香港聯合交易所有限公司
(香港交易及結算所有限公司全資附屬公司)
THE STOCK EXCHANGE OF HONG KONG LIMITED
(A wholly-owned subsidiary of Hong Kong Exchanges and Clearing Limited)

 

 

Money raised by issuers should be used for the intended purposes as disclosed to the market and its shareholders.  Pending investment in described projects, placing proceeds should be safeguarded.  Adequate safeguards should be in place to guard against the risk that the money raised is being used for other purposes.  Directors, both collectively and individually, should exercise proper oversight in this regard.


The Listing Committee of GEM of the Stock Exchange of Hong Kong Limited ("Committee") 

CENSURES: 

for failing to exercise the care, skill and diligence required of them as directors of the Company in breach of GLR5.01(6) and their obligations under the Declaration and Undertaking given to the Exchange in the form set out in Appendix 6-A of the GLR to comply with the GLR to the best of their abilities and to use their best endeavours to procure the Company’s GLR compliance (collectively, "Undertakings").  (The directors identified at (2) to (13) above are collectively referred to as the "Relevant Directors".)

The Committee further CENSURES Mr Dai and Mr Wong for their separate breach of GLR5.20 as Compliance Officers of the Company as of the dates referred to below.

On 8 May 2018, the Committee conducted a hearing into the conduct of the Company and the Relevant Directors in relation to their obligations under the GLR and the Undertakings.

On 5 September 2018, the Committee conducted a disciplinary (review) hearing on the applications by Mr Shao, Mr Wong, Mr Cao, Mr Wang, Mr H Wang, Mr Chan, Mr Lui and Mr Pang for a review of the findings of breaches and the sanctions imposed by the Committee at first instance.

On 11 June 2019, the Listing Appeals Committee conducted a disciplinary (review) hearing on the applications by Mr Shao, Mr Wang, Mr H Wang, Mr Lui and Mr Pang for a review of the findings of breaches and the sanctions imposed by the Committee.

FACTS

The Company was incorporated in the Cayman Islands and listed on 18 July 2001.  At the material time, its core business:

From March to July 2015, the Company completed three share placings raising a total of $1,549 million for which the disclosed intended use of the proceeds were primarily for its principal business activities and as general working capital.

However, it has emerged that from March to August 2015, the Company granted 19 loans (involving a total of over $1,318 million) all funded by the proceeds raised from the placings.  Such lending activity was not within its usual and ordinary course of business and the Company had not engaged in such conduct before.  Each of the loans is referred to below as Loans 1 to 19.  

All Loans 1 to 19 were granted for a term of not more than six months, bore an effective interest of 12 per cent per annum and involved individual sums ranging from $17.6 million to $101 million.  None of them were disclosed to or approved by the shareholders of the Company before they were made.

The Listing Department (“Department”) became aware of the Company’s granting of loans in late December 2015 from the post vetting of the Company’s interim report for the six months ended 31 October 2015 which disclosed loan receivables of over $1,241 million (which comprised Loans 3 to 19 and was equivalent to about 40 per cent of the Company’s total assets as of 31 October 2015).  In its ensuing communications with the Company, Loans 1 and 2 were discovered.  The Company submitted that:

The Alternative Test was only put forward to the Department on 8 January 2016 i.e. after Loans 1 to 19 were made.  The Department did not indicate to the Company at any time that it agreed with the Alternative Test.  On the contrary, it reminded the Company to seek the Exchange's prior consent under GLR19.20 before adopting any alternative test.

Loans 1 to 19 were approved by Mr Dai and Ms Wang, the only two EDs in office at the relevant time, together with Mr Shao, the then Chief Executive Officer ("CEO").  All other NEDs and INEDs subsequently became aware of the Company's granting of loans from the monthly updates circulated by the Company.  The April 2015 monthly update (circulated in May 2015) included brief information about Loan 1.  Most directors submitted however that they became aware of the granting of loans only from the July 2015 monthly update (circulated in August 2015).

