This article provides a summary of key takeaways and learnings from the recent enforcement actions taken by The Stock Exchange of Hong Kong Limited (“Exchange”) against listed issuers and directors as set out in the latest Enforcement Bulletin published by HKEX in March 2023.

Key takeaways from the Exchange’s recent enforcement actions Listed issuers and directors are reminded that disclosure must be accurate, complete in all material respects, and not be misleading or deceptive (Listing Rule 2.13). “Partial truth” disclosures – disclosure that is true on the surface but which omits material facts or gives a misleading picture to investors – may constitute a breach of the Listing Rules and disciplinary actions may follow against those responsible. Common problems in resignation announcements: “personal reasons” is stated as the reasons for director resignations but such term should be used only for limited circumstances. citing disagreement over audit procedures or audit fees for resignations of auditors when there were material, undisclosed issues that led to the resignations. The Exchange monitors disclosures of newly-listed issuers, particularly on the use of IPO proceeds or other significant expenditures that occur around the time of or shortly after listing, and serious sanctions have been imposed against the issuers and directors responsible for such misconduct cases. Issuers and directors should ensure that information in announcements and corporate communication are accurate, complete in all material respects and no material information is omitted. Those involved in disciplinary actions could negotiate settlements with the Exchange which can save time, costs and resources

 

Proper Disclosures

Listing Rule 2.13 sets out the Exchange’s expectations on the disclosure of information: information must be clearly presented and in plain language, and must be accurate and complete in all material respects and not be misleading or deceptive. Specifically, an issuer must not:

1. omit material facts of an unfavourable nature or fail to accord them with appropriate significance;
2. present favourable possibilities as certain or as more probable than is likely to be the case;
3. present projections without sufficient qualification or explanation; or
4. present risk factors in a misleading way.

Failure to comply with Listing Rule 2.13 may constitute a breach of the Listing Rules and the issuer and directors responsible could be liable to disciplinary actions.

 

“Partial truth” disclosures

The Exchange highlighted the problems with “partial truth” disclosures. Disclosure that is true on the surface but which omits key facts or information or gives a misleading picture to investors could be as damaging as making a false disclosure and disciplinary actions may follow against those responsible for such “partial truth” disclosures.

Examples of “partial truth” disclosures:

• disclosure only highlights business’s promising prospects but downplays or omits a key condition precedent that may not be easily fulfilled
• delay in dispatching and publishing financial statements is attributed to the pandemic while the real reason behind the delay is the discovery of material audit issues

Further, the Exchange raised concerns over possible “partial truth” disclosures in announcements for resignations of directors and auditors.

 

Announcements for resignation of directors

In announcements for director resignations, “personal reasons” were often cited by issuers as the only reasons for the resignations, which may be used to hide the real underlying reasons for the resignations.

The Exchange reminded issuers and directors that “personal reasons” only encompass limited circumstances such as illness, bereavement or other genuine personal difficulties that change the director’s circumstances and these do not include work-related issues, disagreements with the board, or disqualifications or detainments of directors.

If an outgoing director notes that the disclosure published by the issuer in relation to the director’s resignation was inadequate or inconsistent with the director’s understanding, the director should raise this with the issuer and, if concerns persists, contact the Exchange directly.

Directors are also reminded of the importance of good record-keeping, especially for a director who has resigned, or if there has been a disagreement amongst the board.

 

Announcements for resignation of auditors

Issuers often attribute the breakdown of relationship with their auditors to a seemingly neutral and generic reason such as “failure to agree on audit fees” or “disagreement over the audit procedures”, when the real reasons behind the resignations may relate to discovery of major auditing issues by the auditors.

Audit committees are reminded to ensure that an announcement for resignation of auditors accurately reflects the reasons for resignation and do not neglect any issues or matters that may affect the audit process, fees, or relationship between the auditors and the issuer.

 

Disclosure misconduct by newly-listed issuers

The Exchange monitors disclosures by newly-listed issuers, particularly on the use of proceeds or other significant expenditures that occur around the time of or shortly after listing.

The Exchange has identified some questionable conducts involving newly-listed issuers:

• material changes on the use of IPO proceeds or outflow of funds that were not properly disclosed
• unusually high underwriting commissions and other listing expenses and significant discretionary listing expenses
• major investments of a material part of IPO proceeds and significant payments for consultancy arrangements shortly after listing with little or no commercial rationale

Any material change of use of proceeds may constitute inside information if such information was not previously disclosed in the listing document. The Exchange expects that an issuer must make an announcement to notify investors of the change after listing. Hence, issuers and directors should ensure that any material change in the use of proceeds after listing are properly disclosed.

Issuers and directors should note that the Exchange will continue to scrutinise unusually high fees or other listing expenses and monitor the use of proceeds after listing.

 

Recent enforcement actions

There were a total of 13 published cases in the second half of 2022 in which sanctions were imposed against issuers and directors by the Exchange. These involved:

• issuers’ failures to follow the procedures for disclosable or connected transactions
• issuers’ failures to make proper disclosures for relevant transactions
• breach of directors’ undertakings to cooperate with the Listing Division’s investigations
• breach of directors’ duties in their failures to protect the issuers’ interests or procure Listing Rules compliance
• breach of directors’ duties in relation to the commercial rationale for relevant transactions

Five of the 13 cases involved settlements with issuers and directors. Parties are reminded that those involved in disciplinary actions could negotiate settlements with the Exchange to save time, costs and resources, and the parties can have greater control over the outcome and the consequences by negotiating an agreed settlement.

 

Conclusion

Proper disclosure is an essential part of maintaining a fair and orderly market. It is important for issuers and directors to understand that mere factual correctness of disclosed information could be insufficient. Incomplete and insufficient disclosures that mislead investors can attract disciplinary actions. Therefore, it is imperative for issuers and directors to ensure that all announcements and corporate disclosures are not only factually accurate, but also complete and not misleading. In addition, issuers should establish internal processes to identify and follow the procedures for discloseable and connected transactions.

 

Key takeaways from the Exchange’s recent enforcement actions Listed issuers and directors are reminded that disclosure must be accurate, complete in all material respects, and not be misleading or deceptive (Listing Rule 2.13). “Partial truth” disclosures – disclosure that is true on the surface but which omits material facts or gives a misleading picture to investors – may constitute a breach of the Listing Rules and disciplinary actions may follow against those responsible. Common problems in resignation announcements: “personal reasons” is stated as the reasons for director resignations but such term should be used only for limited circumstances. citing disagreement over audit procedures or audit fees for resignations of auditors when there were material, undisclosed issues that led to the resignations. The Exchange monitors disclosures of newly-listed issuers, particularly on the use of IPO proceeds or other significant expenditures that occur around the time of or shortly after listing, and serious sanctions have been imposed against the issuers and directors responsible for such misconduct cases. Issuers and directors should ensure that information in announcements and corporate communication are accurate, complete in all material respects and no material information is omitted. hose involved in disciplinary actions could negotiate settlements with the Exchange which can save time, costs and resources.

 

Pan Tsang and Carl Chen

For specific advice on Listing Rules compliance and related matters in Hong Kong, please contact:- Pan Tsang | pan_tsang@robertsonshk.com | +852 2861 8487

Disclaimer: This publication is general in nature and is not intended to constitute legal advice. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.