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Following is a question by the Hon Albert Cheng and a written reply by the Secretary for Financial Services and the Treasury, Professor K C Chan, in the Legislative Council today (October 24):
Question:
Currently, trading in the stocks of a number of listed companies has been suspended for a long time and the longest period of suspension is more than three years. As a result, the funds of minority shareholders have been frozen for a prolonged period of time, but in many cases the companies concerned have not disclosed the reasons for such suspensions. In this connection, will the Government inform this Council:
(a) whether it knows the number of listed companies with stock trading suspended for more than twelve months, and the reasons why trading in these stocks has not resumed for such a long period;
(b) whether it knows the criteria adopted by regulatory bodies for deciding on the suspension and resumption of stock trading; and
(c) whether it will review the existing mechanism for the suspension of stock trading of listed companies and adopt measures to enhance its transparency, such as disclosing the criteria adopted for deciding on the suspension and resumption of stock trading?
Reply:
Madam President,
The rules relating to the suspension of trading on the Stock Exchange of Hong Kong (the Exchange) are administered by the Exchange. The Exchange's reply to the questions raised is set out below:
(a) As at October 16, 2007 (and September 30, 2006 respectively), 29 (34) Main Board and 16 (21) Growth Enterprise Market listed companies were regarded by the Exchange to be long-suspended. Thirty eight out of these companies had been suspended from trading for a period of more than twelve months.
For these companies there are a variety of reasons why trading has yet to resume after such a period. Resumption of trading will depend on the circumstances of each company and its efforts to address the circumstances pertaining to the on going suspension.
Most of these companies are experiencing financial difficulties and/or lack sufficient operations to maintain their listing status. The resumption of trading of the securities of a listed company in severe financial difficulty will usually take some time to achieve as it invariably involves rescue proposals with funds and/or asset injections and a compromise agreement with its creditors. These proposals are considered on a case by case basis and often have to undergo a process of detailed scrutiny. If these companies cannot present a viable resumption proposal to the Exchange in accordance with the provisions of the Listing Rules, their listings will ultimately be cancelled. In other cases companies are suspended pending announcement of price sensitive information or where there is delay in release of financial information and/or where the companies in question need to address governance related concerns.
(b) In carrying out its functions the Exchange considers the need to promote investor confidence in standards of disclosure by listed companies and in the conduct of their affairs, in particular compliance with the continuing obligations regime.
The continuing obligations are founded on the principles of timely disclosure of all relevant information and equal treatment of all shareholders. They perform an essential role in helping to maintain orderly markets and in ensuring acceptable levels of investor protection. When these obligations are not met the Exchange will consider what remedial steps are necessary to restore an orderly market or, depending on the circumstances, to put a listed company into a position in which it can meet its obligations under the Listing Rules. Where appropriate, the Exchange will also consider what sanctions should be imposed through formal disciplinary procedures.
Power to suspend
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Where the maintenance of an orderly market is or may be jeopardised or where protection of investors so requires the Exchange may suspend trading with effect from such time as it may determine and in such circumstances as it thinks fit, whether or not a request is made by an issuer or its authorised advisers. The relevant powers are described in Chapter 6 of the Main Board Listing Rules and Chapter 9 of the Growth Enterprise Market Listing Rules.
The Exchange, in considering whether or not to exercise its powers to suspend trading or to order the resumption of trading, will have regard to the interests of both current shareholders and potential future investors. While concerns are often raised about the impact of suspension of trading on shareholders, in particular minority shareholders, who may be unable to dispose of their interest in the suspended securities, it is equally important to consider whether potential purchasers of those shares will have at their disposal all the information they might need to make an informed investment decision, and can have confidence that the company's circumstances are such that it is able to meet its continuing obligations under the Listing Rules.
Grounds for suspension
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The structure of the Listing Rules and the continuing obligations regime places the onus on listed companies to avoid any suspension of trading. Recourse to suspension should be avoided whenever it is reasonably practicable. The Exchange places great importance on the responsibility of the directors of a listed company, not only to ensure proper security with regard to unpublished price-sensitive information, but also to ensure that relevant information is disclosed in a proper, equitable manner, in the interests of the market as a whole, not to the benefit of a select group or individual.
