Background

In December 2024, The Stock Exchange of Hong Kong Limited (“HKEX“) completed its review of  the issuers’ annual reports for the financial year ended 2023 and published the Review of the Issuers’ Annual Reports 2024 (the “Report“) as well as the Guide on Preparation of Annual Report (the “Guide“) in order to assist issuers in preparing future annual reports. This article summarises the main findings and recommendations in the Report and the Guide.

Review of the Issuers’ Annual Reports 2024

HKEX completed its review of the issuers’ annual reports for 2023 and published the Report which consolidated HKEX’s assessment of issuers’ compliance with specific disclosure requirements under the Listing Rules, adopting a thematic approach and selecting specific areas based on regulatory concerns. The main findings and recommendations are as follows:

(a) Review of Specific Disclosure Requirements

(i) Share schemes: Some issuers only disclosed the number of option shares that could be granted under the remaining scheme limit, but failed to include the option shares that have been granted but not yet exercised.

(ii) Significant investments: Some issuers failed to make the relevant disclosures for significant investments, as significant investments are not confined to securities in the company, but also include funds or wealth management products. If the materiality threshold is exceeded, they must be disclosed.

(iii) Performance guarantees and use of proceeds from fundraisings: Some issuers omitted to disclose the expected timeline for applying unutilised proceeds from fundraisings. Even in the absence of a definitive timetable for the deployment of these funds, issuers should still indicate an approximate timing for fund usage, and update investors through announcements and/or in subsequent financial reports when there is better clarity on the timeline.

(b) Thematic Review

(i) Financial statements with auditors’ modified opinions

• Common examples are:
  • going concern uncertainty, commonly due to deterioration in economic condition and/or business and/or difficulties in obtaining financing; and
  • valuation of assets and limited access to accounting records, which are often attributable to lack of adequate risk identification policies and mitigating measures.
• Issuers should:
  • work closely with the auditors, closely monitor the execution and make adjustment as and when necessary; and
  • put in place adequate risk management and internal control systems through:
    • establishing an appropriate policy, to identify risks emerging from material changes in external environment, as well as internal factors (e.g. material mergers and acquisitions and major overhaul of business/operation model);
    • developing risk-mitigating controls and continuous review of their effectiveness;
    • proper documentation of control procedures and activities; and
    • regular reporting to the board for continuous oversight.

(ii) Material lending transactions

• Certain cases include director misconduct and/or internal control breakdown (e.g. loan impairments, repeated rollovers without commercial rationale, failure to safeguard loan rights).
• Issuers should ensure their controls over material lending transactions are adequate to safeguard shareholders’ funds.

(iii) Management discussion and analysis (MD&A)

• There is room for improvement in quality of disclosure, particularly in discussion of year-on-year performance variances; and significant events and risks, their impacts and issuers’ counter measures. Examples include:
  • Failure to identify and discuss specific underlying causes or business factors that drove the results;
  • Highlighting business plans (e.g., requiring substantial investments) without discussing estimated capital expenditure needs or how these needs will be met;
  • Inadequate disclosure of foreign exchange and interest rate risks, and failure to disclose their impacts or mitigation strategies to these risks; and
  • Disclosing a major change in the business model (e.g. shifting from self-operating to a franchise), but failure to provide reasons for such changes or its impact on financial results and the position in the current year and going forward.
• Newly listed issuers should strive for their MD&A disclosures to align with their listing documents. It is advisable to provide update on significant matters highlighted in the prospectus to enable investors to evaluate whether the post-listing developments are in line with the track record, business plan and prospects outlined in the prospectus.

(iv) Review of Financial Disclosure Under Prevailing Requirements (Including Accounting Standards)

• There is room for improvement in qualitative disclosure, especially regarding material accounting policy information, key judgements and estimates which should focus on how issuers have applied the accounting requirements according to their own facts and circumstances.
• Some issuers used non-GAAP measures, and in some cases the non-GAAP measures were not properly labelled; the reconciliation was omitted; and the adjusting items were not clearly explained.

Guide on Preparation of Annual Report

At the time of publishing the Report, HKEX also published this Guide which summarizes relevant key recommendations made by HKEX over the years after reviewing annual reports, as well as all disclosure requirements under the Listing Rules applicable to annual reports to assist issuers in preparing future annual reports.

