On 20 March 2023, the Hong Kong Stock Exchange (HKEX) published the March 2023 edition of its Enforcement Bulletin, which provides helpful guidance on the HKEX’s expectations as to the issuers’ disclosure of information required under the Hong Kong Listing Rules. The HKEX also elaborated on some disclosure issues related to newly-listed issuers and its concerns over “partial truth” disclosures in public announcements.
The Disclosure of Information Requirements
Under the Hong Kong Listing Rules, timely disclosure of complete and accurate information is a cornerstone requirement for issuers as investors must be given sufficient information to make informed decisions on their investments in issuers. This includes information regarding all material factors which may affect the investors’ interests.
Listing Rule 2.13 in particular lays out the HKEX’s expectations on the presentation of information in company announcements, namely that they must be clearly presented and in plain language, and the information provided must be accurate, complete in all material respects, and not misleading or deceptive.
Issuers’ failure to comply with the disclosure requirements would render the disclosure mechanism ineffective and lead to potential prejudice to investors. The HKEX has demonstrated repeatedly that it would not hesitate to take regulatory and disciplinary action against issuers and their directors for any failings in connection with publishing misleading announcements.
Disclosure misconduct by newly-listed issuers concerning the use of IPO proceeds
The HKEX has conducted several investigations in relation to disclosures made by newly-listed issuers, including matters arising from the relevant prospectuses, listing application documents, and activities prior to and following the listing. In particular, the HKEX has expressed concerns over the following matters:
- significant changes in the use of IPO proceeds or outflows of money that were not properly disclosed to the public, despite the fact that these material factors could be relevant to the investors’ consideration;
- unusually high underwriting commissions or other listing expenses, and material amounts of discretionary listing expenses being paid by the listing applicant or its connected persons (also see the SFC and HKEX’s joint statement on IPO-related misconduct dated 20 May 2021); and
- questionable investments using a significant portion of the IPO proceeds, and seemingly disproportionate payments for consultancy arrangements, which lacked commercial rationale and appeared unfavourable to issuers, and may have been paid in full and in advance (also see the Review of Issuers’ Annual Reports 2022 issued in January 2023).
In this regard, the HKEX sought to remind issuers, directors, and professional advisers that they must ensure that timely and adequate disclosure is made concerning the use of IPO proceeds or any material commitments and expenditures to be incurred around the time of, or shortly after, the listing, and the HKEX will closely examine and monitor the use of IPO proceeds after listing to identify any failures and take enforcement action as appropriate.
“Partial truth” disclosures in company announcements are problematic
Another area of particular concern for the HKEX is the potential that company announcements do not sufficiently and properly reflect the full and complete truth of a matter and, instead, issuers may be inclined to cherry-pick and address only the positive or neutral matters while steering away from sensitive but material matters.
The HKEX notably indicated that this can happen where “a disclosure omits, buries, or downplays material facts of an unfavourable nature, or if favourable possibilities are presented as more probable than they really are.” The HKEX considers such announcements to be “passively” or indirectly misleading, since while the facts and information given may not be false, the omission of other relevant information gives a misleading picture to investors.
The HKEX cited the following examples:
- “Painting a rosy picture of the future prospects of a newly acquired business, whilst failing to disclose that the operation of the new business would be contingent upon obtaining certain governmental approvals which were known to be difficult to obtain.”
- “Attributing a delay in the publication of audited results to the Covid-19 pandemic, when the issuer is also aware, but does not disclose, that serious audit issues have been raised by the auditors, which would likely have resulted in delayed publication irrespective of the pandemic.”
The HKEX reminded issuers and directors that where an announcement is misleading by omission, it can be just as harmful as disclosures which are incorrect or untrue. The HKEX has made it clear that where disclosures are misleading by omission of material information, disciplinary action against those responsible may still follow even if the limited information disclosed was factually correct.
Resignation announcements for directors and auditors
The HKEX particularly noted that one of the common areas where “partial truth” disclosures are deployed is in the resignation announcements for directors and auditors. In particular, while common reasons are given for the departure of the relevant directors (such as to pursue other personal endeavours) or auditors (such as the inability to agree to an audit fee), there is potential for undisclosed underlying reasons of disagreement that may hint at more serious issues in play.
