In this newsletter, we provide a snapshot of the principal Asian, US, European and selected international governance and securities law developments of interest to corporates and financial institutions.
ASIAN DEVELOPMENTS
HKEx Publishes Revised Connected Transaction Rules
On 21 March 2014, The Stock Exchange of Hong Kong Limited (the "Stock Exchange") published amendments to the connected transaction rules under the Rules Governing the Listing of Securities on the Stock Exchange and the Rules Governing the Listing of Securities on the Growth Enterprise Market of the Stock Exchange (collectively the "Listing Rules").
The revised rules will take effect from 1 July 2014. The revised rules follow a public consultation launched by the Stock Exchange in April 2013. The Stock Exchange has also taken the opportunity to rewrite the connected transaction rules in plain language and to align the definitions of "connected person" and "associate" used in various parts of the Listing Rules with those used for connected transactions where their purposes are to protect minority shareholders or avoid conflicts of interest.
Unless an exemption applies, a connected transaction is subject to the requirements of announcement, annual review and independent shareholders' approval. The revised rules aim to ease the compliance burden of listed issuers by simplifying the requirements and introducing new exemptions. Key changes include:
- Exemptions for Connected Persons at the Subsidiary Level
Connected persons include directors, chief executives and substantial shareholders (10% or more) of a listed issuer or any of its subsidiaries. Under the Listing Rules, there are two levels of connected persons: "connected person at the issuer level" and "connected person at the subsidiary level". Taking into account that a connected person at the subsidiary level is less likely to be able to influence the decisions of a listed issuer, the Stock Exchange has amended the rules so that:
- a transaction on normal commercial terms entered into between a listed issuer and a connected person at the subsidiary level will be exempt from the independent shareholders' approval requirement; and
- a director, chief executive or substantial shareholder of an insignificant subsidiary will be excluded from the definition of "connected person". With the exclusion, transactions between a listed issuer and persons connected with insignificant subsidiaries would fall outside the connected transaction regime.
- Increase Monetary Limit for De minimis Transaction
Exemption
Currently, a full exemption applies where a connected transaction is entered into on normal commercial terms and the relevant consideration ratio, assets ratio, revenue ratio and equity capital ratio are all:
- less than 0.1%;
- less than 1%, and the transaction is a connected transaction only because it involves connected persons at the subsidiary level; or
- less than 5%, and the total consideration is less than HK$1,000,000.
- Removing the 1% Cap for the Exemption on Provision of Consumer
Goods or Services
The Stock Exchange has also modified the exemption which applies to a listed issuer buying or selling consumer goods or services. Under the current rules, the value of the transaction must be less than 1% of the listed group's total revenue or total purchases in order for the exemption to apply. The Stock Exchange has removed the 1% cap so that the exemption will apply irrespective of the transaction size so long as the other qualifying conditions are satisfied, e.g. the transaction must be on normal commercial terms and the goods or services must be of a type ordinarily supplied for private consumption. - Exemptions for Indemnity or Insurance Against Directors'
Liabilities
New exemptions have been introduced allowing listed issuers to grant indemnities to directors and to purchase insurance for directors against liabilities incurred in the course of performing their duties, provided that the indemnity or insurance is permitted under Hong Kong law and the law of the place of incorporation of the issuer. - Relaxing the Rules with Regard to Transactions With Third
Parties
Under the existing rules, connected transactions include certain acquisitions or disposals of interest in a target company from or to a third party where a shareholder of the target company is a director, chief executive or controlling shareholder (30% or more) of the listed issuer or any of its subsidiaries. The Stock Exchange has simplified the rules so that:
- a disposal of interest in the target company by the listed issuer will no longer constitute a connected transaction; and
- for acquisitions, the only type of transactions caught by the connected transaction rules is where a substantial shareholder of the target company is (or is proposed to be) a director, chief executive or controlling shareholder at the issuer level or an associate of any of them.
The revised connected transaction rules are available at:
Main Board: http://www.hkex.com.hk/eng/rulesreg/listrules/mbrulesup/Documents/mb_contxn_1407.pdf
Growth Enterprise Market: http://www.hkgem.com/listingrules/amendments/e20140701a.pdf
US DEVELOPMENTS
SEC Developments
SEC Staff Issues Statement on Effect of Court Decision on Conflict Minerals Rule
On 29 April 2014, the SEC Division of Corporation Finance issued a statement on the effect of a recent decision by the US Court of Appeals for the District of Columbia Circuit (the "Court") on the SEC's reporting requirements regarding conflict minerals originating in the DRC and adjoining countries (the "Conflict Minerals Rule").
