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Hong Kong Exchange and Clearing Limited Press Conference on Enhancing Corporate Governance and Market Quality 30 Jan

Hong Kong Exchange and Clearing Limited Press Conference on Enhancing Corporate Governance and Market Quality 30 January 2004. Corporate Governance Update on Progress Paul Chow Chief Executive. Update on Progress.

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Hong Kong Exchange and Clearing Limited Press Conference on Enhancing Corporate Governance and Market Quality 30 Jan

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  1. Hong Kong Exchange and Clearing LimitedPress Conference on Enhancing Corporate Governanceand Market Quality 30 January 2004

  2. Corporate GovernanceUpdate on ProgressPaul ChowChief Executive

  3. Update on Progress • Release of Exposure Paper on Draft Code on Corporate Governance Practices and Corporate Governance Report • Implementation of corporate governance Rule amendments • Consultation conclusions and Rule amendments on initial listing criteria and continuing listing obligations

  4. Update on Progress (2) • Initiatives under Hong Kong’s Corporate Governance Action Plan • International standards as a benchmark • Improving the transparency of our rules and practices • Address perceived inadequacies in the Rules • Codify existing Exchange practices • Make the Rules clearer and more concise (where possible)

  5. Exposure of Draft Code on Corporate Governance Practices and Corporate Governance Report Richard WilliamsHead of Listing

  6. Objective of the Exposure Paper • Public exposure of the draft Code and Corporate Governance Report • To allow the market to comment on: • timing of the proposed implementation of the Code • detailed wording of the draft Code

  7. Structure of Draft Code • Non–mandatory • Two tiers of board practices • 1st tier: Code provisions – comply or explain approach • Non-compliance does not constitute a breach of the Listing Rules • 2nd tier: Recommended Best Practices – listed issuers encouraged to disclose their non-compliance

  8. Code Provisions • Section A: Directors • Section B: Directors’ remuneration • Section C: Accountability and Audit • Section D: Delegation by the Board • Section E: Communication with Shareholders

  9. Major Recommended Best Practices • INEDs comprising at least one-third of the board • Establishment of a nomination committee with a majority of INEDs • Quarterly reporting for Main Board issuers • Continuous training for directors • Disclosure of senior management’s emoluments on a named basis

  10. Corporate Governance Report • Three levels of disclosure requirements • 1st level: Mandatory disclosure requirements • 2nd level: Code provision disclosure – need to explain non-disclosure • 3rd level: Recommended disclosure

  11. Proposed Timetable • Comments on or before 31 March 2004 • Target for publication of Code – end 1st half 2004 • New Code effective for accounting periods commencing: • 1 January 2005 for all the Code provisions and related disclosure obligations (except for those on “internal control”) • 1 July 2005 for the Code provisions on “internal control” and related disclosure obligations • Early adoption encouraged

  12. Corporate Governance Rule AmendmentsAnne ChapmanVice President, Listing

  13. Major areas of corporate governance Rule amendments • New chapters of Main Board Rules on notifiable transactions and connected transactions • Revised classification of notifiable transactions and connected transactions • Revised definition of “reverse takeovers” • Revised definition of “connected persons” • Revised definition of “associate” of a connected person • Refreshment of general mandate • Disclosure of directors’ remuneration

  14. Major Rule Amendments (1) • New Chapters of Main Board Rules • Chapter 14 (Notifiable transactions) • Chapter 14A (Connected transactions) • Alignment of the format and structure of Main Board and GEM Rules

  15. Major Rule Amendments (2) • Classification of notifiable transactions • Categories of notifiable transactions: • Introduced “VSD” • Introduced “reverse takeovers” (existing GEM Rules) into Main Board Rules • Five size tests: • Total assets test which replaces the existing net assets test • Consideration to market capitalisation test which replaces the existing consideration to net assets test • Revenue test as a new stand-alone test • Profits test (no change) • Equity capital test (no change) • Revised percentage thresholds: • Alignment of thresholds with international standards

  16. Major Rule Amendments (3) • Classification of connected transactions • Existing requirement: • Assets test and consideration test only • New requirement: • All size tests (except for profits test) apply • Revised percentage thresholds apply • Existing de minimis thresholds of $1 million and $10 million retained

  17. Major Rule Amendments (4) • Reverse takeovers: • Treated as a deemed new listing • Comply with new listing requirements • Revised definition: • Acquisitions involving a change in control and triggering VSA threshold • Acquisitions within 24 months after a change in control which individually or together trigger VSA threshold

