation with the Listing Committee, a fine. More mundane breaches of listing rules that do not impact on the public market per se would not give rise to the SFC's power to fine.
2.The SFC would be empowered to pair the fine with conditions that are to be met within a defined timeframe to avoid either a further fine or suspension.
3.The amount of the fine would be determined according to fining guidelines that are to be published by the SFC and could be referenced, for example, to market capitalization or share trading turnover.
4.Prior to imposing any fine, the SFC would need to provide the issuer with a warning notice that gives the issuer a specified brief period to make representations.
5.The issuer would be required to disclose any fine or conditions imposed by the SFC (but not any warning notice) together with the steps it is taking to resolve the same (save in exceptional circumstances).
6.The amendment to the SMLR could also provide for the SFC to issue a formal caution where the SFC is of the opinion that there have been sufficiently material breaches of the listing rules that, if left unchecked, could lead to it exercising its power to fine and/or direct a suspension of trading.
7.No change proposed is to alter the SFC's current powers under the SMLR to order suspension at any time.
8.The SMLR may also be supplemented with a provision equivalent to section 201(3) of the SFO that allows the SFC to reach an agreed penalty with the issuer.
9.Where directors do not take steps to meet conditions or reach a negotiated penalty, the SFC is empowered to impose a cold shoulder order (directors, controlling shareholder, their associates) until such time as shareholders have voted on the matter (excluding votes of directors, controlling shareholder, and their associates).

Attendant considerations
The design ensures a much more limited power than what has been previously proposed.
Whether the fine can be applied to directors individually, for example, where they have breached the Directors' Undertaking.
Other benefits of this limited scope of enforcement include:
-it provides the SFC intermediate options to impose discipline not as severe as suspension;
-it may serve a corrective function without requiring recourse to the courts;
-unlike suspensions, investors can continue to trade;
-it could in practice operate as a precursor to suspension if corrective steps not undertaken;
-it can assist publicize the SFC's expectations that issuers should comply with the listing rules as a matter of good CG.

Jurisdiction references
UK.
Singapore.
China.
United States (while SEC powers are not directed at the listing rules per se its powers broadly align with the foregoing jurisdictions as regards disclosure and fraud).

Section 3 reference
3.7.3 Enforcement agencies
See also:
3.6.1 Information disclosures generally;
3.7.1 Impact of regulatory design.

A4.6.4*Statutory backing of certain listing rules

Step required
Undertake a public enquiry/consultation that re-examines the discussion on giving statutory backing to LR Chapters 4 (periodic financial reporting), 14 (notifiable transactions) and 14A (connected transactions).

Recommendation level
Advocate.

Topic addressed
The proposal to give statutory backing to these provisions has been suggested in the past as a counter to the relatively weak disciplinary powers of the SEHK that stand in contrast to the degree of abuse that shareholders can be subjected to where they are breached.
In the interim, the experience following the amendment of LR13.09 and the introduction of Part XIVA of the SFO has been conducive to improving transparency.
While legal remedies for egregious breaches may be available in the courts, this is prone to uncertainty and complexity that create market inefficiency.

Details of recommendation
1.The Financial Services and Treasury Bureau (FSTB), SFC and HKEX should reconnoitre the landscape, including detailed assessments of past problems under these Chapters of the listing rules.
2.Consideration to be given as to whether there is sufficient market consensus to undertake a new public consultation.
3.If there is unlikely to be sufficient consensus, consideration to be given as to whether the issue is important enough to Hong Kong's prosperity to seek guidance from the Government.

Attendant considerations
Likely to be predictable negative reactions to the proposal.
It will be important to distinguish the present exercise from the previous one based on an evolution of underlying conditions in the interim period.
Going forward, it may be appropriate to review whether the civil liability under Part XIVA of the SFO has sufficiently encouraged listed companies to observe the disclosure requirement, and whether it would be necessary to introduce criminal liability (cf. Singapore under s 203 SFA) which was the original plan, dropped eventually due to fear of increased liability and resistance.

Jurisdiction references
UK.
Singapore.

Section 3 reference
3.7.3 Enforcement agencies.

E 4.6.5* Explore a narrow-channel cross-border enforcement arrangement

Step required
Policy-led initiative.

Recommendation level
Explore.

Topic addressed
Cross-border enforcement against listed Mainland enterprises and their directors that breach applicable Hong Kong laws and regulations.
Instances of non-enforcement has a negative effect on enterprises emerging from the Mainland as well as existing listed Mainland enterprises.

Details of recommendation
1.The HKSAR Government to explore the attitude of the relevant authorities in Mainland China to expanding the existing arrangements for reciprocal recognition and enforcement of judgments to create an arrangement specifically tailored to the public capital market.
2.Ambit of arrangement to be considered, for example, breaches of an agreed scope of disclosure obligations (including financial mis-disclosure) and the enforcement of financial penalties and compensation orders by a court.
3.Not to encompass criminal penalties.

Attendant considerations
There is no prospect for reciprocity under current conditions as Mainland China does not accept listings of foreign companies.
Establishing a narrow-channel arrangement as proposed above may be a highly desirable precursor to the proposed IPO Connect.
Requires long term planning and coordination at high levels of Government.

Jurisdiction references
Hong Kong.

Section 3 reference
3.2.2 Non-locally incorporated companies.

No recommendationChanges of control

Issue considered
Whether statutory backing should be given to the Code on Takeovers and Mergers as has been done in the UK.

Reasoning
In the absence of (1) a broader policy change toward statutory regulation and (2) any clear indication that the Code on Takeovers and Mergers is lacking in effectiveness, there is no mandate for recommending any similar change to the legal standing of the Code on Takeovers and Mergers. Should either one of these factors appear to change, then a review of the legal nature of the code may be warranted.

Section 3 reference
3.4.4 Changes of control