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

3. Discussion and analysis of jurisdictions studied. 3.3.1 Legal status of CG disclosures

In the jurisdictions studied, required CG disclosures are scattered in at least three places with varying degree of enforceability or legal backing as the table in Section 3.1.1 above shows: legislative provisions in relating to securities or corporate law, listing requirements enforceable only by the exchange except where they have some measure of statutory backing United States, and codes that may merely promote disclosure without mandating it, which are themselves unenforceable unless non-disclosure also happens to fall under either of the foregoing two categories.

Specific CG disclosures required to be made in the UK arise out of the listing rules that incorporate by reference the UK CG Code. While the code is non-statutory, the listing rules have statutory backing and breaches of them are subject to enforcement by the FCA and, where there has been a breach of the disclosure requirements, may also subject to a claim for damages by investors. In the latter regard it is important to recognize that the relevant nexus for liability is not the UK CG Code per se but the fact that certain of its requirements align with the FCA's DTR, which do have statutory backing, as discussed in Appendix II.7.2. This system shares some similarities with Hong Kong, as discussed in Appendices II.3.3 and II.6.3, the notable difference being that the HK CG Code together with the listing rules does not have any statutory backing. In other regards, that statutory effect is achieved in the UK through the alignment of non- statutory provisions with disclosure obligations having statutory effect shares some similarities with the United States.

As discussed in Appendix III.1.1, the United States is a strongly disclosure based system, and this holds true of the approach to specific disclosures listed issuers are expected to provide to shareholders in relation to the CG standards they have adopted. CG standard-setting and the means by which those standards are enforced extends across each level of the regulatory architecture of the United States. This includes State and Federal law, regulatory law made by the SEC, and the requirements of the Exchanges. The alignment of these obligations are important to appreciate to gain an understanding of the means by which CG standards are reinforced or developed, and the respective roles of the SEC and the Exchanges.

Unlike the UK, important CG standards are set by the Exchanges, however, as noted in Appendix III.4.1, Exchange requirements do not carry statutory force and are not generally regarded as enforceable by shareholders (subject as discussed in Appendix III.6.6). The important caveat to the foregoing statement is that an issuer, in breaching a listing requirement, may also happen to violate a relevant disclosure or anti-fraud provision of the securities laws. This is an important nexus to appreciate because the Exchange's CG rules incorporate information disclosure requirements that are broadly aligned with or tied to disclosures mandated by the SEC under Regulation S-K, made pursuant to the 1933 Securities Act, which sets out the reporting requirements for listed companies in the United States.

Some of the Exchange's requirements go some way to covering areas of CG regulation that are not - or are presently unable to be - addressed by State or Federal laws. The SEC could in theory start adopting some of the Exchange CG rules if they wanted to - after all, they approve each and every one of them before adopted by the Exchange - but that is not the primary purpose of the SEC in the overall CG system of the United States. For example, in Appendix III.3.2 it was observed that Item 407 of Regulation S- K requires disclosures in relation to a similar group of topics with which the HK CG Code is concerned, namely: director independence, board meetings and committees, annual meeting attendance, nominating committee, audit committee, audit committee financial expert, compensation committee, shareholder communications and board leadership structure and role in risk oversight. However, this is not accompanied by any expectation of meeting a specific CG standard - the setting of specific standards is instead taken up by rules of the Exchanges that impose corresponding requirements on issuers, which fall into either mandatory compliance requirements (i.e. must do/have, or must disclose), or recommended practices (i.e. should) - see further Appendix III.4.1.

This alignment has a significant bearing on the overall quality of disclosures that are made - because compliance with the Exchange's standards to some extent become the subject of material required to be reported pursuant to Regulation S-K, securities law becomes relevant to consider in relation to an Exchange's CG requirements. This is important since a false disclosure amounts to a Federal offence, whereas merely breaching an Exchange requirement would otherwise be subject to rather more limited sanctions.

In Singapore, MAS can enforce the SFA, which contains some CG requirements. The CG Code issued by the MAS is enforced by SGX. The Code, as in Hong Kong, operates on a «comply or explain», not mandatory, basis. The listing rules are issued by the SGX subject to approval by MAS, and enforced by SGX on a contractual basis. However, as the listing rules on continuing disclosure has statutory backing under s 203 SFA - this creates a statutory obligation on an issuer and others to comply with SGX's continuing disclosure obligations under its listing rules - intentional or reckless breaches is a criminal offence under s 203 of SFA. MAS could impose civil penalty on offender, or transfer the case to CAD for criminal prosecution. A recent example of MAS's power under s 203 was the high profile China Sky Chemical Fibre Co Ltd case (see Appendices V.4.1 and V.8.3).

The position in Mainland China is more straightforward. CSRC can enforce the CG requirements in the Securities Law, the CG Code and listing rules and a large number of guidelines. The CG Code is issued by the CSRC and is not on a «comply or explain» basis but is mandatory.

