The Stock Exchange of Hong Kong Limited censured Golden Meditech Holdings Limited (the “Company”) (stock code: 801) and a number of its current and former directors for committing numerous serious breaches of the Listing Rules in relation to the disclosure and shareholders’ approval requirements as well as the directors’ ability and the failure to use their best endeavours to procure the Company’s compliance with the Listing Rules.
The Company had failed to comply with the Listing Rules in relation to a series of transactions/events involving the Company’s interest in Funtalk China Holdings Limited (“Funtalk”), which was listed on NASDAQ, with the Company holding a 28.9% interest in it in December 2009.
In March 2011, Fortress Group Limited (“Fortress”) was set up for the privatisation of Funtalk, whereby the Company disposed of its shareholding in Funtalk in exchange for an interest in Fortress and became the holding company of Funtalk and held 100% equity interest. The Company did not make announcements and did not obtain shareholders’ approval (“Issue 1”). In August of the same year, the shareholders of Fortress entered into a shareholders’ agreement (the “Shareholders’ Agreement”) in relation to giving the majority shareholder of Fortress (“PAG”) a right to require Fortress to repurchase PAG’s interest in the outstanding senior obligations of Fortress if Fortress was not sold or listed before August 2014 (the “Put Option”). The Company, again, did not make announcements and did not obtain shareholders’ approval (“Issue 2”).
On 25 March 2014, the Company announced that it had entered into an agreement to dispose of its interest in Fortress. Shareholders’ approval was obtained for it was a very substantial disposal. No reference to the Shareholders’ Agreement or the Put Option had been made in the circular published on 12 May 2014 (the “VSD Circular”) (“Issue 3”).
In July 2014, Mr Kam Yuen, the current executive director (“ED”), chairman and compliance officer of the Company agreed on behalf of the Company to dispose of Funtalk directly, rather than dispose of its interests in Fortress as previously announced and approved by the Company’s shareholders. The Company did not make announcement of the termination of the disposal of Fortress (“Issue 4”).
On 28 November 2014, the Company published its interim report for the period ended 30 September 2014 (the “Interim Report”), providing that the disposal of Fortress had been completed (“Issue 5”).
As Funtalk instead of Fortress was sold, it meant that PAG could still exercise the Put Option, which PAG did on 28 June 2015. On 29 June 2015, the Company announced, contrary to the Interim Report, that the sale of Fortress did not go ahead, and that PAG had exercised the Put Option, as a result of which the Company made an impairment provision in the amount of HK$759,934,000 for the year ended 31 March 2015 (“Issue 6”).
Findings by the Listing Committee
The Company’s breaches
The Listing Committee found that the Company had breached the following:
Issue 1: Rules 14.34, 14.48, 14.49 and 14.51 for its failure to comply with the announcement, circular and shareholders’ approval requirements in respect of the privatisation of Funtalk;
Issue 2: Rules 14.34, 14.38A, 14.40, 14.41 and 14.74 by failing to comply with the announcement, circular and shareholders’ approval requirements in respect of the Put Option;
Issues 3 and 5: Rule 2.13 in relation to the disclosure in the VSD Circular and the Interim Report; and
Issue 4: Rule 14.36 for its failure to announce the termination of the disposal of Fortress.
Mr Kam Yuen’s and Mr Kong Kam Yu’s breaches
The Listing Committee found that Mr Kam Yuen and Mr Kong Kam Yu, both the current EDs of the Company, breached (i) Rule 3.08(f), (ii) their Undertakings for failing to comply with the Listing Rules to the best of their ability; and (iii) their Undertakings for failing to use their best endeavours to procure the Company’s compliance with the Listing Rules.
For instance, they failed to decide and identify whether Issue 1 was a notifiable transaction and relied on an incorrect size test in respect of Issue 2. They also took the view that the Shareholders’ Agreement and the Put Option were not required to be disclosed in the VSD Circular, as they believed the likelihood of PAG exercising the Put Option to be extremely low, which demonstrated that they did not consider or recognise the implications of the Put Option and did not apply such degree of skill, care and diligence as may be reasonably expected of persons of their knowledge and experience holding their office.
