GENERAL

The Companies (Winding Up and Miscellaneous Provisions) (Amendment) Ordinance 2016 Gazetted

The Companies (Winding Up and Miscellaneous Provisions) (Amendment) Ordinance 2016 (Amendment Ordinance) was gazetted on 3 June 2016. The Amendment Ordinance aims to improve and modernize Hong Kong’s corporate winding-up regime. The Amendment Ordinance will come into effect on a appropriate date to be published in the Gazette.

Major provisions of the Amendment Ordinance include:

  • providing for the power of the court to set aside “transactions at an undervalue” entered into by a company within five years before the commencement of its winding-up. A “transaction at an undervalue” is defined as a transaction entered into by a company prior to its winding-up that involves an outright gift by the company to a party, or entered into by the company with a party on terms that provides for the company to receive no consideration or for a consideration which is significantly less than the value of the subject transaction;
  • introducing standalone provisions on the court’s power to set aside transactions which are “unfair preferences” (i.e. transactions entered into by a company prior to its winding-up that unfairly put a particular creditor in a better position than other creditors);
  • providing for the liabilities of directors and members concerned to contribute to the assets of the company in connection with a redemption or buy-back of the company’s own shares out of capital in cases where the company is wound up within one year of the relevant payment out of capital;
  • introducing additional safeguards to reduce the risk of abuse of power in a director-initiated creditors’ voluntary winding-up (e.g. there will be restrictions on the powers of the relevant provisional liquidator who will be liable to a fine in case of non-compliance without reasonable excuse);
  • enhancing the requirements relating to the first creditors’ meeting upon the commencement of a creditors’ voluntary winding-up to ensure that the creditors would have sufficient time and information to prepare for the meeting and make informed decisions; and restricting the powers of the members-appointed liquidator (before the holding of the first creditors’ meeting) and the directors (before the appointment of a liquidator) in order to safeguard against potential abuse;
  • streamlining the winding-up process in order to save time and costs for administration (e.g. simplifying the proceedings of committee of inspection appointed by creditors, and promoting court-free procedures); and
  • enhancing the integrity of the winding-up process by improving the regulatory measures for liquidators and provisional liquidators (e.g. expanding the list of persons disqualified for appointment as a provisional liquidator or liquidator to cover persons with potential conflicts of interest, and introducing a new requirement for disclosure by a prospective provisional liquidator/liquidator of specified relationships between him and his immediate family members etc. and the company concerned).

A copy of the Amendment Ordinance can be downloaded via the link below:

http://www.gld.gov.hk/egazette/pdf/20162022/es12016202214.pdf

New Open-ended Fund Company Structure to be Introduced in Hong Kong

The Securities and Futures (Amendment) Ordinance 2016 (SF Amendment Ordinance), which enables the introduction of a new open-ended fund company (OFC) structure in Hong Kong, was gazetted on 10 June 2016. The commencement date of the SF Amendment Ordinance is yet to be appointed by the Secretary for Financial Services and the Treasury by notice published in the Gazette.

Currently, an open-ended investment fund may only be established in Hong Kong in the form of a unit trust but not in corporate form (mainly due to various restrictions on capital reduction under the Companies Ordinance (Cap. 622)). Pursuant to the SF Amendment Ordinance, there will be a choice to allow such a fund to be set up in the form of a company. It is hoped that with this extra option for structuring a fund, more funds (whether public or private) will choose to be domiciled in Hong Kong, which will deepen and broaden Hong Kong’s asset management industry.

The Securities and Futures Commission (SFC) will be the primary regulator responsible for the registration and regulation of OFCs under the Securities and Futures Ordinance (Cap. 571) (SFO), whereas the Companies Registry will be responsible for the incorporation and statutory corporate filings of OFCs.

The detailed operational and procedural matters will be set out in a new piece of subsidiary legislation, the OFC Rules, to be made by the SFC under the SFO.

