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  • 2004

    Update Number Effective Date

    (DD/MM/YY)         		Topics
    Update No. 20 19/11/2004 The Code on Corporate Governance Practices and Rules on the Corporate Governance Report
    Update No. 19 19/10/2004 The regulation of sponsors and independent financial advisers
    Update No. 18 Update - 31 March 2004 Corporate governance issues

    • Update No. 20

      Note to subscribers for the amendments to the rules governing the listing of securities on the Growth Enterprise Market (the "GEM Listing Rules")

      Update No. 20

      8 December 2004

      Dear Sirs,

      Amendments to the GEM Listing Rules relating to the Code on Corporate Governance Practices and Rules on the Corporate Governance Report

      We enclose reprinted pages of the GEM Listing Rules incorporating amendments to the GEM Listing Rules in relation to the Code on Corporate Governance Practices (the "Code") and the rules on the Corporate Governance Report, together with the filing instructions.

      The Code is inserted as a new Appendix 15 replacing existing GEM Listing Rules 5.35 to 5.45. The Rules on the Corporate Governance Report are inserted as a new Appendix 16.

      Various other consequential amendments to the GEM Listing Rules have been made on the introduction of the Code and Rules on the Corporate Governance Report.

      Revised Code on Corporate Governance

      The Code sets out the Exchange's views on the principles of good corporate governance and two levels of recommendations, namely Code Provisions and Recommended Best Practices. Issuers are expected to comply with, but may choose to deviate from, the Code Provisions. Issuers are encouraged to comply with the Recommended Best Practices which are provided for guidance only. Issuers may devise their own code on corporate governance practices on such terms as they may consider appropriate.

      The Code has five sections dealing with directors, remuneration of directors and senior management, accountability and audit, delegation by the Board and communication with shareholders. In each section, the Code sets out the Code Provisions and/or Recommended Best Practices, together with the underlying principles of the relevant provisions to assist listed issuers in developing their own code of board practices.

      Corporate Governance Disclosure

      Issuers must state whether they have complied with the Code Provisions set out in the Code for the relevant accounting period in their half-year reports and annual reports.

      Issuers are required to include a Corporate Governance Report in their annual reports containing prescribed information on their corporate governance practices.

      Where the issuer deviates from the Code Provisions set out in the Code, the issuer must give considered reasons, in the case of annual reports, in the Corporate Governance Report and, in the case of half-year reports, either by giving considered reasons for each deviation or, to the extent that it is reasonable and appropriate, by referring to the Corporate Governance Report in the immediately preceding annual report, and providing details of any changes together with considered reasons for any deviation not reported in that annual report.

      In the case of the Recommended Best Practices, issuers are encouraged, but are not required, to state whether they have complied with them and give considered reasons for any deviation.

      Coming into Effect

      Subject to the implementation and transitional arrangements set out in Appendix 2 to the Exposure Conclusions Report (which is available on the Exchange's website at www.hkex.com.hk/eng/newsconsul/mktconsul/documents/expocon.pdf), the rule amendments will come into effect on 1 January 2005.

      Please click HEREHERE to see the amendments to the respective sections. The revised version of the entire GEM Board Listing Rules are located in the section headed "Listing Rules (GEM)".

      Yours faithfully

      For and on behalf of

      The Stock Exchange of Hong Kong Limited

      Richard Williams
      Head of Listing

    • Update No. 19

      Note to subscribers for the amendments to the rules governing the listing of securities on the Growth Enterprise Market ("GEM Listing Rules")

      Update No. 19

      1 December 2004

      Dear Sirs,

      Amendments to the GEM Listing Rules relating to the regulation of sponsors and independent financial advisers

      We enclose reprinted pages of the GEM Listing Rules incorporating amendments regarding the regulation of sponsors and independent financial advisers (IFAs).

      The rule amendments were announced in the news release published jointly by The Stock Exchange of Hong Kong Limited (the Exchange) and the Securities and Futures Commission (the SFC) on 19 October 2004 (the "News Release").

      We also enclose filing instructions for the reprinted pages.

      Key objectives of the rule amendments

      The Exchange's primary objectives in introducing these amendments are to:

      •  ensure sponsors, post-listing advisers (to be known as compliance advisers) and IFAs are clear about what is expected of them, in particular, in performing due diligence;
      •  enable sponsors, compliance advisers and IFAs to participate in the market on a level playing field; and
      •  minimise the regulatory risk that sponsors, compliance advisers and IFAs will not discharge their responsibilities in a way that commands market confidence.