For directors’ resignations, the HKEX referred to the issuers’ obligation to announce the resignation and to disclose the reasons for it pursuant to Listing Rule 13.51. This obligation includes the need to assess whether there are any matters to be brought to the attention of investors and the directors are obliged to ensure such disclosure is accurate and meaningful. The HKEX mentioned the unhelpful practice of referring to “personal reasons” and indicated that careful attention is required to ensure that appropriate disclosures are made particularly if the resignation comes during a time of sensitivity.
For directors’ resignations, if the issuers’ announcements do not adequately reflect the circumstances of their departure, then this should be raised with the issuers or the HKEX. Directors are also reminded to make sure they retain proper records in this regard to demonstrate their compliance with their duties.
For auditors’ resignations, the HKEX noted that the issuers’ audit committees are expected to ensure that the auditors’ resignation letters clearly reflect the reasons for the resignations, and the issuers’ announcements should draw investors’ attention to any issues or matters affecting (a) the audit process, (b) the audit fee, or (c) the issuers’ relationships with the auditors. The HKEX referred to the open letter issued by the Accounting and Financial Reporting Council in January 2023 to public interest entity auditors and members of audit committees, and emphasised that simply citing disagreement over audit procedures or audit fees as a generic reason to hide deeper underlying issues which might be the real root cause of the resignation is problematic.
Other recent enforcement cases
In the Enforcement Bulletin, the HKEX also referred to various sanctions that it had imposed against issuers and directors in 13 cases during the second half of 2022. These included the first cases where Director Unsuitability Statements were imposed against 13 directors and Prejudice to Investors’ Interests Statements were also made against another 12 directors. These are among the most severe sanctions that the HKEX can apply to directors and are generally reserved for the most egregious cases of misconduct.
The main areas which have attracted the HKEX’s investigation and recent enforcement included:
- disclosure of inaccurate, incomplete and/or misleading information; and
- failure to comply with the procedural, disclosure, and approval requirements applicable to transactions which constituted (a) major and/or discloseable, and (b) connected transactions.
- breach of duties by failing to safeguard issuers’ assets or interests;
- breach of duties in relation to disclosure of inaccurate, incomplete, and/or misleading information;
- breach of duties by failing to avoid or properly address conflicts of interest in transactions;
- breach of duties by procuring an issuer to provide financial assistance to related parties and failure of other directors to monitor and follow up on relevant transactions; and
- breach of undertakings to cooperate with the Listing Division’s investigation.
These areas are likely to continue to be the HKEX’s key enforcement priorities going forward.
The latest Enforcement Bulletin highlights one of the HKEX’s key focuses on good disclosures. The HKEX’s concerns on “partial truth” disclosures are especially important for issuers and directors to bear in mind for future announcements (particularly including resignation announcements involving directors and auditors). The HKEX expressly stated that directors should not be satisfied with an announcement simply because the facts it contains are correct. The HKEX has made it clear that disclosing incomplete yet factually correct details of a matter may still be considered as misleading by omission. This is a stern reminder that factual accuracy, completeness, and timeliness are expected of issuers’ announcements, and the failure to meet these requirements could result in enforcement and disciplinary action taken by the HKEX against the issuers and directors. The recent enforcement cases demonstrate that the HKEX will not shy away from disciplining issuers and directors who fail to meet the expectations, including making prejudicial statements as to a director’s suitability to continue acting in such capacity.
One notable trend mentioned in the Enforcement Bulletin is the fact that the HKEX achieved early settlements with issuers and directors in five of the thirteen enforcement cases. Based on our experience, there is often an advantage to all parties if the disciplinary matter can be resolved by an early settlement, since this may result in a significant saving of costs, time, and resources, and the avoidance of a prolonged investigation and enhance the chance of persuading the HKEX to impose a less severe sanction. Issuers and directors should consider engaging in early settlement negotiations with the HKEX to improve the prospects of a more favourable outcome.
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