Introduction

The Stock Exchange of Hong Kong Limited (the “Stock Exchange”) published a revised Enforcement Policy Statement (the “Policy Statement”), providing the Stock Exchange’s approach to and objectives of enforcement as well as key concepts underlying its enforcement decisions. The Stock Exchange also updated its Enforcement Sanctions Statement (the “Sanctions Statement”) to reflect the recent rule changes to enhance its disciplinary powers and sanctions, which came into effect on 3 July 2021. This article will summarise the key concepts in both the Policy Statement and the Sanctions Statement.

Key enforcement priorities in the Policy Statement

As emphasised in the Policy Statement, the Stock Exchange’s objectives of enforcement are to deter future breaches and enhance corporate governance of listed issuers. In determining the appropriate regulatory response to a breach of the Rules Governing the Listing of Securities on the Stock Exchange (the “Listing Rules”), the Stock Exchange will consider a range of factors, including but not limited to those set out in the Sanctions Statement, which are discussed below.

1. Responsibility 

As the listed issuers can only operate under the control, and through the acts, of individuals, the Stock Exchange targets to ensure that those individuals who are responsible for discharging duties in connection with listing matters, and those who are capable of failures and misconducts, are held accountable. The primary responsibility sits with the directors as well as members of the senior management. In particular, the listed issuer, the director should note the following key points: 

1. 1. Directors must use their best endeavours to ensure that the listed company complies with the Listing Rules;
   2. Non-executive directors (including independent non-executive directors) shall not only  exercise independent judgement when making decisions and are expected to give the board the benefit of their skills, expertise and varied backgrounds and qualifications but also share the responsibility for ensuring rule compliance; and
   3. Delegation will often not be sufficient to discharge a person’s duties, even if those relied upon are other directors or professional advisers. Directors should seek professional advice where needed, but should apply an enquiring mind when assessing that advice. 

2.   Controls and Cultures

Listed companies are expected to implement appropriate and effective internal controls to ensure regulatory compliance. Compliance and corporate governance should be embedded in the company’s culture. Whether such controls and culture are in place can be a significant factor in the Stock Exchange’s consideration as to the appropriate enforcement to be taken. Key points for listed issuers and directors to note include:

1. 1. Risk management and internal controls should be in place to achieve rule compliance and should be regularly reviewed to ensure they remain effective;
   2. Directors should receive regular briefings and professional development covering not only the business and its operations, but also their legal and regulatory responsibilities and those under the company’s business and governance policies; and
      
   3. Companies must keep proper books and records as part of their control systems. 

3.  Cooperation

Listed companies and their directors are expected to cooperate with the Stock Exchange. This includes a requirement to provide complete, accurate and up-to-date information reasonably requested as part of an investigation into any suspected breach of the Listing Rules. Any non-cooperation, failure to respond or providing misleading information will be viewed as serious misconduct and will result in the most severe sanctions being imposed.

Sanctions Statement

The Sanctions Statement sets out the general principles and factors to be generally taken into account by the Disciplinary Committee or the Listing Review Committee (collectively, the “Committee”) when considering and determining sanctions for breaches of the Listing Rules.

The general principles adopted are set out as follows:

1.    Disciplinary sanctions should be imposed to protect the public and the integrity of the market and facilities the Stock Exchange operates, deter further breaches of the Listing Rules by the respondent(s), improve corporate governance, remedy conduct in breach of the Listing Rules, and deter all other parties subject to the disciplinary jurisdiction of the Stock Exchange from engaging in the same or any similar misconduct;

2.    The Committee will take into account the circumstances of the breach(es), the seriousness of the misconduct, and any relevant mitigating or aggravating factors;

3.    Disciplinary sanctions should be more severe for repeated misconduct, or where the relevant misconduct evidences an intentional, wilful or reckless disregard for the Listing Rules; and

4.    The Committee will determine the disciplinary sanction on the basis of the evidence and submissions before it, and exercise its powers fairly, impartially and with due regard for the principles of natural justice. 

In determining an appropriate sanction, the Committee may consider a range of principal factors in mitigation or aggravation, including (a) the compliance history of the respondents, (b) the disciplinary sanctions previously applied in relation to similar types of breach or comparable circumstances, (c) the level of assistance and cooperation provided by the respondents, (d) whether the respondents made an early decision not to contest the case brought against them, (e) whether the misconduct was unintentional, negligent, wilful, reckless, intentional, deceptive, manipulative and/or fraudulent, (f) whether the misconduct was an isolated instance and self-reported in a timely and comprehensive manner, (g) the size of any commercial advantage or financial benefit obtained as a result of the misconduct, (h) any loss or injury to other parties caused, and (i) any remedial steps taken. 

Concluding remarks

With the recent rule changes to enhance the Stock Exchange’s disciplinary powers and sanctions, which came into effect on 3 July 2021, and the issue of the Policy Statement and the Sanctions Statement, the Stock Exchange’s role as the front-line regulator enforcing the Listing Rules is strengthened. Listed issuers and their directors should expect a more active and vigorous approach adopted by the Stock Exchange in ensuring compliance of the Listing Rules by listed issuers.