Listing Rules and Guidance: Contents


 
 

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  • Interpretative Letters

    This section contains extracts of Listing Division's letters to issuers, interpreting the Listing Rules on specific listing matters.

    Rejection Letter (RL) – This series comprises a selection of letters explaining the Division's rejection of specific listing applications.

    No Further Disciplinary Action (Guidance) Letter (LEGL) - This series comprises a selection of letters issued following investigation of suspected breaches of the Rules and where the Division decided not to pursue disciplinary action. The letters communicate the Division's interpretation or expectations as to the conduct of an issuer and its directors and are now published for general guidance and to promote transparency about the disposal of potential disciplinary matters.

    Please visit Archive to view marked-up versions and versions that have been superseded or withdrawn.

    • 2009

      This section contains extracts of Listing Division's letters to issuers, interpreting the Listing Rules on specific listing matters.

      Rejection Letter (RL) – This series comprises a selection of letters explaining the Division's rejection of specific listing applications.

      No Further Disciplinary Action (Guidance) Letter (LEGL) - This series comprises a selection of letters issued following investigation of suspected breaches of the Rules and where the Division decided not to pursue disciplinary action. The letters communicate the Division's interpretation or expectations as to the conduct of an issuer and its directors and are now published for general guidance and to promote transparency about the disposal of potential disciplinary matters.

      Please visit Archive to view marked-up versions and versions that have been superseded or withdrawn.

      Date (mm/yyyy) Reference Number Particulars Listing Rules Document Type Content Category
      04/2009 RL25-09 LETTER 1 - Extracts of the decision letter of the Head of Listing.LETTER 2 - Extracts of the decision letter of the GEM Listing Committee on review. LETTER 3 - Extracts of the decision letter of the GEM Listing (Review) Committee on review. GEM Rule 11.06 Rejection Letter New Applicants

      • RL25-09

        View Current PDF

        HKEx REJECTION LETTER
        Cite as HKEx-RL25-09 (April 2009)

        Summary
        Listing Rule GEM Listing Rule 11.06
        Reason for rejection and the subsequent disposal of the case on review The Listing Division rejected the listing application of the Company because the Company was not considered suitable for listing under GEM Listing Rule 11.06. The Company has not adequately demonstrated that it had satisfied the requirements in the Exchange's announcement on "Gambling Activities Undertaken by Listing Applicants and/or Listed Issuers".

        The Division's decision was upheld by the GEM Listing Committee but reversed by the GEM Listing (Review) Committee, subject to certain conditions.
        Contents LETTER 1: Extracts of the decision letter of the Head of Listing, The Stock Exchange of Hong Kong Limited

        LETTER 2: Extracts of the decision letter of the Acting Secretary to the GEM Listing Committee on the Company's application to review the decision of the Division

        LETTER 3: Extracts of the decision letter of the Secretary to the GEM Listing (Review) Committee on the Company's application to review the decision of the GEM Listing Committee

        LETTER 1

        [Date]

        [Name and Address of Sponsor]

        Dear Sirs

        Re: Application for new listing of a GEM listing applicant
        (the "Company")
        ______________________________________________________

        We refer to your application Form 5A made on behalf of the Company (the "Application") and the [*th] proof of the Company's listing document dated [*day*month*year] (the "Circular"). We also refer to the materials provided to us together with the Form 5A, and your submissions dated [*day*month*year] which included two legal opinions issued by [the Company's legal advisers in Country Q], [Firm X] dated [*day*month*year] and [*day*month*year]. Capitalised terms used herein shall have the same meanings as defined in the Circular, unless the context otherwise stated.

        Background

        The Company had entered into an acquisition agreement with its controlling shareholder, [CS Co], to acquire interests in a [resort] business (the "Resort") in [Country Q] and an investment company. A portion of the premises in the Resort has been leased to [Gambling Co]. The acquisition constitutes a very substantial acquisition of the Company pursuant to the GEM Listing Rules and is treated as a new listing under GEM Listing Rule 19.54.

        On [*day*month*year], [Subsidiary X], a subsidiary company of [CS Co], entered into an agreement with [Gambling Co] in relation to a marketing program (the "Marketing Agreement"). Under the Marketing Agreement, [Subsidiary X] will bring in punters to [Country Q] to gamble in the foreign area of the Resort's casino (the "Foreign Area") with exclusive right granted by [Gambling Co]. [Subsidiary X] will, among other things, pay [Gambling Co] pro-rated daily rate per table to be operated at the Foreign Area, and bear entirely the profit and loss of the Foreign Area.

        Based on the information disclosed in Appendix "Business of the Acquired Group" of the Circular, [the rental] income received from [Gambling Co] represented approximately 90% of the Resort's total annual revenue for the year ended 31 December [200X].

        The Sponsor takes the view that the principal activity of the acquired business is resort operation and the Company does not and will not operate any casino in [Country Q]. It is submitted that the relationship between the Company and [Gambling Co] is limited to that of lessor/lessee only.

        [Subsidiary X] was included as part of the acquisition under the Company's initial proposal, but was subsequently excluded. [Portion of the Letter Purposely Omitted]

        [Gambling Co]

        [Gambling Co] is a corporation wholly-owned and controlled by the [Country Q] government. As stated in the law creating [Gambling Co] (the "Charter"), it has been given the legislative franchise to operate and maintain gambling operations in [Country Q], and is the only body authorised for the operation of gambling casinos in [Country Q]. All financial arrangements and agreements entered into by [Gambling Co] with other third parties are subject to review by the independent auditing authority of [Country Q] government, [Audit Commission].

        [Gambling Co] may enter into operating or management contracts with any registered and accredited company or qualified person possessing the knowledge, skill, expertise and facilities to ensure the efficient operation of gambling casinos. In its legal opinion dated [*day*month*year], [Firm X] stated that this is the only type of arrangement that is expressly allowed under the Charter to enable private entities other than [Gambling Co] to carry on a gambling business in [Country Q]. Under such operating and management contracts, the service fee that may be retained by those private entities shall not exceed 10% of the gross income, or a fixed monthly rental determined in a public bidding.

        According to [Firm X]'s opinion, an entity with 40% or more foreign ownership is not allowed to be a party to the operating and management contracts under the Foreign Investments Act of [Country Q].

        The Charter does not provide for the procedure for the application, renewal, revocation of contracts for the management or operation of casinos. It does not provide regulatory powers such as supervision and surveillance powers, nor authorise [Gambling Co] to deal with application for operating gambling companies in [Country Q]. It merely provides that all persons primarily engaged in gambling, together with their allied business, with contract or franchise from [Gambling Co], shall register and affiliate their businesses with [Gambling Co]. [Gambling Co] is mandated to issue the corresponding certificates of affiliation. The certificate of affiliation is used by [Gambling Co]-affiliated companies to avail of tax incentives under the Charter.

        Applicable GEM Listing Rules

        [Portion of the Letter Purposely Omitted] The Exchange's announcement on "Gambling Activities Undertaken by Listing Applicants and/or Listed Issuers" (the "Exchange's Announcement") provides that it would not be viewed as contrary to public interest for a listing applicant or listed issuer to be involved in the operation of gambling activities which:

        •   are not unlawful under the Gambling Ordinance, i.e. the gambling activities take place outside Hong Kong and the bookmaking transactions and the parties to the transactions are outside Hong Kong; and
        •   does not violate any applicable laws in the areas where such activities operate.

        Should the operation of such operation of such gambling activities (i) fail to comply with the applicable laws in the areas where such activities operate; and/or (ii) contravene the Gambling Ordinance, the issuer or its business may be considered unsuitable for listing under GEM Listing Rule 11.06.

        To comply with the Exchange's Announcement, new listing applicants are expected to use their best endeavours to ensure that the operation of the gambling activities will comply with the applicable laws in the areas where such activities take place and not contravene the Gambling Ordinance of Hong Kong. In vetting new listing applications, the Listing Division ordinarily expects that a listing applicant:

        •   will operate in a jurisdiction with an established licensing regime for gambling businesses and will be properly licensed or exempt from licensing requirements; and
        •   will be able to provide evidence, in the form of independent third party verification, to the effect that the activity is being carried out under the express authority of the relevant government.

        GEM Listing Rule 11.06 requires that both the Company and its business must, in the opinion of the Exchange, be suitable for listing.

        Issues

        In light of the requirements of the Exchange's Announcement and based on the facts and circumstances of the Application, the Listing Division has reviewed:

        •   whether the Exchange's Announcement applies to the Company, given the fact that a portion of the gambling activities expected to take place at the Company's resort facilities will be undertaken by [Subsidiary X], a subsidiary of the Company's controlling shareholder, and the Company will hold an option to acquire [Subsidiary X]; and
        •   assuming the Exchange's Announcement applies to the Company, whether:
        (a) the Company has established that [Country Q] has an established licensing regime governing gambling businesses; and
        (b) the Company holds, or has caused to be held, directly or indirectly, all licenses required under the applicable laws of [Country Q], or is otherwise exempt from such licensing requirements.

        The Listing Division's Analysis

        Application of the Exchange's Announcement

        Having considered the circumstances of the Application, including the fact that 90% of revenue is expected to be generated from gambling activities, the controlling shareholder will be a significant participant in those activities through [Subsidiary X] and the Company will hold an option to acquire [Subsidiary X], the Listing Division takes the view that a reasonable investor would view the casino business, and in particular, the prospect that it might be injected into the Company, as the Company's business operations. For this reason, the Listing Division considers the Company should not be viewed as just a resort operator but should be seen as a company directly or indirectly involved in gambling activities, and thus subject to the requirements of the Exchange's Announcement.

        Whether the Company has established that [Country Q] has an established licensing regime governing gambling businesses

        Based on the submissions received by the Listing Division to date, it is clear to the Listing Division that there is no authority in [Country Q] charged with specific responsibility for the supervision and inspection of gambling operations. Under the Charter, [Gambling Co] is the sole entity that has been given the exclusive right and legislative franchise to operate and maintain gambling casinos in [Country Q]. The Listing Division is of the view that [Gambling Co]'s ability to appoint companies to conduct gambling operations is more in the nature of franchising than licensing.

        While this may be a legitimate policy choice appropriately made by the [Country Q] government, in our view it is inconsistent with the expectations of the Listing Committee underlying the Exchange's Announcement.

        The Listing Division recognises that [Country Q]'s Audit Commission has some responsibility for reviewing the operations of [Gambling Co]; however, in our view, based on the materials submitted, this review power does not constitute supervision of the type ordinarily expected when considering whether the requirements of the Exchange's Announcement are met.

        Whether the Company holds, or has caused to be held, all applicable licences in [Country Q]

        Given that the Company has failed to establish that [Country Q] has an established licensing regime governing gambling businesses, the Listing Division considers that the Company has also failed to establish that it holds, or has caused to be held, directly or indirectly, all licenses required under the applicable laws of [Country Q], or is otherwise exempt from such licensing requirements.

        The Conclusion

        Based on the above and having considered the documents and information submitted, the Listing Division is of the view that the Company has not adequately demonstrated that it has satisfied the requirements as set out in the Exchange's Announcement. On this basis, the Listing Division has concluded that the Company is not suitable for listing and has therefore determined to reject the Application.

        Right to Be Reviewed By The Listing Committee

        Pursuant to GEM Listing Rule 4.05, the Company has the right to have this decision reviewed by the Listing Committee. As contemplated by GEM Listing Rule 4.08, any such appeal is required to be filed within 7 business days of the receipt of this letter, or of the reasoned decision if one is requested.

        [Portion of Letter Purposely Omitted]

        Yours faithfully,
        For and on behalf of
        The Stock Exchange of Hong Kong Limited

        [Signed]

        Head of Listing

        **********************************************************************

        LETTER 2

        [Date]

        [Name and Address of Sponsor]

        Dear Sirs,

        Re: Review Hearing of the GEM Listing Committee
        (the "Review Hearing") regarding the Company
        Date of the Review Hearing: [* day* month * year]

        On [*day*month*year], the GEM Listing Committee of The Stock Exchange of Hong Kong Limited conducted a review hearing (the "Review Hearing") to consider an application from the Company for a review of the decision of the Listing Division set out in [LETTER 1] dated [* day* month* year], (the "Decision").

        The Review Hearing was conducted before the GEM Listing Committee comprising [names of members purposely omitted] (the "Committee").

        Note: Terms and expressions used and defined in the written submission of the Listing Division shall have the same meanings when used herein unless otherwise defined.

        Decision

        The Committee considered the submissions (both written and oral) made by the Company and the Listing Division. The Committee decided to uphold the Decision to reject the Company's listing application on the basis that the Company was not suitable for listing under Rule 11.06 of the GEM Listing Rules.

        Reasons

        The Committee arrived at its decision for the following reasons:

        1. The Committee did not agree with the Company's contention that it was not in the gambling business. The Committee took the view that the Company was in the gambling business, albeit indirectly, for the following reasons: (i) [Gambling Co] paid the Resort a nominal rent or [X%] of gross wins, whichever was higher. Accordingly, the economics of the Resort was closely tied in with the gambling revenues and the arrangement with [Gambling Co] resembled a profit sharing arrangement in the gambling activities and was not merely an ordinary landlord and tenant relationship as claimed by the Company; and (ii) whilst [Gambling Co] supplied the personnel, the Resort provided fully-fitted premises and gambling equipment to [Gambling Co] and retained ownership of the same. The Committee was also concerned that, because of this particular arrangement, the Company would have little or no control over the gambling activities.
        2. It was necessary for the Company to establish that it had some control over the gambling business or to provide comfort that the essential controls were in place with respect to the gambling business. In this respect, the Committee was of the view that it had not been provided with sufficient information to determine whether [Gambling Co] had sufficient regulation of its gambling activities to meet standards as suggested in paragraph 31 of the Listing Committee Annual Report 2006. It was therefore incumbent on the Company to provide more information about [Gambling Co] to enable the Exchange to make an informed decision.

        In order for the Company to re-submit its listing application, the Committee has suggested that the Company: (i) provide more information on how [Gambling Co] operates and regulates its gambling activities, in particular, to address issues such as prevention of serious crimes and money laundering activities; and (ii) describe how [Gambling Co] runs and controls the gambling activities in the Resort.

        Yours faithfully
        For and on behalf of
        The Stock Exchange of Hong Kong Limited

        [Signed]

        Acting Secretary to the GEM Listing Committee

        **********************************************************************

        LETTER 3

        [Date]

        [Name and Address of Sponsor]

        Dear Sirs,

        Re: Review Hearing of the GEM Listing (Review) Committee
        (the "Review Hearing") regarding the Company
        Date of the Review Hearing: [* day* month * year]

        On [*day*month*year], the GEM Listing (Review) Committee of The Stock Exchange of Hong Kong Limited conducted a review hearing (the "Review Hearing") to consider an application from the Company for a review of the decision of the GEM Listing Committee of [*day*month*year] and set out in the [LETTER 2] dated [* day*month* year] (the "First Decision").

        The Review Hearing was conducted before the GEM Listing (Review) Committee comprising [names of members purposely omitted] (the "Review Committee").

        Note: Terms and expressions used and defined in the written submission of the Listing Division shall have the same meanings when used herein unless otherwise defined.

        Decision

        The Review Committee considered all the submissions (both written and oral) made by the Company and the Listing Division. The Review Committee decided to overturn the First Decision and allow the Company to proceed with its listing application in accordance with the GEM Listing Rules, subject to the following conditions:

        1. That, with the results of the additional due diligence described in paragraph 2 below, the Company provided detailed and prominent disclosure in its Circular of the legal framework in [Country Q] governing gambling activities, in particular any laws, rules, regulations or [Country Q] government polices that provide for, or impose controls on, gambling activity, prevention of money laundering and other serious criminal activity on premises where gambling activities are conducted (the "applicable law"). This disclosure should also include a description of the arrangements and systems in place in [Country Q] to administer and enforce the applicable law.
        2. While the Review Committee considered that the Company had gone some way to responding to the Committee's suggestions set out in the First Decision Letter (see sub-paragraphs (i) and (ii) in the last paragraph of Letter 2), the Review Committee considered that there was more the Company and its independent sponsor could reasonably do to disclose in the Circular, in a manner helpful to investors, a description of the controls [Gambling Co] has put in place to conduct gambling activities, and to comply with the applicable law. With that in mind, and while acknowledging there are limitations flowing from [Gambling Co]'s status as a government-owned and controlled enterprise that is independent of the Company, the Review Committee considers that the Sponsor, as independent sponsor, is in a position to conduct additional due diligence into the manner in which [Gambling Co] conducts its business with its resulting views and findings, and the basis for them, becoming part of the disclosure required by the above paragraph.
        3. That the Company include in its Circular a copy of the following documents: (a) the letter dated [*day*month*year] from [Gambling Co] (providing confirmation regarding its compliance with all applicable laws of Country Q and some of its internal control measures implemented with respect to the operation of its casino at the Resort), (b) the letter dated [* day*month* year] from [Country Q]'s Audit Commission (confirming that Gambling Co has been in full compliance with all relevant laws in respect of all its gaming activities conducted at the Resort) and (c) the letter dated [* day*month* year] from the Office of the Government Corporate Counsel, a division of the Department of Justice of the [Country Q] government (confirming Gambling Co's compliance with applicable laws, including the Anti-Money Laundering Law).

        The Review Committee wishes to emphasise that this decision is specific to this particular instance and shall not serve to create a precedent for any other companies.

        For the avoidance of doubt, should the Company decide to proceed with its application for new listing, such application will be treated strictly on its merits at the material time, and no representation is given, whether express or implied, as to the acceptability of such application if pursued. The new listing application of the Company in its entirety will be subject to the final approval of the GEM Listing Committee.

        Yours faithfully
        For and on behalf of
        The Stock Exchange of Hong Kong Limited

        [Signed]

        Secretary to the GEM Listing (Review) Committee

    • 2008

      This section contains extracts of Listing Division's letters to issuers, interpreting the Listing Rules on specific listing matters.

      Rejection Letter (RL) – This series comprises a selection of letters explaining the Division's rejection of specific listing applications.

      No Further Disciplinary Action (Guidance) Letter (LEGL) - This series comprises a selection of letters issued following investigation of suspected breaches of the Rules and where the Division decided not to pursue disciplinary action. The letters communicate the Division's interpretation or expectations as to the conduct of an issuer and its directors and are now published for general guidance and to promote transparency about the disposal of potential disciplinary matters.

      Please visit Archive to view marked-up versions and versions that have been superseded or withdrawn.

      Date (mm/yyyy) Reference Number Particulars Listing Rules Document Type Content Category
      12/2008 LEGL07-08 Guidance on replying to unusual trading movement enquiries from the Stock Exchange of Hong Kong and ensuring accuracy in the subsequent announcements when there are ongoing business negotiations relating to intended acquisitions or realisations GEM Rules 17.11, 17.56(2) No Further
      Disciplinary
      Action
      (Guidance)
      Letter
      Listed Issuers
      12/2008 LEGL05-08 Guidance on ensuring and achieving accuracy and completeness in disclosure Rule 2.13 (2) No Further
      Disciplinary
      Action
      (Guidance)
      Letter
      Listed Issuers
      11/2008 RL24-08 LETTER 1 - The GEM Listing Approval Group of the Listing Division rejected the listing application of the Company for the reason that the Company was not able to comply with the minimum operating cash flow requirement under GEM Listing Rule 11.12A(1) after excluding an adjustment for a non-cash item in relation to the settlement of certain employment-related expenses directly by the immediate holding company of the Company. LETTER 2 - The GEM Listing Committee upheld the Listing Division's rejection decision. GEM Rule 11.12A(1) Rejection Letter New Applicants
      11/2008 LEGL04-08 Guidance on compliance with the announcement requirement in the event of delay in the completion of an intended notifiable transaction Rule 14.36 No Further Disciplinary Action (Guidance) Letter Listed Issuers
      11/2008 LEGL03-08 Guidance on who constitutes a connected person of an issuer

      Guidance on what procedures an issuer should adopt to ensure compliance with the connected transactions provisions in the Listing Rules

      (Updated in July 2014)
      Rules 2.13,
      14A.35,
      14A.36,
      14A.46
      and
      14A.48
      No Further
      Disciplinary
      Action
      (Guidance)
      Letter
      Listed Issuers
      11/2008 LEGL01-08 Guidance on arrangements to maintain effective accounting procedures and controls following the implementation of revised accounting standards Rule 2.13 (2) No Further
      Disciplinary
      Action
      (Guidance)
      Letter
      Listed Issuers

      • LEGL07-08

        View Current PDF

        HKEx LISTING ENFORCEMENT GUIDANCE LETTER
        Cite as HKEx-LEGL07-08 (December 2008)

        Summary
        Listing Rule GEM Listing Rules 17.11 and 17.56(2)
        Subject Guidance on replying to unusual trading movement enquiries from the Stock Exchange of Hong Kong and ensuring accuracy in the subsequent announcements when there are ongoing business negotiations relating to intended acquisitions or realizations
        Contents Extracts of a No Further Action (Guidance) letter from the authorised signatory of the Stock Exchange of Hong Kong

        [*Date]

        [Name and Address of Listed Issuer]

        Dear Sirs,

        [Name of Listed Issuer] (the "Company", together with its subsidiaries, the "Group")
        No Further Action: Guidance

        The Listing Division ("Division") refers to earlier correspondence concerning the captioned matter resting with your letter dated [*day *month *year]. Capitalized terms used in this letter have the same meanings as they are defined in the Company's announcements dated [*day *month *year] and [*day *month *year], unless otherwise stated.

        Materials Reviewed

        The Division refers to the following materials which have been reviewed:

        1. the Company's announcement dated [*day *month *year] ("First Announcement");
        2. the Company's announcement dated [*day *month *year] ("Second Announcement");
        3. letters from [*name of solicitors] on behalf of the Company and the Relevant Directors to the Division dated [*day *month *year], [*day *month *year], [*day *month *year], [*day *month *year], [*day *month *year] and [*day *month *year]; and
        4. letters from [*name of solicitors] on behalf of the Company and the current Directors to the Division dated [*day *month *year] and [*day *month *year].

        Thank you for the information and materials provided by the Company and the Relevant Directors which enable the Division to have a clearer understanding of the matter.

        Facts

        1. On [*day *month *year (day 1)], in response to the Division's enquiries at around [*time] on unusual trading price and volume movements in the Company's shares, the Company published the First Announcement pursuant to Rule 17.11 of the GEM Listing Rules ("GLR") after the market closed, which stated inter alia that the Directors were not aware of any reason for the unusual movements, and that there were no negotiations or agreements relating to intended acquisitions or realizations which were discloseable under Chapters 19 to 20 of the GLR.
        2. On [*day *month *year (day 6)], being the next business day after publication of the First Announcement, the Company informed the Division that an independent third party had approached the Relevant Directors in early [*month *year] for a possible acquisition of a majority interest in the Company, which if implemented would result in a change in control of the Company as well as a consequential general offer for the outstanding shares. The Company requested a suspension of trading from [*time] on [*day *month *year (day 6)].
        3. On [*day *month *year (day 7)], the Company published a clarification announcement disclosing the Proposal, i.e. the Second Announcement, before the market opened. Trading resumed on the same day. In the Second Announcement, the Company stated that it had inadvertently omitted to disclose information which may be discloseable under GLR17.10, and that subsequent to the issue of the First Announcement, the Board was informed by the Relevant Directors that they had been approached by an independent third party in early [*month] regarding the possible acquisition.

        Comment

        The submissions from the Company and the Relevant Directors referred to above received during the course of our investigation into this matter revealed that the Relevant Directors had been in negotiation with an independent third party regarding different forms of business cooperation since early [*month *year]. In early [*month], the independent third party made a unilateral Proposal, in draft form, to the Relevant Directors in relation to the acquisitions of a majority interest in the Company. As the Proposal had yet to be discussed between the parties concerned, the Relevant Directors considered the Proposal to be preliminary and that the Company was not under any obligation to disclose the Proposal in the First Announcement.

        Based on the materials available, the Division is of the view that there is prima facie evidence that the First Announcement was not accurate and complete in all material respects as required by GLR17.56(2) because it contained a confirmation that there were no negotiations relating to intended acquisitions or realizations which were discloseable under Chapters 19 to 20 of the GLR which does not appear to have been the case.

        Action

        Having reviewed the materials made available to the Division, the Division is of the view that the inaccurate and incomplete disclosure in the First Announcement may in other circumstances have led to disciplinary action against the Company and the Relevant Directors.

        Further, the Relevant Directors remain liable for actions they took as directors of the Company despite their subsequent resignation from the Board, and disciplinary action could be taken against them subsequent to their resignation.

        However, the Division has decided not to take any further disciplinary action. In coming to this decision the Division has taken into account the following factors and conduct subsequent to the events in question.

        The Division notes that in respect of what we believe to be the inaccurate and incomplete disclosure in the First Announcement, the Relevant Directors were prompt in taking remedial actions, including the request for suspension in trading of the Company's shares pending publication of a clarification announcement, and the publication of the Second Announcement. As a result, there was no trading in the Company's shares between the publication of the First Announcement and the Second Announcement and in the circumstances the First Announcement made may not have impacted on shareholders to a significant degree.

        The Division has also noted the subsequent change in control and complete change in Board composition of the Company since the conduct covered by our investigation. We note however that the information available to us indicates that the Relevant Directors (i.e. those in office at the material time) are still currently occupying management positions within the Group.

        It should be noted that our decision is not and should not be interpreted as an agreement on the Company's assessment of the price-sensitivity of the relevant matters or an endorsement in any way of the Company's conduct in this case. Please also note that our decision in this case is based on the facts and circumstances prevailing at the material time, and does not serve as a precedent for other cases or apparently similar factual scenarios which given the passage of time or difference in circumstances may be treated differently.

        Guidance

        1. A fundamental principle underlying listed issuers' announcements and other disclosures made under the GLR is that they must be timely, accurate and complete, and not misleading or deceptive. In the context of responding to enquiries made of listed issuers by the Division concerning unusual movements in trading of the relevant listed securities, notwithstanding the standard form wording given in Note 2 of GLR17.11, issuers and their directors should exercise great caution before giving a blanket negative confirmation relating to the presence of negotiations or agreements referred to under GLR17.11. Failure to do so may result in a breach of GLR17.56(2). We would also draw your attention to the Exchange's announcement of 11 September 2006 which provides guidance on timeliness and accuracy of disclosure of price-sensitive information.
        2. In responding to price alert enquiries from the Division, while the Division appreciates confidentiality concerns regarding ongoing business negotiations, where there is unusual trading movement triggering enquiries from the Division under GLR17.11, the Company is required, in addition to giving confirmations about directors' dealings and matters discloseable under GLR17.10, to also notify the Division of ongoing business negotiations relating to intended acquisitions or realizations discloseable under Chapters 19 to 20 of the GLR. This obligation is separate and distinct from the wider continuing disclosure obligations to shareholders and the market contained in Chapter 17 of the GLR.
        3. If there is doubt regarding whether there is an obligation to make public disclosure of any negotiation or agreement, the Company and its Directors are encouraged to consult the Division and/or seek professional advice as to the Company's disclosure obligations in the circumstances. Towards this end and for good corporate governance, the Company and its Directors are also encouraged to actively record their deliberations on disclosure obligations and GLR applicability regarding each particular set of circumstances.
        4. The Division also notes from the submissions that in this case what we believe to be the inaccurate and incomplete disclosure in the First Announcement appears to have at its root a lack of, or in any event inadequate or ineffective, communication amongst members of the Board at the material time. To improve corporate governance and GLR compliance, the management of the Company is encouraged to create and implement (if they have not already done so), an internal management process which facilitates timely and effective communication amongst members of the Board, access to external professional advice, as well as regular internal training on GLR compliance and corporate governance, in particular with respect to assessment of price-sensitive information.

