BACKGROUND 

On 19 December 2024, the Stock Exchange of Hong Kong Limited (“HKEX”) published its Consultation Conclusions  (“Consultation Conclusions”) setting out the major amendments to the Corporate Governance Code (“CG Code”) and the relevant Rules Governing the Listing of Securities on the HKEX (the “Listing Rules”) following the responses to the Consultation Paper of 14 June 2024 (the “Consultation Paper”). Given the majority support in the market responses, the HKEX has concluded that all the proposals outlined in the Consultation Paper will be adopted with certain modifications or clarifications.

The amendments to the CG Code and the Listing Rules will become effective on 1 July 2025, with transitional arrangements for certain changes. 

The amendments represent key changes to CG practices, in particular, in respect of independent non-executive directors ("INED(s)") and directors' performance and training, and are a culmination of the amendments made to the Listing Rules by the HKEX over the past several years to promote good corporate governance (“CG”) and to address CG concerns. 

 

The HKEX will further publish an updated guidance for boards and directors (“New CG Guide”) in the first half of 2025 to assist issuers’ compliance with the new CG requirements.

 

SUMMARY OF THE KEY CHANGES 

 

1. Board Effectiveness 

 

(a) Designation of lead INED 

 

• Issuers without an independent board chair shall designate one INED as a lead INED. (New Recommended Best Practices C.1.8)

 

- Currently, there is no requirement for issuers to designate an INED to serve as lead INED. The primary role of a lead INED is to serve as an “intermediary” to (i) provide investors with independent insight into the board’s operations and direction, enable the shareholders (particularly minority shareholders) to understand the INEDs’ decision; and (ii) to facilitate communication among the directors, in particular the INEDs, and between shareholders and the board, especially where contact through normal communication channels is inadequate.

 

- The HKEX will provide further elaboration on the expected roles and functions of a lead INED in the New CG Guide in due course. 

 

- The designation as a lead INED would not require an announcement to be made pursuant to the Listing Rules. Nevertheless, for transparency, issuers with a lead INED should publicise any change in lead INED designation as soon as possible through an updated list of directors and their roles and functions via the issuer’s website and HKEX’s website.

 

• Enhanced disclosure requirement in the CG Report regarding the board’s engagement with shareholders, including (i) the nature and number / frequency of such engagements; (ii) the group(s) of shareholders and representatives of the issuer involved and (iii) the issuer’s approach to following up on the outcomes of these engagements. (New Mandatory Disclosure Requirement (“MDR”) paragraph L(d) and new Code Provisions under the CG Code (“CP”) F.1.1)

 

(b) Mandatory director training

 

• All directors must receive mandatory continuous professional development on specified topics each year. (MB Rule 3.09F, 3.09G / GEM Rule 5.02F, 5.02G)

 

- The mandatory training must at least cover each of the following topics: 
  
(i) the roles, functions and responsibilities of the board, its committees and its directors, and board effectiveness; 

(ii) issuers’ obligations and directors’ duties under Hong Kong law and the Listing Rules, and key legal and regulatory developments (including Listing Rule updates) relevant to the discharge of such obligations and duties; 
  
(iii) corporate governance and environmental, social and governance matters (including developments on sustainability or climate-related risks and opportunities relevant to the issuer and its business); 

(iv) risk management and internal controls; and 

(v) updates on industry-specific developments, business trends and strategies relevant to the issuer.

 

• Within 18 months of their appointment, first-time directors shall complete a minimum of 24 training hours, and first-time directors with directorship experience in issuers listed on an exchange other than the HKEX within three years prior to their appointment shall complete a reduced minimum training hours of 12 hours. (MB Rule 3.09H / GEM Rule 5.02H) 

 

• Revised disclosure on the different modes of training undertaken by directors (external, internal or self-study), namely the number of hours completed, the topics covered and a description of the relevant training provider(s) (where applicable) for each mode of training. (Revised MDR paragraph B(i)) 

 

(c) Board performance review

 

• Require a board performance review at least every two years with specific disclosure in the CG Report, details of which will be provided in the New CG Guide in due course. (New CP B.1.4)

 

(d) Disclosure of board skills matrix 

 

• Require issuers to maintain and disclose a board skills matrix in the CG Report, with enhanced disclosure on the board’s skills, details of which will be provided in the New CG Guide in due course. (New CP B.1.5) 

 

(e) Overboarding INED and directors’ time commitment 

 

• An INED must not concurrently hold more than six listed issuer directorships (i) with a three-year transition period for existing issuers starting from 1 July 2025 (i.e. for any relevant general meetings held on or before 30 June 2028); and (ii) from 1 July 2025 onwards in respect of new IPO applicants. (MB Rule 3.12A / GEM Rule 5.07A)

 

- During the transition period, the current requirements in the Listing Rules in respect of the election of an INED who will be holding his or her seventh (or more) listed company directorship shall apply, namely, the listed issuer must set out in the circular to shareholders why the board believes the individual would still be able to devote sufficient time to the board.

 

• Require the nomination committee to annually assess and disclose its assessment of each director’s time commitment and contribution to the board as well as the director’s ability to discharge his or her responsibilities effectively taking into account professional qualifications and work experience, existing directorships of issuers listed on the HKEX and other significant external time commitments of such director and other factors or circumstances relevant to the director’s character, integrity, independence and experience. (New MDR paragraph E(d)(iii)) 

 

2. Independence of INEDs after 9 years 

 

• Hard cap on the tenure of long serving INEDs of 9 years with a three-year cooling-off period and a six-year phased transition period. (MB Rule 3.13A / GEM Rule 5.09A)

 

- A board must not include an INED who has served on the board as an INED for a period of nine years or more, as at the conclusion of the issuer’s annual general meeting that follows the end of the director’s nine-year tenure. 

