At the end of October, the Hong Kong Stock Exchange issued its Consultation Conclusions on Review of the Corporate Governance Code and Associated Listing Rules. The financial crisis has highlighted the importance of corporate governance and the focus of the Stock Exchange in amending the Listing Rules has been to promote a higher level of corporate governance among issuers and to encourage greater accountability of issuers and their directors.

The implementation dates for the rule changes are to be staggered and will take effect on 1 January 2012, 1 April 2012 and 31 December 2012 (and a new rule requiring company secretaries to attend professional training will be implemented in stages according to the date of appointment of the company secretary).

The Stock Exchange has taken the opportunity to clarify how the rules on corporate governance apply under the "comply or explain" principle and the interplay between the Listing Rules and the provisions of the to be renamed Corporate Governance Code (currently the Code on Corporate Governance Practices). The regulatory framework is designed to give issuers flexibility in implementing its corporate governance systems whilst adequately protecting investors and the market. The Listing Rules are the mandatory standard of corporate governance for all issuers. In respect of the Code Provisions (CPs), the issuer may choose not to adopt the provision but it must explain the reasons for its decision in its Corporate Governance Report. For the recommended best practices (RBPs), the issuer is encouraged to comply, but does not need to explain non-compliance. This approach is now set out clearly at the beginning of Appendix 14.

There are lots of detailed tweaks to the Listing Rules, both to make the substantive changes to the requirements and to make plainer language amendments to improve the clarity, certainty and efficacy of the Listing Rules. Directors and company secretaries of listed issuers and their advisers need to understand the changes and ensure that issuers are is able to comply with the revised rules when they are implemented.

The main changes to the Listing Rules, CPs and RBPs are briefly summarised below:

Changes from 1 January 2012

  • Directors' duties - Rule 3.08 will be expanded to emphasise directors duties - directors will now be specifically required to take an active interest in the issuer's affairs. Delegating will be permissible but won't absolve the director from his/her responsibilities or from applying the required skill, care and diligence
  • Chief executive remuneration - Rule 13.51 will be amended to require disclosure of the remuneration of any chief executive who is not a director
  • Directors' voting restrictions - Rule 13.44 will be amended to remove the current exemption for directors voting on a resolution in which he is interested where the director's interest is less than 5%
  • Announcements relating to directors - Rule 13.51 will be amended to expand the circumstances where announcements relating to directors, supervisors and the chief executive are required to announcements on their appointment, resignation, retirement or removal. The requirement to announce information as to civil judgments relating to fraud, breach of duty or other misconduct will be expanded to all matters involving dishonesty
  • Company secretary - Rules 3.28 to 3.29 will be added relating to company secretaries (currently the requirements for company secretaries are contained in Rule 8.17). The Stock Exchange has clarified the factors the Stock Exchange will take into account in assessing the "relevant experience" of a company secretary which will include the length of employment with the issuer, the training undertaken, the person's familiarity with the Listing Rules and other relevant laws and regulations and the person's qualifications in other jurisdictions. Importantly, the company secretary will no longer need to be resident in Hong Kong. Company secretaries will be required to undertake 15 hours relevant professional training per financial year. Transitional arrangements apply to the implementation of the ongoing training requirement (depending on when the company secretary was appointed). The Stock Exchange will not provide accredited training courses but suggests that company secretaries can attend training courses provided by the Hong Kong Institute of Chartered Secretaries to satisfy this new requirement
  • Disclosure of exercise of options by a director of a subsidiary - Rule 13.25A will be amended to remove the requirement for a next day disclosure form in respect of an exercise of share options by a director of a subsidiary. An announcement in that regard will only be triggered if the change in share capital individually or in aggregates is 5% or more since the last monthly return
  • Exemption from poll voting requirement - Rule 13.39 (4) and (5) will be amended to provide an exemption from the requirement that all resolutions must be taken on a poll - the new exception will apply to procedural and administrative votes where the Chairman can decide that no poll is required. An example of a procedural/administrative matter which would fall under the exemption is a vote to adjourn a meeting to ensure orderly conduct
  • Removal of auditor - A new Rule 13.88 will be added requiring shareholder approval for the removal of an auditor before the end of its term of office - the issuer will be required to send a circular to shareholders with any written representations from the auditor to the shareholders and the auditor must be permitted to make written and verbal representations at the general meeting

