- What financial information should a listed company disclose to its shareholders?
Listed companies have to abide by the Companies Ordinance and the Listing Rules in publishing their financial information. If it is a bank, it also has to observe the Best Practice Guide on Financial Disclosure by Authorized Institutions issued by the Hong Kong Monetary Authority.
The Listing Rules provides that for companies not incorporated in Hong Kong, the level of disclosure in their financial reports has to be the same as that of companies incorporated in Hong Kong. As the latter have to abide by the Companies Ordinance, in effect all companies listed in Hong Kong are bound by the provisions on financial disclosure in the Companies Ordinance.
The Listing Rules provides that the financial statements shall provide a true and fair view of the state of affairs of the listed issuer and of the results of its operations and its cashflows. The accounting method used and the disclosure made by listed companies are expected to comply with the accounting standards laid down in the statements of standard accounting practice issued by the Hong Kong Society of Accountants or the International Accounting Standards Committee.
In general, the financial information disclosed by the companies listed on the Main Board should include financial statements, annual and interim reports. For companies listed on the GEM, apart from disclosing the aforementioned financial information, they also have to issue quarterly reports, and in the first two years after being listed, compare every six months the business targets on their listing documents with their post-listing business performance.
It goes without saying that the requirements on financial disclosure in the Companies Ordinance and the Listing Rules are no more than general requirements and may not have taken into consideration the specific needs of investors in relation to companies of different industries. In view of this, the SEHK issued in September 1999 " Reference Disclosure Information in Annual Reports" which most listed companies can use as reference for financial disclosure, so as to enhance the quality of their financial statements and make such documents more geared to the needs of investors.
- Do listed companies need to issue inside information, e.g. "profits warnings", to the market?
Starting from 1 January 2013, a listed company has a statutory duty to disclose inside information in a timely manner.
The term "profit warnings" is not used in the law. However, inside information means information about a listed company that is not generally known to the public but would if generally known to them be likely to have a material impact on the price of the securities of the company. "Profit warnings" is therefore a common type of inside information that may have a major impact on the price of the securities of a company, thus requiring the listed company to make a disclosure. Other examples include:
- changes in the financial situation, business performance or profit forecast which may very likely cause a major fluctuation in the price of its securities;
- certain matters that will cause a major change to the assumption which the profit forecast relied upon; and
- any unexpected income generated or loss incurred due to some non-recurring business, and the amount in question accounts for a major proportion in the profit calculation.
Although whether a piece of information should be disclosed involves subjective judgement and depends on the facts and circumstances of each case, company directors have the responsibility of deciding if something is major information. They should make their judgement basing on factors such as the company's financial standing, asset value, market capitalization and business nature. If they are not sure if certain information should be disclosed, the Exchange should be consulted.
- To enhance the transparency of listed companies, should Main Board listed companies be required to announce their quarterly results?
More frequent reporting helps to improve overall disclosure and discourage leaks of price sensitive information. To set an example in this area the SFC now reports its results quarterly. In December 1998, the Exchange issued a consultation paper asking whether it was appropriate to introduce quarterly reporting for Main Board listed companies. The Exchange received little support for and much opposition to the proposal.
Since then, a number of jurisdictions have introduced quarterly reporting and there is now more support for introducing similar rules in Hong Kong.
- Should listed companies be required to: (a) distribute at least 70% of their profits to shareholders; and (b) seek at least 80% of their shareholders' approval if they wish to retain more than 30% of its profits?
It is not appropriate for the authorities to stipulate the amount of dividends a company should give its shareholders. The SFC is not aware of any jurisdiction that has similar requirements.
It is the listed company's commercial decision as to whether it is best to pay a dividend now or to use the cash to make profits that can enhance future dividends, so is the form of dividends. We do not consider it appropriate for the authorities to try interfere with commercial decisions of a company. The form and size of dividends are matters for the board of directors.
- Are there any requirements on the number of directors that a listed company must have?
There are no specific requirements on the minimum number of directors a listed company must have under the Main Board Listing Rules and the GEM Listing Rules. However, every board of directors of a listed company must include at least three independent non-executive directors who must satisfy the Stock Exchange that he has the character, integrity, independence and experience to fulfil his role effectively.
The Exchange may stipulate for a minimum number of independent non-executive directors which is higher than three, if in the opinion of the Exchange, the size of the board or other circumstances of the listed company justify it.
