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Proposals to enhance Hong Kong's corporate governance regime are contained in a public consultation document issued by the Standing Committee on Company Law Reform (SCCLR) today (July 20).
The SCCLR's proposals relate to three main areas, namely, directors' duties and responsibilities; shareholders' rights and corporate reporting. They are the outcome of the first phase of the ongoing Corporate Governance Review being spearheaded by the SCCLR.
These proposals concentrate on measures to address pressing public concerns regarding the corporate governance standards in Hong Kong. In particular: -
* Ways of improving the laws and practice in relation to directors' duties, nomination and election of directors and connected transactions involving directors.
* Most connected transactions involving directors or controlling shareholders should be subject to voting (on a poll) by disinterested shareholders only.
* To help shareholders protect their own interests, there are proposals to enhance current shareholders' remedies such as the unfair prejudice remedy as well as other measures.
* From the perspective of enhancing the integrity of financial disclosures, there should be a body with authority to investigate financial statements and enforce any necessary changes to the companies' financial statements.
(A list of major proposals is annexed.)
The SCCLR also considers that it is very important for our regulatory regime to be at least on a par with those in other jurisdictions of international standing. As such, the SCCLR has, in working out these proposals, had regard to standards of law and practices in such jurisdictions.
The public consultation will end on October 15. The SCCLR will consider comments received from the public on the proposals before making recommendations to the Government on specific measures to upgrade Hong Kong's corporate governance standards.
The Corporate Governance Review, a roots and branch examination of our existing corporate governance regime, was launched in early 2000 as announced by the Financial Secretary in his 2000/01 Budget Speech. The Corporate Governance Review aimed to identify and plug any gaps in our corporate governance regime.
The SCCLR, tasked with undertaking the Corporate Governance Review, has set up three sub-committees, namely, the Directors Sub-Committee, the Shareholders Sub-Committee and the Corporate Reporting Sub-Committee, to look at issues in these three areas. Members of these sub-committees are drawn from professionals, academics, business sector members, regulators and Government representatives.
Copies of the public consultation document (in both Chinese and English) will be available for collection from the reception counter on the 15th Floor of Queensway Government Offices (High Block) as from 9 am on July 21. The document will also be available at the Companies Registry's website (www.info.gov.hk/cr/).
Comments on the proposals are welcome and shall reach the Secretary to the SCCLR not later than October 15 either through email to jsbush@cr.gov.hk or mail to -
Mr. J. S. Bush
Secretary, Standing Committee on Company Law Reform
Companies Registry
Queensway Government Offices (High Block), 15th Floor
66 Queensway
Hong Kong
Tel. No.: 2867-2820
Annex
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Major proposals in "A Consultation Paper on Proposals made in Phase I of the Corporate Governance Review"
(1) Proposals relating to Directors' Duties and Responsibilities
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* A director should be required to abstain from voting at a board meeting on a transaction in which he has an interest, with exceptions for immaterial transactions.
* For transactions or arrangements above a certain threshold value involving directors or persons connected with directors, the approval of disinterested shareholders voting on a poll should be obtained. The views of the public are being sought with regard to the definition of this threshold value.
* Requirements for disinterested shareholders' approval for connected party transactions should be extended to transactions between a company and an "associated company" and not limited to transactions between the company and "subsidiaries". An "associated company" should be defined as "one in which the company in question controls the exercise of 20% or more of the voting rights of the equity share capital", to be consistent with accounting practice.
* Procedures for the nomination and election of directors should be improved so that shareholders have a meaningful right to nominate and elect directors.
* Directors' fiduciary duties and the standards of care and skill should be set out in a "Code of Best Practice" by way of guidance to directors.
(2) Proposals relating to Shareholders' Rights
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* Connected transactions involving controlling shareholders should be subject to voting (on a poll) by disinterested shareholders only, with defined exceptions.
* The common law derivative action should be replaced by a statutory derivative action which would allow shareholders and directors, past or present, to bring an action on behalf of the company for a wrong done to the company.
* The Securities and Futures Commission should, without having to first obtain court approval, be allowed to bring derivative actions, on behalf of a listed public company including an oversea company listed on the Stock Exchange of Hong Kong.
* The statutory unfair prejudice remedy should be amended so that the court has clear powers to award damages and interest on damages. The statutory remedy should be extended to shareholders or former shareholders of companies including oversea companies.
* Shareholders should have a statutory method of securing access to company records subject to court approval and other safeguards.
* The court should have, in relation to companies including oversea companies: -
(a) a general power, on application by an affected person or a relevant authority, to grant an injunction in relation to any proposed contravention of the Companies Ordinance or breach of fiduciary duties;
(b) a clear power to grant orders as to costs for shareholders taking action, subject to good faith and reasonable grounds requirements.
(3) Proposals relating to Corporate Reporting
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* A body with authority to investigate financial statements and enforce any necessary changes to companies' financial statements should be set up, subject to the public comments on the functions, the jurisdiction and the mode of establishment of the body.
* The accounting and auditing standards setting function should continue to be vested in the Hong Kong Society of Accountants, subject to greater involvement of the public in the standard setting process.
* Directors and auditors should be allowed to prepare and file revised financial statements and a revised auditors' report, in the event that material misstatements in the financial statements are found after the financial statements being laid before the company in the general meeting and (in case of public companies) filed.
* Directors should be required to file a warning document with the Companies Registry to prevent further reliance on misstated financial statements at the earliest possible opportunity. If directors refuse to do so, the law should allow the auditors to file such a document.
* Private companies with limited liability should be required to file their financial statements with the Companies Registry for public inspection.
* Auditors should be allowed to report on any inconsistencies between the audited financial statements and financial information contained in the directors' reports.
* The Listing Rules should be amended to require management discussion and analysis (MD&A) to include more qualitative and forward looking disclosure.
End/Friday, July 20, 2001
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