Changes from 1 April 2012

  • Merger of Appendix 14 and Appendix 23 - Appendix 14 (Code on Corporate Governance Practices – to be renamed the Corporate Governance Code) and Appendix 23 (Corporate Governance Report) will be merged and will be effective on 1 April 2012. According to the Stock Exchange's FAQ's on the rule changes, in an issuer's first interim or annual report covering a period after 1 April 2012, the issuer must state whether it has complied with the CPs in the revised Code as well as under the former Code. Issuers may adopt the revised Code sooner than 1 April 2012
  • Directors' time commitments – A new Principle (A.1) will be introduced providing that the board should regularly review the contribution of directors and whether they are devoting sufficient time to their duties. In addition, a new CP (A.6.6) will be added requiring directors to inform the issuer of any change to their significant commitments in a timely fashion
  • Directors' training – A new CP (A.6.5) will be added, upgraded from the current RBP, on directors' training. In addition, directors must provide to the issuer records of training received. Further, issuers will be required to disclose in their Corporate Governance Reports how directors have complied with the training requirement
  • Chairman and chief executive – The current RBPs relating to the Chairman and chief executive will be upgraded to CPs (A.2.4 - A.2.9) to place greater emphasis on their roles and responsibilities. These include a requirement for the Chairman to hold at least annually meetings with the NEDs without the executive directors being present
  • Reappointment of director who has served more than nine years - A new CP (A.4.3) will be added, upgraded from the current RBP, providing that shareholders should vote by way of a separate resolution on any decision to retain an INED who has served more than nine years. Issuers will be required to include in the circular to shareholders the reasons why the board considers such director to still be independent
  • Website publication of directors' details – A new CP (A.3.2) will be added, upgraded from the current RBP, requiring that a list of directors be published on the issuer's and Stock Exchange's website. According the Stock Exchange's FAQs, issuers may publish this list on the Stock Exchange's website from 1 January 2012


