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, 18 мая 2019

3. Discussion and analysis of jurisdictions studied. 3.6.1 Information disclosures generally

A fundamental mechanism of the accountability of management to shareholders is the ability of shareholders to seek legal recourse where they have been given false or misleading information about a company's affairs, or have not been provided with material information in a timely manner. To the extent a CG system does not adequately provide for such recourse, then to that extent it may be deficient. The ability of a shareholder bringing a private action against a company or its management must be distinguished from the ability of a regulatory agency to bring an enforcement action - this and the following section is concerned with the former, the latter topic is discussed in Section 3.7.3 «Enforcement agencies».

In the UK, the Financial Services and Markets Act 2000 (FSMA) contains important provisions that attach civil liability to information required to be disclosed either by specific provisions in FSMA or by rules made by the FCA pursuant to FSMA. This covers disclosures in the primary market, e.g. a prospectus issued in connection with an initial public offering (IPO), as well as the secondary market.

As regards the issue of listing documents, section 90 of the FSMA provides that a person who suffers loss as a result of the omission of information required to be disclosed in a listing document by the listing rules made by the FCA under section 80(2) of the FSMA may bring a claim for compensation against «any person responsible» for the listing document.

Section 90A and Schedule 10A of the FSMA extend that liability in respect of misleading statements, dishonest omissions or dishonest delays in publishing such information - it being notable that this covers «(i) any untrue or misleading statement in that published information, or (ii) the omission from that published information of any matter required to be included in it.» This can encompass mandatory disclosure requirements set by the FCA that are concerned with CG standards. In particular, listing rule 9.8.6 R requires a statement to be made in the annual report how the issuer has applied the Main Principles in the UK CG Code, and whether the issuer has complied with all relevant provisions in that code - where it has not complied it must give reasons. While this does not mandate compliance with the UK CG Code, a failure to make proper disclosure as required by the listing rules may constitute an untrue or misleading statement or an omission of a «matter required to be included» and accordingly could give rise to a civil damages claim (as well as enforcement by the FCA). However, the foregoing does not mean that an investor can seek damages for a breach of the listing rules per se or in respect of non-compliance with the UK CG Code - there must be a problem with the issuer's compliance with its disclosure obligations under the FCA's Disclosure and Transparency Rules.

Where a listing applicant or issuer has breached a relevant provision, civil liability may arise in respect of a class of persons - all shareholders who have a damages claim in respect of the breach. While the UK does not possess class action rights, the group litigation order does facilitate collective redress, and this may be utilized in relation to shareholder suits, although to date it has not been used in this context (see Appendix II. 7.1). Where shareholders cum litigants can be bundled together by the court, this will reduce the costs of litigation, possibly significantly.

In the United States, disclosure by listed issuers is driven by section 10(b) of the 1934 Securities Exchange Act and the SEC's Rule 10b-5, Regulation FD, and the disclosures required pursuant to Regulation S-K required annually by the SEC the contents of which align with certain CG provisions of the listing requirements of the Exchanges (see the discussion in Section 3.3.1 «Legal status of CG disclosures» and Section 3.7.3 «Enforcement agencies»). While breaches of any of these Federal securities laws are enforceable by the SEC, a breach does not automatically give rise to private causes of action for a shareholder - there must be a direct right of action. However, breaches of the Federal laws often do involve either misrepresentation in financial documents or securities fraud under section 10(b) of the 1934 Act and Rule 10b-5, which does give rise to direct rights of action by investors. Class action rights are available for matters involving individual rights and most shareholder class action suits are brought in respect of either misrepresentation in financial documents or securities fraud (respectively accounting for 97% and 84% of all class action suits in 2013). Shareholders receiving inadequate disclosure may also look to applicable State law and seek fiduciary remedies, and this is discussed in Section 3.7.1 «Impact of regulatory design» and Section 3.7.6 «Role of fiduciary law».

In Singapore, there is a private right of action for any loss or damage sustained by reason of any untrue statement or misrepresentation in prospectuses. For non¬disclosure, under section 203 of the Securities and Futures Act intentional, reckless or negligent non-disclosure of information to the Exchange for forwarding to the securities market attracts both civil and criminal liability, depending on the state of mind of the disclosing entity (see Appendix V.6.5). Hence, intentional or reckless breach of section 203 or Part VII may give rise to an offence under the SFA.

