To further fulfil the commitment to protect personal information, mainland China promulgated the new Personal Information Protection Law (PIPL), which gives individuals rights to control and decide how, with whom and for what purposes to share, analyse or process their personal information.
A typical compliance investigation is likely to involve collecting and analysing employees’ personal information. The internal investigation team of the company concerned may also engage external professionals to assist and may share information with its headquarters outside mainland China. According to the PIPL, such activities are subject to the general or separate consent of the subject of personal information. However, given the sensitivity and confidentiality of the investigation, it may be difficult to obtain the required consent. Therefore, the new PIPL obligations will bring real challenges to internal investigations conducted by enterprises in implementing corporate compliance and internal control systems.
Investigation activities involving personal information include: collecting personal information of employees (such as education background and work experience), examining records of work emails that may violate compliance activities or matters, and using information provided by whistle-blowers. The process also includes obtaining employees’ sensitive information, such as bank accounts, expense and reimbursement records, and their locations during relevant periods, and accessing and processing personal information, including personal information of business partners and customers.
Once an investigation begins, it will be difficult to obtain the investigated person’s explicit consent to provide personal information. Article 13 of the PIPL sets out six circumstances that warrant exemptions from obtaining explicit consent in processing personal information, three of which are related to compliance investigations. Nevertheless, the exemptions have certain limitations.
Under the current rules, it is difficult in practice to draw a line between circumstances requiring explicit consent and circumstances warranting exemptions in internal investigations. Companies that conduct internal investigations should be aware of the limitations of exemptions, rather than fully relying on them to avoid the obligations stated in the PIPL. If these problems are not solved in advance, the reliability of internal investigation report may be impaired. In the worst case, they may cause the investigation to fail.
In recent years, listed companies have shown greater uncertainties in operating and financial conditions amid increasing economic and political complexities globally, Covid-19 resurgences and the market environment. Under the Hong Kong regulatory framework, listed companies should focus on the following aspects of compliance.
Is there any “insider information”? The first factor to consider. Changes in financial condition will likely significantly impact the securities prices of listed companies. The directors of listed companies must quickly assess and identify whether the event or situation constitutes “insider information” under part XIVA of the Securities and Futures Ordinance of Hong Kong. A listed company must, as soon as reasonably practicable after it becomes aware of any insider information, disclose the information to the public. Although the “safe harbour” provisions under the Ordinance, permit listed companies to delay in disclosing insider information under several circumstances, a listed company is not allowed to delay the disclosure of changes in its financial condition or performance. If such changes constitute insider information, they should be disclosed to the public by a timely announcement.
Is it necessary to request a trading halt or suspension? Communicate with HKEX promptly. A listed company that cannot announce inside information promptly, where confidential information has been leaked, should apply to HKEX for a trading halt or suspension until it announces the insider information.
To maintain and ensure an orderly, well-informed and fair market, HKEX will also require listed companies to publish announcements or halt trading in their securities when it deems appropriate, such as asking listed companies to explain unusual fluctuations in their securities price and/or trading volume. In such circumstances, the listed company should maintain timely and close communication with the HKEX regulatory team.
What are the specific financial difficulties? Special disclosure requirements under Hong Kong Listing Rules. In addition to the aforementioned announcement concerning insider information, the Hong Kong Listing Rules set out circumstances for disclosure by listed companies in financial difficulties, mainly including:
(1) Credit default. Where a listed group (as the borrower) breaches the terms of its major loan agreements, such that the lenders may demand immediate repayment, or the listed company’s controlling shareholder has pledged its interest in the listed company’s shares to secure the listed group’s debts, the listed company must announce such information as soon as reasonably practicable (rules 13.17 and 13.19 of the Hong Kong Listing Rules).
(2) Sale transactions and financing arrangements. Self-rescues of listed companies in financial difficulties include selling the existing assets/business/equity for liquidity to mitigate the crisis, or financing by issuing additional equity shares and debt securities. Generally, relevant arrangements will constitute transactions under Chapter 14 of the Hong Kong Listing Rules. If connected parties are involved, they may also constitute connected transactions under Chapter 14A. The listed company should make an overall assessment and identify its compliance obligations in advance, including announcing relevant transactions.
Transaction arrangements are often urgent. Even so, listed companies must go through all the compliance procedures before proceeding with transaction arrangements. When a listed company enters into specific transaction arrangement documents, it should also obtain the approval of its shareholders’ meeting and/or the approval of Hong Kong and other competent regulators (as the case may be) as a condition for the effectiveness of transaction agreements and financing documents.
(3) Business contraction. Where a listed group is in financial difficulties that seriously impair its ability to continue its business or have led to the suspension of some or all of its operations, and/or has net liabilities recorded on its balance sheet date, HKEX may deem that it does not have a substantive business and/or its business is not viable and sustainable in the long term (rule 13.24 of the Hong Kong Listing Rules). In such circumstances, the listed company may request a suspension of trading, or HKEX may directly order the listed company to suspend trading and grant a transitional period for remedial action.
A listed group usually needs to conduct business or debt restructuring during the remedial period to improve its operating performance and apply to HKEX for resuming trading. During that period, the listed company should make timely announcements about HKEX decisions, the suspension/resumption of trading, and the review results (if any) of the Listing Committee.
(4) Bankruptcy liquidation. Serious financial difficulties may cause the major business and assets of a listed group or its controlling shareholder to be taken over by a receiver, or lead to voluntary or compulsory winding-up or bankruptcy of the listed company itself or its major subsidiaries or similar arrangements in the place of incorporation. The Hong Kong Listing Rules provide detailed rules on the disclosure of such matters, which deserve special attention (rule 13.25). For example, a listed company must publish announcements of events such as the appointment of a receiver or manager, the presentation of any winding-up petition and the making of any judgment, declaration or order by any court or tribunal of competent jurisdiction. In addition, the listed group may conduct some transactions subject to trading rules that must be disclosed in the course of bankruptcy liquidation, such as selling the assets of subsidiaries. In such circumstances, the listed company must conduct an overall assessment in advance to identify the approval, disclosure and other compliance procedures to be followed.
Business Law Digest is compiled with the assistance of Baker McKenzie. Readers should not act on this information without seeking professional legal advice. You can contact Baker McKenzie by e-mailing Howard Wu (Shanghai) at firstname.lastname@example.org