Background

In June 2024, the Hong Kong Stock Exchange (the “HKEX” or “Exchange”) released a consultation paper outlining proposed amendments to the Corporate Governance Code and related Listing Rules. The consultation period concluded on 16 August 2024, and on 19 December 2024, the HKEX published its conclusions. This article summarises the main revisions to the Corporate Governance Code.

Revisions to the Corporate Governance Code and Listing Rules

(a) Enhancing Board Effectiveness

The Exchange will not codify the requirement for appointing an independent non-executive director (“INED”) as “Lead INED”. Instead, the proposal for appointing a Lead INED where the chairman is not an INED will be introduced as a recommended best practice in the Corporate Governance Code. The adoption of any recommended best practice by an issuer is voluntary in nature. The Lead INED is not expected to manage day-to-day operations or explain company performance to shareholders or investors. In contrast, the Exchange reported that investors would expect a Lead INED to engage in a meaningful discussion with shareholders on matters such as strategy, governance and capital management, without disclosing material, non-public information.

Separately, in recognition of the importance of shareholders’ access to the board of directors, the Exchange has included an additional requirement in the conclusions requiring issuers to disclose engagement with their shareholders in their Corporate Governance Reports. The required disclosures include:

• the nature and frequency of such engagements;
• the groups of shareholders and representatives of the issuer who are involved; and
• the issuer’s approach to the follow up of these engagements.

Additional guidance on the role and functions of the Lead INED will be provided by the Exchange at a later stage.

(b) Mandatory Director Training

New provisions in the Listing Rules require:

• All existing directors to participate in mandatory continuous professional development training on designated topics[1] during each financial year (no specified minimum number of training hours).
• First-time Directors (i.e. those who have (i) never served as a director of a listed issuer or (ii) have not served as directors of a listed issuer within a period of three years prior to their appointment) must complete 24 hours of continuous professional development training within 18 months of their appointment.
• If a First-time Director has served as a director of an issuer listed on an exchange other than the Main Board or GEM within three years prior to their appointment, they will only be required to complete 12 hours of training.

Please note that the Exchange has removed the proposed “reset mechanism”, which is a proposal to reset the mandatory First-time Director training if such a director has resigned prior to completing the minimum training hours. This was considered an unnecessary burden for First-time Directors and thus removed.

Additionally, amendments to the Corporate Governance Code will require issuers to confirm that directors have participated in specified training and disclose the following details for each director, including:

• Training hours;
• Format or mode of training (e.g., external or internal provider or self-study);
• Training topics; and
• Names of external training providers.

(c) Board Performance Evaluation

Currently, regular evaluation of board performance is a “recommended best practice” under the Corporate Governance Code. The HKEX will elevate this requirement to a code provision, mandating that boards conduct performance evaluations at least every two years based on a “comply or explain” basis. The focus of the evaluation will be on the overall performance of the board, and whether its performance, together with the board’s skills, expertise and qualifications (as identified by the board skill matrix) are aligned with the issuer’s broader business and strategic goals. Issuers will have the discretion to determine the format of the evaluation, including whether the evaluation is conducted internally or externally; however, they must disclose the scope, process, and results of the performance evaluations in their annual corporate governance reports.

The HKEX will issue further guidance on the expected scope and level of detail for disclosure of a board performance review.

(d) Board Skills Matrix

A new code provision will be introduced to require issuers to establish a board skills matrix and disclose:

• The current skill set of the board;
• How directors’ skills, experience, and diversity align with the company’s objectives, values, strategies, and desired culture; and
• Details and plans for acquiring additional skills.

The Nomination Committee will be responsible for assisting the board in maintaining a board skills matrix, and HKEX will provide suggestions as to the format, scope and level of detail for maintaining an effective board skills matrix and making meaningful disclosure.

(e) Limit on INED’s Multiple Appointments

New provisions in the Listing Rules will limit INEDs to serving as directors in a maximum of six Hong Kong-listed issuers (an INED who serves as a director of more than six Hong Kong-listed issuers is an “Overboarding INED”). This rule will have a three-year transition period and an Overboarding INED must comply with the new requirement by the conclusion of the earliest annual general meeting held on or after 1 July 2028. During the transition period, if the board proposes to elect an individual who is an Overboarding INED, it must explain in the shareholder circular why the board believes such an individual can devote sufficient time to the board. The new provision will apply to listing applicants whose A1 submissions will be filed on or after 1 July 2025.

