Regulation imposes costs and restrictions and may often seem to get in the way of business, but the Institute’s latest Annual Corporate and Regulatory Update highlighted the fact that all market participants profit from a well-regulated market.
This year’s Annual Corporate and Regulatory Update (ACRU) forum was a very timely opportunity for regulators to reach out to practitioners on the many issues at the top of the regulatory agenda in Hong Kong.
There was no shortage of issues to be discussed. The latest changes to Hong Kong’s listing rules and Corporate Governance Code were the focus of Hong Kong Exchanges and Clearing Ltd (the Exchange) in the first session of the day. This was followed by an update from the Securities and Futures Commission (SFC) on the top priority of its enforcement work – corporate fraud and misconduct. The Companies Registry then addressed Hong Kong’s new requirement for keeping a significant controllers register and the new licensing regime for trust or company service providers. The day’s discussions were rounded off with an introduction to anti-discrimination legislation in Hong Kong by the Equal Opportunities Commission.
The value of a quality market
In the first session of the day, the Exchange fielded four speakers to discuss the latest listing rule changes designed to uphold the quality and reputation of Hong Kong’s security markets.
Karen Lee, Vice-President, Enforcement, Listing Department, the Exchange, pointed out that the regulatory role of the Exchange, as the frontline regulator of listed companies, is to ensure listed companies comply with their continuing listing requirements, as set out in the listing rules, to protect the interests of shareholders and improve the standards of corporate governance among listed issuers in Hong Kong. ‘The principal aim of the Exchange’s enforcement work is to maintain an orderly, informed and fair market for trading of securities,’ she said.
The revised delisting regime
The Exchange is not a law enforcement agency and Ms Lee pointed out that enforcement of the law takes priority over enforcement of the listing rules. The Exchange will refer serious cases to the SFC and/or other law enforcement authorities, and, in some cases, may temporarily suspend its own investigation or action so as not to prejudice the investigation or actions of other law enforcement agencies.
The biggest gun in the Exchange’s armoury for penalising misconduct is delisting and Joseph Choi, Vice-President, Listed Issuer Regulation, Listing Department, the Exchange, addressed Hong Kong’s new framework to facilitate the timely delisting of issuers. The purpose of the delisting rule amendments is to establish an effective delisting framework to:
- facilitate efficient and orderly exits of poor quality issuers
- provide certainty to the market on the delisting process
- incentivise suspended issuers to act promptly towards resumption, and
- deter material breaches of the listing rules.
Mr Choi explained that prolonged suspension of an issuer is not in the interests of investors or issuers and can have a negative effect on market quality and reputation. The general principle under Rule 6.04 is that continuous suspension without the issuer taking adequate action to restore listing may lead to delisting. However, the current process for delisting an issuer that has been in prolonged suspension is somewhat ‘cumbersome’, Mr Choi pointed out. In one recent case it took 36 months to complete the process.
Under the new rules, which become effective in August this year, the Exchange will apply an 18-month deadline for the resumption of trading. Issuers who fail to take sufficient remedial action within 18 months will be delisted, even if a resumption proposal has been submitted. Suspended issuers must also issue quarterly updates of developments. Mr Choi emphasised that suspended issuers still need to meet their continuing obligations, for example those relating to notifiable and/or connected transactions and the publication of corporate reports. ‘Suspension is not an excuse to cease fulfilling your continuing obligations,’ he said.
Preventing circumvention of the RTO rules
While there is clearly value in having well-drafted rules to maintain market integrity, one should never underestimate the ingenuity of the market in finding ways around them. Dion Wong, Senior Vice-President, Listed Issuer Regulation, Listing Department, the Exchange, highlighted the Exchange’s latest strategy to block attempts to circumvent its reverse takeover (RTO) rules.
An RTO typically refers to the acquisition of assets or a shell company in an attempt to circumvent the new listing requirements, and there have been several new ways that RTOs have been attempted under the regulatory radar. These include issuing a large-scale share subscription and then using the funds to start a new business, or breaking up RTO transactions into a series of acquisitions that do not trigger the RTO rules, but which, taken in aggregate, result in an effective change of control and/or purpose of the business.
