The Conclusions followed a Consultation Paper released by HKEx in December 2010, which attracted a large number of submissions/comments from industry players. The Conclusions can be found here.
HKEx will introduce amendments to the Main Board and GEM Listing Rules, and also amend the existing Corporate Governance Code.1 A complete copy of the amendments to Main Board Rules and the Code can be found here.
The table at the end of this alert summarises the major changes and their implementation dates. Most of them will be implemented by January or April 2012. Our comments on some of these changes appear below.
The current Rule 3.08 will be expanded to state that a director has a duty to take an active interest in the affairs of the Issuer, to obtain a general understanding of its business and is obliged to investigate anything untoward. The amendment to this Rule specifically notes that attendance at formal meetings alone does not satisfy directors’ duties.
Directors should not be surprised; this reflects the current expectations of courts, regulators and investors, and is part of the trend towards greater accountability. The Australian case of Centro is a further demonstration of current expectations of competence and accountability, as directors there were found to have breached their duties of care and diligence for failing to read and understand financial reports. Please see our client alerts on Centro at 1 September 2011 and 30 June 2011, as well as our client alerts on Fortescue at 8 March 2011 and James Hardie at 13 May 2011, all of which comment on recent landmark pronouncements on directors’ duties and liabilities that are likely to be referred to by Hong Kong regulators and stakeholders when determining the standards to which directors’ duties in Issuers in Hong Kong should be judged.
A related change to the Code, which will assist directors to effectively perform their duties, will oblige an Issuer to provide monthly management updates to directors. These updates may not necessarily be in the form of management accounts, but must be sufficient to give directors a balanced and understandable assessment of the Issuer’s performance, position and prospects.
As additional measures to be implemented by amendments to the Code, HKEx will now expect the board (“Board”) of directors of an Issuer to review whether directors are spending sufficient time on the Issuer’s affairs, and directors must inform the Board of any significant change to their time commitments to the Issuer. HKEx will not proceed with a proposal to oblige directors to obtain a minimum of 8 hours of training in a financial year but will instead expect the Issuer to disclose how directors complied with their training obligations.
Previously, a director with 5% or less interest in a company’s issued shares or voting rights would be allowed to vote on a transaction between the Issuer and that company, on the basis that 5% interest was de minimis. This threshold will now be removed.2 Going forward, directors will need to make a more considered assessment of whether a transaction is “material” (HKEx has declined to define “materiality”).
Rule 3.10A will be amended so that at least one-third of the Board need to be INEDs. This emphasises HKEx’s intention to foster strong INED representation on the Board; according to HKEx, this will not impose an undue burden on Issuers as 80% of them need only to appoint one additional INED to meet the requirement. Alternatively, an Issuer could reduce the number of directors. The Rule, unlike the other changes, will become effective 31 December 2012 to allow Issuers time to comply.
Further changes demonstrate the growing importance of INEDs in good corporate governance - according to a new Code provision upgraded from existing Recommended Best Practices, an INED who has served for more than nine years will need shareholders’ approval to continue to serve, and the Issuer will need to explain the reasons for the INED’s re-election and his independence in any circular for the INED’s re-election. Moreover, under the new Rule 3.25, the chairman of the Remuneration Committee of an Issuer will, in the future, need to be chaired by an INED.
Any appointment or removal of an auditor before the end of the auditor’s term will require shareholders’ approval at a general meeting. To increase transparency, and so shareholders understand why an auditor is being removed, an Issuer proposing to remove an auditor will need to send a circular to shareholders and the auditor will be allowed to make representations to shareholders.
For compliance with a new Code provision, an Issuer will also have to ensure that auditors attend the Annual General Meeting; this should not be an onerous obligation as most auditors do attend AGMs as a matter of practice.
Under a new Code provision, a company secretary’s selection, appointment or dismissal must be discussed at a physical Board meeting, again to ensure these events receive appropriate Board attention. There will also be new rules setting out qualifications and experience for company secretaries, as well as a new section in the Code describing their roles and responsibilities. In particular, a company secretary will need to complete 15 hours of professional training service each financial year to comply with a new Rule.
HKEx will also introduce new measures so that Board committees are more effective. For example, an Issuer must establish a remuneration committee with a majority of INEDs, the chairman must be an INED, and there must be written terms of reference for the committee. A nomination committee is also expected to be established, with a majority of INEDs and written terms of reference, although HKEx will allow the chairman to be either the Board chairman or an INED. HKEx will leave it up to Issuers whether to establish a corporate governance committee or the Board can elect to retain these responsibilities themselves.
The changes come into effect on the following dates:
Directors’ duties Main Board Rule (MB R) 3.08,GEM Rule (GEM R) 5.01
Specifying the academic or professional qualifications that the Exchange would consider acceptable.
The requirement for a company secretary to be ordinarily resident in Hong Kong will be removed.
Company secretaries will require 15 hours’ professional training in a financial year (there will be a transitional period for implementation.
A. Remuneration committeeMB Rs 3.25 to 3.27, GEM Rs 5.34 to 5.36, new CPs B.1.1 to B.1.4 and RBPs B.1.6 to B.1.8, new mandatory disclosure requirement under Paragraph L(d)(i) of the Code
B. Nomination committeeNew CPs A.5.1 to A.5.5, new mandatory disclosure requirement under Paragraph L(d)(ii) of the Code
C. Corporate governance functionsNew CPs D.3.1 and D.3.2, new mandatory disclosure requirement under Paragraph L(d)(iii) of the Code
D. Audit committee New CPs C.3.7 and C.3.3(e)(i), and RBP C.3.8. New mandatory disclosure requirement under Paragraph L(d)(iv) of the Code
Issuer to establish a remuneration committee with a majority of INED members; an INED as chairman of remuneration committee and written terms of reference for the remuneration committee.
Issuer to establish a nomination committee with a majority of INEDs; chaired by an INED or the board chairman; establish a nomination committee with written terms of reference and include, as one of the nomination committee’s duties, a review of the structure, size and composition of the board at least annually to complement the issuer’s corporate strategy.
The board to be responsible for corporate governance, and to disclose the corporate governance policy and duties performed in the Corporate Governance Report.
An audit committee’s terms of reference should include arrangements for employees to raise concerns about financial reporting improprieties.An audit committee should meet the external auditor at least twice a year.
1 April 2012
1 April 2012
 Compliance with Listing Rules is mandatory for all issuers; whereas compliance with the Code is not. However, the “comply or explain” principle continues to apply to the Code provisions, so when an issuer does not comply with the Code provisions, they must explain why with considered reasons.
 By an amendment to Rule 13.44.
 Although the wording of the Main Board Code (Appendix 14) and the GEM Code (Appendix 15) are not identical, the paragraph numberings in both Codes are the same.
This publication is only a general outline. It is not legal advice. You should seek professional advice before taking any action based on its contents.
Who does this affect?
Issuers and their professional advisers.
What do you need to do?
If you are an Issuer, you need to take note of the new Rules and implementation dates, and review the action items in this alert required to meet each deadline.
If you are a director of an Issuer, ask the Issuer what it is doing to comply with the new Rules and refresh your knowledge of directors' duties.
If you are the company secretary of an Issuer, consider if you meet the competence criteria.