 

- This amendment received mixed feedback from the market, with 51% of the respondents supporting the hard cap and 49% opposing it. A number of issuers expressed concerns that a hard cap would deprive issuers of the knowledge and experience of long serving INEDs, there would be an impact on board dynamics and also a disproportionate impact on issuers with a majority of INEDs who are long serving as they will need to replace multiple INEDs within a short period.

 

- In light of the strong feedback from the market, the HKEX modified the amendment to introduce a phased implementation over a transition period of six years: 

 

 (i) Phase one (by the first AGM held on or after 1 July 2028) – issuers must not have long serving INEDs representing a majority of the INEDs on the board. 

 

 (ii) Phase two (by the first AGM held on or after 1 July 2031) – issuers must not have any long serving INEDs on the board. 

 

- “Cooling-off period”: Former INEDs who reach the nine-year tenure cap may serve again as an INED of the same issuer only after a cooling-off period of three years. 

 

- During the transition period, the current requirements in the Listing Rules in respect of long serving INEDs will apply namely: (i) the requirement on tenure disclosure in the circular to shareholders and new INED appointments where all INEDs are long serving INEDs will continue to apply to the relevant general meetings held on or before 30 June 2028 (i.e. expiry of phase one); and (ii) the requirements on the re-election of long serving INEDs will continue to apply for any relevant annual general meetings held on or before 30 June 2031 (i.e. expiry of phase two).

 

• Enhanced disclosure on the length of tenure and current period of appointment of each director in the CG Report. (Revised MDR paragraph B(a)) 

 

3. Board and Workforce Diversity 

 

• At least one director of a different gender on the nomination committee. (New CP B.3.5) 

 

• Require an annual review of the implementation of the board diversity policy; and separate disclosure of the gender ratios of senior management and the workforce. An annual review is required even if an issuer has achieved its current diversity objective. (New & revised MDR paragraph J) 

 

• Require issuers to have and disclose a workforce diversity policy save that, it is not mandatory for issuers to set measurable objectives for workforce diversity. (MB Rule 13.92 / GEM Rule 17.104) 

 

• Require issuers to immediately publish an announcement if there are temporary deviations from the gender diversity requirement, with a three-month grace period to re-comply with such requirement. (MB Rule 13.92 / GEM Rule 17.104) 

 

4. Risk Management and Internal Controls 

 

• Enhanced disclosure in the CG Report on the board’s review of the effectiveness of the risk management and internal control systems (“RMIC”), which shall be conducted at least annually. Details to be provided in the New CG Guide in due course. (New MDR paragraph H) 

 

• Enhanced drafting to the RMIC sections of the CG Code emphasising the board’s responsibility for the issuer’s risk management and internal controls, setting out the scope of the annual reviews of the effectiveness of the RMIC Systems. The scope of the review should cover all material controls, including financial, operational and compliance controls. (Section D.2 of the CG Code) 

 

5. Dividends 

 

• Require issuers to disclose in the CG Report specific information on their dividend policy, or explain the reason(s) for not having one, and the board’s dividend decisions (though issuers are not expected to disclose confidential or commercially sensitive information). (New MDR paragraph M) 

 

6. Miscellaneous LR amendments 

 

• Require issuers to set a record date to determine the identity of security holders eligible to attend and vote at a general meeting or to receive entitlements. 

 

• Enhanced disclosure of modified auditors’ opinion, if any, including: (a) details of the modifications and their impact on the issuer’s financial position; (b) management’s position and basis on major judgmental areas and how it is different from that of the auditors; (c) the audit committee’s view towards the modifications, and whether the audit committee has reviewed and agreed with management’s position concerning major judgmental area; and (d) the issuer’s proposed plans to address the modifications. 

 

• Provision of monthly updates, and each director’s right to request for such updates, on the issuer’s financial and operating performance, position and prospects in sufficient detail; and 

 

• Align the requirements applicable to the nomination committee, the audit committee and the remuneration committee on establishing written terms of reference and arrangements during temporary deviations from requirements.

 

WHAT TO LOOK OUT FOR AND NEXT STEPS

 

• The revised Listing Rules and the revised CG Code will become effective from 1 July 2025 with transitional arrangements for the caps on “overboarding” and INED tenure. Listed issuers should consider their long term plans for compliance with the new amendments with their professional advisers, in particular, where a particular listed issuer has a number of long serving INEDs. 

 

• The new requirements will apply to CG Reports and annual reports in respect of financial years commencing on or after 1 July 2025. 

 

• The New CG Guide will be published in the first half of 2025 to assist issuers’ compliance with the new CG requirements. We suggest seeking further advice in relation to the new CG requirements once the HKEX has set out their views and guidance in the New CG Guide.

 

For further details, please refer to the Consultation Conclusions published on the website of the HKEx (https://www.hkex.com.hk).

 

 

About Us

 

Howse Williams is a leading, full service, Hong Kong law firm. We combine the in-depth experience of our lawyers with a forward thinking approach.

 

Our key practice areas are corporate/commercial and corporate finance; commercial and maritime dispute resolution; clinical negligence and healthcare; insurance, personal injury and professional indemnity insurance; employment; family and matrimonial; trusts and wealth preservation; wills, probate and estate administration; property and building management; banking; fraud; distressed debt; investment funds; virtual assets; financial services/corporate regulatory and compliance.

 

As an independent law firm, we are able to minimise legal and commercial conflicts of interest and act for clients in every industry sector. The partners have spent the majority of their careers in Hong Kong and have a detailed understanding of international business and business in Asia.

 

Disclaimer: The information contained in this article is intended to be a general guide only and is not intended to provide legal advice. Please contact [email protected] if you have any questions about the article.