At the Audit Committee meeting on 14 December 2015 ("AC Meeting"), the Company's newly formulated Loan Policy was approved and INED Mr Pang:

On 12 May 2016, the Company announced a discloseable transaction: namely, the granting on the day of Loan 20 (of $70 million) by its subsidiary (which held a money lenders licence) for three months at an interest rate of 12 per cent per annum.  Loan 20 had been approved by Mr Wong and Mr Shao, the only two EDs in office as of 12 May 2016.  Mr Dai and Ms Wang had resigned as of 30 April 2016.  Loan 20 was also ratified by the board of the directors (“Board”) on 12 May 2016.  The Company had conducted the following size tests for Loan 20:

It was only in response to the Department's enquiries on 13 May 2016 regarding an alternative test to the profits test, that the Company submitted the same Alternative Test which yielded 0.4 per cent.

In the financial year ended 30 April 2016, the Company generated interest income of $89 million from the granting of loans whilst generating revenue of $27.75 million from its principal business activities.

GLR REQUIREMENTS

Transactions are classified according to the results of the five size tests performed in accordance with GLR19.07.  The two size tests relevant to this case are:

The transaction classification governs what GLR Chapter 19 requirements apply:

 
GLR19.20 provides that the Exchange “may, where any of the calculations of the percentage ratios produces an anomalous result or is inappropriate to the sphere of activity of the listed issuer, disregard the calculation and substitute other relevant indicators of size, including industry specific tests.  The listed issuer must provide alternative tests which it considers appropriate to the Exchange for consideration”.

The Exchange has published frequently asked questions on its website to provide guidance and clarification on compliance with the GLR (and the equivalent rules in the Main Board Listing Rules). Two relevant ones are:

GLR19.34 provides that "As soon as possible after the terms of a share transaction, discloseable transaction, major transaction, very substantial disposal, very substantial acquisition or reverse takeover have been finalised, the listed issuer must in each case … submit an announcement to the Exchange to be published on the GEM website as soon as possible."

GLR19.40 provides that "A major transaction must be made conditional on approval by shareholders."

GLR5.01 provides that the Exchange expects directors, both collectively and individually, to fulfil fiduciary duties and duties of skill, care and diligence to a standard at least commensurate with the standard established by Hong Kong law.  Specifically, under GLR5.01(6), every director must, in the performance of his duties as a director, "apply such degree of skill, care and diligence as may reasonably be expected of a person of his knowledge and experience and holding his office within the issuer".

The Relevant Directors were under an obligation, pursuant to their respective Undertakings, to use their best endeavours to procure the Company's GLR compliance and comply to the best of their abilities with the GLR.

COMMITTEE'S FINDINGS OF BREACH AT FIRST INSTANCE

The Committee considered the written and oral submissions of the Department, the Company and the Relevant Directors, and concluded as follows:

Company's Breach of GLR19.34 and 19.40

The Committee agreed with the Department that:

On the basis of the Revenue Ratios, the Committee found that all of Loans 1 to 19 were major transactions subject to announcement and shareholder approval requirements, with which the Company did not comply.  The Committee therefore found that the Company repeatedly breached GLR19.34 and 19.40.

As to Loan 20, the Committee agreed with the Department that as:

the gross profit comparison would be the appropriate alternative test to be adopted.

The gross profit comparison yielded a percentage ratio of 49.8%.  On this basis, the Committee found that Loan 20 was a major transaction and the Company breached GLR19.40 by failing to comply with the shareholder approval requirement.

Company's Breach of GLR19.20

As the Company regarded the profits test as inapplicable in the course of conducting the size test for Loan 20, the Company was required to, but did not, consult the Exchange and to submit an alternative test to the Exchange for consideration.  The Committee therefore found that the Company breached GLR19.20.

