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Guidance Note A practical guide to good governance The Hong Kong Institute of Chartered Secretaries Chartered Secretaries. More than meets the eye. Investor Relations Part I March 2009 • Reference number: 8 The Hong Kong Institute of Chartered Secretaries Hong Kong Office 3F Hong Kong Diamond Exchange Building, 8 Duddell Street, Central, Hong Kong Tel: (852) 2881 6177 Fax: (852) 2881 5050 E-mail: email@example.com Website: www.hkics.org.hk Beijing Representative Office Rms 1014-1015, 10F Jinyu Mansion No 129 Xuanwumen Xidajie, Xicheng District, Beijing, China PC 100031 Tel: (8610) 6641 9368 Fax: (8610) 6641 9078 E-mail: firstname.lastname@example.org Website: www.hkics.org.hk Investor Relations - Part I 1. Introduction Investor relations is the communication of the relevant and necessary information by which the investment community can consistently make an informed judgment about the fair value of a company’s shares and securities. 1 Investor Relations Society, UK Investor relations is a strategic management responsibility that integrates finance, communication, marketing and securities law compliance to enable the most effective two-way communication between a company, the financial community, and other constituencies, which ultimately contributes to a company’s securities achieving fair valuation. 2 National Investor Relations Institute, US While the two definitions may have a different focus, they all emphasise the need for communication to the investment community in order to assist the company’s shares and securities to achieve fair valuation. The US definition adds a securities law compliance dimension to the investor relations activities. Maintaining good communications and a high standard of transparency between investors and listed companies will help the listed companies to be more appealing in the market and will ultimately reduce the cost of capital by lowering the perceived risk. The role of investor relations at public listed companies is getting more important. This is driven by the tightened disclosure and reporting requirements; the greater input of investor relations officers (IROs) to the decision-making process of the board of directors; and the increased recognition of the strategic role of IROs in today’s corporate landscape. This guide is a two-part series: Part one explores the compliance aspect of investor relations by looking into the disclosure obligations of companies listed on The Stock Exchange of Hong Kong Limited (the ‘Exchange’). Part two will be more practice-oriented and describe the participation of company secretaries in investor relations activities, including some practice tips. 1 The UK Investor Relations Society posts this definition on its internet site. See http://ir-soc.org.uk//index.asp?pageid=11. 2 The US professional organization of investor relations officers, National Investor Relations Institute, adopted this definition in March 2003. See the institute internet site at http://www.niri.org/about/mission.cfm. 1 2. Disclosure requirements under the Hong Kong Listing Rules It is important that every listed issuer is familiar with the disclosure requirements under the Hong Kong Listing Rules. To ensure full compliance with these disclosure obligations, an internal system for compliance should be in place. Relevant sections of the Hong Kong Listing Rules (Main Board) are: (i) Chapter 2 – Presentation of Information (ii) Chapter 13 – Continuing Obligations (iii) Chapter 14 – Notifiable Transactions (iv) Chapter 14A – Connected Transactions (v) Appendix 14 – Code on Corporate Governance Practices (vi) Appendix 16 – Disclosure of Financial Information (vii) Appendix 23 – Corporate Governance Report The following materials issued by the Exchange are also relevant : (viii) Guide on disclosure of price-sensitive information, January 2002 (ix) Letter issued to issuers, ‘Recent economic developments and the disclosure obligations of listed issuers’, dated 31 October 2008 (i) Chapter 2 - Presentation of Information Rule 2.13 of the Listing Rules specifies the clear obligation of an issuer to provide shareholders and investors with information that is accurate and complete in all material respects. There are regular comments to the listed issuers from the Exchange in relation to the timely and orderly disclosure of price-sensitive material to the market as a whole. Regarding the mode of communication with shareholders, the new Rule 2.07(2A) which is effective from 1 January 2009 permits listed issuers, subject to meeting certain conditions, to supply corporate communications to shareholders by electronic means. 2 (ii) Chapter 13 – Continuing Obligations Listed issuers have a continuous disclosure obligation under Main Board Listing Rule 13.09(1) to keep the Exchange, members of the issuer and other holders of its listed securities informed as soon as reasonably practicable of any information relating to the group which: (a) is necessary to enable them and the public to appraise the position of the group; or (b) is necessary to avoid the establishment of a false market in its securities; or (c) might be reasonably expected materially to affect market activity in and the price of its securities. This obligation is supplemented by the following three obligations under Note 11 to Main Board Listing Rule 13.09(1) for the issuer to notify the Exchange, members of the issuer and other holders of its listed securities without delay where (a) to the knowledge of the directors there is major market upheaval in the industries, countries