|Amendments to the Corporate Governance Code and associated Listing Rules Raise Compliance Concerns|
As a step to promote a higher level of corporate governance among listed companies in Hong Kong, The Stock Exchange of Hong Kong Limited (“Exchange”) announced a series of amendments of the Corporate Governance Code (“Code”), the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (“MB Listing Rules”) and the Rules Governing the Listing of Securities on the Growth Enterprise Market (collectively, the “Listing Rules”) after publishing its "Consultation Conclusions on Review of the Corporate Governance Code and Associated Listing Rules (“Consultation Conclusions”) in October 2011.
The Code sets out (a) principles of good corporate governance; (b) code provisions (“CPs”); and (c) recommended best practices (“RBPs”). The Listing Rules set out a mandatory standard of corporate governance for all listed companies and breaches may lead to sanctions. Listed companies have the flexibility to comply with CPs or, if they do not, explain the reasons for this decision in their corporate governance reports. This is known as the “comply or explain” principle. If they do not comply with CPs, it is not a breach of the Listing Rules and there is no sanction. For RBPs, listed companies are encouraged to adopt. If they do not adopt, they are not required to explain.
Amendments set out in the Consultation Conclusions will take effect as follows: -
l most Listing Rules amendments will be effective on 1 January 2012;
l Code and certain Listing Rules will be effective on 1 April 2012;
l new Listing Rule requiring listed companies to appoint independent non-executive directors (“INEDs”) must be complied with by 31 December 2012;
l new Listing Rule requiring company secretary training will be staggered according to the company secretary’s date of appointment.
A summary of the Rules and Code adopted and their implementation dates can be accessed on the website of the Exchange at http://www.hkex.com.hk/eng/newsconsul/hkexnews/2011/111028news.htm.
In its first interim or half year or annual report covering a period after 1 April 2012, a listed company must state, whether it has, for that period, complied with the CPs in the revised Code as well as with the former Code. Listed companies may adopt the revised Code at an earlier date than 1 April 2012.
The major changes to the MB Listing Rules relating to the directors of listed companies are briefly summarised as follows:-
1. Directors’ duties: Rule 3.08 will be expanded to emphasise directors’ duties. The directors are expressly required to take an active role in a listed company’s affairs and obtain a general understanding of its business. Delegating their functions is permissible but does not absolve them from their responsibilities or from applying the required levels of skill, care and diligence. This amendment will become effective on 1 January 2012.
2. Disclosure of chief executive’s remuneration: Paragraph 24.5 of Appendix 16will be amended to require a listed company to disclose the remuneration of a chief executive who is not a director in its annual reports and in any announcement of his appointment. This rule must be complied with by 1 January 2012.
3. Notifying directorship change and disclosure of directors’ information (including the chief executive): Rule 13.51 has been amended to require the disclosure of, among others, information on the appointment, resignation, re-designation, retirement or removal of a chief executive as well as that of a director or supervisor. This amendment will come into effect on 1 January 2012.
4. Removal of 5% threshold for voting on a resolution in which a director has an interest: To be in line with good corporate governance, amendment has been made to Rule 13.44 to remove the 5% exemption for voting by a director on a board resolution in which he has an interest. As a result, for a resolution on any proposal concerning any other company in which a director is interested, he cannot vote on such resolution even if he has an interest in less than 5% of that company’s issued shares or of the voting rights. This Rule must be complied with by 1 January 2012.
5. Next day disclosure for a director of a listed company’s subsidiaries exercising an option for shares in the listed company: Rule 13.25A no longer requires a listed company to publish a Next Day Disclosure Form upon exercise of an option for shares in the listed company by a director of its subsidiaries. Such amendment is a response to the reported difficulties of large companies in monitoring their overseas subsidiaries to achieve the timeline.
As a result of the amendments, an announcement will be required only if the exercise of an option by a director of a listed company’s subsidiary results in a change of 5% or more in the share capital (either individually or in aggregates) since the last monthly return. If such change is less than 5%, only disclosure in the monthly return is required. This amendment will come into effect on 1 January 2012.
6. Remuneration committee: Rules 3.25 to 3.27 will be introduced to require, inter alia, a listed company to establish a remuneration committee with a majority of INED members and such committee must be chaired by an INED. Upon failure to comply with these Rules, the listed company must immediately announce its reasons for non-compliance with any relevant details. There is a three-month grace period for a listed company to rectify its non-compliance. These Rules must be complied with by 1 April 2012.
7. INEDs to form one-third of board: A new Rule 3.10A will be added requiring at least one-third of the board should be INEDs. This must be complied with by 31 December 2012. In addition, there is a three-month grace period for a listed company to appoint a sufficient number of INEDs to comply after failing to meet the requirement.
The Exchange has been approaching a full-blown regulatory framework on corporate governance since it first issued its Code of Best Practice in 1993. It is observed that increasing formality of regulations on corporate governance will be the trend, while the regulations will be implemented in an incremental manner with flexibility in a combination of compulsory rules, Code Provisions on a “comply or explain” basis, and suggestive recommendations for best practice.
Looking forward, corporate governance will inevitably become a particular listing issue. Issuers, investors, managers and related parties are encouraged to seek professional advice timely to suit their business development.We would be happy to provide further updates on these developing issues. Please contact us for further information.
The law and procedure on this subject are very specialized and complicated. This article is just a very general outline for reference and cannot be relied upon as legal advice in any individual case. If any advice or assistance is needed, please contact our solicitors.
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