Draft Legislation in Hong Kong Would Improve Corporate Governance

Draft legislation in Hong Kong would significantly enhance corporate governance by enlarging shareholders remedies and access, codifying the directors’ duty of care, strengthening the rights of independent auditors of financial statements. A statutory statement on a director’s duty of care, skill and diligence would enhance corporate governance in Hong Kong by replacing the corresponding common law rules and equitable principles that created uncertainty as to how the courts would apply them.

Fiduciary duties that apply to directors of Hong Kong listed companies include a duty to act in good faith in the interests of the company, a duty to exercise powers for proper purpose, a duty to refrain from fettering their own discretion, a duty to avoid conflicts of interest, and a duty not to compete with the company.

The draft would also require the preparation of a separate directors’ remuneration report by all listed companies incorporated in Hong Kong. The directors’ remuneration report would cover various types of benefits given to the individual directors by name, including the basic salary, fees, housing and other allowances, benefits in kind, pension contributions, bonuses, payment for loss of office and long-term incentive schemes including share options. It would be approved by the board of directors and signed on behalf of the board by a director. With the exception of service contracts, the information in the report would be subject to audit.

In view of the increasing importance of auditors on the corporate governance front, the draft would provide auditors with a qualified privilege for statements made in the course of their duties as auditors. Auditors would not, in the absence of malice on their part, be liable to any action for defamation at the suit of any person in respect of any oral or written statement which they make in the course of their duties as auditors.

Currently, the right of auditors to request information under the Companies Ordinance is quite restrictive. For example, the auditors can request information only from the officers of the company, not company employees. The draft would empower auditors to require information in the performance of their duties from a wider range of persons, including the employees of the company and the officers and employees of its Hong Kong subsidiaries, and any person holding or accountable for any of the company’s or subsidiaries’ accounting records. When a holding company has a subsidiary which is not a company incorporated in Hong Kong, the auditor may require the holding company to obtain from the relevant parties at the subsidiary such information, explanations or other assistance as the auditor may reasonably require for the performance of their duties.

In recognition of the key role that shareholders play in driving company performance, the legislation would promote wider participation of shareholders and ensure that they are informed and involved. For example, the draft would introduce a number of measures to enhance shareholders’ rights in the decision-making process, including providing members with a right to propose a resolution to be moved at a meeting which they have requested to be convened and requiring companies to circulate at corporate expense shareholders’ statements relating to the business of general meetings and proposed resolutions, so long as they are received in time for sending together with the notice of the meeting.

In addition, companies, subject to shareholder approval, would be able to use electronic communications as a default position, permitting companies to use email and websites to communicate with their shareholders. Individual shareholders would be able to request communication in paper form if they wish. Shareholders would also be given the right to inspect voting records and documents, including proxies, after a general meeting so as to improve the transparency of the voting process.

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