The Securities and Futures Commission (SFC) has recently sought disqualification orders against listed company directors in a number of court actions commenced in the past few months. The proceedings against the directors have been brought under section 214 of the Securities and Futures Ordinance. If successful, the court has the power to disqualify the relevant directors from being directors or from being involved, directly or indirectly, in the management of any corporation for up to 15 years. The SFC is also seeking compensation orders from certain directors in some cases.
There have also been a number of regulatory developments emphasising the role of boards of directors and senior management. These, together with the recent enforcement actions, highlight the increased focus on directors. In light of this, all directors, including non-executive directors, must ensure that they fully understand the regulatory framework and are able to discharge properly their responsibilities.
SFC's allegations regarding directors' conduct
The SFC has commenced a number of court actions over recent months against directors of listed companies. The specific allegations against the directors are different in each case, but all relate to breaches of directors' duties. Examples of alleged breaches include that the relevant director(s):
The SFC has targeted both non-executive and independent non-executive directors in these matters, reinforcing the accepted position that non-executive directors have the same duties to exercise reasonable care, skill and diligence, as well as fiduciary duties, as executive directors. The SFC's allegations highlight the standards of conduct the regulator expects of executive and non-executive directors (in all cases, the Court of First Instance has not yet heard the petitions and is therefore yet to make a decision as to whether to grant the orders sought).
Increased focus on INEDs
In addition to the legal proceedings described above, there has been an increased focus by regulators on the role of the board of directors, and in particular the importance of senior management in ensuring robust risk management. On 14 December 2016, the HKMA issued a circular providing further guidance on the empowerment of INEDs in the banking industry. In particular, the circular contained measures to be taken by locally incorporated authorised institutions (AIs) to ensure that there are sufficient suitably qualified people willing to serve as INEDs on the boards of HK-incorporated AIs. On 16 December 2016, the SFC announced its new "Manager in Charge" regime in relation to licensed corporations, which is designed to enhance senior management accountability.
INEDs in the context of listed companies
The HKMA's circular and the SFC's new MIC regime add to the existing regulatory requirements concerning INEDs.
INEDs are required by various Main Board Listing Rules, including those set out below, to be members of the board and certain important board committees:
Navigating through the regulation
It is clear that INEDs play a vital role in offering an independent perspective to board decisions, which is important in ensuring that board actions are made in the best interests of the company.
Although the increased focus on non-executive directors seeks to benefit companies and the market through clearer expectations of what constitutes best practice, it is important that non-executive directors are given the appropriate tools to navigate through the regulatory framework so that they can adequately discharge their responsibilities.
To assist non-executive directors, we recommend that companies:
Source: Conventus Law