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.