or regions where the issuer has significant operations or transactions, or significant changes in exchange rates of currencies that are key to its operations; (b) to the knowledge of the directors there is such a change in the issuer’s financial condition or in its performance of its business or in the issuer’s expectation of its performance that knowledge of the change is likely to lead to substantial movement in the price of its listed securities; (c) the issuer has committed significant resources to an activity which is non-core business and this has not previously been disclosed. In addition, under Rule 13.10, an issuer shall respond promptly to any enquiries made of the issuer by the Exchange concerning unusual movements in the price or trading volume of its listed securities or any other matters by giving such relevant information as is available to the issuer or, if appropriate, by issuing an announcement in accordance with Rule 2.07C containing a statement to the effect that the issuer is not aware of any matter or development that is or may be relevant to the unusual price movement or trading volume of its listed securities and shall also respond promptly to any other enquiries made of the issuer by the Exchange. One of the biggest challenges facing the IROs is crisis management. During a crisis, open communication with the external parties is very important. The IROs should take a proactive, determined and open attitude. There is no hard and fast rule in crisis management. Following 3 is the rule of thumb: (1) Understand and state the facts; (2) Understand your audience; (3) Communicate with the key audience; (4) Be proactive; (5) Prepare for every contingency; (6) React appropriately; (7) Speak with one voice. (iii) Chapter 14 – Notifiable Transactions Rule 14.34 states that as soon as possible after the terms of a share transaction, discloseable transaction, major transaction, very substantial disposal, very substantial acquisition or reverse takeover have been finalised, the listed issuer must in each case: (1) Inform the Exchange; and (2) Publish an announcement (iv) Chapter 14A – Connected Transactions Under Rules 14A.47, 14A.48 and 14A.49, announcement, independent shareholders’ approval or circular are required for connected transactions unless waivers are obtained from the Exchange or exempted under the de minimis transaction rule. (v) Appendix 14 - Code on Corporate Governance Practices Section E of Appendix 14 ‘Code on Corporate Governance Practices’ of the Listing Rules mentioned about communication with shareholders. The principle of effective communication is to maintain an on-going dialogue with shareholders and in particular, use annual general meetings or other general meetings to communicate with shareholders and encourage their participation. The related code provisions which require the issuers to comply with are as follows: (a) In respect of each substantially separate issue at a general meeting, a separate resolution should be proposed by the chairman of that meeting; and 4 (b) The chairman of the board should attend the annual general meeting and arrange for the chairmen of the audit, remuneration and nomination committees (as appropriate) or in the absence of the chairman of such committees, another member of the committee or failing this his duly appointed delegate, to be available to answer questions at the annual general meeting. The chairman of the independent board committee (if any) should also be available to answer questions at any general meeting to approve a connected transaction or any other transaction that is subject to independent shareholders’ approval. (vi) Appendix 16 – Disclosure of Financial Information Paragraph 32 of Appendix 16 of the Listing Rules states that a listed issuer shall include in its annual report a separate statement containing a discussion and analysis of the group’s performance during the financial year and the material factors underlying its results and financial position. It should emphasise trends and identify significant events or transactions during the financial year under review. The minimum requirements for the contents of the management discussion and analysis (‘MD&A’) section are outlined in paragraph 32. The MD&A section of the annual report contains the key information of the listed issuer as it provides an analysis from management’s perspective of the company’s business and financial performance. All information subsequently released during the investor meeting should be consistent with the information already disclosed in the MD&A section and the financial statement. (vii) Appendix 23 – Corporate Governance Report Section 3(c) recommends the following disclosures in the Corporate Governance Report to promote better investor relations: (1) Any significant changes in the listed issuer’s articles of association during the year; (2) Details of shareholders by type and aggregate shareholding; (3) Details of the last shareholders’ meeting, including the time and venue, major items discussed and particulars as to voting; (4) Indication of important shareholders’ dates in the coming financial year; and (5) Public float capitalisation as at the end of the year. 5 (viii) Guide on disclosure of price-sensitive information, January 2002 (the ‘Guide’). The Guide is intended to help issuers and their directors to fulfil their obligations under the Listing Rules. It does not form part of the Listing Rules. Following are the key paragraphs in relation to the daily jobs of IROs: (a) Questions from analysts and correction of analysts’ forecasts