Enhanced disciplinary regime with emphasis on holding individuals including senior management accountable for Listing Rule breaches

On 20 May 2021, The Stock Exchange of Hong Kong Limited (Exchange) published conclusions to its consultation on review of the Rules Governing the Listing of Securities on the Exchange (Listing Rules) relating to disciplinary powers and sanctions

The Exchange decided to implement all the proposals in the consultation paper (see our previous client alert “Hong Kong Stock Exchange proposes to enhance disciplinary regime to deter misconduct” published in August 2020), with minor modifications.

Overall, the amended Listing Rules, which will be implemented with effect from 3 July 2021, will enhance the Exchange’s powers to hold accountable, and impose appropriate sanctions on, individuals (including members of the senior management, e.g. company secretary, chief operating officer, chief financial officer) responsible for Listing Rule breaches. 

See below a list of questions and answers summarising the key amendments:

Question 1: What are the major changes affecting directors of listed issuers?

Answer:

(1)

One of the existing reputational sanctions – “in the case of wilful or persistent failure by a director of a listed issuer to discharge his responsibilities under the Listing Rules, state publicly that in the Exchange’s opinion the retention of office by the director is prejudicial to the interests of investors” will be amended as follows:

“state publicly that in the Exchange’s opinion the occupying of the position of director or senior management of a named listed issuer or any of its subsidiaries by an individual may cause prejudice to the interests of investors” (PII Statement),

enabling the Exchange to make such a statement where the occupying of the position of director or senior management of the issuer or any of its subsidiaries by the individual may cause prejudice to the interests of investors, even if the failure may not be wilful or persistent.

(2)

A new reputational sanction will be introduced, namely that the Exchange may “in the case of serious or repeated failure by a director to discharge his responsibilities under the Listing Rules, state publicly that in the Exchange’s opinion the director is unsuitable to occupy a position as director or within senior management of a named listed issuer or any of its subsidiaries” (Director Unsuitability Statement).

Question 2: What are the major implications for members of senior management?

Answer:

(1)

Under the existing Listing Rules, members of senior management are among the parties who may be subject to disciplinary actions (Relevant Parties). The term “senior management” is, however, not defined in this context.

Under the amended Listing Rules, the term “senior management” will be defined for disciplinary purposes to include:

  • any person occupying the position of chief executive, supervisor, company secretary, chief operating officer or 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 issuer’s corporate communication or any other publications on the Exchange’s website or on the listed issuer’s website”.

(2)

The disciplinary sanctions which may be made against members of senior management include:

  • private reprimand;

  • public statement involving criticism / public censure;

  • PII Statement;

  • rectification or other remedial order; and

  • reporting the person’s conduct to another regulatory authority.

(3)

Members of senior management will be subject to secondary liability for Listing Rule breaches as discussed in Question 5 below.

Question 3: What are the major implications for professional advisers (e.g. lawyers, financial advisers)?

Answer:

(1) 

The amended Listing Rules will impose the following express obligations on professional advisers when acting in connection with Listing Rule matters:

  • to use all reasonable efforts to ensure that their clients understand and are advised as to the scope of and their obligations under the Listing Rules; and

  • not to knowingly provide information to the Exchange which is false or misleading in a material particular.

(2)

Professional advisers will be subject to secondary liability for Listing Rule breaches as discussed in Question 5 below.

(3)

One of the disciplinary sanctions under the existing Listing Rules is to ban a professional adviser or its employees from representing a specified party in relation to a stipulated matter or matters coming before the Listing Division or the Listing Committee for a stated period. This sanction will be extended to cover banning of representation of any or a specified party.

Question 4: Are there any changes to the scope of Relevant Parties?

Answer:

Other than defining the term “senior management”, the disciplinary regime will be expanded to include the following new parties:

  • employees of professional advisers of listed issuers and their subsidiaries;
  • guarantors of structured products;
  • guarantors for issue of debt securities; and
  • parties who give an undertaking to, or enter into an agreement with, the Exchange.


Question 5(a): Secondary liability on Relevant Parties for Listing Rule breaches will be introduced under the amended Listing Rules. In what circumstances will such a liability be imposed?

Answer:

Secondary liability will be imposed on Relevant Parties who have “caused by action or omission or knowingly participated in a contravention of the Listing Rules”.

The Exchange explained in the conclusions paper that in making an assessment in relation to such a threshold, the Exchange will take into consideration the facts and circumstances of the matter, including the roles and responsibilities of the Relevant Party in question in respect of the subject matter of the breach and also the listed issuer’s Listing Rule compliance.

As to the liability for an omission, the Exchange noted that this can only arise if the relevant individual was under a duty to act, but failed to do so. However, it should be noted that ignorance of the Listing Rules would not form a liability exclusion or a basis for a defence.

See also a few case scenarios set out in paragraph 93 of the consultation paper showing how secondary liability would work in practice.

Question 5(b): Will a senior management member or professional adviser be liable if despite having given the correct advice on a matter, the individual were to be overruled by the board, and as a result a breach was committed?

Answer:

The Exchange explained in the conclusions paper that in those circumstances, it is clear that the Listing Rule breach was not caused by the action of the senior management member / professional adviser and therefore he would not be subject to secondary liability.

Question 6: What are the major implications for listed issuers?

Answer:

Under the amended Listing Rules, in cases involving more serious misconduct, if a PII Statement or a Director Unsuitability Statement is made against an individual, the Listing Committee may impose follow-on actions which include (in addition to suspension or cancellation) the denial of facilities of the market to the relevant listed issuer for a specified period. The follow-on actions apply, and will be triggered, where an individual subject to a PII Statement or a Director Unsuitability Statement continues to be a director or senior management member of the specified listed issuer after a specified date.

After a PII Statement with follow-on actions or a Director Unsuitability Statement has been made against an individual, the named listed issuer must include a reference to the statement in all its announcements and corporate communications unless and until that individual is no longer its director or senior management member.

Question 7: What are the other additional circumstances introduced by the amended Listing Rules where disciplinary sanctions can be imposed?

Answer:

(1)

The amended Listing Rules will include an explicit provision permitting the imposition of a sanction in circumstances where there has been a failure to comply with a requirement imposed by the Listing Division, the Listing Committee or the Listing Review Committee of the Exchange. Such sanctions may be imposed on all Relevant Parties through secondary liability where a party has failed to comply with a requirement imposed by the Listing Division, the Listing Committee or the Listing Review Committee. 

(2)

The amended Listing Rules will also explicitly provide for an obligation of a party subject to enquiries or investigations by the Exchange or the Securities and Futures Commission to provide accurate, complete and up-to-date information or explanation.