Codifying the Waiver of Company Secretary Qualifications into Listing Rule 3.28: What Does this Entail?

Currently, listed issuers in Hong Kong are required to appoint a company secretary to discharge compliance and reporting obligations owed to the Stock Exchange of Hong Kong (“the Exchange”). Listing Rule 3.28 sets out the required professional qualifications of a company secretary, which includes (i) a chartered company secretary (ii) a certified public accountant or (iii) a solicitor. The Exchange will also take into account the relevant experience of the proposed candidate, assessing elements such as (i) the length of employment with the issuer and previous roles undertaken with any other issuers (ii) his or her familiarity of the rules and other relevant regulations (iii) any relevant training and (iv) professional qualifications in other jurisdictions.

In today's globalised and constantly evolving business world, the needs of companies around the world are also changing rapidly. Issuers have been seizing the opportunity to hire company secretaries that are familiar with the company's development and internal affairs to ensure sound corporate governance. Inevitably, not all these candidates possess the required qualifications, and as a result, the Exchange has in the past granted waivers to company secretaries who do not necessarily possess the qualifications listed out in Rule 3.28. The waiver, if granted, is on the condition that the appointed candidate be assisted by a person with the relevant qualifications for a period of not more than three years. The waiver is currently not codified into the Listing Rules.

In an August 2019 Consultation Paper (the “Consultation Paper”), the Exchange proposed to codify the option of a waiver into Listing Rule 3.28, for candidates who do not possess the qualifications listed above. The Exchange also seeks to codify the factors taken into account when granting a waiver, including (i) whether the issuer has principal business activities primarily outside of Hong Kong (ii) whether the directors consider the individual to be suitable to act as the company secretary and (iii) whether the proposed company secretary will be assisted by a qualified person throughout a period of no more than three years. We seek to explore the implications of the proposed codification regarding whether the proposed candidate is suitable to act as the company secretary.

In principle, the codification of any existing norms, rules or standards could serve as an effective drafting tool to perfect any oversights and to remedy any unintended consequences arising from the original drafting. Codification also provides more clarity for the purposes of compliance and enforcement, therefore achieving more transparency and consistency. However, codification may not always be an all-encompassing tool to close the gap between any rule-drafting oversights and the commercial reality. As mentioned above, waivers are already currently relied upon by issuers who wish to appoint company secretaries who do not fall under the requirements of Listing Rule 3.28. Interestingly, the Consultation Paper did not explicitly explain the reason behind the codification of the waiver. Since it is evident that the Exchange is not adverse to granting waivers and the issuers are also familiar with the parameters of the existing rules, it begs the question of whether there is a real need for change.

Other jurisdictions such as Singapore, the UK and the US do not provide for an explicit option of a waiver for company secretary qualifications. In the UK, the Corporate Governance Code states that the appointment of company secretaries is the "decision of the board as a whole" with candidates' qualifications largely similar to Hong Kong. Unlike Hong Kong, issuers can appoint company secretaries who, "because of his or her experience or membership of another body, appears capable of discharging the functions of a company secretary" by virtue of section 273(1) and 273(2) of the Companies Act. This effectively means that those candidates that would have otherwise been appointed through a waiver in Hong Kong could be appointed directly by the board in the UK. This shows, therefore, that the issuer is encouraged to shape the qualifications of the ideal candidate themselves.

In the US, the recommendations regarding the appointment of a company secretary are set out in corporate governance guidelines and codes of "best practice" for the board of companies listed on NYSE or NASDAQ. In particular, a list of "core competencies" published by the Society of Corporate Secretaries and Governance Professionals is referenced by issuers to assess the company secretary's suitability. Interestingly, the list focuses on qualities such as "being able to lead and work within a multi-disciplinary setting" and "being flexible and creative", signaling that the board of the issuer has the power to define and outline the qualifications of the ideal candidate to suit their own needs.

