The Stock Exchange of Hong Kong Limited (HKEx) in its recent Enforcement Bulletin raises concern regarding issuers’ announcements which only tell part of the story. This can happen where the facts and information of the disclosure that are given are not necessarily false, but the disclosure omits, buries, or downplays material facts of an unfavourable nature, or if favourable possibilities are presented as more probable than they really are. It warns issuers that an announcement which is misleading by omission can be just as damaging as an announcement which states something which is incorrect or untrue.  Disciplinary action may follow against those responsible and it is no defence that limited information that was disclosed was not factually wrong.

Resignation of directors and auditors is specifically highlighted as a problematic area of such “partial truth” disclosures.

HKEx points out that it is common to see resignation announcements which state simply that a director is resigning for personal reasons or to pursue other endeavours, or that an auditor has resigned because of an inability to agree an audit fee. While such disclosure is appropriate in many cases, there is sometimes meaningful information for investors that requires a step deeper.  For example:

• a director may have decided to spend time on other endeavours because there has been an unresolved breakdown in his or her relationship with the rest of the board over a corporate governance issue.
• The impossibility of agreeing an audit fee may have arisen because the auditor has identified high-risk, problematic areas of concern in the audit which the issuer appears reluctant to address.

Resignation of directors

HKEx reminds issuers that careful attention must be paid to ensuring that appropriate disclosure regarding a director’s resignation are made, particularly if the resignation comes during a time of sensitivity, pressure (financial or otherwise), or disagreement for the listed issuer, the board or the director personally. In addition, “personal reasons” should only encompass reasons such as illness, bereavement or other genuine personal difficulties that change the director’s circumstances.

HKEx also reminds resigning directors that they should raise inadequate announcement regarding his or her resignation with the issuer or contact the Exchange directly if concerns persist.  HKEx restates the importance of good record-keeping, which could demonstrate how duties have been individually discharged.  Such record may be particularly important for a director who has resigned, or if there has been a disagreement amongst the board.

Resignations of auditors

HKEx echoes the concern of the Accounting and Financial Reporting Counsel (AFRC) that “disagreement over audit fees” has been used as a generic reason to hide the real root cause of the auditors’ resignation.

In AFRC’s open letter to public interest entity auditors and members of audit committee published in January 2023, it notes that out of 56 auditor resignations for the period from 1 November to 31 December 2022, 44 attributed their resignations to disagreement over audit fees.  AFRC is unconvinced of such reasoning given that audits for the December 2022 year-end financial statements should have already been commenced in the period, with related audit fees having been agreed in advance.

HKEx restates its reminder to audit committees that they are expected to ensure that the auditors’ resignation letter clearly reflects the reasons for their resignation, and procure the issuer to disclose in the auditors’ resignation announcement anything that needs to be brought to the shareholders’ attention regarding any issues or matters affecting the audit process or fee, or the issuer’s relationship with the auditors. HKEx further reminds AFRC’s expectation that audit committees should understand, and make appropriate disclosure of, the reasons for an auditor’s resignation.

HKEx also urges issuers and directors to avoid satisfying themselves with a “partial truth” disclosure either to avoid addressing sensitive matters or to buy time – such as attributing a delay in the publication of audited results to the Covid-19 pandemic, when the issuer is aware that serious audit issues have been raised by the auditors, which would likely have resulted in delayed publication regardless of the pandemic.

On 24 March 2023, The Stock Exchange of Hong Kong Limited (the “Exchange“) published the consultation conclusions (the “Consultation Conclusions”) on the listing regime for Specialist Technology Companies on the Main Board of the Exchange under the new Chapter 18C of the Main Board Listing Rules.  The new Chapter 18C, together with the guidance letter on Specialist Technology Companies (GL115-23) (the “Guidance Letter”), came into effect on 31 March 2023.

For more information, please refer to our article.

In the recent case of Chen Wencan and Another v. Secretary For Justice and Another[1], the Court of First Instance (CFI) has dismissed a judicial review application against the Securities and Futures Commission (SFC) relating to restriction notices issued in an ongoing investigation into a suspected “ramp-and-dump” scheme. The Applicants contended that the restriction notices issued by the SFC under sections 204(1)(a) and 205(1) of the Securities and Futures Ordinance (SFO) to freeze their assets in various trading accounts held with certain licensed corporations on the basis of section 207(e) of the SFO was unconstitutional as it (i) was not prescribed by law and (i) was a disproportionate interference with their property rights.

The CFI noted in this judicial review that similar issues had been dealt with earlier in the case of Tam Sze Leung and Others v Secretary for Justice and Another[2]. The CFI is not persuaded that there are any significant differences raised by the Applicants which point to any reason why a different view should be taken. The below is the summary of the court’s reasoning in Tam Sze Leung:

• Whilst the court agreed that the relevant administrative intervention powers granted to the SFC are highly intrusive to the individual’s property rights under articles 6 and 105 of the Basic Law, the court came to the overall conclusion that sections 204 and 205 when invoked on the basis of section 207(e) of the SFO satisfy the “prescribed by law” requirement as there is (i) sufficient clarity as to the scope and manner to exercise these powers and (ii) sufficient legislative safeguards (e.g. review mechanism in the Securities and Futures Appeals Tribunal and judicial review) to prevent abuses.
• The restriction or limitation from the exercise of powers under sections 204 and 205 is on balance no more than is necessary to accomplish the legitimate aim of the protection of investors and the public interest and strikes a reasonable balance between the societal benefits of the encroachment and inroads made with the constitutionally protected rights of the individual and does not result in an unacceptably harsh burden on the individual.

To conclude, albeit restriction notices are (i) issued against the licensed corporation (as the subject of the restriction) which is not accused of any wrongdoing and (ii) highly intrusive to the individual’s property rights, the recent judgment reaffirms the SFC statutory powers to issue restriction notices, in allowing the SFC to serve the important function of protecting the investors and the public interest.

[1] [2023] HKCFI 796; See https://legalref.judiciary.hk/lrs/common/ju/ju_frame.jsp?DIS=151339&currpage=T.

[2] [2022] HKCFI 2330; See https://legalref.judiciary.hk/lrs/common/ju/ju_frame.jsp?DIS=147488&currpage=T.

On 1 June 2023, the new regulatory regime for virtual asset trading platform (“VATP“) operators will come into effect, whereby all operators of centralised VATPs carrying on business in Hong Kong or actively marketing their services to Hong Kong investors need to be licensed by the Securities and Futures Commission (the “SFC“) under the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (Cap. 615) (the “New AMLO Regime“).  To prepare for this upcoming New AMLO Regime, the SFC consulted the public on its proposed regulatory requirements for VATP operators.

For more information, please refer to our article.

MinterEllison has collaborated with the Fresh Fish Traders’ School’s (FFTS) once again by sponsoring a Chinese New Year Card Design Competition. The winning design had been used as our greeting card for clients. This is one the ways MinterEllison gives back to the community, and the participating students have received supermarket and book vouchers as a token of appreciation.

Our Partner Katherine U, Associate Thomas Sham along with other Community Investment Committee members attended the awards ceremony held at FFTS on 31 March 2023. We are very pleased to be able to meet and present the prizes to the talented students in person after two years since the pandemic started.