New Main Board listing rules in Hong Kong to restrict the breaches of directors

Source¸ Mr. Aleksander Kutnik¸ PKF Malta¸ August 2012

The Stock Exchange of Hong Kong (HKEX) changed the listing rules regarding the directors of the companies. The way of actions of the legislator has seemed clear and understandable – provide higher restrictions and sterner penalties for the boards.

The cause of legislator’s reaction to provide the amendments has been surely involved with still repeating breaches of directors of listed companies. The new regulations are more serious threat for the directors¸ who are used to skipping some inconvenient points of the previous rules. Since now every director may be taken to court much faster than before¸ if he does not be careful and scrupulous in complying strictly to the directives.

As we can observed in the Amendments to the Main Board Rules (Chapter 3 about “Directors”)¸ it was added the point¸ that “directors must satisfy the required levels of skill¸ care and diligence and the delegating director’s functions is permissible¸ but does not absolve them from their responsibilities or from applying the required levels of skill¸ care and diligence”. This notation can be treated like an introduce¸ which is demanded to show the real direction of the overall changes¸ which as general provide the new formal and more strictly rules for the board of directors.

All because of the growing amounts of breaches of directors. In March this year for example¸ Securities and Futures Commission (SFC) found the chairman and the executive director of the Styland Holdings guilty acting against company’s interests. The commission proved that Kenneth Cheung Chi Shing and his wife Yvonne Yeung Han Yi have been receiving financial benefits by to almost $86 milion.

That was one of the main reasons to change and add some new notations in the Main Board Rules. Here you have got some examples of the amendments. Now¸ each board must consist independent non-executive directors representing at least one-third of the board (this condition should be done by 31 December 2012). The board must also establish a renumeration committee leaded by an independent non-executive director and comprising a majority of independent non-executive directors.

The new Main Board Rules refer also to the time and level of serving of a non-executive director’s independence. The older notations mentioned that “an independent non-executive director serves more than 9 years¸ his further appointment should be subject to a separate resolution to be approved by shareholders”. Now the legislator went one stop more – all the reasons¸ why the board believes and is ready to be re-elected¸ should be enclosed in the paper to shareholders.

In the Amendments to the Main Board Rules the investors find also new requirements for issuers. The Listing Rules require issuers to publish the procedures for shareholders to propose a person for election as a director on their websites and their constitutional documents on the Exchange’s website and on their own.

New Main Board listing rules might be the landmark¸ which will start to making the boards aware that any of action against the client’s company would be perceived. The question is¸ how strong is the determination of HKEX and SFC to fight with bad and extremely costly for companies practices using by directors. For now¸ it seems the legislator is fully motivated.