Corporate Governance 

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HKEX Consultation Conclusions on The Main Board Profit Requirement and Review of Listing Rules Relating to Disciplinary Powers and Sanctions

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HKEX Consultation Paper on ‘Review of Corporate Governance Code and Related Listing Rules’

The International Valuation Standards Council (“IVSC”) Financial Instruments Board (“FI Board”) has published the Exposure Draft (the “Draft”) with proposals to improve the valuations of financial instruments outlined in IVS 500 Financial Instruments (“IVS 500”). The IVSC FI Board has launched the consultation to invite comments on the proposals in the Draft, which covers (1) Standards objectives and agenda, (2) Guidance on governance around valuation process, and (3) Principles of data taxonomy and control. As a professional valuation advisory firm, AVISTA has outlined the key points in the Draft for the latest proposals of improvements of financial instruments valuation.
 
Standards Objectives and Agenda
 
In review of IVS 500, the FI Board aims to establish the principles that will enable entities to develop fit-for-purpose valuations of financial instruments adaptable to varying market conditions or circumstances and to different reporting purposes, including financial, tax, and regulatory reporting. The proposals made by the FI Board are principles-based guidance requiring valuation processes in line with the concepts outlined in IVS 500. Meanwhile, considering the potential conflicts with the requirements in other International Valuation Standards (“IVS”), the Standards Review Board is also proposing consequential amendments to IVS 101 Scope of Work to IVS 105 Valuation Approaches and Methods.
 
The improvements to IVS 500 will be considered in stages, where the Draft firstly focuses on the areas of Governance and Data. The two remaining areas of Methods and Models, and Controls and Reporting will be considered and published in subsequent documents that will also contain revised proposals on Governance and Data based on received comments for the Draft. This practice is to address the interdependencies among different areas and facilitate the comments from the stakeholders on the proposals.
 
Guidance on Governance around Valuation Process 
 
The Draft proposes the guidance over the valuation processes that entities should follow to ensure adequate governance around financial instrument valuations. A valuation process should be (a) systemic, (b) consistently applied, (c) economically sound, and (d) controlled. To be specific, the governance around valuation process requires the valuation of financial instrument with similar portfolios, financial principles and market practice to be developed consistently, with end-to-end documentation and controls’ implementation.
 
The Draft, in the meantime, also highlights a series of principles covering the governance and controls over financial instruments valuation, including (a) ownership, (b) accountability, (c) transparency, (d) consistency, (e) review and challenge, (f) diversity, (g) documentation. In general, the principles emphasize clear responsibility for execution among different functions and individuals, transparent documentation for consistent valuation methods, as well as independent and diverse assessment for valuation processes.
 
Principles of Data Taxonomy and Control
 
The Draft highlights the importance of data as inputs to the valuation process to derive fit-for-purpose valuation. The quality of data adopted in the valuation process should ensure the objectivity and the effective communications of the valuation decisions.
 
The Draft proposes a data taxonomy differentiating static data and dynamic data to establish the standardized best practice for participants both within and across the entities involved in the valuation processes. It is not mandatory to adopt the taxonomy outlined in the Draft, but any taxonomy developed and adopted by an entity should be consistent with the principles proposed in the Draft.
 
In addition, the Draft requires the policies and processes in place to control the identification, assessment, aggregation and management of outsourced and internally generated data. In particular, the policies and processes should ensure (a) accuracy and integrity, (b) completeness, (c) adaptability, (d) timeliness, (e) transparency and (f) proportionality.
 
<a href="https://www.ivsc.org/files/file/view/id/1890" target="_blank" rel="noopener"><img src="../../../../../uploads/cover_586d37e853.jpeg" width="200" /></a>
 
To read the full Exposure Draft released by IVSC, please click <a href="https://www.ivsc.org/files/file/view/id/1890" target="_blank" rel="noopener">here</a>.
 
AVISTA’s Professional Services for Financial Instruments Valuation
 
As a corporate member of IVSC, AVISTA provides professional valuation and financial advisory services on financial instruments. The knowledge and experience of AVISTA can facilitate the most appropriate valuation service ensuring IVS-compliant valuation processes and reporting.
 
We are closely monitoring the latest development of IVSC consultation for valuations of financial instruments. For further information or enquiry regarding the Exposure Draft, please feel free to contact us.

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IVSC Exposure Draft on Improvements of Financial Instruments Valuation

The Stock Exchange of Hong Kong Limited (“HKEX”) published a consultation paper titled ‘Review of Listing Rules Relating to Disciplinary Powers and Sanctions’ (the “Consultation Paper”) in August 2020, which proposed changes in respect of HKEX’s disciplinary regime. The Consultation Paper follows a wide-ranging review of the HKEX’s disciplinary powers and sanctions under Chapter 2A of the Listing Rules, to ensure that the disciplinary regime continues to remain robust and effective. The consultation period had ended on 9 October 2020.
 
