The Hong Kong Stock Exchange (“HKEX”) has issued a comprehensive Guidance Letter (the “Guidance”) on independent investigations for listed companies suspended from trading due to allegations of accounting or corporate irregularities. The Guidance sets out the HKEX’s expectations on the investigation scope and procedures, independence and transparency requirements and how listed issuers can work towards resumption of trading as soon as practicable.

Here are some key takeaways from the Guidance:

Constitution of an independent committee

The Guidance emphasises the considerations that should be taken into account when forming an investigation committee to ensure its independence. The HKEX requires that each member of the independent committee to provide written confirmation of their independence, and the committee should not consist of directors whose independence may be reasonably questioned, including those potentially involved in or aware of the irregularities. For accounting-related matters, at least one committee member must possess appropriate professional qualifications or accounting expertise.

The Guidance expressly provides that it would not be appropriate for an independent committee to engage advisers who act for the issuer, its connected persons, or individuals involved in the irregularities.

Considerations when appointing an investigator

An investigator engaged by the independent committee must have the necessary expertise, competence, resources and time to perform the engagement. Consideration should be given to the investigator’s experience and reputation in handling inquiries of comparable scope and intricacy.

When irregularities involve potentially fraudulent activities, the committee should engage forensic investigators with appropriate expertise. The Guidance points out that changing investigators in the middle of an investigation is discouraged. In the event that a change becomes unavoidable, the issuer must publicly announce the change setting out full justification for the decision.

Planning, monitoring, and critical review

Independent committees must agree with the investigator on clear objectives, scope, and methodology, and to establish regular reporting mechanisms to monitor progress. For cases involving accounting irregularities, the HKEX emphasises the importance of maintaining regular communication with the issuer’s auditors and providing regular updates on any additional accounting-related issues or irregularities identified during the investigation. The committee must also ensure that the auditor is satisfied with the methodology and findings of the investigator.

An independent committee is expected to exercise appropriate scepticism rather than accepting findings at face value. For instance, when evaluating denials of involvement in unauthorised transactions, the committee must take into account the interviewee’s position and responsibilities. If an interviewee had transaction approval authority, investigators must thoroughly examine how they could have remained unaware of the questioned transaction.

Common defective investigations

The HKEX specifically identifies several common investigation deficiencies, including:

• Unclear selection criteria for investigation samples
• Inadequate investigation scope that fails to cover all material irregularities
• Insufficient alternative procedures to address investigation limitations

It is not uncommon that an investigation reveals areas in the issuer’s internal control system which could be further enhanced. If this occurs, an independent committee must critically assess whether there is any need to expand the scope of investigation and to sufficiently address any systemic issues.

Reporting and disclosure requirements

After the investigation results are ready, the issuer should publish the findings in a timely manner and to summarise the contents of the investigation report. The Guidance makes clear that the announcement should at least cover the independent committee’s assessment on the following matters:

• Whether the irregularity identified is an isolated incident, a recurring incident and/or a systemic failure and the basis of that view;
• The adequacy of the investigation conducted (including any limitations encountered during the investigation and how these were addressed or mitigated); and
• Any recommended remedial action.

The board of directors should also state its assessment of the impact of the irregularities on the issuer, and to set out a  timeline for implementing any remedial measures.

At MinterEllison, we have ample experience advising both issuers and independent committees on independent investigations and assisted a number of prolong suspended issuers to successfully resume trading. Please feel free to reach out to any of our team members if we can be of assistance.

We are thrilled to announce that Jun Kwong, Partner of our Dispute Resolution and Regulatory practice group, has received the prestigious LexisNexis® 40 UNDER 40 Award in the 2024 Greater China List.

The LexisNexis® 40 UNDER 40 Award is a prestigious recognition by LexisNexis® (a global provider of legal, regulatory, and business information services) celebrating 40 legal professionals under the age of 40 who have demonstrated outstanding potential for growth and a strong motivation to further the development of the legal sector.  Jun being recognised in the 2024 list demonstrates and celebrates Jun’s contributions over the past year and underscores his excellence.

Having worked with the seasoned litigators forming MinterEllison LLP’s dispute resolution team for over a decade, Jun has developed a wide-ranging dispute resolution practice, particularly focusing on financial services regulatory, contentious probate and estate administration, contentious competition law, and commercial litigation.  Jun’s expertise and dedication have been instrumental in numerous high-profile cases that the team has handled in the past few years, including a long High Court trial for a dispute over the estate of a billionaire, enforcement actions in the Competition Tribunal, an internal investigation leading to the resumption of trading of a Hong Kong listed company, and a regulatory action in the Market Misconduct Tribunal.

