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Legal Update

The Stock Exchange of Hong Kong Limited Publishes Consultation Conclusions on Proposals in the 2008 Combined Consultation Paper

8 December 2008
Mayer Brown JSM Legal Update

Introduction

The Stock Exchange of Hong Kong Limited (the "Stock Exchange") has recently published its "Consultation Conclusions on Proposals in the 2008 Combined Consultation Paper" (the "Consultation Conclusions") in respect of the "Combined Consultation Paper on Proposed Changes to the Listing Rules" (the "Consultation Paper") issued by it in January 2008.  The Consultation Paper sets out the proposals to address 18 substantive policy issues including corporate governance and initial listing criteria, as well as some amendments to the Main Board Listing Rules and the GEM Listing Rules (together the "Listing Rules").

The Stock Exchange intends to implement the proposals in respect of 15 issues and the amendments to the Listing Rules will become effective on 1 January 2009.  This document aims to highlight those selected issues which are expected to be of particular relevance to listed companies generally.

Quick Reference

The following table sets out for your quick reference matters which would possibly require your immediate action/attention:

Issue No.

Subject

Possible immediate action/attention items

3.

Qualified accountants

Listed issuers with financial years ending after 31 December 2008 will have to disclose in their annual reports on compliance with the new Code Provisions subsequent to 1 January 2009.  Such new Code Provisions specifically provide that the board of directors of the listed issuer is responsible for conducting an annual review of the adequacy of staffing of the financial reporting functions and the oversight role of the audit committee.

8.

Disclosure of changes in issued share capital

Next Day Disclosure Return:  Next Day Disclosure Return is required to be submitted in respect of any changes in issued share capital as a result of or in connection with certain events (please refer to Issue 8 below for further details) by 9:00 a.m. the next business day.

Monthly Return: a new form of Monthly Return will be adopted in respect of information relating to share capital and other movements in securities and shall be submitted by 9:00 a.m. of the fifth business day following the end of each calendar month.

Share option grants: announcement to be published as soon as possible upon the granting of options pursuant to a share option scheme.

12.

Voting at general meetings

Voting by poll: mandatory voting by poll at all general meetings. 

Notice of general meetings: listed issuers should disclose in their annual reports on any deviation from the new Code Provision which provides that 20-business day notice is to be given for annual general meetings and 10-business day notice is to be given for all other general meetings.

13.

Disclosure of information about and by directors

Continuous disclosure of information by listed issuers: continuous and immediate disclosure by listed issuers of certain important information, and periodically disclosure of other information, about directors and supervisors. 

Continuous disclosure of information by directors and supervisors: a new obligation is introduced requiring directors and supervisors to keep the listed issuers advised of any changes in such information.

14.

Codification of waiver to property companies

The Relief (as defined in Issue 14 below) will be codified to provide exemption from shareholders' approval in respect of Qualified Property Projects (as defined in Issue 14 below). 

Qualified Issuers (as defined in Issue 14 below) entering into Type B property joint ventures (as defined in Issue 14 below), who wish to take advantage of the codified Relief, should obtain in advance, at its annual general meeting or extraordinary/special general meeting, a General Property Acquisition Mandate together with the proposed annual cap to engage in the acquisition of Qualified Property Projects.

17.

Review of the Director's and Supervisor's Declaration and Undertaking

Existing directors are required to sign and submit a new Undertaking to the Stock Exchange by 31 March 2009.

18.

Review of the Model Code for Securities Transactions by Directors of Listed Issuers

Extension of "black-out" period: the "black out" periods will be extended to commence from the listed issuer's financial period end date to the date on which the listed issuer published the relevant results announcement.

Time limits for director's dealings in the issuer's securities: the Model Code will be modified to impose five-day time limits for a listed issuer to respond to a request for clearance to deal and for the dealing to take place once clearance is given.

Issue 1: Use of websites for communication with shareholders  

The Stock Exchange will implement a procedure permitting a listed issuer to take that a shareholder is deemed to have given their consent to a corporate communication being made available to them solely on the listed issuer's website.  The deeming procedure comprises a basic requirement that the procedure has been approved by shareholders in general meeting or there is an enabling provision in the listed issuer's constitutional documents. The additional requirement to the deeming procedure is that the listed issuer has to ask each shareholder individually for consent and no objection has been received within 28 days from the consent request.  There will be no deemed consent if consent request was sent less than 12 months after a previous request had been made.  A shareholder who had disposed of all his shares in a listed issuer but subsequently becomes a shareholder again will be treated as a new shareholder. The listed issuer cannot act upon any consent previously given by him and a "fresh" consent (either expressly given or deemed) will be needed for electronic communication.

