Abuse or Amuse – Disciplinary Powers and Sanctions on Professional Advisers?

The Stock Exchange of Hong Kong Limited (“Exchange”) issued a Consultation Paper on proposed changes with regards to the Exchange’s disciplinary regime in August 2020. This article examines selected proposals of relevance to the legal profession.

Express obligations on professional advisers when acting in connection with Rule matters

Recognizing the role that professional advisers play in the discharge of rule obligations by listed issuers, the Exchange has proposed to impose express obligations for such advisers to (i) use all reasonable efforts to ensure that their clients understand and are well advised as to the scope of their obligations under the Rules; and (ii) not knowingly provide information to the Exchange which is false or misleading.

  (i) Use all reasonable efforts to ensure clients understand the scope of their obligations

The assumption under the existing Rule 2A.10 that professional advisers are subject to an obligation to use all reasonable efforts to ensure that their clients understand and are advised on the scope of the Rules is correct. Such obligations are inherent under The Hong Kong Solicitors’ Guide to Professional Conduct (the “Solicitors’ Guide”) and Solicitors’ Practice Rules (Cap. 159H) (the “Practice Rules”).

Using all reasonable efforts to ensure that clients understand and are advised on the scope of the Rules falls under a duty to act in the best interest of one’s client, and to maintain a proper standard of work under Rule 2 of the Practice Rules, a non-compliance of which will lead to possible disciplinary proceedings by the Council of the Law Society. Furthermore, Principle 6.01 of the Solicitors’ Guide imposes a duty onto solicitors to act competently, and to serve clients in a conscientious, diligent, prompt, and efficient manner. Reading the aforementioned duties entails that when advising an issuer, a legal adviser has a duty to ensure that the client understands and are advised on the scope of the rules.

The new obligations, therefore, will be an ineffectual attempt to produce additional hurdles for legal advisers on top of the existing provisions governing their professional conduct.

We refer to the Exchange’s recognition in the Consultation Paper that the primary responsibility for compliance remains with the listed issuer, and in particular, its directors. Thus, if the ultimate rationale of this proposed obligation is for the smooth discharge of rule obligations by listed issuers, it should be noted that the Director’s Declaration and Undertaking under Form B, as prescribed in Appendix 5 to the Listing Rules, serves the same purpose.

  (ii) Not knowingly provide false or misleading information

We consider this proposed obligation to have little additional value to the existing provisions which already create potential civil and criminal liabilities for professional advisers suppling false or misleading information, as illustrated below.

Section 277 of the Securities and Futures Ordinance (the “SFO”) imposes civil liability when a person discloses/disseminates false or misleading information that is likely to induce securities transactions if the misinformation or the omission is material (“False Information”), and the person knows that, or is reckless or, negligent as to whether, the information is False Information. Similarly, Section 298 of the SFO imposes criminal liability in virtually the same circumstances as Section 277 of the SFO except that negligence will not suffice to establish criminal liability. Any person who contravenes Section 298 of the SFO is liable to maximum fines of HK$10 million and 10 years of imprisonment.

Further, Section 384 of the SFO imposes criminal liability on any person who intentionally or recklessly provides information which is false or misleading, when filing a prospectus, listing document or public disclosure materials disseminated under the Hong Kong Listing Rules, with the Securities and Futures Commission (the “SFC”) or the Exchange. The provision of false or misleading information caught by this section, namely “intentionally or recklessly” is wider than just “knowingly” under the proposed new obligation. As such, a more stringent standard is already in place for professional advisers, rendering the second part of the proposal redundant.

The combination of the provisions above safeguards the accuracy of the information submitted to the Exchange. The rationale of the proposed obligation is for the same purpose as the above statutory provisions set out to achieve. It is therefore of minimal value and, in our view, unnecessary.

Including employees of professional advisers of listed issuers and their subsidiaries as a Relevant Party under the Rules

The Listing Committee can, under the existing Rule 2A.09(5), ban an individual employed by a professional adviser from representing a specified party in relation to a stipulated matter coming before the Listing Division or the Listing Committee for a stated period. It is the Exchange’s position that such disciplinary actions cannot be imposed without including the employees of professional advisers as a Relevant Party. We, however, believe that there are existing provisions available for disciplinary purposes to the same effect as the above, if not harsher, that warrants the dispensing of this proposal.

