Introduction

Two recent statements of disciplinary action published by The Stock Exchange of Hong Kong Limited (the “Stock Exchange”) show that the Exchange is prepared to take disciplinary action directly against company secretaries, where, in the Stock Exchange’s opinion, their action or omission caused or contributed to a listed issuer’s breach of the Listing Rules. Rather than treating the role as merely administrative, the Stock Exchange emphasised that company secretaries play an important role in supporting the board, ensuring compliance, and facilitating information flow. Where a company secretary fails to discharge those duties, and that failure causes a listed issuer’s breach of the Listing Rules by action or omission, personal liability may arise under Rule 2A.10B(3).

Venus Medtech case

Between January 2020 and June 2023, Venus Medtech (Hangzhou) Inc. (“Venus Medtech”) provided financial assistance to two executive directors in the form of loans without the authority or knowledge of the board and in breach of the reporting, announcement, circular and independent shareholders’ approval requirements under the Listing Rules.

Mr Wong, the former joint company secretary and an external service provider, admitted that he had received drafts of annual results and annual reports containing references to financial assistance provided to directors, but did not personally review those drafts, failed to identify the potential Listing Rule implications, and did not escalate the matter to its board. Instead, he delegated his company secretarial functions to a service team employed by the service provider.

The Listing Committee held that his delegation to a service team and reliance on external legal advisers and auditors did not absolve him of responsibility, because an appointment as company secretary is personal and requires adequate attention, personal judgment, and the use of existing expertise. Mr Wong failed to exercise proactive supervision over the service team and to maintain sufficient knowledge of the delegated matters. The Listing Committee therefore found him liable under Rule 2A.10B(3) for causing, by action or omission, Venus Medtech’s breaches of Chapters 13, 14 and 14A of the Listing Rules. As at the date of the publication of this newsletter, we cannot find any published disciplinary sanctions taken against the relevant directors of Venus Medtech relevant to the breach of the Listing Rules mentioned in this case.

Lisi Group case

As the company secretary and a member of senior management of Lisi Group (Holdings) Limited (“Lisi Group”) at the material time, Ms Pang attended audit committee and board meetings at which the auditor repeatedly flagged problematic fund transfers by a subsidiary of Lisi Group to a connected person of Lisi Group across three financial years. The Stock Exchange found that, despite those warnings, she did not take steps to understand the cause, nature and implications of the transfers, did not advise the board on governance matters, and did not assist the board in ensuring that board procedures and the applicable Listing Rules were followed.

The Listing Committee found that, by virtue of her conduct and knowledge, together with two other directors, Ms Pang failed to take adequate action to consider and advise the board on the fund transfers, and thereby caused, by action or omission, the company’s contravention of the Listing Rules, making her liable under Rule 2A.10B(3) of the Listing Rules. Importantly, the Stock Exchange also found that she had misunderstood her duties as company secretary as being only administrative, a position plainly rejected in the disciplinary decision.

Regulatory implications

These decisions underline that the Stock Exchange now take the view that the company secretary as part of a listed issuer’s governance and compliance infrastructure, not simply as an organiser of meetings, filings and records. The provisions of the Corporate Governance Code cited in both statements describe the company secretary as being responsible for ensuring good information flow within the board, ensuring that board policies and procedures are followed, and advising the board on governance matters.

The decisions also show that the Stock Exchange may look beyond directors when serious compliance failures occur and may pursue those in senior management or governance functions whose inaction contributed to the breach. In particular, Rule 2A.10B(3) was expressly cited as permitting sanctions against a relevant party, including a member of senior management such as a company secretary, who has caused by action or omission, or knowingly participated in, a contravention of the Listing Rules.

Commentary

For listed issuers, now these cases suggest that a company secretary is expected to engage substantively with corporate governance and compliance issues. Failing to ask follow-up questions, escalate red flags, or ensure that the board receives timely compliance advice may expose the company secretary personally to sanctions, even where auditors, compliance advisers or external legal counsel are also involved, which in turn imposes duties similar to those of a director.

More importantly, the decision of Venus Medtech indicates that an external service provider who acts as joint company secretary for providing company secretarial services to a listed company, will be personally liable to the breach of the Listing Rules or other corporate governance failures committed by the listed company, which the Stock Exchange attributed the responsibility to him. Unlike directors of a listed company, who are generally vested with the responsibility to oversee the management and operations of a company, information available to the company secretary and the level of control which may be exerted by the company secretary over the management and operation of the listed company is relatively limited. In addition, while the company secretary should use its best endeavour to ensure compliance of a listed company, the company secretary should not be expected to police a listed company in terms of its compliance and corporate governance.

To contrast, the duties owed by a company secretary should be distinguished from the fiduciary duties owed by directors to the company and shareholders as a whole where there have been well-established duties and standard of care of a director under the Companies Ordinance (Chapter 622 of the Laws of Hong Kong) and the relevant case law, while there is no analogous established standard of care imposed to company secretaries under Hong Kong law. As such, although Note 3 to Rule 2A.10 of the Listing Rules states “in exercising its powers of sanction the Exchange will recognise the differing roles and levels of responsibility of the persons against whom sanctions may lie under rule 2A.09 [of the Listing Rules]”, the above recent cases suggest that the Stock Exchange will attribute a breach of the Listing Rules to the company secretary, who may now in turn carry similar duties of a director from compliance perspectives.