Ms Wong pointed out that, as set out in its Guidance Letter (GL78-14), the Exchange will be taking a principles-based approach to RTOs. A principles-based approach enables the Exchange to identify attempts to circumvent the RTO rules by looking at the outcome of multiple transactions.
In addition, the Exchange has taken further action to address shell activities. Under Rule 13.24, a listed issuer must carry on sufficient operations, or have assets of sufficient value to warrant its continued listing. Once again, the Exchange will be taking a principles-based approach. The ‘sufficiency’ of operations or assets will be determined by means of a qualitative test rather than a prescribed threshold. Ms Wong pointed out that some companies carry on minimal operations after a material disposal, or after discontinuing a core business in an attempt to maintain listing status.
The Exchange will consult the market on its proposed listing rule amendments relating to backdoor listing and continued listing criteria over the next few months.
Hong Kong’s new AML/CFT regime
Compliance with Hong Kong’s new anti–money laundering and counter–financing of terrorism (AML/CFT) regime has been high on the agenda for governance professionals working in the trust or company service provider (TCSP) sector. The Companies Registry fielded four speakers to address ACRU on this topic.
Margaret Chan, Senior Solicitor, Companies Registry, pointed out that the new regime is designed to ensure that Hong Kong abides by its obligations as a member of the Financial Action Task Force (FATF), the intergovernmental body established in 1989 that sets international standards on AML/CFT. Among the 40 Recommendations made by FATF, Recommendations 22, 28 and 35 are relevant to designated non-financial businesses and professions (DNFBPs), a group which includes TCSPs. These Recommendations require DNFBPs:
- to be subject to customer due diligence (CDD) and record-keeping requirements when they engage in specified transactions
- to be subject to effective systems for monitoring and ensuring compliance with AML/CFT requirements, and
- to be subject to a range of effective, proportionate and dissuasive sanctions, whether criminal, civil or administrative, for any non-compliance with AML/CFT requirements.
FATF will be carrying out a mutual evaluation of Hong Kong later this year and the government has brought in legislation to ensure that FATF Recommendations are complied with. The Anti–Money Laundering and Counter–Terrorist Financing Ordinance (AMLO) (Cap 615) brings in a new licensing regime for TCSPs and makes them subject to statutory CDD and record-keeping requirements.
The new licensing regime for TCSPs
Ms Chan highlighted the compliance requirements relating to the new licensing regime for TCSPs under the AMLO. TCSPs now need to apply for a licence from the Registrar of Companies (the Registrar) and satisfy a ‘fit-and-proper’ test before they can provide trust or company services as a business in Hong Kong. The Registrar has set up a register of TCSP licensees, which is open for public inspection, and staff of the Companies Registry will conduct compliance inspections.
Ms Chan also highlighted the statutory CDD and record-keeping requirements relevant to TCSPs when they engage in the specified transactions set out in the AMLO. These ‘specified transactions’ include all of the core services provided by TCSPs, such as forming companies, acting as a director or a secretary of a company, providing a registered office, etc.
Ms Chan recommended ACRU attendees refer to the guidelines and reference materials that the Companies Registry has made available online regarding the new requirements brought in by the AMLO. Among other things, the Companies Registry has published a Guideline on Licensing of Trust or Company Service Providers and a Guideline on Compliance of Anti–Money Laundering and Counter–Terrorist Financing Requirements for Trust or Company Service Providers.
These materials are available at the new website dedicated to the new licensing regime for TCSPs (www.tcsp.cr.gov.hk). Roger Wong, Deputy Registry Manager, Companies Registry, introduced this
new website and the Companies Registry’s new office to ACRU attendees. The new office, the Registry for Trust or Company Service Providers, is located in Kowloon Bay.