(a) Mandatory disclosure requirements

(i) According to the Listing Rules (mainly Appendix D2) and guidance materials from HKEX, it is mandatory to disclose the following information in the annual reports:

• Directors, senior management and shareholders;
• Financial reporting, accounting and auditing matters;
• Issue of securities or resale of treasury shares and related matters;
• Public float;
• Repurchase of securities and treasury shares;
• Notifiable transactions;
• Connected transactions;
• Share schemes;
• (if applicable) Newly listed issuers;
• (if applicable) Issuers listed under special listing regimes or other listing structures; and
• Corporate governance / environmental, social and governance.

(b) Recommended disclosure in specific areas from thematic review

(i) Financial statements with auditors’ modified opinions

• If an issuer receives a modified audit opinion (covers “qualified opinion”, “adverse opinion” and “disclaimer of opinion”), it should disclose the following in the annual report:
  • Details of modifications and their actual or potential impact on the issuer’s financial position;
  • Management’s position and basis on major judgmental areas, and how the management’s view is different from that of auditors;
  • Audit committee’s view towards the modifications, and whether the audit committee reviewed and agreed with the management’s position concerning major judgmental areas; and
  • Issuer’s proposed plans to address the modifications.
• Issuers and their audit committees should engage in discussion with the auditors about the proposed action plans to increase the chance of successfully addressing the auditors’ concerns and resolving the audit issues.

(ii) Management discussion and analysis (MD&A)

• The MD&A provides narrative elaboration of the business trends and year-on-year variances (both positive and negative) of the financial results of an issuer compared to the preceding year, such as to allow investors to understand the key drivers of the issuer’s financial performance, risks and uncertainties of its business and related mitigating measures.
• For the content that needs to be covered in the MD&A, please refer to the Listing Rules Appendix D2, paragraphs 28(2)(d) and 32.
• To enhance the quality of disclosure, issuers are recommended to duly consider the following in determining what information to present in their MD&A:
  • Business review (including internal and external factors, using performance/efficiency indicators or industry specific ratios, material line items reported on the financial statements and other expenses)
  • Principal risks and uncertainties (including how it has affected, or is likely to affect their operation, financial position and business plans, and whether they can be mitigated)
  • Liquidity and financial resources (including how it plans to meet the relevant capital expenditure requirements, as well as the requirement to support daily operations and financial commitments (e.g. debt repayment), and whether there are any fundraising plan)
• Issuers should have due regard to their own circumstances in determining the appropriate information (in terms of type, scope and level of detail) with a view to facilitating investors in appraising the issuers’ past and future performance.
• In drafting MD&A, directors should also ensure that the presentation is clear, concise, fair, understandable and balanced, such that both good and bad news are presented and reported clearly and evenly, without glossing over or omitting material facts. Directors should endeavour to make the MD&A section informative and avoid using boilerplate statements. They are encouraged to challenge past practices of how key information is structured and conveyed, and make improvements as necessary.
• Issuers should strive to have their MD&A disclosure on par with the disclosure standard of a listing document.

(iii) Material asset impairments

• If an issuer reports a material asset impairment in its financial statement, it should discuss the circumstances that led to the impairment as part of its discussion on significant events or transactions during the financial year.
• Where the impairment is supported by a valuation, issuers should disclose details of such valuation, including:
  • Valuation method and reason for using that method;
  • Details of values of inputs used together with basis and assumptions; and
  • Explanation on any changes in valuation method used or inputs or assumptions.

(iv) Material lending transactions

• An issuer that engaged in money lending activities outside its ordinary and usual course of businesses (i.e. non-money lenders) should disclose the following:
  • Details of loan receivables (including major terms);
  • Discussion of any material impairments or write-offs of loan receivables and the basis of impairment assessments; and
  • Reasons for granting the loans and how they meet its business strategies.

(v) Performance guarantees

• Under the Listing Rules, an issuer is required to disclose in the annual report whether the actual performance of the acquired business meets the guarantee. If the guarantee is not met, the issuer is also required to:
  • disclose by announcement the shortfall; whether the vendor has fulfilled its obligation and the directors’ opinion on the fairness of their decision to exercise (or not exercise) the issuer’s rights under the terms of guarantee; and
  • provide appropriate updates in annual reports about the actions the directors have taken so far, and intend to take, and to explain the directors’ actions, in particular whether and how they are fair and reasonable and in the best interests of the shareholders.

