What constitutes cooperation and non-cooperation in the context of the HKEX’s investigations and disciplinary actions?

The HKEX considers cooperation from listed issuers and directors to be essential for maintaining an orderly, informed and fair market. Directors are required to provide an undertaking that they will cooperate with any HKEX investigations. Against this backdrop, there is a clear regulatory expectation for listed issuers and directors to cooperate in the context of an investigation.

As there is a general expectation that parties will cooperate, mere compliance with a listed issuer’s or a director’s statutory or regulatory obligations will not amount to cooperation. The level of a party’s cooperation needs to be “exceptional”.

What is considered “cooperation”?

Some examples of cooperation include:

1. Providing true and complete information and documents regarding the suspected breach or misconduct - This includes taking early and proactive steps to preserve evidence, providing full disclosure of relevant information (even if it has not been specifically requested by the HKEX) and assisting with obtaining relevant evidence from third parties.
2. Taking a proactive approach by devoting resources to investigating the matter and responding to the HKEX’s enquiries - This may involve engaging professional parties, such as auditors, forensic investigators, legal or financial advisers and internal control reviewers, as necessary to assist with fact-finding and proactively reporting to the HKEX any breaches or misconduct. The HKEX also expects early and proactive reporting of any breaches or misconduct.
3. Admitting to breaches or misconduct at an early stage - This demonstrates a proactive attitude and willingness to take responsibility for breaches. Such admissions should be submitted to the HKEX in writing, with sufficient details of the relevant Listing Rule(s), relevant events related to the breach, the identity of the parties involved, a clear admission of breach, the reasons for the breach and any remedial actions taken or to be taken.
4. Initiating settlement or accepting sanctions. Should parties intend to settle, they should approach the HKEX as early as possible. The HKEX clearly states that it is less likely to be amenable to settlement the further the enforcement action progresses.

What is considered “uncooperative conduct”?

Some examples of uncooperative conduct include:

1. Failing to respond to the HKEX’s enquiries.
2. Providing inaccurate, incomplete or misleading information.
3. Unnecessarily prolonging the HKEX’s investigation.
4. Failing to attend an interview or disciplinary hearing where a party’s presence has been requested.
5. Providing late submissions, evidence or documents.

The HKEX expressly states that any failure to provide relevant information or submissions at the appropriate time could result in adverse consequences. In particular, less weight may be attached to late submissions or adverse inferences may be drawn. Failure to provide information and submissions in a timely manner may also be considered an aggravating factor, and the relevant party may, in appropriate cases, be found to be in breach of their obligation to cooperate with the HKEX.

The HKEX takes a holistic view when considering the appropriate regulatory response to the breach in question, and in appropriate cases, where cooperation should be recognised, there may be a reduction in the sanction and/or the inclusion of a statement to reflect the parties’ cooperation in the news release or statement of disciplinary action. Conversely, uncooperative conduct may result in a separate breach of a party’s obligations and result in a more severe sanction.

Legal professional privilege: Would a refusal to disclose privileged materials be seen as uncooperative conduct?

Similar to the position of the SFC, as stated in the Guidance Note on Cooperation with the SFC, the HKEX makes clear that it fully respects the parties’ right to legal professional privilege, and if privilege is asserted on a bona fide basis, it will not be regarded as uncooperative conduct. Parties voluntarily waiving legal professional privilege, on a limited basis, over certain documents to assist the HKEX’s investigation may also contribute to the HKEX’s assessment of their degree of cooperation.

What substantive updates have been included in the HKEX’s latest Sanctions Statement?

As well as publishing the Cooperation Guidance, the HKEX has updated its Sanctions Statement. The Enforcement Policy Statement has also been updated to include links to these documents. The Sanctions Statement added an appendix setting out the primary disciplinary sanctions available following the revisions of the HKEX’s disciplinary powers and sanctions in July 2021. Other substantive updates include:

1. Passive misconduct - The HKEX draws attention to “passive misconduct”, whereby directors may be found in breach by failing to take sufficient steps to discharge a duty, such as to address control environment failings (e.g., internal control deficiencies or lack of oversight) for which they are responsible, even if such failings do not lead to other breaches of the Listing Rules or loss (see paragraph 5(c) of the Sanctions Statement).
2. Collective and individual responsibility - The HKEX reinforces that directors have a collective and individual responsibility for Listing Rules compliance (see paragraph 5(d) of the Sanctions Statement).
3. Reliance on others in the discharge of duties - Where a party claims to have relied on others (such as other directors, senior management, staff members or professional advisers) to discharge their duties, in defence of a breach of duties, the HKEX will assess whether such reliance is reasonable in the context of whether the party has continued to (i) maintain adequate oversight, (ii) apply professional scepticism and (iii) exercise independent judgment (see paragraph 7(m) of the Sanctions Statement).
4. Internal controls - The HKEX will assess whether a party has appropriate supervisory, risk management, operational or technical procedures and/or controls in place for procuring compliance with the Listing Rules by reference to:

a. Effectiveness and robustness of the internal controls systems, policies, procedures and working practices;

b. The necessary skills, experience and resources of directors and staff, including any training on internal controls and risk management measures;

c. Any regular reviews and updates to the control environment to ensure compliance with the Corporate Governance Code; and

d. The existence of proper channels to escalate concerns regarding risks and Listing Rules compliance matters and procedures to properly handle the escalated concerns (see paragraph 7(n) of the Sanctions Statement).

What are some practical considerations when facing a HKEX investigation?

Based on our recent experience assisting listed issuers and directors in resolving HKEX investigations, it would be worthwhile for directors to bear the following points in mind:

1. All directors, including independent non-executive directors, should be mindful of the principle of individual and collective responsibility of directors in ensuring the listed issuer’s Listing Rules compliance. This may include ensuring the listed issuer has devised, implemented and communicated appropriate policies to its staff to address potential compliance issues and confirming there is sufficient monitoring and supervision in place to achieve compliance. The HKEX expects the directors to exercise proactivity and independent judgment to identify and raise to the board any issues concerning Listing Rules compliance.
2. Directors should keep a proper record of their involvement in promoting good practices for internal control, risk management and corporate governance. This will serve as helpful supporting evidence of their track record in such areas. For example, board minutes or minutes of other internal meetings, such as those of the audit committee or corporate governance committee, should contain reasonably sufficient details to reflect the matters raised and discussed at the meetings.
3. Where it is necessary for directors to rely on the listed issuer’s supporting function or employees, such as the listed issuer’s internal audit department, there should not be any excessive reliance and the directors must still ensure they maintain adequate oversight, apply professional scepticism and exercise independent judgment with supporting evidence. The listed issuer should maintain an effective internal reporting system for any Listing Rules compliance matters.
4. Timely engagement with the HKEX is the key. Where breaches are identified, directors should consult with the listed issuer’s legal advisors as soon as possible to decide when and how the matter should be reported to the HKEX, whether admissions should be made and whether it is appropriate to initiate settlement at an early stage. The HKEX will consider possible settlement proposals at any stage of the enforcement action. It is also important to take active steps to implement appropriate remedial measures as soon as possible instead of waiting for directions from the HKEX. Sufficient resources should be allocated to handle the HKEX’s investigation and any submissions or information provided to the HKEX should be made in a timely manner.
5. With respect to internal controls, it is important for directors to adopt a proactive approach to discharge their duties. As pointed out by the HKEX in its Enforcement Bulletin (PDF download), issued in February 2022 (Feb 2022 Enforcement Bulletin), the adequacy of the internal controls needs to be considered on an ongoing basis to ensure proper and effective implementation. It is important to note that engaging external auditors to conduct annual audits is not sufficient to ensure the adequacy and effectiveness of internal controls as external auditors do not generally conduct a thorough internal control review within the scope of their annual audit work.
6. As clarified by the HKEX in the Feb 2022 Enforcement Bulletin, disciplinary sanctions may still be appropriate even if no loss is suffered or where any loss suffered was not attributable to internal controls deficiencies. The HKEX’s focus remains on the listed issuer maintaining robust internal controls to properly manage risks and disciplinary action is not contingent on loss.

Conclusion

It is generally recommended to adopt a cooperative approach when handling regulatory enquiries as it is in the interest of both regulators and listed issuers/directors to resolve the investigation effectively and efficiently, to identify and resolve the underlying issues, and to save time and costs. Uncooperative conduct often results in public criticism of the party’s approach and increased severity of sanctions. With respect to regulatory breaches, prevention is usually better than cure, and the onus is on listed issuers and their directors to foster a pre-existing environment and culture of compliance. Developing greater awareness of the regulatory expectations and requirements would be a proactive first step.

In-depth 2022-357