In addition to being an online information resource for guidelines, external circulars and FAQs, etc, the new website enables user registration, online submission of applications and notifications, as well as free online searches of the Register of TCSP Licensees. It is a 24-hour portal and is accessible via mobile devices anytime and anywhere. Users can also access all the relevant specified forms for applications and notifications on the website.
Register of significant controllers
Another key area of AML/CFT compliance is the provision of beneficial ownership information. Ahead of the FATF mutual evaluation coming up later this year, the government has sought to address this issue via the Companies (Amendment) Ordinance 2018. This ordinance imposes a new requirement on companies incorporated in Hong Kong to keep significant controllers registers (SCRs). Ellen Chan, Deputy Principal Solicitor, Companies Registry, clarified a number of issues relating to the SCR requirement.
Companies are required to take reasonable steps to ascertain whether they have any significant controllers and to identify them in their significant controllers registers. A ‘significant controller’ is a person that has significant control over the company and includes a registrable person and a registrable legal entity. A person will have significant control if the person meets one or more of the following conditions:
- directly or indirectly holding more than 25% of the issued shares (the right to share in more than 25% of the capital/profits) of the company
- directly or indirectly holding more than 25% of the voting rights in the company
- directly or indirectly holding the right to appoint or remove a majority of the board of directors of the company
- having the right to exercise, or actually exercising, significant influence or control over the company, and/or
- having the right to exercise, or actually exercising, significant influence or control over the activities of a trust or a firm that is not a legal person, but whose trustees or members satisfy any of the first four conditions (in their capacity as such) in relation to the company.
A registrable legal entity is a legal entity which is a member of the company and has significant control over the company. A registrable person is a natural person or specified entity that has significant control over the company. A specified entity is any of the following:
- a corporation sole
- a government of a country or territory, or part of a country or territory
- an international organisation whose members include two or more countries or territories (or their governments), and/ora local authority or local government in a country or territory.
Angelina Mok, Deputy Registry Manager, Companies Registry, gave useful practical examples of how to identify significant controllers, whether as a registrable legal entity or a registrable person. She also referred ACRU attendees to the dedicated thematic section on the significant controllers register on the Companies Registry’s website: www.cr.gov.hk/en/scr. In addition to frequently asked questions and videos, visitors can access the:
- Companies (Amendment) Ordinance 2018
- Companies Registry External Circular No 2/2018, and
- Guideline on the Keeping of Significant Controllers Registers by Companies.
SIDEBAR: Anti-discrimination law and practice in Hong Kong
This year, for the first time, ACRU played host to the Equal Opportunities Commission (EOC). Peter Reading, Legal Counsel, EOC, gave a lively introduction to anti-discrimination legislation in Hong Kong. This area could be a ticking time bomb for many employers as social expectations relating to issues such as sexual harassment and discrimination in relation to sex, disability and race are evolving rapidly both globally and locally. Promoting equality and eliminating discrimination in the workplace, protecting employees from harassment and providing reasonable facilities for persons with disabilities are not only the right things to do, they are increasingly subject to legal liability.
Mr Reading outlined the four ordinances in Hong Kong designed to promote equality and eliminate discrimination:
- The Sex Discrimination Ordinance
- The Disability Discrimination Ordinance
- The Family Status Discrimination Ordinance, and
- The Race Discrimination Ordinance.
Compliance and governance professionals should not only familiarise themselves with the letter of the law, he added, but also the changing expectations regarding discrimination. ‘Laws evolve to meet the changing needs of society,’ he pointed out. For example, an increasing number of couples are cohabiting rather than get married and many jurisdictions are adapting to this changing demographic by introducing legal provisions to ensure that cohabiting couples are not subject to discrimination.
Mr Reading made an appeal to ACRU attendees to ensure that the organisations they work for:
- are aware of their legal obligations as employers and service providers
- have comprehensive policies on discrimination and investigations
- provide regular and ongoing training to all staff, and
- deal with complaints in a timely, independent and transparent manner.
More information is available on the EOC website: www.eoc.org.hk.