Report on Improving Corporate Governance in Hong Kong

Оригинал на английском языке.
Гонконгский институт лицензированных публичных бухгалтеров
Hong Kong Institute of Certified Public Accountants
Авторы: Syren Johnstone и Say H Goo
Обзор текущего состояния (дата издания отчета 15.12.2017) корпоративного права Гонконга, основанного на Ординансе "О компаниях" 2014 года (Hong Kong Companies Ordinance) и Ординансе "О ценных бумагах и фьючерсах" 2003 года (Hong Kong Securities and Futures Ordinance). Исследование недостатков действующего режима и предложения о направлениях развития.

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Суббота, 11 мая 2019 апдейт:

3. Discussion and analysis of jurisdictions studied. 3.2.2 Cross border enforcement and cooperation

With many foreign companies listed on the Exchanges in each of the jurisdictions studied, cross border enforcement becomes an important issue. The regulators in these jurisdictions all have to deal with the challenges of cross-border enforcement of securities law, listing rules and CG standards against overseas companies. The problem of directors of failed or fraudulent issuers disappearing across borders to avoid enforcement is not unique to Hong Kong. For example, as discussed in Appendix III.8.3, the United States, another frequent destination for Mainland enterprises to list and which HKEX regards as a competitor in this regard, has also experienced cross border enforcement problems - a number of Mainland enterprises there have «gone dark» by simply disappearing and ceasing, in breach of Federal securities laws, to make any further regulatory filings leaving regulatory agencies with no effective means to pursue legal recourse.

Regulators from one jurisdiction have no right to enter another jurisdiction to carry out investigation and obtain evidence without the consent and assistance of the other jurisdiction. Thus, a common arrangement is for one regulator to sign a memorandum of understanding (MoU) with another regulator to facilitate mutual co-operation and assistance. Mainland China has signed MoUs with all four jurisdiction studied: HK (19 June 1993), United States (28 April 1994), Singapore (30 Nov 1995) and the UK (7 Oct 1996). At the international level, there is the International Organization of Securities Commission (IOSCO) multi-lateral MoU (MMoU) for mutual assistance. Industry regulators in each of the five jurisdictions studied are signatories to the MMoU: SEC (19 Nov 2002), SFC (3 March 2003), FCA (10 March 2003), MAS (17 November 2005) and CSRC (29 May 2007).

Whether a regulator is able to provide assistance under an MoU or MMoU to another regulator will depend on whether the assistance sought is covered by the MoU or MMoU and it is lawfully able to provide such assistance. So, for example, if there is a client confidentiality agreement between a bank in the requested regulator's jurisdiction and its client, the requested regulator may not be able to force the bank to provide confidential document to the requested regulator for forwarding to the requesting regulator, unless there is legislation in the requested jurisdiction giving the requested regulator power to obtain such document in connection with the request of the requesting regulator. This was what happened in the 1998 Crownhampton case. However, so far as Hong Kong law is concerned, this gap has been addressed through the introduction section 179 of the SFO, which empowers the SFC to appoint an authorized person to obtain records from bankers, auditors and others (failure to comply being an offence), and more recent changes to sections 186 and 186A of the SFO that facilitate the provision of assistance by the SFC and Hong Kong Monetary Authority (HKMA) to foreign regulators.

Many jurisdictions often have laws corresponding to these powers under the SFO. For example, Switzerland has legislation to provide for the Swiss Federal Banking Commission to provide such assistance even in the absence of an MoU. Singapore has section 172 of the SFA. In contrast, Mainland China lacks a similar enabling provision for the CSRC. Thus, the CSRC was unable to provide any assistance to the SFC in relation to it seeking access to the bank records of a controlling shareholder based in Mainland China of Hanergy Thin Film Power Group, a Hong Kong listed issuer that had been suspended from trading pending investigation of suspected anomalies. Article 179(8) of Mainland China's Securities Law merely provides that CSRC «may establish co-operative mechanism of supervision and administration in collaboration with the securities regulatory bodies of any other country or region and apply a cross-border supervision and administration.»