(vi) Newly listed issuers

• The IPO prospectus contains material information on the listing applicant’s business, major shareholders, regulatory/industry environment, principal risks and other matters. After listing, issuers should disclose appropriate information in their annual reports to keep investors updated on the developments of major matters highlighted in the prospectus. For example:
  • Where there are material changes in circumstances as presented in the prospectus (such as material changes in financial performance and position, business environment and risks, business plans and use of IPO proceeds), the issuer should adequately discuss the changes and, if applicable, the directors’ actions to be taken.
  • Where the issuer was given non-competition undertakings by its major shareholders to establish a clear delineation between their businesses, the issuer should disclose whether such shareholders have fulfilled their undertakings
  • In some cases, the issuers might have undertaken (or required by the Listing Committee as a condition to listing) to take certain actions after listing. Such issuers are expected to take appropriate actions to fulfill such undertaking (or condition) and make relevant disclosure in the annual reports.
• Newly listed issuers should consult their compliance advisers for preparing the annual reports and other compliance matters.

(c) Financial disclosure under prevailing requirements

(i) Issuers should prepare the financial statements with a high standard of financial disclosure and ensure compliance with the applicable accounting standards.

(ii) When preparing financial information in annual reports, the following areas require particular attention: accounting policy information, judgements and estimates; revenue; business combinations; material intangible assets – impairment testing; valuation of Level 3 financial assets; credit risk disclosure on trade receivables; presentation of non-GAAP measures; and disclosure of possible impact of applying a new or amended standard in issue but not yet effective.

HKEX emphasised that other than the disclosure requirements set out in this Guide, issuers must ensure that their annual reports fully comply with all other relevant laws, rules and regulations, and industry standards, as applicable.

In addition, it is recommended that issuers and their audit committees adopt a proactive approach by communicating thoroughly with their auditors regarding audit plans, areas of focus for audits well before the end of that financial year in order to minimise the possibility of last-minute surprises.

In discrimination cases, when a court finds that an individual has suffered discrimination, it may award damages for “injury to feelings”. This type of compensation differs from economic losses, such as lost wages or incurred expenses. It specifically recognizes the emotional harm, humiliation, and distress that an individual may suffer due to discrimination.

The Hong Kong courts utilise established guidelines to quantify such damages, often referred to as “Vento bands”, named after a landmark UK case. The Vento bands have been considered and accepted by the Court of Appeal in Hong Kong and provide a range of monetary compensation that is categorised as follows:

• Lower Band: For less serious cases, where the act of discrimination is a one-off or isolated incident.
• Middle Band: For cases that do not merit the highest band but are serious enough to exceed the lower band.
• Upper Band: Reserved for the most severe cases, such as prolonged or systematic discrimination.

To ensure that compensation awards maintain their intended remedial value, the bands require periodically updates to reflect current economic conditions, including inflation.

It is also important to note that each case is unique, and the specific circumstances will always be taken into account when determining the appropriate level of damages. The court will consider factors such as the severity of the discrimination, its duration, and the psychological impact on the individual.

In the recent disability discrimination case in the District Court (陈詠琴 v 第一流行鋼琴教室有限公司 [2024] HKDC 2046), damages were awarded for “injury to feelings”. The Court took the opportunity to adjust the Vento scale bands for inflation as applied in Hong Kong.

The case involved a customer service officer at a piano learning centre who was dismissed due to her disability and related sick leave during her probation period, constituting an unlawful disability discrimination act under the Disability Discrimination Ordinance (“DDO“). The District Court ordered the employer to pay the employee HK$95,000 for injury to feelings and HK$48,000 for loss of income.

The Court’s Decision

The amount of damages for injury to feelings generally follows the scale established in the UK case of Vento v Chief Constable of West Yorkshire Police [2002] EWCA Civ 1871, i.e.,:-

(a)Top Band: £15,000 – £25,000;

(b) Middle Band: £5,000 – £15,000; and

(c) Bottom Band: £500 – £5,000.