        Invitation

        We invite the board of Directors of the Company and the Relevant Directors to comment on this letter if they wish. Your submission, together with this letter, will be placed on the compliance files of the Company and the Relevant Directors. No further action will be taken in respect of this matter which is now considered closed.

        Publicity

        We wish to inform you that, at an appropriate time, the Division may, in the discharge of its regulatory function, publicize certain facts and guidance given in this letter. This would be done on an anonymous and redacted basis, to explain our views on the issues raised by this case for the benefit of the market as a whole. If such disclosure is made it may be published on our website and in our quarterly publication "Exchange".

        Yours faithfully,
        For and on behalf of
        The Stock Exchange of Hong Kong Limited

        [Signed]

        [Authorised Signatory]

      • LEGL05-08

        View Current PDF

        HKEx LISTING ENFORCEMENT GUIDANCE LETTER
        Cite as HKEx-LEGL05-08 (December 2008)

        Summary
        Listing Rule Main Board Listing Rule 2.13(2)
        Subject Guidance on ensuring and achieving accuracy and completeness in disclosure
        Contents Extracts of a No Further Action (Guidance) letter from the authorised signatory of the Stock Exchange of Hong Kong

        [*Date]

        [Name and Address of Listed Issuer]

        Dear Sirs,

        [Name of Listed Issuer] (the "Company")
        Announcement dated [*day*month*year]
        No Further Action: Guidance

        We refer to earlier correspondence concerning the captioned matter resting with the letter of [*name of solicitors] to the Listing Division ("Division") dated [*day*month*year]. Unless otherwise stated, the terms and abbreviations in the Company's announcement dated [*day*month*year] (the "Announcement") are adopted in this letter.

        Materials Reviewed

        The Division refers to the following materials which have been reviewed:

        1. the Company's announcements dated [*day*month*year], [*day*month*year] and the Announcement; and
        2. [*name of solicitors'] submissions on behalf of the Company and [*name of the Chairman], one dated [*day*month*year], one dated [*day*month*year], one dated [*day*month*year] and two dated [*day*month*year] together with the enclosures to these letters.

        Thank you for the information and materials provided by the Company which enable the Division to have a clearer understanding of the matter.

        Facts

        In the Announcement the Company disclosed to shareholders and the market information relating to a substantial acquisition that it was proposing to make. In summary:

        1. [*Name of the subsidiary], a wholly-owned subsidiary of the Company, [*name of the Chairman] and the Company had entered into an agreement dated [*day*month*year] (the "Agreement") under which [*name of the subsidiary] was to acquire from [*name of the Chairman] one issued share of [*Company A] (being 100% issued share capital of [*Company A] for a consideration of HK$[*no.] to be satisfied by the Company's issuance of [*a specified number of] new shares of the Company to [*name of the Chairman] at the [*date of completion].
        2. [*Name of the Chairman] was at the time the Chairman, an Executive Director and the controlling shareholder of the Company. He was also the sole director and sole ultimate beneficial owner of [*Company A]. [*Company A] is an investment holding company incorporated in [*name of the country] which was intended to be used by [*name of the Chairman] to hold a [*x]% equity interest in the [*name of JV]. The JV was the sole beneficial owner and developer of a residential and commercial property development project in the [*name of country] as identified in the Announcement.
        3. A statement was made in the Announcement dated [*day*month*year] to the effect that "[*Company A] did not hold any equity interest in the JV" which was owned at the time as to [*x]% by [*Company B] and [*y]% by [*Company C] (the "Statement").
        4. The transaction was a very substantial acquisition and a connected transaction for the Company. The Company dispatched a circular in relation to the Agreement on [*day*month*year]. At the EGM on [*day*month*year], the Company obtained independent shareholders' approval of the Agreement which was duly completed on [*day*month*year].
        5. A complaint was subsequently received by the Division concerning the accuracy of the information given in the Announcement as to the ownership of the JV. As a result the Division has undertaken enquiries during the course of which the Company has denied any breach of the Listing Rules concerning the Statement made in the Announcement.

        Comment

        We have reviewed and carefully considered the materials more particularly described above from which we note the following:

        The JV was formed as a [*nature of enterprise] on [*day*month*year], and until [*day*month*year], was owned as to [*x]% by [*Company B] and [*y]% by [*Company C] (the "Original Shareholding") and was described as such in the Announcement.

        In [*month*year], various agreements were entered into by the existing shareholders of the JV namely [*Company B], [*Company C] with [*Company A] with a view to joining [*Company A] as a third shareholder of the JV. However these agreements expressly provided that such new shareholdings were not to be effective until after fulfillment of two conditions (i) registration and certification of the payment in full of the respective capital contribution towards the JV's increased registered capital of RMB[*no.]; and (ii) the issuing of the revised business licence to the JV (the "Conditions"). It is our understanding that the agreements were entered into so as to facilitate the JV's application to the relevant authority for a change of status to [*nature of enterprise] paving the path for the deal contemplated at the time and which was subsequently agreed and disclosed in the Announcement.

        In [*month*year], a revised business licence was issued to the JV by the appropriate [*name of country] Government body. This document records a change of status of the JV with effect from [*day*month*year]. This document indicates that one if not both of the Conditions referred to above had yet to be fulfilled. Thus it appears that there were some grounds for adopting the position stated in the Announcement as to the status of [*Company A] in the JV as at the date of publication. However the absence of any narrative as to the important events taking place between [*month] and [*month*year] is a matter of concern impacting on the quality of disclosure and information available to shareholders.

        The Division takes the view that disclosure of the events from [*month*year] to [*month*year] which directly concerned and resulted in the shareholdings in the JV at the time of the Announcement could be material information directly relevant to the then existing shareholdings in the JV. This is particularly so, given the Company's ultimate target under the Agreement was the acquisition through [*Company A] of [*x]% effective interest in the JV. Any inaccuracy or incompleteness of information provided to shareholders could have serious and far-reaching implications as to (a) the existence of proper title and interest in the JV of the proposed vendor from whom [*Company A] was to acquire the [*x]% shareholdings in the JV; and (b) in turn the Company's acquisition of valid and proper title to [*x]% effective interest in the JV; and consequently on the decisions made by shareholders as to the resolutions placed before them.

        Action

        The Company has acknowledged in its submissions to the Division that having reviewed the relevant documents in responding to the Division's enquiries, "the Company agrees that more disclosure of shareholdings in [*the JV] (in particular the arrangement joining [*Company A] as a shareholder to facilitate the regulatory application procedures) could have been made in the Announcement provided it was carefully worded so as not to mislead the public that [*Company A] already had at the time, any lawful rights as a shareholder of [*the JV]."

        We have considered all of the foregoing information. We have concluded that no further regulatory action is appropriate or necessary. In coming to this decision we have noted the concession made by the Company as to the completeness of the disclosure made in the Announcement. We have also noted that, as disclosed in the Announcement, completion of the transaction was subject to conditions including the provision of a legal opinion by the [*name of country] legal adviser to [*name of the subsidiary] that [*Company A] is the lawful owner of [*x]% of the registered capital of the JV free and clear of encumbrances; and further that this condition and all other conditions have been fulfilled leading to completion on [*day*month*year].

        We do believe however that the circumstances of this case do require that we comment on the process adopted by the Company and the following guidance be offered in order to inform the future performance of the Company in relation to matters relating to corporate governance.

        Guidance

        1. We would remind the Company and its directors that under Rule 2.13 of the Listing Rules, information contained in announcements, circulars and other disclosure made by listed issuers pursuant to the Listing Rules must be accurate and complete in all material respects and not be misleading or deceptive. It is the responsibility of the directors to ensure that the issuer's regulatory announcements and other disclosures comply with Rule 2.13. This is particularly so for those directors who are actively involved in their preparation and had knowledge of the relevant matters which are the subject of the relevant disclosure.
        2. Timely disclosure of information by listed issuers to the investing public and the market is of utmost importance towards ensuring a fair, orderly and efficient securities market in Hong Kong. Shareholders and investors base their investment decisions on information available in the market. In the case where a proposed transaction is subject to shareholders' approval, shareholders have to rely on information provided by the listed issuer and its management about the proposed transaction in their consideration of whether to approve the transaction and the quality of such information thereby underpins their investment decisions.
        3. We note that the directors did not seek professional advice for example from [*name of country] lawyers to confirm the accuracy of this view they had reached or from Hong Kong lawyers from the perspective of Rule 2.13 compliance as regards the Announcement. The Division wishes to remind the Directors that in appropriate cases, it is advisable that they take professional advice with a view to ensuring Listing Rule compliance. In this case, the Division believes it would have been prudent and necessary that Directors of the Company sought professional advice before acting on the view they had reached.
        4. We accept that an assessment of materiality will depend on the facts of a given case. However where issues of materiality arise, the Division considers management should and would urge management again to seek independent and professional advice to ensure that the Company's Listing Rule obligations are complied with in a timely manner.
        (i) The Division would also stress the need for the Company to have in place an effective internal control system to embed its disclosure and other compliance obligations under the Listing Rules and to provide appropriate guidance for senior management as to how such obligations could properly be fulfilled.
        (ii) Directors of the Company should be aware of their responsibilities towards the Company's shareholders and the market in procuring the Company's due and timely compliance with its Listing Rule obligations. In this regard, the Division would urge the Directors of the Company to undergo training on compliance and corporate governance matters, so as to increase and refresh their knowledge on these matters. Compliance and corporate governance best practices are being constantly revised to reflect changing market expectations, and in consequence it is vital that management engage in a regular programme of continuing education as to their duties and responsibilities.

        Invitation to Comment

        We invite the board of directors of the Company to comment on this letter if they wish. Your submission, together with this letter, will be placed on the Company's compliance file. No further action will be taken in respect of this matter which is now considered closed.

        Publicity

        We wish to inform you that, at an appropriate time, the Division may, in the discharge of its regulatory function, publicize certain facts and guidance given in this letter. This would be done on an anonymous and redacted basis, to explain our views on the issues raised by this case for the benefit of the market as a whole. If such disclosure is made it may be published on our website and in our quarterly publication "Exchange".

        Yours faithfully,
        For and on behalf of
        The Stock Exchange of Hong Kong Limited

        [Signed]

        [Authorised Signatory]

      • RL24-08

        View Current PDF

        HKEx REJECTION LETTER
        Cite as HKEx-RL24-08 (October 2008)

        Summary
        Listing Rule GEM Listing Rule 11.12A(1)
        Reason for rejection and the subsequent disposal of the case on review The GEM Listing Approval Group of the Listing Division rejected the listing application of the Company for the reason that the Company was not able to comply with the minimum operating cash flow requirement under GEM Listing Rule 11.12A(1) after excluding an adjustment for a non-cash item in relation to the settlement of certain employment-related expenses directly by the immediate holding company of the Company.

        The Listing Division's rejection decision was upheld by the GEM Listing Committee.
        Contents LETTER 1: Extracts of the decision letter of the Head of IPO Transactions Department of the Listing Division, The Stock Exchange of Hong Kong Limited

        LETTER 2: Extracts of the decision letter of the Acting Secretary to the GEM Listing Committee on hearing of the Company's application to review the decision of the Listing Division

        LETTER 1

        [Date]

        [Name and Address of Sponsor]

        Dear Sirs

        Re: Application for new listing of a GEM listing applicant
        (the "Company" together with its subsidiary, the "Group")

        We refer to your application Form 5A dated [*day*month*year] made on behalf of the Company (the "Application"), the [draft] Proof of the Company's prospectus dated [*day*month*year] (the "Prospectus") and your submissions dated [*day] and [*day*month*year] (the "Submissions"). Capitalised terms used in this letter have the same meanings as those defined in the Prospectus and the Submissions, unless otherwise stated.

        The GEM Listing Approval Group of the Listing Division (the "Approval Group") held a meeting on [*day*month*year] to consider the Application. Having considered the relevant facts and circumstances, the Approval Group resolved that the Group is not able to comply with the minimum operating cash flow requirement under Rule 11.12A(1) of the GEM Listing Rules.

        Accordingly, the Application is rejected. The analysis and conclusion of the decision are set out below.

        A. Relevant Facts
        1. The Group is [a service company]. During [the first year of the Track Record Period (comprising Year 1 and Year 2)], the Group incurred certain employment-related expenses (the "Employment Expenses") of HK$[●] million which were settled directly by [Entity X], the immediate holding company of the Company, and treated as a capital contribution to the Group (the "Settlement").
        2. [Portion of Letter Purposely Omitted]
        3. The Settlement was presented in the cash flow statement of the audited financial statements of [Entity Y] (the principal subsidiary of the Company) for [Year 1] as "Increase in capital reserve" under "Cash flows from financing activities". [Entity Y]'s audited financial statements for [Year 1] were approved by its Directors and signed off by [the Reporting Accountants of the Company] on [*day*month*year]. In [Entity Y]'s audited financial statements, the operating cash flow before changes in working capital and tax paid ("Operating Cash Flow") presented an outflow of HK$[●] million for [Year 1].
        4. The Settlement was presented in the Group's consolidated cash flow statement in the Accountants' Report as an adjustment of HK$[●] million for a non-cash item under "Cash flows from operating activities" (the "Adjustment"). As such, the Group's Operating Cash Flow presented an inflow of HK$[●] million for [Year 1].
        5. If the Adjustment was not made, the Group's Operating Cash Flow for [Year 1] would be an outflow of HK$[●] million, and the Group's aggregate Operating Cash Flow for [Year 1 and Year 2] would be an inflow of [less than HK$20 million].
        6. The cash flow statements of the Group for [Year 1 and Year 2] were prepared in accordance with Hong Kong Accounting Standard 7 ("HKAS 7") and the Adjustment was made in order to reflect the Group's actual cash flows from its operating activities. The Employment Expenses, as submitted by the Sponsor, are common in the [industry] as attractive remuneration packages and often required for recruiting talented [employees] to join from larger and more established firms, and the Company considered that these expenses constituted normal operating activities of the Group and were in the ordinary and usual course of the Group's [business]. As such, the Sponsor considered that the Group's aggregate Operating Cash Flow of HK$[●] million [as disclosed in the Accountants' Report] for [Year 1 and Year 2] is the Group's positive cash flow in accordance with Rule 11.12A(1).
        7. The Group generated total Operating Cash Flow of HK$[●] million for [Year 1 and Year 2], recorded a net profit of HK$[●] million in [Year 2] after a net loss in [Year 1]. The Company is expected to maintain a similar level of profits in [the year immediately after Year 2], and meet the profit test under Main Board Listing Rule 8.05 within two years in [two years immediately after Year 2]. The Sponsor considered that the cash flow and profit levels strongly indicated that the Group has a viable business with both substance and prospects. If the Exchange was to consider the 24-month period ended [three months after the end of Year 2], the Group's Operating Cash Flow would be HK$[●] million, which meets the minimum requirement of HK$20 million under Rule 11.12A(1).
        B. Applicable Listing Rules and Interpretations, and Relevant Accounting Standards
        8. Rule 11.12A(1) of GEM Listing Rules requires a new applicant or its group must have an adequate trading record of at least two financial years comprising a positive cash flow generated from operating activities in the ordinary and usual course of business before changes in working capital and tax paid of at least HK$20,000,000 in aggregate for the two financial years immediately preceding the issue of the listing document.
        9. The note to Rule 11.12A(1) further states that "A statement of cash flow prepared using the indirect method for submission to the Exchange for the purpose of satisfying rule 11.12A must also be included in the prospectus for disclosure purpose... Details regarding cash flow statement prepared under the indirect method are further described under Hong Kong Accounting Standard 7".
        10. Operating activities are defined in HKAS 7 as the principal revenue-producing activities of the entity and other activities that are not investing or financing activities. According to paragraph 14(d) of HKAS 7, cash flows from operating activities are primarily derived from the principal revenue-producing activities of the entity, and generally result from the transactions and other events that enter into the determination of profit or loss. Examples of cash flows from operating activities include, among others, cash payments to and on behalf of employees.
        11. As stated in the Consultation Conclusions on the Growth Enterprise Market issued by the Exchange on 2 May 2008 (the "Consultation Conclusions"), the Operating Cash Flow requirement of Rule 11.12A(1) is a good indicator of the business viability of an applicant.
        12. When reviewing whether a new listing applicant satisfies the requirement of Rule 11.12A(1), the Listing Division ordinarily considers the burden of proof to be on the sponsor and the listing applicant to demonstrate compliance. In view of the importance of this listing eligibility standard, in areas where significant judgment is required by directors or the reporting accountants that affects the Listing Division's analysis of Rule 11.12A(1), the Listing Division does not rely solely on the judgment of the directors and/ or reporting accountants in reaching its conclusions. Instead the Listing Division may reach its own conclusion based on the information presented in order to ensure that the eligibility standards of Rule 11.12A(1) are interpreted in a consistent manner and not unduly affected by the views of individual boards of directors and/ or reporting accountants.
        C. The Issue
        13. Whether the Settlement constitutes operating activities in the ordinary and usual course of the Group's business, and if not, whether the Company would be able to fulfil the Operating Cash Flow requirement under Rule 11.12A(1).
        D. Analysis
        14. The Approval Group considers the Operating Cash Flow requirement under Rule 11.12A(1) to be a question of fact. In particular, the Approval Group will consider whether the Group is able to fulfil the Operating Cash Flow requirement without relying on activities conducted outside the Group's ordinary and usual course of business.

        Ordinary and usual course of business
        15. Rule 11.12A(1) requires the Operating Cash Flow to be generated from operating activities "in the ordinary and usual course of business". Therefore, by simply asserting that Operating Cash Flow prima facie meets Rule 11.12A(1) because it is prepared under an accepted accounting standard is not sufficient. The operating inflows and outflows making up the Operating Cash Flow must also have to be made in an applicant's ordinary and usual course of business.
        16. The Approval Group does not dispute that the Employment Expenses were incurred for the ordinary and usual course of the Group's business. The Employment Expenses had to be incurred by the Group during its business operations in generating its income for [Year 1]. Without incurring such expenses, the Group would most likely not be able to generate the level of revenue it did in [Year 1].
        17. The Approval Group, however, considered that the Adjustment will distort in substance what ought to be the Group's cash outflow from operating activities in its ordinary and usual course of business during the relevant period. Normally, it would not be expected to be part of the Group's ordinary and usual operating activities to have a third party incurring expenses on the Group's behalf. Had the Employment Expenses not been settled by [Entity X] on the Group's behalf, they would be expected to be incurred by the Group in its ordinary and usual course of business and reflected as part of the Group's operating cash outflow. The effect of which would be a negative Operating Cash Flow of HK$ [●] million for [Year 1].
        18. The Operating Cash Flow requirement is intended to be an indicator of the Group's business viability. If the Settlement was to be accepted as the Group's usual and ordinary course of business, the purpose of Rule 11.12A(1) would be rendered useless as an eligibility requirement. The Approval Group did not consider it appropriate to accept the Settlement as in the usual and ordinary course of the Group's business, and thus the Adjustment should not be taken into account when ascertaining whether the Company is able to meet Rule 11.12A(1).

        Compliance with HKAS 7
        19. The note to Rule 11.12A(1) aims to inform users that the statement of cash flow using the indirect method, prepared in accordance with HKAS 7 must be submitted to the Exchange and included in the prospectus. This note serves to facilitate a consistent form of disclosure by applicants. The Approval Group has not sought to disagree with the Operating Cash Flow as presented in the Group's financial statements. It is asserted by the Sponsor and the applicant that prima facie the Company's cash flow statement on its face complied with the minimum cash flow requirement under Rule 11.12A(1) of the GEM Listing Rules, and was prepared by a "big four" international accounting firm in accordance with applicable accounting standards stated under that Rule. However, the assessment of an applicant's ability to comply with the financial eligibility requirements under GEM Listing Rules may not necessarily be treated identically to its accounting presentation. The same principle is set out in the Listing Division's rejection letter HKEx-RL10-06. The Listing Division may exclude certain income/ expense which may not be generated/ incurred from an applicant's usual and ordinary course of business even if it, prima facie, is able to meet the profit requirement under Main Board Listing Rule 8.05(1)(a) based on the financial data presented in its audited financial statements.
        20. Therefore, based on the facts and circumstances of this case as discussed above, the Approval Group considered it is not appropriate to accept the Group's cash flow position under its current accounting presentation for the purpose of determining the Group's ability to meet the eligibility requirement under Rule 11.12A(1).

        Quantitative requirement under Rule 11.12A(1)
        21. The Approval Group disagreed with the Sponsor's argument that a two financial-year period as the basis for the cash flow eligibility requirement was arbitrary when the Rule was considered. The intention of the revised GEM regime, as stated in paragraph 2 of the Consultation Conclusions is to reposition GEM as a second board and as a stepping stone towards the Main Board of the Exchange. The two financial-year period would enable a level of track record where the Operating Cash Flow requirement can be ascertained. This two financial-year period fits in with the requirement for an issuer to be listed on GEM for at least one year, rendering the total period of financial scrutiny and regulatory assessment three years in total, before it can apply to transfer its listing to the Main Board, mirroring the three-year track record period requirement for Main Board applicants.
        22. Rule 11.12A(1) clearly sets out that the timeframe for the Operating Cash Flow requirement is the "two financial years immediately preceding the issue of the listing document". This will reduce applicants from "shopping" for the ideal period which enables them to meet the requirement, which may cause confusion in the disclosure in the prospectus, among others. Therefore, the Sponsor's suggestion to use the 24-month period preceding [three months after the end of Year 2] in ascertaining compliance with Rule 11.12A(1) cannot be accepted because the proposed period does not fall within the financial years of the Company as required under the GEM Listing Rules.
        23. The Approval Group also pointed out that the proposal to implement the Operating Cash Flow requirement of Rule 11.12A(1) was made known to potential applicants as early as July 2007.

        Capital expenses
        24. The Approval Group noted it was also submitted that the Employment Expenses, on a non-accounting standpoint, should be treated as capital expenses, and thus should not be treated as an operating cash outflow. However, the Approval Group looked at the Operating Cash Flow using the indirect method prepared under HKAS 7 as a starting point for the assessment of an applicant's ability to comply with the financial eligibility requirements. The Employment Expenses have been included as part of the net profit of the Group for a reason, that is, they were common in the [industry] as attractive remuneration packages and often required for recruiting talented [employees] to join from larger and more established firms, and were incurred in the usual and ordinary course of the Group's business. The assertion of the Employment Expenses now being capital in nature on a non-accounting standpoint and not being considered as an operating cash outflow of the Group is without basis.
        E. The Conclusion
        25. The Approval Group has taken note of the details set out in the Submissions, among others, that the Group has started to be profitable in [Year 2] and the Company would be able to meet the Main Board eligibility requirements in time. The Approval Group has no comment on this. However, the Company is applying to list on GEM Board which has certain eligibility requirements. These requirements, such as the Operating Cash Flow requirement, are clear. To be able to list on GEM, these requirements are to be complied with.
        26. Having considered all relevant facts and circumstances, which include, among others, that the Settlement does not constitute "operating activities in the ordinary and usual course of the Group's business", the Approval Group considered that the Adjustment should be disregarded. As a result, the Group's aggregate Operating Cash Flow in the ordinary and usual course of business for [Year 1 and Year 2] for the purpose of Rule 11.12A(1) would be a cash inflow of [less than HK$20 million].
        27. On the basis of the Approval Group's analysis set forth above, it is concluded that the Company is not able to comply with the Operating Cash Flow requirement of HK$20 million under Rule 11.12A(1). Accordingly, the Application is rejected on such basis.

        [Portion of Letter Purposely Omitted]

        Pursuant to Rule 4.05(1) of GEM Listing Rules, the Company has the right to have this decision reviewed by the GEM Listing Committee.

        [Portion of Letter Purposely Omitted]

        Yours faithfully
        For and on behalf of
        The Stock Exchange of Hong Kong Limited

        [Signed]

        Head of IPO Transactions Department

        ***************************************************************************

        LETTER 2

        [Date]

        [Name and Address of Sponsor]

        Dear Sirs,

        Re: Review Hearing of the GEM Listing Committee
        (the "Review Hearing") regarding the Company
        Date of the Review Hearing: [*time* day* month* year]

        On [*day*month*year], the GEM Listing Committee of The Stock Exchange of Hong Kong Limited considered an application from the Company for a review of the decision of the Approval Group of the Listing Division and set out in [LETTER 1] dated [*day*month*year] (the "Division's Decision").

        The Review Hearing was held before the GEM Listing Committee comprising [names of members purposely omitted] (the "Committee").

        Note: Terms and expressions used and defined in the written submissions of the Listing Division shall have the same meanings when used herein unless otherwise defined.

        Decision

        The Committee considered all the submissions (both written and oral) made by the Company and the Listing Division. The Committee determined to uphold the Division's Decision that the Company was not able to comply with the Operating Cash Flow requirement of HK$20 million under Rule 11.12A(1) of the GEM Listing Rules and, accordingly, the Application was rejected on such basis.

        Reasons

        The Committee arrived at its decision for the following reasons:

        1. Rule 11.12A(1) of the GEM Listing Rules required a new applicant or its group must have an adequate trading record of at least two financial years comprising a positive cash flow generated from operating activities in the ordinary and usual course of business before changes in working capital and taxes paid of at least HK$20,000,000 in aggregate for the two financial years immediately preceding the issue of the listing document.
        2. Whether Rule 11.12A(1) was complied with was a question of fact. In examining the facts of each case, one must look beyond the description given to a transaction and should instead focus on the substance of the transaction.
        3. There was no dispute that the Employment Expenses were incurred for [Entity Y]'s ordinary and usual course of business. Without these expenses, the Company could not have hired or retained the staff to generate the level of business activities it did in [Year 1]. At the Review Hearing, the Company further confirmed that the Employment Expenses were incurred for recruiting staff providing services exclusively for [Entity Y] and that these employees did not provide service to [Entity X]. In fact, [Entity X] was an investment holding company holding shares in the Company. Accordingly, the Settlement did not constitute operating activities in the ordinary and usual course of the Group's business.
        4. It might be the practice of [Entity X] to pay for the start-up costs of its subsidiaries but the Settlement did not constitute operating activities in the ordinary and usual course of the Group's business.
        5. For the purposes of ascertaining whether the Company was able to comply with Rule 11.12A(1), the Adjustment should not be taken into account. The Adjustment would distort in substance what ought to be the Group's cash outflow from operating activities in its ordinary and usual course of business during the relevant period. The economic reality was that, had the Employment Expenses not been settled by [Entity X] on the Group's behalf, they would have to be incurred by the Group in its ordinary and usual course of business and reflected as part of the Group's operating cash outflow.
        6. By simply asserting that the Operating Cash Flow prima facie met Rule 11.12A(1) because it was prepared under the accepted accounting standards was not sufficient. The operating inflows and outflows must also have to be in substance made in the Company's ordinary and usual course of business.
        7. The above ruling was made strictly on the interpretation of Rule 11.12A(1) that the Company failed to comply with the eligibility requirement under the GEM Listing Rules. The Committee considered that the non-compliance with the Operating Cash Flow requirement under the Rule could not be remedied by way of disclosure.

