Listing Rules and Guidance: Contents


 
 

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LD10-2

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HKEx LISTING DECISION
Cite as HKEx-LD10-2 (January 2000)

Summary
Name of Parties Company A — a listed company and the parent of Company B and Company C
Company B — a subsidiary of Company A spun off from Company A the previous year
Company C — a subsidiary of Company A proposed to be spun off
Subject Whether remaining business of Company A after proposed spin-off was able to meet profit requirement of Rule 8.05
Listing Rules Rule 8.05 and Paragraph 3(c) of Practice Note 15
Decision Results of Company A should exclude results of both Company B and Company C which meant that profit requirement of Rule 8.05 would not be met by Company A and proposed spin-off was not approved

Summary of Facts

Company A had spun off Company B the previous year and proposed to spin off Company C.

The three-year pro forma combined profits of Company A excluding the results of both Company B and Company C would not be able to meet the profit requirement of Rule 8.05.

The three-year pro forma combined profits of Company A excluding the results of only Company C would be able to meet the profit requirement of Rule 8.05.

The sponsor submitted that Paragraph 3(c) of Practice Note 15 only required exclusion of the results of the entity to be spun off and not the results of entities already spun off.

Furthermore, the three-year pro forma combined profits of Company A excluding the results of Company C included an exceptional gain arising from the spin-off of Company B. The sponsor submitted that the gain arose in the ordinary and usual course of business of Company A and should therefore not be excluded from the profit calculation. Without the inclusion of the exceptional gain, Company A would not be able to meet the profit requirement of Rule 8.05.

Analysis

Practice Note 15 requires that Company A itself has to satisfy independently the requirements of Chapter 8 of the Listing Rules. The remaining business of Company A had to be assessed on a stand-alone basis.

The fact that the three-year results of Company A excluding the results of both Company B and Company C would not be able to meet independently the profit requirement of Rule 8.05 showed that Company A could not support its own listing status. If the spin-off were to proceed, Company A would become mainly an investment holding company with interests in two spun-off companies. It would not be acceptable for two businesses (i.e. that of Company B and Company C) to support three separate listings (i.e. that of Company A, Company B and Company C).

As for the gain arising from the spin-off of Company B, this was also recognised as an exceptional item in the consolidated profit and loss account of Company A. Since a spin-off is a one-off event which should not be regarded as an activity in the ordinary and usual course of business of Company A, the exceptional gain should be excluded from the calculation of profits for the purposes of Rule 8.05.

Decision

For the purpose of Rule 8.05, the three-year results of Company A should exclude the results of both Company B and Company C. Since, by so doing, the results of Company A would not be able to meet the profit requirement of Rule 8.05, the proposed spin-off was not approved.