Breach by the Relevant Directors

The Committee decided that each of the Relevant Directors breached GLR5.01(6) (exercise their duties with care, skill and diligence) as shown below:

Mr Dai and Ms Wang

Mr Dai and Ms Wang breached GLR5.01(6) by reason of the followings:

Mr Shao

Mr Shao was the CEO from September 2013.  He participated in approving Loans 1 to 19 in that capacity.  He was appointed an ED on 30 April 2016 and he approved Loan 20 in May 2016.  The Committee concluded that Mr Shao breached GLR5.01(6) in relation to Loan 20 by failing to ensure the Company: (a) conducted correct size tests calculations; and (b) consulted the Exchange as required under GLR19.20.

NEDs and INEDs (Mr Wong, Prof Deng, Mr Cao, Mr Yang, Mr Wang, Mr H Wang, Mr Lui, Mr Pang and Mr Chan)

Mr H Wang, appointed as INED on 18 June 2015, was in office when Loans 11 to 19 were granted.  He was re-designated as a NED in June 2017.  All the other eight NEDs and INEDs were in office when Loans 1 to 19 were made.  (Note: Mr Wong was appointed a Director of the Company in 2008 and had since assumed alternate positions of ED and NED as well as Chairman and Vice Chairman until his resignation on 30 November 2017).  He was a NED when Loans 1 to 19 were granted and was re-designated as an ED on 11 January 2016.)

The Committee found that these nine directors breached GLR5.01(6) in the following manner:

In addition, the Committee concluded that Mr Wong (as an ED in May 2016) also breached GLR5.01(6) in relation to Loan 20 by failing to ensure the Company: (a) conducted correct size tests calculations; and (b) consulted the Exchange as required under GLR19.20.

Breach of GLR5.20 by Mr Dai and Mr Wong

GLR5.20 provides that “The Compliance Officer’s responsibilities must include, as a minimum … (1) advising on and assisting the board of directors of the issuer in implementing procedures to ensure that the issuer complies with the GLR …”.

Mr Dai was the Compliance Officer from 4 December 2009 to 29 April 2016.  The Committee found that Mr Dai breached GLR5.20 as: (a) there was no evidence that he rendered advice or acted as required by the rule; and (b) he caused the Company to grant Loans 1 to 19 without any or any proper loan policy, without proper due diligence conducted; and without ensuring the Company’s GLR compliance.

By 30 April 2016, when Mr Wong was appointed the Compliance Officer, the Loan Policy had been adopted.  Nonetheless, the Committee found that Mr Wong also breached GLR5.20 for the following reasons:

Breach of Undertakings

The Committee concluded that by reason of their failure to act and the respective breaches of GLR referred to above, the Relevant Directors also breached their Undertakings to comply with the GLR to the best of his/her ability; and to use their best endeavours to procure the Company’s GLR compliance.

At the disciplinary (review) hearing, the Committee on review upheld the findings of breaches of the Committee at first instance in respect of Mr Shao, Mr Wong, Mr Cao, Mr Wang, Mr H Wang, Mr Chan, Mr Lui and Mr Pang.

The Listing Appeals Committee further upheld the findings of breaches of the Committee in respect of Mr Shao, Mr Wang, Mr H Wang, Mr Lui and Mr Pang.

REGULATORY CONCERN

The Committee views the breaches in this case as serious.  The Committee is highly critical of the conduct of the Company and the Relevant Directors as loans were advanced with the placing proceeds which:

The Company's adoption of the Alternative Test and its related submissions appeared to be post-event justification and self-serving in seeking to contest its breaches of the GLR.

SANCTIONS

Having made the findings of breach stated above, and having concluded that the breaches are serious, the Committee (or, in the case of Mr Shao, Mr Wang, Mr H Wang, Mr Lui and Mr Pang, the Listing Appeals Committee) decided to:

The Listing Appeals Committee on review determined to endorse the directions for training imposed on Mr Shao, Mr Wang, Mr H Wang, Mr Lui and Mr Pang.

For the avoidance of doubt, the Exchange confirms that the sanctions and directions detailed in this news release apply only to the Company and the Relevant Directors identified above and not to any other past or present board members of the Company.

 

 

Ends