Tycoons are making a last-minute effort to undo a HK Listing Rule change which will prohibit directors from dealing between the end of a financial period and the release of the results, starting from 1-Jan-09. The regulators should not U-turn.

Tycoons whinge over blackout period
23 December 2008

On 28-Nov-08, the Stock Exchange of Hong Kong Ltd (SEHK) finally published the conclusions of a consultation it started on 11-Jan-08 on changes to the Listing Rules, several of which enhance corporate governance and investor protection in Hong Kong.

One of those changes, which SEHK is proceeding with, is to change the basis of the blackout period during which a director cannot deal prior to the release of his company's results. Under existing rules, directors can deal up until 1 month before the results are released. Under the new rule, which takes effect in 9 days' time on 1-Jan-09, directors cannot deal from the day after the end of the financial period until the results are released.

We covered the detailed background to the rule change in our article "The insider blackout period" on 24-Apr-08. The results of an opinion poll conducted by Webb-site.com, showed that an overwhelming 97.5% of 475 respondents agreed that directors should be prohibited from dealing from the end of the financial period until the results are published.

Some well-connected tycoons and company directors are not happy about the rule change, and have launched an aggressive last-minute campaign to reverse it. This shows a great disrespect for due process - there was a proper market consultation and the Listing Committee, which comprises a cross-section of market participants (who are appointed by a committee of 3 directors of HKEx and 3 from the SFC), has reached a conclusion to go ahead.  The rule changes have been approved by the SFC. From proposal to implementation, the process will have lasted almost a year, and nobody can claim it is a surprise.

Lo Ka-shui, the hereditary Chairman of property investor Great Eagle Holdings Ltd (Great Eagle, 0041) and a former government-appointed director of HKEx (0388), was among those whinging to The Standard, which ran articles twice last week. Among the invalid complaints were a claim that "it may become more difficult for major shareholders to fight a hostile takeover bid". This is of course nonsense, because if you are the major shareholder of the company, then nobody can take it over without buying your stake. That's why we hardly ever have a hostile takeover bid in HK, where nearly every company has a controlling shareholder or "concert party" group of shareholders who together to control the company. Is there any chance of a hostile bid for Great Eagle, Mr Lo?

Mr Lo, who is an independent director of 6 other HK-listed companies, also claimed that there was a "growing trend" for institutional investors to appoint independent directors to listed company boards. We disagree - institutions normally avoid that, not least because they don't want ever to be accused of having insider information. Investors expect boards to be professionally and competently run without having to intervene.

Another person who should know better is Abraham Shek Lai-him (also known as Abraham Razack), the legislator for the real estate and construction sector. Apart from the arduous duties of being a Functional Constituency legislator, he's an independent director of an amazing 13 listed companies, the second-highest count of any INED in Hong Kong, or 15 if you count Eagle Asset Management (CP) Ltd, the Manager of Champion REIT, which is controlled by Mr Lo's Great Eagle, and Regal Portfolio Management Ltd, the manager of Regal REIT, which is ultimately controlled by Mr Lo's brother Lo Yuk Sui.

The Standard quotes Mr Shek as saying in a letter to LegCo's Financial Affairs Panel that "The extension...means that out of one year, there are seven months where you can't sell your shares". That's only true if you leave your reporting to the last possible minute, Mr Shek. Under HK's slack reporting deadlines, you have 3 months to produce your half-year results and 4 months to produce your annual results. However, that is going to change. On 23-Jul-08 SEHK announced that the deadlines will be cut to 2 months and 3 months respectively for periods ending on or after 30-Jun-10 and 31-Dec-10 (in Hong Kong, we don't like to rush reform). Expect another round of complaints in about 18 months time when that gets introduced. Even Richard Williams, the Head of Listing at SEHK, could not bring himself to call this anything more than a minor improvement - he said "The accelerated results...are a step in the right direction...and will bring the Exchange's requirements closer to international norms". Closer, but not up to scratch.

But whatever the reporting deadline, why should a director be able to trade in his shares when the latest accounts that all other investors hold are at least 6 months out of date? Of course he shouldn't. A director of a listed company should have access to monthly management accounts which give far more recent information. And if he is an executive director, he would probably also know how the order books or business prospects are looking too.

Mr Lo seeks to invoke human rights and the rule of law, saying "The spirit of the law and rules should be to put everyone on a level playing field without bias to any particular group of investors." Well, in that case, Mr Lo, you will allow ordinary investors full access to all internal corporate documents and management accounts, will you? Put them all on your web site, broadcast all your board meetings, and then we can talk about a level playing field.

There are a more than a thousand other listed companies whose shares you can deal in all year round, without restrictions, so it is not a great hardship to be prohibited from dealing in the 7 companies (or 15, in Mr Shek's case) where you have privileged access to information.

Another complaint comes from the Chamber of Hong Kong Listed Companies (mostly small ones). They apparently haven't read the Listing Rules. CEO Mike Wong reportedly said that the blackout would make it more difficult for directors to exercise stock options. That's not true, because paragraph 7(d)(iv) of the Model Code in Appendix 10 specifically allows a director to exercise options he was previously granted (as long as they have a fixed exercise price, when granted which they usually do). So directors can exercise options during the blackout period - they just can't then turn around and dump the shares in the market, until the results are out. In a press release yesterday, the Chamber repeated a lot of the same points made by Mr Lo.

The Chamber also makes the facile claim that the law against illegal insider dealing is sufficient protection against abuse. With only a handful or fewer cases prosecuted each year, and a high burden of proof, that simply isn't enough. 95% of 443 respondents in our opinion poll agreed that directors often benefit by share dealing after the financial period has ended but before results are released.

The Stock Exchange, its Listing Committee and the SFC should stand their ground. HK will be a higher-quality market if they do, and that must be a good thing for both investors and issuers. Directors of listed companies will still have adequate opportunities to cash in or add to their holdings and an incentive to get their results out faster to maximise the permitted dealing period.

© Webb-site.com, 2008

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