        Yours faithfully
        For and on behalf of
        The Stock Exchange of Hong Kong Limited

        [Signed]

        Acting Secretary to the GEM Listing Committee

      • LEGL04-08

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        HKEx LISTING ENFORCEMENT GUIDANCE LETTER
        Cite as HKEx-LEGL04-08 (November 2008)

        Summary
        Listing Rule Main Board Listing Rule 14.36
        Subject Guidance on compliance with the announcement requirement in the event of delay in the completion of an intended notifiable transaction
        Contents Extracts of a No Further Action (Guidance) letter from an authorised signatory of the Stock Exchange of Hong Kong

        [*date]

        [Name and Address of Listed Issuer]

        Dear Sirs,

        [Name of Listed Issuer] (the "Company")
        Rule 14.36 of the Listing Rules
        No Further Action: Guidance

        We refer to earlier correspondence concerning the captioned matter resting with the Company's letter dated [*day *month *year].

        Materials Reviewed

        The Listing Division (the "Division") refers to the following materials which have been reviewed:-

        1. the Company's announcement dated [*day *month *year] (the "Announcement"); and
        2. the Company's submissions dated [*day *month *year].

        Thank you for the information and materials provided which enables the Division to have a clearer understanding of the matter.

        Facts

        1. On [*day *month *year], the Company and [*name of company] (collectively the "Purchasers") entered into sale and purchase agreements with [*name of company] and [*name of company] (collectively the "Vendors") in respect of an intended acquisition of an aggregate of a [*%] interest in [*name of target company] (the "Intended Acquisition"). The sale and purchase agreements referred to above were supplemented by agreements dated [*day *month *year]. The agreements signed on [*day *month] and [*day *month *year] are collectively referred to in this letter as the "Sale and Purchase Agreements".
        2. The Intended Acquisition constituted a major transaction of the Company for the purposes of the Listing Rules. Pursuant to the terms of the Sale and Purchase Agreements, the long-stop date for the Intended Acquisition (the "Completion Date") was [*day *month *year (initial intended date for completion)].
        3. On [*day *month *year], supplemental agreements were entered into between the Purchasers and the Vendors to extend the Completion Date for [*number] days to [*month *year (first extended date for completion)] (the "First Supplemental Agreements"). This information was disclosed by the Company in its announcement dated [*day *month *year].
        4. On [*day *month *year], the Purchasers and the Vendors entered into further supplemental agreements to further extend the Completion Date to [*day *month *year (second extended date for completion)] (the "Second Supplemental Agreements"). No disclosure to shareholders and the market was made at that time.
        5. The Company published the Announcement on [*day *month *year] (about [*number] months later) to disclose the signing of the Second Supplemental Agreements and the further delay in the completion of the Intended Acquisition (the "Completion").
        6. The Intended Acquisition did not however proceed to completion and the Sale and Purchase Agreements lapsed on [*day *month *year]. Disclosure of this event was made by the Company on [*day *month *year].
        7. The submissions received from the Company indicate that no independent or professional advice was sought by the Company at the material time regarding the Company's obligations under the Listing Rules in connection with the signing of the Second Supplemental Agreements or the further delay in Completion.

        Comment

        1. Rule 14.36 of the Listing Rules provides that "Where a transaction previously announced pursuant to this Chapter is terminated or there is any material variation to its terms or material delay in the completion of the agreement, the listed issuer must as soon as practicable announce this fact by means of an announcement......".
        2. The Company has denied any breach of Rule 14.36 of the Listing Rules in connection with the timing of the disclosure of the further extension of the Completion Date.
        3. Having considered the submissions and materials available, the Division is of the preliminary view that there may have been a breach of Rule 14.36 in respect of the Company's failure to timely disclose the signing of the Second Supplemental Agreements and the further extension of the Completion Date for [*number] months (from [*month *year (first extended date for completion)] to [*month *year (second extended date for completion)] as provided for under the First Supplemental Agreements and the Second Supplemental Agreements respectively).
        4. We note that the Company submitted that it had been reassured by [*name of target company] that the only outstanding condition [portion of letter purposely omitted] would be fulfilled shortly after the signing of the Second Supplemental Agreements. The Company might have genuinely believed that the outstanding condition to the Sale and Purchase Agreements could be fulfilled shortly after [*month *year (date of signing of the Second Supplemental Agreements)] and that there would not be any material delay in Completion at the time. For the avoidance of doubt, the Division does not challenge this assertion for the purposes of this letter and no conclusion has been drawn by the Division as to the Company's assertions on this point.
        5. However, the Division is of the view that the fact that Completion had still not taken place for over [*number] months after the signing of the Second Supplemental Agreements rendered the further delay a material one giving rise to the obligation to make an announcement under Rule 14.36 as soon as practicable after [*day *month *year (date of signing of the Second Supplemental Agreements)]. This is particularly so when the market was already aware of the delay in Completion following the signing of the First Supplemental Agreements, which was disclosed on [*day *month *year]. Given the public information already then in the market, there was in our view a legitimate expectation on the part of shareholders and the market that Completion would take place the latest by [*month *year (first extended date for completion)]. The further extension of the Completion Date meant that the expectation was no longer realistic, and the Company was therefore under an obligation to update shareholders and the investing public with the new information regarding a possible further delay in the Completion.

        However, after considering all of the material available as described above and taking into account the following factors, the Division does not intend to take any further action on this matter:-

        (a) the clean compliance history of the Company since its securities were first listed on the Exchange in [*month *year];
        (b) the conduct referred to in this letter appears to be a one-off incident. The Division notes that there were [*number] further extensions of the Completion Date following the signing of the Second Supplemental Agreements in [*month *year (date of signing of the Second Supplemental Agreements)] and the relevant subsequent supplemental agreements were promptly disclosed by the Company in compliance with Rule 14.36 on each occasion by announcements dated [*day *month *year], [*day *month *year] and [*day *month *year]; and
        (c) remedial measures taken by the Company since these events, such as the training organised for the senior management of the Company in [*month *year] and the circulation of a compliance manual in [*month *year].

        However, the Division is of the view that the following guidance may be useful to improve the Company's corporate governance in the future.

        Guidance

        1. In this case, the obligation to comply with the announcement requirement under Rule 14.36 arises as soon as there is any material variation of the terms or material delay in the completion of a transaction which is required to be announced pursuant to Chapter 14. Any delay in making the necessary announcement would not serve the purpose of Rule 14.36 which is to safeguard the timely disclosure by listed issuers to shareholders and investors, which in turn contributes towards an open, transparent and orderly market.
        2. We accept that an assessment of materiality will depend on the facts of a given case. However where issues of materiality arise, in connection with the application of Rule 14.36 and other rules, the Division considers management should and would urge management to seek independent and professional advice to ensure that the Company's Listing Rule obligations are complied with in a timely manner. This is particularly so in the circumstances of this case, when the Company's shareholders and the investing public were already in possession of information relating to the delay in Completion which was disclosed in the Company's announcement dated [*day *month *year].
        3. In the absence of any sound and cogent reasons to the contrary, the best practice for issuers should be to make further and timely disclosure of information to shareholders and the market.
        4. The Division would stress the need for the Company to have in place an effective internal control system to embed its disclosure and other compliance obligations under the Listing Rules and to provide appropriate guidance for senior management as to how such obligations could properly be fulfilled. We note that the Company has taken steps in this direction with the preparation and circulation of a written compliance manual in [*month *year].
        5. Directors of the Company should be aware of their responsibilities towards the Company's shareholders and the market in procuring the Company's due and timely compliance with its Listing Rule obligations. In this regard, the Division would urge the Directors of the Company to undergo training on compliance and corporate governance matters, so as to increase and refresh their knowledge on these matters. Again the Division notes the action taken by the Directors on this point in [*month *year]. However, compliance and corporate governance best practices are being constantly revised to reflect changing market expectations, and in consequence it is vital that management engage in a regular programme of continuing education as to their duties and responsibilities.

        Invitation

        We invite the board of Directors of the Company to comment on this letter if they wish. Your submission, together with this letter, will be placed on the Company's compliance file. No further action will be taken in respect of this matter which is now considered closed.

        Publicity

        We wish to inform you that at an appropriate time, the Division may, in the discharge of its regulatory function, publicise the facts and guidance given in this letter. This would be done on an anonymous and redacted basis, to explain our views on the issues raised by this case for the benefit of the market as a whole. If such disclosure is made it may be published on our website and in our quarterly publication "Exchange".

        Yours faithfully,
        For and on behalf of
        The Stock Exchange of Hong Kong Limited

        [Signed]
        [Authorised Signatory]

      • LEGL03-08

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        HKEx LISTING ENFORCEMENT GUIDANCE LETTER
        Cite as HKEx-LEGL03-08 (Published in November 2008) (Updated in July 2014)

        Summary
        Listing Rule Main Board Listing Rules 2.13, 14A.35, 14A.36, 14A.46 and 14A.48
        Subject
        •   Guidance on who constitutes a connected person of an issuer
        •   Guidance on what procedures an issuer should adopt to ensure compliance with the connected transactions provisions in the Listing Rules.
        Contents Based on and modified from a No Further Action (Guidance) letter from an authorised signatory of the Stock Exchange of Hong Kong

        [*date]

        [Name and Address of Listed Issuer]

        Dear Sirs,

        [*Name of Listed Issuer] Limited (the "Company")
        No further action: Guidance Letter

        We refer to the earlier correspondence concerning the captioned matter resting with the letter (with enclosures) from [*name of solicitors], the Company's solicitors, dated [*day *month *year] (the "Company's Submission").

        Materials Reviewed

        The Listing Division (the "Division") refers to the following materials which have been reviewed:

        1. the Company's announcement (the "Acquisition Announcement") dated [*day *month *year];
        2. the Company's Submission dated [*day *month *year];
        3. the submission by [*name of NED], a then non-executive director of the Company, through his solicitors, [*name of solicitors], dated [*day *month *year]; and
        4. the Company's announcement (the "Termination Announcement") dated [*day *month *year] in relation to the termination of the Acquisition;

        Thank you for the information and material provided by the Company which enables to Division to have a clearer understanding of the matter.

        Facts

        1. On [*day *month *year], the Company and [*name of subsidiary] (the "Purchaser") entered into an Agreement with [*name of individual] whereby the Purchaser agreed to acquire and [*name of individual] agreed to dispose of his entire interest in [*name of a company] at a consideration of [*amount] (equivalent to approximately [*amount]) (the "Acquisition").
        2. According to the submissions referred to above, [*name of NED] informed the Company that [*name of individual] was his sister's boyfriend at the time when the Acquisition was entered into in [*month *year]. [*name of NED] apparently first met [*name of individual] together with his sister in [*month *year], and his sister introduced [*name of individual] to [*name of NED] as her boyfriend. Based on this representation, the Board allegedly reviewed, considered and concluded that [*name of individual]'s, relationship with [*name of NED]'s sister, would not render him a connected person of the Company under Chapter 14A of the Listing Rules.
        3. On [*day *month *year], the Company published an announcement in relation to the Acquisition. It was stated in the Acquisition Announcement that [*name of individual] was a third party independent and not connected to the Company. On [*day *month *year], the Company published a circular in relation to the Acquisition. It was stated in the circular that [*name of individual] was a third party independent and not connected to the Company.
        4. In fact, it emerged from a complaint sent to the Division on [*day *month *year] that [*name of individual] and [*name of NED]'s sister had been married since [*month *year]. [*name of individual] was therefore the brother-in-law of [*name of NED] at the relevant time and thus a connected party for the purposes of the Listing Rules. The submissions received assert that [*name of NED] and the Company were unaware of the extent of the relationship between [*name of individual] and [*name of NED]'s sister until alerted by the Division. The nature of that relationship was subsequently confirmed in [*name of NED]'s submission dated [*day *month *year].
        5. However, on [*day *month *year], the Company announced that the Purchaser and [*name of individual] entered into a formal termination agreement with the Company on [*day *month *year]. The Acquisition had been terminated because [*name of individual] could not procure the necessary approval from the [*name of authority] and [*name of authority] for the registration of the Purchaser as the owner of [*name of company] according to the time schedule set out in the Acquisition Agreement. There is no reference to the connected relationship being part of the reason for the termination.
        6. On [*day *month *year], the Company announced that the Compensation Payments of approximately [*amount] (including the consideration of [*amount] and the interest penalty of [*amount]) in connection to the termination of the Acquisition had been fully received by the Company in [*month *year].
        7. On [*day *month *year], [*name of NED] retired as a non-executive Director of the Company.

        Comment

        1. The prima facie evidence available to us from the material referred to above suggests that [*name of individual] was in fact a connected person of the Company at the time the transaction was entered into in [*month *year].
        2. The Division notes the assertion in [*name of NED]'s and the Company's Submission that [*name of NED] and the Company were not aware of the actual nature of the relationship between [*name of individual] and [*name of NED]'s sister at the relevant time i.e. [*month] to [*month *year]. The Division also notes the Company's submission that [*name of NED] was not involved in the negotiation leading to the signing of the agreement with [*name of individual]. As a non-executive Director, [*name of NED] was only notified at the time of the preparation of the Acquisition Announcement, when his view and declaration of interests in the transaction was sought.
        3. Based on the materials available, in the Division's view, there is prima facie evidence to suggest that the Company did not comply with Rules 2.13, 14A.35, 14A.36, 14A.46 and 14A.48 of the Listing Rules as the Company (i) did not comply with the announcement, circular and shareholders' approval requirements under the Listing Rules at the time when the potential connected transaction was entered into and (ii) published announcements on [*day] and [*day *month *year] which contained information which is potentially inaccurate, incomplete and misleading in relation to this transaction.
        4. However, having considered the materials we have decided to take no further action in relation to this matter. In coming to this decision, the Division has noted the following factors arising subsequent to the events described above giving rise to regulatory concern:
        (a) the Acquisition was subsequently terminated in [*month *year] and the Company received a refund of the consideration together with penalty interest. It appears therefore that shareholders' financial interests may not have been prejudiced, although their ability to consider and make informed investment decisions may have been prejudiced in the circumstances of this case; and
        (b) [*name of NED] has since retired as non-executive director of the Company on [*day *month *year] and consequently the connected relationship no longer exists. There is a presumption that [*name of NED] was best placed to enquire and establish the precise extent of the relationship that existed. Any breach is to some extent a function of his efforts to address this issue.

        Guidance

        Nevertheless the Division continues to have concerns as to the Company's ability to identify and manage connected relationships and we believe that the following guidance may be useful to inform your compliance processes and decision making in the future.

        1. The Company's attention is drawn to the definition of connected person set out in Rule 14A.12(2)(a), which includes "a person cohabiting with him [a connected person described in rule 14A.07(1), (2) or (3)] as a spouse... ". When a transaction is proposed to be entered into by the Company with a person and the Company is on notice that this person has a relationship with a person referred to in Rules 14A.07(1) to (3), the Company should:
        (a) make more detailed enquiries as to whether the such relationship falls within the definition of connected person under Rule 14A.12(2)(a); and
        (b) consult with the Exchange and/or external lawyers as to whether the person falls within the definition of a connected person.
        In this connection we would observe that the Company placed total reliance on the representation made by [*name of NED]. The information he provided should in our view have alerted the Company to make further and more detailed enquiries of [*name of individual] to ascertain and verify the representation made by [*name of NED]. It is possible that such enquiries may have alerted the Company to compliance issues. If the acquisition had not been terminated for the reasons given, it is possible that the Company could have been exposed to regulatory action because of the failure to identify and address the compliance issues arising from the relationship.
        2. If this has not yet been done, it is advisable that the Company puts in place procedures to ensure compliance with Chapter 14A of the Listing Rules. Such procedures may include:
        (a) establishing a list of connected persons of the Company, with a periodic review, to ensure that the list is kept up-to-date;
        (b) ensuring that all transactions are cleared by the Corporate Governance Committee, which is responsible for overseeing the Company's corporate governance matters; and
        (c) seeking professional advice (for example from the Company's Compliance Advisor) before transactions are entered into.
        3. We are also concerned by the inaccurate announcements made by the Company on [*day] and [*day *month *year]. Pursuant to Rule 2.13, any announcement made by the Company must be accurate and complete in all material respects and not be misleading or deceptive. Where the Company is subsequently made aware that material information provided to the public in an announcement is inaccurate, incomplete and/or misleading, the Company is advised to report the same to the Exchange immediately and issue a clarification announcement as soon as practicable. We would recommend that the Company should reflect on the lessons to be learnt from the circumstances described in this letter and implement appropriate changes to ensure that appropriate checks and balances are installed by which the accuracy of information given to shareholders and the market is ensured.
        4. We would also remind you that the announcement, circular and shareholders' approval requirements of connected transactions must be satisfied by an issuer before or at the time when the issuer enters into the transaction, not after the transaction has already been entered into. The Company's attention is drawn to the following:
        (a) Rule 14A.35 of the Listing Rules requires an issuer to announce the connected transaction as soon as practicable after its terms have been agreed; and
        (b) Rule 14A.36 also requires the connected transaction to be made conditional on approval by independent shareholders.

        Invitation to Comment

        We invite the board of directors of the Company to comment on this letter if they wish. Your submission, together with this letter, will be placed on the Company's compliance file. No further action will be taken in respect of this matter which is now considered closed.

        Publicity

        We wish to inform you that, at an appropriate time, the Division may, in the discharge of its regulatory function, publicize certain facts and guidance given in this letter. This would be done on an anonymous and redacted basis, to explain our views on the issues raised by this case for the benefit of the market as a whole. If such disclosure is made it may be published on our website and in our quarterly publication "Exchange".

        Yours faithfully,
        For and on behalf of
        The Stock Exchange of Hong Kong Limited

        [Signed]
        [Authorised Signatory]

      • LEGL01-08

        View Current PDF

        HKEx LISTING ENFORCEMENT GUIDANCE LETTER
        Cite as HKEx-LEGL01-08 (November 2008)

        Summary
        Listing Rule Main Board Listing Rule 2.13(2)
        Subject Guidance on arrangements to maintain effective accounting procedures and controls following the implementation of revised accounting standards
        Contents Extracts of a No Further Action (Guidance) letter from an authorised signatory of the Stock Exchange of Hong Kong

        [*Date]

        [Name and Address of Listed Issuer]


        Dear Sirs,

        [Name of Listed Issuer] (the "Company", together with its subsidiaries, the "Group")
        No Further Action: Guidance

        We refer to earlier correspondence concerning the captioned matter resting with your letter dated [*day *month *year].

        Materials Reviewed

        The Listing Division (the "Division") refers to the following materials which have been reviewed:

        1. the Company's announcements of various dates [* dates of the announcements];
        2. the Company's interim report for the 6 months ended [*day *month *year] (the "Interim Report");
        3. the Company's letters dated [*day *month *year], [*day *month *year] and [*day *month *year] to the Division;
        4. the 2 Reports of Factual Findings and Recommendations dated [*day *month *year] and [*day *month *year] prepared by [*]; and
        5. the Company's letters dated [*day *month *year], [*day *month *year] and [*day *month *year].

        Thank you for the information and materials provided by the Company which enabled the Division to have a clearer understanding of the matter.

        Facts

        1. In the Company's announcement dated [*day *month *year] (the "Announcement"), the Company disclosed and admitted that there were misstatements (the "Misstatements") concerning the amount of the Group's unaudited net profit from ordinary activities attributable to shareholders in the Group's announced results for the quarter ended [*day *month *year], the six months ended [*day *month *year], and the nine months ended [*day *month *year] (collectively referred to as the "Financial Results"), as follows:
        (a) The amount as previously reported in the Company's results announcements (i.e. the Misstatements): [*the respective amounts]; and
        (b) The properly restated amount: [*the respective amounts].
        2. The Misstatements in respect of the Group's results for the 6 months ended [*day *month *year] also appeared in the Company's Interim Report.

        Analysis

        1. Based on the materials made available, the Division understands that the Misstatements were a result of cumulative failings on the part of the Company, including the following:
        (a) not maintaining a separate [*nature of accounting document] as part of its basic accounting records;
        (b) failure by the Company's management responsible for the proper functioning of the Company's accounting team and systems (and also the Company's auditors, [*name of the Company's auditors]) to detect this weakness;
        (c) not raising the issue of the absence of [*nature of accounting document] with the Company's Audit Committee or the Board;
        (d) no formal engagement of the Company's auditors at the material time to assist the Company's Accounting Department in ensuring that the consequences of adoption of HKAS [*number] were comprehensively addressed; and
        (e) a fundamental conceptual error on the part of the relevant accounting staff in preparing, reviewing and approving the journal entries for the [*relevant] investment portfolio.
        2. Having reviewed the materials made available to the Division, and in view of the circumstances of the matter, the Division is of the view that cumulative failures may in other circumstances lead to disciplinary action against the Company.
        3. However, in the circumstances of this case, the failures may not have been material from the perspective of Rule 2.13 and consequently no further action will be taken in respect of this matter. The Division notes, in particular, the Company's submission that the Misstatements did not have any material impact on the fundamental financial position of the Company, and the Misstatements of the profit and loss accounts were counter-balanced by corresponding understatements in the reserves. Further, the fact that [*another regulatory body] has decided not to pursue this matter has also been taken into account. In addition the Listing Division has taken advice on the materiality of the Misstatements from an independent analyst in the [*relevant industry] sector working for a firm with an international name and reputation. The analyst's views broadly support the position adopted by the Company.

        In the circumstances, the Division has decided not to take any further action on the matter. However, the Division is of the view that it is appropriate that this guidance letter be issued to you.

        Guidance

        1. The Division is of the view that it is of utmost importance that a listed issuer has in place an effective accounting system to ensure that accurate periodic financial reports are prepared and published for the company's shareholders and the investing public in a timely manner. This will contribute towards maintaining a fair and orderly market for the trading of a listed issuer's securities. Accounting staff members of the Company should be properly supervised by experienced (and preferably professionally qualified) staff who in turn should report to the senior management, including the Audit Committee, on a regular basis.
        2. Whenever the Company considers the adoption of a new accounting policy or standard, the Company should seek, where deemed necessary, external professional advice, including advice on the steps which should be taken by the Company to ensure proper implementation of the new accounting policy. This would assist the Company's accounting department in ensuring that they fully understand and can address all issues arising from the adoption of the new accounting policy. It is advisable that where advice is sought, it should be clearly defined and set out in writing.
        3. In addition, it is incumbent upon the Company to provide regular and adequate internal or external training to all staff who are involved in accounting and financial reporting matters so that they are aware of the impact of new developments, and can prepare for the proper implementation of new accounting policies and standards.
        4. The Division would also draw your attention to section C of the Code of Corporate Governance Practices set out in Appendix 14 to the Listing Rules which provides further guidance on financial reporting and internal control matters. Code 3.2.1 provides that there should be at least an annual review of the effectiveness of the Company's internal control systems.
        5. In the Division's view, if the Company had followed the above-mentioned guidance, the Misstatements on the implementation of HKAS [*number] might have been prevented.

        Invitation to Comment

        [Portion of Letter Purposely Omitted] we invite the board of directors of the Company to comment on this letter if they wish. Your submission, together with this letter, will be placed on the Company's compliance file. No further action will be taken in respect of this matter which is now considered closed.

        Publicity

        We wish to inform you that, at an appropriate time, the Division may, in the discharge of its regulatory function, publicize certain facts and guidance given in this letter. This would be done on an anonymous and redacted basis, to explain our views on the issues raised by this case for the benefit of the market as a whole. If such disclosure is made it may be published on our website and in our quarterly publication "Exchange".

        Yours faithfully,
        For and on behalf of
        The Stock Exchange of Hong Kong Limited

        [Signed]

        [Authorised Signatory]

    • 2007

      This section contains extracts of Listing Division's letters to issuers, interpreting the Listing Rules on specific listing matters.

      Rejection Letter (RL) – This series comprises a selection of letters explaining the Division's rejection of specific listing applications.

      No Further Disciplinary Action (Guidance) Letter (LEGL) - This series comprises a selection of letters issued following investigation of suspected breaches of the Rules and where the Division decided not to pursue disciplinary action. The letters communicate the Division's interpretation or expectations as to the conduct of an issuer and its directors and are now published for general guidance and to promote transparency about the disposal of potential disciplinary matters.

      Please visit Archive to view marked-up versions and versions that have been superseded or withdrawn.

      Date (mm/yyyy) Reference Number Particulars Listing Rules Document Type Content Category
      07/2007 RL23-07 Letter 1 - The Listing Division rejected the listing application of the Company for the reason that the Company was unable to comply with the minimum profit requirement under Listing Rule 8.05(1)(a) and the suitability requirement under Listing Rule 8.04. Letter 2 - The Listing Committee upheld the rejection decision of the Listing Division. Letter 3 - The Listing (Review) Committee reversed the decision of the Listing Committee, subject to certain specified conditions. Rule 8.05(1) (a) Rejection Letter New Applicants
      07/2007 RL22-07 Letter 1 - The Listing Division rejected the listing application of the Company for the reason that the Company has not complied with the Listing Committee's requirement of increasing the shareholders' approval threshold for delisting and privatisation through scheme of arrangement or capitalisation to above the current minimum requirements. Letter 2 - The Listing Committee decided to overturn the decision of the Listing Division, subject to certain specified conditions. Rule 2.04 Rejection Letter New Applicants
      02/2007 RL21-07 The Listing Committee rejected the listing application of the Company for the reason that the Group was not able to demonstrate that it is capable of carrying on its business independently of its controlling shareholders and therefore the Listing Committee considered the Group not suitable for listing as required by Listing Rule 8.04. Rule 8.04 Rejection Letter New Applicants
      02/2007 RL20-07 Letter 1 - The Listing Committee considered the Company not suitable for listing under Listing Rule 8.04 because the Company's business model was effectively captive to another company which was both the source of its principal raw materials and its principal customer channel during the Track Record Period. The Listing Committee considered this to be an extreme case that could not be adequately addressed by corporate governance measures alone given the conflicting roles of the Company's controlling shareholder. Letter 2 - The Listing (Review) Committee decided to uphold the decision of the Listing Committee. Rule 8.04 Rejection Letter New Applicants
      02/2007 RL19-07 The Listing Committee rejected the listing application of the Company for the reason that the Group should not be considered suitable for listing under Listing Rule 8.04 in light of that the change in the nature of the Company's revenue generating activities going forward was so fundamental as to affect its suitability for listing and was not a matter which could be dealt with solely by disclosure. Rule 8.04 Rejection Letter New Applicants
      02/2007 RL18-07 Letter 1 - The GEM Listing Committee rejected the listing application of the Company for the reason that the Group should not be considered suitable for listing under GEM Listing Rule 11.06 in light of the various issues arising from an anonymous complaint relating to the Company's borrowings from its employees. Letter 2 -The GEM Listing (Review) Committee decided to overturn the decision of the GEM Listing Committee, subject to certain specified conditions. GEM Rule 11.06 Rejection Letter New Applicants

      • RL23-07

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        HKEx REJECTION LETTER
        Cite as HKEx-RL23-07 (July 2007)

        Summary
        Listing Rule Listing Rule 8.05(1)(a)
        Reason for rejection and the subsequent disposal of the case on review The Listing Division rejected the listing application of the Company for the reason that the Company was unable to comply with the minimum profit requirement under Listing Rule 8.05(1)(a) and the suitability requirement under Listing Rule 8.04.