There are circumstances where steps cannot be taken in the time available to avoid a suspension of trading. The following is a non-exhaustive list of examples of circumstances in which the Exchange will normally suspend trading:
(i) A listed company is unable to publish price-sensitive information;
(ii) There is or may be a leak of price-sensitive information and the listed company is unwilling or unable to issue an announcement within an appropriate time frame;
(iii) There is uneven dissemination or leakage of price-sensitive information in the market giving rise to an unusual movement in the price or trading volume of the listed company's securities;
(iv) There are unexplained unusual movements in the price or trading volume of the listed company's securities and the listed company's authorised representative cannot immediately be contacted by the Exchange to confirm that the listed company is not aware of any matter or development that is or may be relevant to the unusual price movement or trading volume of its listed securities;
(v) A listed company appoints receivers or liquidators are appointed;
(vi) A listed company is unable to assess its financial position and inform the market accordingly;
(vii) A listed company receives an offer for its securities and the listed company is unable to issue an announcement pursuant to the Takeovers Code within an appropriate time frame;
(viii) The Exchange considers that the listed company does not have a sufficient level of operations to warrant the continued listing of the company's securities;
(ix) A listed company fails to meet the continuing obligations of listing in a manner severe enough, in the opinion of the Stock Exchange, to justify suspension. For example, with effect from January 1, 2005, Main Board-listed companies which fail to publish financial results by the due date in accordance with the Listing Rules will be suspended; or
(x) The Exchange considers there are insufficient shares in public hands.
Resumption of dealings
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In the interests of promoting a continuous market for the trading of listed securities, the Exchange stipulates that the period of any suspension be kept as short as is reasonably possible. This means that a listed company and its advisers must produce an appropriate draft announcement for review by the Exchange as soon as possible after the suspension arises. Under normal circumstances, the Exchange will restore dealings as soon as possible following publication of an appropriate announcement, or after specific requirements have been met. In the majority of cases, the resumption of dealings will normally take place at the commencement of trading on the morning if the announcement is published on the HKEx website and the company's own website by 11pm of the previous night on a business day.
However the procedure for lifting a suspension will depend on the circumstances and the Exchange reserves the right to impose such conditions as it considers appropriate.
As an example, a listed company may be suspended due to qualified audit opinion where the auditor is unable to express an opinion on whether the listed company has been able to maintain proper books and records. Such an opinion raises serious concerns about whether the company has in place adequate compliance procedures, systems and controls to enable the company to meet its financial and other disclosure obligations under the Listing Rules. To protect investors the Exchange will suspend trading pending clarification of the concerns raised and such remedial action as may be necessary. In these circumstances the Exchange may impose as a condition for resumption of trading that the listed company undertake a review of its systems and controls and obtain an independent confirmation that the directors have established procedures which provide a reasonable basis for them to make proper judgements with respect to the company's continuing obligations under the Listing Rules.
Rejection of a proposal for the resumption of trading
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During any period of suspension the listed company may request the lifting of the suspension. The Exchange will not entertain a request by a listed company to resume trading if it is not satisfied that the circumstances prevailing at the time warrant resumption of trading. Usually a decision to reject a request for a lifting of suspension is made by the Listing Division.
Where the Listing Division rejects an application by a listed company to lift a suspension of trading which has been in effect for more than 30 days, the listed company has the right to have that decision referred to the Listing Committee for review.
Where the Listing Committee endorses, modifies or varies the Listing Division's decision, that listed company shall have the right to have that decision reviewed by the Listing Appeals Committee, whose decision shall be conclusive and binding on that listed company.
These arrangements provide safeguards to ensure that the Listing Division exercise their powers and carry out their day to day administration of the Listing Rules in a professional and impartial manner.
(c) As is noted in The Listing Committee Report 2006, at the Policy Meeting held in January 2006, the Listing Committee noted that a lack of cooperation or responsiveness from listed issuers was a main cause for the prolonged suspension of a number of listed issuers and the lack of transparency in the process. The majority of such suspended listed issuers either delayed the provision of relevant information or provided incomplete and piecemeal information regarding the problem that led to the suspension. Without the full co-operation of the listed issuers, the Exchange would be denied information necessary to form a complete picture of the extent of the problems faced by a listed issuer. Furthermore, an appropriate regulatory response would be a balancing act of on the one hand ensuring that a suspended listed issuer is allowed to resume trading after investors are fully informed and, on the other hand, ensuring that the listed issuer's suspension is for the shortest possible period.
To provide greater transparency about suspensions the Listing Committee supported the Listing Division considering whether or not to apply one or more of the following options; (i) the Exchange publishing the conditions imposed for resumption; (ii) requiring the suspended issuer to publish a weekly update for temporary suspensions or a monthly or quarterly update for long suspensions; and/or (iii) automatically invoking the delisting procedure if a security has been suspended for a prolonged period of time without the issuer taking steps to achieve resumption.
The Listing Division has adopted this guidance in its current working practices.
Ends/Wednesday, October 24, 2007
Issued at HKT 12:45
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