THE STOCK EXCHANGE OF HONG KONG LIMITED
(A wholly-owned subsidiary of Hong Kong Exchanges and Clearing Limited)
Stock Exchange Publishes Consultation Conclusions on Proposed Amendments to the Listing Rules Relating to Corporate Governance Issues
The Stock Exchange of Hong Kong Limited (the Exchange), a wholly-owned subsidiary of Hong Kong Exchanges and Clearing Limited (HKEx), published today (Friday) Consultation Conclusions on Proposed Amendments to the Listing Rules Relating to Corporate Governance Issues.
The consultation was part of HKEx's ongoing efforts to strengthen the corporate governance practices of issuers in Hong Kong and ensuring Hong Kong's standards are in line with the best current international practices, in light of its particular circumstances. In addition to the Listing Rules, company and securities legislation has a significant role to play in the regulatory framework for corporate governance. The Exchange's efforts have been complemented by moves to strengthen the statutory obligations on listed companies through the introduction of revised standards in the Securities and Futures Ordinance, in particular the enhanced disclosure of interests in securities and the requirement for dual filing. The Exchange's efforts have also been complemented by proposals from the Standing Committee on Company Law Reform, including proposals for a statutory requirement for connected transactions to be approved by disinterested shareholders, a derivative right of action and the strengthening of the unfair prejudice remedy.
The Exchange recognises there have been global developments in corporate governance since the consultation began in January 2002 and the new policies arising from the consultation conclusions are a partial response to the prevailing issues. It also recognises there is more work to be done - by the Exchange and others - as part of the efforts to bolster corporate governance standards in Hong Kong.
There were 167 responses to the consultation, including submissions from issuers, market practitioners and a variety of organisations. One of responses represents near identical responses from 337 individuals who submitted their views to the Exchange indirectly through a website operated by a financial analyst. When finalising its position on the consultation proposals, the Exchange has had regard to a number of factors including the level of sentiment expressed for individual proposals, the substance of arguments put forward in the submissions and the standing of the respondents, etc. Respondents generally supported most of the proposals and they offered many constructive comments.
The vast majority of the proposals will either be adopted or adopted with modifications. The Exchange is now drafting revised Main Board and GEM Rules based on its consultation conclusions. The revised Rules will be subject to the approval of the Exchange's board of directors and the Securities and Futures Commission. To ensure effective implementation, the Exchange intends to implement changes to the Rules by the end of the first half of this year, and issuers will be given a sufficient transition period to comply with the new requirements, where necessary.
The following are the conclusions on some of the key areas covered in the consultation. A discussion of all the issues covered in the consultation, statistical analysis of the responses and a profile of the respondents are available on HKEx's website*.
Voting by poll
The Exchange will require voting by poll for connected transactions and all transactions that require controlling shareholders to abstain from voting, given the broad support of various professional and trade groups. The Exchange will also extend the requirement of voting by poll to transactions requiring any interested shareholders to abstain from voting. For the protection of minority shareholders' rights, voting by poll should be required for matters involving conflicts of interest, in which case, interested shareholders should be required to abstain. Issuers will be required to publish the results of the poll on the business day following the meeting. The existing Rules already contain the obligations of the chairman of the meeting to demand a poll. The Exchange will reiterate the respective obligations in the Code of Best Practice.
To further protect minority shareholders, issuers will be required to disclose the procedures for demanding a poll in their circulars to shareholders when voting by poll is not mandatory for approving the transactions outlined in the circular. In addition, the Exchange will include in the revised Code of Best Practice that the chairman of a general meeting should announce the procedures for demanding a poll at the general meeting approving the transactions.
Placing of shares using the general mandate
The Exchange will retain the existing 20 per cent limit on the issue of securities under the general mandate and will not impose any restriction on the number of refreshments of the general mandate, in light of the diverse views of respondents.
To protect minority shareholders' interests and address respondents' concerns about the placing of shares using the general mandate, the Exchange will amend the Main Board Rules to require independent shareholders' approval for any refreshments of the general mandate after the annual general meeting (AGM).