The key enhancements to the existing disciplinary regime are set out below. 
<ol>
<li>Lowering existing thresholds for public statements regarding individuals Currently, the HKEX’s power to issue a public statement to the effect that a director continuing to remain in office is prejudicial to the interests of investors (“PII Statement”) can only be exercised where there has been a wilful or persistent failure by the director to discharge his responsibilities under the Listing Rules. The HKEX is proposing to remove this threshold as it is difficult in determining whether an action is wilful. This amendment will provide greater flexibility to the HKEX in being able to issue PII Statements against directors where warranted, without the need to prove that the director’s conduct is wilful or persistent. </li>
<li> Enhancing follow-on actions in relation to public statements regarding individuals and publication requirements Currently, the follow-on actions which the HKEX may direct where an individual subject to a PII Statement remains in office as a director are limited to suspension or cancellation of listing of the issuer’s securities or any class of its securities. In order to bring the compliance attitudes and cultures within listed issuers into sharp focus for the purpose of benefitting the investing public, the following enhancements are proposed in case of serious misconduct: (a) The follow-on actions which the Listing Committee or the Listing Review Committee may direct include the denial of facilities of the market to that listed issuer for a specified period; and (b) The follow-on actions apply where an individual subject to a PII Statement continues to be a director or senior management member of the specified listed issuer. The HKEX also proposes that, after a PII Statement with follow-on actions has been made against an individual, the listed issuer identified in the statement must include a reference to the PII Statement in all of its announcements and corporate communications, unless and until that individual is no longer a director or a senior management member of the relevant listed issuer. </li>
<li>Introducing director unsuitability statements For more serious cases of misconduct where there is a evident or repeated failure by a director to discharge his responsibilities, the HKEX is proposing a new sanction, which would enable it to issue a public statement that, in its opinion, the director is unsuitable to occupy a position as a director or within the senior management of a named listed issuer or any of its subsidiaries. </li>
<li>Introducing secondary liability The HKEX is also proposing to introduce secondary liability for Listing Rule breaches in circumstances where it determines the person “has caused by action or omission or knowingly participated in a contravention of the Listing Rules”. These persons may include directors and senior management, substantial shareholders, professional advisers and their employees, authorised representatives, supervisors and a guarantor of an issuer in the case of a guaranteed issue of debt securities or structured products. Set out below are some examples of how secondary liability would be applied: (a) Chief Financial Officers for failure to obtain auditors’ agreement before publication and material inaccuracy of preliminary results announcement; (b) Chief Operating Officers for failure to disclose share charge in a timely manner and in its interim report; (c) Company Secretaries for material inaccuracy of listed issuer’s announcement of controlling shareholder’s transfer of shares; (d) Substantial Shareholders for breach of maintain minimum public float; (e) Financial Advisers for material inaccuracy of listed issuer’s Circular.</li>
</ol>
 
We believe the proposed enhancements could further enable the HKEX to take timely and effective disciplinary actions, which in turn promote market quality and maintain the integrity of the Hong Kong capital market.

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HKEX Consultation Paper on ‘Review of Listing Rules Relating to Disciplinary Powers and Sanctions’

The Stock Exchange of Hong Kong Limited (“HKEX”) has recently published an updated Guidance Letter HKEX-GL86-16 for IPO applicants (“Guidance Letter”) which emphasizes the board of directors of an IPO applicant should ensure necessary corporate governance (CG) and environmental, social and governance (ESG) mechanisms are built into the listing processes in order to promote sustainability, good corporate governance, and diversity. According to the 3.7(a) &amp; (b) under E. “Business” section of updated IPO Guidance, IPO applicants are required to :
 
<ol style="list-style-type: lower-roman;">
<li>put in place relevant mechanisms that enable them to meet the Exchange’s requirements on CG and ESG well in advance so that they are in compliance upon listing. The board of directors of an applicant is collectively responsible for its management and operations (including the establishment of such mechanisms); and </li>
<li>appoint directors (including independent non-executive directors) as early as possible so that directors can engage in the formulation of the necessary mechanisms and related policies on CG and ESG.</li>
</ol>
 
Further to the amendment to the Guidance Letter made in May 2019 to require additional disclosure on (i) ESG matters (including material information on applicants’ environmental policies, and details of the process used to identify, evaluate and manage significant ESG risks) and (ii) gender diversity of the board in the listing documents of new applicants, HKEX has taken this as an extra step to strengthen the disclosure obligation of ESG information by IPO applicants. It is a prerequisite for listing applicants to get braced for ESG mechanisms and relevant disclosure in spite of the fact HKEX does not make ESG report as a mandatory disclosure requirement in the listing document for the time being.
 
It is advisable for pre-IPO companies to establish good corporate governance and enhance board’s oversight of ESG matters including identification and control of material ESG risks in advance not only to cope with the potential queries raised by HKEX but also to echo with the call for ESG information by institutional investors upon their decision-making process.
 
 
Click <a href="https://en-rules.hkex.com.hk/node/5041" target="_blank" rel="noopener">here</a> to read the updated Guidance Letter HKEX-GL86-16 for IPO applicants.