On 20 May 2021, the Stock Exchange of Hong Kong Limited (SEHK) published its 'Consultation Conclusions on the Review of Listing Rules relating to Disciplinary Powers and Sanctions' (Consultation Conclusions). All of the proposals, with only a few adjustments, have been adopted and will take effect on 3 July 2021. According to the SEHK’s quantitative analysis of the responses to the consultation, the market is generally in support of the proposals except for one, of which 53% of the respondents have indicated disagreement. This proposal relates to the imposition of secondary liability on 'Relevant Parties' for Rulesi breaches, which we will discuss in more details in this Legal Update.
Secondary liability is not a new conceptii, so what are the changes made that have raised such attention from the market?
Relevant Parties under the Revised Rules
Relevant Parties are those subject to the SEHK's disciplinary jurisdiction. Under the Rules as amended pursuant to the Consultation Conclusions (Revised Rules), they include
- listed issuer and its subsidiaries (listed group);
- directors, senior management and professional advisers (and the employees of the advisers) of the listed group;
- substantial shareholders, authorised representatives and supervisors of the listed issuer;
- guarantors of a guaranteed issue of debt securities or structured products; and
- any other party who gives an undertaking to or enters into an agreement with SEHK.
Amongst the above, (1) employees of professional advisers, (2) guarantors and (3) parties under an undertaking are newly added, and the term "senior management" has been more elaborately defined.
Not all of the Relevant Parties (e.g., senior management or substantial shareholder) have specific obligations or responsibilities expressly imposed upon them under the current Rules. Under the Revised Rules that will take effect in July, sanctions may be imposed on any Relevant Parties (e.g., a member of the senior management) if the party is found to have "caused by action or omission or knowingly participated" in contravention of the Rules or a requirement imposed by the Listing Division or the Listing Committee. As mentioned above, 53% of the respondents to the consultation have indicated disagreement to these changes.
Senior management is now defined under the Revised Rules to include:
- any person occupying the position of (a) chief executive, (b) supervisor, (c) company secretary, (d) chief operating officer, or (e) chief financial officer, by whatever name called;
- any person who performs managerial functions under the directors’ immediate authority; or
- any person referred to as senior management in the listed company’s corporate communication or any other publications on SEHK’s website or on the listed company’s website.
In other words, a manager or senior manager who reports directly to the board may be held liable for breaching the Rules if they are found to have 'caused' or 'knowingly participated' in the breach. Could they be held liable even if they are only responsible for the execution of the board's decision (which eventually leads to breaching the Rules) and are not involved in the decision making?
'Caused' or 'Knowingly Participated'
In the Consultation Conclusions, the SEHK stressed that secondary liability would only be imposed in circumstances where the conduct in question was a significant factor in breaching the Rules, not when the involvement is only trivial and/or administrative in nature.
The SEHK provided examples to illustrate what may constitute 'caused' or 'knowingly participated' in breaching the Rules, such as:
Scenario one: After the board and its audit committee approved the results announcement, the auditors made further comments on the data before publication. The chief financial officer (CFO), who was not a member of the board, decided, without discussing the auditors’ further comments with the board, to publish the results announcement without incorporating those comments. The listed company had thus breached the Rules in failing to obtain its auditors’ agreement before publication of the preliminary results announcement. Under the Revised Rules, the CFO would be liable for causing a contravention of the Rules.
Scenario two: The financial adviser engaged to advise on a major acquisition was aware of the target’s deteriorating financial performance, but agreed with the listed issuer and its directors to withhold disclosure of this material information in the circular to shareholders. Under the Revised Rules, the financial adviser would be liable for having knowingly participated in a contravention of the Rules.
Culpability was clear in both scenarios but what if the CFO in the scenario one did refer to the board the auditors' comments and yet the board decided not to incorporate the comments nor to discuss with the auditors? Would the CFO, by signing off the publication of the announcement, then be regarded as having 'knowingly participated' in breaching the Rules? Similar queries have also been raised by company secretary groups, who suggested that the new Rules may be too harsh for company secretaries who only play a supporting role.
In response, the SEHK only said that company secretaries are expected to have a significant role to play in complying with the Rules and corporate governance matters under the Corporate Governance Code, and should therefore be subject to secondary liability. It is unclear if the SEHK is assuming the company secretaries or any senior management to have an apparent authority based on the roles they play. However, the SEHK did explicitly state in the Consultation Conclusions that the imposition of any disciplinary sanctions on individuals who are not directors of the listed issuer will be contingent on the assessment of the relevant individual’s culpability and liability; and that this will necessarily involve consideration of that individual’s position and conduct in respect of the particular case, which may include consideration of his or her role, duties, responsibilities, power, authority, and/or the information that was available to him or her. While this sounds assuring, further guidance will definitely be helpful to provide clarity.