At Issue
12/14/2011 10:25:43 PM EST
New listing rules amendments on corporate governance
Edwin Kwok examines the latest amendments by the Stock Exchange on the corporate governance requirements for listed companies .under the Listing Rules.
Posted by LexisNexis

On 28 October 2011, The Stock Exchange of Hong Kong Limited (the ‘Exchange’) published conclusions to its 2010 Consultation Paper on Review of the Code on Corporate Governance Practices and Associated Listing Rules. This followed the receipt of 118 submissions from issuers, market practitioners, professional and industry associations, institutional investors and individuals.

In line with the corporate governance regimes in many other countries, the Exchange has adopted the ‘comply or explain’ principle as a central element in its regulation of listed issuers. The ‘comply or explain’ principle was introduced through the Corporate Governance Practices Code (the ‘Code’), which was modelled on the UK Corporate Governance Code, forms Appendix 14 of the Rules Governing the Listing of Securities of the Stock Exchange (the ‘Rules’). Under the ‘comply or explain’ regulatory framework, issuers are governed by a combination of Rules, code provisions (CPs) and recommended best practices (RBPs) as follows:

• Rules are standards of corporate governance requiring mandatory compliance by all issuers. If an issuer breaches any of the Rules, it may lead to sanctions.
• CPs provide an issuer with the flexibility to either adopt them or not. If an issuer chooses not to adopt them, then it must explain the reasons for its failure to adopt them in its corporate governance report; and if an issuer does not comply with CPs, it is not a breach of the Rules and there is no sanction.
• RBPs are desirable best practices that an issuer is encouraged to comply with. If an issuer chooses not to comply, then it does not need to explain.

The conclusions will add a new section to the Code explaining the rationale of the ‘comply or explain’ principle. It will be expressly stated in the Code that deviations from CPs are acceptable ‘if the issuer considers there are more suitable ways for it to comply with the principles’. Shareholders should not consider departures from
CPs and RBPs as breaches, and issuers must consider their own individual circumstances, size and complexity of operations, and nature of the risks and challenges they face in formulating their corporate
governance practices, which should not be a ‘box ticking’ exercise.

The main areas of the conclusions are discussed below. Most of the Rule amendments will be effective on 1 January 2012, while amendments to the Code and some of the Rules will be effective on 1 April 2012.

Independent non-executive directors (INEDs)

The consultation recognised the importance of INEDs and the conclusions have adopted various proposals to increase INEDs’ participation in corporate governance matters. One major change is to upgrade the recommendation to a Rule that ‘at least one-third of the board of an issuer should be INEDs’. This will bring Hong Kong rules in line with PRC regulations. Issuers must comply with the new Rule by 31 December 2012, and there will be a 3-month grace period to appoint a sufficient number of INEDs if the number falls below one-third.

The roles of INEDs in the sub-committees of the board have been strengthened. There will be new Rules requiring a remuneration committee to comprise a majority of INEDs and be chaired by an INED. Similar changes will be made to the nomination committee, except that the nomination committee could be chaired by the chairman of the board instead of an INED and the changes will be CPs instead of Rules. The recommendation that shareholders should vote on a separate resolution to retain an INED, who has served on
the board for more than nine years, will be upgraded to a CP. In the circular nominating an INED for election to the board, a CP will be upgraded from an RBP to require the board to explain why the person is independent and should be elected. To assist INEDs to express their views independently, the current RBP that the chairman should at least hold meetings with non-executive directors (NEDs) annually (including INEDs), without executive directors being present, will be elevated to a CP.

The conclusions, however, rejected the proposal imposing a limit on the number of INED positions an individual may hold. This is different from the relevant PRC regulation stating that an individual can, in principle, only concurrently hold the post of independent directors in a maximum of five listed companies. The Exchange also
rejected the observation that INEDs should be elected by minority shareholders only.

Directors’ duties, time commitments and training

The conclusions have expanded the description of the scope of directors’ duties by expressly stating in Rule 3.08 that ‘at a minimum, directors are required to take an active interest in the issuer’s affairs, obtain a general understanding of its business and follow up anything untoward that comes to their attention’. To address the concern that the amendment may affect delegation of responsibilities, the new Rule clarifies that directors may delegate their functions, but doing so does not absolve them from the required levels of skill, care and diligence,
which follows the common law position. A note will be added to Rule 3.08 to state that directors are generally expected to be guided by the Guidelines for Directors issued by the Companies Registry and the Guide for INEDs published by the Hong Kong Institute of Directors ( To enhance protection on potential claims against directors in the performance of their duties, particularly if a director may have insufficient means to meet the claims, the recommendation that ‘an issuer should arrange appropriate insurance cover in respect of legal action against its directors’ will be upgraded to a CP.