Jun’s ability to deliver outstanding legal work and provide practical, client-focused advice has not only generated significant value for MinterEllison LLP’s but has also pushed the boundaries of his legal practice in the Greater China region.  Jun’s recent accomplishment of passing the Greater Bay Area Lawyers Qualification Exam further demonstrates his commitment to expanding his capabilities and bandwidth of services to clients.

This award is also a testament to the collective effort and supporting culture of MinterEllison LLP, and reflects the high standards of excellence and innovation that MinterEllison LLP strives for.

We extend our heartfelt congratulations to Jun for this well-deserved recognition. We are proud to have Jun as part of our team and look forward to his continued success. Please join us in celebrating Jun’s remarkable achievement.

On 12 November 2024, the Securities and Futures Commission of Hong Kong (“SFC“) published a circular on the use of generative artificial intelligence language models (“AI LMs“) in respect of SFC licensed corporations (“LCs“) offering services or functionality provided by AI LMs or AI LM-based third party products in relation to their regulated activities (“Circular“). The SFC acknowledges that the AI LMs can be, or are being, used by LCs to respond to client enquiries, summarize information, generate research reports, identify investment signals, and generate computer code.

The SFC endorses the responsible use of AI LMs to promote innovation and enhance operational efficiency. In the Circular, the SFC reminds LCs about the risks associated with the use of AI LMs, including hallucination risks, biases, cyberattacks, inadvertent leakage of confidential information, and breaches of personal data privacy and intellectual property laws. The SFC also sets out expectations for LCs using AI LMs, including implementing effective policies, procedures, and internal controls. These include that LCs should ensure senior management oversight and governance, proper model risk management, effective cybersecurity, and data risk management.

Further, the SFC considers the deployment of AI LMs for providing investment recommendations, advice, or research to investors or clients as high-risk applications. Consequently, LCs are required to implement additional risk mitigation measures for such high-risk applications, including the necessity of involving human intervention to address hallucination risks and ensure the factual accuracy of the AI LM’s output before communicating it to the user. The SFC reminds LCs intending to adopt AI LMs in high-risk use cases that they must comply with the notification requirements under the Securities and Futures (Licensing and Registration) (Information) Rules and they are encouraged to discuss their plans with the SFC.

According to the Circular, it is observed that the general approach adopted by the SFC is that the obligation to provide correct information lies with LCs’ responsibility and professional duties. If there is incorrect information, the fault does not lie with the AI LMs but with the users, specifically the LCs in this instance, who have failed to carry out the necessary verifications. This approach is not new, and the use of AI LMs will depend on the effectiveness of human oversight as well as the ability to identify tasks for which AI LMs can and should be utilized.

Full version of the Circular can be found here.

In CTBC Bank Co., Ltd. v Industrial and Commercial Bank of China Limited [2024] HKCFI 2820, the Court of First Instance (“Court“) recently dismissed the defendant’s application for a stay of proceedings in favour of the Guiyang Intermediate People’s Court (“Guiyang Court“) on the ground of forum non conveniens (“FNC“).  Earlier this year, we reported on another case in which the Hong Kong Court dismissed a similar application (see our earlier news update here).

Background

The plaintiff (CTBC) served as the bank for the vendor in a transaction involving the sale of green petroleum coke from South America to Mainland China, with the defendant (ICBC) acting as the purchaser’s bank.  An irrevocable letter of credit (“L/C“) was issued in favour of the vendor, and the vendor presented all compliant documents, along with a bill of exchange for approximately CNY 63 million (“Sum“), to CTBC, stipulating payment from ICBC 90 days after sight of the bills of exchange.  ICBC confirmed the acceptance of the documents and set the payment date for 30 August 2023 (“Confirmation“).  Relying on this Confirmation, CTBC credited the vendor’s account with the Sum.

Subsequently and before 30 August 2023, ICBC was restrained from making the payment by an interim injunction order from the Guiyang Court, linked to allegations of fraud by the purchaser in proceedings against the vendor and ICBC’s Guizhou branch (“Mainland Fraud Proceedings“), which were commenced on 20 September 2023.  On 22 November 2023, CTBC initiated legal action against ICBC in Hong Kong for the recovery of the Sum under the L/C and the bills of exchange.

Shortly after the commencement of the Hong Kong proceedings, on 26 December 2023, ICBC initiated additional proceedings in the Guiyang Court against the vendor and CTBC as defendants, seeking to set aside the Confirmation and payment obligation under the L/C, based on the alleged L/C fraud by the purchaser (“Mainland Acceptance Proceedings“).