Issuers should have their own policy on the extent to which analysts’ questions should be answered. Issuers should decline to answer analysts’ questions where individually or cumulatively the answers would provide unpublished price-sensitive information. Directors should resist pressure from analysts to provide or comment on data that may involve the dissemination of unpublished price-sensitive information. Where any information is wrongly interpreted by analysts and is materially incorrect, issuers should ask the analysts to correct it immediately. (b) Draft reports from analysts Under normal circumstances, issuers should make no comment on an analyst’s financial projections or opinions. If an analyst sends an issuer a draft report for its comment, the issuer can, of course, refuse to respond. Where the report contains inaccurate information already in the public domain or not price-sensitive, issuers should inform the analyst for there is no advantage to any party having inaccurate information being circulated. If an issuer is aware of unpublished price-sensitive information that would correct a fundamental misconception in the report, it should consider making public disclosure of such data and at the same time correcting the report. (c) Conduct of meetings with analysts Some issuers are concerned that they may be misinterpreted or mistakenly accused of providing price-sensitive information following meetings with analysts. 3 Such 3 A research analyst was guided by an issuer to revise his profit estimate. After obtaining the information, the analyst broadcasted the information internally. The Securities and Futures Commission found that the analyst was not acting fairly to other members of the investing public who were not aware of the information. The Securities and Futures Commission publicly reprimanded the research analyst for selective disclosures of price-sensitive information, whereas the Exchange also imposed a public censure on the issuer for breach of the listing agreement for selective disclosure of price- sensitive information. 6 risk can be reduced by having appropriate internal procedures. These procedures could, for example, include ensuring that more than one company representative and the compliance officer, if any, are present during these meetings and that accurate records of all discussions are kept. Alternatively, issuers could consider opening up such meetings to the press and the public, or announcing in advance the fact of an analysts’ meeting and, where price-sensitive information is to be made public, publishing at the same time the information to be disclosed as required by the Listing Rules. Issuers should also be aware of the possibility of analysts obtaining price-sensitive information during visits to the issuer’s premises. Employees meeting the analysts during the visit should be briefed as to the extent and nature of information that can be communicated. (ix) Recent economic developments and the disclosure obligations of listed issuers dated 31 October 2008 In the wake of the recent economic developments in Hong Kong and other parts of the world, on 31 October 2008, the Exchange issued a letter to all listed issuers reminding directors and senior management of the applicable continuous disclosure standards and providing further interpretative guidance and observations on the Exchange's expectations for disclosure obligations of listed issuers. The letter emphasises that continuous disclosure should be carried out in the ‘spirit’ of the Listing Rules, i.e. to ensure that investors have and can maintain confidence in the market. It reminds directors and senior management that in periods of market volatility and turmoil, the market is more sensitive to information concerning the financial performance of the listed issuers and that they should take this into account when deciding whether information is potentially price-sensitive and be disclosed. The letter ends with a non-exhaustive compliance checklist for directors on continuous disclosure obligation procedures. We will discuss this in greater detail in Part 2. 7 3. Takeovers Code and Share Repurchase Code (the ‘Codes’) The Codes do not have the force of law and should not be interpreted as if they were statutes. The Codes represent a consensus of opinion of those who participate in Hong Kong’s financial markets and the Securities and Futures Commission regarding standards of commercial conduct and behaviour considered acceptable for takeovers, mergers and share repurchases. The primary purpose of the Codes is to treat shareholders affected by takeovers, mergers and share repurchases fairly. The Codes seek to achieve fair treatment by requiring equality of treatment of shareholders, mandating disclosure of timely and adequate information to enable shareholders to make an informed decision as to the merits of an offer and ensuring that there is a fair and informed market in the shares of companies affected by takeovers, mergers and share repurchases. The Codes also provide an orderly framework within which takeovers, mergers and share repurchases are to be conducted. 