However, for Hong Kong-incorporated listed issuers, the statutory requirement for express consent from shareholders remains unchanged until the Hong Kong Companies Ordinance has been relaxed in this regard.  Therefore, the amendments to the Listing Rules will not confer any immediate benefit on a Hong Kong listed issuer but will only enable it to avail itself of future changes to the law in Hong Kong in this area.

Issue 2: Information gathering power

A listed issuer will have to provide to the Stock Exchange as soon as possible or otherwise within the time limits imposed, any information the Stock Exchange reasonably considers appropriate to protect investors or ensure smooth operation of the market and any information the Stock Exchange may reasonably require for the purpose of investigating a suspected breach of or verifying compliance with the Listing Rules.

Issue 3: Qualified accountants

The requirement for a qualified accountant will be removed.  The Code on Corporate Governance Practices will be expanded to specifically provide that the board of directors of the listed issuer is responsible for reviewing and ensuring adequate accounting systems and appropriate human resources for financial reporting function whilst the audit committee has an oversight role over the financial reporting function and to review and report to the board on the same.  If a listed issuer chooses to deviate from the Code Provision requirements, it is required to explain in its Corporate Governance Report for such non-compliance.  For listed issuers with financial years ending on 31 December 2008, they do not need to comply with the new Code Provision but are encouraged to disclose in their annual reports for the financial year ended 31 December 2008 the latest development of the company to comply with the new Code Provisions.  For listed issuers with financial years ending after 31 December 2008, they have to disclose in their annual reports whether they have complied with the new Code Provisions subsequent to 1 January 2009 or explain non-compliance.

Issue 7: Review of the Stock Exchange's approach of pre-vetting public documents of listed issuers

Specific pre-vetting requirements

Certain documents which require pre-vetting of the Stock Exchange will be set out in the Listing Rules, which comprise (i) listing document; (ii) circular relating to cancellation or withdrawal of listing of listed securities; (iii) circular relating to transactions that require shareholders' approval under the notifiable transaction requirements in the Listing Rules; (iv) circular relating to connected transactions; (v) circular to shareholders seeking their approval of matters under certain requirements of the Listing Rules; and (vi) circulars or offer documents in connection with takeovers, mergers or offers.

The Stock Exchange will further amend the Listing Rules to the effect that pre-vetting of the following types of announcements would no longer be required: announcement for major transactions, very substantial acquisitions/disposals, reverse takeovers, cash companies and transactions/arrangements which would result in a fundamental change in principal activities after listing.  It should be noted that it is still uncertain when these amendments will be made and thus after 1 January 2009, pre-vetting of these types of announcements is still required until further notice by the Stock Exchange.

In exceptional circumstances, the Stock Exchange may request to review any announcements prior to publication in individual cases.

Where a listed issuer publishes an announcement under the Listing Rules which is not subject to the pre-vetting requirement, the Stock Exchange may require the listed issuer to submit information and/or documents in respect of such announcement to demonstrate its compliance with the Listing Rules.  For announcements made in respect of a share/discloseable transaction required under Main Board Listing Rules 14.34 and 14.35/GEM Listing Rules 19.34 and 19.35, listed issuers must complete the size tests checklist and submit it to the Stock Exchange not later than the publication of the announcements.

The Listing Rules will also set out certain specific circumstances under which a listed issuer must consult the Stock Exchange on the application of the Listing Rules governing aggregation of transactions before it enters into any proposed transactions. The Stock Exchange may nevertheless aggregate transactions pursuant to existing Listing Rules where no prior consultation was made by the listed issuer.

Pre-vetting not required for certain types of documents

Pre-vetting by the Stock Exchange of the circulars in respect of proposed amendments to a listed issuer's constitutional documents will no longer be required.  At the despatch of such circulars, the listed issuer should submit to the Stock Exchange (i) a letter addressed to the listed issuer from its legal advisers confirming that the proposed amendments comply with the Listing Rules and the laws of the place where it is incorporated; and (ii) a confirmation from the listed issuer that there is nothing unusual about the proposed amendments for a company listed in Hong Kong.

The removal of the pre-vetting requirement also applies to the explanatory statement to shareholders where a listed issuer purchases its own shares on the Stock Exchange.  At the despatch of such explanatory statement, the listed issuer should submit to the Stock Exchange (i) a confirmation from the listed issuer that the explanatory statement contains information required under the Listing Rules and neither the explanatory statement nor the proposed share repurchase has unusual features; and (ii) an undertaking from its directors to the Stock Exchange in accordance with the Listing Rules requirements.