      Overview of the amended rules

      The amended rules address, amongst other things:

      Sponsors and compliance advisers

      •  when an issuer must appoint a sponsor or compliance adviser;
      •  independence requirements for sponsors and compliance advisers;
      •  the roles and responsibilities of sponsors and compliance advisers including the due diligence the Exchange expects sponsors should typically perform;
      •  the responsibilities of issuers to assist sponsors and compliance advisers;
      •  undertakings and declarations required to be given by sponsor and IFA firms to the Exchange;

      IFAs

      •  independence requirements for IFAs;
      •  the roles and responsibilities of IFAs including the reasonable steps an IFA will typically perform in order to be able to make the statements required by rule 20.22, dealing with the letter setting out its independent financial advice;
      •  the responsibilities of issuers to assist IFAs they appoint; and
      •  undertakings and declarations required to be given by IFAs to the Exchange.

      Key amendments

      The key amendments are set out below.

      Sponsors and compliance advisers

      •  The rules will include an amended definition of "Sponsor" in rule 1.01.
      •  Compliance advisers will be expressly referred to in rule 6.67 dealing with the Exchange imposing sanctions.
      •  Rules 6.01 to 6.03 relating to sponsors will be repealed.
      •  A new chapter, Chapter 6A, will set out most of the roles and obligations of sponsors and compliance advisers including as follows:
      •  the current rules require that a new applicant appoint a sponsor to assist it through the listing application process and for a fixed period after listing. Under the amended rules, new applicants (including issuers deemed to be new applicants pursuant to rule 19.54) will continue to be required to appoint (at least) one sponsor to assist with their initial applications for listing. Additionally, all listed issuers will have to appoint a compliance adviser for the period commencing on initial listing and ending on publication of financial results for the second full financial year after listing, and for any further period directed by the Exchange;
      •  the current rules provide that no sponsor may act for any new applicant or continue to act for any listed issuer in circumstances where any actual or potential conflict of interest impedes or is likely to impede its ability to provide competent advice to the new applicant or listed issuer in a professional and impartial manner. The amended rules will provide that sponsors and compliance advisers must perform their duties with impartiality and that at least one sponsor appointed by a new applicant must be independent. Compliance advisers need not be independent;
      •  the independence test will be set out in the amended rules. To provide clarity to issuers the independence test will be a bright-line (or black letter) test;
      •  sponsors will be required to give the Exchange a statement addressing whether they are independent and, if they are not, how their lack of independence arises. (The prescribed form for that statement will be set out in Form K of Appendix 7.) Sponsors will also have to advise the Exchange if there is any change to the information in the statement after it is given;
      •  sponsors and compliance advisers will have to give undertakings to the Exchange in the forms prescribed in Form A of Appendix 5 and Form M of Appendix 7, respectively. The undertakings will provide, for example, that the sponsor or compliance adviser will comply with the GEM Listing Rules and cooperate in any investigation conducted by the Listing Division and/or the GEM Listing Committee of the Exchange;
      •  sponsors will have to conduct due diligence, having regard to a new practice note [2], Due diligence by sponsors in respect of initial listing applications, dealing with due diligence by sponsors in respect of initial listing applications including the Exchange's expectations of due diligence sponsors will typically perform to meet their obligations under the rules;
      •  after undertaking the necessary due diligence, sponsors will have to make a declaration to the Exchange concerning the new applicant. The declaration must be in the form prescribed in Form G of Appendix 7;
      •  compliance advisers will only be required to provide advice and guidance if they are asked for it by the issuer by whom it is appointed. Listed issuers will have to consult with and, if necessary, seek advice from their compliance advisers on a timely basis in the prescribed circumstances, for example, before publication of any regulatory announcement, circular or financial report; and
      •  issuers will be required to assist sponsors and compliance advisers. For example, new rule 6A.05 will provide that a new applicant and its directors must assist the sponsor to perform its role and must ensure that its substantial shareholders and associates also assist the sponsor.