A copy of the SF Amendment Ordinance can be downloaded via the link below:

http://www.gld.gov.hk/egazette/pdf/20162023/es12016202316.pdf

LISTING RULES–RELATED DEVELOPMENTS

SFC and HKEx Issue Joint Consultation on Listing Regulation

The SFC and Hong Kong Exchanges and Clearing Limited (HKEx) have jointly issued the “Consultation Paper on the Proposed Enhancement to The Stock Exchange of Hong Kong Limited’s (Stock Exchange) Decision-making and Governance Structure for Listing Regulation”. The proposed enhancements aim to achieve closer coordination and co-operation between the SFC and the Stock Exchange on listing policy formation and listing regulation.

Key proposals made in the Joint Consultation Paper include the following:

  • While the listing function will remain within the Stock Exchange, two new Stock Exchange committees, namely the Listing Policy Committee and the Listing Regulatory Committee, on which the SFC and the Stock Exchange are equally represented, will be established.
  • The Listing Policy Committee, comprising representatives from the SFC and the Listing Committee as well as the Chief Executive of HKEx, the Chief Executive Officer of the SFC and the Chairperson of the Takeovers and Mergers Panel (Takeovers Panel), creates a forum for the relevant regulatory bodies to co-ordinate, collaborate and jointly develop listing policy that is responsive to regulatory needs.
  • To streamline the process for making important or difficult listing decisions, the Listing Regulatory Committee, comprising representatives from the SFC and the Listing Committee (but not the Chief Executive of HKEx, the Chief Executive Officer of the SFC and the Chairperson of the Takeovers Panel), will decide cases that involve suitability issues or have broader policy implications. This enables the SFC to have earlier and more direct input on listing matters and to collaborate with the Stock Exchange on decision-making, which will make the overall process more efficient.
  • The process for IPO applications will be simplified so that they can be vetted and approved more efficiently. According to the Joint Consultation Paper, it is expected that a large majority of IPO applications do not involve suitability issues or give rise to broader policy implications − these cases will be approved by the Listing Committee as is currently the case. In addition, under the proposed regime, the SFC’s Corporate Finance Division will no longer, as a matter of routine, issue a separate set of comments on the statutory filings made by new listing applicants.
  • For disciplinary matters, the structure for the conduct of disciplinary proceedings will be similar to the present one with the following enhancements:

(a) each disciplinary hearing (whether at first instance or upon review) will be chaired by a practising or retired senior counsel (or other individuals of equivalent qualification); and

(b) a reasoned decision will be published following each disciplinary hearing.

Set out below are the structure charts of the proposed regime:

For Non-Disciplinary Matters -

(Click here to view chart)

Key:

denotes reporting structure

------- denotes case flow

* The Listing Regulatory Committee will oversee, give guidance on and decide in the first instance any matter that arises in the day-to-day administration of the Listing Rules in relation to any of the following matters:

  • that involve the suitability for listing of a new applicant and its business under rule 8.04 of the Listing Rules;
  • that are of a novel, potentially controversial or sensitive nature;
  • that appear to have policy implications, whether arising from a listing application, a transaction by a listed issuer or otherwise; or
  • which decision will have general effect within the meaning of Rule 2.04 of the Listing Rules

(collectively, LRC Matters).

For Non-Disciplinary Matters -

(Click here to view chart)

Key:

^ To enhance procedural fairness for disciplinary matters, it is proposed that a Listing Disciplinary Chairperson Group consisting of practising or retired senior counsel (or other individuals of equivalent qualification) be established by the Stock Exchange. Each disciplinary hearing (whether at first instance or upon review) will be chaired by a member of this Group.

The deadline for submission of comments on this Joint Consultation Paper is 19 September 2016.

