CSj highlights the latest additions to the Institute’s guidance note series, providing members with new guidance on non-governmental organisations, anti–bribery and corruption, competition law, and mergers and acquisitions.
The Institute’s seven Interest Groups, set up under the Technical Consultation Panel in 2016, have built up a substantial body of practical guidance on the Institute’s website (www.hkics.org.hk) for the benefit of the Institute’s members and the wider profession and community. This article highlights the latest additions to this series.
Governance best practice for NGOs
The fifth in the series of guidance notes by the Institute’s Public Governance Interest Group (PGIG) was published on the Institute’s website in October 2019. This new guidance note focuses on board governance best practice for non-governmental organisations (NGOs).
Most NGOs in Hong Kong adopt the structure of companies limited by guarantee. Under the Companies Ordinance, the model articles for companies limited by guarantee (available on the Companies Registry website: https://www.cr.gov.hk) make it clear that the board of directors should be in charge of the day-to-day operational governance of the NGO. In this context it is usual for the board to delegate some of its roles and responsibilities to committees reporting to the board. This is permitted – for example Model Article 4 states that the directors may, ‘if they think fit, delegate any powers that are conferred on them under these articles to any person or committee’.
While the board can delegate its powers, the new guidance note makes the important point that directors cannot delegate their responsibilities. They must at all times retain personal attention as to the overall workings of their NGO, including proper oversight of the delegated committees. The guidance note cites a recent case where directors were found to be in breach of their directors’ duties under the Companies Ordinance for failing to check that requisite government building approvals had been given for the construction of certain building works. The board had delegated oversight of the construction to a member of a committee.
‘Therefore, do delegate, but remember that you will be judged by what a reasonable director in your position would have done,’ the guidance note states. ‘We would like to emphasise that whilst it makes sense and enhances board efficiency to delegate the workload of directors to board committees, the ultimate responsibility for decisions taken rests with the board of directors itself. As such, directors should be vigilant in delegating their responsibilities to board committees, and having sound policies and procedures to guide the practices of the NGO does help.’
The new guidance note also reminds readers that there is no one-size-fits-all in terms of what committees should be adopted by NGOs. The Hong Kong Council of Social Services (HKCSS) recently conducted a survey under its NGO Governance Platform Project, to which 77 NGOs responded. Based on the findings of this survey, the guidance note sets out the types of committee commonly adopted by NGO boards in Hong Kong. Rather surprisingly, only around a fifth to a quarter of the NGOs responding to the HKCSS survey stated that they had governance-related committees such as nomination, remuneration and audit committees.
‘In a commercial enterprise it is expected that there would be these types of governance-related committees. The disconnect is that an NGO seeking donor and third-party funds would be expected to demonstrate that they have proper audit, nomination and remuneration committees as part of good governance. This would help to attract more funding and help to ensure the long-term sustainability of the NGO,’ the guidance note states. It recommends that NGOs should at least have audit, nomination and remuneration committees to demonstrate commitment to good governance.
The guidance note directs readers to useful best practice advice available online on the issues raised above. A good place to start is the provisions relating to the audit, nomination and remuneration committees in Hong Kong’s listing rules. In addition, the Independent Commission Against Corruption (ICAC) has useful information and advice on these committees in its Best Practice Checklist, Governance and Internal Control in Non-Governmental Organisations (available on the ICAC’s Corruption Prevention Advisory Service website: https://cpas.icac.hk).
As easy as ABC?
The fifth guidance note by the Ethics, Bribery and Corruption Interest Group, published on the Institute’s website in October 2019, addresses the risks of cross-border corruption for listed companies in Hong Kong and recommends practical prevention measures that companies should consider.
The guidance note points out that Hong Kong has a good anti–bribery and corruption (ABC) track record. This has been achieved over many decades by building up institutions such as the ICAC to root out corruption and foster an atmosphere where competition can flourish. Hong Kong cannot afford to drop its guard, however. As trade becomes ever more global, cross-border corruption risks have become increasingly evident. The guidance note addresses this issue in three steps:
- identifying the corruption risks facing Hong Kong–listed companies operating across borders
- highlighting their obligations under local and international law, and
- setting out meaningful steps they can take to reduce risks to an acceptable level.
Cross-border corruption risks
Companies should be particularly vigilant when doing business in jurisdictions where public sector corruption is rife and where officials are unaccountable to electorates or face little public scrutiny. Moreover, bribery and corruption risks tend to be concentrated in certain business functions. For example the ICAC, in its Anti-Corruption Guide for Listed Companies, singles out procurement as ‘generally the most corruption-prone business function’ due to its power over spending. Corruption involving procurement staff can take many forms. It may involve a bribe being paid to persuade staff to choose one vendor over another, or a contract being agreed above market prices, with staff splitting the difference with the supplier, or some form of favour being offered to staff or to their friends or relatives.