The District Court in this case took into account the impact of inflation in Hong Kong and adjusted the amounts as follows:-

(a) Top Band: HK$285,000 – HK$475,000;

(b) Middle Band: HK$95,000 – HK$285,000; and

(c) Bottom Band: HK$9,500 – HK$95,000.

The District Court ruled that the discriminatory behaviour in this case was the most serious at the bottom band, or the lowest at the middle band, and decided that the amount of damages for injury to feelings should be HK$95,000 for the following reasons:-

(a) the discriminatory act was one-off in nature;

(b) throughout her employment, the employee maintained a good relationship with her colleagues, performed satisfactorily, and received no complaints;

(c) the employer’s abrupt dismissal of the employee just days before the expiry of the probationary period appeared to be a deliberate attempt to circumvent the obligation to provide a one-month notice or compensation in lieu;

(d) there were only 8 days between the employee’s notification of her disability and her dismissal. Given that she had just been diagnosed, she was experiencing significant worry and anxiety, which compounded the employer’s discriminatory treatment during this vulnerable time;

(e) following her dismissal, the employee experienced emotional distress and stress, leading to disrupted sleep and hindering her rehabilitation progress; and

(f) the employer never issued an apology and has expanded its business after the claim was filed, as if rubbing salt in the employee’s wounds.

Takeaways

This decision reinforces the legal protections against disability discrimination and raises awareness among employers regarding their responsibilities under the DDO. Employers must recognize that dismissing an employee due to his or her disability is unlawful, regardless of whether the employee is on probation or not. The increase in compensation inevitably leads to greater potential liability for employers and other respondents in successful discrimination cases, depending on the applicable compensation band.

Employers are advised to seek legal advice to ensure compliance with the DDO and to understand their rights and responsibilities when it comes to managing employees with disabilities. Regular legal reviews can help mitigate risks associated with discrimination claims.

The court decision can be accessed here.

We are pleased to announce that our corporate team successfully acted for Beijing Saimo Technology Co., Ltd. (“Saimo”, stock code: 2571.HK) on its initial public offering and H share listing on the Main Board of The Stock Exchange of Hong Kong Limited on 15 January 2025. We acted as Hong Kong counsel for Saimo.

Saimo is a PRC technology company focusing on intelligent connected vehicle (“ICV”) simulation testing technologies, and primarily engaged in the design and research and development of ICV simulation testing products and the provision of related testing, validation and evaluation solutions.

Our deal team was led by partner, Nicole Chan, and other team members included Mark Leung, Celeste Cheung, Ashley Liu and Christie Leung.

Background

In June 2024, the Hong Kong Stock Exchange (the “HKEX” or “Exchange”) released a consultation paper outlining proposed amendments to the Corporate Governance Code and related Listing Rules. The consultation period concluded on 16 August 2024, and on 19 December 2024, the HKEX published its conclusions. This article summarises the main revisions to the Corporate Governance Code.

Revisions to the Corporate Governance Code and Listing Rules

(a) Enhancing Board Effectiveness

The Exchange will not codify the requirement for appointing an independent non-executive director (“INED”) as “Lead INED”. Instead, the proposal for appointing a Lead INED where the chairman is not an INED will be introduced as a recommended best practice in the Corporate Governance Code. The adoption of any recommended best practice by an issuer is voluntary in nature. The Lead INED is not expected to manage day-to-day operations or explain company performance to shareholders or investors. In contrast, the Exchange reported that investors would expect a Lead INED to engage in a meaningful discussion with shareholders on matters such as strategy, governance and capital management, without disclosing material, non-public information.

Separately, in recognition of the importance of shareholders’ access to the board of directors, the Exchange has included an additional requirement in the conclusions requiring issuers to disclose engagement with their shareholders in their Corporate Governance Reports. The required disclosures include:

• the nature and frequency of such engagements;
• the groups of shareholders and representatives of the issuer who are involved; and
• the issuer’s approach to the follow up of these engagements.

Additional guidance on the role and functions of the Lead INED will be provided by the Exchange at a later stage.

