The latest directive issued by the Hong Kong Government prohibiting public gathering of more than four people has become effective. It is now the season for annual general meetings (AGMs) for Hong Kong-listed companies. We discuss in this update possible options listed companies may have, in view of the prohibition, when preparing their upcoming general meetings.
The New Directive
The Prohibition. On 27 March 2020, the Hong Kong Government issued three new directivesi to enforce “social distancing” amid a surge in imported COVID-19 cases, including one it issued under the Prevention and Control of Disease (Prohibition on Group Gathering) Regulation (Prohibition on Group Gathering Regulation) prohibiting group gatherings (i.e. a gathering of more than four people) in public places, effective from 29 March 2020 for a 14-day period (which may be renewed on expiry).
Exemptions. Schedule 1 to the Prohibition on Group Gathering Regulation lists certain group gatherings that are exempted from compliance with the regulation, including:
"Group gathering at a meeting of a body that must be held within a specified period in order to comply with any Ordinance or other regulatory instrument that governs the operation of the body or its business" (paragraph 11) ("Paragraph 11 Exemption").
Impact On Corporate General Meetings
In our view, AGMs fall within the Paragraph 11 Exemption and may proceed. A company listed on The Stock Exchange of Hong Kong Limited (HKSE) is required to lay its annual financial statements before shareholders at its AGM within six months after the end of its financial year under the Rules Governing the Listing of Securities on the Stock Exchange (the “Listing Rules”).
We are seeing listed companies implementing precautionary measures, e.g. body temperature checks at venue entrances, making masks and hand sanitisers available, and arranging seating at the venue. The question is how listed companies can and should further enable social distancing at the AGMs, in view of the Prohibition on Group Gathering Regulation. See Possible Options below.
Extraordinary General Meetings (“EGMs”)
As EGMs are different, in our view, they do not fall squarely within the Paragraph 11 Exemption. They are invariably held to approve one or more transactions in compliance with the Listing Rules, but it is debatable whether they must be held within a specified period.
Section 7 of the Prohibition on Group Gathering Regulation provides an apparent defence for the holding of an EGM (in case the Paragraph 11 Exemption is not available) if there is a reasonable excuse to organise, participate in or allow the gathering.
What constitutes "reasonable excuse" is purely factual and may involve subjective assessment. We call on the relevant authority to issue guidance with a view to providing more certainty to those who need to arrange their businesses and affairs. At the same time, we call on boards of listed companies to exercise restraint and set a high threshold for themselves in case they really need to proceed with their EGMs, instead of postponing the EGMs. The urgency and necessity of the underlying transactions differ from company to company and it would be up to the board to justify a non-postponement as reasonable.
As an aside, the Prohibition on Group Gathering Regulation affects not only the organisers of the meeting (being the company and its directors), but also participants (i.e. shareholders) and owners/operators of the EGM venue. There is thus a further complication that the defence of urgency and necessity may not apply to them equally.
Consequences of non-compliance. If the convening of an EGM is found to be in breach of the Prohibition on Group Gathering Regulation, people who participate in or organise the gathering, or own, control or operate the place in which the gathering takes place commit an offence and each is liable on conviction to a fine at level 4 (currently HK$25,000) and imprisonment for six months under Section 6. A person who only participates in the prohibited gathering may discharge his or her liability by paying a fixed penalty of $2,000.
In other words, the company and its directors would be subject to criminal liability and may face indemnity claims from shareholders and other participants in the EGM and owners and operators of the EGM venue, not to mention the adverse publicity and reputational damage.
- Postponing the EGMs
Given the above, postponing an EGM may be a safer approach but it would be challenging to fix an alternative date for the adjourned meeting when the pandemic is still developing. The Hong Kong Government has already stated that the new directives may be renewed or reissued after the 14-day period.
- Utilisation of electronic facilities
While a virtual meeting is a very attractive alternative, virtual corporate general meetings are not yet fully supported by laws and practices in Hong Kong. That means, a company should still maintain a primary place of physical venue to convene a meeting, although companies are free to make use of telecommunication facilities for shareholders to take part in the meeting online, subject to the company’s articles of association and applicable laws. What remains to be addressed are the logistical questions of setting up such facilities and enabling access, and the practical question of online verification of shareholders’ identities.
- Issuing guidance to shareholders to submit proxies and avoid physical attendance
It is a shareholder’s inherent right to attend the company’s general meeting. So if the meeting is called and not postponed, the company does not have an automatic right to bar shareholders from attending. The right to bar attendance is usually vested with the chairman of the meeting and is normally invoked only if the attendance of a particular member is not conducive to the orderly conduct of the meeting.
Under normal circumstances, it would raise eyebrows if a company encouraged its shareholders to vote by proxy only and avoid physical attendance. It is simply against corporate governance norms of accountability. However, the present circumstances legitimately call for social distancing. If the postponement of a meeting is not a viable option, then perhaps the market should be prepared if companies are to make such recommendation.
i The three directives are the Prohibition on Group Gathering Directive (as discussed in the text) and two other directives (which were made pursuant to the Prevention and Control of Disease (Requirements and Directions) (Business and Premises) Regulation, effective from 6pm on 28 March 2020): – (i) imposing various requirements, including the number of customers and distance between different groups of customers, for catering businesses; and (ii) directing specified premises, including places of amusement and places of public entertainment, to be closed. Each of these directives takes effect for a 14-day period, and may be renewed or re-issued upon expiry.