  18. Major Rule Amendments (5) • Revised definition of “connected person” • Includes connected persons at subsidiary level • Includes, for the purpose of connected transactions, non wholly owned subsidiaries of which connected person(s) at the issuer’s level (individually or together) is/are a substantial shareholder • Includes, for the purpose of connected transactions, “relatives” of a connected person as his deemed associates : • includes his spouse, parents, children and siblings • includes his mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, sister-in-law, grandparents, grand-children, uncle, aunt, cousin, nephew and niece, whose association with the connected person is such that, in the opinion of the Exchange, the proposed transaction should be subject to the connected transaction provisions

  19. Major Rule Amendments (6) • Revised definition of “associate” : • in relation to an individual, • a trustee-controlled company • a subsidiary of a trustee-controlled company • a holding company of a trustee-controlled company and a subsidiary of any such holding company • in relation to a corporation, • a trustee • a trustee-controlled company • a subsidiary of a trustee-controlled company • a holding company of a trustee-controlled company and a subsidiary of any such holding company

  20. Major Rule Amendments (7) • Limit on general mandate: • Existing limit of 20% of issued share capital retained • Further consideration will be given to lowering the limit • Refreshment of general mandate • Revised requirements: • Refreshment subject to shareholders’ approval once a year • Independent shareholders’ approval for subsequent refreshments in a year • GEM and Main Board rules aligned

  21. Major Rule Amendments (8) • Disclosure of directors’ remuneration in annual reports • Existing Main Board Rule: • By bands only • Existing GEM Rule: • On an individual but “no name” basis • New Main Board and GEM Rules: • On a “named” basis

  22. Implementation • New Rules effective on 31 March 2004 • Transitional arrangements : • Refer to the attachment to the HKEx’s press release • New Rules will be published on HKEx’s website at www.hkex.com.hk today

  23. Consultation Conclusionson Proposed Amendments to the Listing Rules Relating to Initial Listing Criteriaand Continuing Listing ObligationsKeniel WongSenior Vice President, Listing

  24. Focus The Consultation Conclusions focus on: • initial listing eligibility criteria • continuing obligations • disclosure requirements at the time of initial listing

  25. Initial listing eligibility criteria Introduction of alternative financial standards to the profit requirement: • Market capitalisation / revenue test • Market capitalisation / revenue / cash flow test Market Capitalisation Public Float • Number and spread of shareholders

  26. Initial listing eligibility criteria Market capitalisation / revenue test • Market capitalisation: at least HK$4 billion • Revenue: at least HK$500 million • requirement for a higher minimum number of shareholders : 1,000

  27. Initial listing eligibility criteria Waiver of the 3-financial-year trading record requirement for listing applicants • applying to list under market capitalisation / revenue test • Pre-requisites: • management experience • management and ownership continuity

  28. Initial listing eligibility criteria Market capitalisation / revenue / cash flow test • Market capitalisation: at least HK$2 billion • Revenue: at least HK$500 million • Positive cash flow: at least HK$100 million

  29. Initial listing eligibility criteria Minimum expected market capitalisation at the time of listing • Current requirement: • at least HK$100 million • Increased to at least HK$200 million • Definition of “market capitalisation”

  30. Initial listing eligibility criteria Public float • Current requirement: • 25% (if market capitalisation does not exceed HK$4 billion) • floor: 10% (discretionary, if market capitalisation exceeds HK$4 billion) • New: • 25% by reference to aggregate market capitalisation of all securities of applicant • floor: 15% (discretionary, if market capitalistaion exceeds HK$10 billion)

  31. Initial listing eligibility criteria Number and spread of shareholders • increased to 300 • for issuers applying to list under the market capitalisation / revenue test, minimum requirement is 1,000 • top 3 public shareholders hold not more than 50% of public float

  32. Continuing obligations Public float • suspension if public float falls below 15% • may consider waiver in general offer situation – 3 months • not extended to share repurchase situation • where lower % accepted for issuers (with market capitalisation over HK$10 billion) • lower % only applicable at time of listing • % fixed • applicable throughout issuers’ listing on the Exchange • will not be considered post listing • confirmation of sufficiency in annual reports

  33. Continuing obligations Timeliness of accounts • immediate suspension – on failure to publish financial results on due date • transitional period

  34. Disclosure requirementsat the time of Initial Listing • Over-allotment option and price stabilising activities • Persons in control of the listing applicant • Management experience / qualification • Applicant group prospects

  35. Implementation • Effective Date : 31 March 2004 • Except: • for initial listing eligibility criteria: • Form A1 submitted before this date, and listed within three months afterwards • for continuing obligations: • a transitional period up to 31 December 2004 in respect of new rule on timely publication of financial information

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