Human resources is another high-risk function – jobs, promotions or even internships may be offered in exchange for cash or favours. The guidance note points out that the medium of exchange is not important; what matters is the substance of the deal. If somebody receives a benefit to modify their behaviour in a way that breaches laws, internal rules or codes of conduct, they are corrupt.
Corruption of this type poses serious problems for companies. There are the obvious costs, money paid as bribes for example, but also the legal and reputational costs. The guidance note points out that that there are also systemic costs since corruption can cripple national economies, as it has done in parts of the developing world including some of Hong Kong’s major trading partners.
The legal implications
Governance professionals and Chartered Secretaries are responsible for helping businesses navigate the maze of ABC regulation. In terms of cross-border business, this can be highly complex due to the confusing web of international laws and regulations in this area.
Within Hong Kong, companies must abide by the Prevention of Bribery Ordinance (POBO), which is enforced by the ICAC to combat bribery and corruption in both the public and private sectors. While the POBO’s reach is technically restricted to Hong Kong, the guidance note points out that bribery acts taking place outside Hong Kong may still be pursuable under the POBO if any part of the act occurred in Hong Kong. There have also been calls to extend the POBO’s reach to cover activities involving Hong Kong residents overseas.
Hong Kong companies involved in cross-border trade also need to consider the laws in the other jurisdictions where they operate and the guidance note warns that there has been a trend for tougher ABC rules internationally. In addition, companies can find themselves subject to extraterritorial laws such as the US Foreign Corrupt Practices Act and the UK’s Bribery Act.
The guidance note also offers practical advice on the steps companies can take to reduce bribery and corruption risks. The first step involves risk review and planning. ‘A business should understand the nature of the risks it faces, taking into account its industry, corporate structure, countries of operations and applicable jurisdictions and laws. These will provide a basis for planning and help identify risk areas to address,’ the guidance note states.
Businesses should also have written codes of conduct for employees. ‘Issues frequently arise when employees lack guidance, or when rules are treated as informal and flexible. It would help to define to staff what is considered acceptable or not. This is particularly important when a business operates across borders with different cultural norms,’ the guidance note states.
Such codes of conduct should be backed up by staff training in the form of an ongoing training programme rather than a one-off training session. Whistleblower channels should also feature in companies’ ABC programmes and the guidance note offers best practice advice for setting up and maintaining such channels.
The fourth guidance note issued by the Competition Law Interest Group, published in October 2019, reviews the first two full judgments handed down by the Competition Tribunal (the Tribunal) under the Competition Ordinance. The Competition Commission v Nutanix Hong Kong Ltd and Others  (the Nutanix case), and Competition Commission v W Hing Construction Co Ltd and Others (the W Hing case) cases provide valuable insight into the methods of investigation by the Competition Commission (the Commission), as well as the Tribunal’s approach in applying the First Conduct Rule, which targets cartel behaviour. The guidance note looks at the two judgments and recommends practical steps to be taken by companies to ensure compliance with Hong Kong’s competition law.
Can companies be held liable for the conduct of their employees?
The Nutanix case indicates that companies will be liable for an employee’s infringing conduct if it is sufficiently related to the course of employment. This will be so in most cases where the employer has authorised or given the impression that an employee can perform certain acts for the company which turn out to infringe competition law. The Nutanix case indicates that the company will not be held liable only in exceptional cases, such as where the employee acts on his or her own interest and outside the scope of delegated authority. Steps should be taken, therefore, for clear delineation of authority and for records of delegation to be maintained, such that opportunistic conduct of individual employees will not constitute infringement by the company.
Can individuals be held liable for antitrust contraventions?
While no sanctions were sought against individuals in the Nutanix and W Hing cases, the Commission is seeking fines against individuals and a director disqualification order in its third enforcement action, which has not yet been decided by the Tribunal. This is a timely reminder that individuals may be held liable for their involvement in a contravention of the Ordinance and be fined for their conduct, while directors may also be disqualified from being a director for up to five years.
Can anti-competitive practices be inferred?
The Tribunal in the Nutanix case clarified that the existence of anti-competitive practices can often be inferred. This may be the case, for instance, where a number of unexplained coincidences viewed together appear to constitute an infringement. It is therefore insufficient for companies to deny responsibility by showing an absence of certain communications or agreements. Companies should keep records reflecting the underlying rationales of their conduct. In the event of an investigation by the Commission, these records may support the company’s explanations and defend against unfavourable inferences.
