The Risks of Going Online
This update provides an overview of the recent implementation of the rules pertaining to online display of documents (the “Documents to Display Proposals”) by The Stock Exchange of Hong Kong Limited (the “HKEx”), which took effect on October 4, 2021. The Documents to Display Proposals are part of HKEx’s ongoing paperless initiatives to further modernize and enhance the competitiveness of the listing regime in Hong Kong.
On July 24, 2020, the HKEx published a consultation paper (the “Consultation Paper”) seeking public feedback on proposals regarding (i) a paperless listing and subscription regime, (ii) online display of documents and (iii) a reduction of the types of documents on display. In December 2020, the HKEx published consultation conclusions announcing that it would adopt all the aforesaid proposals with minor modifications and setting out its responses to feedbacks from institutional and individual respondents on the various proposals set out in the Consultation Paper.
Online Display of Documents
Prior to the implementation of the rules pertaining to the Documents to Display Proposals (the “Online Display Rules”), listed issuers were required to place various documents on display for physical inspection under the Rules Governing the Listing of Securities on the HKEx (the “Listing Rules”). Issuers typically display these documents for inspection at a place in Hong Kong (e.g. the issuer’s office or the office of its legal advisor) for such period of time as required under the Listing Rules. In light of technological advancement and the paperless initiatives, HKEx believes that these measures are out-of-step with the common practice of other Hong Kong and overseas regulators with respect to making documents more accessible to the public via electronic means.
As a result of the implementation of the Online Display Rules, a number of documents that were once required to only be made available for physical inspection are now required to be displayed online on both the HKEx’s website and the issuer’s own website for the same duration as previously required for physical inspection. By way of illustration, for a connected transaction that requires shareholders’ approval, any contracts pertaining to the transaction must now be published on the HKEx’s website and the issuer’s own website for a reasonable period of time (being not less than 14 days).
How Does This Affect You
Depending on the size of the transaction, the Listing Rules may require issuers to obtain shareholders’ approval for certain notifiable transactions and connected transactions (each, a “Relevant Transaction”). For these Relevant Transactions, the issuer must issue a circular and make available certain documents for display. The purpose of the circular is to provide shareholders with information necessary to make an informed assessment of the transaction prior to casting their votes at the general meeting. Therefore, the documents required under the Listing Rules to be on display are expected to provide additional relevant information for investors to better assess the Relevant Transaction.
As aforementioned, under the Online Display Rules, issuers will need to display contracts pertaining to the Relevant Transaction online. As a result, business terms of the contracts will be publicly accessible and can even be downloaded and retained by members of the public. This would no doubt pose a significant concern to contracting parties, especially when those business terms may contain trade secrets, confidential and proprietary information and will be competitively harmful or may even trigger privacy concerns, which are not suitable for public display.
What You Can Do
Application for Waiver. Under the current Online Display Rules, if issuers do not wish certain information to be disclosed, they may apply to the HKEx for specific disclosure relief by making a waiver application requesting for redaction of certain information stipulated in the contracts. HKEx will take a case-by-case approach to determining whether redaction should be permitted, with reference to the Guide on Applications for Waivers and Modifications of the Listing Rules (the “Waiver Guide”) issued by the HKEx, based on the merits of each individual case by taking into account of, among other things, the need to ensure sufficient accessibility and transparency of information to enable investors to make fully informed investment decisions against the legitimate concern of protecting business confidentiality and trade secrecy. For details, the Waiver Guide also helpfully sets out different factors which the HKEx would consider in making the assessment for the specific disclosure relief.
Consult your Legal Adviser. Prior to entering into an agreement or transaction involving a company (or its holding company) listed on the HKEx, it is important to consider the following factors:
- Nature and size of the transaction. First and foremost when structuring a transaction, consult your advisor as to whether the transaction falls within the ambit of the Listing Rules pertaining to notifiable transaction and connected transaction. It is also critical to determine if this particular transaction requires shareholders’ approval of the HKEx-listed company under the Listing Rules. If shareholders’ approval is required, the transaction would require a circular to be dispatched to shareholders and the implication of the Online Display Rules would need to be considered.
- Commercial Sensitivity. Are there certain information that are considered confidential or commercial sensitive? Would there be any privacy concerns if the contract is made publicly accessible? Would the sensitive information be able to be redacted based on the Waiver Guide? It is imperative to bear these questions in mind when drafting and negotiating the contract with your counterparty. Consult your advisor how to best protect your interest.
- What is your role. When entering into a contract, if the counterparty is HKEx-listed, it is worthwhile to understand from the counterparty whether the transaction will be subject to shareholders’ approval with respect to such counterparty and hence require online display of certain documents under the Listing Rules. This is especially important when you do not want to disclose certain sensitive information of the contract to the public.