(f) Annual Assessment of Directors’ Time Commitment and Contribution

The Exchange will introduce a new mandatory disclosure requirement with respect to the annual assessment by the nomination committee on each director’s time commitment and contributions to the board. Such an assessment would consider the effectiveness of a director’s ability in the discharge of his or her responsibility taking into account their qualifications, experience, number of directorships held at listed issuers, time commitments in other significant external roles (such as full-time positions outside their directorships, consultant roles or public duties), and other factors related to their personality, character, independence, and experience.

The Exchange has also reminded that the nomination committee’s assessment should be a holistic one which should cover areas including the nature of a director’s involvement on the board and the commitment required from a director to perform his or her responsibilities effectively, and not simply focus on the number of hours spent by a director.

The Exchange has also clarified that while each director should be assessed, it is not expected that disclosure in the corporate governance report will be made on an individual named basis. The Exchange will provide further guidance on this.

(g) Independence of INEDs

New provisions in the Listing Rules will not allow an issuer’s board to include an INED who has served (as INED) for nine years or more. An INED who has been serving nine years or more (“Long Serving INED”) will no longer be considered an independent director. Following this nine-year term, an INED must not serve as an INED for the same issuer for at least three years (increased from the originally proposed period of two years). During this “cooling-off period”, they cannot serve as directors for the issuer or its holding companies or subsidiaries.

Given these proposed amendments, issuers should proactively consider and gradually implement future appointments for INEDs. It is important to note that the Listing Rules require listed issuers to have at least three INEDs, with their number not being less than one-third of total directors. Additionally, at least one INED must possess appropriate professional qualifications or relevant financial management experience.

The new requirements will be implemented in two phases:

• Phase one will apply to an issuer that has a majority of its INEDs being Long Serving INEDs, where such an issuer must not have Long Serving INEDs representing a majority of INEDs at the conclusion of the first general meeting held on or after 1 July 2028.
• Phase two will apply to all issuers, that an issuer’s board must not include any Long Serving INEDs at the conclusion of its first annual general meeting held on or after 1 July 2031.

Going forward, it will be a mandatory disclosure requirement to disclose the length of tenure and current period of appointment for each named director.

(h) Board and Employee Diversity

To enhance diversity among boards and employees, several amendments are proposed:

• New code provision requiring at least one director of a different gender to be on the nomination committee.
• Elevating current requirements for annual reviews of board diversity policies from a code provision to a mandatory disclosure requirement.
• New Listing Rules requiring issuers must have and must disclose diversity policies with respect to its board members and its workforce (including senior management).
•  Revised mandatory disclosure requirements requiring issuers to disclose separately gender ratios for (i) senior management, and (ii) the workforce (excluding senior management). This has revised the previous requirement which allowed the disclosure of gender ratio of the workforce, including senior management, as a group.
• Incorporating existing guidelines regarding temporary deviations from gender diversity requirements into Listing Rules – if a listed issuer is unable to meet the requirement to have directors of different genders on the board at any time (e.g., after the only female director resigns), it must immediately announce this fact, its details and reasons, and appoint appropriate directors within three months.

(i) Risk Management and Internal Controls

Boards must review the effectiveness of risk management and internal control systems at least annually. Several code provisions will be elevated to mandatory disclosure requirements in corporate governance reports, and issuers will be required to provide more detailed disclosures including:

• Main features of risk management and internal control systems (including any significant changes);
• Process used for reviewing these systems;
• Confirmation from the board regarding the appropriateness and effectiveness of these systems along with supporting information (including confirmations from management, relevant board committees responsible for risk management and internal controls, other internal departments, independent auditors, or external providers); and
• Details of any significant control failures or weaknesses identified during reviews that have been reported but not resolved along with any remedial measures taken or proposed.

(j) Dividends

It is currently a code provision that requires issuers to establish a dividend payment policy and disclose it in their annual reports. This requirement will be elevated to a mandatory disclosure requirement; issuers with established dividend policies must disclose:

• The purpose or objectives of that policy;
• Key factors considered by the board when deciding whether to declare, recommend or pay any dividends; and
• Confirmation that all dividend decisions made by the board during the reporting period comply with the issuer’s dividend policy (or explain any deviations).