The Court had concluded that Section 13(p)(1) of the Securities Exchange Act of 1934 (the "Exchange Act"), adopted pursuant to Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the "Dodd-Frank Act"), and the Conflict Minerals Rule "violate the First Amendment to the extent the statute and rule require regulated entities to report to the Commission and to state on their website that any of their products have 'not been found to be 'DRC conflict free'.'"
The statement issued by the Division of Corporation Finance on 29 April 2014 provided the following guidance:
- The 2 June 2014 deadline for issuers to file any reports required under the Conflict Minerals Rule remained in effect;
- The Form SD and any related Conflict Minerals Report should comply with and address those portions of the Conflict Minerals Rule that the Court upheld;
- Companies that are not required to file a Conflict Minerals Report should disclose their reasonable country of origin inquiry and briefly describe the inquiry they undertook; and
- Companies that are required to file a Conflict Minerals Report should include a description of the due diligence that the company undertook. If, after exercising due diligence, the company determines that any of its products have not been found to be "DRC conflict free" or if the company is unable to determine whether or not a product qualifies as "DRC conflict free," the company does not need to identify the products as "DRC conflict undeterminable" or "not found to be 'DRC conflict free,'" but should disclose, for those products, the facilities used to produce the conflict minerals, the country of origin of the minerals and the efforts to determine the mine or location of origin.
No company is required to describe its products as "DRC conflict free", having "not been found to be 'DRC conflict free'", or "DRC conflict undeterminable". If a company voluntarily elects to describe any of its products as "DRC conflict free" in its Conflict Minerals Report, it would be permitted to do so provided it had obtained an independent private sector audit as required by the rule. Pending further action, such a report will not be required unless a company voluntarily elects to describe a product as "DRC conflict free" in its Conflict Minerals Report.
Our related client publication is available at:
SEC Issues Guidelines on Using Social Media in Registered Securities Offerings
On 21 April 2014, the Staff of the Division of Corporation Finance of the SEC (the "Staff") released guidance to facilitate the use of social media for certain communications in registered securities offerings.
Recognising the interest in using technologies such as social media to communicate with security holders and potential investors, this guidance permits offering participants to use Twitter or other similar social media with character limitations to issue Rule 134 offering announcements and Rule 433 free writing prospectuses with respect to registered securities offerings.
Under the new SEC Staff guidance, offering participants are permitted to electronically communicate Rule 134 announcements and Rule 433 free writing prospectuses if:
- the electronic communication is distributed through a platform that has technological limitations on the number of characters or amount of text that may be included in the communication (e.g., Twitter);
- including the required statements in their entirety, together with the other information, the communication would exceed the limit on the number of characters or amount of text; and
- the communication contains an active hyperlink to the required statements and prominently conveys, through introductory language or otherwise, that important or required information is provided through the hyperlink.
The Staff also addressed the situation where an issuer distributes an electronic communication in compliance with Rule 134 or Rule 433 under the Securities Act of 1933 and a third party that is not an offering participant re-transmits that communication. This may arise in the context of some electronic communication platforms, such as those made available through certain social media websites, that permit users to re-transmit a posting or message they receive from another party. The Staff clarified its position that if the third party is neither an offering participant nor acting on behalf of the issuer or an offering participant and the issuer has no involvement in the third party's re-transmission beyond having initially prepared and distributed the communication in compliance with either Rule 134 or Rule 433, the re-transmission would not be attributable to the issuer.
The guidelines are available at:
http://www.sec.gov/divisions/corpfin/guidance/securitiesactrules-interps.htm#110-01
PCAOB Adopts Auditing Standard and Amendments
On 10 June 2014, the Public Company Accounting Oversight Board ("PCAOB") adopted a new auditing standard and amendments to its auditing standards to strengthen auditor performance requirements in the following three areas that historically have represented increased risks of material misstatement in company financial statements:
- related party transactions;
- significant transactions that are outside the normal course of business for the company or that otherwise appear to be unusual due to their timing, size, or nature; and
- financial relationships and transactions with its executive officers.
The guidelines are available at:
http://pcaobus.org/Rules/Rulemaking/Docket038/Release_2014_002_Related_Parties.pdf
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