In Mainland China, the accuracy of statements in a prospectus is subject to laws and administrative measures that provide the CSRC with enforcement powers (see Appendices IV.2.2 and IV.3.4). Continuing disclosure requirements, including disclosure of related party transactions, is part of the CG Code and is mandatory (see Appendix

IV. 4.5). The CSRC can enforce the Code against any breach, although in practice enforcement may sometimes be wanting. Where breaches of company or securities laws give rise to private causes of action, and where shareholders have a sufficiently similar claim, the action may with the approval of the court be conducted under a joint litigation adjudication process - however, in the case of a securities civil compensation suit, this is subject to a pre-condition that there must have been a relevant administrative sanction imposed by the CSRC or court judgment. While this is not the same as a class action right, and is more of a case management tool similar to the UK's group litigation order, the ability of shareholders with similar claims to be bundled together by the court may be highly advantageous to them qua litigants, particularly as regards sharing the costs of litigation.

Hong Kong

The position in Hong Kong is both similar and different in respect of primary and secondary market disclosures.

As regards the primary market - where listing documents are issued as a prospectus - investors have civil rights for damages under s. 40 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32) (CWUMPO), broadly similar to s. 90 of the FSMA, subject to two important differences.

First, an IPO prospectus will comprise disclosures required by both CWUMPO and the listing rules, however, the test for the purposes of civil liability in Hong Kong is whether the disclosures as made constitute an «untrue statement», referring to false or misleading statements or material omissions. Although the scope of these CWUMPO provisions have never been tested in court, it is expected that mere non-compliance with the disclosures required by CWUMPO would not, without an element of untruth and materiality, give rise to a cause of action. As the disclosures required by the listing rules are not necessary for a valid prospectus to be issued, there would appear to be no grounds for a case based solely on the mere omission of those requirements. In contrast, FSMA allows private actions to be brought where loss has been suffered as a result of the omission of any matter (1) reasonably required to be included to enable an informed investment decision to be made, or (2) required to be included by the listing rules or by the FCA. These FSMA provisions address similar concepts as does section 3 of the SMLR, although under the SMLR the power to act is only extended to the SFC and the power only encompasses matters related to the admission, suspension or cancellation of the company's listing. While the SMLR provisions establish the dual filing regime, the question that may be asked is why the situation is different in Hong Kong as compared to the UK. Part of this answer rests in the legal nature of the listing rules in the two jurisdictions - as already noted, the listing rules in the UK have statutory backing. This distinction is important, particularly as regards item (2) above, which clearly attaches potential liability to breaches of disclosure requirements imposed by the FCA including the listing rules. The topic of the SMLR is returned to in Section 3.7.3 «Enforcement agencies», which leads to a recommendation in respect of the SFC's powers under the SMLR.

Second, the scope of persons subject to civil liability in the UK encompasses any person «responsible for listing particulars». In Hong Kong, prospectus liability is more specifically limited to directors, promoters and persons who have authorized the issue of the prospectus.

The position is also quite different when considering shareholder rights in relation to disclosures made in the context of the secondary market. Shareholders who have suffered loss in consequence of market misconduct have a statutory right to claim for damages under sections 281 or 305 of the SFO - for present purposes this includes where an issuer distributes false or misleading information likely to induce transactions (sections 277 or 298 of the SFO). Where information constitutes a false or misleading public communication, shareholders may also have a claim under section 391 of the SFO.

Where no information has been provided but has been withheld, it would need to be shown that it amounts to inside information that was not disclosed in accordance with the statutory requirement to disclose it (under Part XIVA of the SFO) thus giving rise to a potential shareholder claim under section 307Z of the SFO - non-disclosure of what was required by the listing rules to be disclosed would not assist in this regard.


As regards disclosures in the primary market, all jurisdictions studied have a broadly similar approach to providing to causes of action to investors. A notable difference is that omissions of disclosures required by the listing rules can give rise to a cause of action in the UK and Singapore, whereas in Hong Kong omissions of information required by the listing rules is ostensibly irrelevant.

