Compliance issues for domestic enterprises listing in Hong Kong

By Shen Cheng and Chen Wei, AllBright Law Offices

The enthusiasm of domestic enterprises to list in Hong Kong has exploded of late. Certain seemingly minor non-compliance matters can, if not properly handled, also have an adverse impact on the implementation of a project. This column proposes some ideas to solve and explore the categorization and requirements of Hong Kong Exchanges and Clearing (HKEx) with regards to the disclosure of non-compliance matters.

AllBright Law Offices

Pursuant to its guidance letter, HKEX-GL63-13, HKEx divides non-compliance incidents into three categories, namely material impact non-compliances, systemic non-compliances and immaterial non-compliances. The substantive impact, as well as both rectification and disclosure requirements, etc. vary for the different categories of non-compliance incidents.

Material impact non-compliances. The determination of “material impact” focuses mainly on two aspects. One, the impact on the issuer’s finances; for example, an incident that could result in the issuer’s incurring a huge penalty or compensation. Two, the impact on the issuer’s business operations; for example, it may be unable to engage in its main business due to a failure to secure relevant qualifications or failure to complete environmental protection procedures.

Material impact non-compliances can be further divided into two situations: one resulting in the issuer failing to satisfy listing requirements and the other being insufficient to constitute a substantive obstacle to listing. As for the first situation, the issuer can only file after rectification and operating in a compliant manner for a certain length of time. As for the other scenario, the issuer may file, but must disclose in detail the non-compliance incident in the listing documents, including the specific circumstances of the said matter, the attendant risks, whether penalties had been or could be assessed, the maximum amount of any potential fines, the confirming opinion of the competent authority on the issue and the corrective measures taken. Also, the issuer needs to ensure that it has completed rectification of the non-compliance incident before listing.

Systemic non-compliances. Such non-compliance incidents do not reach the level of “material impact”, but because they are repeated and/or continuous violations of the law, they will cause HKEx to worry that the issuer, or its directors and/or senior management personnel, lack the capabilities to operate or are deliberately operating in a non-compliant manner. Accordingly, the issuer will also have to disclose in detail such non-compliance incidents in its listing documents, the scope of such disclosure being similar to the requirements in respect of “material impact non-compliances”. Among the sections of the prospectus that may be involved are “Overview and Synopsis”, “Business” and “Risk Factors”. HKEx does not compel issuers to rectify such non-compliance incidents, but rather gives the decision-making power to the directors and sponsor of the issuer.

Immaterial non-compliances. All other non-compliance incidents fall under the category of immaterial non-compliance incidents. HKEx neither requires their disclosure nor compels their rectification.


This column proposes to analyze certain typical systemic non-compliances of domestic enterprises and provide certain ideas of approaches to resolving them.

陈炜 CHEN WEI  锦天城律师事务所高级律师  Senior Associate AllBright Law Offices
Senior Associate
AllBright Law Offices

Failure to pay social insurance premiums punctually and housing reserve contributions in full. If an issuer fails to pay social insurance premiums punctually, the social insurance authority may order it to pay within a specified period of time or make up the difference and pay a surcharge for the overdue amount. If it still fails to pay, it will face a fine of not less than one time and not more than three times the outstanding amount. If an issuer is in arrears in the payment of, or has underpaid its contribution to, the housing reserve, the housing reserve authority may order it to pay up within a specified period of time. If it still fails to do so, the court may proceed with enforcement.

Among the targeted approaches to resolve the same are having an auditor calculate the unpaid social insurance premiums, housing reserve contributions and late payment fine for the results season and confirm whether provisions need to be made; or achieving full compliance before filing.

Failure to carry out recordal/registration of leased premises. If an issuer fails to carry out lease registration/recordal with the local real estate authority after entering into a premises lease contract, the competent authority may order it to rectify the matter within a specified period. If it fails to do so, the competent authority will fine it not less than RMB1,000 (US$144.5) and not more than RMB10,000.

Among the targeted approaches to resolve the same are the issuer endeavouring to avoid failing to register all of the leased property, so as to ensure that recordal of the lease contract for its main business premises is completed; or the issuer making an undertaking to the effect that if the competent authority demands that recordal/registration be carried out, it will promptly do so and avoid a fine.

Commencing use of self-built premises without carrying out acceptance. If the owner delivers possession of the premises without arranging for the completion acceptance check, the competent authority has the right to impose a fine of not less than two per cent and not more than four per cent of the contract price.

Among the targeted approaches to resolve the same are verifying whether use of the premises has actually commenced, whether the construction procedures have all been carried out and whether the relevant completion recordal procedures (including civil defence, fire safety, environmental protection, etc.) have been completed. If the premises are the issuer’s main place of business and rectification cannot be completed before filing, use of such premises should be suspended. In addition to the foregoing approaches, the issuer’s securing of a compliance certificate from the relevant competent authority, providing evidence that it has not been subjected to penalties during the results season is a common resolution approach to addressing the abovementioned systemic non-compliances.

Under most circumstances, the said systemic non-compliances do not have a substantive impact on the issuer’s finances or business operations, but a substantial disclosure thereof in the prospectus will still draw particular attention of the HKEx and investors to the issuer’s compliance in its operations, which could be disadvantageous to the listing. Accordingly, we would recommend that an issuer pay the necessary attention to such non-compliance incidents at the project preparatory stage, endeavour to effect rectification as soon as possible and, to the maximum extent possible, reduce the risk exposure from such previous non-compliance incidents.

Shen Cheng is a partner and Chen Wei is a senior associate at AllBright Law Offices

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