A copy of the Joint Consultation Paper can be downloaded via the link below:

http://www.sfc.hk/edistributionWeb/gateway/EN/consultation/openFile?refNo=16CP2

The Stock Exchange Issues a New Guidance Letter on IPO Vetting and Suitability for Listing

The Stock Exchange has issued a new Guidance Letter (GL68-13A) on IPO vetting and suitability for listing in view of the recent trend of listing “shell companies”. The Stock Exchange noted that there has been a number of listed issuers whose controlling shareholders either changed or gradually sold down their interests shortly after the regulatory lock-up period following listing. One explanation for this phenomenon could be the perceived premium attached to the listing status of such issuers rather than the development of the underlying business or assets. The Stock Exchange believed that such companies would invite speculative trading activities when identified by potential buyers.

Where the Stock Exchange has concerns in respect of listing applicants whose size and prospects did not appear to justify the costs or purpose associated with a public listing, this would raise questions regarding the companies’ suitability for listing. While the Stock Exchange did not prescribe a bright-line test in identifying such companies, it identified in the Guidance Letter a non-exhaustive list of characteristics such companies might have which would bring into question the suitability of their listings:

  1. small market capitalisation;
  2. only marginally meeting listing eligibility requirements;
  3. involve fund raising disproportionate to listing expenses (i.e. a high proportion of the listing proceeds were used to pay listing expenses);
  4. involve a pure trading business with a high concentration of customers;
  5. asset-light businesses where a majority of the assets are liquid and/or current assets;
  6. involve a superficial delineation of business from the parent whereby the applicant’s business is artificially delineated from the parent by geographical area, product mix or different stages of development; and/or
  7. have little or no external funding at the pre-listing stage.

When a potential listing applicant exhibits some of these characteristics, the Stock Exchange expects the applicant and its sponsors to provide a robust analysis to substantiate that the applicant is suitable for listing including, among other things, in respect of the following areas:

  • use of proceeds;
  • future objectives and strategies;
  • profit and revenue growth; and
  • (where an applicant is in a potential sunset industry) feasibility of business and the ability and resources to modify its business to respond to the market’s changing demands.

The Stock Exchange may impose additional requirements or conditions on applicants with the characteristics mentioned above or exercise its discretion to reject the applicant’s listing on the ground of suitability.

Separately, the Stock Exchange has also updated two Guidance Letters, namely, GL16-09 (on pre-vetting of documents and announcements in IPO cases and post-vetting announcements relating to price stabilization actions) and GL79-14 (on documentary requirements and administrative matters for collective investment scheme applicantions).

Copies of these Guidance Letters can be downloaded via the links below:

GL68-13A : http://en-rules.hkex.com.hk/net_file_store/new_rulebooks/g/l/gl6813a.pdf

GL16-09 : http://en-rules.hkex.com.hk/net_file_store/new_rulebooks/g/l/gl1609.pdf

GL79-14 : http://en-rules.hkex.com.hk/net_file_store/new_rulebooks/g/l/gl7914.pdf

SFC ENFORCEMENT ACTIONS

SFC Reprimands and Fines Three Securities Houses for Various Regulatory Breaches

The SFC has recently reprimanded and fined three securities houses for various regulatory breaches. Set out below are summaries of these cases:

  • In the first case, the SFC reprimanded and fined Guotai Junan Securities (Hong Kong) Limited (Guotai Junan) HK$1.3 million for non-compliance with the regulatory requirements in relation to ascertaining client identity.

In July 2014, Guotai Junan was unable to provide to the SFC (upon its request) details of the ultimate clients of certain transactions it effected for an intermediary client in Korea within the timeframe as stipulated in the Client Identity Rule Policy issued by the SFC. The intermediary client claimed that it could provide the requested information without its clients’ written consent. It was not until January 2015 that Guotai Junan provided the requested information to the SFC. Notwithstanding this, Guotai Junan continued to effect more than 8,000 transactions for the intermediary client between August 2014 and January 2015 despite having been reminded by the SFC of its obligation under the Client Identity Rule Policy to refuse the business of those who are not prepared to provide ultimate client information to the regulators within two business days upon request.

