Hong Kong: Dubious payments, undisclosed loans, luxury shopping sprees and a slap on the wrist

Disciplinary sanctions meted out by the Stock Exchange during 2022 reflect a regulatory toolkit that is not fit for purpose, writes Jane Moir, ACGA Head of Research.

Hong Kong Exchanges and Clearing (HKEX) can deploy a limited range of sanctions against badly behaving listed firms and in 2022 had due cause to use them. Yet the toughest penalty it dished out was stopping a handful of directors from continuing to serve in their role.

This less-than-onerous punishment was reserved for just four of the 31 disciplinary actions disclosed by HKEX during the course of the year. In three of these cases, the ultimate infringement was failure to cooperate with the investigation.

In the fourth case, a decision to pledge nearly RMB1 billion to secure the loan obligations of the controlling shareholder at Good Resources Holdings ended badly for one director, and ultimately the company. Trading was suspended in September 2020 and the company de-listed in May 2022. The director received his unsuitability statement in October 2022.

The limited jeopardy faced by directors in Hong Kong stems from listing rules that lack statutory backing and the Exchange’s knuckle-wrapping approach to enforcement. If Hong Kong is to enshrine minority shareholder rights and not merely aim to chalk up new listings, it should revisit a 2005 proposal by the Securities & Futures Commission to codify financial reporting and notifiable/connected transaction rules into law. That long-awaited class action regime, first mooted by a Judiciary steering group back in 2004, would meanwhile also help tilt the balance toward minority shareholders.

All infringers think alike?

A range of dubious activities by listed firms yielded mere criticism and censure by HKEX in 2022. This included advancing cash, loans, and property to controlling shareholders and family members. On 28 December, China New City Commercial Development and four directors were dressed down by HKEX for failing to disclose advances to its controlling shareholder group (also a listed property developer, Zhong An Group) for eight years. The sums ranged from a modest RMB39 million to RMB2.22 billion each year.

There was a censure for Mingfa Group (International) and rebukes for the former chairman and CEO after the company failed to disclose transactions involving property villas and family members. At Xinyuan Property, 10 notifiable and connected transactions with the parent, its subsidiaries and a JV company went undisclosed as RMB570 million flowed out in loans and deposit payments. The company and two directors were censured; a former executive director was deemed prejudicial to investors’ interests (had she stayed on). Meanwhile at Christine International Holdings, seven current and former directors were disciplined for undisclosed connected deals with the former chairman’s sister.

Misuse of IPO proceeds, or company money generally, was also conspicuous. At China Bright Culture, there was a censure for the company and a director after the company diverted the bulk of its IPO proceeds into a promissory note arranged by its joint global IPO coordinator, AMTD Global Markets. In the case of Raffles Interior, the company paid around 40% of its IPO proceeds to service providers with a doubtful commercial rationale (dubious services, high fees, all referred to the chairman by his friends or parties connected with the company’s listing).

Six former directors at National Investments Fund meanwhile in March 2022 were sanctioned for using at least HK$61 million of the company coffers during the course of four years to splurge on luxury assets such as a yacht, diamond, cars, club membership and paintings.

A depressing chain of events

In an all too familiar set of circumstances, investors in lottery company RexLOT Holdings were the ultimate losers after the company’s share price collapsed in 2015 on the back of a short seller alleging inflated sales and profits. The company tapped into offshore finance but more fraud allegations followed and the company was wound up. It de-listed in 2021.

The HKEX disciplinary brief on RexLOT is a long one, ranging from inaccurate disclosure and ‘earnest’ payments of HK$210 million to HK$2 billion deposit payments for deals and joint ventures which never materialised. A censure for the company, which has since de-listed, may not be of much comfort to the investors who lost out. There were “prejudice to investor” statements levied against directors (if the director had stayed on, that would have been prejudicial to the interests of investors), including INED Chow Siu Ngor, a partner at law firm King & Wood Mallesons. He is currently an INED at another company, CCT Fortis Holdings.

Shareholder toolkit: still waiting

Unfortunately 2022 was not a year where Hong Kong dusted class action reform off the shelf, or where policy-makers took any steps to improve the recourse open to minority shareholders in Hong Kong. The government-appointed Working Group on Class Actions in December 2020 very much kicked the can down the road, stating that it was going to do a consultancy study on the economic impact of a class action regime. The premise for doing so was Covid 19 and the global economic situation.

This does not suggest the regime will see the light of day any time soon, if at all. It is worth noting that the Chief Justice’s Working Party on Civil Justice Reform first recommended that Hong Kong adopt a class action regime in 2004, and the Law Reform Commission echoed this sentiment in 2012.

The full disciplinary action taken by HKEX in 2022 can be found here.