Announcements/circulars with subject matters involving trading arrangements for listed securities (including a suspension or resumption of dealings, and a cancellation or withdrawal of listing) will no longer require pre-vetting.  However, the listed issuer must consult the Stock Exchange before such announcements/circulars are issued.  No reference to a specific date or specific timetable in respect of such matter which has not been agreed in advance with the Stock Exchange can be made in such announcements/circulars.

No circular requirement for discloseable transactions

The circular requirement for discloseable transactions will be removed.  In the event that a profit forecast has been prepared in respect of the discloseable transaction, the listed issuer will be required to include in the announcement (or issue a further announcement, as the case may be) the content(s) of experts' reports as required to be included in circulars under the current Listing Rules.

Stock Exchange disclaimer statement

The Stock Exchange's disclaimer statement will be required in any listing document, circular, announcement or notice issued by listed issuers.  The contents of such disclaimer statement will be modified to make it also applicable to HKEx website.

Issue 8: Disclosure of changes in issued share capital

Disclosure by 9:00 a.m. the next business day

Listed issuers shall, by submitting a Next Day Disclosure Return by 9:00 a.m. the next business day, disclose changes in the listed issuer's share capital as a result of or in connection with any of the events set out as follows: (i) placing; (ii) consideration issue; (iii) open offer; (iv) rights issue; (v) bonus issue; (vi) scrip dividend; (vii) repurchase of shares or other securities; (viii) exercise of an option by a director; (ix) capital reorganisation; and (x) change in issued share capital not falling within any of these categories or within any of the de minimis categories.  For example, if there is such notifiable changes on 1 January 2009, a Next Day Disclosure Return will need to be submitted by 9:00 a.m. on 2 January 2009.  Both English and Chinese versions of the Next Day Disclosure Return must be submitted.

Subject to de minimis threshold

The de minimis categories will comprise changes resulting from an exercise of an option other than by a director, exercise of warrant, conversion of convertible securities and share redemption. An item under the de minimis categories will be discloseable if it represents 5% or more of the listed issuer's existing issued share capital.  It may also become discloseable if certain relevant Listing Rules apply (e.g. aggregation).

Next Day Disclosure Return

The Next Day Disclosure Return, which will be merged with the current Share Buyback Report, will comprise two sections.  Section I deals with disclosure under the new next day disclosure regime and section II deals with the disclosure under the current Share Buyback Report.  Hence, listed issuers will need to complete both sections for share repurchases.

Monthly Return

Listed issuers shall, by submitting a Monthly Return, provide an update on a monthly basis on information relating to share capital and other movements in securities, including future obligations to issue shares, by 9:00 a.m. of the fifth business day following the end of each calendar month.  Listed issuers must submit a Monthly Return even if there have not been any changes since the previous Monthly Return.  The Monthly Return in respect of January 2009 will need to be submitted by 9:00 a.m. on 6 February 2009.  Both English and Chinese versions of the Monthly Return must be submitted.

Disclosure of share option grants

Listed issuers must, as soon as possible upon the granting of options pursuant to a share option scheme, publish an announcement setting out certain details in relation to the grant in accordance with the Listing Rules requirements.

Issue 10: Alignment of requirements for material dilution in major subsidiary and deemed disposal

Under the current Listing Rules, there are different shareholders' consent requirements for material dilution in a major subsidiary (pursuant to Main Board Listing Rule 13.36(1)(a)(ii) and GEM Listing Rule 17.39(2)(ii)) and deemed disposal (pursuant to Main Board Listing Rule 14.29 and GEM Listing Rule 19.29). 

The Listing Rules will be amended to align the requirements, thereby the shareholders' consent requirement will be based on a size test threshold of 25% (i.e. the threshold for a major transaction) and that a written certificate might be accepted in lieu of a physical shareholders' meeting. 

Issue 12: Voting at general meetings

Voting by poll

Other than for certain transactions such as connected transactions under Chapter 14A of the Main Board Listing Rules and Chapter 20 of the GEM Listing Rules, transactions that are subject to independent shareholders' approval, and transactions where an interested shareholder will be required to abstain from voting, the Listing Rules do not currently require voting by poll on all resolutions at general meetings. 

The Listing Rules will be amended to make voting by poll mandatory at all general meetings held on or after 1 January 2009, notwithstanding that the notice of general meeting has been given before that date.

Notice of general meetings

The Listing Rules will be amended by introducing a new Code Provision in respect of general meeting to be held on or after 1 January 2009 that 20 clear business days (normally equivalent to 28 clear calendar days notice) is to be given for annual general meetings and 10 clear business days (normally equivalent to 14 clear calendar days notice) is to be given for all other general meetings.