(b) Mandatory Director Training

New provisions in the Listing Rules require:

• All existing directors to participate in mandatory continuous professional development training on designated topics[1] during each financial year (no specified minimum number of training hours).
• First-time Directors (i.e. those who have (i) never served as a director of a listed issuer or (ii) have not served as directors of a listed issuer within a period of three years prior to their appointment) must complete 24 hours of continuous professional development training within 18 months of their appointment.
• If a First-time Director has served as a director of an issuer listed on an exchange other than the Main Board or GEM within three years prior to their appointment, they will only be required to complete 12 hours of training.

Please note that the Exchange has removed the proposed “reset mechanism”, which is a proposal to reset the mandatory First-time Director training if such a director has resigned prior to completing the minimum training hours. This was considered an unnecessary burden for First-time Directors and thus removed.

Additionally, amendments to the Corporate Governance Code will require issuers to confirm that directors have participated in specified training and disclose the following details for each director, including:

• Training hours;
• Format or mode of training (e.g., external or internal provider or self-study);
• Training topics; and
• Names of external training providers.

(c) Board Performance Evaluation

Currently, regular evaluation of board performance is a “recommended best practice” under the Corporate Governance Code. The HKEX will elevate this requirement to a code provision, mandating that boards conduct performance evaluations at least every two years based on a “comply or explain” basis. The focus of the evaluation will be on the overall performance of the board, and whether its performance, together with the board’s skills, expertise and qualifications (as identified by the board skill matrix) are aligned with the issuer’s broader business and strategic goals. Issuers will have the discretion to determine the format of the evaluation, including whether the evaluation is conducted internally or externally; however, they must disclose the scope, process, and results of the performance evaluations in their annual corporate governance reports.

The HKEX will issue further guidance on the expected scope and level of detail for disclosure of a board performance review.

(d) Board Skills Matrix

A new code provision will be introduced to require issuers to establish a board skills matrix and disclose:

• The current skill set of the board;
• How directors’ skills, experience, and diversity align with the company’s objectives, values, strategies, and desired culture; and
• Details and plans for acquiring additional skills.

The Nomination Committee will be responsible for assisting the board in maintaining a board skills matrix, and HKEX will provide suggestions as to the format, scope and level of detail for maintaining an effective board skills matrix and making meaningful disclosure.

(e) Limit on INED’s Multiple Appointments

New provisions in the Listing Rules will limit INEDs to serving as directors in a maximum of six Hong Kong-listed issuers (an INED who serves as a director of more than six Hong Kong-listed issuers is an “Overboarding INED”). This rule will have a three-year transition period and an Overboarding INED must comply with the new requirement by the conclusion of the earliest annual general meeting held on or after 1 July 2028. During the transition period, if the board proposes to elect an individual who is an Overboarding INED, it must explain in the shareholder circular why the board believes such an individual can devote sufficient time to the board. The new provision will apply to listing applicants whose A1 submissions will be filed on or after 1 July 2025.

(f) Annual Assessment of Directors’ Time Commitment and Contribution

The Exchange will introduce a new mandatory disclosure requirement with respect to the annual assessment by the nomination committee on each director’s time commitment and contributions to the board. Such an assessment would consider the effectiveness of a director’s ability in the discharge of his or her responsibility taking into account their qualifications, experience, number of directorships held at listed issuers, time commitments in other significant external roles (such as full-time positions outside their directorships, consultant roles or public duties), and other factors related to their personality, character, independence, and experience.

The Exchange has also reminded that the nomination committee’s assessment should be a holistic one which should cover areas including the nature of a director’s involvement on the board and the commitment required from a director to perform his or her responsibilities effectively, and not simply focus on the number of hours spent by a director.

The Exchange has also clarified that while each director should be assessed, it is not expected that disclosure in the corporate governance report will be made on an individual named basis. The Exchange will provide further guidance on this.

(g) Independence of INEDs

New provisions in the Listing Rules will not allow an issuer’s board to include an INED who has served (as INED) for nine years or more. An INED who has been serving nine years or more (“Long Serving INED”) will no longer be considered an independent director. Following this nine-year term, an INED must not serve as an INED for the same issuer for at least three years (increased from the originally proposed period of two years). During this “cooling-off period”, they cannot serve as directors for the issuer or its holding companies or subsidiaries.

