CSj highlights the latest additions to the guidance note series of The Hong Kong Institute of Chartered Secretaries (the Institute), providing guidance on anti-competitive information exchange, conflicts of interest and managing the signing stage of merger and acquisition transactions.

The Institute’s seven Interest Groups, set up under the Technical Consultation Panel in June 2016, have built up a substantial body of practical guidance on the Institute’s website (www.hkics.org.hk) for the benefit of the Institute’s members, and the wider profession and community. This article highlights the latest additions to this series.

Anti-competitive information exchange

The First Conduct Rule of Hong Kong’s Competition Ordinance (Cap 619) prohibits anti-competitive agreements which have the object or effect of preventing, restricting or distorting competition in Hong Kong. As well as prohibiting obvious cartel conduct, such as price-fixing, market sharing, bid-rigging and output limitation, the First Conduct Rule also prohibits certain types of information exchange. One example of such prohibited conduct is the exchange of competitively sensitive information (CSI) between competitors. 

Because this area of competition law is not clear cut, and because information exchange is so prevalent across all sectors of the economy, this area remains an ongoing risk that companies need to manage. The sixth in the series of guidance notes published by the Institute’s Competition Law Interest Group highlights the risks of anti-competitive information exchange and provides some practical steps that can be taken, facilitated by the governance professional, to ensure compliance with the competition rules in Hong Kong.

Defining competitively sensitive information

CSI includes any information which would reduce uncertainty in the market if shared with a competitor. The guidance note points out that sharing information relating to price and quantity would be particularly high risk from a competition law perspective, and the more recent and contemporaneous the information, the more valuable the CSI might be to a competitor when determining its future conduct. Genuinely public or historic information is less of a concern and can generally be shared. The competition law risk is also reduced when the information is anonymised and aggregated before being exchanged, unless the relevant market is concentrated and competitors can easily reverse-engineer the data. 

Governance professionals would be well advised to keep up to date with enforcement actions, both locally and globally, to get a sense of how broadly competition authorities can interpret what constitutes CSI. The guidance note looks at two cases that will assist in this regard. It also addresses the question of how the exchange of CSI can take place – a question relevant to determining whether a breach of the First Conduct Rule has taken place. The highest risk usually lies in parts of a business where employees have direct contact with competitors, but risk can also arise in the context of trade association meetings and industry events, or even in less formal settings such as social events and casual conversations with ex-colleagues or friends. CSI can also be communicated indirectly via a third party. 

Enforcement actions in Hong Kong 

The guidance note reviews a recent First Conduct Rule enforcement action in Hong Kong and makes the point that the consequences of contravening the First Conduct Rule are serious. A company can be fined up to 10% of the Hong Kong turnover of its wider corporate group for each year of the contravention, for up to three years. If a contravention spans more than three years, the fine will be capped at 10% of the Hong Kong turnover of the three years that generated the highest turnover. 

The guidance also makes it clear that the Competition Commission (the Commission) in Hong Kong is determined to enforce individual accountability for breaches of the competition law. Individuals may be subject to financial penalties and directors can also face disqualification for up to five years in certain circumstances, including where a director did not know but ought to have known that the conduct of the company constituted a contravention. Senior management, including company secretaries, can also potentially be liable.

Practical compliance tips

Following the remit of the Institute’s guidance note series, the guidance also suggests steps that can be taken to mitigate compliance breaches in this area with the involvement/facilitation of the governance professional. The following are some practical steps that companies can take to deal with the competition law risk.

  • Train staff to avoid sharing CSI such as pricing or volume data, and remember that anti-competitive information exchange can occur even in informal settings.
  • Establish a clear policy for the identification and handling of CSI – access to CSI should be limited.
  • Always consider whether the information to be shared with a third party is CSI, and why it is being shared. Is it for a legitimate reason? If not, avoid sharing it. If it has to be shared, are adequate protective mechanisms in place?
  • Identify the teams/individuals most at risk of engaging in anti-competitive information exchange and provide them with targeted antitrust training.
  • If CSI is received unintentionally, the company should publicly distance itself from the receipt of the CSI and make it clear that it was not requested and will not be used. If the incident happens during a meeting, a company’s representative should ask for his or her objection to receiving the CSI to be minuted and report it to the legal or compliance team immediately. A record of this public distancing should be made in case the conduct is ever scrutinised by a competition authority.
  • Ensure staff know who to speak to if they have any queries or concerns regarding CSI.