      IFAs

      •  The rules will include a new definition of "IFA group" in rule 1.01.
      •  New rules 17.92 to 17.99 will set out most of the roles and obligations of IFAs.
      •  IFAs will be required to perform their duties with impartiality and be independent. The independence test will be set out in the rules. As with the sponsor independence test, to provide clarity to issuers the independence test will be a bright-line test.
      •  IFAs will be required to give the Exchange a declaration of their independence in the prescribed form to be set out in Appendix 13. IFAs will also have to advise the Exchange if there is any change in the circumstances set out in the independence declaration.
      •  As with sponsors and compliance advisers, IFAs will have to give an undertaking to the Exchange in the form prescribed in Appendix 14. The undertaking will provide that the IFA will comply with the GEM Listing Rules and cooperate in any investigation conducted by the Listing Division and/or the GEM Listing Committee of the Exchange.
      •  IFAs will have to take all reasonable steps to satisfy themselves that there is a reasonable basis for making the statements required by rule 20.22(1) to (5) and that there is no reason to believe any information relied on by the IFA in forming its opinion or any information relied on by any third party expert on whose advice or opinion the IFA relies in forming its opinion, is not true or omits a material fact.
      •  A note to rule 17.92 will set out the due diligence steps the Exchange expects an IFA will typically perform.
      •  The amended rules will also set out the responsibilities of issuers to assist IFAs. That is, rule 17.93 will provide that, for example, an issuer must keep the IFA informed of any material change to any information previously given to or accessed by the IFA.

      Coming into effect

      Subject to the transitional arrangements described in the News Release, the rule amendments will come into effect on 1 January 2005.

      The amendments to the relevant sections of the GEM Listing Rules have been marked-up for your ease of reference. Please click HEREHERE to see the amendments to the respective chapters. The revised version of the entire GEM Listing Rules is located in the section headed "Listing Rules (GEM) ".

      Yours faithfully
      For and on behalf of
      The Stock Exchange of Hong Kong Limited

      Richard Williams
      Head of Listing

    • Update No. 18

      Note to subscribers for the amendments to the rules governing the listing of securities on the Growth Enterprise Market ("GEM Listing Rules")

      Update No. 18

      31 March 2004

      Dear Sirs,

      Amendments to the GEM Listing Rules relating to corporate governance issues

      We enclose reprinted pages of the GEM Listing Rules incorporating amendments to the GEM Listing Rules in relation to corporate governance issues, together with the filing instructions.

      The principal amendments are as follows:

      Directors and board practice

      •   Independent non-executive directors ("INEDs") play a pivotal role in the corporate governance of issuers. Given the increasingly important role of INEDs and to ensure that the views of INEDs carry significant weight in the board's decisions, the minimum number of INEDs required under the GEM Listing Rules is increased from 2 to 3
      •   One of the major responsibilities of INEDs is to provide an objective view on the assessment of the financial statements of issuers. Issuers are required to appoint at least one INED with appropriate professional qualifications or accounting or related financial management expertise
      •   The quality and independent state of mind of INEDs are essential for ensuring the effectiveness of their contribution. Additional guidelines have been introduced to assist issuers in assessing the independence of proposed INEDs

      Required standard of directors' dealings

      •   The GEM Listing Rules have been amended to provide expressly that any breach of the required standard of directors' dealings will be regarded as a breach of the GEM Listing Rules
      •   A definition of "dealing" has been introduced to the required standard of directors' dealings to explain under what circumstances a transaction constitutes a dealing by a director in the securities of an issuer. New requirements have also been introduced on the notification and disclosure of directors' dealings and reporting on compliance with the required standard so as to enhance transparency