On directors’ time commitments, the Code will, for the first time, include a new principle to require the board to regularly review the time required from a director to perform his/her responsibilities, and whether each director is spending sufficient time performing them. A new CP has been introduced to require directors to inform the board of any change to their significant commitments in a timely manner. The new amendment is substantially less stringent than the position initially proposed, and the board is not required under the new principle to disclose the results of its review to shareholders.

The current recommendation on directors’ training stating that ‘all directors should participate in continuous professional development to develop and refresh their knowledge and skills’ will be upgraded to a CP, with further amendments clarifying that issuers should place an appropriate emphasis on the roles, functions and duties of a director in arranging and funding suitable training for directors. Disclosure must be made in the corporate governance report on how each director complies with his/her training requirements. The proposal to set a minimum 8-hour professional training for directors in each financial year was, however, not adopted.

Board committees

Various changes will be made to strengthen the governance of the remuneration committee, nomination committee and audit committee. The proposal to require an issuer to establish a corporate governance committee was dropped, but a new mandatory disclosure requirement requiring an issuer to disclose the performance of corporate governance duties in its corporate governance report will be added to the Code.

Establishing a remuneration committee (with a majority of INEDs) with written terms of reference will be made a Rule requirement, whereas the requirement to establish a nomination committee (with a majority of INEDs) will be upgraded from an RBP to a CP. The Exchange’s 2009 review found that 63% of issuers did not have a nomination committee. Upgrading the establishment requirement from an RBP to a CP is expected to impact on a large number of issuers. To enhance transparency, new CPs will be added to require the terms of references of the two committees to be made available on both the issuer’s and the Exchange’s websites.

In relation to the operation of the committees, a new CP has been introduced to expressly permit the remuneration committee to perform an advisory role to the board, with the board retaining the final authority to approve executive directors’ and senior management’s remuneration. The RBPs ensuring the nomination committee has sufficient resources and is able to seek independent professional advice at the issuer’s expense have been upgraded to CPs. The current CP that audit committee members should meet the external auditor at least once a year will be increased to twice a year, and the audit committee’s terms of reference will require committee members to review arrangements for employees to raise concerns about improprieties in
financial reporting, internal control or other matters of the issuer.

Board meetings and procedures

The current Rules allow a director to vote on a board resolution for a proposed transaction with a company which he/she is beneficially interested in no more than 5% of that company’s issued shares or voting rights. The conclusions have rightly removed the 5% exemption on the basis that the principle on materiality in Rule 2.16 stating that ‘there is no benchmark for materiality of an interest nor may it necessarily be defined in monetary or financial terms’ should equally apply to directors.

To tackle the concerns that some directors, particularly INEDs and NEDs, often lack sufficient information and knowledge of the issuers’ affairs to effectively perform their duties and discharge their responsibilities, there will be a new CP requiring all members of the board to be provided with monthly updates, which should give a balanced and understandable assessment of the issuer’s performance, position and prospects in sufficient detail to enable the board as a whole and each director to discharge their duties. Information in the monthly update may be ‘sensitive’ or confidential, but it need not necessarily be price-sensitive information. If, however, the update reveals undisclosed price-sensitive information, the director will be precluded from dealing in the securities of the issuer until the information has been properly disclosed to the market, which the issuer ought to do so as soon as reasonably practicable under Rule 13.09.

On the attendance of board meetings by directors, the Code will be amended to require mandatory disclosure in the corporate governance report of the number of board or committee meetings a director attended and the number of these meetings attended by his/her alternate. Attendance by an alternate will no longer be counted as attendance by the director himself/herself and attendance by electronic means, such as telephonic or video conference, may be counted as physical attendance subject to the issuer’s constitutional documents and the law of the place of incorporation.

Shareholders’ meetings and communication

To further strengthen the existing requirement that each separate issue at a general meeting be proposed and considered by way of a separate resolution, the conclusions have adopted requirements of the Singapore Code to prohibit issuers from ‘bundling’ resolutions unless the resolutions are interdependent and linked, so as to form one significant proposal. The Rules now mandatorily require voting by poll at general meetings on all matters. The conclusions adopted a new Rule to allow voting by a show of hands if the chairman, in good faith, decides that the resolution relates purely to a procedural and administrative matter. Procedural and administrative matters are those that: (i) are not on the agenda of the general meeting or in any supplementary circular to members; and (ii) which relate to the chairman’s duties to maintain the orderly conduct of the meeting and/or allow the business of the meeting to be properly and effectively dealt with, while allowing all shareholders a reasonable opportunity to express their views. The Exchange will publish guidance to provide further examples of procedural and administrative matters as ‘frequently asked questions’ (FAQs) on its website.

