Updates On Listing Regulation And Enforcement

Introduction

In its June 2025 Listing Regulation and Enforcement Newsletter, the Stock Exchange of Hong Kong Limited (the "Stock Exchange") provided updates on several key regulatory areas. This article focuses on three specific topics: new corporate governance requirements, issuers undertaking securities trading and financial investment activities, and non-compliance issues in material transactions.

New corporate governance requirements

On 19 December 2024, the Stock Exchange published the consultation conclusion on its "Review of the Corporate Governance Code and Related Listing Rules". The revised Corporate Governance Code and related Rules Governing the Listing of Securities on the Stock Exchange (the "Listing Rules") aim to strengthen board effectiveness, independence, and diversity. The new requirements will apply to corporate governance reports and annual reports for financial years commencing on or after 1 July 2025, with transitional arrangements in certain areas. Key new obligations for issuers include:

1. Director training:Mandatory annual training on specific topics for all existing directors. First-time directors must complete at least 24 hours of training on specific topics within 18 months of their appointment.
2. Board performance review/skills:Issuersare requiredconduct regular board performance reviews (at least once every two years) and disclose a board skills matrix.
3. Cap onindependent non-executive director("INED")tenure:A maximum tenure of nine years for Independent Non-Executive Directors will be implemented in two phases over a six-year transition period.
4. Cap on "overboarding":A limit of six concurrent directorships in other Hong Kong-listed issuers for INEDs will be introduced over a three-year transition period.
5. Lead INED:Issuers, particularly those where the board chair is not independent, are encouraged to designate a Lead INED.
6. Diversity:Issuers must annually review their board diversity policy and establish a workforce diversity policy. The nomination committee should include directors of different genders.
7. Enhanced disclosures:New disclosure requirements concerning risk management, internal controls, dividend policy/decisions, and shareholder engagement.

Issuers undertaking securities trading
and financial investment activities

The Stock Exchange has noted an increasing trend of issuers engaging in frequent and/or substantial securities trading and financial investments outside their principal businesses, with some activities leading to non-compliance.

The Stock Exchange's reviews identified potential governance shortcomings, including trading behaviours inconsistent with stated objectives. For instance, some issuers claimed long-term strategic intent for stock purchases but engaged in frequent trading without material benefits, while others placed temporary funds in illiquid, high-risk vehicles under the guise of treasury management. Many of these activities resulted in investment losses, with few issuers opting for share buybacks or dividends to return surplus cash to shareholders.

Disclosures on these activities were often limited and generic, lacking detail on investment policies and control mechanisms.

The Stock Exchange emphasises that issuer funds belong to shareholders. Directors must critically evaluate whether such activities represent a proper use of shareholder capital and align with shareholder expectations and issuer strategy. Issuers holding substantial excess cash or making significant investments are strongly encouraged to formulate and disclose a detailed dividend policy. Those engaging in securities trading as a business must possess the necessary expertise, infrastructure, and controls.

Issuers are urged to enhancedisclosure in financial reports and regulatory filings, providing detailed accounts of:

1. Investment policy and objectives: Investment purpose and permissible/prohibited investments;
2. Risk management and control measures: Defined risk limits, counterparty risk and liquidity management; and
3. Approach and oversight mechanisms: Roles and authority of the board or designated committees (e.g. investment committee) in approving, monitoring and reviewing investments.

Non-compliance in material transactions

The Stock Exchange continues to identify a high number of breaches related to disclosure and shareholder approval requirements for major transactions, very substantial acquisitions or disposals and connected transactions. Common reasons cited by issuers include inadvertent oversight, insufficient technical knowledge, resource shortages, or isolated incidents, though root causes often point to internal control deficiencies. Repeated breaches may indicate insufficient prior remedial actions.

When a breach occurs, the Stock Exchange typically requires the issuer to undertake a series of remedial and enhancement actions, including but not limited to provide a detailed chronology of events leading to the breach and subsequent actions and propose specific remedial actions with clear implementation timelines.

Issuers should promptly announce these matters to enhance market transparency. To ensure ongoing compliance, issuers must consider implementing robust measures, including:

1. Robust policies and procedures:Establish and maintain adequate policies to ensure Rule compliance.
2. Adequately resourced compliance function:Establish a well-resourced team with capable staff who can escalate issues timely.
3. Oversightby directors and senior management:Ensure robust oversight over compliance-related decisions.
4. Regular training:Provide ongoing training to relevant personnel on the Rules and compliance requirements.
5. Seekprofessionaladvice:Engage professional advisers where appropriate.

Conclusion

The updates in the Stock Exchange's newsletter underscore its ongoing commitment to enhancing market governance, transparency, and issuer compliance. Issuers are encouraged to review the new corporate governance requirements carefully, critically assess their securities trading and investment activities, and strengthen internal controls to prevent non-compliance in material transactions. Consulting legal or compliance advisers is recommended to navigate these evolving obligations effectively.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.