Additionally, Mr Kam Yuen, as the Company’s sole representative on the board of Fortress, agreed to the disposal of Funtalk by Fortress without consulting the Board, obtaining professional advice, conducting any due diligence or even reviewing the implications of the change in the nature of the disposal. They also demonstrated a severe lack of knowledge of the Company’s Listing Rules compliance by treating the disposal of Funtalk the same as the Company disposing of its interest in Fortress.
Breaches by former EDs and current independent non-executive directors (the “INEDs”)
The Listing Committee found that the former EDs and the current INEDs breached (i) Rule 3.08(f), (ii) their Undertakings for failing to comply with the Listing Rules to the best of their ability and (iii) their Undertakings for failing to use their best endeavours to procure the Company’s compliance with the Listing Rules.
As a matter of fact, they did not raise any enquiries about Issues 1 or 3 and failed to notice a large discrepancy in the size test used in respect of Issue 2. Further, they did not consider or suggest it was necessary for the Company to seek advice from professional advisers to ensure compliance.
Review by the Review Committee and the Listing Appeals Committee
The former EDs and the current INEDs applied for a review to the Listing Appeals Committee and the Review Committee on of the decisions and sanctions imposed. Nevertheless, findings of breach were upheld by both Committees.
Sanctions imposed by the Listing Committee and as varied by the Review Committee
The Stock Exchange censured the Company for its breach of Rules 2.13, 14.34, 14.36, 14.38A, 14.40, 14.41, 14.48, 14.49, 14.51 and 14.74 and requested the Company to appoint, within two months from the publication of the news release, an independent compliance adviser satisfactory to the Listing Department on an ongoing basis for consultation regarding compliance with the Listing Rules for two years.
The Stock Exchange has also requested the Company to publish an announcement to confirm that the directions regarding the appointment of an independent compliance adviser and training requirements imposed on the current director and that the Company to submit drafts of the announcements for the Listing Department’s comment and may only publish the announcements after the Listing Department has confirmed it has no further comment on them.
The Current EDs
The Stock Exchange censured the current EDs for breach of Rule 3.08(f) and their Undertakings and requested Mr Kam and Mr Kong to attend 24 hours of training on Listing Rules compliance, director’s duties, including 4 hours of training on notifiable and connected transactions and provide the Listing Department with the training provider’s written certification of full compliance within two weeks after training completion.
The current non-executive directors (the “NEDs”)
The Stock Exchange criticised the current NEDs and INEDs for breach of Rule 3.08(f) and their Undertakings and requested them to attend 12 hours of training on Listing Rules compliance (the “Training”), director’s duties, including 4 hours of training on notifiable and connected transactions and provide the Listing Department with the Training provider’s written certification of full compliance within two weeks after Training completion.
The former ED
The Stock Exchange criticised the former ED for breach of Rule 3.08(f) and his Undertakings and as a pre-requisite of any future appointment as a director of any company listed on the Stock Exchange, the former ED, who is currently not a director of any other company listed on the Stock Exchange, to attend the Training, to be completed before the effective date of any such appointment and to provide the Listing Department with the training provider’s written certification of full compliance.
Implications and Significance
For listed issuers, any breach of the disclosure requirements under the Listing Rules is a serious matter as the requirements serve to safeguard the interests of shareholders and investors, which in turn contributes to an orderly, informed and fair market for the trading of securities listed on the Stock Exchange. Also, the board of directors of a listed company is collectively responsible for the management and operation of the company.
We shall also bear in mind that directors including INEDs and NEDs have oversight responsibilities which cannot be discharged by delegating to other members of the board or staff of a company. One of the roles of an INED is to provide checks and balance, and to bring an independent judgment to bear on the strategy, affairs and transactions of the company, especially where the powers of the board are concentrated in the hands of only one or two directors. Further, a director has the responsibility to inform the Board of the affairs of an issuer and the protection of the issuer’s investments, particularly where such information triggers Listing Rules compliance issues.
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