Under Section 23(8) of the SFO, the Exchange is required to refer breaches of Rules allegedly committed by a solicitor or a professional accountant that may also constitute a breach of duty imposed by law or under rules of professional conduct to the Law Society or the Hong Kong Institute of Certified Public Accountants (the “HKICPA”). Such referrals should be made according to the Memorandum of Understanding dated 18 December 1996 between the Exchange and the Law Society and between the Exchange and the Financial Reporting Council (the “FRC”) dated 27 December 2007 (the “FRC MOU”).

On a similar note, when a breach of the Listing Rules by a legal adviser triggers the breaching of the professional duty to act competently, and with integrity, the solicitor faces inquiry and investigation under its own regulatory body, whose Disciplinary Tribunal can, amongst all other sanctions, suspend the solicitor from practicing for a period that the Solicitors Disciplinary Tribunal deems fit (Section 10(2)(b) of the Legal Practitioners Ordinance (the “LPO”)). This order, which will be publicly available, seems to completely cover the banning of representation that the Exchange wishes to enforce, and offers a bigger deterrent impact for misconduct.

While it may be argued that Section 23(8) of the SFO applies only when the employee is a solicitor, we note that the Exchange can also, under Section 3 of Solicitors Disciplinary Tribunal Proceedings Rules (Cap. 195C), make an application to the Law Society to consider a complaint regarding the conduct of a solicitor’s employees and trainee solicitors. The possible sanctions for the above-named respondents include the cancellation or suspension of the training contract (Section 10(2)(f)) LPO) and the prohibition of employment of the employee for such a period that the Solicitors Disciplinary Tribunal decide (Section 10(2)(g) of the LPO). Again, the available orders seem to include sanctions to the same effect of, if not more severe than, a banning of representation.

Imposing secondary liability on Relevant Parties if they have ‘caused by action or omission or knowingly participated in a contravention of the Listing Rules’

The Exchange stated that the current framework does not include a prescribed standard of compliance for members of senior management, substantial shareholders, professional advisers, authorized representatives, and significant shareholders. As such, disciplinary actions may not be possible even if the conduct was a significant factor in the commission of a Rule Breach.

A lack of standard of compliance?

We agree with the Exchange’s position to the extent that members of senior management, substantial shareholders and significant shareholders may not be governed by a prescribed standard of compliance, serving as a good incentive to impose secondary liability onto these parties for rule breaches. However, we do not believe that the imposing of secondary liability should include professional advisers that are already subject to existing standards of compliance prescribed by the law and their respective professional regulatory bodies.

Section 213 of the SFO grants the SFC the power to apply to the Court of First Instance for a broad range of declaratory orders and injunctions for contraventions of any provisions of the SFO or any other condition imposed pursuant to any provision of the SFO. Contravention includes aiding and procuring a person to commit any such contravention and directly or indirectly being knowingly involved in any such contravention.

Further, a contravention of the Listing Rules, whether caused by action, omission or knowing participation, seems to breach the Solicitor’s Guide and Practice Rules and can attract sanctions made available under Section 10 of the LPO that reciprocate those for professional advisers under Rule 2A.09. When the solicitor is retained by the issuer, a contravention of the Listing Rules is likely to breach a solicitor’s duty to act in the best interest of their client (Rule 2 of the Practice Rules); a contravention by omission is likely to breach one’s duty to carry out the instructions with diligence, reasonable care and skill (Principle 5.12 of the Solicitors’ Guide). Knowingly participating in a contravention of the listing rules is likely a breach of one’s duty to not do anything that is likely to compromise integrity (Rule 2 of the Practice Rules).

There are obligations prescribed by law and by the professional regulatory body, which indirectly prevent a legal adviser from contravening the Listing Rules, whether directly himself or by procuring the client to commit such contraventions. The incentive to impose a secondary liability onto professional advisers because there is a lack of prescribed standard of compliance is mistaken. The existing framework deemed imposing the proposed secondary liability redundant. It may create a negative deterrent effect when professional advisers are burdened with unnecessary extra responsibilities for the same purpose that the existing framework sets to achieve.

