In recent months the Hong Kong regulators have taken various initiatives to strengthen corporate governance in Hong Kong. Among these are the amendments to the Takeovers Code (please see the article "Revised Takeovers Code Effective" above) and a consultation paper, released by the Stock Exchange on 21 January 2002, outlining proposed amendments to the listing rules which specifically address corporate governance issues.
The proposed reforms have had mixed reception - some criticise them as half-hearted and much too conservative to make any real difference to Hong Kong’s corporate governance landscape. Nevertheless, if adopted, they are likely to bring major changes to the daily practice of many market practitioners in diverse ways. The areas affected include the treatment of different types of notifiable transactions, definition of "connected persons" of listed companies, listed companies’ voting procedures, directors’ practices and disclosure of vital information, among others.
The consultation paper is organised under the three headings set out below. The following are some highlights of the proposals.
A. Protection of shareholders’ rights
- Various reforms have been proposed on shareholders’ approval for different types of transactions. For example, voting by poll will be required for all connected transactions and all resolutions requiring independent shareholders’ approval.
- In certain circumstances an independent board committee must be appointed to advise the independent shareholders on voting, and an independent expert engaged to advise the such committee.
- Transactions entered into by listed companies will be reclassified and the approval process for each type of transaction revised. For example, a new category of "very substantial disposals" will be created, for which shareholders’ approval will be required.
- More safeguards will be put in place to prevent dilution of shareholders’ interests. For example, unless a listed company can show to the Stock Exchange’s satisfaction that it is in severe financial difficulties, no issue of shares under a general mandate will be allowed if a placing or subscription price in any placing and top-up arrangements represents a discount of 20% or more to the trading price of the shares.
- There will be tighter restrictions on major shareholders of a listed company disposing of their interests shortly after listing.
- To prevent the company from changing the nature of its business to the detriment of investors’ interests, shareholders’ approval will be required for any transaction or series of transactions within 12 months after listing, which would result in a material change to the character or nature of the company’s business.
- The approval procedure for de-listing a company will be brought in line with the revised Takeovers Code provisions (see previous published article "Revised Takeovers Code Effective").
B. Directors and board practices
- The role of independent non-executive directors will be enhanced. Among other things, further guidance is proposed to be issued by the Stock Exchange to clarify the requirement for "independence" of such directors. Listed companies will be required to appoint a number of independent non-executive directors which represents at least 1/3 of the board, and not less than two in any event, with at least one such director having appropriate professional qualifications or experience in financial matters.
- Minimum standards for board practices will be set out in the Code of Best Practice, which, however, will only be recommended and not mandatory at this stage.
- The establishment of governance committees will be encouraged. Audit committees satisfying certain rules of composition will be required, whilst remuneration and nomination committees will be recommended.
- Listed companies will be required to disclose in their half-year and annual reports various governance matters, such as whether the companies have met the minimum standards in the Code of Best Practice.
- The duties and responsibilities of listed company directors, together with recommendations and requirements for their proceedings, will be set out in more detail. For example, more restrictions will be imposed on directors’ securities dealings and shareholders’ approval will be required for certain types of directors’ service contracts.
C. Corporate reporting and disclosures of information
- MB companies will be required to publish quarterly reports and to issue quarterly results announcements within 45 days after their quarter-end.
- Summary half-year reports will be allowed. Certain disclosure and timing requirements for such summary reports will be imposed. Half-year reports and results must be issued within two months of the relevant period-end
- Companies will be required to publish and despatch their annual reports within three months of their financial year-end.
© Herbert Smith 2002
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