As already noted, the listing rules in the UK has since 2002 been a matter to be issued by a statutory regulator that has statutory powers to enforce the rules. Although shareholders cannot enforce the listing rules directly, they may bring an action for damages against the issuer where a breach of the listing rules has involved a breach of an issuer's disclosure obligations under the DTR.
The position is broadly the same in Singapore. Enforceability of the listing rules concerning continuing disclosure obligations under section 203 of the SFA is a major difference from the position in Hong Kong - reckless or negligent non-disclosure of information to the Exchange for forwarding to the securities market does attract civil (and potential criminal) liability (See Appendix V.6.4). Moreover, section 25 of the SFA provides that a person aggrieved by a failure to observe the listing rules may apply to the High Court for an order to direct compliance (see Appendix 4.1).
In the United States the listing rules of the Exchanges operate on a contractual basis as between the issuer and the Exchange. The rights of shareholders in relation to disclosures made by issuers are established by Federal laws, as discussed in Section 3.6.1 «Information disclosures generally». Of interest are discussions in the United States courts concerning whether shareholders possess standing to enforce Exchange listing rules against issuers in which they have invested. Several cases have noted that the 1934 Act does not preclude the private enforcement of Exchange rules in court, and that, while a legislative intent to permit a Federal claim for violation of Exchange rules regarding disclosures cannot be inferred, civil liability for a breach of such rules is potentially justified. It has been noted by the Court that certain requirements of the Exchanges serve an important function of protecting investors. The Court in Norlin Corp v Rooney, Pace, Inc. recognized that a derivative action seeking an injunction could be brought where the alleged damage to be avoided was a delisting by the NYSE. Academic literature also supports the possibility that shareholders could be regarded as third-party beneficiaries to the listing contract between the issuer and the Exchange. These cases and lines of thinking are important for CG purposes as they may provide an important avenue for shareholders to redress corporate wrongdoing. This is capable of extending not only to mis-disclosure issues but also to breaches of listing requirements that mandate shareholder involvement (as was in issue in the Norlin case), however, there is no definitive case that establishes this with certainty.
Hong Kong
As in the United States, the listing rules in Hong Kong operate on a contractual basis as between the issuer and the SEHK. While they are issued by the SEHK pursuant to powers given to it by the SFO, and are overseen and approved by the SFC, the rules do not have statutory force and do not have statutory backing. Breaches of the Hong Kong listing rules are subject only to the disciplinary sanctions available to the SEHK, as set out in MBLR 2A.09, and the limited «reserve powers» of the SFC under the SMLR. However, enforcement action taken by the SEHK or the SFC does not provide any remedies to investors. By way of illustration, over the period 1 January 2016 to end 31 October 20176 48 directors of Main Board issuers were subject to censure or criticism for breaching their Director's Undertakings to the SEHK. Of these, only 6 directors received a higher sanction from the SEHK, which stated that the directors remaining in their post would be prejudicial to the interests of investors - however, in each case the relevant individuals had already ceased to act as directors by the time such announcement was made. Some of the other 42 directors were required to undertake compulsory training. Granted that 48 individuals represents a small portion of the total number of directors of listed issuers, but what is particularly worth noting in these cases is that most of these breaches involved disclosure breaches, and some involved breaches of the notifiable and connected transaction provisions of the listing rules - for example, failing to obtain shareholder approval when required or provide the required disclosures. In the period 1 January 2015 to 31 October 2017, 14 companies had breached one or more of these requirements. These provisions represent important aspects of the SEHK's mandatory listing rules that seek to improve the CG standards of listed issuers and protect the interest of shareholders as a whole. Given that such breaches are regarded by the SEHK as «serious» and represent directors falling short of the degree of skill, care and diligence required and expected of directors, the sanctions seems weak. This goes to the effectiveness of the CG standards enforcement system, a topic that is returned to in Section 3.7.3 «Enforcement agencies».
Unless a breach of the listing rules gives rise to a statutory basis for a claim (see Section 3.6.1. «Information disclosures generally»), a breach does not give rise to any civil cause of action, subject to two caveats, neither of which is well bedded into Hong Kong law.
First, two cases of interest to the question of the listing rules and the rights of shareholders: SFC v. Wong Shu Wing and Another and SFC V. Kenneth Cheung Chi Shing And Others (the Styland (2012) case), both discussed in Appendix I.7.1. In Wong Shu Wing it was held that information required by the listing rules to be given to shareholders is, for the purposes of section 214(1)(c) of the SFO, information a shareholder might reasonably expect (which is not dissimilar to certain concerns of FSMA). In that case, the failure to provide such information was part of the issuer's unfair prejudice toward shareholders. A similar point concerning section 214(1)(c) was made in Styland (2012) in relation to frequent breaches of the listing rule obligations regarding disclosure and shareholder approval. The former case was under a Carecraft procedure and the latter point was made obiter dicta, which weakens the strength of these precedents.