        The Listing Division's rejection decision was upheld by the Listing Committee but reversed by the Listing (Review) Committee, subject to certain specified conditions.
        Contents LETTER 1: Extracts of the decision letter of the Head of Listing, The Stock Exchange of Hong Kong Limited

        LETTER 2: Extracts of the decision letter of the Acting Secretary to the Listing Committee on hearing of the Company's application to review the decision of the Listing Division

        LETTER 3: Extracts of the decision letter of the Secretary to the Listing (Review) Committee on hearing of the Company's application to review the decision of the Listing Committee

        LETTER 1

        [Date]

        [Name and Address of Sponsor]

        Dear Sirs

        Re: Application for new listing of a Main Board listing applicant
        (the "Company" together with its subsidiary, the "Group")

        We refer to your application Form A1 dated [*day*month*year] made on behalf of the Company (the "Application"), various submissions and the hearing proof of the Company's prospectus dated [*day*month*year] (the "Prospectus"). Capitalised terms used herein shall have the same meanings as those defined in the Prospectus, unless the context otherwise stated.

        Based on the information provided, the Listing Division is of the view that the Company is unable to comply with the minimum profit requirement under Listing Rule 8.05(1)(a) and the suitability requirement under Listing Rule 8.04. Accordingly, the Company's listing application is rejected. The Listing Division's analysis and conclusion are set forth below. In forming our view, we have sought guidance from the Listing Committee.

        Minimum Profit Requirement under Listing Rule 8.05(1)(a)

        A. Relevant Facts

        The Group's business
        1. The Group is engaged in the businesses of merchant banking, asset management and venture capital fund management. The Group also makes direct investments in listed securities.
        2. The Group's merchant banking activities focus on corporate situations which are opaque and identifying undervalued assets. The Group's returns are usually based on some form of carried interest or direct equity participation in the restructured assets and may also receive advisory fees and success fees.
        3. One of the predominant strategies used by the Group is injecting acquired assets into listed companies which in turn are acquired principally for resale in the near term. Accordingly, investments in such listed companies are classified as "financial assets at fair value through profit or loss" under the International Financial Reporting Standards.
        The Group's profits

        4. [The majority of the Group's revenue in the third year of the Track Record Period (comprising Year 1, Year 2 and Year 3)] were derived from unrealized gains ("Financial Gains") as a result of increase in the fair value of the Company's investments in [several listed companies] (the "Investee Companies"). The Investee Companies hold [participation interests in natural resources projects in overseas countries] ("Overseas Participation Interests").
        B. Applicable Listing Rules and Guidance
        5. Listing Rule 8.05(1)(a) requires that profit attributable to equity holders of a new listing applicant must, in respect of the most recent year, be not less than HK$20 million and, in respect of the two preceding years, be in aggregate not less than HK$30 million. The profit should exclude any income or loss of the new listing applicant, or its group, generated by activities outside the ordinary and usual course of its business.
        6. The Listing Division views the minimum profit requirement under Listing Rule 8.05(1)(a) as an effective indicator of the past performance of the management during the track record period and such requirement, together with appropriate disclosure, should enable investors to make an informed assessment of the listing applicant as contemplated by Listing Rule 2.03(2). When reviewing whether a new listing applicant satisfies the requirement of Listing Rule 8.05(1)(a), the Listing Division ordinarily considers the burden of proof to be on the sponsor and listing applicant to demonstrate compliance. In view of the importance of this listing eligibility standard, in areas where significant judgment is required by directors or their reporting accountants that affects the Listing Division's analysis of Listing Rule 8.05(1)(a), the Listing Division does not rely solely on the judgment of the directors and/or accountants in reaching its conclusions. Instead the Listing Division may reach its own conclusion based on the information presented in order to ensure that the eligibility standards of Listing Rule 8.05(1)(a) are interpreted in a consistent manner and not unduly affected by the views of individual boards of directors and/or reporting accountants.
        7. Listing Decision HKEx-LD45-2 states that in determining whether any income can be counted towards satisfaction of the profit requirement of Listing Rule 8.05(1)(a), the Exchange must be satisfied that, based on the facts and circumstances of a particular case, the income arises from the ordinary and usual course of business.
        C. Issue
        8. Whether the Financial Gains should be recognized as profit for the purpose of the minimum profit requirement under Listing Rule 8.05(1)(a).
        D. Listing Division's Analysis
        9. The Listing Division considers the profit requirement under Listing Rule 8.05(1)(a) to be a question of fact. In particular, the Listing Division will consider whether the Group is able to fulfill the minimum profit requirement without relying on profit from activities conducted outside the Group's ordinary and usual course of business.
        10. Based on the description of the Company's business in the Prospectus, the main objective of the Group's merchant banking activities is to realize the acquired assets at an opportune time.
        11. The Financial Gains are a result of fair value gains and the Listing Division is of the view that these gains should not be regarded as profits for the purpose of Listing Rule 8.05(1)(a) as such gains could not be regarded as income in the conventional sense, that is, they are not realised, and they do not contribute to the cashflows of the Group.
        12. Therefore, any Financial Gains on the Group's investments in the Investee Companies which were recognized in the profit and loss accounts represent incidental income arising from their merchant banking activities and do not form part of the ordinary and usual business of the Group based on our interpretation under Listing Rule 8.05(1)(a). The Company may receive payment for its services in kind for its merchant banking activities. However, any unrealized gains derived before the sale of the [listed securities] in question are incidental income.
        13. The Listing Division's analysis is likened to a case where an applicant submitted that it was able to meet the profit requirement under Listing Rule 8.05(1)(a) on the basis that the interest income derived from bank deposits were incurred in the usual and ordinary course of business. The Listing Division was of the view that this should not be the case as any income for the purpose of Listing Rule 8.05(1)(a) should be income actively derived from the Company's principal course of business rather than income derived from a source which is incidental to the issuer's business, as indicated by Rejection Letter HKEx-RL3-04.
        14. The Company's equity holdings in the Investee Companies which hold the Overseas Participation Interests are [less than 20%]. Therefore, the Company has not demonstrated that it controls these companies through beneficial ownership or board control. The Company has in fact submitted that it does not control these companies.
        15. Given that the Company holds less than 50% equity interest in each of the investee companies as detailed in the Prospectus and the Company does not have control of the board of these investee companies, the Company has therefore not demonstrated that it had control over the financial and operating policies of these investee companies. We refer to a precedent case, which was rejected by the Listing Division as indicated by Rejection Letter HKEx-RL14-06, the Listing Division had taken the position that where the Company does not maintain control over the associated companies, the results of such entities should be excluded for the purpose of Listing Rule 8.05(1)(a). We are of the view that the same principle should apply here. As the Company's equity investments were not controlling stakes, the Financial Gains should be considered as passive in nature.
        Accounting treatment
        16. The Company has submitted that the Financial Gains are part of its merchant banking business and these gains should then form part of its operating activities. However, based on the Accountants' Report, the Financial Gains are not classified as part of Turnover/Revenue but as a separate line in its Consolidated Income Statements. In addition, such Financial Gains are categorised as cash flows from investing activities rather than from operating activities in the Consolidated Cash Flow Statements of the Accountants' Report.
        17. Based on the presentation of the Company's consolidated accounts, it would seem to indicate that the Financial Gains did not form part of the Group's usual and ordinary course of business by presenting such gains as "gain on financial assets at fair value through profit or loss", which was separated from "turnover/revenue". The Group's "Turnover/revenue" mainly represented (i) corporate finance and other advisory fees; (ii) fees from placement of shares; (iii) fund management fee income; and (iv) wealth management services fee. As such, the disclosure in the Accountants' Report is inconsistent with the description of the Company's principal businesses in the Prospectus.
        18. Therefore, we conclude that the Financial Gains recognized in the profit and loss accounts during the Track Record Period should not be included for the purpose of Listing Rule 8.05(1)(a). When the Financial Gains are excluded, the Company would record a pro-forma loss attributable to equity holders of the Company for each year of the Track Record Period. The Company is thus unable to comply with the minimum profit requirement of Listing Rule 8.05(1)(a).
        19. Fair value accounting is increasingly prevalent in accounting. The Listing Division is not disputing how the Financial Gains are recorded in the Company's financial statements as long as the treatment complies with the relevant accounting standards. We believe there is compliance in this regard. However, as set out in our Rejection Letter HKEx-RL10-06 the profit of an issuer for the purpose of Listing Rule 8.05(1)(a) may be treated differently to its accounting profit.
        E. Conclusion
        20. On the basis of the Listing Division's analysis set forth above, the Listing Division has concluded that the Group is not able to satisfy the minimum profit requirement of HK$30 million in aggregate in respect of the first two financial years of the Track Record Period and HK$20 million in respect of the most recent financial year of the Track Record Period under Listing Rule 8.05(1)(a). Accordingly, the Listing Division has decided to reject the Company's listing application.

        Pursuant to Listing Rule 2B.05(1), the Company has the right to have this decision reviewed by the Listing Committee.

        [Portion of Letter Purposely Omitted]

        Yours faithfully,
        For and on behalf of
        The Stock Exchange of Hong Kong Limited

        [Signed]

        Head of Listing

        **********************************************************************

        LETTER 2

        [Date]

        [Name and Address of Sponsor]

        Dear Sirs,

        Re: Review Hearing of the Listing Committee
        (the "Review Hearing") regarding the Company
        Date of the Review Hearing: [* day* month * year]

        On [*day*month*year], the Listing Committee of The Stock Exchange of Hong Kong Limited conducted a review hearing (the "Review Hearing") to consider an application from the Company for a review of the decision of the Listing Division set out in [LETTER 1] dated [* day* month* year], (the "Decision").

        The Review Hearing was conducted before the Listing Committee comprising [names of members purposely omitted] (the "Committee").

        Note: Terms and expressions used and defined in the written submission of the Listing Division shall have the same meanings when used herein unless otherwise defined.

        Decision

        The Committee considered the submissions (both written and oral) made by the Company and the Listing Division. The Committee decided to uphold the Decision to reject the Company's listing application on the basis that the Company was unable to satisfy the minimum profit requirement under Listing Rule 8.05(1)(a).

        Reasons

        The Committee arrived at its decision for the following reasons:

        1. Pursuant to Listing Rule 8.05(1)(a), the profit attributable to equity holders of a new listing applicant must, in respect of the most recent year, be not less than HK$20 million, and, in respect of the preceding years, be in aggregate not less than HK$30 million. The profit should exclude any income or loss of the new listing applicant, or its group, generated by activities outside the ordinary and usual course of its business.
        2. The Committee noted the accounting treatment of income under the IFRS and that the Company had shown its gains on financial assets at fair value through profit or loss in the Consolidated Income Statements. The Committee did not dispute the Company's presentation of its financial statements. However, it should be noted that the IFRS are standards adopted by accountants in preparing financial statements while Listing Rule 8.05(1)(a) sets out the profit test which a listing applicant must comply with. The Committee was of the view that gains which were qualified as income under the IFRS did not necessarily mean that they would qualify as income under Listing Rule 8.05(1)(a), which specifically excludes any income of the issuer, or its group, generated by activities outside the ordinary and usual course of its business.
        3. The Company was engaged in, among other things, the business of merchant banking and, in return, received both advisory fees and payment for its services in kind which could be realized at a future date. The Committee was not satisfied that the Company's gains arising from their merchant banking activities could be sufficiently and reliably attributed to the Company's ordinary and usual course of business.
        4. In particular, the Committee considered that the unconventional nature of the Company's business model made it difficult for the source and derivation of the Company's profits to be sufficiently transparent for the Committee to conclude that Listing Rule 8.05(1)(a) had been satisfied.
        5. On the basis of the above, the Committee was not satisfied that the Company complied with Listing Rule 8.05(1)(a).

        Yours faithfully
        For and on behalf of
        The Stock Exchange of Hong Kong Limited

        [Signed]

        Acting Secretary to the Listing Committee

        **********************************************************************

        LETTER 3

        [Date]

        [Name and Address of Sponsor]

        Dear Sirs,

        Re: Review Hearing of the Listing (Review) Committee
        (the "Review Hearing") regarding the Company
        Date of the Review Hearing: [* day* month * year]

        On [*day*month*year], the Listing (Review) Committee of The Stock Exchange of Hong Kong Limited conducted a review hearing (the "Review Hearing") to consider an application from the Company for a review of the decision of the Listing Committee of [*day*month*year] and set out in the [LETTER 2] dated [* day*month* year] (the "First Decision").

        The Review Hearing was conducted before the Listing (Review) Committee comprising [names of members purposely omitted] (the "Review Committee").

        Note: Terms and expressions used and defined in the written submission of the Listing Division shall have the same meanings when used herein unless otherwise defined.

        Decision

        The Review Committee considered all the submissions (both written and oral) made by the Company and the Listing Division. The Review Committee decided to overturn the First Decision and allow the Company to proceed with its listing application in accordance with the Listing Rules, subject to the following conditions:

        1. the Company should make prominent disclosure of the following in the Company's Prospectus to the satisfaction of the Listing Division:
        (i) full details of all listed investments and all other investments set out in Listing Rule 21.08(15) and an analysis of any provision for diminution in value of investments set out in Listing Rule 21.08(16) as applicable to investment companies;
        (ii) information about the underlying performance of the shares in each investee company, including performance, track record, breakdown of gains and price movement;
        (iii) concentration of shares in a few investee companies and the liquidity of such shares; and
        (iv) valuation of underlying shares in each investee company with detailed figures and the basis of such valuation.
        2. no waiver will be given in respect of compliance with Listing Rule 4.04. The accounts of the Group should therefore be updated to [the balance sheet date of Year 3+1].

        In addition, due to the volatility and nature of the Group's business, the Review Committee recommends that: (a) the annual report and accounts of the Group issued after listing should disclose the information set out in Listing Rule 21.12(1)(a) to (c) as applicable to investment companies; and (b) the Company considers continuing to publish its quarterly results.

        The Review Committee wishes to emphasise that this decision is specific to this particular instance and shall not serve to create a precedent for any other companies.

        For the avoidance of doubt, should the Company decide to proceed with its application for new listing, such application will be treated strictly on its merits at the material time, and no representation is given, whether express or implied, as to the acceptability of such application if pursued. The new listing application of the Company in its entirety will be subject to the final approval of the Listing Committee.

        Yours faithfully
        For and on behalf of
        The Stock Exchange of Hong Kong Limited

        [Signed]

        Secretary to the Listing (Review) Committee

      • RL22-07

        View Current PDF

        HKEx REJECTION LETTER
        Cite as HKEx-RL22-07 (July 2007)

        Summary
        Listing Rule Listing Rule 2.04
        Reason for rejection and the subsequent disposal of the case on review The Listing Division rejected the listing application of the Company for the reason that the Company has not complied with the Listing Committee's requirement of increasing the shareholders' approval threshold for delisting and privatization through scheme of arrangement or capitalization to above the current minimum requirements.

        The Listing Committee decided to overturn the decision of the Listing Division, subject to certain specified conditions.
        Contents LETTER 1: Extracts of the decision letter of the Head of Listing, The Stock Exchange of Hong Kong Limited

        LETTER 2: Extracts of the decision letter of the Acting Secretary to the Listing Committee on hearing of the Company's application to review the decision of the Listing Division

        LETTER 1

        [Date]

        [Name and Address of Sponsor]

        Dear Sirs

        Re: Application for new listing of a Main Board listing applicant
        (the "Company" together with its subsidiary, the "Group")

        We refer to your application Form A1 dated [*day*month*year] made on behalf of the Company (the "Application") and various submissions (the "Submissions") in response to the letter of [*day*month*year] issued by the Secretary to the Listing Committee (the "LC Letter"). Capitalised terms used herein shall have the same meanings as defined in the second hearing proof of the Company's prospectus dated [*day*month*year] (the "Prospectus"), unless the context otherwise stated.

        Based on the information provided, the Listing Division is of the view that the Company has not complied with the requirement set out by the Listing Committee in the LC Letter. Therefore, the Listing Division has decided to reject the Application of the Company. The analysis and conclusion of the Listing Division have been set out below.

        Relevant Facts

        Requirements of the Listing Committee

        The Application was considered by the Listing Committee on [*day*month*year] (the "Hearing Meeting"). The Listing Committee had raised a number of concerns in relation to, among other things, the relationship between the Company and its controlling shareholder, Mr. X, and the businesses of Mr. X that competed with the Company in certain aspects.

        The Listing Committee noted that [two commercial projects] of the Group had been held by another two companies controlled by Mr. X and his associates, [Listco A] and [Listco B]. [Listco A] and [Listco B] had both been listed on the Exchange and then privatized by Mr. X at a substantial discount in [two years prior to the beginning of the of the Track Record Period and the third year of the Track Record Period] respectively (the "Privatizations"). The then independent financial advisers were of the view at that time that the terms of the Privatizations were not fair and reasonable to investors. In the Hearing Meeting, the Listing Committee considered this to be a corporate governance issue and was not persuaded that full disclosure and enhanced corporate governance measures proposed to be adopted by the Company would be sufficient to address the issues arising from the Privatizations.

        The Listing Committee set out in the LC Letter, among other comments and requirements, the requirement, subject to the compliance with the relevant rules and regulations (e.g. the Code on Takeovers and Mergers), of increasing the approval threshold for delisting and privatization through scheme of arrangement or capitalization to above the current minimum requirements of the Company's articles of association (the "Articles").

        The Sponsor's submissions in response

        The Sponsor had made the Submissions in response to the Listing Committee's concerns and requirements.

        The Sponsor had provided a legal opinion issued by the Company's Cayman Islands legal adviser opining that the approval thresholds set out in the relevant sections of the Cayman Islands Companies Law are statutory thresholds and, accordingly such sections would override any alternative provisions in respect of such matters contained in the Company's Articles. The Sponsor had also provided another four legal opinions from counsels in Hong Kong, Bermuda, the United Kingdom and Australia to address the Listing Committee's concerns. According to the conclusion of these legal opinions, it is more likely than not that an attempt to amend the Articles to increase the statutory thresholds for delisting and privatization by way of scheme of arrangement would be held by the courts of each of the five jurisdictions to be invalid.

        It is also stated in the Submission that the Sponsor had noted from the letter from the Securities and Futures Commission (the "SFC") dated [*day*month*year], a copy of which was sent to the Exchange by the SFC, that "the Executive Director of the Securities and Futures Commission does not object to the Company including in its Articles provisions which increase the shareholder's approval threshold for delisting and privatization through scheme of arrangement or capitalization". However, the Company was of the view that it is not in the interest of the Company to amend provisions in the Articles at this point to increase the shareholders' approval threshold for delisting and privatization through scheme of arrangement or capitalization. As such, it had decided not to amend provisions in the Articles to increase the relevant shareholders' approval threshold. Instead, Mr. X had agreed to undertake not to privatize the Company for ten years from the date of listing.

        Issue

        Whether the Listing Committee's requirement set out in the LC Letter has been complied with.

        Applicable Listing Rule

        Listing Rule 2.04 provides that "... the Exchange Listing Rules are not exhaustive and that the Exchange may impose additional requirements or make listing subject to special conditions whenever it considers it appropriate."

        Our Analysis

        The Listing Division considers that the requirement to vary the Company's Articles set out in the LC Letter was duly established by the Listing Committee pursuant to Listing Rule 2.04.

        In the letter from the SFC to the Sponsor of [*day*month*year], the SFC stated its view that "[i]n the current matter the Executive does not see why, in principle, provisions which increase the shareholders' approval threshold for delisting and privatization should necessarily conflict with the provisions of the Code". It is also stated in the Submission that the Sponsor had noted that the Executive Director of the SFC did not object to the Company including in its Articles such provisions. Based on this information, the Listing Division considers it to be clear that under relevant requirements in Hong Kong it is possible for the Company to include in its Articles the relevant provisions to increase the shareholders' approval threshold for delisting and privatization.

        It is the established practice of the Exchange to use the standards of shareholder protection provided in Hong Kong as minimum standards that all listed companies are expected to meet. Given the standards duly established by the Listing Committee are permissible in Hong Kong the Listing Division expects the Company to use reasonable endeavours to comply with the Listing Committee's requirement. While the Listing Division notes the legal opinion of the Company's Cayman Islands legal adviser, it considers it possible for the Company to re-domicile to Hong Kong and incorporate the relevant provision in its Articles in order to be in full compliance with the Listing Committee's requirement. The Listing Division, however, notes that the Company has not taken such steps to comply with the Listing Committee's requirement of increasing the approval threshold for delisting and privatization.

        Our Conclusion

        Based on the information contained in the Submissions and in light of the facts and circumstances of the case and our analysis set forth above, the Listing Division notes that the Company has not complied with the Listing Committee's requirement of increasing the shareholders' approval threshold for delisting and privatization through scheme of arrangement or capitalization to above the current minimum requirements. The Listing Division therefore has decided to reject the Application.

        Way Forward

        Pursuant to Listing Rule 2B.05(1), the Company has the right to have this decision reviewed by the Listing Committee.

        [Portion of Letter Purposely Omitted]

        Yours faithfully,
        For and on behalf of
        The Stock Exchange of Hong Kong Limited

        [Signed]

        Head of Listing

        ***********************************************************************

        LETTER 2

        [Date]

        [Name and Address of Sponsor]

        Dear Sirs,

        Re: Review Hearing of the Listing Committee
        (the "Review Hearing") regarding the Company
        Date of the Review Hearing: [* day* month * year]

        On [*day*month*year], the Listing Committee of The Stock Exchange of Hong Kong Limited conducted a review hearing (the "Review Hearing") to consider an application from the Company for a review of the decision of the Listing Division of [*day*month*year] and set out in the [LETTER 1] dated [* day*month* year] (the "First Decision").

        The Review Hearing was conducted before the Listing Committee comprising [names of members purposely omitted] (the "Committee").

        Note: Terms and expressions used and defined in the written submission of the Listing Division shall have the same meanings when used herein unless otherwise defined.

        Decision

        The Committee considered all the submissions (both written and oral) made by the Company and the Listing Division. The Committee decided to overturn the First Decision and allow the Company to proceed with its listing application in accordance with the Listing Rules, subject to: (a) the conditions laid out in the LC Letter, with the exception of Point [*] that required the Company to amend its Articles to increase the approval threshold for delisting and privatization through scheme of arrangement or capitalization to above the current minimum requirements, and (b) that prominent and detailed disclosure (as described below) should be made in the Company's prospectus to the satisfaction of the Listing Division.

        The Committee believed that requiring the Company to increase the approval threshold for delisting and privatization through scheme of arrangement of capitalization to above the minimum requirements of the Articles would likely be ineffectual or unenforceable. Instead, the Committee took the view that prospective public investors should be made fully aware of the risks associated with the controlling shareholder's previous privatization of two predecessor companies, [Listco A] and [Listco B]. Given the possibility that both Privatizations were against the best interests of public shareholders, the Committee considered that such an outcome may pose a real risk for the Company's public shareholders as well. As such, the Committee required disclosure above and beyond what was being proposed in the Prospectus.

        Towards that end, the Company should provide, in a prominent area in the Summary section of the Prospectus, a detailed description of the history of the Privatizations of the predecessor companies, incorporating relevant information similar to that contained in [page*] (under Risk Factors "We may be privatized by our controlling shareholder(s) in the future") and [page*] (under History, Development and Group Structure) but also including the full set of facts [regarding the Privatizations].

        In addition, the Committee wishes to note that the proposal by the Company, as presented in the written submission to the Committee dated [*day*month*year] (i.e. a date after the First Decision but before the Review Hearing), that the controlling shareholder, Mr. X, undertook not to initiate any proposal for privatization for a period of ten years does not address the Committee's concerns in this area - it is not the period of time that is the issue, but the manner in which any privatization scheme is conducted that is important, namely that it should be fair and transparent to the public shareholders. A blanket moratorium on privatizations may benefit neither the Company nor its public shareholders. For the sake of clarity, the Committee does accept the additional measures proposed by the Company [including (i) a provision in the Articles to the effect that the board would not approve a scheme meeting of shareholders to consider privatization by way of a scheme of arrangement unless the independent board committee has endorsed it as fair and reasonable; and (ii) Mr. X would undertake not to requisition any meeting of shareholders to vote on a privatization proposal which the independent board committee has not endorsed as fair and reasonable].

        The Committee wishes to emphasise that this decision is specific to this particular instance and shall not serve to create a precedent for any other companies.

        For the avoidance of doubt, should the Company decide to proceed with its application for new listing, such application will be treated strictly on its merits at the material time, and no representation is given, whether express or implied, as to the acceptability of such application if pursued. The new listing application of the Company in its entirety will be subject to the final approval of the Listing Committee.

        Yours faithfully
        For and on behalf of
        The Stock Exchange of Hong Kong Limited

        [Signed]

        Acting Secretary to the Listing Committee

      • RL21-07

        View Current PDF

        HKEx REJECTION LETTER
        Cite as HKEx-RL21-07 (February 2007)

        Summary
        Listing Rule Listing Rule 8.04
        Reason for rejection and the subsequent disposal of the case on review The Listing Committee rejected the listing application of the Company for the reason that the Group was not able to demonstrate that it is capable of carrying on its business independently of its controlling shareholders and therefore the Listing Committee considered the Group not suitable for listing as required by Listing Rule 8.04. The Listing Committee noted that in view of the importance of the Group's relationship with its controlling shareholders, there were inadequate arrangements and no sufficient and tested corporate governance measures to manage actual and potential conflicts of interest between the Group and its controlling shareholders.
        Contents Extracts of the decision letter of the Secretary to the Listing Committee

        [Date]

        [Name and Address of Sponsor]

        Dear Sirs

        Re: Application for new listing of a Main Board listing applicant
        (the "Company" together with its subsidiary, the "Group")

        We refer to your application Form A1 dated [*day*month*year] made on behalf of the Company (the "Application") and the hearing proof of the Company's prospectus dated [*day*month*year] (the "Prospectus") and your submission dated [*day*month*year] (the "Submission"), which was also tabled at the Listing Committee hearing of [*day*month*year]. Capitalised terms used herein shall have the same meanings as defined in the Prospectus, unless the context otherwise requires.

        At the Listing Committee meeting held on [*day*month*year], [names of members purposely omitted] attended to consider the Application. Having considered all relevant facts and circumstances in totality, which include, inter alia, the Group's relationship with its controlling shareholders and the corporate governance measures adopted by the Company, the Listing Committee resolved that the Group is not suitable for listing as required by Listing Rule 8.04. Accordingly, the Company's listing application is rejected. The analysis and conclusion are set out below.