Issue 13: Disclosure of information about and by directors

Requiring continuous disclosure of information in Main Board Listing Rule 13.51(2) and its GEM Listing Rule equivalent

Upon new appointment or re-designation of a director or supervisor, the current Listing Rules requires the disclosure in an announcement information as set out in Main Board Listing Rule 13.51(2) (and its GEM Listing Rule equivalent).  Such information ranges from positions held within the listed issuer's group, previous experience including past directorship in the last three years and other major appointments and qualifications, to particulars of public sanctions by statutory or regulatory authorities, bankruptcy or insolvency, fraud, dishonesty or corruption and insider dealing. 

The new Main Board Listing Rule 13.51B (and its GEM Listing Rule equivalent) will be introduced to impose a requirement for continuous and immediate disclosure to paragraphs (h) to (v) of Main Board Listing Rule 13.51(2) (and its GEM Listing Rule equivalent), permitting the information required under paragraphs (a) to (e) and (g) Main Board Listing Rule 13.51(2) (and its GEM Listing Rule equivalent) to be disclosed periodically in annual and interim reports. 

Continuous disclosure of director's and supervisor's biographical details – other changes

The Listing Rules will be amended to:

  • introduce a new obligation requiring directors and supervisors to keep the listed issuers advised of any changes in the information required under Main Board Listing Rule 13.51(2) (and its GEM Listing Rule equivalent);
  • clarify that the disclosure referred to in Main Board Listing Rule 13.51(2) (and its GEM Listing Rule equivalent) and the new draft Main Board Listing Rule 13.51B (and its GEM Listing Rule equivalent) need not be made if prohibited by law;
  • require disclosure of directors' and supervisors' current and past directorships (for the past three years) in all public companies with securities listed in Hong Kong and/or overseas; and
  • require disclosure of directors' professional qualifications, which includes any qualification in respect of a professional discipline, such as law, accounting, engineering, architecture, surveying or medicine, and any professional title and membership of a professional body.

Issue 14: Codification of waiver to property companies

On 14 December 2006, the Stock Exchange and the Securities and Futures Commission jointly announced a conditional waiver of general effect (the "Waiver") which exempts listed issuers actively engage in property development as a principal business activity (the "Qualified Issuers") from the shareholders' approval requirement of the Listing Rules in certain scenarios of acquisitions of land or property development projects in Hong Kong from Government or Government controlled entities through public auctions or tenders (the "Qualified Property Projects").  The Listing Rules will be amended to codify such Waiver (the "Relief"). 

The Relief will apply to Qualified Issuers only.  The criteria in determining whether property development was a principal activity of a listed issuer would include reference to certain disclosure formats in the issuer's latest published financial statements as set out in new Note 2 to Main Board Listing Rule 14.04(1)(g) (and its GEM Listing Rule equivalent). 

The scope of the Relief will be confined to: (a) Qualified Property Projects solely but should allow such projects to contain a portion of a capital element as opposed to being restricted to projects that are of a revenue nature only; and (b) Qualified Property Projects involving property joint ventures with connected persons where the connected person is only connected by virtue of being a joint venture partner with the listed issuer in existing single purpose property projects ("Type B property joint ventures").

The Relief would require: (a) Qualified Issuers entering into Type B property joint ventures to obtain in advance, at its annual general meeting or extraordinary/special general meeting, a General Property Acquisition Mandate together with the proposed annual cap to engage in the acquisition of Qualified Property Projects; and (b) that Qualified Issuers, save for exemption under the Relief, would continue to be subject to the other requirements of the Listing Rules, including the general obligations of disclosure under Main Board Listing Rule 13.09. 

The requirements for the letters from the independent board committee and independent financial adviser are respectively set out in the current Main Board Listing Rules 14A.21 and 14A.22/GEM Listing Rules 20.21 and 20.22.

Issue 16: Disclosure of information in takeovers

Codifying current practice of granting waivers

A new Listing Rule will be introduced to codify the current practice of granting waivers to listed issuers to publish prescribed information of the target companies in a supplementary circular at a later time when the information becomes available.

Extension to non-hostile acquisitions

The new Listing Rule should be extended to non-hostile acquisitions where there is insufficient access to non-public information.

Time for despatch of supplemental circular

The supplemental circular should be despatched to shareholders within 45 days.