Conflicts of interest

Identifying and managing conflict of interest situations is crucial to good governance in any organisation. The seventh in the series of guidance notes published by the Institute’s Ethics, Bribery and Corruption Interest Group gives guidance on identifying the types conflicts of interest to be aware of, the possible legal implications for organisations, and some recommended practical measures which companies, and in particular governance professionals, should consider adopting to prevent and manage such conflicts. 

Managing conflicts of interest

Managing conflicts of interest requires an understanding of the diverse scenarios that might be involved. The guidance note starts by looking at actual conflicts of interest – where the private interests of members of organisations compete with the interests of their organisations, or are in conflict with their official duties or responsibilities. The guidance warns that ‘private interests’ can include both the financial and personal interests of members, and those of their connections, including family and other relations such as personal friends and the clubs and societies to which they belong. Their connections may also include any person to whom they owe a favour or to whom they may be obliged in any way. 

The picture becomes further complicated in cases of perceived or potential conflicts of interest. In perceived conflicts of interest, the actions and decisions of the persons involved are perceived by a third party to be under the influence of their private interests. Perception of conflicts of interest is critical because this may cast doubt on the integrity of the person involved and cause damage to the reputation of the organisation. In a potential conflict of interest situation, the persons involved may, in the future, be influenced by their private interests when performing their official duties. 

The consequences of getting it wrong 

If not handled properly, conflicts of interest may have very serious consequences. The guidance note highlights the possible legal implications where fraudulent acts are involved (for example, falsifying documents to cover up the conflicts involved). This may lead to criminal offences such as deception, fraud and false accounting. If an advantage is offered or accepted in a conflict of interest situation, it may lead to a breach of the Prevention of Bribery Ordinance enforced by the Independent Commission Against Corruption (ICAC). 

Even where conflicts of interest situations do not involve wrongdoing, however, mishandling them may distort and cast doubts on the reliability of the professional judgement and decisions, independence and impartiality of those involved. The guidance note also points out that many professional institutes require members to commit to ethical practices. Professionals failing to handle conflicts of interest properly may contravene the respective professional code of ethics and be subject to disciplinary sanction, for example suspension of their professional qualification. 

The role of company secretaries 

The guidance note also highlights the role of company secretaries in managing conflicts of interest. It points out that, as the eyes and ears of the chairman, the chief executive and other members of the board, company secretaries have an influential role to play in ensuring the right ethical culture in an organisation and to act as the guardian of the ethical values of the organisation. They also have specific duties to ensure that the board is fully aware of its responsibility to avoid engaging in any market misconduct practices. This includes the expectation for company secretaries to perform their professional role in managing connected transactions and disclosure of interest among directors. Being in a unique position to create the right culture for good governance through guiding management and the board to fulfil their responsibilities, company secretaries are far more than just playing a compliance role. Some practical takeaways for company secretaries to consider are set out below.

It should be made clear to directors that they have an obligation to disclose fully and fairly any conflict of interest at the earliest possible time and, if possible, before discussion of the issue by the board. They should be aware that being negligent in disclosing conflicts of interest may carry possible legal liabilities. 

  • If there is likely to be a conflict of interest, it is recommended that the director involved should not be present at related discussions and refrain from voting on the issue.
  • When conflict of interest situations arise, the company secretary should ensure that management deals with it in an effective and transparent manner.
  • Regular business practice reviews for the organisation should be implemented. Also, ethics training for all levels of staff, including directors, should be conducted regularly in order to ensure they know how to handle conflicts of interest properly. 
  • A whistleblowing policy should be introduced, implemented and widely understood by all levels of staff.

Managing the signing stage in M&A transactions

The ‘signing’ stage in mergers and acquisitions (M&A) transactions signifies an agreement of terms and conditions among the parties. The ‘closing’ stage occurs upon the satisfaction of agreed conditions. In some cases, there may be a lengthy gap between the two stages, in particular when multiple regulatory approvals are required for the consummation of the transaction. These could include antitrust clearance and a change of controllers in regulated industries. 

The sixth in the series of guidance notes published by the Institute’s Takeovers, Mergers and Acquisitions Interest Group revisits the scenario of a split signing and closing situation in M&A transactions, and walks the governance professional through some key issues to facilitate a smooth signing process.

