No More “Partial Truth” – HKEX Reinforces the Need for Proper and Effective Disclosures

The Hong Kong Stock Exchange (the “HKEX”) issued the March 2023 edition of its Enforcement Bulletin (the “Bulletin”) on 20 March 2023. Among other things, the HKEX focused on the topic of good disclosures of listed issuers, which is crucial to ensuring a high-quality, fair and orderly capital market, and sets out its expectations on proper and effective disclosures. The HKEX reiterated the general principles under Listing Rule 2.03 of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the “Listing Rules”) that potential investors and the public shall be given sufficient information to enable them to make a properly informed assessment of an issuer, and shall be kept fully informed of material factors which might affect their interests.

This newsletter provides a summary of the Bulletin in respect of:

(A) disclosure misconduct by newly-listed issuers in relation to use of proceeds;

(B) problems with “partial truth” disclosures, in particular those concerning reasons for resignation of directors and auditors; and

(C) recent enforcement cases.

(A) Disclosure Misconduct by Newly-listed Issuers – Use of Proceeds

The HKEX conducted several investigations in relation to the disclosures made by newly-listed issuers concerning, among other things, the issuer’s prospectus, listing application documents, and activities prior to and shortly after the listing. In particular, the HKEX has highlighted their concerns over the following use of IPO proceeds or outflows of money that were not properly disclosed, and which could have been material to the investing public:

• Significant change in the use of IPO proceeds or outflow of money;

• Unusually high underwriting commissions, or other listing expenses;

• Material amounts of discretionary listing expenses being paid by the listing applicant or its connected persons;

• Questionable investments of a material part of IPO proceeds; and

• Seemingly disproportionate payment for professional and consultancy arrangements which lacked commercial rationale. In some cases, such payments were fully made in advance and/or resulted in the issuer incurring substantial losses.

Issuers, directors, and professional advisers are advised to make timely and adequate disclosure of any material commitments and expenditures, in particular those concerning matters that will occur at or around the time of or shortly after listing. The HKEX will continue to closely examine and monitor the use of IPO proceeds after listing, any unusually high fees or other listing expenses paid, and will take enforcement action as appropriate.

(B) Problems with “Partial Truth” Disclosures

The HKEX observed that some listed issuers tend to only tell “part of the story” by omitting, burying, or downplaying material facts of an unfavourable nature, or present favourable possibilities as more probable than they really are, in their disclosures. Whilst the facts and information in these “partial truth” disclosures cannot be regarded as incorrect, the omission of other relevant yet potentially sensitive information would very likely give a misleading picture, which in the HKEX’s view, is no less detrimental to the investors’ interest than false or untrue announcements.

In particular, the HKEX explored how “partial truth” disclosures may be problematic when it comes to resignation announcements of directors and auditors. The HKEX made clear that the common resignation reasons (such as a director’s resignation for personal reasons or to pursue other endeavours, or an auditor’s resignation due to inability to agree an audit fee) are generic and unhelpful, and may even be misleading or deceptive where they are used to hide the underlying reasons which are material to investors’ interests.

Director’s resignations

Pursuant to Listing Rule 13.51, listed issuers are obliged to announce the resignations of directors and disclose the reason for such resignations. Listing Rule 13.51C further provides that directors are required to assist in this regard and ensure that the disclosure in the announcement is accurate and meaningful. 

Reference was made to the joint news release published in 2007, which provides that “personal reasons” should only encompass reasons such as illness, bereavement or other genuine personal difficulties, and do not appropriately describe reasons such as work-related schedules, disqualification of the director, detainment by the police or other authorities (including imprisonment) or change in the issuer's circumstances, etc. Careful attention shall also be paid if the resignation comes during a time of sensitivity, pressure (financial or otherwise), or disagreement with the board. In such context, listed issuers and directors shall ensure appropriate disclosures are made and should not satisfy themselves with a “partial truth” disclosure just to avoid addressing sensitive matters, or to buy time.

Auditor’s resignations

The HKEX expressed similar concerns over announcements in relation to resignations of auditors, and stated that solely citing disagreement over audit procedures or audit fees, without disclosing more, is of limited value to the public. The HKEX referred to the requirements set out in the HKEX’s Listed Issuer Regulation Newsletter published in December 2022 and also highlighted that the audit committees of the issuers are reminded to ensure that the auditors’ resignation letters clearly reflect the reasons for the resignations. The listed issuers’ announcements should disclose any issues or matters affecting the audit process, the audit fee, or the issuers’ relationships with the auditors, for example, the auditor having identified high-risk areas of concern which the issuer appeared reluctant to address.

The HKEX reminded that where the disclosure is insufficient, the HKEX may bring disciplinary action and seek public sanction against those responsible (including the listed issuer and the directors). The truthfulness of information in the announcements would not constitute a valid defence.

(C) Recent Enforcement Cases

The Bulletin also set out various sanctions that HKEX had imposed against issuers and directors during the second half of 2022. There were a total of 13 cases, including the first case where Director Unsuitability Statements and Prejudice to Investors’ Interests Statements were imposed. These are among the most severe sanctions which the HKEX could apply to directors and are generally reserved for the most egregious cases of misconduct.

The main areas which have attracted the HKEX’s attention include but are not limited to the following:-

Issuers

• Disclosure of inaccurate, incomplete and/or misleading information; and

• Failure to comply with the reporting requirements regarding major and/or discloseable transactions and connected transactions.

Directors

• Breach of undertakings to cooperate with the Listing Division’s investigations;

• Failure to provide accurate, complete and/or not misleading information;

• Breach of directors’ duties in relation to the issuer’s breaches of the Listing Rules and failure to use their best endeavours to procure compliance with the Listing Rules;

• Breach of directors’ duties and/or undertakings to protect the issuer’s assets;

• Breach of directors’ duties to protect the issuer’s interests as a whole and avoid or properly address their conflict of interest in transactions; and

• Breach of directors’ duties for failing to monitor and follow up on relevant transactions and in relation to the commercial rationale for agreements and the due diligence conducted.

Conclusion

Given Hong Kong’s role as Asia’s premier international financial centre, the HKEX has actively advocated on enhancing corporate governance and practices among Hong Kong listed issuers. The Bulletin clearly reflects the HKEX’s emphasis on proper and adequate disclosure, which is evidenced by the sanctions imposed by the HKEX in this regard. Accordingly, listed issuers and their directors should not make “partial truth” disclosures, and shall carefully assess whether their announcements contain all relevant and material matters that should be brought to the attention of the potential investors and the general public, and are not misleading.

*This information is for guidance purposes only and should not be regarded as a substitute for taking legal advice. Please refer to the full terms and conditions on our website.

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