        A. Relevant Facts

        Relationship with the Controlling Shareholders
        1. The Company is currently listed on the GEM. The Group is engaged principally in the business of [production and distribution of Product X], which accounted for [approximately 95%] of the Group's total income for each of the three years during the Track Record Period (comprising [Year 1, Year 2 and Year 3]). During the Track Record Period, [approximately 90%] of the Group's total turnover was derived [through referrals made by Company X].
        2. [Company X] also conducts promotional activities for and provides copyright licensing services to the Group under the Master Royalty Agreements. The [referrals made] and the provision of other services by [Company X] to the Group under the Master Royalty Agreements form a crucial part of the Group's operation.
        3. [For Year 3], the distribution business of the Group's [Product Y] represented approximately 1% of the Group's total revenue. The distribution revenue through the distribution network of [Company Y] under the Master Distribution Agreement represented [over 20%] of the Group's total distribution revenue.
        4. In addition to the Master Royalty Agreements and the Master Distribution Agreement, [Company X and Company Y] (collectively the "Controlling Shareholders") will continue to provide various services to the Group which constitute continuing connected transactions including sub-lease of office premises, production and consignment sales of merchandise, promotional services and updating and maintenance of websites. Full details are set out in the Prospectus.
        Overlap of Board of Directors
        5. There are a total of nine members on the Board of the Company, comprising six executive directors and three independent non-executive directors ("INEDs"). Five of the six executive directors are also directors of [Company X] and/or [Company Y]. It is also noted from the Submission that the Company proposed the following resignations, re-designations and appointments of directors to avoid any actual or potential conflicts of interest:
        (a) [Four of the above five overlapping directors including Mr. A] will resign from the board of the Company and/or the principal operating subsidiary of the Company;
        (b) [Mr. A] will remain as a senior manager of the principal operating subsidiary of the Company;
        (c) [Mr. B, one of the above five overlapping directors,] will be re-designated as a non-executive director and chairman of the Company;
        (d) [Mr. C] will be nominated and appointed as a director of the Company; and
        (e) the company secretary and financial controller of the Company will be nominated and appointed as directors of the Company.
        Following such resignations, re-designations and appointments, [ Mr. B], the chairman and a non-executive director of the Company, would remain as a director of [Company Y]. In addition, three directors of the principal operating subsidiary of the Company would remain as directors of [Company X or Company Y].
        Corporate governance measures
        6. The Company is of the view that the three existing INEDs possess sufficient knowledge, experience and expertise to provide advice to the Group and the shareholders and make contributions to the development of the Group's strategies and policies. All of the three INEDs are practicing accountants and have qualifications in order to effectively be able to understand and advise on financial matters and matters such as connected transactions.
        7. The decision-making mechanism of the Board is set out in the Company's Articles of Association which include provisions that the Directors and the Sponsor considered are sufficient corporate governance measures in place for the purpose of minority shareholders protection. It was submitted that additional executive directors who will be independent of each of [Company X and Company Y] may be appointed. The Sponsor has submitted that it considered that the Company has more than sufficient corporate governance arrangements in place to manage any potential conflicts of interest and competition which may arise between the Company and its Controlling Shareholders.
        Non-competition Undertakings
        8. [Prior to the Track Record Period, ie Year -2], [Company X] and each of the Company and the principal operating subsidiary of the Company entered into a deed of non-competition undertakings (the "Original Deeds of Non-competition Undertakings") respectively in relation to the production of certain products. [In Year 3], [Company X and Company Y] entered into a non-competition agreement (the "Non-competition Agreement"), pursuant to which the business scopes of [Company X and Company Y] are restricted to their respective business activities defined in the Non-competition Agreement. For activities not covered in the Non-competition Agreement, [Company X and Company Y] will decide by mutual consultation. Details of the Original Deeds of NonCompetition Undertakings, forming part of the proposed acquisition of 80% equity interests in the principal operating subsidiary of the Company from [Company X], were set out in the Company's circular dated July [Year -2] and considered, among other things, by shareholders of the Company in its extraordinary general meeting held in September [Year -2].
        B. Applicable Listing Rules
        9. Listing Rule 8.04 states that "[B]oth the issuer and its business must, in the opinion of the Exchange, be suitable for listing".
        10. Listing Rule 8.10(1)(a) requires that where a new applicant has a controlling shareholder with an interest in a business apart from the applicant's business which competes or is likely to compete, either directly or indirectly, with the applicant's business, the applicant's listing document must prominently disclose further information in relation to the excluded business.
        11. Paragraph 27A of Appendix 1A to the Listing Rules provides that the listing document should include a statement explaining how the issuer is satisfied that it is capable of carrying on its business independently of the controlling shareholder (including any associate thereof) after listing, and particulars of the matters that it relied on in making such statement.
        12. It is stated in Listing Decision HKEx-LD51-2 that, when interpreting the requirements under paragraph 27A of Appendix 1A to the Listing Rules and Listing Rule 8.10(1)(a), the Exchange normally requires an applicant to take into account factors relating to the conduct of the applicant's business independently from its controlling shareholder, in areas including financial independence, operational independence and management independence. An applicant may be dependent on its controlling shareholders in one or more of these areas. Where the degree of independence is excessive, this may translate into a concern about the suitability of an applicant for listing for purposes of Listing Rule 8.04. Similarly, competition is normally regarded by the Exchange as a disclosure issue and the requirement of Listing Rule 8.10 applies. However, in extreme cases where, in the view of the Exchange, there are inadequate arrangements to manage actual or potential conflicts of interest between the listing applicant and other businesses under the control of a common controlling shareholder, the Exchange would consider the impact on the applicant's suitability for listing. Where suitability of listing is an issue of our concern, the Exchange may rely on its discretion to reject the application for listing.
        13. In its meeting on 23 January 2006, the Listing Policy Committee recognized that in circumstances where conflicts of interest arising from the competing business of the controlling shareholder existed, it is the ordinary practice of the Listing Division to focus on the new applicant's corporate governance mechanisms such as board structures and policies. Contractual terms such as terms underlying the non-competition undertakings and options are one aspect of this review but the non-competition undertaking is not required as a necessary condition to comply with the Listing Rules. As an agreement between the controlling shareholder and the applicant memorializing certain aspects of how they intend to manage their affairs in the future, a non-competition agreement may be one relevant factor among many considered by the Exchange when reaching a conclusion on suitability for listing in an individual case. This position was endorsed by the Listing Policy Committee and is reflected in Paragraphs 21 to 23 of the Listing Committee Annual Report 2006.
        C. The Issue
        14. Given the nature of the businesses carried out by the Group and the Controlling Shareholders and the extent of their relationship, the Listing Committee has reviewed whether the state of affairs that exists between the Group and its Controlling Shareholders including the existing/potential competition and the potential conflicts of interest of certain common directors would render the Company unsuitable for listing on the Main Board.
        D. The Analysis

        No significant independent access to customers
        15. Given that [approximately 90%] of the Group's total turnover were derived [through referrals made by Company X] during the Track Record Period, the Listing Committee considered it to be clear from the record that the Group heavily relies on [Company X] for the procurement of [customers to the Group] and has not demonstrated that during the Track Record Period it was able to procure [customers] for its business to a significant level. In reaching this conclusion, the Listing Committee accepted the submission of the Sponsor that [not all business may necessarily be introduced by Company X to the Group] but determined that the level of financial reliance was not materially mitigated by this factual detail.
        16. The Listing Committee also considered that the listing application materials clearly established that the [referrals made] and other services provided by [Company X] under the Master Royalty Agreements form a crucial part of the Group's operation. This view is supported by the information contained in the Prospectus which states that in the event the Master Royalty Agreements entered into between the Group and the Controlling Shareholders have to be terminated or cannot be renewed upon expiry, the Group's profitability and financial results could be adversely affected. The estimated amount of royalties payable to [Company X] for [the year immediately after Year 3] will be [nearly doubled that of Year 3]. The level of reliance of the Group on the Controlling Shareholders can be seen to be increasing in line with the increasing amount of royalties paid/payable to the Controlling Shareholders.
        Increasing reliance on distribution through Company Y
        17. Although the Group's turnover from distribution [of Product Y] is presently small, the Listing Committee noted that the Group intends to develop distribution channels in Japan and explore expansion opportunities elsewhere in Asia, including the PRC. This development is in line with the Company's anticipation [of the prosperity of distribution business in Japan] as disclosed in the "Risk Factors" section and the shift in market demand for [Product Y] in Japan as seen in the "Industry Overview" section of the Prospectus. It can therefore be envisaged that the Group's reliance on its Controlling Shareholders will increase.
        Problematic composition of the Board of Directors
        18. The Listing Committee considered that the present composition of the Company's Board of Directors and that of its principal operating subsidiary created a significant possibility that actual or potential conflicts of interest could be encountered regularly by the Company following listing on the Main Board. While GEM Listing Rule 11.03 explicitly contemplates that a GEM listed company may have a close relationship with a controlling shareholder in certain circumstances, the Listing Rules for the Main Board are substantially different in this respect. Recent precedents established clearly that the Exchange expected there to be a greater separation of the board of directors of a Main Board listed company from that of its controlling shareholder than was currently exhibited by the Company, and the Listing Committee did not consider it appropriate for different standards to apply to a GEM listed company applying to list on the Main Board.
        19. The Listing Committee noted the Company's proposal to revise the structure of its Board of Directors to address concerns of this kind. However, the Listing Committee did not consider the proposed changes would fully address its concerns, and would themselves raise possible concerns regarding management continuity under Listing Rule 8.05(1)(b). As such, the proposals of the Company currently on the record were not considered to be adequate.
        Arrangement to manage conflicts of interest
        20. It is noted that the corporate governance measures in place (such as review and approval of connected transactions by the INEDs and independent shareholders) only meet the basic requirements under the Listing Rules and are not different from cases where actual and potential conflicts of interest are not a significant concern. Save for the proposed changes to the Board of Directors described above, there are no further corporate governance measures adopted by the Company to manage actual and potential conflicts of interest.
        E. The Conclusion
        21. Having considered all relevant facts and circumstances in totality, which include, inter alia, the Group's relationship with its Controlling Shareholders and the corporate governance measures adopted by the Company, and on the basis that:
        (a) the Group's relationship with its Controlling Shareholders is fundamental to its business operations for the reasons set forth above and the Group has not been able to demonstrate that it is capable of carrying on its business independently of its Controlling Shareholders;
        (b) the Company's proposal to revise the structure of its Board of Directors were not considered adequate and would themselves raise possible concerns regarding management continuity under Listing Rule 8.05(1)(b); and
        (c) there are inadequate arrangements and no sufficient and tested corporate governance measures to manage conflicts of interest between the Group and its Controlling Shareholders,
        the Listing Committee resolved that the Group is not suitable for listing as required by Listing Rule 8.04. Accordingly, the Company's listing application is rejected.
        F. Other Considerations
        22. During the course of the vetting of the Company's listing application, it was apparent that the structure of the Company's Board of Directors and related corporate governance practices were not consistent with the standards the Listing Committee currently expects of Main Board listed companies. In considering the Company's listing application the Listing Committee acknowledged that the GEM Listing Rules, notably Rule 11.03, contemplated that GEM listed companies may have closer relationships with their parent companies in some circumstances. It was also apparent from the record that the Company had complied with applicable GEM Listing Rules concerning necessary approvals by independent shareholders in all respects. Therefore, absent the Company's application to list on the Main Board, the Exchange and the Listing Committee would not have had occasion to intervene to seek changes to the composition of the Board of Directors of the Company or the principal operating subsidiary of the Company, or to seek other modifications of their relationship with the controlling shareholders and their affiliated companies.
        23. It is the ordinary practice of the Listing Committee, through the Listing Division, to work with listing applicants during the vetting process to revise their application materials to improve the level of disclosure for prospective investors and to ensure compliance with the Listing Rules. That practice has been followed in this case. In certain instances the Listing Committee may also establish conditions that must be met in order for an individual applicant to be eligible for listing, so that its expectations on particular matters may be more easily satisfied. In this case the Listing Committee, following due consideration, declined to establish specific conditions for the Company to meet with respect to the composition of its Board of Directors and other corporate governance matters in order to be eligible for a listing on the Main Board.
        24. The Listing Committee considered that in the case of an existing GEM listed company, absent an identifiable Listing Rule compliance concern, such matters were more properly left to be decided through the normal operations of a company's Board of Directors and consultation with shareholders as required by the GEM Listing Rules. Any revisions to past practices that may be required to meet the standards of the Main Board were best adopted well in advance of an application for listing, so that the effects of such changes could be reviewed during the application process.

        Pursuant to Rule 2B.07(1) of the Listing Rules, the Company has the right to have this decision reviewed by the Listing (Review) Committee.

        [Portion of Letter Purposely Omitted]

        Yours faithfully,
        For and on behalf of
        The Stock Exchange of Hong Kong Limited

        [Signed]

        Secretary to the Listing Committee

      • RL20-07

        View Current PDF

        HKEx REJECTION LETTER
        Cite as HKEx-RL20-07 (February 2007)

        Summary
        Listing Rule Listing Rule 8.04
        Reason for rejection and the subsequent disposal of the case on review The Listing Committee considered the Company not suitable for listing under Listing Rule 8.04 because the Company's business model was effectively captive to another company which was both the source of its principal raw materials and its principal customer channel during the Track Record Period. The Listing Committee considered this to be an extreme case that could not be adequately addressed by corporate governance measures alone given the conflicting roles of the Company's controlling shareholder.

        The Listing (Review) Committee decided to uphold the decision of the Listing Committee.
        Contents LETTER 1: Extracts of the decision letter of the Secretary to the Listing Committee

        LETTER 2: Extracts of the decision letter of the Secretary to the Listing (Review) Committee on hearing of the Company's application to review the decision of the Listing Committee

        LETTER 1

        [Date]

        [Name and Address of Sponsor]

        Dear Sirs

        Re: Application for new listing of a Main Board listing applicant
        (the "Company" together with its subsidiary, the "Group")

        We refer to your application Form A1 dated [*day*month*year] made on behalf of the Company (the "Application") and the hearing proof of the Company's prospectus dated [*day*month*year] (the "Prospectus"). Capitalised terms used herein shall have the same meanings as defined in the Prospectus, unless the context otherwise requires.

        At the Listing Committee meeting held on [*day*month*year], [names of members purposely omitted] attended to consider the Application. Having considered all relevant facts and circumstances in totality, which include, inter alia, the business model of the Company, the Director's conflicting roles and the corporate governance measures adopted by the Company, the Listing Committee considered that the Company is not suitable for listing as required by Listing Rule 8.04. Accordingly, the Company's listing application is rejected. Further reasons for the Listing Committee's decision are set forth below.

        Captive business model

        The Company's business model is captive in a way that the sourcing of its principal raw materials ([over 90%] of total purchase of principal raw materials during the Track Record Period) and its principal customer channel ([approximately 60%] of total sales during the Track Record Period) are dominated by the same party, [Entity X]. The pricing of the purchases from and the sales made to [Entity X] are not in line with market prices, where the purchases are made at 10% to 45% and sales are made at 5% to 35% higher than market prices. [Entity X] acts as a "middle-man" between the Company and its largest ultimate customer [Entity Y], at a pre-determined commission rate.

        The Listing Committee considered that the Company's application was an extreme case. There were concerns about the Company's reliance on a major customer which was also the Company's major supplier. There had been instances in the past of high reliance on a customer or high reliance on a supplier, but none where there was high reliance on one party as both supplier and customer. The Company's relationship with [Entity X] is fundamental to its business and the Company has not shown that it is capable of carrying on its business independently of [Entity X]. This has translated into a concern about the suitability of the Company for listing for the purposes of Listing Rule 8.04.

        Mr. Q's conflicting roles

        [Mr. Q], the Company's chairman, executive director and controlling shareholder, had been a senior management member of the predecessor of [Entity X] prior to the establishment of the Company and has maintained a good relationship with [ Entity X]. Although the Directors and the Sponsor confirmed that [Entity X] is an independent third party of the Company and does not have any common shareholder or management to that of the Company, during the vetting process the Listing Division noted that [Mr. Q] had signed [a number of] technical agreements in relation to the technical standards required by [Entity Y] ("Technical Agreements") in the capacity of [Entity X]'s representative. As evidenced by the opinion of the PRC legal advisers to the Company, [Mr. Q] is not duly authorised to sign on behalf of [Entity X].

        With [Entity X]'s endorsement of the Technical Agreements signed by [Mr. Q], it has appeared that [Mr. Q] may have acted as an agent for both the Company and [Entity X] in conducting relevant transactions. In the case of the Company which operates in a captive business model, where both the sales and supplies are dominated by the same independent third party, [Mr. Q]'s dual role raises concerns as to whether [Mr. Q] will act in the best interests of the Company and its shareholders as a whole, and avoid any potential conflict of interests and duty as required under Listing Rules 2.03 and 3.08.

        On the other hand, if [Mr. Q] did not act as an agent for both the Company and [Entity X], [Mr. Q]'s signing of the Technical Agreements with [Entity Y] on behalf of [Entity X] and the Sponsor's submissions demonstrates an unusually close relationship between the Company and [Entity X]. In this regard, although there is no evidence of common shareholding and management between the two parties, the Listing Committee remains concerned as to (i) transfer pricing practices between the two parties; (ii) potential conflicts of interests between the two parties; and (iii) how the performance of the Company may be independently evaluated, given that there were no specific corporate governance measures in place during the Track Record Period to ensure that the business transactions were carried out on normal commercial terms.

        Conclusion

        The Listing Committee considered that the Company's application raised issues that could not be addressed by corporate governance measures alone and resolved that the Company was not suitable for listing under Listing Rule 8.04. Accordingly, the Company's listing application is rejected.

        Pursuant to Rule 2B.07(1) of the Listing Rules, the Company has the right to have this decision reviewed by the Listing (Review) Committee.

        [Portion of Letter Purposely Omitted]

        Yours faithfully,
        For and on behalf of
        The Stock Exchange of Hong Kong Limited

        [Signed]

        Secretary to the Listing Committee

        ************************************************************

        LETTER 2

        [Date]

        [Name and Address of Sponsor]

        Dear Sirs,

        Re: Review Hearing of the Listing (Review) Committee
        (the "Review Hearing") regarding the Company
        Date of the Review Hearing: [* day* month * year]

        On [*day*month*year], the Listing (Review) Committee of The Stock Exchange of Hong Kong Limited conducted a review hearing (the "Review Hearing") to consider an application from the Company for a review of the decision of the Listing Committee of [*day*month*year] and set out in the [LETTER 1] dated [* day*month* year] (the "First Decision").

        The Review Hearing was conducted before the Listing (Review) Committee comprising [names of members purposely omitted] (the "Review Committee").

        Decision

        The Review Committee considered the submissions (both written and oral) made by the Company and the Listing Division. The Review Committee decided to uphold the First Decision to reject the Company's listing application on the basis that the Company was not suitable for listing under Rule 8.04 of the Listing Rules.

        Reasons

        The Review Committee arrived at its decision for the following reasons:

        1. The Review Committee noted that the Company operated in a captive business model. There was high reliance on one supplier for its raw materials and at the same time, high reliance on one distributor for the distribution network to one customer. The Review Committee agreed with the Listing Committee at first instance that the Company's application was an extreme case. The Review Committee had concerns about the Company's reliance on a major customer which was also the Company's major supplier. The Review Committee believed that the Company should show that it was capable of carrying on its business independent of [Entity X] which was acting as a "middle-man".
        2. The Review Committee was of the view that the Company and its directors lacked understanding of the importance of corporate governance. The Review Committee noted that [Mr. Q] had signed [a number of] Technical Agreements in the capacity of [Entity X]'s representative and that, as evidenced by the PRC legal advisers' opinion, [Mr. Q] was not duly authorised to sign on behalf of [Entity X]. The Review Committee was concerned that [Mr. Q] had conflicting roles.

        With [Entity X]'s endorsement of the Technical Agreements signed by [Mr. Q], it appeared that [Mr. Q] might have acted as agent for both the Company and [Entity X] in conducting relevant transactions. In the case of the Company which operated in a captive business model, where both the sales and supplies were dominated by the same independent third party, [Mr. Q]'s dual role raised concerns as to whether [Mr. Q] would act in the best interests of the Company and its shareholders as a whole, and avoid any potential conflict of interests and duty as required by Rules 2.03 and 3.08.

        On the other hand, if [Mr. Q] did not act as an agent for both the Company and [Entity X], [Mr. Q]'s signing of the Technical Agreements with [ Entity Y] on behalf of [Entity X] and the Sponsor's submission demonstrated an unusual close relationship between the Company and [Entity X]. In this regard, although there was no evidence of common shareholding and management between the two parties, the Review Committee was concerned as to (i) transfer pricing practices between the two parties; (ii) potential conflicts of interests between the two parties; and (iii) how the performance of the Company might be independently evaluated, given that there were no specific corporate governance measures in place during the Track Record Period to ensure that the business transactions were carried out on normal commercial terms.
        3. On the basis of the above, the Review Committee was not satisfied that the Company was suitable for listing under Rule 8.04.

        The Review Committee wishes to emphasise that this decision is specific to this particular instance and shall not serve to create a precedent for any other companies.

        Yours faithfully
        For and on behalf of
        The Stock Exchange of Hong Kong Limited

        [Signed]

        Secretary to the Listing (Review) Committee

      • RL19-07

        View Current PDF

        HKEx REJECTION LETTER
        Cite as HKEx-RL19-07 (February 2007)

        Summary
        Listing Rule Listing Rule 8.04
        Reason for rejection and the subsequent disposal of the case on review The Listing Committee rejected the listing application of the Company for the reason that the Group should not be considered suitable for listing under Listing Rule 8.04 in light of that the change in the nature of the Company's revenue generating activities going forward was so fundamental as to affect its suitability for listing and was not a matter which could be dealt with solely by disclosure.
        Contents Extracts of the decision letter of the Secretary to the Listing Committee

        [Date]

        [Name and Address of Sponsor]

        Dear Sirs

        Re: Application for new listing of a Main Board listing applicant
        (the "Company" together with its subsidiary, the "Group")

        We refer to your application Form A1 dated [*day*month*year] made on behalf of the Company (the "Application") and the hearing proof of the Company's prospectus dated [*day*month*year] (the "Prospectus"). Capitalised terms used herein shall have the same meanings as defined in the Prospectus, unless the context otherwise requires.

        At the Listing Committee meeting held on [*day*month*year], [names of members purposely omitted] attended to consider the Application. Having considered all relevant facts and circumstances in totality, including among other things, the expiry of the Subsidy Programmes, the significant decline in the Group's forecast profit for [the financial year immediately after the Track Record Period] and the new engagement [through acquisition], which together give rise to doubts on the Group's prospects going forward, the Listing Committee resolved that the Group is not suitable for listing as required by Listing Rule 8.04. Accordingly, the Company's listing application is rejected. The analysis and conclusion are set out below.

        A. Relevant Facts

        Expiry of Subsidy Programmes
        1. During the Track Record Period (comprising [Year 1, Year 2 and Year 3]), the Group has been awarded contracts to supply and install [Product X] under certain government Subsidy Programmes. These Subsidy Programmes all expired [immediately after submission of listing application].
        2. [Approximately 35% of the Group's revenue for each of the three years during the Track Record Period and for the five months after Year 3] was attributable to the sales and installation of [Products X] in connection with the Subsidy Programmes.
        3. Based on the Sponsor's submission, the Group's forecast profit [for the year immediately after Year 3] is expected to be [a decline of approximately 40% as compared to that of Year 3].

        Product Y
        4. [Immediately after Year 3], the Group entered into a sale and purchase agreement to acquire 42.5% interest in [Entity X]. [Entity Y], a subsidiary of [Entity X], was granted an exclusive right of daily operations of the Plant to supply processed [Product Y] to the certain surrounding areas of the Plant for a period of 50 years starting from [the end of Year 2]. The Plant is currently under construction and is expected to commence operation around [one year after submission of listing application].
        5. The acquisition of the interests in [Entity X] was approved by the shareholders of the Company at an extraordinary general meeting [2 months after the Track Record Period].
        6. The net loss of [Entity X] Group [for Year 2, Year 3 and the six months after Year 3 represented approximately less than 10% of the Group's profit].
        B. Applicable Listing Rules
        7. Listing Rule 8.04 states that "[B]oth the issuer and its business must, in the opinion of the Exchange, be suitable for listing".
        C. The Issue
        8. Given the expiry of the Subsidy Programmes, the significant decline in the Group's forecast profit and the new engagement in the [Product Y] business through acquisition, the Listing Committee has reviewed whether the state of affairs of the Group including the change in revenue generating activities and the possible decline in the Company's future financial performance would render the Company unsuitable for listing on the Main Board at this time.
        D. The Analysis
        9. The Listing Committee noted that the Subsidy Programmes contributed to a significant portion of the Group's revenue and net profit during the Track Record Period. The Group met the track record profit requirement on the basis of a business that was highly dependent on the existence of the Subsidy Programmes which had expired and would not continue after listing. The forecast [40%] decline in profitability was indicative of the Company's uncertain prospects going forward.
        10. The Listing Committee also noted that the Plant [to supply Product Y] is currently under construction and is expected to commence operation around [one year after submission of listing application]. As such, it is only a "start up" business with untested ability to generate revenue going forward.
        11. By reason of the aforesaid, the Listing Committee did not consider that the track record results of the Company were indicative of the Company's business going forward. The Listing Committee determined that the change in the nature of the Company's revenue generating activities going forward was so fundamental as to affect its suitability for listing and was not a matter which could be dealt with solely by disclosure.
        E. The Conclusion
        12. Having considered all relevant facts and circumstances in totality, and on the basis of the rationale as set out in Section D above, the Listing Committee resolved that the Group is not suitable for listing as required by Listing Rule 8.04. Accordingly, the Company's listing application is rejected.

        Pursuant to Rule 2B.07(1) of the Listing Rules, the Company has the right to have this decision reviewed by the Listing (Review) Committee.


        [Portion of Letter Purposely Omitted]

        Yours faithfully,
        For and on behalf of
        The Stock Exchange of Hong Kong Limited

        [Signed]

        Secretary to the Listing Committee

      • RL18-07

        View Current PDF

        HKEx REJECTION LETTER
        Cite as HKEx-RL18-07 (February 2007)

        Summary
        Listing Rule GEM Listing Rule 11.06
        Reason for rejection and the subsequent disposal of the case on review The GEM Listing Committee rejected the listing application of the Company for the reason that the Group should not be considered suitable for listing under GEM Listing Rule 11.06 in light of the various issues arising from an anonymous complaint relating to the Company's borrowings from its employees.

        The GEM Listing (Review) Committee decided to overturn the decision of the GEM Listing Committee, subject to certain specified conditions.
        Contents LETTER 1: Extracts of the decision letter of the Secretary to the GEM Listing Committee

        LETTER 2: Extracts of the decision letter of the Secretary to the GEM Listing (Review) Committee on hearing of the Company's application to review the decision of the GEM Listing Committee

        LETTER 1

        [Date]

        [Name and Address of Sponsor]

        Dear Sirs

        Re: Application for new listing of a GEM listing applicant
        (the "Company" together with its subsidiary, the "Group")

        We refer to your application Form 5A dated [*day*month*year] made on behalf of the Company (the "Application") and the hearing proof of the Company's prospectus dated [*day*month*year] (the "Prospectus"). Capitalised terms used herein shall have the same meanings as defined in the Prospectus, unless the context otherwise requires.