Implementation Date

The revised provisions of the Corporate Governance Code and related Listing Rules are set to take effect on 1 July 2025. These changes will apply to corporate governance reports and annual reports for financial years commencing on or after that date.

For the new rules regarding the maximum tenure of INEDs and restrictions on multiple directorships, there will be a three-year transition period. Issuers and INEDs are reminded to ensure compliance by the conclusion of the first annual general meeting of an issuer following 1 July 2028.

Additionally, amendments concerning Long Serving INEDs will be implemented in two phases over a six-year transition period. The first phase requires that no issuer can have a board of directors, where the majority of its INEDs are Long Serving INEDs, by the conclusion of its first annual general meeting held on or after 1 July 2028. The second phase mandates that by the first annual general meeting held on or after 1 July 2031, no Long Serving INEDs may serve on the board of directors of any issuer.

[1] The continuous professional development must at least cover each of the following topics; (1) the roles, functions and responsibilities of the board, its committees and its directors, and board effectiveness; (2) issuers’ obligations and directors’ duties under Hong Kong law and the Listing Rules, and key legal and regulatory developments (including Listing Rule updates) relevant to the discharge of such obligations and duties; (3) corporate governance and ESG matters (including developments on sustainability or climate-related risks and opportunities relevant to the issuer and its business); (4) risk management and internal controls; and (5) updates on industry-specific developments, business trends and strategies relevant to the issuer.

The recent decision of the Hong Kong Court of First Instance (“Court“) in Anthony Mackay v Chi-X Asia Pacific Holdings Ltd [2024] HKCFI 2901 highlights the critical importance of having clear, written employment contracts in place.

Background

The case concerns a dispute between Mr. Anthony Mackay (“Mr. Mackay”) and Chi-X Asia Pacific Holdings Limited (“Chi-X AP”) regarding his employment as Chief Executive Officer of Chi-X AP. Mr. Mackay alleged that he had reached an oral agreement with Chi-X AP whereby he would receive an annual salary of US$500,000 and certain core entitlements, including participation in a Long-Term Investment Plan (“LTIP”) and a guaranteed first-year bonus of US$500,000 (“Alleged Guaranteed Bonus“), regardless of whether his employment would be terminated before the conclusion of his first year.

The terms of the Alleged Guaranteed Bonus were not reflected in the subsequently executed written employment contracts, which provided for a discretionary bonus for each financial year instead. Further, Mr. Mackay and Chi-X AP, both of which were legally represented, had engaged in negotiations over the terms of the LTIP. Although draft LTIP terms were presented to Mr. Mackay by Chi-X AP, he did not sign his agreement to the same because he wanted to check the figures. Mr. Mackay’s case was that he orally agreed to join the LTIP in a phone call with Chi-X AP’s representative subsequently.

Following the termination of Mr. Mackay’s employment by Chi-X AP within his first year, he brought claims against Chi-X AP for various entitlements, including but not limited to the Alleged Guaranteed Bonus and unpaid entitlement under the LTIP.

The Court’s Ruling

It is trite that while oral agreements can indeed be binding, the onus of proving their existence and terms rests squarely on the party asserting them. This burden of proof requires the claimant to adduce compelling evidence, and the Court emphasized the significance of contemporaneous documentation and subsequent conduct in evaluating the veracity of alleged oral agreements.

In assessing Mr. Mackay’s claims, the Court embarked on a fact-sensitive inquiry and examined the available evidence in detail. The claims supported by written documentation, such as those for remuneration for March 2016 (despite the stipulation in the amended employment contract that Mr. Mackay’s employment commenced on 1 April 2016), interest on late salary payments, outstanding ORSO contributions, and expense reimbursements, succeeded. However, the claims based solely (or largely) on alleged oral agreements were subject to more rigorous scrutiny.

The Court was not convinced that Chi-X AP had orally agreed to pay the Alleged Guaranteed Bonus to Mr. Mackay. The Court reached this conclusion upon considering, among other things, that neither the term sheets of Mr. Mackay’s remuneration package nor the communications between Mr. Mackay and Chi-X AP’s representatives before or after the start of his employment referred to any guaranteed bonus. On the contrary, the written employment contracts provided for a bonus the payment and amount of which would be determined by the board “in its absolute discretion”. The Court’s observation that Mr. Mackay’s pleadings on this point had evolved over time further weakened his position. Even on Mr. Mackay’s alternative case that the board of Chi-X AP failed to exercise its discretion to award a bonus to him in accordance with its common law duty of rationality and good faith (i.e. the Braganza duty), the Court was unable to conclude that the board’s refusal to award a bonus was irrational, perverse or lacking in bona fides. In this connection, the Court emphasized judicial restraint in interfering with board decisions, particularly when supported by documented financial and performance considerations.