Given these proposed amendments, issuers should proactively consider and gradually implement future appointments for INEDs. It is important to note that the Listing Rules require listed issuers to have at least three INEDs, with their number not being less than one-third of total directors. Additionally, at least one INED must possess appropriate professional qualifications or relevant financial management experience.

The new requirements will be implemented in two phases:

• Phase one will apply to an issuer that has a majority of its INEDs being Long Serving INEDs, where such an issuer must not have Long Serving INEDs representing a majority of INEDs at the conclusion of the first general meeting held on or after 1 July 2028.
• Phase two will apply to all issuers, that an issuer’s board must not include any Long Serving INEDs at the conclusion of its first annual general meeting held on or after 1 July 2031.

Going forward, it will be a mandatory disclosure requirement to disclose the length of tenure and current period of appointment for each named director.

(h) Board and Employee Diversity

To enhance diversity among boards and employees, several amendments are proposed:

• New code provision requiring at least one director of a different gender to be on the nomination committee.
• Elevating current requirements for annual reviews of board diversity policies from a code provision to a mandatory disclosure requirement.
• New Listing Rules requiring issuers must have and must disclose diversity policies with respect to its board members and its workforce (including senior management).
•  Revised mandatory disclosure requirements requiring issuers to disclose separately gender ratios for (i) senior management, and (ii) the workforce (excluding senior management). This has revised the previous requirement which allowed the disclosure of gender ratio of the workforce, including senior management, as a group.
• Incorporating existing guidelines regarding temporary deviations from gender diversity requirements into Listing Rules – if a listed issuer is unable to meet the requirement to have directors of different genders on the board at any time (e.g., after the only female director resigns), it must immediately announce this fact, its details and reasons, and appoint appropriate directors within three months.

(i) Risk Management and Internal Controls

Boards must review the effectiveness of risk management and internal control systems at least annually. Several code provisions will be elevated to mandatory disclosure requirements in corporate governance reports, and issuers will be required to provide more detailed disclosures including:

• Main features of risk management and internal control systems (including any significant changes);
• Process used for reviewing these systems;
• Confirmation from the board regarding the appropriateness and effectiveness of these systems along with supporting information (including confirmations from management, relevant board committees responsible for risk management and internal controls, other internal departments, independent auditors, or external providers); and
• Details of any significant control failures or weaknesses identified during reviews that have been reported but not resolved along with any remedial measures taken or proposed.

(j) Dividends

It is currently a code provision that requires issuers to establish a dividend payment policy and disclose it in their annual reports. This requirement will be elevated to a mandatory disclosure requirement; issuers with established dividend policies must disclose:

• The purpose or objectives of that policy;
• Key factors considered by the board when deciding whether to declare, recommend or pay any dividends; and
• Confirmation that all dividend decisions made by the board during the reporting period comply with the issuer’s dividend policy (or explain any deviations).

Implementation Date

The revised provisions of the Corporate Governance Code and related Listing Rules are set to take effect on 1 July 2025. These changes will apply to corporate governance reports and annual reports for financial years commencing on or after that date.

For the new rules regarding the maximum tenure of INEDs and restrictions on multiple directorships, there will be a three-year transition period. Issuers and INEDs are reminded to ensure compliance by the conclusion of the first annual general meeting of an issuer following 1 July 2028.

Additionally, amendments concerning Long Serving INEDs will be implemented in two phases over a six-year transition period. The first phase requires that no issuer can have a board of directors, where the majority of its INEDs are Long Serving INEDs, by the conclusion of its first annual general meeting held on or after 1 July 2028. The second phase mandates that by the first annual general meeting held on or after 1 July 2031, no Long Serving INEDs may serve on the board of directors of any issuer.

[1] The continuous professional development must at least cover each of the following topics; (1) the roles, functions and responsibilities of the board, its committees and its directors, and board effectiveness; (2) issuers’ obligations and directors’ duties under Hong Kong law and the Listing Rules, and key legal and regulatory developments (including Listing Rule updates) relevant to the discharge of such obligations and duties; (3) corporate governance and ESG matters (including developments on sustainability or climate-related risks and opportunities relevant to the issuer and its business); (4) risk management and internal controls; and (5) updates on industry-specific developments, business trends and strategies relevant to the issuer.