Obtaining the necessary approvals

The guidance starts by addressing the process for obtaining the necessary approvals – a prerequisite for all corporate entities entering into the signing of an M&A transaction. Typically, internal approvals include those from the board of directors and in some cases investment committees (if one has been established). For joint ventures and deals involving listed companies, shareholders’ approvals may well be required, as well as specific shareholders’ consents or waivers in relation to any pre-emption rights. 

In this connection, the corporate entities’ constitutional documents and agreement among shareholders are the primary sources for identifying the necessary internal approvals. For listed companies, references should also be made to the compliance requirements of the Listing Rules. 

Internal approvals are obtained when the terms and conditions of the transaction are still being negotiated. The parties may also agree to amend the terms to deal with unforeseen circumstances after signing but before closing. In addition, regulatory authorities may impose conditions when providing their consents. 

In view of these potential obstacles to a successful signing and/or closing of the transaction, flexibilities permitting changes to the agreed terms are usually built into the internal approvals. For board and shareholder approvals, a common way of doing this is by granting power to authorised persons to approve amendments or modifications to the terms and conditions of the transaction as they consider ‘necessary or desirable’. 

An alternative way to allow flexibility, but within a predetermined scope, is to give the authorisation subject to satisfying certain conditions. By way of example, to preempt situations where a regulator grants its approval subject to conditions, the internal approvals may specify that they are given subject to meeting conditions imposed by regulators. 

Making the necessary disclosures 

The guidance also addresses the legal requirements relating to disclosure of M&A transactions. In particular, where one or more parties to the transaction are Hong Kong listed companies, they should be sensitive as to whether the transaction may constitute inside information and whether it is of a substantial size where additional compliance requirements such as an announcement may need to be published. 

The Securities and Futures Ordinance (Cap 571) requires a Hong Kong listed company to disclose any inside information to the market as soon as reasonably practicable. The Hong Kong Listing Rules also contain obligations on the company to disclose information to avoid a false market in its securities.

M&A transactions are commonly viewed as important transactions of a listed company and news of the company entering into such transactions may affect the trading price or volume of the company’s listed securities. If the senior management or directors of a listed company considers entering into the proposed M&A transaction to be inside information, it is crucial to maintain its confidentiality until it is ready for release by way of a full announcement (usually immediately after the deal has been signed). If the necessary degree of confidentiality cannot be maintained or confidentiality may have been breached, the inside information must be disclosed immediately by the publication of a holding announcement and, if necessary, requesting a temporary suspension of trading prior to the holding announcement being published.

In addition to being considered inside information, an M&A transaction may constitute a notifiable transaction and/or a connected transaction pursuant to Chapters 14 and 14A of the Listing Rules which, among other compliance requirements, may need to be disclosed by issuing a deal announcement on the HKEXnews website and the listed company’s own website. 

The guidance notes reviewed in this article are available on the Institute’s website: www.hkics.org.hk. More information relating to managing conflicts of interest is available on the Independent Commission Against Corruption website: www.icac.org.hk, and that of the Hong Kong Business Ethics Development Centre: https://hkbedc.icac.hk.



The Institute would like to thank everyone involved in the guidance notes reviewed in this article, in particular the members of the Institute’s Interest Groups set out below.

Competition Law Interest Group

David Simmonds FCG FCS (Chairman), Adelaide Luke, Alastair Mordaunt, Brian Kennelly QC, Mike Thomas and Neil Carabine. Gratitude is expressed to Adelaide Luke, Partner, Herbert Smith Freehills, as the author of the guidance note reviewed in this article.

Ethics, Bribery and Corruption Interest Group 

Dr Brain Lo FCG FCS (Chairman), Anna Lam, Jeremy Birch, Michael Chan, Ralph Sellar and William Tam ACG ACS. Gratitude is expressed to the Hong Kong Business Ethics Development Centre, ICAC, as the author of the guidance note reviewed in this article. 

Takeovers, Mergers and Acquisitions Interest Group 

Michelle Hung FCG FCS (Chairman), Dr David Ng FCG FCS, Henry Fung, Kevin Cheung, Lisa Chung, Patrick Cheung and Philip Pong. Gratitude is expressed to Kevin Cheung, Partner, Linklaters, as the author of the guidance note reviewed in this article.

Mohan Datwani FCG FCS(PE), Institute Deputy Chief Executive, serves as Secretary to the Institute’s Interest Groups. If you have any comments and/or suggestions relating to the Institute’s Interest Groups, he can be contacted at: mohan.datwani@hkics.org.hk.