In the absence of MoU's being a panacea to legal hurdles, or domestic laws providing avenues for foreign regulatory investigations, foreign regulators have had to develop their own ways of getting evidence. For example, in the United States, the PCAOB has used its power under the SOX and PCAOB rules to require registered audit firms and their associated persons to cooperate with requests for information in Board investigations, and have sanctioned audit firms and their employees for failure to co- operate. However, this has only been partially effective in that the firms refusing to co-operate have been sanctioned, without this leading to the sought after co-operation.

In 2012 the SEC sued the China affiliates of the top five accounting firms for refusing to produce, contrary to the SOX and the 1934 Act, audit work papers relating to United States listed Mainland Chinese issuers that were under SEC investigation for fraud. The CSRC had earlier refused to provide assistance arguing that it would be against Mainland China's national sovereignty and breach of Mainland Chinese law to allow a foreign regulator to oversee domestic companies regardless of where they are listed. The year prior, a Federal judge ruled in favour of the SEC against Deloitte in a case concerning fraud investigation into Longtop Financial Technologies Ltd (see Appendix IV.5.2). Deloitte had resigned as auditor over alleged false reporting yet had initially refused to cooperate with the SEC stating that it was prohibited by Mainland Chinese law to do so. The CSRC has since been more cooperative by providing a substantial volume of audit work papers and other documents to the SEC. These cases demonstrate the potential cross-border enforcement difficulties that regulators face when seeking cooperation from the CSRC, a problem that is well recognized by Hong Kong's regulatory bodies. These actions have assisted to procure better cooperation. In 2013 the PCAOB entered into an enforcement cooperation MoU with the CSRC and the Chinese Ministry of Finance with a view to progressing better arrangements on cross-border inspections of audit firms under the PCAOB's oversight. This has encompassed seeking joint inspections of relevant audit firms based in China.

Cooperation may depend on de facto assistance as opposed to de jure actions. In the recent China Sky case, the MAS website said that the success of the case was partly through «assistance rendered by the authorities and regulators in the People's Republic of China». However, the website does not explain how the Mainland Chinese authorities were able to render assistance. Given China Sky is an S-chip incorporated in Cayman Islands not also listed in Mainland China, the CSRC or other Mainland Chinese authorities technically does not have jurisdiction over it. One might therefore speculates that the only kind of assistance the CSRC could render is to persuade the controlling shareholder to cooperate with the Singapore authorities.

In 2013 Singapore introduced a direct listing framework to address the problem of lack of regulatory reach and to enhance the quality of its market. Under the framework, Mainland Chinese companies must be incorporated in Mainland China and have obtained the approval of CSRC in order to seek a listing on SGX. The Mainland companies have to go through the regulatory processes and due diligence conducted by the relevant regulatory organisations in both countries.This measure, which appears in many ways to be similar to the H-share listing scheme in HK, provides a measure of assurance to the marketplace. It also provides the basis for mutual co-operation and assistance. Before this scheme, many Mainland companies listed in Singapore were red-chip stocks that were merely shells incorporated in a tax-free or low tax jurisdiction, while the revenue generating operations and businesses remained onshore in Mainland China. This gave the owners of those companies significant insulation from Singapore regulatory actions and accountability. A string of events with red-chip companies had led to many being suspended from trading, giving rise to a loss of confidence from foreign investors. Any attempt to impose sanctions or regulatory penalties on the listed vehicle affected the minority shareholders adversely while the majority shareholders/original owners remained free to continue business as usual in Mainland China (whether by transferring the businesses out or by simply moving on). Furthermore, the authorities in Mainland China regularly took the view that no action could be taken against the responsible persons despite a breach of Singapore law because no offence had been committed under Mainland China's domestic laws. The lack of accountability and regulatory reach were systemic flaws in corporate governance and regulatory oversight, and also hindered rescue and restructuring efforts. However, it remains to be seen whether the scheme will prove successful in terms of actual cross-border enforcement.