        The Company's listing application was originally considered by the GEM Listing Committee on [*day*month*year]. Subsequent to the meeting, the Listing Division received an anonymous complaint relating to the Company's borrowings from its employees (the "Complaint") which gave rise to new information to be considered.

        At the GEM Listing Committee meeting held on [*day*month*year] which [names of members purposely omitted] attended, the GEM Listing Committee reconsidered the Company's listing application and resolved that the Group should not be considered suitable for listing under GEM Listing Rule 11.06 in light of the various issues arising from the Complaint. The analysis and conclusion are set out below.

        Relevant Facts

        As disclosed in the Prospectus, during the Track Record Period (comprising [Year 1, Year 2 and Year 3]) the Group had borrowings aggregating approximately HK$200 million as at 31 December [Year 1] from approximately 2,000 employees to partly finance the Group's operation and development. Such borrowings did not comply with the relevant PRC laws and the relevant loan agreements were not legally enforceable. The Group fully repaid such borrowings during [Year 2].

        Subsequent to the GEM Listing Committee meeting of [*day*month*year] when the Company's listing application was approved in-principle, the Listing Division received the Complaint. Upon enquiries with the Sponsor on the allegations therein, additional information not disclosed in the Prospectus nor submitted to the Listing Division previously was revealed as follows:

        (a) Upon repayment of the HK$200 million employee loans in [Year 2], some employees voluntarily made certain investment arrangements with [Entity X] in the aggregate amount of HK$150 million and designated the sum for [Entity X's] on-lending to the Company. The Company's subsequent borrowings from [Entity X] up to approximately HK$300 million as at 31 December [Year 3] were wholly funded by the Group's employees in the form of such designated loans;
        (b) A number of employees entered into the investment arrangements with [Entity X] on behalf of approximately 2,000 employees based on verbal agreement and personal relationship among them; and
        (c) A separate loan agreement was entered into between [Entity X] and the Company. All default risks in respect of repayment by the Company would be borne by the employees and [Entity X] would not bear any credit risk in respect of the designated loans to the Company.

        The Applicable GEM Listing Rules

        GEM Listing Rule 11.06 states that "Both the issuer and its business must, in the opinion of the Exchange, be suitable for listing."

        GEM Listing Rule 11.12(1) states that a new applicant must demonstrate that, throughout the period specified in Rule 11.12(2), it has actively pursued one focused line of business and must make a statement in the listing document concerning that business which complies with the requirements of Rules 14.15 to 14.18.

        Note 3 to GEM Listing Rule 11.12 further provides that a new applicant must be able to demonstrate that it has a business of both substance and potential. A business will, subject to Rule 11.14, only be regarded as having the requisite substance if the applicant can show that it has spent at least the 24 month period prior to the issue of the listing document making substantial progress in building up that business. Examples of measurements of progress have been given under Note 4 to Rule 14.15. Among other things, item (h) under Note 4 to Rule 14.15 cites "funding arrangement (such as the equity and debt finance previously obtained)" as a relevant measurement of progress.

        GEM Listing Rule 2.18 states that "The directors, having made all reasonable enquiries, confirm that, to the best of their knowledge and belief:-...there are no other matters the omission of which would make any statement in this document misleading..."

        GEM Listing Rule 5.01 states that "The board of directors of an issuer is collectively responsible for the management and operations of the issuer. The Exchange expects the directors, both collectively and individually, to fulfil fiduciary duties and duties of skill, care and diligence to a standard at least commensurate with the standard established by Hong Kong law. This means that every director must, in the performance of his duties as a director:- act honestly and in good faith in the interests of the company as a whole,..."

        GEM Listing Rule 5.02 states that "Every director must satisfy the Exchange that he has the character, experience and integrity and is able to demonstrate a standard of competence commensurate with his position as a director of an issuer...The Exchange expects every director of an issuer: - (1) to be cognizant of the GEM Listing Rules and reasonably familiar with the obligations and duties imposed upon him and the issuer pursuant to the GEM Listing Rules..."

        The Analysis and Conclusion

        Substance and Potential

        In order to comply with GEM Listing Rule 11.12, an applicant must, inter alia, demonstrate that it has a business of both substance and potential, which means that it has spent at least 24 months making substantial progress in building up that business. Funding arrangements are an example of measurement of progress pursuant to GEM Listing Rule 14.15. The Company's borrowings from its employees (directly or indirectly in the form of designated loans) had increased from HK$200 million at the end of [Year 1] to HK$250 million and HK$300 million at the end of [Year 2] and [Year 3], representing 35% or more of the Group's total borrowings at the end of [Year 1], [Year 2] and [Year 3] respectively.

        From the above, while the GEM Listing Committee noted that the Company has over the years built up an established business, it is of the view that the Company made less progress during the active business pursuits period in obtaining sufficient bank financing than had been considered at the time the original approval in-principle was granted.

        Omissions of Material Information in the Prospectus

        Although the legal forms of the investment arrangement between the employees and [Entity X] and the loan agreement between the Company and [Entity X] appeared to entail separate obligations and commitments, they were in essence a tailor-made arrangement to enable the Company to obtain financing indirectly from its employees without violating the relevant PRC laws. Therefore, the two transactions together form material information for potential investors to assess the true financial position of the Group and should be disclosed together to reflect the substance of the arrangement. Simply disclosing the loans from [Entity X] and the repayment of the employee loans in [Year 2] without stating the link between them was considered to be incomplete and possibly misleading to potential investors, who would not be able to assess fully the operational and financial position of the Company as the current disclosure in the Prospectus would give investors an impression that the Group was able to obtain sufficient funding from financial institutions and no longer relies on the funding from its employees.

        Directors' Suitability

        Pursuant to GEM Listing Rule 2.18, the directors of the Company are collectively and individually responsible for the accuracy and completeness of the contents of the Prospectus.

        Based on the above analysis that there has been omission of material information in the Prospectus, the GEM Listing Committee considered that the directors' integrity as required under GEM Listing Rules 5.01 and 5.02 would be questionable.

        Conclusion

        The GEM Listing Committee, having considered the following relevant issues in totality:

        (a) substance and potential of the Company's business;
        (b) omission of material information in the Prospectus; and
        (c) suitability of directors of the Company,

        is of the view that the Company is not suitable for listing pursuant to GEM Listing Rule 11.06.

        Pursuant to Rule 4.07(1) of the GEM Listing Rules, the Company has the right to have this decision reviewed by the GEM Listing (Review) Committee.

        [Portion of Letter Purposely Omitted]

        Yours faithfully,
        For and on behalf of
        The Stock Exchange of Hong Kong Limited

        [Signed]

        Secretary to the GEM Listing Committee

        **********************************************************************

        LETTER 2

        [Date]

        [Name and Address of Sponsor]

        Dear Sirs,

        Re: Review Hearing of the GEM Listing (Review) Committee
        (the "Review Hearing") regarding the Company
        Date of the Review Hearing: [* day* month * year]

        On [*day*month*year], the GEM Listing (Review) Committee of The Stock Exchange of Hong Kong Limited conducted a review hearing (the "Review Hearing") to consider an application from the Company for a review of the decision of the GEM Listing Committee of [*day*month*year] and set out in the [LETTER 1] dated [* day*month* year] (the "First Decision").

        The Review Hearing was conducted before the GEM Listing (Review) Committee comprising [names of members purposely omitted] (the "Review Committee").

        Decision

        The Review Committee considered the submissions (both written and oral) made by the relevant parties to the review. The Review Committee remained troubled by the failure of the Company, and the failure of the Company's advisers in advising the Company, to make timely disclosure of the investment arrangements involving the Company's employees when, clearly, the Company's advisers were in possession of details of these arrangements at an early stage. However, based on the submissions, the Review Committee decided to overturn the First Decision, subject to the following conditions which should be complied with to the satisfaction of the Listing Division:

        1. The Company should make more prominent and full disclosure in the prospectus of the relevant investment arrangements between the Company's employees and [Entity X] and the relevant loan agreement between the Company and [Entity X]. The Review Committee was of the view that the disclosure made in the draft prospectus dated [*day*month*year] (hearing proof), in particular in the "Risk Factors" section and pages [*], was wholly inadequate; and
        2. The Board of Directors of the Company should receive appropriate training and familiarisation from [the Sponsor and Legal Advisers to the Company] before the listing of the Company. The scope of the training should include ongoing role and responsibilities of directors under the GEM Listing Rules and compliance with the relevant rules and regulations applicable to companies listed in Hong Kong. A copy of the relevant training materials prepared by [the Legal Advisers to the Company] should be provided to the Listing Division as evidence of the training. The Review Committee also wished to highlight the importance of Rule 6A.24 relating to the responsibilities of a Compliance Adviser.

        For the avoidance of doubt, should the Company decide to proceed with its application for new listing, such application will be treated strictly on its merits at the material time, and no representation is given, whether express or implied, as to the acceptability of such application if pursued. The new listing application of the Company in its entirety will be subject to the final approval of the GEM Listing Committee.

        The Review Committee wishes to emphasise that this decision is specific to this particular instance and shall not serve to create a precedent for any other companies.

        Yours faithfully
        For and on behalf of
        The Stock Exchange of Hong Kong Limited

        [Signed]

        Secretary to the GEM Listing (Review) Committee

    • 2006

      This section contains extracts of Listing Division's letters to issuers, interpreting the Listing Rules on specific listing matters.

      Rejection Letter (RL) – This series comprises a selection of letters explaining the Division's rejection of specific listing applications.

      No Further Disciplinary Action (Guidance) Letter (LEGL) - This series comprises a selection of letters issued following investigation of suspected breaches of the Rules and where the Division decided not to pursue disciplinary action. The letters communicate the Division's interpretation or expectations as to the conduct of an issuer and its directors and are now published for general guidance and to promote transparency about the disposal of potential disciplinary matters.

      Please visit Archive to view marked-up versions and versions that have been superseded or withdrawn.

      Date (mm/yyyy) Reference Number Particulars Listing Rules Document Type Content Category
      04/2006 RL16-06 Letter 1 - The Listing Division rejected the listing application of the Company for the reason that the Company had failed to demonstrate that the Company and its business were suitable for listing under GEM Listing Rule 11.06. Letter 2 - The GEM Listing Committee, subject to certain specified conditions, reversed the rejection decision of the Listing Division on review. GEM Rule 11.06 Rejection Letter New Applicants
      04/2006 RL15-06 Letter 1 - The Listing Committee rejected the listing application of the Company for the reason that the Company was not considered to be suitable for listing as it had not put in place throughout the track record period the required controls and procedures on which it was relying on for listing eligibility purposes. Letter 2 - The Listing (Review) Committee reversed the rejection decision of the Listing Committee on review. Rule 8.04 Rejection Letter New Applicants
      04/2006 RL14-06 Letter 1 - The Listing Division rejected the listing application of the Company for the reason that the Company was not able to satisfy the minimum profit requirement under Listing Rule 8.05(1)(a) after excluding: (i) the results of the Group's associated companies, (ii) the results of the Group's jointly controlled entities and (iii) deemed gain on dilution of the Group's investment in an associate. Letter 2: The Listing Committee upheld the rejection decision of the Listing Committee on review. Rule 8.05 (1)(a) Rejection Letter New Applicants
      04/2006 RL13-06 Letter 1 - The GEM Listing Committee exercised its discretion under GEM Listing Rule 2.07 to request the Company to provide the Listing Division with detailed explanations regarding the issues raised by the GEM Listing Committee. The Company failed to address the concerns of the Listing Committee by providing the appropriate level of assurance to the Listing Division. The Listing Division therefore rejected the listing application of the Company. Letter 2: The GEM Listing Committee upheld the rejection decision of the Listing Division on review. GEM Rule 2.07 Rejection Letter New Applicants
      04/2006 RL12-06 Letter 1 - The Listing Division rejected the listing application of the Company as the Company failed to satisfy the "capability of carrying on its business independently" requirement of Listing Rule 8.04. Letter 2 - The Listing Committee upheld the rejection decision of the Listing Division on review. Rule 8.04 Rejection Letter New Applicants
      02/2006 RL10-06 A Main Board applicant failing to satisfy the profit requirements of Listing Rule 8.05(1)(a) Rule 8.05 (1)(a) Rejection Letter New Applicants

      • RL16-06

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        HKEx REJECTION LETTER Cite as HKEx-RL16-06 (April 2006)

        Summary
        Listing Rule GEM Listing Rule 11.06
        Reason for rejection and subsequent disposal of the case on review The Listing Division rejected the listing application of the Company for the reason that the Company had failed to demonstrate that the Company and its business were suitable for listing under GEM Listing Rule 11.06.

        The Listing Division's rejection decision was reversed by the GEM Listing Committee, subject to certain specified conditions.
        Contents LETTER 1: Extracts of the decision letter of the Head of Listing, the Stock Exchange of Hong Kong Ltd

        LETTER 2: Extracts of the decision letter of the Acting Secretary to the GEM Listing Committee on hearing the application of the Company to review the decision of the Listing Division

        LETTER 1

        [Date]

        [Name and Address of Sponsor]

        Dear Sirs,

        Re: Application for new listing of a GEM listing applicant
        (the "Company" together with its subsidiaries, the "Group")

        We refer to your Form 5A dated [*day*month*year] applying, on behalf of the Company, for the listing of the shares of the Company on the Growth Enterprise Market (the "Application") and our earlier letter of [*day*month*year] (the "Hearing Letter"). Terms used in this letter have the same respective meanings as defined in the hearing proof of the prospectus dated [*day*month*year] (the "Prospectus") and the Hearing Letter, unless the context requires otherwise.

        At the GEM Listing Committee meeting of [*day*month*year], the Committee directed the Listing Division to reconsider its analysis of the Application, in light of a number of concerns raised as follows:

        1) The exclusion of [certain specified form of production in the specified servicing industry, "Excluded Activities"] from the Company's business;
        2) The exclusion of [Mr. X's Excluded Activities] from the management contract signed between [Mr. X] and the Company;
        3) The heavy reliance of the Company on the success and contribution of one person, namely, [Mr. X]; and
        4) The importance of past breaches of various statutory requirements by the Group.

        These concerns constitute a framework established by the Committee for the Listing Division to review the Company's compliance with GEM Listing Rule 11.12 and the suitability of the Company for listing under GEM Listing Rule 11.06. Further to this guidance provided by the Committee and in light of the particular facts and circumstances of this case, the Listing Division has reached the following conclusions:

        I. GEM Listing Rule 11.12

        Relevant Facts

        The Group is principally operating as a service provider for [certain specified type of servicing] industry in the [* Region]. Its business activities comprise: (i) [management of individuals who have entered into personal management contracts with the Company, pursuant to which the Company procures performance opportunities for them, "Contracted Individual Management"]; (ii) [specified type of production in the related servicing industry ("Operation 1")]; and (iii) [other specified type of production in the related servicing industry (Operation 2")]. The Sponsor has represented that the Group's turnover which were generated from assignments with [Mr. X]'s participation were approximately [80%] and [70%] for [first year and second year of the Track Record Period] respectively [("Year 1" and "Year 2")].

        The founder and controlling shareholder of the Group, [Mr. X], has other personal businesses, including the [Excluded Activities]. For commercial reasons the [Excluded Activities] are excluded from the Group's business. The Group has represented that the [Excluded Activities] can be delineated from those of [Operation 1] and [Operation 2], based on [method of distribution], expertise and techniques required, and different costs of production.

        The Group provides guidance to [contracted individuals] under its management on their career development in the [specified type of servicing] industry and procures performance opportunities for them. The Group currently has [over 10 contracted individuals] under its management, including [Mr. X]. The contract regarding [Contracted Individual Management] between [Mr. X] and the Group has specifically excluded [Mr. X's Excluded Activities] on a [specified] basis. The Group has represented that the reason for such exclusion is that [Mr. X] intends to further develop his [non-local] career within the [Excluded Activities].

        Issue

        Whether the exclusion from the Group of the [Excluded Activities] conducted by [Mr. X], and the associated revenues from [Contracted Individual Management], is permissible under the requirements of the GEM Listing Rules.

        The Rule

        GEM Listing Rule 11.12(1) states that:-

        "......a new applicant must demonstrate that...... it has, either by itself or through one or more of its subsidiaries, actively pursued one focused line of business......"

        Note 1 to the Rule states that:-

        "The requirement for a new applicant to demonstrate its active business pursuits is one specific to GEM."


        Note 6 to the Rule states that:-

        "For a new applicant to be considered suitable for listing, it should be actively engaged in one focused line of business rather than two or more disparate businesses. The reason for this is that the Exchange expects an applicant's management to be devoting its attention towards advancing one core business rather than a variety of concerns which compete or may compete for their attention."

        Our Analysis

        In considering whether a new applicant conducts one focused line of business, the Exchange applies the principle set out in Note 6 to GEM Listing Rule 11.12. When interpreting the GEM Listing Rules in this respect, the Exchange will normally consider a new applicant that is engaged in multiple business activities to be engaged in one focused line of business if there is a rational basis for the activities of the company to be conducted in one enterprise, and all the material business activities of the company have been conducted for the 24 months constituting the active business pursuit period.

        Having further reviewed the facts of this case in light of the guidance provided by the Listing Committee, we are of the view that it is not reasonable to make a distinction between (i) [Operation 1] and [Operation 2] and (ii) [Excluded Activities] in a case where such production activities relate to the activities of one particular person. [Certain specified forms of merchandise] have become an important revenue source for both [the business of the Company] and the [Excluded Activities]. Given [Mr. X's] heavy involvement in the [Excluded Activities], his stated intention to develop this aspect of his career further, and the Group's reliance on [Mr. X's] personal success and contribution, conflicts of interest would remain an issue and would likely be difficult to control given the structure adopted by the Group. Given this background and the potential for conflicts of interest to arise in this case, in our view the Listing Rules should be interpreted to require the applicant and sponsor to present clear and convincing support for the proposition that the Group's structure is necessary in order to pursue its proposed line of business, and that adequate steps have been taken to limit the potential for conflicts of interest.

        •   Group Structure

        Applying this standard, it is our conclusion that there is no convincing reason for the exclusion of [Mr. X's Excluded Activities] from his contract regarding [Contracted Individual Management] with the Group. Such exclusion is not found with the other contracts regarding [Contracted Individual Management] executed by the Group. Therefore, in our view the contract structure proposed for [Mr. X's] contract is not a necessary element of the Group's proposed line of business.
        •   Potential Conflicts of Interest

        Furthermore, it is our conclusion that the Group's current structure creates inherent conflicts of interest between [Mr. X] and the Group, and in our view no effective means to ensure a meaningful contribution by [Mr. X] to the Group in the future has been established. Since [Mr. X] will also control the management of the Group, any non-compete undertaking to be provided by [Mr. X] will be difficult for the Group to enforce effectively. Such conflicts of interest arising from separate business activities that compete or may compete for the attention of management are a specific concern identified in Note 6 to Rule 11.12.
        Our Conclusion

        Under the framework for review established by the Committee and in light of the facts and circumstances of the case, we are of the opinion that the Group has not satisfied the requirements of GEM Listing Rule 11.12.
        II. GEM Listing Rule 11.06

        Relevant Facts

        All facts relevant for our consideration of Rule 11.12 as discussed immediately above are also relevant for our consideration of Rule 11.06. Reference is made to such facts for purposes of our analysis, but they are not repeated here. Additional facts relevant for our analysis of Rule 11.06 are as follows:

        Based on materials submitted, two former group companies had failed to comply with various Hong Kong statutory requirements. At the time of conducting the Group's business, each of the two group companies had failed to, within the prescribed time limits, (i) apply for business registration after commencement of business in Hong Kong; (ii) register itself as an overseas company with the Hong Kong Companies Registry after its establishment of a place of business in Hong Kong, (iii) notify the Commission of Inland Revenue of Hong Kong regarding employment of its employees who were chargeable to salaries tax, (iv) enroll its employees on a mandatory provident fund scheme and to make contributions for such employees to the scheme; and (v) take out employment compensation insurance policy in respect of its liability as an employer. One of the two group companies had also failed to notify the Commissioner of Inland Revenue of Hong Kong of its chargeable profits in respect of the [two years prior to the Track Record Period] within the time limits prescribed under the Inland Revenue Ordinance. In response to comments by the Exchange, the Sponsor has submitted that the business transfers from the two former group companies to the Group had been effected in accordance with the Transfer of Business (Protection of Creditors) Ordinance and, on the basis of a counsel's opinion, the Group will not be exposed to any penalty that may be imposed on the two former group companies as a result of the latter's non-compliances. However, such instances of non-compliance could result in the former group companies being subject to monetary fines under the relevant Ordinances and each of the then officers (who include [Mr. X]) being subject to monetary fines and an imprisonment sentence of up to 84 months.

        Issue

        Whether, in light of the framework for review established by the Listing Committee in light of the facts and circumstances of this case, the Company and its business are suitable for listing.

        The Rule

        Rule 11.06 requires that the Company and its business must, in the opinion of the Exchange, be suitable for listing.

        Our Analysis

        The Group's sources of revenue are very limited and rely most significantly on (i) [Mr. X] as a [contracted individual] under the Group's management and (ii) [Mr. X's] personal reputation and relationships in the industry. [Mr. X] will also be the chairman of the board of directors, a member of the Group's senior management team, and the dominant controlling shareholder of the Group. For these reasons, we consider that there is a substantial identity between the Group and the success and contribution of one person, [Mr. X], during the active business pursuit period ("ABP period"). But for the existence and contribution of [Mr. X], the Group would not have had any business of substance during the ABP period.

        The persistent breaches of various statutory requirements by the former group companies have illustrated a clear disregard of laws and regulations by the Group's management. Whether or not the Group is insulated from legal liability for such past events, such actions remain relevant for purposes of the Listing Rules and may be relied upon by the Exchange in reaching its conclusions regarding suitability. The past actions of directors and management of the Group in conducting business activities substantially similar to those of the Group inform the Exchange's review of whether it would be reasonable to expect that the Directors would comply with applicable laws, regulations and the Listing Rules in the future. In addition, any custodial sentence imposed on [Mr. X] by the courts would be likely to have an extreme adverse impact on the Group, given its undue reliance on [Mr. X] as discussed immediately above.

        Given the substantial identity between the Group and the success and contribution of one person, [Mr. X], during the ABP period, in our view past actions by [Mr. X] individually and the potential personal responsibility of [Mr. X] for such actions must necessarily inform the analysis of the Company's suitability for listing under Rule 11.06. Further, the nature of the statutory breaches on the record as having been conducted by former group companies are serious and, taken in aggregate, would constitute convincing grounds for finding a new applicant unsuitable for listing if they had been conducted by such company directly. In light of the repeated breaches of various statutory requirements by former group companies controlled by [Mr. X], as well as the potential personal liability of [Mr. X] for such actions, in our view the Company should not be considered suitable for listing under Rule 11.06. The steps taken by the Company to insulate itself from legal liability are relevant to this analysis, but the Listing Division does not consider them to be adequate in light of the substantial identity between the Company and [Mr. X] in this case.

        Our Conclusion

        Under the framework for review established by the Committee and in light of the facts and circumstances of the case, we are of the opinion that the Group is not suitable for listing, pursuant to GEM Listing Rule 11.06.

        Given our conclusions set forth above, we have decided to reject the Application. Pursuant to Chapter 4 of the GEM Listing Rules, the Company has the right to have this decision reviewed by the GEM Listing Committee.

        [Portion of Letter Purposely Omitted]

        Yours faithfully,
        For and on behalf of
        The Stock Exchange of Hong Kong Limited

        [Signed]

        Head of Listing

        ************************************************************

        LETTER 2

        [Date]

        [Name and Address of Sponsor]

        Dear Sirs,

        Re: Review Hearing of the GEM Listing Committee
        (the "Review Hearing") regarding the Company
        Date of the Review Hearing: [* day* month* year]

        On [* day* month*year], the GEM Listing Committee of The Stock Exchange of Hong Kong Limited conducted a review hearing (the "Review Hearing") to consider an application from the Company for a review of the decision of the Listing Division to reject the listing application of the Company as set out in [LETTER 1] dated [* day* month* year], (the "Decision").

        The Review Hearing was conducted before the GEM Listing Committee comprising [names of members purposely omitted] (the "Committee").

        Note: Terms and expressions used and defined in the written submission of the Listing Division shall have the same meanings when used herein unless otherwise defined.

        Decision

        The Committee considered the submissions (both written and oral) made by the Company and the Listing Division. The Committee decided, upon fulfillment of the following condition, to overturn the Decision and that the Company could proceed with its listing application with the Exchange in accordance with the Rules Governing the Listing of Securities on the Growth Enterprises Market of The Stock Exchange of Hong Kong Limited:

        [Mr. X] provides an undertaking to the Company that he would only serve six months prior written notice [to the Group] to terminate his contract regarding [Contracted Individual Management] (as per definition in the hearing proof prospectus) when:

        a. the proportion of the Group's turnover attributable to assignments related to [Mr. X] fell below 50%; or
        b. [Mr. X] and his associates together held less than 30% of the issued share capital of the Company.

        The Committee wishes to stress that the above decision is specific to this particular instance and shall not serve to create a precedent for any other companies.

        For the avoidance of doubt, should the Company decide to proceed with its application for new listing, such application will be treated strictly on its merits at the material time, and no representation is given, whether express or implied, as to the acceptability of such application if pursued. The new listing application of the Company in its entirety will be subject to the final approval by the GEM Listing Committee.

        Yours faithfully,
        For and on behalf of
        The Stock Exchange of Hong Kong Limited

        [Signed]

        Acting Secretary to the GEM Listing Committee

      • RL15-06

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        HKEx REJECTION LETTER
        Cite as HKEx-RL15-06 (April 2006)

        Summary
        Listing Rule Listing Rule 8.04
        Reason for rejection and the subsequent disposal of the case on review The Listing Committee rejected the listing application of the Company for the reason that the Company was not considered to be suitable for listing as it had not put in place throughout the track record period the required controls and procedures on which it was relying on for listing eligibility purposes.

        The Listing Committee's rejection decision was reversed by the Listing (Review) Committee on review.
        Contents LETTER 1: Extracts of the decision letter of the Secretary to the Listing Committee of The Stock Exchange of Hong Kong Limited.

        LETTER 2: Extracts of the decision letter of the Secretary to the Listing (Review) Committee on hearing the application of the Company to review the decision of the Listing Committee.

        LETTER 1

        [Date]

        [Name and Address of Sponsor]

        Dear Sirs,

        Re: Application for new listing of a Main Board listing applicant
        (the "Company" together with its subsidiaries, the "Group")

        We refer to your Form A1 listing application dated [*day*month*year] made on behalf of the Company (the "Application") and the Hearing Proof of the Company's listing document dated [*day*month*year] (the "Prospectus"). Capitalised terms used herein shall have the same meanings as those defined in the Prospectus, unless otherwise stated.