Guotai Junan has agreed to engage an SFC - approved independent reviewer, to review its systems and processes in respect of its compliance with the regulatory requirements to ascertain client identity.

  • In the second case, the SFC reprimanded SynerWealth Financial Limited (SynerWealth) and fined it HK$2.7 million for internal control failures relating to short selling orders and for failing to report the deficiencies of its trading system to the SFC in a timely manner as required under the Code of Conduct for Persons Licensed by or Registered with the SFC.

The SFC’s investigation found that from November 2012 to January 2014, there were at least 65 instances of short sales executed by SynerWealth due to its failure to put in place effective internal control procedures to detect and prevent short selling. The SFC also found that SynerWealth identified deficiencies in its self-developed trading system as early as January 2013, but it failed to report material errors or defects of the system to the SFC.

  • In the third case, the SFC reprimanded and fined Schroder Investment Management (Hong Kong) Limited (Schroder) HK$1.8 million for failing to disclose all notifiable interests in Hong Kong listed shares.

An SFC investigation found that from August 2005 to January 2013, Schroder failed to disclose to the Stock Exchange and the relevant listed companies all notifiable interests in Hong Kong listed shares held in client portfolios and managed by Schroders plc and certain of its subsidiaries (Schroder Entities) where they did not have or were unable to exercise proxy voting rights. Schroder was responsible for preparing and filing the notices to disclose all notifiable interests in Hong Kong listed shares for the Schroder Entities to the Stock Exchange and the relevant listed companies.

Although Schroder obtained legal advice to the effect that an “interest” in shares was broadly defined and included an interest in shares of any kind even where the Schroder Entities did not have a voting discretion in the relevant shares, Schroder failed to properly follow the advice.

According to Schroder, it discovered the disclosure failures in November 2012 when it was preparing to implement a new global system for the monitoring and reporting of disclosable interests in shares. In February and March 2013, Schroder filed a total of 236 substantial shareholders notices to the Stock Exchange to correct previous disclosure notices filed for the Schroder Entities from July 2010 to January 2013.

Copies of the relevant SFC’s Statements of Disciplinary Action can be downloaded via the links below:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/enforcement-news/openAppendix?refNo=16PR49&appendix=0

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/enforcement-news/openAppendix?refNo=16PR50&appendix=0

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/enforcement-news/openAppendix?refNo=16PR59&appendix=0

SFC Obtains Disqualification Orders against Former Senior Executives of Listed Company

The SFC has obtained disqualification orders in the Court of First Instance against three former senior executives of China Best Group Holding Limited (China Best) (namely, Mr Wang Jian Hua, former advisor to the board of China Best, his wife, Ms Ma Jun Li, former chairman and executive director of China Best, and Mr Zhang Da Qing, former chief executive officer and executive director of China Best) for breaching their directors’ duties in handling a proposed acquisition of interests in a coal mine in 2008.

The disqualification orders were made after the Court earlier found that Mr Wang had diverted to himself the corporate opportunity of a proposed acquisition of 60% of the equity interest in ChongHou Energy Resources Limited from Asset Rich International Limited (Asset Rich), a company ultimately owned by a nominee of Mr Wang and therefore not third parties independent of China Best. Mr Wang was also found to have devised a scheme to conceal his personal benefit in the proposed acquisition at the expense of China Best and failed to disclose his interest to China Best’s board and in the issue of two false and misleading announcements dated 3 March and 3 December 2008.

The Court also found that Ms Ma and Mr Zhang had failed to make reasonable enquiries in respect of Asset Rich’s and its ultimate beneficial shareholder’s background and connection with Mr Wang and had wrongfully authorized the issue of the two announcements.

Pursuant to section 214 of the SFO, the Court ordered that Mr Wang, Ms Ma and Mr Zhang be disqualified from being a director or being involved in the management of any listed or unlisted company in Hong Kong, without the leave of the Court, for 10 years, six years and six years, respectively.

