William Wong, Associate, Deacons, outlines some common deficiencies in corporate disclosures which frequently result in the need to issue clarification announcements.
Listed companies in Hong Kong are reminded that insufficient information or deficiencies in corporate disclosures may lead to the issue of clarification or supplemental announcements. This article reminds listed companies of certain aspects of the following types of corporate disclosures to which they should pay attention so as to avoid the need to issue clarification announcements.
- Announcements relating to resignation of directors – are they really resigning for ‘personal reasons’?
- Profit warning/alert announcements – are there specific figures to accompany the profit warning/alert? Is it a ‘profit forecast’ under the Takeovers Code during an offer period?
- Announcements relating to continuing connected transactions – have you disclosed the pricing policies?
- Annual reports – have you disclosed the actual use of proceeds from equity fund raisings?
1. Are your directors really resigning for ‘personal reasons’?
According to the Guidance on disclosure when a listed issuer’s director resigns, jointly released by Hong Kong Exchanges and Clearing (HKEx) and the Hong Kong Institute of Directors in 2007, HKEx does not consider it sufficient for listed companies to disclose that their directors have resigned for ‘personal reasons’ without further elaboration. We note that in recent years there have been a few instances where listed companies issued clarification or supplemental announcements to further elaborate on the ‘personal reasons’ for resignation.
Listed companies are reminded to take note of the said guidance in making disclosures when their directors resign. Salient points of the guidance are set out below.
Meaning of personal reasons
‘Personal reasons’ encompasses only reasons such as illness, bereavement or other genuine personal difficulties that change the director’s circumstances, but not reasons such as work-related schedules, disqualification of the director, detainment by the police or other authorities (including imprisonment), change in the listed company’s circumstances, or restructuring of the listed company’s management teams.
Even where a director’s reasons for resignation are personal, directors and the listed companies are expected to make meaningful disclosure.
Restructuring of management teams
In the event of a restructuring of the listed company’s management teams requiring individuals to resign their directorship in one company in order to take up a directorship in another company, the listed company should describe the restructuring, the director’s new role, and any actual or potential conflicts that may arise, including how such conflicts will be managed.
If a director is appointed as a director of more than one listed company and resigns from only one or some, but not all, of the directorships, it would not be appropriate for a listed company to claim that a director has resigned for personal reasons without further elaboration. The director and the listed company should disclose, at a minimum, why the personal reasons do not necessitate the director’s resignation from all of his directorships.
Follow up with the director on his reasons for resignation
In the event a director advises the listed company that he is resigning for personal reasons but the listed company knows or suspects that is not the case, the listed company must apply its knowledge to challenge the director’s disclosure. The listed company’s further communications with the director should not delay the announcement, rather, the listed company’s initial announcement should make it clear that the listed company will follow up with the director and make a further announcement if appropriate.
2. Profit warning/alert announcements
Clear sense of materiality is required
The Securities and Futures Commission (SFC) requires that profit alerts and warnings should provide a clear sense of materiality. Without specific figures, investors have difficulty in realistically assessing the effect of an announcement on the value of the company. Therefore, the SFC expects the following standard of disclosure:
- a range for the expected profit or a percentage increase or decrease in the expected profit from the prior year, and
- quantification of specific factors contributing to the profit or loss (for example, a gain or loss from the sale of property or listed investments).
The SFC’s corporate regulation team seeks clarification from listed companies which have not provided sufficiently specific information in their profit warning/alert announcements. We have often seen clarification/supplemental announcements issued for these reasons.
As profit warnings or profit alerts are, by definition and generally, expected to be price-sensitive, listed companies should select both ‘Profit Warning’ and ‘Inside Information’ for their profit warnings/alert announcements. Listed companies which select only ‘Profit Warning’ have to cancel the original posting and revise the headline.
‘Profit forecast’ under the Takeovers Code
A more complicated issue arises when a listed company (as an offeree company) issues a profit warning/alert announcement during an offer period. In such cases, such announcements would normally be regarded as profit forecasts under Rule 10 of the Takeovers Code and would therefore need to be ‘reported on’ by both the offeree company’s financial advisers and its accountants or auditors in accordance with Rule 10.4.
The SFC will normally be prepared to permit publication of the forecasts without full compliance with Rule 10, on the conditions that:
- the announcement will contain an appropriate warning that the forecasts do not meet the standard required by Rule 10 and that shareholders and potential investors should exercise caution in placing reliance on such forecasts in assessing the merits and demerits of the transaction, and
- the forecasts will be reported on as soon as reasonably practicable and the relevant reports will be contained in the next document to be sent to shareholders.
3. Continuing connected transactions – disclosure of pricing policies
Generic boilerplate pricing terms will no longer be sufficient
Listed companies are reminded that generic boilerplate pricing terms in respect of continuing connected transactions (such as: ‘prevailing market price‘, ‘prices on normal commercial terms‘, ‘prices based on arm’s length negotiations‘, ‘on a costs-plus mechanism‘, ‘government prescribed price‘) are no longer considered sufficient according to the guidance letter published by the HKEx on pricing policies for continuing connected transactions and their disclosure (HKEx Guidance Letter – HKEx-GL73-14). We have seen a number of clarification announcements issued to provide further information on the pricing terms and policies.
To meet the disclosure requirement, listed companies are reminded to take note of the following salient points of the guidance letter.
Specific pricing terms
When entering into agreement with connected persons, listed companies should agree on specific pricing terms, such as fixed monetary consideration, a predetermined formula, or fixed-per-unit consideration.
Pricing based on a reference price
If the pricing is determined based on a reference price (for example, a government prescribed price), the listed company should disclose: the name of the government authority or organisation publishing the price, how and where the price is disclosed or determined, and the frequency of update to the reference price.
Transactions of different natures
If the agreement covers transactions of different natures, the listed company should clearly set out the pricing policy for each type of transaction.
Circumstances where specific pricing terms are not applicable
If it is not commercially practical for the listed company to agree with the connected person on specific unit price or contract sum:
- disclose the methods and procedures that management will follow to determine the price and terms of the transactions, and
- explain why its directors consider that the methods and procedures can ensure that the transactions will be conducted on normal commercial terms and not prejudicial to the interests of the listed company and its minority shareholders.
4. Annual reports – disclosure of actual use of proceeds from equity fund raisings
Listed companies are reminded to provide meaningful updates on the actual use of proceeds from equity fund raisings (such as from IPOs, placings and issue of shares under general mandate or specific mandate) in annual reports, including a breakdown of how the funds were allocated among different uses, as suggested by the HKEx’s report issued in March 2014 on review of disclosure of annual reports. We have seen many supplemental announcements relating to annual reports published by listed companies to give further details relating to the issue of shares during the reporting period, including details of actual use of proceeds with breakdown.
William Wong, Associate, Deacons, Copyright: 2015 Deacons.
All rights reserved.