        At the Listing Committee meeting held on [*day*month*year], at which [names of members purposely omitted], had attended to consider the Application, the Listing Committee has resolved that the Group is not suitable for listing as required by Rule 8.04. The analysis and conclusion are set out below.

        Relevant Facts

        The Group is principally engaged in the management and operation of the only licensed casino in [a city in Country A which is outside Hong Kong]. According to the Casino License granted by the [relevant government department of Country A], the Group has the exclusive right to operate a casino within a [*km] radius of [a city in Country A] for an initial period of [*] years from [*day*month*year]. Thereafter, the Group has the right to extend its right of exclusivity for a further [*] years subject to the consent of the [relevant government department of Country A].

        The development of [Country A 's] regulatory regime on anti-money laundering ("AML")

        In [*day*month*year] (i.e. in the second year of the Company's three-financial-year track record period), [Country A] became a full member of Asia/Pacific Group ("APG") on money laundering. APG is the regional body responsible for the development and implementation of AML policies in Asia. The APG's AML policies themselves are based upon the standard-setting recommendations formulated by The Financial Action Task Force on Money Laundering ("FATF") on money laundering. FATF was established by the G-7 industrialised countries and its recommendations (the "Recommendations") have been acknowledged and accepted as the international benchmark for the prevention of money laundering. FATF's recommendations have been utilised as the basis for AML legislation or regulations in many countries (including [portion of letter purposely omitted]), and have been recognised and adopted by regional bodies (including APG to which Hong Kong is a founding member) and international organisations such as The World Bank and the United Nations.

        In [*day* month* year] (i.e. in the first year of the Company's three-financial-year track record period), the [relevant government department of Country A] promulgated [certain] guidelines on the regulation of casinos and the prevention of money laundering based on the relevant recommendations issued by FATF. [Portion of the letter purposely omitted]

        The development of the Group's internal AML structure, policies and measures

        According to the submission of the Sponsor, the Group has established its own internal AML structure, controls and procedures, as follows:

        •   On a Group level, the Company has developed an AML regime which, substantiated by its legal advisers in [Country A], complies with all applicable AML laws and regulations and, which supported by the views of [Consultant A], an independent consultant, attains internationally-benchmarked standards based on the recommendations issued by FATF.
        •   On a Company level, both executive and non-executive directors with recognised expertise and experience relevant to AML matters have been appointed:
        •   [Mr.X], [qualifications and work experience of Mr.X purposely omitted], became an executive director [two months before the Company submitted its listing application]; and
        •   [Mr.Y], and [Mr.Z] [qualifications and work experience of Mr.Y and Mr. Z purposely omitted], each became an independent non-executive director [two months before the Company submitted its listing application].
        •   The Company has set up committees, at both the board level (the AML Oversight Committee) and working level (the AML Sub-Committee), to devise, manage and implement comprehensive policies, procedures and internal controls, formally documented in the Company's AML manual. Since [the middle of the first year of the Company's three-financial-year track record period], the Company has conducted three rounds of internal audits in relation to its AML procedures and performance.
        •   [Consultant A], as independent consultant, was engaged in [the second year of the Company's three-financial-year track record period] to conduct an independent review and assessment of the Company's AML procedures and found the Company to be in full compliance with the relevant FATF recommendations and to have established an internal control regime that meets international standards. Having worked with [Consultant A] since its appointment in [the second year of the Company's three-financial-year track record period], the Company has acted upon its various recommendations and suggestions to further enhance its AML procedures and practices.
        •   Although not specifically focusing on AML matters, the Company has also commissioned a report from a firm of independent experts in Australia, [Expert B], to review the Company's wider internal controls [in the year immediately prior to, and in the first and second years of the Company's three-financial-year track record period]), as compared to standards practised by casinos in Australia and the Nevada, USA. It is apparent that the standard of the Company's internal controls is comparable to those practised in Australia and Nevada, USA.

        The Applicable Listing Rule

        Rule 8.04 states that both the issuer and its business must, in the opinion of the Exchange, be suitable for listing.

        The Issue

        The Listing Committee has reviewed whether the Group is suitable for listing, in light of the recent legal developments in [Country A] and the management changes in the Group.

        The Analysis and Conclusion

        The Listing Committee noted the following:-

        •   With [Country A] becoming a full member of the APG on [*day*month* year] (i.e. in the second year of the Company's three-financial-year track record period), the legal environment of the Group's casino business had recently changed. A number of the Company's internal AML structure and control measures and policies were also developed during the track record period and had been subject to only a short period of testing.
        •   In addition, a key executive, [Mr.X], and two non-executive Directors with experience relevant to AML matters had been recently appointed by the Company and were relatively untested in their respective roles.
        •   These factors suggested that it would not be appropriate to approve the Company's listing application at present but it might be in future.

        The Listing Committee agreed that it was necessary for the Company's AML controls and procedures to have been in place throughout the track record period that the Group is relying on for listing eligibility purposes. In light of the fact that this was not the case for the Company, the Committee found the Company was not suitable for listing as required by Rule 8.04 and determined to reject the Company's listing application.

        Please note that, pursuant to Rule 2B.07(1) of the Listing Rules, the Company has the right to a further review of the Application by the Listing (Review) Committee.

        We have assigned a case number to this transaction as stated above. Please quote prominently this case number in any future correspondence relating to this case for efficient processing of the documents and avoiding unnecessary delay.

        [Portion of Letter Purposely Omitted]

        Yours faithfully,
        For and on behalf of
        The Stock Exchange of Hong Kong Limited

        [Signed]

        Secretary to the Listing Committee

        ***************************************************************

        LETTER 2

        [Date]

        [Name and Address of Sponsor]

        Dear Sirs,

        Re: Review Hearing of the Listing (Review) Committee
        (the "Review Hearing") regarding the Company
        Date of the Review Hearing: [* day* month* year]

        On [*day* month*year], the Listing (Review) Committee of The Stock Exchange of Hong Kong Limited conducted a review hearing (the "Review Hearing") to consider an application from the Company for a review of the decision of the Listing Committee made on [*day* month* year] as set out in [LETTER 1], (the "Listing Committee's Decision").

        The Review Hearing was conducted before the Listing (Review) Committee comprising [names of members purposely omitted] (the "Review Committee").

        Note: Terms and expressions used and defined in the written submission of the Listing Division shall have the same meanings when used herein unless otherwise defined.

        Decision

        Having considered the additional information provided by the Company in its written and oral submissions, the Review Committee decided that the Company could proceed with its listing application with the Exchange in accordance with the Listing Rules on the following conditions:

        1. the Company engage an independent professional party to review/audit its internal controls with a focus on anti-money laundering, on a bi-annual basis, and the findings will be disclosed in its annual report. The Company will act upon any recommendations of the independent auditor, where appropriate; and
        2. the Company's controlling shareholder, [*], indemnify the Company for any liabilities suffered and brought about by any actions or suits filed by third parties as a result of any shortcomings and deficiencies in the anti-money laundering internal controls of the Company that may have occurred prior to listing.

        For the avoidance of doubt, should the Company decide to proceed with its application for new listing, such application will be treated strictly on its merits at the material time, and no representation is given whether express or implied, as to the acceptability of such application if pursued. The new listing application of the Company in its entirety will be subject to the final approval by the Listing Committee.

        The Review Committee wishes to stress that the above decision is specific to this particular instance and shall not serve to create a precedent for any other companies.

        Yours faithfully
        For and on behalf of
        The Stock Exchange of Hong Kong Limited

        [Signed]

        Secretary to the Listing (Review) Committee

      • RL14-06

        View Current PDF

        HKEx REJECTION LETTER
        Cite as HKEx-RL14-06 (April 2006)

        Summary
        Listing Rule Listing Rule 8.05(1)(a)
        Reason for rejection and the subsequent disposal of the case on review The Listing Division rejected the listing application of the Company for the reason that the Company was not able to satisfy the minimum profit requirement under Listing Rule 8.05(1)(a) after excluding: (i) the results of the Group's associated companies, (ii) the results of the Group's jointly controlled entities and (iii) deemed gain on dilution of the Group's investment in an associate.

        The Listing Division's rejection decision was upheld by the Listing Committee.
        Contents LETTER 1: Extracts of the decision letter of the Head of Listing, the Stock Exchange of Hong Kong Ltd

        LETTER 2: Extracts of the decision letter of the Acting Secretary to the Listing Committee on hearing of the Company's application to review the decision of the Listing Division

        LETTER 1

        [Date]

        [Name and Address of Sponsor]

        Dear Sirs

        Re: Application for new listing of a Main Board listing applicant
        (the "Company" together with its subsidiary, the "Group")

        We refer to the listing application of the Company dated [*day*month*year] and various related documents and submissions (the "Submissions") we received. Terms used in this letter have the same respective meanings as defined in your submissions and in the [draft] Proof of the prospectus of the Company dated [*day*month*year] (the "Prospectus"), unless the context requires otherwise.

        Based on the information provided, the Listing Division is of the view that the Group is not able to demonstrate to our satisfaction that it has complied with the minimum profit requirements of HK$30 million in respect of the first two years of the Track Record Period ([comprising Year 1, Year 2 and Year 3]) under Rule 8.05(1)(a) and therefore has decided to reject the listing application of the Company. The analysis and conclusion of the Listing Division have been set out below.

        1. Relevant facts
        1.1 The Group's business

        The Group's business focuses on acting as arranger and agent of structured finance solutions, such as syndicated commercial loans and tax leases. It is also engaged in direct investment in [certain categories of real and personal properties and other distressed assets] ("[Direct Investment Assets]") through the establishment of investment funds, and in administering and monitoring such investment portfolios on a non-discretionary basis.
        1.1.1 Pages [*] of the Prospectus describe the Group's business model as follows:

        "The [Company's] business model is to earn:

        •   Arrangement fees, fees from structuring and arranging debt finance;
        •   Administrative fees, performance fees, and performance bonuses and brokerage commissions from distressed assets investment business; and
        •   Interest income and capital gains from proprietary investments in [Direct Investment Assets]."
        1.1.2 It is noted from the Accountants' Report of the Prospectus that:
        (a) "These [associated companies] are undertakings over which the Group exercises significant influence, which is normally where the Group holds between 20% and 50% of the voting rights, or over which the Group exercises significant influence otherwise, but which it does not control".
        (b) "Jointly controlled entities are collective investment schemes ("CISs") set up to invest in property development projects which are held for sale". The Group's attributable equity interests in these CISs ranged from approximately 3% to 40%.
        (c) It is stated in Note 2(c) of the Accountants' Report that, "the Group's interests in jointly controlled entities are accounted for by the equity method". In addition, the Group's associates are accounted for using the equity method of accounting.
        1.2 The Group's profits
        1.2.1 It is noted from the Prospectus the following:
          [Year 1]
        [HK$'000]
        [Year 2]
        [HK$'000]
        [Year 3]
        [HK$'000]
        The Group's profits presented in the accountants' report [19,000] [27,000] [62,000]
        Items included in the Group's profits:      
        Share of results of associates after tax - [4,500] [16,000]
        Share of results of jointly controlled entities [3,000] [2,500] -
        Deemed gain on dilution of investment in an associate (Note 1) - [11,000] -
        Profits after exclusion of the above items — HK$'000 [16,000] [9,000] [46,000]


        Note 1: The deemed gain on dilution of investment in an associate arose from the issue of new shares by [Entity X] in [Year 2] which resulted in dilution of the Group's interest in [Entity X] from 100% to [approximately 45%].
        2. Applicable Listing Rules and Guidance
        2.1 Rule 8.05(1) requires a new applicant to have a three-year trading record under substantially the same management and ownership. The Rule specifically provides that the specified minimum profit level (i.e. profit of not less than HK$20 million in the most recent year and HK$30 million in aggregate in the two preceding years) must be met by "the issuer, or its group (excluding any associated companies and other entities whose results are recorded in the issuer's financial statements using the equity method of accounting)".
        2.2 Rule 8.05(1)(a) also states that "The profit mentioned above should exclude any income or loss of the issuer, or its group, generated by activities outside the ordinary and usual course of its business".
        2.3 In the Consultation Conclusions on Proposed Amendments to the Listing Rules relating to Initial Listing Criteria and Continuing Listing Obligations issued by the Exchange in January 2004 (the "Consultation Conclusions"), the following comments were made on the calculation of profits under Rule 8.05(1) in the case of associated companies and jointly controlled entities:
        33. We have maintained our current policy that such post-tax profits should exclude any income generated by activities outside the ordinary and usual course of business, as well as the results of associated companies.
        34. Given our requirement to demonstrate ownership continuity and control for at least the most recent financial year in the track record period, the results of associated companies should be excluded from the calculation of post-tax profits, as the listing applicant does not have control over these companies.
        35. In the case of joint ventures under control restrictions or jointly controlled companies, there exist a number of operational issues, such as whether and how they are to be accounted for in the accounts of listing applicants, and whether the listing applicants have "negative control" in the form of the power of veto over certain key areas of operations. For the purposes of determining the appropriate treatment of the results of these entities, we consider that a separate review should be conducted. In the meantime pending the outcome of such a review, we have maintained our existing policy that the results of these entities (over which the listing applicants have not been able to demonstrate "control") are to be excluded from the calculation of post-tax profits.
        2.4 In the Frequently Asked Questions on Rule Amendments relating to Corporate Governance and Listing Criteria Issues issued by the Exchange on 31 March 2004, a question was raised on how the results of a jointly controlled entity which has been accounted for by the proportional consolidation method under International Auditing Standards should be treated. The Exchange replied in question 17 that "normally, results of jointly controlled entities will be excluded for the purposes of Rule 8.05, unless the issuer can demonstrate positive control over the entities".
        3. Issues

        Whether, in light of the above results attributable to associates and jointly controlled entities, and deemed gain on dilution of investment in an associate, the Group complies with the profit requirements under Rule 8.05(1)(a).
        4. Sponsor's submissions
        4.1 The Sponsor's submission dated [*] stated that:
        (a) The act of investing in the "associate" (and realization) is in the ordinary and usual course of business of the Group and the Group's business is structured in such a way that much of its investments are associated companies. Hence, the elimination of results of associates does not apply to the current situation. Similarly, the results of jointly controlled entities should also not be excluded as they are investment returns.
        (b) The acquisition and sale of defaulted loans and [assets] are often transacted at the level of an investment holding company, such as [Fund A] or [Fund B] for the purposes of ease of transfer, tax liability management and limiting risk exposure.
        (c) Pages [*] of the Prospectus state that the funds are held through investment vehicles (i.e. associated companies) which are held by a charitable trust to ensure the funds functions as a whole as an independent entity in accordance with recognized corporate principles.
        4.2 The Sponsor's submission dated [*] further elaborated, among other things, the following:
        (a) Such income [share of results from jointly controlled entities] represented realized investment returns of [Entity X] from its jointly controlled entities engaged in real estate investment. It is submitted that the share of results of jointly controlled entities should be included and not excluded for calculation of the Group's net profits in terms of Rule 8.05(1) of the Listing Rules.
        (b) The deemed gain on disposal of an associate arose from the issue of new shares by [Entity X] that diluted the Group's interest in [Entity X] from 100% to [approximately 45%] in [the middle of Year 2]. The share issue was a genuine fund raising exercise as new funds were raised. The amount of deemed gain on disposal was recorded when [Entity X] technically turned, upon the above share issue, from a subsidiary to an associated company of the Company, and did not directly arise from any associated companies and other entities whose results are recorded in the Group's financial statements using the equity method of accounting. On this basis, the deemed gain on disposal of [Entity X] should be included, rather than excluded, for the purpose of the profit test under Rule 8.05(1).
        5. Division's Analysis
        5.1 The Listing Division considers the profit requirement under Rule 8.05(1)(a) to be a question of fact. In particular, the Listing Division considers whether the Group is able to fulfill the minimum profit requirement without relying on:
        (a) the results of associated companies and other entities (including jointly controlled entities) whose results are recorded in the Group's financial statements using the equity method of accounting; and
        (b) profit from activities conducted outside the Group's ordinary and usual course of business.
        Share of results of associates and jointly controlled entities
        5.2 Rule 8.05(1) requires that the profit of the issuer and subsidiary, excluding any associated companies and other entities whose results are recorded in the issuer's financial statements using the equity method of accounting, to meet the minimum profit requirement. The Consultation Conclusions also clarifies the Division's existing policy to exclude the results of jointly controlled entities from the profits test under Rule 8.05(1).
        5.3 Rule 8.05(1) contemplates that the new applicant must exercise positive and effective control over its business, and accordingly, refers to the group, which is defined to include the issuer and its subsidiaries (over which it would have control), and excludes its associates and other entities whose results are equity accounted for. The existing policy of the Exchange is also reiterated in the Consultation Conclusions, which stated that the results of entities (both associated companies and jointly controlled entities) over which the new applicants have not been able to demonstrate control are to be excluded from the calculation of post-tax profits. While not explicitly stated in the Consultation Conclusion, it is the view of the Listing Division that this position would apply to the share of results of the associates and the jointly controlled entities of the Group which have been equity accounted for, regardless of whether or not such results are realized investment returns as a result of distributions by the jointly controlled entities.
        5.4 Having considered the Sponsor's submissions, it is the Listing Division's view that the clear statements in the Consultation Conclusions should prevail, notwithstanding the views of the Sponsor. Accordingly, the share of results of associates after tax and the jointly controlled entities must be excluded from the Group's track record for purpose of considering the minimum profit requirement under Rule 8.05(1)(a).

        Deemed gain on dilution of investment in an associate (the "Deemed Gain")
        5.5 The Group describes itself as a structured finance arrangement and direct investment firm, whose business model is to earn arrangement fees from structuring and arrangement debt finance, administrative and performance fees from its assets investment business, and interest income and capital gains from proprietary investments in [Direct Investment Assets].
        5.6 The Listing Division notes that the issue of new shares is part of the Group's capital fund raising activity. It is described on page [*] of the Prospectus that "[in the middle of Year 2], [Entity X] raised [approximately US$8 million] in shareholders' equity capital from a number of independent third party investors as part of its strategic expansion. The [Company's] shareholding interest was diluted to [approximately 45%] as a result." It is also stated in the Sponsor's submission dated [*] that this dilution gave rise to a deemed gain on dilution which is a one off gain and not in the ordinary and usual course of business of the Group.
        5.7 It is the Division's view that the Deemed Gain represents unrealized gain resulting from the Group's capital fund raising activities, rather than gain generated from activities within the ordinary and usual course of its business. On this basis, profit from the Deemed Gain should be excluded from the profit test under Rule 8.05(1)(a) as the profit did not arise from the Group's usual and ordinary course of business.

        Adjusted profit figures for purposes of Rule 8.05
        5.8 After exclusion of the Group's share of results of associates after tax, its share of results of jointly controlled entities, and the deemed gain on dilution of investment in an associate from its profit, the aggregate profit of the Group for the first two years and the final year of its Track Record Period were approximately [HK$25,000,000] and [over HK$45,000,000] respectively.
        6. Conclusion
        6.1 On the basis of the Listing Division's analysis set forth above, the Group is not able to satisfy the minimum profit requirement of HK$30 million in aggregate in respect of the first two years of the Track Record Period under Rule 8.05(1)(a) of the Listing Rules. Therefore, the Listing Division has decided to reject the listing application of the Company.

        [Portion of Letter Purposely Omitted]

        Pursuant to Listing Rule 2B.05(1), the Company has the right to have this decision reviewed by the Listing Committee.

        [Portion of Letter Purposely Omitted]

        Yours faithfully,
        For and on behalf of
        The Stock Exchange of Hong Kong Limited

        [Signed]

        Head of Listing

        ***************************************************************************

        LETTER 2

        [Date]

        [Name and Address of Sponsor]

        Dear Sirs,

        Re: Review Hearing of the Listing Committee
        (the "Review Hearing") regarding the Company
        Date of the Review Hearing: [* day* month * year]

        On [*day*month*year], the Listing Committee of The Stock Exchange of Hong Kong Limited conducted a review hearing (the "Review Hearing") to consider an application from the Company for a review of the decision of the Listing Division set out in [LETTER 1] dated [* day*month* year], (the "Decision").

        The Review Hearing was conducted before the Listing Committee comprising [names of members purposely omitted] (the "Committee").

        Note: Terms and expressions used and defined in the written submission of the Listing Division shall have the same meanings when used herein unless otherwise defined.

        Decision

        The Committee considered the submissions (both written and oral) made by the Company and the Listing Division. The Committee decided to uphold the Decision to reject the Company's listing application.

        Reasons

        The Committee arrived at its decision for the following reasons:

        1. The Group's business in jointly controlled entities, which ranged from approximately 3% to 40% were held via [Entity X] at the material times, i.e. from the beginning of the track record period until [the middle of Year 2];
        2. Rule 8.05(1) excluded the results of the Group's associated companies and other entities whose results were recorded in the Group's financial statements using the equity method of accounting;
        3. page [*] of the Accountants' Report (appendix I to the Company's draft prospectus) set out the Group's accounting policy relating to jointly controlled entities. It stated that the Group's interests in jointly controlled entities, comprising a significant interest in investment funds which were contractually jointly controlled, were accounted for by the equity method of accounting. Further, [the Company's legal adviser ] also submitted at the Review Hearing that the funds has as a matter of accounting treatment been equity accounted for;
        4. page [*] of the Accountants' Report provided that the Group's share of results from jointly controlled entities of [Year 1] and [Year 2] were in the sums of approximately [HK$3 million] and [HK$25 million] respectively. Such sums, which were equity accounted for, would therefore not be recognized under Rule 8.05(1); and
        5. after excluding the share of results of jointly controlled entities for [Year 1] and [Year 2], the aggregate profit of the Group was approximately [HK$25,000,000] which fell short of the requirements of Rule 8.05(1)(a). Its application for listing was hence rejected.

        The Company had failed to produce cogent reasons or to illustrate exceptional circumstances to convince the Committee to arrive at a decision different from the Division's Decision.

        Yours faithfully
        For and on behalf of
        The Stock Exchange of Hong Kong Limited

        [Signed]

        Acting Secretary to the Listing Committee

      • RL13-06

        View Current PDF

        HKEx REJECTION LETTER
        Cite as HKEx-RL13-06 (April 2006)

        Summary
        Listing Rule GEM Listing Rule 2.07
        Reason for rejection and the subsequent disposal of the case on review At the hearing meeting considering the Company's listing application the GEM Listing Committee considered that a high standard of review should be applied in light of the facts and circumstances of the Company's case, in particular, the following:
        •   the Company changed its reporting accountants during its listing applications;
        •   significant sales by the Group to companies controlled by the employees of the Group and its related parties were noted during the Active Business Pursuit Period of the Company.
        The Listing Committee exercised its discretion under GEM Listing Rule 2.07 to request the Company to provide the Listing Division with detailed explanations regarding the issues raised by the GEM Listing Committee.

        The Company failed to address the concerns of the Listing Committee by providing the appropriate level of assurance to the Listing Division. The Listing Division therefore rejected the listing application of the Company.

        The Listing Division's rejection decision was upheld by the GEM Listing Committee.
        Contents LETTER 1: Extracts of the decision letter of the Head of Listing, the Stock Exchange of Hong Kong Ltd

        LETTER 2: Extracts of the decision letter of the Acting Secretary to the GEM Listing Committee on hearing of the Company's application to review the decision of the Listing Division

        LETTER 1

        [Date]

        [Name and Address of Sponsor]

        Dear Sirs,

        Re: Application for new listing of a GEM listing applicant
        (the "Company" together with its subsidiaries, the "Group")

        We refer to:

        (i) the listing applications of the Company (the "[First Listing Application]"; "[Second Listing Application]" and the "[Present Listing Application]") dated [*day*month*year]; [*day*month*year] and [*day*month*year];
        (ii) the hearing proof of the prospectus dated [*day*month*year] (the "Prospectus");
        (iii) the letter of [*day*month*year] from the Secretary to the GEM Listing Committee to the Sponsor [after hearing the Second Listing Application of the Company] (the "LC Letter"); and
        (iv) the Sponsor's submissions dated [*day*month*year] (the "Submissions") in response to the LC Letter.

        Capitalised terms used in this letter shall have the same meanings as defined in the Prospectus and the Submissions, unless the context requires otherwise.

        Relevant Facts

        The [Present Listing Application]

        The [First Listing Application] was filed for the first time on [*day*month*year] and lapsed on [*day*month*year] (six months after filing) as no responses were made to a set of Listing Division's comments made on [*day*month*year]. On [*day*month*year], the Sponsor re-submitted the [Second Listing Application] together with an updated draft prospectus. A significant change noted in the re-filing was that the Company had changed its reporting accountants for the purposes of the [Second Listing Application] from [Reporting Accountants AA] ("[Reporting Accountants AA]") to [Reporting Accountants BB] ("[Reporting Accountants BB]"). It was also noted that there were significant sales by the Group to companies controlled by employees of the Group and its related parties during the Active Business Pursuit Period (the "Sales Transactions").

        Views of the GEM Listing Committee

        The [Second Listing Application] was considered by the GEM Listing Committee on [*day*month*year] [shortly before the Second Listing application lapsed]. The GEM Listing Committee had raised a number of concerns in relation to the circumstances of [Reporting Accountants AA's] resignation and the existence and rationale for the Sales Transactions.

        The GEM Listing Committee considered that the facts and circumstances of the [Second Listing Application] should warrant significant concern. [Portion of Letter Purposely Omitted]. The GEM Listing Committee considered that the resignation of [Reporting Accountants AA] [shortly before the First Listing Application lapsed] was a very serious step which had suggested that there were serious problems with [Reporting Accountants AA's] audit and that [Reporting Accountants AA] was exceedingly concerned with the audit and the Sales Transactions in particular. To check the concerns that had been raised would require a more comprehensive audit than that had been performed to date by the Company's current reporting accountants, [Reporting Accountants BB], and which would include a forensic audit.

        The GEM Listing Committee took note that [Reporting Accountants BB] had performed certain procedures including (i) site visits to and interviews with some relevant retailers, (ii) company search, (iii) inspection of original business certificates of some relevant retailers, (iv) vouching of some source documents, (v) scrutinizing the Group's sales lists to identify omissions of related party transactions and (vi) inspection of customers' profiles. The GEM Listing Committee took the view that the procedures performed by [Reporting Accountants BB] were not adequate in the circumstances. In light of the seriousness of the concerns identified by [Reporting Accountants AA], the GEM Listing Committee had considered it necessary for [Reporting Accountants BB] to vet all of the Company's customers for the purposes of expressing a clear audit opinion on the Company's financial statements. The Company should also be required to explain to the satisfaction of the Exchange the detailed rationale for conducting the Sale Transactions.

        The GEM Listing Committee had, therefore, in [the hearing meeting considering the Second Listing Application of Company A], requested the Sponsor and the directors of the Company to, among others:

        1. explain to the satisfaction of the Exchange the reasons for [Reporting Accountants AA's] departure;
        2. explain to the satisfaction of the Exchange how [Reporting Accountants BB] had been able to satisfy themselves that the related party transactions were limited to those that had been identified;
        3. explain to the satisfaction of the Exchange the detailed reasons for the Sales Transactions; and
        4. confirm and substantiate whether the employees who owned the businesses to which the Sale Transactions were made with (the "Businesses") were conducting genuine businesses.