Issue 17: Review of the Director's and Supervisor's Declaration and Undertaking (the "DU Forms")

Streaming the DU Forms

The DU Forms will be streamlined by:

  • removing the questions concerning director's and supervisor's biographical details;
  • removing the statutory declaration requirement;
  • amending the GEM Listing Rules to align with the practice of the Main Board Listing Rules as regards the timing of submission of the DU Forms;
  • amending the Listing Rules so that the listing documents relating to new listing applicants for the listing of equity and debt securities must contain no less information about directors and supervisors than that required under Main Board Listing Rule 13.51(2); and
  • amending the listing application procedures to harmonise with the proposed amendments to streamline the DU Forms.

Despite the removal of the statutory declaration requirement, a director or supervisor who provides his/her DU Forms to the Stock Exchange which contains false or misleading information will still be subject to the criminal liability imposed by section 384 of the Securities and Futures Ordinance.

Amending the Main Board Director's Undertaking to include detailed provisions for service of disciplinary proceedings

Amendments will be made to paragraph (e) of Part 2, Appendix 5B, and paragraph (d) of Part 2, Appendix 5H, of the Main Board Listing Rules to include detailed provisions for service similar to those of the GEM Listing Rules and for consistency, amending the wording of the GEM Listing Rules.

Requiring existing directors to re-execute Directors' Undertakings

In view of the changes made to the Directors' Undertakings noted above, existing directors are required to sign a new undertaking (in the form set out in Part 2 of the new DU Forms save for the omission of the declaration set in paragraph (i)) (the "Undertaking").  To facilitate the process of collecting new Undertakings from existing directors, the Stock Exchange will be introducing a transitional Listing Rule: Main Board Listing Rule 3.20A (and its GEM Rule equivalent).  The new Listing Rule sets the deadline as 31 March 2009 for directors to sign and return the new Undertakings.

Codifying the Stock Exchange's powers to gather information from directors

A new provision in the Directors' Undertakings will be included to impose on directors a similar obligation as discussed in Issue 2.

Issue 18: Review of the Model Code for Securities Transactions by Directors of Listed Issuers

Introducing 3 new exceptions to the definition of "dealing" under paragraph 7(d) of the Model Code

The following new exceptions to the definition of dealing will be introduced:

  • dealing where the beneficial interest or interests in the relevant securities of the listed issuer do not change;
  • dealing where a shareholder who places out his existing shares in a "top-up" placing where the number of new shares subscribed by him/her pursuant to an irrevocable, binding obligation equals the number of existing shares placed out and the subscription price (after expenses) is the same as the price at which the existing shares were placed out; and
  • dealing where the beneficial ownership is transferred from another party by operation of law (i.e. where the transfer occurs automatically as a result of applicable laws rather any act on the part of the relevant parties, such as the director may be entitled to receive an interest in securities as a result of the laws governing intestacy or, where the director is a joint holder of securities, the director may obtain ownership of the securities if the other joint holder dies).
Clarifying the meaning of "price sensitive information" in the context of the Model Code

A note to Rule A.1 of the Model Code will be introduced to clarify and align the meaning of "price sensitive information" in the Model Code with the meaning contained in Main Board Listing Rule 13.09.

Extending the "black out" period

The Listing Rules will be amended such that the current "black out" periods will be extended to commence from the listed issuer's financial period end date to the date on which the listed issuer published the relevant results announcement.

Time limits for director's dealings in the issuer's securities

Rule B.8A.1 of the Model Code will be modified to impose a five-day time limit for an issuer to respond to a request for clearance to deal and a five-day time limit for dealing to take place once clearance is given.

************************************

The HKEx News Release on 28 November 2008 contains information and other related materials, including hyperlinks to the Consultation Conclusions and the Frequently Answered Questions, on the issues described above ( http://www.hkex.com.hk/news/hkexnews/0811282news.htm ).  The Consultation Conclusions only present the results of the consultation concerning 15 out of the 18 policy issues.  The remaining three issues remain under assessment and separate conclusions will be published at a later date.  Rather than repeating all the items reported in the Consultation Conclusions in this document, the above discussion does not cover such issues which may not be of relevance to listed companies generally.  The omitted issues are issue 4 (Review of sponsor's independence), issue 6 (Bonus issues of a class of securities new to listing) and issue 9 (Disclosure requirements for announcements regarding issues of securities for cash and allocation basis for excess shares in rights issue).

For further information, please contact:

Patrick Wong (patrick.wong@mayerbrownjsm.com)
Derek Tsang (
derek.tsang@mayerbrownjsm.com)
Jacqueline Chiu (
jacqueline.chiu@mayerbrownjsm.com)
Jeckle Chiu (
jeckle.chiu@mayerbrownjsm.com)

Learn more about our Hong Kong office and Corporate Finance practice.

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