  • Electronic board attendance permitted – A new CP (A.1.7) will be added clarifying that electronic attendance counts for board attendance
  • Company secretary - A new section F of the Corporate Governance Code will be added on the role and responsibilities of a company secretary. This provides that:
  • the secretary should be an employee of the issuer (if the issuer uses an external service provider, there should be a named person at the issuer for the service provider to contact)
  • selection, appointment or dismissal of the company secretary should be a board decision
  • the company secretary should report to the Chairman and/or chief executive
  • all directors should have access to the advice and services of the company secretary
  • Remuneration committee - Rules 3.25 to 3.27 will be added requiring an issuer to establish a remuneration committee with a majority of INEDs, an INED as Chairman, written terms of reference, an announcement obligation if the issuer fails to comply (with a three month rectification period) and a requirement to specify in the Corporate Governance Report which of the two permitted models for the remuneration committee the issuer has adopted. In addition, CPs B.1.1 to B.1.4 will be amended to:
  • require that professional advice to the remuneration committee should be independent
  • allow a model where the remuneration committee performs an advisory role to the board
  • remove "performance based" from the CP relating to directors remuneration
  • require issuers to make the terms of reference available on the issuer's and Stock Exchange's websites (according to the Stock Exchange's FAQs, issuers may publish such information on the Stock Exchange's website from 1 January 2012)
  • Nomination committee - New CPs (A.5.1 to A.5.5) will be added, upgraded from the current RBPs, requiring the
  • nomination committee to:
  • be established with a majority of INEDs and chaired by an INED or the board Chairman
  • have written terms of reference made available on the issuer's and Stock Exchange's websites (as for the remuneration committee, issuers may publish such information on the Stock Exchange's website from 1 January 2012)
  • include as one of its duties a review of the structure and composition of the board at least annually
  • have sufficient resources and enable it to seek independent advice at the cost of the issuer
  • Responsibility for corporate governance – New CPs (D.3.1 to D.3.2) will be added providing that the board should be responsible for corporate governance with terms of reference on duties to be performed by the board and its committees. Such policy and duties must be disclosed in the Corporate Governance Report. In addition, a new RBP (B.1.9) will be added requiring the board to regularly evaluate its performance
  • Audit committee and whistle blowing policy - A new CP (C.3.7) will be added, upgraded from the current RBP, providing that the audit committee's terms of reference should include arrangements for employees to raise concerns about financial reporting improprieties. CP 3.3(e)(i) will also be amended to require the audit committee to meet with external auditors at least twice per year (currently the requirement is once). In addition, a new RBP will be added recommending that the audit committee establishes a whistle blowing policy
  • Senior management remuneration – A new CP (B.1.5) will be added requiring disclosure of senior management remuneration by band
  • Monthly updates – A new CP (C.1.2) will be added requiring that management should provide monthly updates to board members to give a balanced and understandable assessment of the issuer's performance, position and prospects in sufficient detail to enable the directors to discharge their duties under Chapters 3 and 13 of the Listing Rules (this may include information such as management accounts and management updates)
  • Disclosure of long term basis for generating or preserving business value – A new CP (C.1.4) will be added requiring that the annual report should include an explanation of the basis on which the issuer generates or preserves value over the longer term and its strategy for delivering its objectives
  • Directors' insurance – A new CP (A.1.8) will be added, upgraded from the current RBP, providing that issuers should arrange appropriate insurance for directors
  • Resolutions – A new CP (E.1.1) will be added providing that issuers should avoid "bundling" resolutions and if bundled, should explain the reason and implications of the resolutions
  • Attendance of directors and auditors - New CPs (A.6.7, upgraded from the current RBP, and A.6.8) will be added requiring that NEDs (including INEDs) should attend board, committee and general meetings and contribute to the issuer's strategy and policies. The Corporate Governance Report must include the directors' attendance record by name. The CP relating to attendance of the Chairman of specified committees at the AGM is extended to the Chairman of "any other committees" (CP E.1.2) - this has also been extended to require that the management should ensure that the auditors attend the AGM to answer questions about, among other matters, the audit
  • Information on shareholders' rights – Issuers will be required to disclose in the Corporate Governance Report matters regarding shareholders' rights that were previously a recommended disclosure including: the way to convene an EGM, the procedures for sending enquiries to the board and for making proposals at shareholders' meetings (paragraph O of the revised Code)
  • Communications policy – A new CP (E.1.4) will be added requiring issuers to establish a communications policy
  • Constitutional documents – A new Rule 13.90 will be added requiring issuers to publish their constitutional documents on their own and the Stock Exchange's website. Additionally, a new disclosure requirement will be added (previously this was only recommended) requiring changes to the constitutional documents during the year to be disclosed in the Corporate Governance Report (Paragraph P of the revised Code)
  • Procedures for electing directors – A new Rule 13.51D will be added requiring issuers to publish on their website procedures for shareholders to propose someone to be elected as a director

Changes from 31 December 2012

  • one third of the board to be INEDs – A new Rule 3.10A will be added requiring at least one-third of the board to be INEDs. Issuers must comply by 31 December 2012. In addition, a new rule will be introduced to allow issuers a period of three months to comply with the requirement after any failure in complying

A copy of the consultation conclusions can be found here and a mark up of the Listing Rules can be found here. In addition, the Stock Exchange has issued a set of FAQs which can be found here.

The Listing Rule changes are extensive and all issuers, their directors, company secretaries and advisors must ensure they fully understand the new Rules and their implications before their implementation.

We would be happy to provide a training seminar on the rule changes. Please contact us for further information.