4. Internal Policy for Disclosure IROs are encouraged to implement and publish a formal disclosure policy in line with the listed entity’s corporate governance policy. Paragraph 14 of the Guide provides a road map on how to develop a communication policy and procedure for the systematic dissemination of price-sensitive information. Such procedures include setting up a list of the types of information which is considered to be price-sensitive for the company, with regular review to ensure that the list is kept up-to-date; clearance with a compliance officer before disclosure of information; and assign specific directors or senior officers to communicate with external parties. To withstand pressure to disclose prematurely confidential price-sensitive information, the issuers should consider making their internal policies on communication known outside the company. The directors should put in place appropriate procedures to keep price-sensitive information confidential until a formal announcement is released. If necessary, issuers should consult their professional advisers to determine whether information is price-sensitive. 8 5. Activities of IROs There are a number of activities over a financial year. Some of them are statutory required and some are at the discretion of the IROs. In carrying out the various activities, IROs should bear in mind that they have to comply with the requirements under the Listing Rules and its internal system for disclosure. When preparing the press release and company presentation, the information disclosed should be consistent with published announcement or financial statements. When having one-on-one meetings and group briefings, it should be noted that the meetings are used to provide background to support the already publicly disclosed information, as well as to articulate the following: (1) Long term strategy; (2) Organisation history, vision and goals; (3) Management philosophy and the strength and depth of management; (4) Competitive advantages and risks; (5) Industry trends and issues; (6) Key profit drivers in the business. Earning forecasts should not be discussed unless it has previously been released by the listed issuer by way of an announcement or in an initial public offer prospectus. It should be reminded that no undisclosed price-sensitive information be discussed in any meeting with an investor. The basic principle is to make sure that information is disclosed to the market as a whole and all users of the market have simultaneous access to the same information. To ensure consistency of disclosure, the IROs or other authorised representatives should be present at all the meetings with the investors. The listed issuer should keep all meeting records for future reference. 6. Investor Relations on Issuers’ Internet Sites Internet is an effective means to communicate with investors. Some listed issuers have developed dedicated investor relations page on their internet sites. 9 7. Conclusion Compliance with the legal rules governing disclosure will increase the listed issuer’s transparency. In turn, this will boost investors’ confidence and could, in the long term, promote market efficiency. In times of market volatility and turmoil, the investment community is likely to be more sensitive to information concerning the financial performance of listed issuers. Keeping an open channel with the investors is therefore vital for the issuers and we should expect to see the IROs playing a more prominent role in the corporate boardrooms. In the next part of the guide, we will look into how company secretaries participate in some of the investor relations activities. 10 Further Readings Hong Kong Exchanges & Clearing Limited • Guide on disclosure of price-sensitive information, January 2002 The Stock Exchange of Hong Kong Limited • Chapter 13 of the Rules Governing The Listing Of Securities on the Exchange • Practice note 11 on suspension and restoration of dealings • News release on clarification of formal requirements for profit forecasts by main board issuers and obligations of main board and GEM issuers on the release of price-sensitive information, 11 September 2006 • Letter issued to issuers, ‘Recent economic developments and the disclosure obligations of listed issuers’, dated 31 October 2008 Securities and Futures Commission • Circular to analysts on handling non-public price-sensitive information, 2004 • Listing Regulatory Handbook (Indicative Draft), January 2005 Australasian Investor Relations Association • Best Practice Investor Relations: Guidelines for Australasian Listed Entities, May 2006 11 Acknowledgement The Institute would like to thank Dr Eva Chan, Head of Investor Relations, C C Land Holdings Limited for preparing this general guide and the following people for reviewing the various drafts: Names below are in alphabetical order: Mr Phillip Baldwin, Chief Executive, HKICS Mrs April Chan, Vice President, HKICS Mr Ken Chan, Company Secretary, China Aerospace International Holdings Limited Mr Richard W.K. Leung, Immediate Past President and Chairman, Technical Consultation Panel, HKICS Dr Brian Lo, Vice President & Company Secretary, APT Satellite Holdings Limited Mr David Ng, Director, Lippo Asia Ltd. Mrs Natalia Seng, President, HKICS 12 The copyright of this guide vests with the HKICS. No part of this guide may be copied, reprinted or excerpted in any way or in any place for any purpose, unless prior written consent is obtained from the HKICS. The information given in this publication is provided in good faith with the intention of furthering the understanding of the subject matter. Whilst we believe the information to be accurate at the time of publication, the HKICS and its staff cannot, however, accept any liability for any loss or damage occasioned by any person or organisation acting or refraining from action as a result of any views expressed therein. If the reader has any specific doubts or concerns about the subject matter they are advised to seek legal advice based on the circumstances of their own situation.