Principles on FNC

The applicable principles on FNC were set out recently in ING Bank NV v Industrial and Commercial Bank of China Ltd [2024] HKCFI 2220 (see our earlier news update here).  To answer the question whether there is other available forum with competent jurisdiction where the action may be tried more suitably for the interests of all the parties and the ends of justice, the Court adopts a three-stage test:-

1. First, the defendant applying for a stay has to establish that (i) Hong Kong is not the natural or appropriate forum; and (ii) there is another available forum that is clearly or distinctly more appropriate than Hong Kong (“Stage 1”). Stage 1 is considered from the point of view of the trial;
2. If the defendant establishes both (i) and (ii) above, the burden shifts to the plaintiff to establish that he will be deprived of a legitimate personal or juridical advantage if the action is tried in a forum other than Hong Kong (“Stage 2”);
3. If he can establish that, the Court will have to balance the advantages of the alternative forum with the disadvantages the plaintiff may suffer. The ultimate question is whether substantial justice will be done in the alternative forum (“Stage 3”).

The Court’s Decision

Having considered and balanced all the relevant factors, the Court was not satisfied that the Guiyang Court was clearly or distinctly more appropriate than the Hong Kong Court to hear the trial of this action:-

• Although the governing law of the L/C would be PRC law as the place of performance is in the Mainland, it is unlikely in the commercial sphere that there is a significant difference between Hong Kong law and PRC law. Indeed, the single joint expert’s report did not reveal any major difference.  Further, it is well-recognised that Hong Kong Courts are equipped to deal with PRC legal issues.
• In respect of ICBC’s fraud claim, such claim turns on issues of facts and Hong Kong Court is well-experienced in resolving the same.
• As regards one of ICBC’s defences that CTBC did not in fact negotiate the L/C, Hong Kong Courts will have no difficulty dealing with such legal issue.
• ICBC’s main argument in support of the stay application was the existence of parallel proceedings before the Guiyang Court and the risk of inconsistent findings. There is a risk that ICBC has to honour its payment obligation to CTBC in breach of the injunction order, which will be a real prejudice to ICBC.  However, the Court rejected such argument on the ground that CTBC was only a third party to the Mainland Fraud Proceedings without the right to make an independent claim, and thus the resolution of which will not provide any relief to it.  The Court held that there was a real possibility that the Guiyang Court would not determine certain key issues, including whether CTBC in fact negotiated the L/C or not and whether CTBC negotiated the L/C in good faith or not.
• As for the Mainland Acceptance Proceedings brought by ICBC, they were started after this action. The Court held that while CTBC was entitled to make a counterclaim in those proceedings in the Mainland, CTBC should not be compelled to participate in the same, especially when those proceedings involved other parties not pertinent to CTBC’s interests.
• Although some of the witnesses are in the Mainland, the Court held that there was no evidence that any of the witnesses would not be able to attend trial in Hong Kong in person or by video-link. Vendor’s witnesses had indicated an unwillingness to give evidence in the Mainland but a willingness to attend trial in Hong Kong.  CTBC’s witnesses are of course in Hong Kong.

Takeaways

In recent years, there has been a notable increase in cross-border disputes between Mainland China and Hong Kong.  This rise can be attributed to the growing economic integration and the complex legal landscape that governs their interactions.  As businesses and individuals from both jurisdictions engage more frequently in trade, investment, and various commercial activities, the potential for legal conflicts has escalated.  The Hong Kong Courts, known for their impartiality and adherence to the rule of law, play a crucial role in adjudicating such disputes.  They strive to balance the interests of all parties involved, considering factors such as jurisdiction, governing law, and the most appropriate forum for the resolution of conflicts.

Having looked at two recent stay applications based on FNC, it is observed that Hong Kong Courts will not easily stay legal proceedings simply because the governing law is PRC law or that there are elements of Mainland involvement.  The Hong Kong Courts will carefully examine and thoughtfully address any jurisdictional challenges, employing a rigorous principled approach while considering the interests of all parties and upholding justice.

Please see full judgment here.

The Hong Kong Court of Appeal (“CA“)’s recent decision in Sir Elly Kadoorie & Sons Limited v Samantha Jane Bradley [2024] HKCA 747 marks a significant development in the evolving tort of harassment, particularly its application to corporate plaintiffs. This case summary outlines the key aspects of the CA’s decision.

Background:

The plaintiff company, Sir Elly Kadoorie & Sons Limited (“SEKSL”), brought an action against the defendant, Ms. Samantha Jane Bradley (“Ms. Bradley”), a former senior employee, seeking an injunction to restrain Ms. Bradley from continuing her acts of harassment and damages for harassment. SEKSL sued on its own behalf and as a representative of its current and former officers, employees, and agents (collectively, “Representees“). The alleged harassment consisted of over 500 emails sent by Ms. Bradley between December 2020 and May 2022, containing repetitive and hostile accusations against SEKSL and associated individuals. These emails were sent after the termination of Ms. Bradley’s employment and a consultancy agreement that she subsequently entered into with SEKSL.