In practice, cross-border enforcement can also be limited by differences between the legal systems of domestic and foreign jurisdictions. For example, the recent United States Court of Appeals case United States v Allen held that testimony obtained in a foreign jurisdiction (by the FCA in this case) was inadmissible under the Fifth Amendment (because of the potential use of compelled testimony in criminal proceedings).

Mainland China's 2010 amendments to its State Secrets Law, generally regarded as capable of wide application, have given rise to other problems. Under sections 179 and 183 of the SFO, a person who receives a notice from SFC to disclose document must generally comply unless there is «reasonable excuse». In SFC v Ernst & Young, Standard Water, a company based in Mainland China, applied to SEHK for listing but later withdrew its application after E&Y, its reporting accountants and auditors, informed the SEHK of its resignation upon discovery of certain inconsistencies in documentation provided by the company. SFC requested Ernst & Young's Hong Kong office to provide audit work papers but was met with the claim that the papers were kept in the Mainland by their partners, and that production of such papers would be against Mainland China's secrecy law. The court ordered Ernst & Young to co-operate as foreign illegality is not a «reasonable excuse». This has indeed been the approach taken by the courts in many other jurisdictions.

Hong Kong

Non-Hong Kong incorporated companies listed in Hong Kong are subject to the jurisdiction of the SFC under the SFO, which has extensive powers of investigation and enforcement, and shareholders can enforce their rights via civil actions for damages or derivative suits. However, an important hurdle is to obtain evidence. The SFC needs co¬operation from overseas jurisdictions. As regards Mainland enterprises, its avenues via the CSRC are limited. The SFC has pointed out that the MMoU has limitations as it does not require regulators to provide information nor does it require cooperation where misconduct occurs in one jurisdiction that affects another. To address this limitation, the SFC signed a further MoU in 2014 with CSRC to strengthen enforcement cooperation under the Shanghai-Hong Kong Stock Connect and in 2016 for the Shenzhen-Hong Kong Stock Connect scheme. Among other things, this complements practices in relation to: enforcement cooperation, alerts and the exchange of investigatory information, joint investigations, service of documents, executions, investor compensation, and the publication of information. The stock connect MoU's aim is to fight against cross-border market abuse and misconduct, reinforce cross-border enforcement cooperation, maintain market order in Hong Kong and Shanghai, and to protect the legal rights of investors in both markets. However, it remains to be seen whether the arrangements will result in effective cross-border enforcement.

That the CSRC does not have investigative powers similar to the SFC represents a significant disjunct across the two jurisdictions that is important to consider in view of the predominance of Mainland issuers listed on the Hong Kong market. It means that the effectiveness of any cooperation between the SFC and the CSRC agreement will ultimately be limited. Clearly, if the CSRC were to be given powers similar to those enjoyed by the SFC, this would go a long way to giving greater effect to the MoU. The recent MoU entered into between the SFC and the Hong Kong Police Force (HKPF) may become relevant in this regard if it enables the SFC, via the police, to obtain investigative cooperation from the HKPF's counterparts in Mainland China.

A problem for Hong Kong is the CG standards of Mainland enterprises listed in Hong Kong that are not also listed or incorporated in Mainland China, as there is no effective regulatory nexus for the CSRC to regulate these companies. Despite the CSRC-SFC MoU on cross-border enforcement and co-operation, the SFC and the HKEX have no real reach over wrongdoing directors located in the Mainland. This is exacerbated where the business operations are physically in Mainland China with little presence in Hong Kong. Any form of assistance CSRC is able to provide is likely to be informal pressure. Alternatively, where the Mainland enterprises or their directors have assets or bank accounts in Hong Kong, or their auditors are in Hong Kong, SFC can take legal action against the assets or auditors bringing pressure to bear on the wrongdoing directors to co-operate. Despite the difficulties and challenges the SFC faces, it has successfully investigated a number of cases, sometimes with the help of CSRC.