These cases do indicate the direction of the court's attitude to egregious breaches of the listing rules, i.e. that breaches are capable of being relevant to investor remedies even in the absence of any effect on trading in the issuer's shares. However, an investor cannot bring an action under section 214 - only the SFC can. This means that the opportunity for an investor remedy being obtained via this route is contingent on the SFC deciding to bring an action, the SFC having other matters to consider that are not always aligned with the interests of shareholders. This in practice relegates the question of private rights in public companies to the collective interests of the public market as a whole.
Second, it is arguable that breaches of the listing rules might be actionable by the SFC under section 213(1)(a)(i)(B) of the SFO on the basis that the listing rules are «requirements given or made pursuant to» section 23 of the SFO. In the UK, section 382 of the FSMA allows the FCA to apply to the court for various orders if a «relevant requirement» is contravened, and Teare J held in Hall v Cable & Wireless plc that «relevant requirement» includes listing rules. However, this has not been tested in court in Hong Kong and in the UK such rules have a different standing in law. The conservative and widely held view is that section 213 is not intended to work in this manner. In any event, for the purposes of this study, while section 213 can provide remedies to shareholders, only the SFC may bring an action under it.
Although in Hong Kong shareholders can bring common law or statutory derivative action (and multiple derivative action) against defaulting directors, the usual problems of cost and free riding apply. Furthermore, it is not certain whether breach of listing rules would be actionable under a derivative suit.
Discussion
One of the main problems with the Hong Kong listing rules vis-a-vis accountability to shareholders is that they do not give shareholders any means of enforcing the listing rules against a company in which they invest or its directors. Breaches that do not give rise to statutory claims can only be dealt with by the regulators, but their enforcement is relatively weak and does not provide remedies to investors. To the extent one regards the listing rules as important in establishing minimum acceptable CG standards, this represents a serious deficiency in shareholder protection.
The discussion in Section 3.3.1 «Legal status of CG disclosures» and Section 3.3.2 «Disclosure of listing rule compliance» led to two recommendations that directors should be subject to disclosure obligations in respect of compliance with the listing rules as a means of providing shareholders with information as to their standing in this regard - the point being made that shareholders have a legitimate expectation that an issuer and its directors should comply with the listing rules. Under those recommendations (A4.5.1 «Legal status of CG-related disclosures» and C4.5.2 «Status of listing rule compliance and related disclosures (continuing)»), such disclosures would be brought within the scope of section 384(3) of the SFO - however, for the purposes of the present section it should be noted that shareholders do not have any right to enforce Section 384, which means that shareholders would need to establish a claim on some other basis, as discussed in Section 3.6.1 «Information disclosures generally». For the reasons explained in that section, it would not be a simple task for a shareholder to show that mis-disclosure of an issuer's compliance with the listing rules gave rise to an actionable claim.
In summary, shareholders in Hong Kong appear to have no clear basis on which they can bring directors to account where they or the issuer have breached the listing rules and the disclosure obligations imposed on them. Developments in the UK and Singapore have resolved this gap by giving shareholders a right to enforce the listing rules directly. Because that was done by giving statutory backing to the listing rules, there have been some calls for Hong Kong to do likewise. Doing so would involve a complex change to Hong Kong's regulatory architecture, it being noted that previous attempts to implement such a change have been highly controversial and have failed. (The topic of a revised regulatory architecture is also discussed in relation to the SFC's power to enforce the listing rules in Section 3.7.3 «Enforcement agencies», which does make recommendations on this issue.)
In the context of the present discussion, the changes in the UK and Singapore can also be understood as merely a means by which the objective of giving shareholders rights has been achieved. However, it is possible to ameliorate these deficiencies in Hong Kong and improve accountability to shareholders at different levels of the Hong Kong system.
A different route for giving locus standi to shareholders to bring an action for breaches of the listing rules would be through the contractual basis of the relationship between the SEHK and the issuer. Namely, to establish shareholders of an issuer as third party beneficiaries of that contract via the Contracts (Rights of Third parties) Ordinance with a right to enforce terms of the contract. Doing so would be consistent with academic literature in the United States, as discussed above. According to the Hong Kong Department of Justice, the beneficiaries of a contract under the Ordinance can be expressed as any member of a class. This could be put into effect without involving any changes to the regulatory architecture as it would only require the introduction of changes to the listing rules, which can be made by the SEHK subject to the approval of the SFC. This could be implemented with some specificity, indicating which provisions of the listing rules are intended to benefit shareholders. For example, following the approach taken in the UK, this could be limited to disclosure obligations. However, prima facie, such a benefit may only apply in respect of companies being admitted to listing after the relevant change to the listing rules, and extending the rights to shareholders of existing issuers would need to be explored further.
The foregoing leads to Recommendation S4.4.1 «Shareholders as beneficiaries of listing rules».
The above discussion and recommendation is really a part of a larger theme: creating more effective means of legal recourse over the listing rules, whether by creating powers in the hands of the SFC, or shareholders individually or collectively. The recommendations made and referred to in this section may be considered as counterpoints to the recommendations arising out of the discussion in Section 3.7.3 «Enforcement agencies», which leads to Recommendation A4.6.4 «Statutory backing of certain listing rules».