Deprivation of legal representation

Under the proposed regime, legal advisers may be more reluctant to act for listed companies under the GEM Board due to a heightened risk of their firms’ liability or personal liability attached to their legal work. The choice to not accept instructions from a prospective client is set out under Principle 5.01 of the Solicitors’ Guide. The introduction of a secondary liability may, inadvertently, affect the right to a choice of lawyers for lawful rights and interests of related parties under Article 35 of the Basic Law.

Existing referral scheme

As correctly recognized by the Exchange’s Enforcement Policy Statement (revised on 17 February 2017), referrals are made to other law enforcement or regulatory bodies for conduct which falls within their jurisdiction. An indirect contravention of the Listing Rules that falls under the abovementioned standards of compliance prescribed by the law and the professional regulatory bodies should be referred to the respective bodies and the Exchange should not attempt to resolve the issue through an expansion of unjustifiable disciplinary powers.

No undertakings given to the Exchange

We recognize that the collective responsibility of directors for compliance is a cornerstone of the Exchange’s enforcement regime and is clearly established by the Listing Rules. This obligation is reinforced by the personal undertaking given by the directors to the Exchange to use their best endeavours to procure Listing Rule compliance by listed companies. We do not contest the imposing of secondary liability onto parties such as directors that have made a compliance related undertaking to the Exchange, but such undertakings are not made by professional advisers. The imposing of a secondary liability onto a party that did not enter into a contract with, nor give an undertaking to, the Exchange, cannot be justified.

Sanctions may be imposed on all Relevant Parties through secondary liability where a party has failed to comply with a requirement imposed by the Listing Division, the Listing Committee, or the Listing Review Committee

The scope is ambiguous and further clarifications are needed as to whether “all Relevant Parties”, to which the proposed secondary liability relates, is taken to mean all Relevant Parties that have caused a contravention by action, omission or knowing participation, or all Relevant Parties listed under the existing Rule 2A.10. The scope of the latter is too wide. For optimal disciplinary and deterrent effect, the sanctions should be restricted to and focused on, who the requirements are directed to, as currently practiced.

In addition, the Exchange is a public body and the decisions of the Listing Committee or the Listing Review Committee are amendable to judicial review. Based on our observation, over the past 20 years, there were only five judicial review proceedings against the decisions of the Exchange in disciplinary and no-disciplinary review hearings. Imposing secondary liability on professional advisers is likely to attract more judiciary reviews which increases the risk of the committees’ decisions being challenged. The Exchange needs to take into consideration that responding to a judicial review is time-consuming and expensive - which may not be in the best interest of the investors and the market.

To extend the ban on professional advisers to cover representation of any party

Under the existing Rule 2A.09 (5), the Listing Committee can ban a professional adviser, or a named individual employed by a professional adviser, from representing a specified party in relation to a stipulated matter or matters coming before the Listing Division or the Listing Committee for a stated period. The Exchange proposed to extend the scope of the ban to cover the representation of any party.

Based on the publicly available listing enforcement notices and announcements as of today, it is our observation that 2A.09 (5) is rarely utilized. If it is indeed an “effective practical disciplinary tool” that calls for enhancements, we should see more published enforcement news or announcements relating to such bans. Given the low utilization rate of such provisions by the Exchange, the need to extend the coverage of the ban is questionable.

Reiterating the arguments above, the Exchange’s Enforcement Policy Statement recognizes that referrals are made to other law enforcement or regulatory bodies for conduct which falls within their jurisdiction. Upon referrals and investigations, the Disciplinary Tribunal under the Law Society can, amongst all other sanctions, suspend the solicitor from practice for such a period that the Solicitors Disciplinary Tribunal thinks fit. Furthermore, Section 213(2)(f) of the SFO states that the SFC can apply to the Court of First Instance for a possible order directing a person to refrain from doing any act specified in the order. The Exchange’s existing referral regime, together with the SFC’s powers, provides readily available sanctions that this proposal wishes to achieve, and thus gives little reason towards why the scope of the ban in question should be expanded.

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, Withers

Tiffany is a Trainee Solicitor in the Corporate team. She started her training contract with the firm in September 2020 and assists on a board range of corporate and commercial matters.