However, all issuers will be required to establish an independent board committee and appoint independent financial advisers to provide an opinion on the reasonableness of the refreshments of the general mandates subject to independent shareholders' approval. All issuers will also be required to disclose information on their past general mandates, including the amount raised and how it was used, in their announcements and/or circulars to shareholders.
Since most GEM issuers are emerging companies that rely on external funds to develop their businesses, the Exchange will amend the GEM Rules to require independent shareholders' approval for the second and subsequent refreshments of the general mandate after the AGM.
To further protect minority shareholders' interests and address respondents' concerns, the Exchange will limit the placing of shares under a general mandate at a substantial discount to the market price. Issuers will only be able to issue shares at a discount of 20 per cent or more if they can satisfy the Exchange that they are in severe financial difficulty. Issuers will be required to issue an announcement on any placing of shares, once the shares are placed, if the placing price is at a discount of 20 per cent or more to the market price. The announcement shall disclose, among other things, a generic description of the 10 largest placees who in aggregate subscribe to 50 per cent or more of the total number of shares placed, and the number of shares subscribed by each of the placees.
Introduction of "total assets test"
For the purpose of classifying transactions under the Rules, the Exchange will retain the "net assets test" as the norm "assets test". However, issuers will be allowed to elect to use total assets as the basis for their "assets test" and later to revert to the norm "net assets test", subject to proper disclosure of their decisions to the Exchange and the market. They must have valid reasons for their election to use the "total assets test" and reverting to the norm "net assets test".
Issuers that have elected to use total assets for their "assets test" calculation shall use the same asset basis for their "consideration test", de minimis thresholds for connected transactions and other provisions of the Rules that have reference to "net tangible assets" or "net assets".
The following tables summarise the thresholds we will adopt for classifying notifiable transactions using "net assets test", "total assets test" and "consideration test", and the de minimis thresholds for connected transactions.
Notifiable transactions (for both Main Board and GEM Rules)
Minimum number of independent non-executive directors
The Exchange will amend the Main Board and GEM Rules to require issuers to appoint at least three independent non-executive directors (INEDs), as a move toward its long-term aim to increase the number of INEDs on the board. In addition, the Exchange will recommend as a good practice in the revised Code of Best Practice that INEDs comprise at least one-third of the board, with the one-third rounded down when it is not a whole number.
There will be a one-year transitional period for issuers to comply with the new INED requirement, and the requirement will be reviewed two or three years after implementation.
Issuers will be required to inform the Exchange and publish an announcement immediately if the number of its INEDs falls below the minimum requirement. Issuers will be required to appoint a sufficient number of INEDs to meet the minimum requirement under the Rules within three months after the number of INEDs has fallen below the minimum number required.
The existing Main Board and GEM Rules set out the basic principles for determining independence of INEDs. The Exchange will include more guidance to assist issuers in assessing independence of INEDs.
To ensure that INEDs are able to properly discharge their responsibility to provide an objective view on the assessment of issuers' financial statements and participate in the audit committee, the Exchange will amend the Rules to require issuers to appoint at least one INED who has appropriate professional qualifications or experience in financial matters.
Directors' contracts and remuneration
The Exchange will amend the Rules to require shareholders' approval for a service contract that is to be granted to a director of the issuer or its subsidiaries for a duration exceeding three years. A service contract that requires the issuer to give a period of notice of more than one year or to pay compensation of more than a year's remuneration (other than solely on account of an early termination by the issuer of a fixed term contract) will also be subject to shareholders' approval. Shareholders who are the directors with an interest in the service contracts and their associates will be required to abstain from voting at the general meetings approving the respective service contracts.
The Exchange will amend the Main Board Rules to require issuers to disclose directors' remuneration on an individual basis, but they will not be required to disclose the directors' names due to respondents' concerns about directors' privacy.
The amendment will promote transparency on remuneration matters, enabling shareholders to be in a better position to assess issuers' remuneration policies.
The GEM Rules currently require issuers to disclose individual directors' remuneration on a "no name" basis and that requirement will be retained.