A new Rule has been introduced to require shareholders’ approval at a general meeting to appoint an auditor or remove an auditor before the end of its term of office. A new CP will be included to require the issuer’s management to ensure external auditors attend annual general meetings. Mandatory disclosure by issuers of attendance at general meetings of each director in the corporate governance report will be required in the future.

To enhance shareholders’ communication, a new CP stating that issuers should establish a shareholder communication policy will be introduced. Issuers will be required to publish their constitutional documents on their websites and the Exchange’s websites, and the procedures for shareholders to propose a person for election as a director on their websites. Significant changes to constitutional documents require mandatory disclosure in the corporate governance report.

Company secretary

The current Rules on a company secretary’s qualifications are Hong Kong focused. Given that, nowadays, a substantial number of issuers principally operate in the PRC and jurisdictions outside Hong Kong, the conclusions will remove the requirement for a company secretary to be ordinarily resident in Hong Kong and repeal Rule 19A.16, so that PRC issuers’ company secretaries will need to meet the same requirement as other issuers. A company secretary is also required to attend no less than 15 hours of relevant professional training in each financial year. The implementation of the company secretary training requirements will be staggered according to the date of appointment of an individual as the company secretary of an issuer.

To qualify as a company secretary, the Exchange will consider either: (i) the academic or professional qualifications; or (ii) the relevant experience of a person when deciding whether the person is capable of discharging the functions of a company secretary. The conclusions clarified that the Exchange will consider the person’s: (i) length of employment with the issuer and other issuers; (ii) familiarity with the Rules and other relevant laws and regulations; (iii) relevant training taken and/or to be taken; and (iv) professional qualifications in other jurisdictions, in assessing his/her ‘relevant experience’. A person may qualify as a company secretary if the Exchange is satisfied that he/she has the relevant experience despite not being a member of the Hong Kong Institute of Chartered Secretaries, a solicitor, barrister or professional accountant.


The amendments adopted by the conclusions must be welcomed. Most of the changes are not over-prescriptive as good corporate governance should not be imposed through a ‘one size fits all’ approach. Issuers should note that the Code will remind issuers that they should formulate a corporate governance framework that best suits them based on their own individual circumstances, which essentially is the spirit underlying the ‘comply or explain’ principle. Practitioners or compliance advisors advising issuers are advised to familiarise themselves with the amendments, particularly their respective implementation dates, in advising their clients on the new
requirements and ensuring their corporate governance reports satisfy the new mandatory disclosure requirements.

Edwin Kwok
Paul Hastings


The full text of the consultation conclusions, including the implementation dates of each amendment, is available under the ‘Home > News & Consultations > Market Consultations’ section on the Exchange’s website at:





• 《上市規則》-《上市規則》條文所要求的企業管治標準是適用於所有發行人的強制規定,如有違反可招致聯交所的制裁。
• 《守則》條文-發行人可靈活選擇遵守與否,如發行人決定不遵守,則須在企業管治報告內解釋原因。發行人選擇不遵守《守則》條文並不構成違反《上市規則》,不會遭受制裁。
• 建議最佳常規-建議最佳常規是明確訂明發行人可取的最佳常規,鼓勵發行人遵守,但不遵守亦毋須解釋。




諮詢文件認同獨立非執行董事的重要性,《諮詢總結》亦採納了多項有關增加獨立非執行董事參與企業管治的建議。其中一項主要修訂是將 「獨立非執行董事須佔董事會人數至少三分之一」這一建議升級為《上市規則》條文。此項修訂將使香港《上市規則》與中華人民共和國相關法規相符。發行人必須於2012年12月31日或之前遵從此條文。在發行人未能符合此項規定時,給予其三個月時間委任足夠人數的獨立非執行董事,以符合三分之一的人數規定。















現行的《守則》條文僅訂明在股東大會上每一項實際獨立的事宜應當個別提出決議案。為加強該規定,《諮詢總結》採納了《新加坡守則》之要求,進一步訂明發行人應避免「捆紮」決議案,除非有關決議案彼此間互相依賴,形成一項重要決議。現行《上市規則》強制要求股東大會就所有事項須以投票方式表決。《諮詢總結》採納了在《上市規則》新增條文,容許主席在股東大會上有權決定豁免程序及行政事宜以投票方式表決。程序及行政事宜指:(i) 並非載於股東大會通告的議程或任何致股東的補充通函內;及(ii) 牽涉到主席須維持大會有序進行及/或容許大會事務更妥善有效地處理,同時讓所有股東有合理機會表達意見等職責。聯交所將在其網站內以常見問題方式發出指引,列舉更多程序及行政事宜的例子。












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