The jurisdiction in which a listed company is incorporated and its constitution documents may have its own requirements on the composition of the board of directors and accordingly the number of directors which a listed company can have may differ from one case to another.
- Can a listed company director be also director of any of the subsidiaries of that listed company?
Yes, he can. In fact, it is very common for a listed company director to hold different management positions within the listed group.
Under the Listing Rules (both for Main Board and GEM), a listed company is only specifically required to make public any changes in its own board but not the board of its subsidiaries. Therefore, if the subsidiary is not also listed on the Stock Exchange, its board changes may not necessarily be made public.
- Can a person be a director of more than one listed company?
Yes, he can. The Listing Rules do not impose a specific limit on the number of listed company directorship that a person can hold but a director needs to satisfy the Stock Exchange that he can fulfil such level of standard of fiduciary duties and duties of skill, care and diligence required of him under the Listing Rules (both for Main Board and GEM).
- How do I know that there is a change in the board of directors of a listed company?
A company listed on the Main Board is required to make arrangements to ensure that any changes in its directorate are made public by means of a press release or such method as the company thinks fit. These press releases are normally also posted on Stock Exchange's website. A company listed on GEM must announce these changes by an announcement in the GEM website.
- Should there be any restriction on the amount of salary and remuneration payable to the directors and management of listed companies?
It is not appropriate for the authorities to introduce rules that interfere with commercial decisions of a company. As such, the SFC does not think that the authorities should cap the amount of remuneration payable to a listed company's management. The level of management remuneration is a pure commercial decision for the listed company.
Any rule seeking to fix remuneration for directors of listed companies based on profits will need to have exceptions to deal with start up companies that have yet to make any profits and companies that incur losses. Without such exceptions these companies would soon find themselves with no directors. But any system of exceptions would require a regulator to judge what is the right remuneration. It is not appropriate or practical for the regulators to set the amounts for directors' remuneration.
- Is there any restriction on listed companies granting options or share offer scheme to its employees?
Pursuant to the Listing Rules, a company offering securities to be listed on the main board may offer normally not more than 10% of the securities in issue to the employees (and their family members) of the company, its subsidiaries or associated companies under preferential terms. However, such preferential arrangements are subject to the prior approval of the Stock Exchange of Hong Kong (SEHK).
For the Growth Enterprise Market (GEM), if the company is offering shares by placing, it is not allowed to introduce any preferential terms on the pricing. Nevertheless, in the share allocation process, a GEM company may set aside a pre-determined quantity of shares for placing to the employees in the group, or allow a particular rank of staff to be allotted more shares. However, the above placing arrangements must be fully disclosed in the listing document. The SEHK also reserves the right to reject any proposed placing arrangements mentioned above.
If a listed company or its subsidiary intends to grant to its employees options over shares, the relevant scheme is subject to the approval of the shareholders of the company, as well as the shareholders of its holding company listed on the main board or GEM in a general meeting. Any person (including connected persons) eligible for the share issue under such schemes is required to abstain from voting in the general meeting.
Moreover, the life of the options must not exceed ten years. The total amount of securities under the share option scheme within the specified period when aggregated with any securities under any other schemes must be limited to 10% of the relevant class of securities in issue. In granting the share options, the entitlement of any one participant must be subject to a fixed ceiling representing no more than 25% of the aggregate securities involved in the relevant scheme.
Besides, the subscription price must be on a fair and equitable basis. For main board companies, the price must normally be no more than 20% below the average closing price of the shares for the five trading days preceding the date of grant. For GEM companies, the subscription price must be at least the higher of -
- the closing price of the shares on the date of grant, and
- the average closing price of the shares for the five trading days preceding the date of grant.
- Should listed companies be required to seek at least 75% of their shareholders' approval if they wished to use more than 10% of their assets?
Currently, listed companies are required to:
- disclose all transactions to buy or sell assets which value is 15% or more of the company's assets or consolidated assets; and
- seek their shareholders' approval where the amount involved is 50% or more of the company's assets or consolidated assets.
Listed companies must seek their shareholders' approval if they or their subsidiaries enter into any transaction to buy or sell assets to or from their directors, chief executives, or substantial shareholders and their associates.
In May 1999, the Exchange issued a consultation paper dealing with proposed changes to the rules on transactions and connected transactions. In general, the responses supported the current thresholds for transactions requiring shareholders' approval are appropriate.