Similarly, Mr. Mackay’s claim for his LTIP entitlement was dismissed. The Court found that his failure to formally accept the LTIP terms, combined with ongoing negotiations concerning the percentage allocation, undermined his assertion of a concluded agreement. The Court found his explanation that his and Chi-X AP’s lawyers were simply unaware of the oral agreement implausible, given the lack of any contemporaneous documentation or communication supporting his claim.

Implications and Significance

The Mackay decision reinforces the importance of well-drafted and comprehensive written employment agreements in Hong Kong. It serves as a cautionary tale for both employers and employees, highlighting the risks associated with relying on oral agreements, particularly for complex matters like executive compensation. Above all, this case reinforces the message that comprehensive written contracts are essential for establishing clarity, managing expectations, and preventing disputes from arising.

The full judgment can be accessed here.

The Hong Kong Stock Exchange (“HKEX”) has issued a comprehensive Guidance Letter (the “Guidance”) on independent investigations for listed companies suspended from trading due to allegations of accounting or corporate irregularities. The Guidance sets out the HKEX’s expectations on the investigation scope and procedures, independence and transparency requirements and how listed issuers can work towards resumption of trading as soon as practicable.

Here are some key takeaways from the Guidance:

Constitution of an independent committee

The Guidance emphasises the considerations that should be taken into account when forming an investigation committee to ensure its independence. The HKEX requires that each member of the independent committee to provide written confirmation of their independence, and the committee should not consist of directors whose independence may be reasonably questioned, including those potentially involved in or aware of the irregularities. For accounting-related matters, at least one committee member must possess appropriate professional qualifications or accounting expertise.

The Guidance expressly provides that it would not be appropriate for an independent committee to engage advisers who act for the issuer, its connected persons, or individuals involved in the irregularities.

Considerations when appointing an investigator

An investigator engaged by the independent committee must have the necessary expertise, competence, resources and time to perform the engagement. Consideration should be given to the investigator’s experience and reputation in handling inquiries of comparable scope and intricacy.

When irregularities involve potentially fraudulent activities, the committee should engage forensic investigators with appropriate expertise. The Guidance points out that changing investigators in the middle of an investigation is discouraged. In the event that a change becomes unavoidable, the issuer must publicly announce the change setting out full justification for the decision.

Planning, monitoring, and critical review

Independent committees must agree with the investigator on clear objectives, scope, and methodology, and to establish regular reporting mechanisms to monitor progress. For cases involving accounting irregularities, the HKEX emphasises the importance of maintaining regular communication with the issuer’s auditors and providing regular updates on any additional accounting-related issues or irregularities identified during the investigation. The committee must also ensure that the auditor is satisfied with the methodology and findings of the investigator.

An independent committee is expected to exercise appropriate scepticism rather than accepting findings at face value. For instance, when evaluating denials of involvement in unauthorised transactions, the committee must take into account the interviewee’s position and responsibilities. If an interviewee had transaction approval authority, investigators must thoroughly examine how they could have remained unaware of the questioned transaction.

Common defective investigations

The HKEX specifically identifies several common investigation deficiencies, including:

• Unclear selection criteria for investigation samples
• Inadequate investigation scope that fails to cover all material irregularities
• Insufficient alternative procedures to address investigation limitations

It is not uncommon that an investigation reveals areas in the issuer’s internal control system which could be further enhanced. If this occurs, an independent committee must critically assess whether there is any need to expand the scope of investigation and to sufficiently address any systemic issues.

Reporting and disclosure requirements

After the investigation results are ready, the issuer should publish the findings in a timely manner and to summarise the contents of the investigation report. The Guidance makes clear that the announcement should at least cover the independent committee’s assessment on the following matters:

• Whether the irregularity identified is an isolated incident, a recurring incident and/or a systemic failure and the basis of that view;
• The adequacy of the investigation conducted (including any limitations encountered during the investigation and how these were addressed or mitigated); and
• Any recommended remedial action.