Powers of the Commission
The guidance note emphasises that both the Nutanix and W Hing cases show that the Commission is serious about being an effective and active enforcer. The cases also demonstrate that the Commission can access all forms of communication. In addition to office raids and the seizure of documents, the Commission also relied on emails, WhatsApp messages and audio recordings from employees’ personal phone devices as evidence of infringing conduct in the Nutanix case. Any misperceptions held by management and front–line staff that personal devices are not subject to investigation should be corrected.
‘With its first wins under its belt and with increased funding for litigation from the government, companies should be prepared for an uptick in enforcement in the area of competition law in Hong Kong in the coming years,’ the guidance note states. It adds that it will be increasingly important for companies of all sizes to continuously review and, where appropriate, update their compliance policies and ensure that employees are well aware of the risks associated with any contravention of the law.
Closing strategies in mergers and acquisitions
The fourth guidance note from the Institute’s Takeovers, Mergers and Acquisitions Interest Group was published on the Institute’s website in October 2019. The new guidance note gives company secretaries and governance professionals an overview of a common closing mechanism for mergers and acquisition (M&A) transactions – the locked box mechanism.
The guidance note reviews the key differences between the ‘Locked Box’ and the ‘Completion Accounts’ mechanisms in M&A transactions. Under the Locked Box mechanism, the equity price is ‘locked’ with known amounts of cash, debt and working capital at a pre-signing date (Locked Box date) based on a historical balance sheet (Locked Box balance sheet). Under the Completion Accounts mechanism, in contrast, the enterprise value is agreed upon at signing date and then adjusted for actual cash, debt and working capital movements between the signing and closing date to determine the equity price.
The guidance note points out that, in essence, the transfer of risks and rewards takes place earlier under the Locked Box approach at the Locked Box date compared to at the completion date under the Completion Accounts approach. The Locked Box mechanism is particularly attractive for transactions where the parties value greater certainty on the transaction price, or when a quick integration is required post-completion. It also provides a way for the seller to minimise the risks and complexities of post-deal negotiation with the buyer, who may attempt price-chipping (that is, bridging a value gap through Completion Accounts adjustments).
However, the adoption of the Locked Box mechanism relies heavily on the buyer’s confidence in the quality of the Locked Box balance sheet and the guidance note gives practical advice to practitioners on the many governance and due diligence implications of adopting the Locked Box mechanism for M&A transactions. ‘It may appear to be more advantageous for a seller to adopt a Locked Box mechanism. However, if appropriate comfort can be offered to the buyer over the integrity and accuracy of the Locked Box balance sheet, accompanied by sufficient warranties and indemnification over the Locked Box accounts, the mechanism can still be attractive to the buyer,’ the guidance note states.
Ultimately, the pricing considerations and mechanisms are the same for Locked Box and Completion Accounts. Both mechanisms end up with the buyer paying the seller the equity price (that is, enterprise value adjusted for cash, debt, and difference between the target and actual working capital). However, different mechanisms should be selected under different circumstances. A wrong choice can make negotiations complex, or may even risk failure to complete the deal, the guidance note warns.
The guidance notes mentioned in this article are available in the Publications section of The Hong Kong Institute of Chartered Secretaries website: www.hkics.org.hk.
The Institute would like to express its thanks to the members of the Interest Groups set out below (membership is as at date of publication). In addition, thanks are due to Alastair Mordaunt, Partner, Freshfields Bruckhaus Deringer LLP, for contributing to the latest Competition Law Interest Group guidance note.
Public Governance Interest Group
April Chan FCIS FCS (Chairman), Lau Ka-shi BBS, Rachel Ng ACIS ACS, Samantha Suen FCIS FCS(PE), Stella Ho and Stella Lo FCIS FCS(PE).
Ethics, Bribery and Corruption Interest Group
Dr Brian Lo FCIS FCS (Chairman), Lily Chung, Michael Chan, Ralph Sellar, Robert Hunt and William Tam.
Competition Law Interest Group
David Simmonds FCIS FCS (Chairman), Brian Kennelly QC, James Wilkinson, Mike Thomas and Neil Carabine.
Takeovers, Mergers and Acquisitions Interest Group
Michelle Hung FCIS FCS (Chairman), Dr David Ng FCIS FCS, Henry Fung, Kevin Cheung, Lisa Chung, Patrick Cheung and Philip Pong.
Mohan Datwani FCIS FCS(PE), Institute Senior Director and Head of Technical & Research, serves as Secretary to the the Institute’s Interest Groups. He can be reached at: firstname.lastname@example.org.