Hong Kong

In Hong Kong, the specific CG related disclosures required by the listing rules and the HK CG Code are generally regarded as being matters of concern only for the listing rules. This includes, for example, Chapter 4 dealing with periodic financial reporting, Chapters 14 and 14A respectively concerned with notifiable and connected transactions, and the many specific comply or explain provisions of the HK CG Code. In general, the disciplinary sanctions able to be imposed in respect of listing rule breaches are limited and generally regarded as lacking teeth. However, this is also potentially subject to similar caveats as already discussed in the context of the United States since mis¬disclosure is nevertheless subject to overarching information laws applying to the market. However, these laws in practice maybe unlikely to be relevant as CG disclosures are in normal circumstances unlikely to relate to inside information for the purposes of Part XIVA of the SFO, and are similarly unlikely to be information that may affect market activity for the purposes of the market misconduct provisions of sections 277 and 298 of the SFO. Accordingly, a false or misleading CG disclosure is, based on the foregoing, merely a matter subject to the relatively weak disciplinary mechanisms of the SEHK, which do not include any power to fine. One caveat to the foregoing is the SFC's powers under the SMLR to suspend trading in an issuer's securities or cancel an issuer's listing where, inter alia, information is false or misleading.

On the other hand, there is some case law that supports the position that breaches of listing rule requirements pertaining to required disclosures can give rise to an actionable claim under section 214 of the SFO (see Section 3.6.2 «Listing rules»). However, such claims only seem capable of arising in respect of more egregious cases amounting to misfeasance etc., and can only be brought by the SFC. Logically, one might extend this concept to suggest a right of shareholders to bring a derivative action on the basis that the directors owe a fiduciary duty to the company as regards sufficient compliance with the listing rules (as has been argued in the United States - see Appendix III.6.3), however, no such action has to date emerged.


Hong Kong does not have any equivalent of Regulation S-K per se. However, it does have a more general provision in section 384(3) of the SFO that submitting a record or document containing false or misleading information to the SEHK or the SFC (a «specified recipient») is an offence that potentially attracts criminal liability including fines. The application of that section is subject to two important components set out in section 384(4) of the SFO. First, the person providing the document must have received prior written warning from the specified recipient that the provision of the document would constitute an offence if it contains false or misleading information. Second, either the specified recipient must reasonably rely on the document or the provider must intend the recipient to rely on it. By way of example, this provision has been used by the SEHK in relation to various forms required to be submitted in connection with new listing applications. It has not been used in relation to the annual disclosures made by an issuer as required by the HK CG Code.

Based on the general premise that weaker enforcement mechanisms are less capable of bringing about desired behaviours, there is an argument that the quality of CG disclosures could be enhanced if a mechanism of enforcement were put in place that was more effective than the existing sanctions available to the SEHK or the SFC. Requiring CG disclosures to be submitted on a section 384(3) based form would bring the disclosures within the SFC's powers to bring an enforcement action against individuals. If undertaken before a magistrate summarily the SFC can seek a fine of up to level 5 (currently being HK$50,000). It is suggested that this provides a relatively quick means of exerting influence on the undertaking of directors without imposing excessive penalties and as such represents a step toward a more effective mechanism of enforcement. More egregious breaches can be pursued on indictment, which carries fines of up to HK$500,000. In both cases, the fines would give rise to disclosure requirements thus interacting with reputational liability, particularly if the offence is repeated. The presence of these risks would be another factor bringing focus to quality and completeness of the disclosure. While shareholders do not gain any direct rights under this approach, they may benefit from such an increased focus.

Bringing CG-related disclosures within the scope of section 384(3) is a convenient mechanism of underwriting the importance of the quality of disclosures because it would give CG disclosures a measure of statutory support, and because it could be implemented by a relatively simple amendment to the listing rules that would not involve any changes to the law. The relevant disclosures covered would be those made pursuant to MBLR Chapters 4 (periodic financial reporting), 14 (notifiable transactions) and 14A (connected transactions) and Appendix 14, each of which have been previously identified by the SEHK as important parts of the listing rules intended to improve the CG of listed issuers.

The implementation can be effected through the use of a declarative form. The two requisite components of section 384(4) are easily satisfied by the incorporation of an appropriate notice into the form, as has been done with other forms, and it would be reasonable for the SEHK to rely on it in furtherance of its regulatory objectives as established by statute.

The form would need to be submitted by or on behalf of the directors and address compliance with the relevant obligations. An advantage of using a form-based approach is that, as has been done with other forms, the declaration could include a statement that the directors have undertaken all reasonable enquiries etc.

The foregoing leads to Recommendation A4.5.1 «Legal status of CG-related disclosures».

One the recognized problems of compliance with CG requirements, including with regard to disclosures, is that compliance can be undertaken on a box-tick basis, meaning that there is an apparent satisfaction of the relevant requirement without the objective of that requirement being met. It is suggested that box-tick approaches to compliance are to a significant extent supported by an ineffective enforcement regime. This is complicated by the tendency of the HKEX (and other standard-setting bodies such as the UK's FRC) - currently the primary and largely sole enforcer of the listing rules - to count box-tick compliance as evidence of a functioning CG system. (For a discussion of the methodological problems of measuring good CG, see Section 3.1.4.) This may bring a less acute enforcement eye to the adequacy of a disclosure and whether it is in fact misleading. For example, disclosures made pursuant to Chapters 4, 14 or 14A may constitute incomplete disclosure of relevant facts. While mis-disclosure under the comply or explain provisions of the CG Code may require a more subtle examination, box-tick explanations of, for example, how an issuer has applied code principles or met code provisions may nevertheless be prone to being incomplete explanations of the facts. By bringing the disclosures under the SFO, the above recommendation brings them under the SFC's jurisdiction, which may bring greater responsibility to making the disclosures, particularly if enforcement is more actively applied.


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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