In neighboring Singapore, the qualifications of the company secretary are largely similar to those in Hong Kong. The Code of Corporate Governance issued by the Singapore Stock Exchange states that the appointment of the company secretary is "a decision of the board as a whole". However, unlike Hong Kong, there is no option of a waiver, illustrating the degree of involvement of the Singapore Stock Exchange. When comparing these jurisdictions, we can see that the authorities focus on providing clear guidelines to the issuers to ensure that company secretaries are appointed to suit their own needs, while the qualifications of the company secretaries are largely decided by the issuer. Therefore, there is some consensus regarding the authorities' degree of involvement in the appointment of company secretaries. However, by codifying the waiver in Hong Kong, the Exchange is showing that it is willing to be more actively involved in a company’s internal affairs.

Some might believe that if individuals who do not possess the recognised qualifications are deemed qualified to discharge duties that require a great level of technical knowledge, the standard of corporate governance will decline. However, the adequate appointment of company secretary is merely one element of maintaining sound corporate governance. Ultimately, sound corporate governance requires effort from both the Exchange and the issuer, where the Exchange takes into account the issuer’s commercial needs and circumstances and provides a comprehensive regulatory framework for the issuer to make sound decisions in the best interest of the company. Understandably, it is not easy for the issuer to agree upon a company secretary candidate. However, if the Exchange codifies the option of a waiver, it could be that more issuers will begin to rely on it and may use the opportunity to divert challenging appointment decisions to the Exchange, affecting the very essence of sound corporate governance.

In the consultation conclusions published by the Exchange in November 2008 regarding the proposal to remove the requirement for a qualified accountant to be in senior management from the listing rules, paragraph 63 stated that "the board of a listed issuer should have both the responsibility and the freedom to decide the number of personnel and accounting qualifications which are suitable for the company." The relevant rule (Listing Rule 3.24 – the requirement for appointment of a qualified accountant) was ultimately repealed in 2009. If the Exchange once determined that the role of agreeing on qualifications of the issuer's corporate personnel should lie within the board, it may send inconsistent signals to the market if it gains the power to determine the qualifications of a company secretary.

Professional qualifications do not necessarily speak for one's ability to perform the duties of a company secretary. This explains why a number of issuers have appointed a senior management member or a long-standing employee that has worked in a related role with the issuer to act as company secretary. To accommodate this trend, relevant mechanisms and Code Provisions have been built into the Listing Rules to ensure that the issuers adhere to best practice recommendations. In 2011, the Exchange introduced Code Provision F which encourages issuers to appoint company secretaries who have sufficient knowledge of the issuer's day-to-day affairs, explicitly granting the issuer a necessary degree of flexibility. Under the general corporate governance principle of "comply and explain", issuers have already been given a large degree of flexibility to cater their appointment to their specific needs.

Ultimately, no one understands the needs of the issuer better than the issuer itself, therefore it is only reasonable that a necessary degree of flexibility should be preserved. Previously, waivers were understandably granted when compelling evidence was presented to the Exchange. In contrast, the codified waiver may even give the Exchange the opportunity to exercise a subjective perception of competence, especially since it could be difficult for the Exchange to assess the real needs of the issuer. All in all, when considering the commercial reality in Hong Kong, there is no clear indication of any negative consequences brought about by the status quo. The waiver for professional qualifications of company secretaries, if codified, may remove a slight degree of flexibility that is required for issuers to decide on their own internal affairs. Although codification in principle is intended to be an effective rule-drafting tool, it is yet to be seen how this will play out if applied to the waivers for company secretaries. 



Partner, Corporate Team, Withers

Mike is a partner in the corporate team. He has over twenty years’ experience in corporate finance and specialises principally in initial public offerings on the Main and Growth Enterprise Market Boards of the Hong Kong Stock Exchange, including the listing of real estate investment trusts.

He also has extensive experience in mergers and acquisitions, corporate reorganisations, compliance pertaining to Hong Kong listing rules and local securities regulatory compliance.

Trainee Solicitor, Withersworldwide

Jessica is a trainee solicitor who just completed her seat in the corporate team. During her time with the corporate team, she was involved in matters relating to capital markets and cross border financing. She started her training contract in 2018 and has assisted high net worth clients in cross-border succession planning and divorces with complex needs and asset profiles with the private client and tax team and dispute resolution team respectively.