The recent decision of the Hong Kong Court of First Instance (“Court“) in Anthony Mackay v Chi-X Asia Pacific Holdings Ltd [2024] HKCFI 2901 highlights the critical importance of having clear, written employment contracts in place.

Background

The case concerns a dispute between Mr. Anthony Mackay (“Mr. Mackay”) and Chi-X Asia Pacific Holdings Limited (“Chi-X AP”) regarding his employment as Chief Executive Officer of Chi-X AP. Mr. Mackay alleged that he had reached an oral agreement with Chi-X AP whereby he would receive an annual salary of US$500,000 and certain core entitlements, including participation in a Long-Term Investment Plan (“LTIP”) and a guaranteed first-year bonus of US$500,000 (“Alleged Guaranteed Bonus“), regardless of whether his employment would be terminated before the conclusion of his first year.

The terms of the Alleged Guaranteed Bonus were not reflected in the subsequently executed written employment contracts, which provided for a discretionary bonus for each financial year instead. Further, Mr. Mackay and Chi-X AP, both of which were legally represented, had engaged in negotiations over the terms of the LTIP. Although draft LTIP terms were presented to Mr. Mackay by Chi-X AP, he did not sign his agreement to the same because he wanted to check the figures. Mr. Mackay’s case was that he orally agreed to join the LTIP in a phone call with Chi-X AP’s representative subsequently.

Following the termination of Mr. Mackay’s employment by Chi-X AP within his first year, he brought claims against Chi-X AP for various entitlements, including but not limited to the Alleged Guaranteed Bonus and unpaid entitlement under the LTIP.

The Court’s Ruling

It is trite that while oral agreements can indeed be binding, the onus of proving their existence and terms rests squarely on the party asserting them. This burden of proof requires the claimant to adduce compelling evidence, and the Court emphasized the significance of contemporaneous documentation and subsequent conduct in evaluating the veracity of alleged oral agreements.

In assessing Mr. Mackay’s claims, the Court embarked on a fact-sensitive inquiry and examined the available evidence in detail. The claims supported by written documentation, such as those for remuneration for March 2016 (despite the stipulation in the amended employment contract that Mr. Mackay’s employment commenced on 1 April 2016), interest on late salary payments, outstanding ORSO contributions, and expense reimbursements, succeeded. However, the claims based solely (or largely) on alleged oral agreements were subject to more rigorous scrutiny.

The Court was not convinced that Chi-X AP had orally agreed to pay the Alleged Guaranteed Bonus to Mr. Mackay. The Court reached this conclusion upon considering, among other things, that neither the term sheets of Mr. Mackay’s remuneration package nor the communications between Mr. Mackay and Chi-X AP’s representatives before or after the start of his employment referred to any guaranteed bonus. On the contrary, the written employment contracts provided for a bonus the payment and amount of which would be determined by the board “in its absolute discretion”. The Court’s observation that Mr. Mackay’s pleadings on this point had evolved over time further weakened his position. Even on Mr. Mackay’s alternative case that the board of Chi-X AP failed to exercise its discretion to award a bonus to him in accordance with its common law duty of rationality and good faith (i.e. the Braganza duty), the Court was unable to conclude that the board’s refusal to award a bonus was irrational, perverse or lacking in bona fides. In this connection, the Court emphasized judicial restraint in interfering with board decisions, particularly when supported by documented financial and performance considerations.

Similarly, Mr. Mackay’s claim for his LTIP entitlement was dismissed. The Court found that his failure to formally accept the LTIP terms, combined with ongoing negotiations concerning the percentage allocation, undermined his assertion of a concluded agreement. The Court found his explanation that his and Chi-X AP’s lawyers were simply unaware of the oral agreement implausible, given the lack of any contemporaneous documentation or communication supporting his claim.

Implications and Significance

The Mackay decision reinforces the importance of well-drafted and comprehensive written employment agreements in Hong Kong. It serves as a cautionary tale for both employers and employees, highlighting the risks associated with relying on oral agreements, particularly for complex matters like executive compensation. Above all, this case reinforces the message that comprehensive written contracts are essential for establishing clarity, managing expectations, and preventing disputes from arising.

The full judgment can be accessed here.