The Exchange will recommend in the revised Code of Best Practice that as a good board practice, issuers are encouraged to disclose directors' remuneration on an individual, named basis in their annual report.
Quarterly reporting
The existing Rules place reliance on the continuing disclosure obligations of issuers for price sensitive information in order to ensure a timely flow of information to the market. The Exchange will encourage Main Board issuers to adopt quarterly reporting as a recommended good practice in the revised Code of Best Practice, to promote transparency. Quarterly reporting will not be a requirement for Main Board issuers for the time being in light of the majority of the views received and respondents' concerns over the practical issues that may arise.
The Exchange will review on a periodic basis the flow of relevant information to the market and the role that quarterly reporting might play in that process. In particular the Exchange will consider in light of developments in other major markets whether it is appropriate to introduce quarterly reporting for Main Board companies by 2005, the target date set for implementation of quarterly reporting in Europe. The Exchange will engage the market in a continuing dialogue on this subject.
The existing quarterly reporting requirement in the GEM Rules will be retained.
Half-year and annual financial reporting
The current Main Board Rules permit a two-phased publication arrangement, under which Main Board issuers may publish a simplified half-year results announcement. Such Main Board issuers are required to subsequently submit a full version of the results announcement to the Exchange for publication on the HKEx website within 21 days of publication of the simplified results announcements, but not later than the reporting deadline of three months following the financial period. Both Main Board and GEM issuers are also allowed to adopt a similar two-phased publication arrangement for their annual results announcements.
Given the existing Rules that allow issuers to distribute a summary financial report in place of a full annual report to shareholders, the Exchange will adopt the same approach for half-year reporting. Issuers will be allowed to distribute a summary half-year report in place of a full half-year report, provided they have ascertained the wishes of individual shareholders. Since the Exchange will amend the Rules to require issuers to contain in principle the same information in their half-year/annual results announcements and their summary half-year report/summary financial report, the Exchange will abolish the existing two-phased publication arrangement for half-year results announcements of Main Board issuers and annual results announcements of Main Board and GEM issuers. An appropriate transitional period will be given to issuers to prepare themselves to comply with the new disclosure and reporting requirements.
Code of Best Practice
The Exchange will adopt a balanced and disclosure-based approach to regulate board practices of issuers. The Code of Best Practice will contain two tiers of recommendations. The first tier will contain minimum standards of board practices. The second tier will be the recommended good practices serving as guidelines for issuers' reference. Issuers will be required to include a report on corporate governance in their annual reports and disclose information relating to their corporate governance practices in the report. They will also be required to disclose any deviation from the minimum standards in their report on corporate governance.
The Exchange believes the proposed Rule changes will strengthen its existing Rules and Code of Best Practice, particularly from the perspective of protecting shareholders' rights, advancing board practices and increasing the transparency of issuers. The Exchange also believes the strengthening of the Rules is an ongoing process and will continue to review the Rules from time to time to ensure they are in line with the best current market practices and international standards. In promoting high standards of corporate governance, the Exchange can assist by setting the minimum standards of board practices in the Rules and Code of Best Practice. However, the ultimate success will only follow if there are full support and commitment from issuers and directors. The Exchange will continue to work closely with other regulators and professional bodies to raise directors' awareness of the importance of good corporate governance practices and strengthen their commitments to achieve high standards of board practices. In addition, the Exchange will continue to take into account developments in corporate governance standards and practices.
* The discussion of all the issues covered in the consultation, the statistical analysis of the responses and the profile of the respondents have been posted on the HKEx website.
Consultation Conclusions: www.hkex.com.hk/eng/newsconsul/hkexnews/2003/documents/cc-e.pdf ;
Profile of Respondents and Analysis of Responses: www.hkex.com.hk/eng/newsconsul/hkexnews/2003/documents/pr-e.pdf
The discussion of all the issues covered in the consultation is also available in print, which can be collected at 11/F, One International Finance Centre, 1 Harbour View Street, Central, Hong Kong.