The Hong Kong Stock Exchange has taken disciplinary action against CHK OIL (00632) and a former director. The Exchange publicly censured the company and its former Executive Director, CEO, and Chairman, Mr. Yu Jiyuan, for actions that harmed investor interests.
According to the ruling, the company published financial results and reports that were seriously inaccurate, incomplete, and/or misleading, constituting a breach of the Listing Rules. Mr. Yu was found to have failed for over two years to report issues concerning a major company asset to the Board of Directors, the Audit Committee, and the auditors, including the loss of said asset.
The company, through a subsidiary, held extraction rights for certain oil and gas fields under a lease agreement with local US government authorities. Continued production was required to maintain these rights. In June 2022, the authorities issued a written order demanding the resumption of production in some fields under the lease. As the company did not respond to this demand, the authorities terminated the lease in November 2022.
During this critical period, Mr. Yu was aware of the written order and the subsequent termination of the lease but did not inform the company's Board. The Board only became aware of the matter in August 2024. Mr. Yu had multiple opportunities where he could and should have reported the order and the lease termination to the Board, the Audit Committee, and the auditors, yet he took no action.
Despite knowing that the terminated lease was a major asset and that its loss would severely impact the financial condition of the company and its subsidiaries, he allowed the company to continue carrying the lease on its financial records. Evidence showed that the company's failure to remove the terminated lease from its balance sheet led to a significant overstatement of its total assets by approximately 65.5% and 58.1% for the fiscal years ending December 31, 2022, and 2023, respectively. Consequently, the published financial statements were seriously inaccurate, incomplete, and/or misleading.
The investigation further found that Mr. Yu delegated responsibilities related to the lease and communications with government officials to an employee of the subsidiary. However, he failed to ensure the employee was sufficiently capable of handling these matters. After the delegation, he did not actively supervise or guide the employee by staying adequately informed and following up on developments.
The Exchange determined that Mr. Yu failed to fulfill his director duties and responsibilities under the Listing Rules, and the breaches were serious. Both the company and Mr. Yu agreed to settle the disciplinary action. They did not contest the respective violations and accepted the sanctions imposed by the Listing Committee.
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