      Notifiable transactions and connected transactions

      •   Amendments have been made to Chapters 19 (notifiable transactions) and 20 (connected transactions) to codify our interpretations in respect of certain provisions where the existing GEM Listing Rules were not clear or may have been ambiguous. The main changes are:
      •   amendments to the definition of "connected person" to include persons who are connected by virtue of their relationship at the subsidiary level and to clarify under what circumstances a non wholly-owned subsidiary and relatives of a director, chief executive, management shareholder and substantial shareholder will be treated as a connected person
      •   amendment to the definition of "connected transaction" to reflect the application of the connected transaction Rules in certain transactions between an issuer and a party which is not a connected person
      •   introduction of a new category of notifiable transaction, namely "very substantial disposal". This will ensure that shareholders are given an opportunity to exercise their voting rights and to express their views at a general meeting to approve any disposal transaction that may have a significant impact on the remaining business of the issuer and its prospects
      •   introduction of a total assets test to replace the net assets test to address the practical problems of the existing net assets test, in particular to provide issuers with net liabilities or negligible net assets with clarity on the application of the classification tests to their circumstances
      •   introduction of a new classification test, the consideration to market capitalisation test to replace the consideration to net assets test
      •   introduction of a new classification test, the revenue test as a stand-alone test to measure the impact of a transaction on the issuer in terms of level of business activity
      •   introduction of new percentage thresholds for classifying notifiable transactions based on the new tests
      •   all of the new tests except for the profits test will be used to classify connected transactions
      •   abolition of the annual shareholders' approval requirement for "continuing connected transaction"
      •   additional disclosure requirements for announcements and circulars relating to notifiable transactions and connected transactions

      Financial reporting and disclosure obligations

      •   The following major changes have been made to Chapter 18 of the GEM Listing Rules:
      •   issuers will be permitted to distribute a summary half-year report rather than a full half-year report
      •   the two-phased publication arrangement for annual results announcements has been abolished. To achieve this, the disclosure requirements for results announcements have been brought into line with the disclosure requirements for summary financial reports and summary half-year reports
      •   introduction of new disclosure requirements relating to compliance with the required standard of directors' dealings and the requirements in respect of INEDs and establishment of an audit committee for annual reports and half-year reports to enhance transparency
      •   introduction of recommended disclosures on management discussion and analysis for annual and half-year reports to enhance transparency
      •   A new section on disclosure of pro forma financial information has been included in Chapter 7 to explain when pro forma financial information must be prepared and the standards of preparation and assurance associated with any disclosure of pro forma financial information whether mandated or voluntary

      Continuing listing obligations

      •   To safeguard minority shareholders from material or unfair dilution of their interests, issuers are required to obtain independent shareholders' approval for the second and subsequent refreshments of a general mandate in any one year. An issuer will not be allowed to place its securities for cash consideration under a general mandate at a discount of 20% or more, unless it can satisfy the Exchange that it is in a serious financial difficulty and that the only way it can be saved is by an urgent rescue operation
      •   Voting by poll is required for connected transactions and other transactions which require approval by shareholders and shareholder(s) and their associates that have a material interest must abstain from voting
      •   Shareholders' approval is required for directors' service contracts that may exceed 3 years or directors' service contracts that expressly require the issuer to give a period of notice of more than 1 year or to pay compensation of more than 1 year's emoluments on termination

      Other corporate governance rule amendments

      •   The definition of "associate" in Chapter 1 has been expanded to remove the loophole in the existing GEM Listing Rules in relation to trust arrangements involving a company under the control of the trustee of a trust of which the connected person or any of his family interests is a beneficiary or discretionary object
      •   The definition of "subsidiary" has been expanded to include an entity which is accounted for in the audited consolidated accounts of an issuer as a subsidiary under applicable accounting standards
      •   Guidelines have been introduced to assist issuers in determining whether a shareholder has a "material interest" in a transaction codifying our existing interpretation of the GEM Listing Rules
      •   An issuer wishing to cancel/withdraw its primary listing on the Exchange in circumstances where the issuer has no alternative listing must obtain the prior approval of 75% or more of its shareholders, the same approval threshold for a privatisation offer under the Takeovers Code
      •   Issuers may not purchase their own shares on the Exchange if the purchase price is more than 5% above the average closing market price of those shares for the 5 preceding business days
      •   Amendments have been made to clarify the definition of "profit forecast" and reflect the practice that any estimate of profits or losses or reference to future profits or losses may be regarded as profits forecasts
      •   The provisions of Appendix 3 (Articles of Association) regarding nomination of directors have been amended to ensure that shareholders are given sufficient time to consider information on any proposed nomination of a director

      Coming into effect

      Subject to the transitional arrangements set out in HKEx's news release of 30 January 2004 and its attachment, the rule amendments will be effective on 31 March 2004.

      Yours faithfully
      For and on behalf of
      The Stock Exchange of Hong Kong Limited

      Richard Williams
      Head of Listing

      The amendments to the relevant sections of the GEM Listing Rules have been marked-up for your reference, please click herehere to see the amendments to the respective chapters.