A shareholder wishing to bring an action under the SFO's provisions in relation to secondary market disclosures, including Parts XIII to XIVA of the SFO, would need to prove, amongst other things, that the information concerned is likely to have a material effect on trading in the issuer's shares. This may amount to a significantly more difficult task than in the UK where a breach of a disclosure requirement is concerned, or establishing a claim under Rule 10b-5. It also implicitly positions secondary market information that falls short of that standard as relatively unimportant to ongoing investment decisions, at least insofar as statutory legal remedies for damages are concerned. This reflects the basis of the Hong Kong provisions as primarily serving the needs of market integrity as opposed to the private rights of shareholders in a public company.

In certain regards, Part XIVA of the SFO is broadly equivalent to Regulation FD in that both are significantly directed toward the reduction of the risk of insider dealing. However, a breach of Part XIVA enables affected investors to pursue a legal cause of action against the wrongdoer whereas a breach of Regulation FD does not, and in this regard Hong Kong gives a wider right to shareholders, albeit subject to the caveat discussed in the preceding paragraph above.

Unlike the UK, breaches of disclosure requirements under the listing rules in Hong Kong are incapable of giving shareholders the right to a damages claim, unless some other breach of law is involved. This difference arises out of the different legal standing of the listing rules. (The accountability of directors and issuers to shareholders in relation to listing rule disclosures is discussed next, in Section 3.6.2 «Listing rules».)

While Hong Kong law does provide shareholders with actionable rights under CWUMPO and the SFO, as described above, there remain no instances of civil litigation being brought under them. This is in part due to the difficulties of bringing litigation, including costs and the ability to obtain evidence. Moreover, since these provisions have not been tested in court in a civil claim, there is no case law available to guide a future potential claimant on the application of these provisions. Taken together, rights of shareholders may work well on paper but in practice they are in some ways rendered a lame duck.

The absence of shareholder law suits, despite the availability of rights and numerous potentially actionable cases, may be attributable to the fact that Hong Kong does not possess any effective mechanism of collective redress. This stands in contrast to the availability of class action rights in the United States (see Appendix III.7.1), and case management tools in the UK (group litigation - see Appendix II.7.1) and Mainland China (joint litigation - see above), all of which work to alleviate one of the major hurdles of bringing litigation, namely, costs. The issue of costs being economically viable is an important aspect of providing meaningful access to justice, as was recognized in the considerations leading to the introduction of the group litigation order in the UK. In the absence of collective redress mechanisms, shareholders in Hong Kong instead rely on the SFC as their de facto proxy to take actions that can bring about class-like remedies. However, as discussed in Section 3.7.3 «Enforcement agencies» and Section 3.7.6 «Role of fiduciary law», the SFC is not an unconflicted agency insofar as it needs to take into account a range of matters before deciding whether to commence an action that may benefit shareholders.

In 2007 the OECD stated that it regards class action rights as an effective «ex-post means of redress». In May 2012 the LRC proposed the adoption of class actions for consumer cases (see Appendix I.2.1). However, there is no further action on the part of the Department of Justice (DoJ) in response to the LRC's proposal, and no adequate explanation has been offered for the delay. Recommendation 1 of the LRC's 2009 consultation paper had proposed a regime «for multi-party litigation so as to enable efficient, well-defined and workable access to justice», effectively the same premise of Lord Woolf in his Final Report. While the LRC considered the approach taken in the UK and recognized it is capable of achieving the objectives of the class action, it instead elected to recommend the adoption of a class action rather than the group/joint litigation cum case management approach as seen in the UK and Mainland China. This was a result of the LRC's concern with flexibility versus predictability of procedural outcomes. However, enacting class action rights is a significantly more complex task as compared to what would be required to allow the court to adopt new rules of procedure. In the interim, shareholders are left with no development, leaving the horse in some ways behind the cart. Facilitating any form of joint litigation does begin to address the cost issue as a fundamental hurdle to access shareholder rights. The question of the specific funding model - for example, whether contingency fees should be permitted as are allowed in class actions in the United States - is clearly important to consider in this regard but should not operate to forestall reform on the availability of collective redress. Other funding solutions may emerge, for example, if two or more larger institutional shareholders institute actions, this may serve to significantly reduce costs proportionately for smaller shareholders that tag along on the litigation. Or other developments in the law may subsequently be built on a successful implementation of joint litigation. In short, developments in the UK and Mainland China support the case for collective redress to be reconsidered.

The foregoing leads to Recommendation A4.4.2 «Collective redress».


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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