However, it has been recognised that the Listing Rules need to be refined in respect of Main Board listed companies with negative or negligible net tangible assets. Under the current rules, companies listed on the Main Board with negative or negligible net tangible assets will need to seek their shareholders' approval for any transaction made. In these circumstances, there is a need for other tests that allow listed companies to continue their day-to-day operations while protecting the shareholders' rights to information and to vote on significant transaction. The Exchange will consult the market regarding this matter in due course.
- Is there any role conflict for SEHK to regulate the listing matters of HKEx (stock code: 388)?
On 3 March 1999, the Financial Secretary announced in his budget speech a structural reform for the Hong Kong securities and futures markets which included merging five recognized and approved market operators (including Stock Exchange of Hong Kong (SEHK), Hong Kong Futures Exchange (HKFE), Hong Kong Securities Clearing Company (HKSCC), SEHK Options Clearing House and HKFE Clearing) into one holding company, i.e. Hong Kong Exchanges and Clearing Ltd (HKEx), and listing the shares of the HKEx in SEHK.
To ensure that the HKEx would perform its responsibilities as a listed company, the SFC and HKEx have made a number of arrangements, including the formulation of the Exchanges and Clearing Houses (Merger) Ordinance, revising the Listing Rules and entering into a Memorandum of Understanding.
According to the Exchanges and Clearing Houses (Merger) Ordinance, as a recognized exchange controller, HKEx has the responsibility of ensuring that the securities and futures trades of the two exchanges are done in an orderly and fair market; that it would always act on the principle of public interest when it is performing its responsibilities; and that when there is any conflict of interest, public interest should prevail.
The Listing Rules has also been revised to include a new chapter on the listing of HKEx (Chapter 38). The new provisions stipulate that in relation to HKEx's application for listing and status as a listed issuer, the SFC has the powers and functions that SEHK has in relation to a listed issuer, except for the power to make Listing Rules. In cases where a conflict of interest may arise, the SFC has the powers to remove the power of the Exchange. As a listed company, HKEx has to take up all the rights and obligations of a listed company.
The Memorandum of Understanding signed by the SFC, HKEx and SEHK states that for matters involving HKEx, all actions and decisions that should have been taken by the SEHK should be made by the SFC, unless in circumstances where the SFC has stated in writing that a conflict of interest will not arise if an action or decision was to be taken by the Exchange. Furthermore, the SEHK should report to the SFC immediately of any abnormal market activities it spotted in its daily market surveillance exercise in the securities of the HKEx which indicate a possible breach of the relevant rules and regulations, codes and licence conditions.
- Is investment advice published in newspapers regulated?
Anyone who engages in the provision of specific investment advice in return for remuneration must be licensed by the SFC, and any failure to do so may result in prosecution. However, given the protection of press freedom under the Basic Law, Bill of Rights Ordinance and the Common Law, newspapers and other print media enjoy the freedom to publish opinions and standpoints. As a result, for articles in newspapers and other print media which contain investment advice for public consumption, the commentary work of the authors of such articles do not fall within the scope of "advising on securities/futures" as defined in Securities and Futures Ordinance (SFO) and therefore, do not have to hold an SFC licence.
Although journalists are exempted from the registration requirement in respect of the publication of their investment advice, they are still required to observe other provisions under the SFO. If there is evidence showing that a particular journalist has made false or misleading statements in any newspapers or print media to induce the sale of the securities of any corporation, the SFC may prosecute the person concerned. In addition, should anyone deliberately disseminate statements indicating that the activities of certain market participants will cause the price of a particular security listed on the Stock Exchange to soar or plummet thereby creating a false and misleading appearance of active trading in that security, the person concerned is also liable to prosecution. The SFC currently monitors the financial press on a daily basis, paying special attention to articles with analyses on various securities investments. The SFC is determined to take immediate action if any offences are found.
In general, investors who have incurred losses in reliance on any advice and suggestions published in the newspapers or other print media may consider instituting legal proceedings demanding compensation from the relevant parties in respect of any advice that has been provided through their negligence. However, it may be difficult for the investors to establish their grounds for the legal proceedings. Therefore, success for claims in relation to the above activities are very often not so forthcoming. As a result, investors must exercise caution and scrutinize any market information which may itself be subject to verification and must refrain from making reckless investment decisions based on such information.