Hong Kong Stock Exchange Enforcement Updates

The latest enforcement bulletin released by the Hong Kong Exchanges and Clearing Limited (HKEX) in March 2023 provides valuable insights into the disciplinary and enforcement actions taken by the regulator in the first quarter of 2023. This article highlights some of the significant cases and issues discussed in the bulletin.

Disclosure of information

The HKEX continues to monitor listed companies’ compliance with the corporate governance code and disclosure requirements, taking disciplinary action against those who do not meet the standards. The HKEX conducted investigations together with the Securities and Futures Commission against a number of newly listed companies, and took disciplinary actions against the relevant companies and directors.

In one case, a listed company used a significant portion of its IPO proceeds to enter into an asset management agreement with one of the parties involved in the listed company’s IPO. This party in turn invested the entire amount into a promissory note issued by its affiliated party. No disclosure and necessary approval were made or obtained of the arrangement. Further, an upfront fee of US$3.5 million was paid by the listed company under the asset management agreement.

In another case, a listed company entered into a number of agreements for professional and consultancy services agreements around the time of its listing, as well as an investment management agreement. No disclosure was made in the prospectus about these agreements, despite a substantial portion of the listed company’s IPO proceeds would be used to settle the payments under the agreements. Subsequent disclosure of these agreements led to delay in publication of the company’s financial information.

Full and frank disclosure of information by listed companies remains a critical area of concern for the HKEX. The HKEX is of particular concern whenever a listed company engages in disclosing ‘partial truth’. Disclosing all the favourable information, and downplaying or burying material facts of an unfavourable nature may mislead investors. The problem of ‘partial truth’ disclosure could be particularly exacerbated when listed companies announce the resignation of their directors and auditors.

Enforcement actions

The bulletin also sets out the sanctions published by the HKEX in the second half of 2022.

The HKEX published sanctions in 13 cases in the second half of 2022. Among the 13 cases, unsuitability statement and prejudice to investors’ interests statements were made against the relevant directors. The HKEX reminded directors of their obligations to safeguard the assets and interest of listed companies; ensuring that transactions are entered into with proper commercial rationale; and exercise proper risk management following the entry into the transactions.

The HKEX enforcement bulletin can be found here.

In ensuring that compliance with the disclosure obligations, listed companies may consider developing and adopting various disclosure procedures, such as (i) overseeing and coordinating disclosure (nominating a director and/or senior officer overseeing and co-ordinating disclosure of information; educating directors and staff on disclosure policies and procedures); (ii) monitoring disclosure; (iii) releasing company information; (iv) handling rumours, leaks and inadvertent disclosures (developing protocols for responding to market rumours, leaks and inadvertent disclosures); (v) responding to analysts and responding to financial reports and projections.

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