October 27, 2022

Hong Kong-listed Company Directors May Face Severe Sanctions for Non Cooperation in Rule Breach Investigation, Warns Hong Kong Stock Exchange


The Stock Exchange of Hong Kong Limited (Exchange) published earlier this week a new 'Guidance Note on Cooperation' (Cooperation Note) and a revised Sanctions Statement, urging listed issuers and directors to cooperate in its investigations and disciplinary actions, failing which may result in the imposition of a sanction on grounds of non-cooperation. 

The publication of the Cooperation Note at this junction is perhaps no coincidence. We note that since the introduction of the Exchange's enhanced disciplinary powers in July 2021, there have been four disciplinary cases where a Director Unsuitability Statement (DUS) was issued. In three out of such four cases, DUS sanctions were imposed against directors (including independent non-executive directors) on grounds of non-cooperation with the Exchange's enquiries. 

DUS is a very serious sanction: once imposed, it is expected that the board of the relevant issuer would take active steps to remove the director from holding any office within the issuer; and if the sanctioned director remains in office, follow-on actions (such as denial of market facilities) may be imposed and continued disclosure of such existing DUS must be made in all corporate communication.

Given the serious nature of DUS, the Exchange stated in the 'Consultation Conclusion on Review of Listing Rules relating to Disciplinary Powers and Sanctions' (May 2021) that DUS is reserved for "the most egregious or severe cases of misconduct" (paragraph 92). Such statement is also reflected in the 'Flowchart of the Disciplinary Sanctions against Individuals' attached to the newly revised Sanctions Statement.

As it appears that the Exchange may take non-cooperation as "the most egregious or severe cases of misconduct", directors of listed issuers are strongly advised to read the new Cooperation Note which follows closely the 'Guidance Note on Cooperation with the SFC' issued in December 2017. In paragraph 3.2 of the Cooperation Note, uncooperative conduct is stated to include but not limited to:

  1. a failure to respond to the Exchange, including a failure to provide substantive responses to some or all of the Exchange’s enquiries; 
  2. provision of inaccurate, incomplete or misleading information; 
  3. unnecessarily prolonging the Exchange’s investigation; 
  4. failure to attend an interview or disciplinary hearing at which a Party has been requested to appear; or 
  5. the provision of late submissions, evidence or documents. 

Given the above, listed issuers and directors should consult their lawyers as soon as possible upon receiving the Exchange's enquiries.


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