On 31 May 2023, the Court of First Instance dismissed SEKSL’s claims essentially on the ground that as a corporate entity, SEKSL had no standing to bring a harassment claim in its own capacity. Furthermore, the judge found that SEKSL did not have the “same interest” as the individuals it sought to represent, and therefore could not bring a representative action on their behalf. SEKSL lodged an appeal against this decision.

The Tort of Harassment at Common Law:

The CA reviewed the development of the tort of harassment in Hong Kong, noting that it has only truly emerged in the past decade. The CA summarised the elements a claimant in an action for the tort has to show as follows:

1. The defendant, directly or through third parties, engaged in a course of sufficiently repetitive, unreasonable, and oppressive conduct that caused (or he ought reasonably to know would cause) worry, alarm, emotional distress, or annoyance to the claimant victim;
2. The conduct complained of must, objectively, amount to harassment;
3. The defendant either intended to cause harm or injury to the claimant victim by his harassing conduct, or was reckless as to whether the victim would suffer harm or injury as a result of the harassing conduct; and
4. The claimant victim suffered actual damage caused by the harassment, which may include anxiety, distress, recognised psychiatric illness, and financial loss.

The CA noted that unlike jurisdictions such as the UK and Singapore, Hong Kong has not enacted specific anti-harassment legislation. As such, there remains scope for the common law tort of harassment to develop incrementally.

Availability of Injunctive Relief:

A significant aspect of the CA’s decision was its analysis of the availability of injunctive relief to SEKSL. The CA emphasised the wide and flexible powers of courts to grant injunctions, citing the UK Supreme Court’s recent judgment in Wolverhampton City Council v London Gypsies and Travellers [2024] 2 WLR 45. It held that the court has jurisdiction to grant SEKSL a “free-standing injunction” to restrain Ms. Bradley from continuing her acts of  harassment of the Representees, even if SEKSL itself cannot sue for harassment in its own capacity.

Corporate Plaintiffs and Harassment Claims:

On the question of whether a corporate entity can bring a harassment claim in its own right, the CA took a more nuanced approach than the lower court. While not definitively resolving the issue, the CA concluded that it was at least reasonably arguable that a corporate plaintiff could bring such a claim.

The CA suggested several potential ways the law could develop to allow harassment claims by corporate claimants. For instance, the concept of “worry, emotional distress or annoyance” might be extended to include the impact on relevant officers or employees dealing with the harassment. Alternatively, the damage that is necessary to complete the tort may take the form of the financial loss suffered by a company arising from counteracting harassing acts.

The CA emphasized that the boundaries of the common law tort are still being explored, and that there could plainly be scope for the common law tort of harassment to develop incrementally in Hong Kong to permit a corporate entity to bring an action for harassment in its own capacity. It rejected the notion that the tort’s development should be restricted by its original rationale of protecting individuals in densely populated areas, as proposed in Lau Tat Wai v Yip Lai Kuen Joey [2013] HKCFI 639, given the various ways modern technology enables harassment.

Decision and Orders:

The CA allowed SEKSL’s appeal and set aside the lower court’s orders. It held that:

1. The court has jurisdiction to grant SEKSL a “free-standing injunction” to restrain Ms. Bradley from continuing her acts of harassment of the Representees;
2. Whether the court ought to grant the injunction sought by SEKSL against Ms. Bradley can only be determined after trial, because the exercise of the court’s discretion whether to grant the injunction depends on the facts and circumstances of the case;
3. Since both SEKSL and the Representees are entitled to invoke the court’s jurisdiction for the grant of an injunction to restrain Ms. Bradley from continuing her acts of harassment, they have the “same interest” for the purpose of representative proceedings, and SEKSL is entitled to bring the present action as a representative action on its own behalf and also on behalf of the Representees against Ms. Bradley;
4. SEKSL’s claim for injunctive relief could not be struck out on the ground that it discloses no reasonable cause of action or is plainly and obviously unsustainable; and
5. Since SEKSL’s claim for injunctive relief is fact-sensitive, the claim is not suitable for disposal on point of law.

This judgment significantly advances the law on the tort of harassment in Hong Kong. It reaffirms the court’s broad jurisdiction to grant “free-standing” injunctive relief and leaves open the possibility for corporate entities to bring harassment claims in their own right.

The full judgment can be accessed here.