The number of trading suspensions of companies listed on the Stock Exchange of Hong Kong (HKEX) has increased dramatically in 2024, raising concerns about the stability and resilience of these companies. According to the HKEX’s monthly prolonged suspension status report (Main Board), as of 31 July 2024, 77 Hong Kong-listed companies were suspended for three months or more, compared to 53 as of 29 December 2023 – a 31% increase in just seven months.
Issues that result in suspension can have severe repercussions if left unresolved, including potential delisting, damage to the listed company’s reputation, diminishing stock liquidity and value, loss of investor support and confidence, and a direct threat to business continuity.
In this article, we examine the best practices to bolster listed company resilience in the face of possible trading suspension in Hong Kong.
Typical reasons for trading suspensions
Excluding temporary trading suspensions arising from corporate activities or the announcement of sensitive information, there are many reasons for the prolonged suspension of a listed company. These include:
1. Delayed disclosure of financial results
Hong Kong-listed companies may face trading suspensions if they do not disclose financial results on time due to disruptions, such as auditor or key management changes, which can be compounded by challenges in data collection and complex financial issues. On 2 April 2024, more than 60 listed companies announced trading suspensions due to failure to disclose their 2023 financial results by 31 March 2024, including those in real estate, construction and energy sectors. This wave of suspensions was partly due to the resignation of auditors and key management personnel, which delayed financial reporting.
2. Fraudulent financial issues uncovered by auditors
When auditors uncover fraudulent financial issues or detect potential fraud risks during an audit, they may issue a disclaimer of opinion, prompting trading suspensions until the company addresses these concerns. Golden Century International Holdings Group Limited was suspended in April 2023 due to audit issues that resulted in a disclaimer of opinion. The company was required to address these issues and publish its outstanding financial results before resuming trading.
3. Short seller allegations
Allegations from short sellers about financial irregularities, such as revenue inflation, asset overstatement or off-book liabilities, can lead to trading suspensions if not promptly addressed by the company. The trading suspension of Luckin Coffee is a notable example, where short seller allegations that it had inflated its sales figures resulted in a significant drop in stock price and regulatory penalties. This underscores the impact of short seller reports in exposing financial misconduct and the repercussions for companies involved.
4. Whistleblower allegations against senior management
Reports of misconduct by senior management, such as asset misappropriation or undeclared related party transactions, can result in trading suspensions pending investigations and corrective action. Tempus Holdings Limited was suspended in April 2023 due to allegations of misappropriation of funds by an executive director. The company was required to conduct an independent forensic investigation and review its internal controls to address the allegations before trading could resume.
5. Questions over the company’s solvency
Fundamental issues like potential insolvency due to cash flow difficulties or significant litigation threaten a company's stability and may lead to trading suspensions or delisting under HKEX rules. EcoGreen International Group Limited has been suspended since 4 April 2022 due to debt issues and cash flow problems. It failed to fulfill the resumption requirements, with its listing cancelled in July 2024.
According to the Listing Rules issued by the HKEX, it will de-list companies whose shares have been suspended from trading for 18 consecutive months. Based on the HKEX's 2023 Prolonged Suspension Status Report, this policy led to the delisting of 34 Main Board companies, with an additional 14 companies delisted since January 2024. This underscores the importance of timely remedial actions to avoid prolonged suspensions.
One of the most challenging issues for Hong Kong-listed companies to respond to is allegations of fraud. The percentage of Hong Kong-listed companies accused of fraud by regulators more than doubled to 31% in 2023 amid stricter regulations. The 2024 ACFE Report to Nations illustrates that financial statement fraud and corruption schemes compound more quickly and are more costly than other schemes. While some listed companies commit financial statement fraud to make the company look healthier or more profitable to mislead key stakeholders, many companies face fraud allegations that are unsubstantiated.
Company’s duties to address potential fraud allegations
When auditors identify potential fraud risks or financial fraud within a listed company, the company should communicate with the auditors in a timely manner to lift the suspension within the required period and avoid the risk of delisting. The resumption guidance given by the HKEX includes conducting an independent forensic investigation on the audit issues raised by the auditors, disclosing investigation results and taking appropriate remedial measures.
However, if a listed company is suspended due to allegations – from whistleblower reports or short seller reports alleging financial and/or management fraud – the situation could be more complicated, and a public announcement would not be sufficient. Directors and Independent Executive Directors (“INEDs”) should quickly address the issues and communicate with shareholders to:
- Ensure that allegations are properly triaged and investigated
- Protect the company’s integrity and reputation
- Restore the confidence of key stakeholders and investors
- Limit the exposure of Directors and INEDs to personal legal liability
To seek the resumption of trading as quickly as possible, the company’s Directors and INEDs should form an Independent Special Committee to conduct an independent investigation, engaging external advisors, such as regulatory lawyers, forensic consultants and public relations experts, to address the allegations or the underlying issues that led to the suspension.
Key components of an effective independent investigation
The independent investigation should provide a factual conclusion that addresses the allegations: whether the allegations are substantiated, how everything happened, who was involved, the business impact, financial losses, root causes, remediation suggestions and so on.
Here are the key components of an effective investigation:
1. Collaborate with external counsel and forensic consultants
The Independent Special Committee should select a point of contact who can closely work with external advisors, exercise good judgment and make key decisions throughout the investigation.
2. Develop a carefully designed work plan
The work plan should define key issues and objectives. Its review scope should be focused but comprehensive, applying a comprehensive investigation tool kit that includes access to internal and external sources of information, as well as assigned roles and responsibilities.
3. Implement the work plan effectively
Use evidence preservation and collection techniques, efficient and cost-effective technology-enabled data and document reviews, interviews conducted under legal privilege, and carefully managed data access to ensure compliance with local data privacy laws.
4. Update and report regularly
Apart from regular progress updates and a timeline for interim and final reporting, external counsel and forensic consultants should immediately inform the Independent Special Committee of any significant findings so that investigative procedures and focus can be pivoted in a timely manner.
5. Communicate with key stakeholders
External advisors should have thoughtful discussions with the Independent Special Committee before responding to key stakeholders. The financial impact should be quantified, and internal control deficiencies should be identified to allow development of appropriate remediation plans.
Here are some common pitfalls that listed companies should avoid when conducting independent investigations:
- The scope of the independent investigation is insufficiently focused, and the review methodology is not comprehensive or thorough enough to draw conclusions regarding the allegations.
- The independent investigation is not conducted in a timely manner. This could result in crucial evidence being destroyed or lost.
- The independent investigation is not conducted in a confidential manner and under legal privilege. This is necessary to protect the integrity of the investigation and the reputations of all relevant parties.
- An effective remediation plan showing that identified internal control deficiencies will be properly addressed and rectified is not shared with the regulator. This is typically a condition for resumption of trading.
- Even if a good remediation plan is developed, many companies subsequently fail to dedicate adequate resources to implement and test remediation controls.
Fostering long-term resilience through better governance
Conducting an independent investigation in a timely and effective manner is the short-term solution for addressing potential risks that have been identified. It is also a way for companies to avoiding the immediate crisis of delisting. However, to ensure business continuity, it is important for listed companies to develop a long-term governance strategy that enhances corporate culture and resilience, and which mitigates risks through an effective compliance framework.