As a result of the problem of cross-border enforcement, gateway mechanisms that ensure, or facilitate, that only companies able to comply with CG standards are admitted to listing becomes a relatively more important component of improving the CG standards in Hong Kong (see further below under Section 3.7.8 «Listing regime standards upon entry»). An ex ante approach would seek an early stage means of identifying, preventing or reducing the likelihood of wrongdoing - ex ante mechanisms of enforcement that provide for more effective early-warning identification and correction mechanisms can work better in this regard.

Five of the enforcement recommendations made elsewhere in this Report would subject non-locally incorporated companies to a more effective and ongoing system of enforcement, the cross-border


Содержание отчета

Executive summary
Executive Summary I Key Findings
Executive Summary II Summary of Recommendations
Executive Summary III Approach to the Study
Executive Summary IV Abridged Text of the Analysis

1 Introduction to the study and its purposes
1.1 Purpose of this Report
1.2 The development of CG in Hong Kong
1.2.1 Domestic drivers
1.2.2 Global drivers
1.3 Structure of this Report
1.3 Structure of this Report
1.3.1 Methodology
1.3.2 Analysis
1.3.3 Recommendations
1.4 Scope and limitations of this Report
1.5 Next steps

2 Methodology
2.1 Scope
2.1.1 CG concepts
2.1.2 CG Geographic reach
2.1.3 CG mechanisms
2.2 Work process
2.2.1 Data collection
2.2.2 Initial data organization
2.2.3 Oral evidence
2.2.4 Parity check
2.2.5 Analysis
2.2.6 recommendations

3 Discussion and analysis of jurisdictions studied
3.1 Overarching considerations
3.1.1 Thematic topics
3.1.2 Trends in regulating CG standards
3.1.3 The role of culture
3.1.4 The methodology of assessment
3.1.5 Cost-benefit considerations
3.1.6 Maintaining competitiveness
3.1.7 Effectiveness
3.2 Non-locally incorporated companies
3.2.1 Application of local laws and regulations
3.2.2 Cross border enforcement and cooperation
3.3 Information
3.3.1 Legal status of CG disclosures
3.3.2 Disclosure of listing rule compliance
3.3.3 Board evaluation
3.3.4 Audit committee
3.4 Involvement
3.4.1 Shareholder stewardship
3.4.2 Shareholder votes
3.4.3 Remuneration
3.4.4 Changes of control
3.5 Equality
3.5.1 Voting rights generally
3.5.2 Weighted voting rights
3.6 Accountability
3.6.1 Information disclosures generally
3.6.2 Listing rules
3.6.3 Board refreshment
3.6.4 Appointment of independent directors
3.7 Effectiveness
Part A - CG system design
3.7.1 Impact of regulatory design
3.7.2 Policy development agencies
3.7.3 Enforcement agencies
3.7.4 Audits of public companies
3.7.5 Duties of directors
3.7.6 Role of fiduciary law
Part B - Specific actions
3.7.7 Differentiation of CG requirements
3.7.8 Listing regime standards upon entry
Part C - Independent directors
3.7.9 Determination of independence
3.7.10 Requirements relating to INED performance
3.7.12 Empowerment of INEDs - controlling shareholders
Part D - Other items
3.7.13 Whistle-blowing
3.8 Coda

4 Recommendations
Introduction and approach to the recommendations
Part A - The board
4.1 Processes
4.2 Independent directors
4.3 CG standards
Part B - Enforcement
4.4 Shareholders
4.5 CG disclosures
4.6 Regulators
4.7 Ex ante mechanisms
Part C - Architecture and policy
4.8 Architecture
4.9 Policy
4.10 Summary tables

5 Concluding remarks
5.1 The Recommendations
5.2 The Hong Kong market

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