In the early trading hours of April 2, 2024, more than 60 Hong Kong-listed firms published announcement of suspension for trading due to failure to disclose their 2023 financial results by March 31, 2023. Multiple real estate companies, construction companies and energy companies were involved.
According to the Listing Rules issued by the Stock Exchange of Hong Kong (hereinafter referred to as "the Exchange"), it will de-list the companies that have been suspended for trading for 18 consecutive months. The Exchange can also issue an announcement of delisting to certain suspended companies at any time, depending on the specific circumstances and give them a relatively short period of time (“Specific Remediation Period”). If such companies fail to resume stock purchases and sales within the Specific Remediation Period, the Exchange will de-list their shares in accordance with the terms of the Listing Rules Section 6.10.
In addition, as required by the Exchange, the suspended companies are responsible for disclosing relevant information, including: (i) the Insider Information required by the Securities and Futures Ordinance, and (ii) all information required by the Listing Rules (such as financial performance, required disclosure and related party transactions).
We note that the main reason for this massive wave of suspension was the failure of the listed companies to disclose their annual performance before the deadline. The fundamental cause is that for the listed companies to meet the established performance indicators and investor expectations under such a difficult and competitive environment, the risk as well as the motivation of conducting internal corruption and financial statement fraud spiked.
In addition to the newly suspended 60 companies, according to the Exchange's disclosure of the “monthly report on long-suspended companies (Main Board)” issued on March 28, 2024, as of March 28, 2024, 53 of the Hong Kong Main Board listed companies, are suspended for three months or above.
At the same time, according to the disclosure, the "Criteria or Guidelines for resumption of trading / Main outstanding issues” which was given by the Stock Exchange to the Main Board listed companies that have been suspended for 3 months or above, included several references to "conduct independent forensic investigation, disclose the investigation results and take appropriate remedial measures", "conduct an independent forensic investigation on the audit issues raised by the auditors, evaluate the impact of the relevant issues on the company's business operation and financial condition, disclose the investigation results and take appropriate remedial action", and "conduct independent internal monitoring review and certify that the company has set up adequate internal controls and procedures".
Therefore, when the auditors of the listed companies identify potential fraud risks or financial fraud within the company, the timely intervention of the independent forensic investigation team plays a pivotal role in whether the listed companies can lift the suspension within the prescribed period.
From our perspective, the suspended companies should communicate with their auditors in a timely manner if they intend to lift the suspension within the prescribed period and avoid the risk of delisting; form an independent investigation committee in a timely manner to address potential risks identified; and engage a forensic investigation team to conduct the independent investigation work.
In addition, it's important for the listed companies to pay more attention to compliance, anti-fraud and related risk monitoring during the business course, investigate the red flags as soon as they are identified and communicate the results of the investigation to the auditor in a timely manner, in order to avoid the risk of suspension due to failure to announce financial results on time.
Originally published by Hong Kong lawyer, May 2024.
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