Copies of the Court’s respective judgments on liability and on the length of the period of disqualification can be downloaded via the links below:

http://legalref.judiciary.gov.hk/lrs/common/search/search_result_detail_frame.jsp?DIS=101185&QS=%2B&TP=JU

http://legalref.judiciary.gov.hk/lrs/common/search/search_result_detail_frame.jsp?DIS=104269&QS=%2B&TP=JU

SFC Reprimands and Fines State Street Global Advisors Asia Limited over Management of Tracker Fund

The SFC has reprimanded and fined State Street Global Advisors Asia Limited (SSGA) HK$4 million for its failure to comply with regulatory requirements in managing the Tracker Fund of Hong Kong (Tracker Fund).

An SFC investigation found that from 1 December 2008 to 30 June 2013, the cash balances of the Tracker Fund which were deposited with State Street Bank and Trust Company’s (SSBT) demand deposit account did not earn any interest because SSBT’s deposit rates on Hong Kong dollars were zero. SSBT was the Tracker Fund’s trustee and an affiliate of SSGA. SSGA did not check the rate of interest offered by other banks. According to the SFC’s findings, the prevailing commercial interest rates on Hong Kong dollars for a deposit of the same size and term as the Tracker Fund’s cash balances were above zero during the relevant period. Further, SSGA wrongly represented in six interim and annual reports of the Tracker Fund that the Tracker Fund’s cash balances were placed in a non-interest bearing current account.

The SFC considered that SSGA had, in breach of the Code on Unit Trusts and Mutual Funds, failed to, inter alia:

  • ensure that interest received on the Tracker Fund’s deposit from its connected person was at a rate not lower than the prevailing commercial rate for a deposit of that size and term;
  • have adequate policies and procedures in place to comply with the regulatory requirements regarding the Tracker Fund’s deposits;
  • provide accurate information regarding the deposit accounts in the annual and interim reports of the Tracker Fund; and
  • avoid situations where conflicts of interest may arise, and/or manage and minimize the conflict by putting appropriate safeguards and measures in place where the conflict could not be avoided, in order to protect investors’ interests.

In deciding the sanctions, the SFC took into account that SSGA:

  • co-operated with the SFC in resolving the SFC’s concerns;
  • agreed to make a voluntary payment of HK$318,315 into the Tracker Fund;
  • agreed to engage an independent reviewer to conduct an internal controls review of the cash management policy and procedures of SFC-authorized funds managed by SSGA; and
  • had a clean disciplinary record in relation to its regulated activities.

A copy of the SFC’s Statement of Disciplinary Action can be downloaded via the link below:

https://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/openAppendix?refNo=16PR61&appendix=0

SFC Publicly Censures Two Entities within a Banking Group for Breach of Dealing Disclosure Requirements under the Takeovers Code

The SFC has publicly censured Bank of America, National Association (BANA) and Merrill Lynch International (MLI), units of the Bank of America Merrill Lynch Group (BofAML Group), as a result of their failure to disclose dealings in relevant securities in two groups of transactions (Transactions) in 2015 as required under the Takeovers Code.

The Transactions relate to the partial offer for China Resources Beer (Holdings) Company Limited and the privatization of Power Asset Holdings Limited, respectively, in which Merrill Lynch (Asia Pacific) Limited – a unit of the BofAML Group – acted as financial advisor. After commencement of the respective offer periods in the partial offer and the privatisation, BANA and MLI executed equity swaps as part of the Transactions, but both failed to comply with the dealing disclosure obligations under Rule 22 of the Takeovers Code.

In deciding the sanction, the SFC took into account BofAML Group’s full cooperation and the remedial measures it had put in place to ensure future compliance with the Takeovers Code.

A copy of the Takeovers Executive’s Statement can be downloaded via the link below:

http://www.sfc.hk/web/EN/files/CF/pdf/Public_censure/009%20-%20Public%20Statement%20(ENG)%20FINAL.pdf