The Stock Exchange of Hong Kong Limited (the "Exchange") recently announced changes to the Listing Rules, which impose, among others, greater demand on the board or the nomination committee when appointing independent non-executive directors (INEDs).

The changes were released in the consultation paper "Consultations - Review of the Corporate Governance Code (Code) and related Listing Rules", and will take effect on 1 January 2019.

We discussed the consultation paper in our  Update of 8 November 2017. In this article, we summarise the final rule or code changes in reference to the Main Board Listing Rules.  

1. Assessment of INED's Independence

 

Proposed Changes in the Consultation

Final Changes

Rule
3.13(3)1

Extend the cooling off period for a proposed INED, who has been a director, partner, principal or an employee of a professional adviser providing services to the issuer and related entities, from one year to three years.

The cooling off period is extended to two years.

Rule
3.13(4)1

Introduce a one-year cooling off period for a proposed INED who has had material interests in the issuer's principal business activities in the past.

Adopted.

Note 2 to Rule 3.131

Introduce a new note to encourage the inclusion of an INED's immediate family members' connection with the issuer in assessing his independence.

Adopted.
Immediate family members refer to the spouse and children under 18 years old.

RBP2A.3.3

Introduce a new requirement that the board states its reasons in the Corporate Governance Report determining that an INED is independent, even if he holds cross-directorships or has significant links with other directors through involvement in other companies or bodies.

Adopted.

Code Provision3 C.3.2

Extend the cooling off period for former partners of the issuer's audit firm to act as a member of the issuer's audit committee from one to three years.

The cooling off period is extended to two years.

2. INED's Time Commitment and Others 

 

Proposed Changes in the Consultation

Final Changes

Code Provision A.5.5

The information contained in the board's circular to shareholders accompanying the INED election resolution should include: 

(a) the process used for identifying the proposed INED and why the board believes the individual should be elected and the reasons why it considers the individual to be independent;

(b) if the proposed INED will be holding the seventh (or more) listed company directorship, why the board believes the individual would still be able to devote sufficient time to the board;

(c) the perspectives, skills and experience that the proposed INED can bring to the board; and

(d) how the proposed INED contributes to diversity of the board.  

Adopted.
No cap on multiple directorship but the board must explain if an INED holds seven or more.

Code Provision A.2.7

Requires the board chairman and the INEDs (excluding NEDs) to meet at least annually.

Adopted.

3. Issuer to have Board Diversity Policy, Dividend Policy and Nomination Policy 

 

Proposed Changes in the Consultation

Final Changes

Rule 13.92

Introduce new Rule 13.92 (previously Code Provision A.5.6) requiring the issuer to have a diversity policy and to disclose the policy or a summary of it in the Corporate Governance Report.

Adopted.
Diversity policy is upgraded from a Code Provision to a Rule requirement.

Code Provision E.1.5

Introduce a new Code Provision requiring the issuer to have a policy on payment of dividends and disclose it in the annual report.

Adopted.

MDR4L.(d)(ii)

Introduce a new requirement that the issuer should disclose its nomination policy in the Corporate Governance Report.

Adopted.

4. The Exchange's "Guidance for Board and Directors" ("Guidance")

The Exchange also published, together with the Consultation Paper Conclusions, the new Guidance for Board and Directors, which covers: 

(a) Directors' Duties and Board Effectiveness ( in which new listing applicants are encouraged to appoint INEDs at least two months prior to listing);
(b) Board Committees;
(c) Board Diversity and Policy (with specific recommendations on Gender Diversity);
(d) Company Secretary (with specific recommendations on using External Service Providers); and
(e) Corporate Governance For Weighted Voting Rights Issuers. 

Footnotes

1 Rule 3.13 sets out a non-exhaustive list of factors that HKSE takes into account when assessing the independence of INEDs.

2 RBP means Recommended Best Practice which is subject to voluntary disclosure under the Code.

3 A Code Provision is subject to 'comply or explain' requirement.

4 MDR means Mandatory Disclosure Requirements.

Visit us at www.mayerbrownjsm.com

Originally published on 3 August 2018

Mayer Brown is a global legal services organization comprising legal practices that are separate entities (the Mayer Brown Practices). The Mayer Brown Practices are: Mayer Brown LLP, a limited liability partnership established in the United States; Mayer Brown International LLP, a limited liability partnership incorporated in England and Wales; Mayer Brown JSM, a Hong Kong partnership, and its associated entities in Asia; and Tauil & Chequer Advogados, a Brazilian law partnership with which Mayer Brown is associated. "Mayer Brown" and the Mayer Brown logo are the trademarks of the Mayer Brown Practices in their respective jurisdictions.

© Copyright 2018. The Mayer Brown Practices. All rights reserved.

This article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein. Please also read the JSM legal publications Disclaimer.