The board of directors should also state its assessment of the impact of the irregularities on the issuer, and to set out a  timeline for implementing any remedial measures.

At MinterEllison, we have ample experience advising both issuers and independent committees on independent investigations and assisted a number of prolong suspended issuers to successfully resume trading. Please feel free to reach out to any of our team members if we can be of assistance.

We are thrilled to announce that Jun Kwong, Partner of our Dispute Resolution and Regulatory practice group, has received the prestigious LexisNexis® 40 UNDER 40 Award in the 2024 Greater China List.

The LexisNexis® 40 UNDER 40 Award is a prestigious recognition by LexisNexis® (a global provider of legal, regulatory, and business information services) celebrating 40 legal professionals under the age of 40 who have demonstrated outstanding potential for growth and a strong motivation to further the development of the legal sector.  Jun being recognised in the 2024 list demonstrates and celebrates Jun’s contributions over the past year and underscores his excellence.

Having worked with the seasoned litigators forming MinterEllison LLP’s dispute resolution team for over a decade, Jun has developed a wide-ranging dispute resolution practice, particularly focusing on financial services regulatory, contentious probate and estate administration, contentious competition law, and commercial litigation.  Jun’s expertise and dedication have been instrumental in numerous high-profile cases that the team has handled in the past few years, including a long High Court trial for a dispute over the estate of a billionaire, enforcement actions in the Competition Tribunal, an internal investigation leading to the resumption of trading of a Hong Kong listed company, and a regulatory action in the Market Misconduct Tribunal.

Jun’s ability to deliver outstanding legal work and provide practical, client-focused advice has not only generated significant value for MinterEllison LLP’s but has also pushed the boundaries of his legal practice in the Greater China region.  Jun’s recent accomplishment of passing the Greater Bay Area Lawyers Qualification Exam further demonstrates his commitment to expanding his capabilities and bandwidth of services to clients.

This award is also a testament to the collective effort and supporting culture of MinterEllison LLP, and reflects the high standards of excellence and innovation that MinterEllison LLP strives for.

We extend our heartfelt congratulations to Jun for this well-deserved recognition. We are proud to have Jun as part of our team and look forward to his continued success. Please join us in celebrating Jun’s remarkable achievement.

On 12 November 2024, the Securities and Futures Commission of Hong Kong (“SFC“) published a circular on the use of generative artificial intelligence language models (“AI LMs“) in respect of SFC licensed corporations (“LCs“) offering services or functionality provided by AI LMs or AI LM-based third party products in relation to their regulated activities (“Circular“). The SFC acknowledges that the AI LMs can be, or are being, used by LCs to respond to client enquiries, summarize information, generate research reports, identify investment signals, and generate computer code.

The SFC endorses the responsible use of AI LMs to promote innovation and enhance operational efficiency. In the Circular, the SFC reminds LCs about the risks associated with the use of AI LMs, including hallucination risks, biases, cyberattacks, inadvertent leakage of confidential information, and breaches of personal data privacy and intellectual property laws. The SFC also sets out expectations for LCs using AI LMs, including implementing effective policies, procedures, and internal controls. These include that LCs should ensure senior management oversight and governance, proper model risk management, effective cybersecurity, and data risk management.

Further, the SFC considers the deployment of AI LMs for providing investment recommendations, advice, or research to investors or clients as high-risk applications. Consequently, LCs are required to implement additional risk mitigation measures for such high-risk applications, including the necessity of involving human intervention to address hallucination risks and ensure the factual accuracy of the AI LM’s output before communicating it to the user. The SFC reminds LCs intending to adopt AI LMs in high-risk use cases that they must comply with the notification requirements under the Securities and Futures (Licensing and Registration) (Information) Rules and they are encouraged to discuss their plans with the SFC.

According to the Circular, it is observed that the general approach adopted by the SFC is that the obligation to provide correct information lies with LCs’ responsibility and professional duties. If there is incorrect information, the fault does not lie with the AI LMs but with the users, specifically the LCs in this instance, who have failed to carry out the necessary verifications. This approach is not new, and the use of AI LMs will depend on the effectiveness of human oversight as well as the ability to identify tasks for which AI LMs can and should be utilized.

Full version of the Circular can be found here.