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1
Hong Kong Exchange and Clearing Limited
Press Conference on Enhancing Corporate Governance
and Market Quality
30 January 2004
2
Corporate GovernanceUpdate on Progress
Paul 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
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
Objective of the Exposure Paper
7
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
Structure of Draft Code
8
Section A: Directors Section B: Directors’ remuneration
Section C: Accountability and Audit
Section D: Delegation by the Board
Section E: Communication with Shareholders
Code Provisions
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
Comments on or before 31 March 2004 Target for publication of Code – end 1st half 2004 New Code effective for accounting periods commenc
ing:
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
Proposed Timetable
12
Corporate Governance Rule Amendments
Anne ChapmanVice President, Listing
13
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
Major areas of corporate governance Rule amendments
14
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
Major Rule Amendments (1)
15
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
Major Rule Amendments (2)
16
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
Major Rule Amendments (3)
17
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
Major Rule Amendments (4)
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
Consultation Conclusionson Proposed Amendments to the Listing Rules
Relating to Initial Listing Criteriaand Continuing Listing Obligations
Keniel WongSenior Vice President, Listing
24
The Consultation Conclusions focus on:
initial listing eligibility criteria
continuing obligations
disclosure requirements at the time of initial listing
Focus
25
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
Initial listing eligibility criteria
26
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
Initial listing eligibility criteria
27
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
Initial listing eligibility criteria
28
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
Initial listing eligibility criteria
29
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”
Initial listing eligibility criteria
30
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)
Initial listing eligibility criteria
31
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
Initial listing eligibility criteria
32
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
Continuing obligations
33
Timeliness of accounts
immediate suspension – on failure to publish financial results on due date
transitional period
Continuing obligations
34
Over-allotment option and price stabilising activities
Persons in control of the listing applicant
Management experience / qualification
Applicant group prospects
Disclosure requirementsat the time of Initial Listing
35
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
Implementation