        The Sponsor's and [Reporting Accountants BB's] Submissions in response

        The Sponsor and [Reporting Accountants BB] had made their responses to the comments of the GEM Listing Committee as follows:

        1. [Reporting Accountants AA] had stopped carrying out its work [shortly before the First Listing Application lapsed] when the Sales Transactions were identified. [Reporting Accountants AA] had failed to propose any concrete plans for the Company's consideration and had ceased its work. [Reporting Accountants AA] had also refused to resume work when requested by the Company to review the supporting documents which the Company had subsequently gathered. The Sponsor found the circumstances surrounding [Reporting Accountants AA's] departure unreasonable and unprofessional.
        2. [Reporting Accountants BB] had performed additional audit work of a forensic nature to cover the entire sales transactions for [the active business pursuit period of the Company comprising Year 1, Year 2 and a six-month stub period thereafter]( the "ABP Period") to determine the completeness of the disclosures of the related party transactions which had included:-
        (i) checking sales transactions of the Group during the ABP Period to sales invoices, delivery notes, and their subsequent settlements. The average coverage of the work undertaken to verify the identities and existence of the customers had represented [almost 90%] of the total sales during the ABP Period;
        (ii) performing 100% vouching of bank-in slips and cash receipts, matching the names of the depositors on the bank-in slips with the customers for settlement through banks, checking the sequential number of cash receipts for cash settlement, comparing the dates of payments as shown in the bank-in slips and cash receipts against those shown on the invoices, etc.;
        (iii) performing analytical procedures on the reasonableness of the terms, including gross profit margin and sales pattern in term of volume, pricing and timing/frequency of the top 50 customers, which had represented [approximately 80%] of the Group's total sales during the ABP Period. However no further analytical procedures on sales pattern were performed on the remaining [approximately 20%] of the Group's total sales during the ABP Period, which had comprised of customers with average sales amounts of [approximately HK$20,000];
        (iv) visiting [over 50] customers which had represented [approximately 70%] of the Group's total sales during the ABP Period;
        (v) conducting company searches on [over 100] customers which had represented [approximately 55%] of the Group's total sales during the ABP Period;
        (vi) conducting telephone interviews with [over 100] customers which had covered [approximately 10%] of the Group's total sales during the ABP Period; and
        (vii) sending confirmations to customers representing [95%] of the Group's total sales during the ABP Period. Of this [95%], confirmations without negative responses were received for [over 80%] whilst the remaining [15%] were mainly walk-in customers.
        3. The Sponsor submitted that the reasons for not performing ancillary audit work on 100% of the Group's sales were mainly that certain sales of the Group were related to (i) "walk-in" retail customers or customers without contact details; and (ii) customers who had declined to accede to [Reporting Accountants BB's] requests for confirmation as they had ceased trading relationships with the Company. These sales had represented on average HK$20,000 per customer.
        4. Some employees of the Group had approached the Company's management at [the end of Year 1] and expressed interest in reselling the Company's products. The Company's management had endorsed these proposals after taking into account the facts that:
        (i) the proposals could increase the Group's sales;
        (ii) the proposals could expand the Group's sales network to the rural areas;
        (iii) these employees were familiar with the Group's products; and
        (iv) these employees were relatively free during the long winter in [the PRC].
        5. To verify whether the Businesses were genuine, [Reporting Accountants BB] had performed the following:-
        (i) site visits;
        (ii) interviews with relevant parties;
        (iii) obtaining written confirmations from the "related parties";
        (iv) analytical procedures on the reasonableness of the terms of the sales (e.g. gross profit margins and unit prices);
        (v) reviewing copies of business licenses and capital verification reports;
        (vi) vouching relevant supporting documents (e.g. sales contracts, purchase orders, invoices, receipts, or goods delivery notes); or
        (vii) independent company searches.
        6. [Reporting Accountants BB] submitted that they had made site visits and interviewed the beneficiaries of the related parties and had not identified any irregularities from the above procedures that warrant further work, and was not aware of any evidence that suggested that the relevant sales were not genuine.

        Issue

        Whether the Sponsor and [Reporting Accountants BB] have made responses to the comments made by the GEM Listing Committee during [the hearing meeting considering the Second Listing Application of the Company] to the satisfaction of the Exchange.

        Applicable GEM Listing Rules

        Rule 2.07 of the GEM Listing Rules provides that "... the GEM Listing Rules are not exhaustive and that the Exchange may impose additional requirements or make listing subject to special conditions whenever it considers it appropriate."

        Our Analysis

        The Exchange applies an explicit risk based approach in determining whether the facts and circumstances of an individual case warrant a significant variation of the standard of review ordinarily accorded to IPO applications. This would mean in some, exceptional, cases that the Listing Division would not necessarily accept at face value opinions provided by qualified experts, including professional accountants. The critical point from the Exchange's perspective is that warning signs found during the course of vetting clearly indicate that a higher standard of review should be applied to provide a high level of assurance about the eligibility, suitability and disclosure by the IPO applicant for purposes of complying with the GEM Listing Rules.

        The making of the commentary and requests for detailed explanations of various issues by the GEM Listing Committee at [the hearing meeting considering the Second Listing Application of the Company] was one of a number of instances in which the GEM Listing Committee exercised its discretion in accordance with the GEM Listing Rules. The GEM Listing Committee took the view that their requests in the current circumstances were within their powers of discretion memorialised in Rule 2.07, proportionate to the seriousness of the issues identified and designed to address those issues squarely. The Committee had noted with concern issues which did not appear to have been resolved by obtaining appropriate assurance to a sufficiently high standard. The Committee considered that the resignation of [Reporting Accountants AA] was a very serious step which suggested that there were serious problems with [Reporting Accountants AA's] audit and that [Reporting Accountants AA] was exceedingly concerned with the audit and the Sales Transactions in particular. As found by the Committee, the issues identified suggested that there might be potential problems either with the Company's business model or the veracity of disclosure presented to the Committee, or both.

        Based on the information contained in the Submissions, the Listing Division notes that certain concerns and requests previously raised by the GEM Listing Committee had not been satisfactorily addressed. In particular, the Division notes that the Sponsor and/or [Reporting Accountants BB]:

        (i) has not verified the identities and existence of customers to whom [over 10%] of the Group's total sales during the ABP Period were made;
        (ii) has not performed further analytical procedures on the sales pattern for [almost 20%] of the Group's total sales;
        (iii) has not visited customers to whom [over 30%] of the Group's total sales during the ABP Period were made;
        (iv) has not received confirmations from customers to whom [almost 20%] of the Group's total sales during the ABP Period were made;
        (v) has not performed any further alternative audit procedures on certain customers who are no longer contactable by the Group; and
        (vi) has on the record submitted that they would not be able or willing to extend their scope of work beyond that they have carried out to date.

        Although the Sponsor and [Reporting Accountants BB] have extended their scope of work, given the gaps in complying with the requests of the GEM Listing Committee, which we view as significant, it is the view of the Listing Division that such work has fallen short of the heightened standard of review required by the GEM Listing Committee in the circumstances.

        Our Conclusion

        In light of the facts and circumstances of the case and our analysis set forth above, the Listing Division has concluded that the Company has not made satisfactory responses to the concerns identified by the GEM Listing Committee. The Listing Division therefore has decided to reject the [Present Listing Application].

        [Portion of Letter Purposely Omitted]

        Pursuant to Rule 4.05(1) of the GEM Listing Rules, the Company has the right to have this decision reviewed by the GEM Listing Committee.

        [Portion of Letter Purposely Omitted]

        Yours faithfully,
        For and on behalf of
        The Stock Exchange of Hong Kong Limited

        [Signed]

        Head of Listing

        ********************************************************

        LETTER 2

        [Date]

        [Name and Address of Sponsor]

        Dear Sirs,

        Re: Review Hearing of the GEM Listing Committee
        (the "Review Hearing") regarding the Company
        Date of the Review Hearing: [* date * month* year]

        On [*date*month*year], the GEM Listing Committee of The Stock Exchange of Hong Kong Limited conducted a review hearing (the "Review Hearing") to consider an application from the Company for a review of the decision of the Listing Division set out in [LETTER 1] dated [*date* month* year], (the "Decision").

        The Review Hearing was conducted before the GEM Listing Committee comprising [names of members purposely omitted] (the "Committee").

        Note: Terms and expressions used and defined in the written submission of the Listing Division shall have the same meanings when used herein unless otherwise defined.

        Decision

        The Committee considered the submissions (both written and oral) made by the Company and the Listing Division. The Committee decided to uphold the Decision to reject the Company's listing application.

        Reasons

        The Committee arrived at its decision for the following reasons:

        1. The Sales Transactions were unusual, in that they were with parties who could be viewed as being related to the Company or its controlling shareholder, and constituted a material part of the ABP Period.
        2. The gross profit margins of the Sales Transactions were inconsistent with the gross profit margin of the Company as a whole during [Year 1] and [Year 2].
        3. The effect of the Sales Transactions was to distort the results of the ABP Period to the extent that if they were excluded from the ABP Period the Company would reflect a downward trend in sales.
        4. Viewing the above factors taken as a whole, together with the other facts and circumstances of this case, the Committee concluded that the Company had failed to produce cogent evidence to convince the Committee to overturn the Decision.

        Yours faithfully
        For and on behalf of
        The Stock Exchange of Hong Kong Limited

        [Signed]

        Acting Secretary to the GEM Listing Committee

      • RL12-06

        View Current PDF

        HKEx REJECTION LETTER
        Cite as HKEx-RL12-06 (April 2006)

        Summary
        Listing Rule Listing Rule 8.04
        Reason for rejection and the subsequent disposal of the case on review The Listing Division rejected the listing application of the Company as the Company failed to satisfy the "capability of carrying on its business independently" requirement of Listing Rule 8.04.

        The Listing Division's rejection decision was upheld by the Listing Committee.
        Contents LETTER 1: Extracts of the decision letter of the Head of Listing, the Stock Exchange of Hong Kong Ltd

        LETTER 2: Extracts of the decision letter of the Acting Secretary to the Listing Committee on hearing the application of the Company to review the decision of the Listing Division

        LETTER 1

        [Date]

        [Name and Address of Sponsor]

        Dear Sirs,

        Re: Application for new listing of a listing applicant
        (the "Company" together with its subsidiaries, the "Group")

        We refer to your application form dated [*day*month*year] applying, on behalf of the Company, for the listing of the shares of the Company on the Main Board of the Exchange. We also refer to your submissions dated [*day*month*year] (the "Submissions") in response to our comments dated [*day*month*year]. Capitalized terms used in this letter have the same meanings as defined in the 2nd Submission Proof of the Company's prospectus dated [*day*month*year] (the "Prospectus"), unless otherwise stated.

        Based on the facts and submissions provided to us, the Listing Division is of the view that the Group is not able to demonstrate to our satisfaction that it is capable of carrying on its business independently of [Parent X]. We would like to take this opportunity to explain in detail our reasoning in reaching this conclusion.

        1. Background
        1.1 The Group is a provider of [certain financial services, namely "Service 1", "Service 2" and "Service 3"], in Hong Kong with access to an extensive distribution network in [Asia], operating for over 25 years. Upon completion of the proposed listing, [Parent X] will be the ultimate controlling shareholder of the Company controlling, directly and indirectly, approximately [75%] of the Company's issued share capital and will be entitled to nominate all members of the board of directors of the Company and control matters requiring shareholders' approval. There are proposed to be ten members of the Board of Directors of the Company, five of whom have long-standing working relationships with [Parent X] and are officers or directors of [Parent X] or an affiliated company:
        •   [Mr. A], a non-executive director, is the Chairman of [Parent X];
        •   [Mr. B], a non-executive director, is the President of [Parent X];
        •   [Mr. C], an executive director, is a director of [Parent X] and the President of [Parent Group T], a subsidiary of [Parent X], and intends to devote 50% of his time to the business of the Group;
        •   [Mr. D], an executive director, is a director of [Parent Group U], a subsidiary of [Parent X], and intends to devote 50% of his time to the business of the Group; and
        •   [Mr. E], an executive director, is a director and an executive vice president of [Parent Group V], a subsidiary of [Parent X],
        1.2 Immediately after the proposed listing, both the Group and [Parent X] will be engaged in (1) [Service 1]; (2) [Service 2]; and (3) [Service 3]. The proposed delineation of the business of the Group from that of [Parent X] is described in detail in the Prospectus. However the Prospectus also states that in conducting its operations the Group is, to a certain extent, dependent on [Parent X]. Among other things, the Group relies on [Parent X] for:
        •   the referral of clients;
        •   the distribution services [relating to Service 1] through [Parent X's] branch network in [Asia];
        •   the information technology system necessary to perform certain core functions, including the processing of [services required for Service 1];
        •   [the trading revenue generated by Service 3];
        •   certain support services, such as strategic research and development, product development and marketing for [Service 1]; and
        •   correspondent [financial] services.
        1.3 In addition, the Group includes a [subsidiary engaging in the provision of Service 2] which is regulated by the Hong Kong Monetary Authority ("HKMA") and the HKMA requires [Parent X] to provide the Group company with such support and assistance as may be required to ensure that the Group company maintains its capital and liquidity levels in accordance with the requirements of the HKMA.
        1.4 The Prospectus includes a description of a number of exempt and non-exempt connected transactions between the Group and [Parent X]. In particular, the non-exempt continuing connected transactions described include:
        •   provision of inter-group lending services by members of the Group to [Parent X's ] Group;
        •   purchase of [certain foreign currency] from [Parent X];
        •   sale of [certain foreign currency] to [Parent X's] Group;
        •   provision of support services by [Parent X's] Group to the Group, specifically:
        •  distribution support services;
        •  arranging cash to do remittances by third party companies;
        •  conducting credit reviews; and
        •  seconding of management and supervisory staff from [Parent X] to the Group;
        •   provision of [certain auxiliary financial services] by [Parent X's] Group to the Group; and
        •   licence of [certain] system software to [Parent X's] Group.
        2. Issues
        2.1 Given the nature of the relationship between the Group and its controlling shareholder, [Parent X], has the Company demonstrated to the satisfaction of the Exchange that the Group's business can be carried out independently of [Parent X] as contemplated by paragraph 27A of Appendix 1A of the Listing Rules? If not, should the Company and its business be considered unsuitable for listing under Rule 8.04 of the Listing Rules?
        2.2 [Portion of Letter Purposely Omitted Regarding a Waiver Application Which Does Not Form the Subject Matter of the Rejection].
        3. Analysis - Independence and Suitability for Listing Independence from [Parent X]
        3.1 The Listing Division has reviewed the relationship of the Group with [Parent X] in both quantitative and qualitative terms.

        Quantitative Aspects
        3.2 For the quantitative aspects, our analysis focused principally on the following three types of services provided by the Group:
        •   [Service 1];
        •   [Service 2]; and
        •   [Service 3].
        3.3 [Service 1]
        3.3.1 According to the breakdown by business segment as shown on page [*] of the Prospectus, [Service 1] accounted for [approximately 60%], [approximately 70%], [approximately 60%] and [approximately 70%] of the Group's total income for each of the three years [of the Track Record Period ("Year 1", "Year 2" and "Year 3")] and the six months [immediately after the Track Record Period ("Stub Period")] respectively. We note that the Group relies on the distribution network of [Parent X] in [Asia].
        3.3.2 We note your argument that while unlikely, it is technically possible for the Group to arrange the delivery of the [relevant service] through a [third party] network in [Asia] instead of through [Parent X]. However, although the Group could look for alternative distribution network in [Asia] for distribution, in our view, it has not demonstrated whether another alternative distribution network could be easily identified and utilized, particularly in light of [Parent X's] controlling shareholder position.
        3.3.3 As such, we consider that the distribution network of [Parent X] is a crucial part of the operation of [Service 1]. This is supported by the Prospectus itself which recognizes that in the event that [Parent X] is unable to handle distribution on behalf of the Group, the Group might not be able to establish its own distribution network in [Asia] on terms acceptable to the Group and the Group's business would be adversely affected.
        3.4 [Service 2] [note: Service 2 involves payment of interest to the Group's customers]
        3.4.1 According to the breakdown by business segment as shown on page [*] of the Prospectus, [Service 2] accounted for [approximately 40%], [approximately 30%], [approximately 20%] and [approximately 20%] of the Group's total income for each of the three years of the [Track Record Period] and the [Stub Period] respectively. We note that the [operation of Service 2] by the Group and related financial services division receives client referrals from [Parent X], in particular clients who are residents of [Asia] with long-standing relationships with [Parent X].
        3.4.2 We also note from your reply of your submission of [*day*month*year] that the interest expenses paid to customers arising from those clients referred from [Parent X] represented [approximately 60%], [approximately 70%], [almost all] and [almost all] of the Group's total interest expense for each of the three years of the [Track Record Period] and the [Stub Period] respectively. As such, we consider that nearly all of the Group's clients are referred from [Parent X].
        3.5 [Service 3]
        3.5.1 According to the breakdown by business segment as shown on page [*] of the Prospectus, [Service 3] accounted for [approximately 20%] and [approximately 10%] of the Group's total income for [Year 3] and the [Stub Period] respectively. We note that for this income stream, the Group engages in [the provision of the relevant service] for [Parent X's] various international branches, and the Group relies on [Parent X's] needs to generate the trading revenue for [Service 3] of the Group.
        3.5.2 According to the Prospectus and the submissions by the Sponsor, the Group began to actively pursue this segment of [Service 3] in [Year 3] to diversify its business from [Service 1]. In fact, we note from the breakdown of turnover to connected persons on page [*] of the Prospectus that the Group derived income relating to [Service 3] from [Parent X] branches of approximately HK$[10] million in [Year 3] (compared with the net profit of the Group for [Year 3] of approximately HK$[30] million) and no such income was generated in [Year 1] and [Year 2]. Without the income from [Service 3] derived from [Parent X's] branches, the Group may not be able to meet the minimum profit requirement as required under Rule 8.05(1)(a) of the Listing Rules.

        Qualitative Aspects
        3.6 For the qualitative aspects, our analysis focused principally on the following two areas:
        •   support and guarantee from [Parent X] to comply with requirements of HKMA; and
        •   reliance on infrastructure of [Parent X].
        3.7 Support and guarantee from [Parent X] to comply with requirements of HKMA
        3.7.1 We note that [Subsidiary A], a principal operating subsidiary of the Company, is a company [that involves in provision of Service 2]. As such, HKMA requires [Parent X] to provide [Subsidiary A] with such support and assistance as may be required to ensure that [Subsidiary A] maintains its capital and liquidity levels in accordance with the requirements of HKMA.
        3.7.2 If [Parent X] does not give such support or guarantee to [Subsidiary A], [Subsidiary A] would not be able to satisfy the requirements of HKMA and [Subsidiary A] would not be qualified to operate as a registered company [under the relevant regulations prescribed by HKMA]. In such situation, the Group's business and operations relating to [Service 2] would be seriously affected.
        3.7.3 As a result of these regulatory requirements, we consider the Group's reliance on [Parent X] to be substantial and not easily replaced.
        3.8 Reliance on infrastructure of [Parent X]
        3.8.1 We note that the Group relies on [Parent X's] information technology system to perform functions such as data-processing of remittances. [Parent X] has also agreed to provide to the Group certain support services using its expertise such as [*].
        3.8.2 In order to implement such support services, [Parent X] would provide the Group with access to its information technology and technological support [for the provision of services relating to Service 1].
        3.8.3 Although we note that a fee is being charged by [Parent X] on normal commercial terms in the provision of the above services, we consider the reliance on the infrastructure of [Parent X] to be critical for the Group's operations. If [Parent X] does not provide such information technology and technical support to the Group, the Group would be required to find replacement to obtain such support under which the terms of the support services might not be negotiated on terms acceptable to the Group. Even if the Group were able to obtain such information technology and technical support to implement and process its services, it may incur extra operating costs and its financial results may be adversely affected.
        3.9 Conclusion
        3.9.1 Our analysis on the relationship of the Group with [Parent X] in both quantitative and qualitative terms set forth above has led us to conclude that the Group is not able to demonstrate to our satisfaction that it is capable of carrying on its business independently of [Parent X].
        Suitability for Listing
        3.10 The Sponsor submitted in its Form A1 that, among other things, all the qualifications for listing set out in the Listing Rules have been met or fulfilled, insofar as required to be met or fulfilled prior to application. This included Listing Rule 8.04 which requires the Group and its business to be suitable for listing.
        3.11 The Listing Division considers that the requirement under paragraph 27A of Appendix 1A of the Listing Rules is not merely a disclosure issue if the listing applicant is so dependent on its controlling shareholder that consequently it cannot carry on its business independently of its controlling shareholder. The Listing Division is of the view that it is crucial for the listing applicant to be independent from the controlling shareholder after listing such that the influence of controlling shareholder on the listing applicant is kept to a minimum and the interest of the shareholders can be protected accordingly. Otherwise, the listing applicant and its business will be, in the opinion of the Exchange, considered unsuitable for listing under Rule 8.04 of the Listing Rules.
        4. Conclusion
        4.1 Based on the analysis set forth above and having considered the information submitted, we consider that the Group's relationship with [Parent X] is so fundamental to its business operations that the Group has not able to demonstrate to our satisfaction that it is capable of carrying on its business independently of [Parent X]. As such, the Company and its business are, in the opinion of the Exchange, considered unsuitable for listing under Rule 8.04 of the Listing Rules. On this basis, the Listing Division has decided to reject the listing application of the Company.

        [Portion of Letter Purposely Omitted]

        Please also note that, pursuant to Rule 2B.05 of the Listing Rules, the Company has the right to have the ruling reviewed by the Listing Committee.

        [Portion of Letter Purposely Omitted]

        Yours faithfully,
        For and on behalf of
        The Stock Exchange of Hong Kong Limited

        [Signed]

        Head of Listing

        ********************************************************************

        LETTER 2

        [Date]

        [Name and Address of Sponsor]

        Dear Sirs,

        Re: Review Hearing of the Listing Committee
        (the "Review Hearing") regarding the Company
        Date of the Review Hearing: [* day * month* year]

        On [* day* month*year], the Listing Committee of The Stock Exchange of Hong Kong Limited conducted a review hearing (the "Review Hearing") to consider an application from the Company for a review of the decision of the Listing Division set out in [LETTER 1] dated [* day* month* year], (the "Decision").

        The Review Hearing was conducted before the Listing Committee comprising [names of members purposely omitted] (the "Committee").

        Note: Terms and expressions used and defined in the written submission of the Listing Division shall have the same meanings when used herein unless otherwise defined.

        Decision

        The Committee considered the submissions (both written and oral) made by the Company and the Listing Division. The Committee decided to uphold the Decision to reject the Company's listing application on the basis that the Company has failed to satisfy Rule 8.04 of the Listing Rules.

        Reasons

        The Committee arrived at its decision for the following reasons:

        1. The Company is engaged in the provision of [financial services, namely Service 1, Service 2 and Service 3]. The Company acknowledged in its written submission that the Group relied on [Parent X] to a certain extent in conducting its operations. However, the Committee considered that the Group's business operations were primarily dependent on [Parent X]:
        (a) Referral of clients by [Parent X]

        The Group was dependent on [Parent X] for referral [regarding Service 2] during the track record period. This was evidenced by the fact that the interest expenses paid to clients referred by [Parent X] represented [approximately 60%], [approximately 70%], [almost all] and [almost all] of the Group's total interest expense for each of the three years of the [Track Record Period] and the [Stub Period].
        (b) [Service 1]

        Although it would be possible for the Group to operate [Service 1] through third parties in [Asia], this would most likely be on terms that would adversely affect the Group's financial performance and fundamental business model.
        (c) [Service 3]

        In particular, the Group relies on [Parent X's] branches and subsidiaries to generate the trading revenue relating to [Service 3]. The Company submitted at the Review Hearing that the unaudited profit of the Group for [Year 3] was approximately HK$[50] million and [half of which] was attributable to trading services relating to [Service 3]. This fact corroborated the Committee's finding that the Group's business operations were dependent on [Parent X].
        2) Given the above, the Committee was of the view that the Company was incapable of carrying on business independently of [Parent X]. As such, the Company had failed to satisfy Rule 8.04 of the Listing Rules which requires that both the issuer and its business must, in the opinion of the Exchange, be suitable for listing.

        The Company had failed to produce cogent reasons or to illustrate exceptional circumstances to convince the Committee to overturn the Decision.

        Yours faithfully
        For and on behalf of
        The Stock Exchange of Hong Kong Limited

        [Signed]

        Acting Secretary to the Listing Committee

      • RL10-06

        View Current PDF

        HKEx REJECTION LETTER
        Cite as HKEx-RL10-06 (February 2006)

        Summary
        Listing Rule Listing Rule 8.05(1)(a)
        Reason for rejection and the subsequent disposal of the case on review The Listing Division rejected the listing application of the Company as the Company failed to satisfy the profit requirements of Listing Rule 8.05(1)(a) in light of the uncertainty associated with the preferential tax rate of its principal subsidiary and its impact on the Group's profits during the Track Record Period.
        Contents Extracts of the response of the Head of Listing, the Stock Exchange of Hong Kong Ltd

        [Date]

        [Name and Address of Sponsor]

        Dear Sirs

        Re: Application for new listing of a Main Board listing applicant
        (the "Company" together with its subsidiary, the "Group")

        We refer to your A1 application form dated [*day*month*year] (the "Application") applying, on behalf of the Company, for the listing of the shares of the Company on the Main Board of the Exchange. We also refer to your submissions together with the A1 application form and your submissions dated [*day*month*year] (the "Submissions"). Capitalized terms used in this letter have the same meanings as defined in the A1 Proof of the Company's prospectus dated [*day*month*year] (the "Prospectus"), unless otherwise stated.

        Based on the information provided, and on balance, the Listing Division is of the view that the Group is not able to demonstrate to our satisfaction that it has complied with the minimum profit requirements of HK$30 million in respect of the first two years of the Track Record Period under Rule 8.05(1)(a) and therefore has decided to reject the listing application of the Company. The analysis and conclusion of the Listing Division have been set out below.

        1. Relevant Facts
        1.1. The Group is principally engaged in providing professional consultancy and market agency services in relation to [* industry] in the PRC, including consultancy, marketing planning, promotion planning, and sales execution.

        The profit presented in the accountants' report
        1.2. According to the accountants' report, the Group has recorded the following profit attributable to shareholders during the last three financial years ("Year 1", "Year 2"; and "Year 3") [profit numbers purposely omitted]. Had these numbers been applied as profit attributable to shareholders for the purpose of compliance with Rule 8.05(1)(a), the Group would have been able to meet the requirements of 8.05(1)(a) with:-
        •   [approximately HK$42 million] profit for [Year 3]; and
        •   an aggregate of [approximately HK$31 million] for [Year 1] and [Year 2].
        The income tax rate applied in the accountants' report
        1.3. The above profit figures presented in the accountants' report were virtually all contributed by the Company's sole principal operating subsidiary, [Subsidiary X]. In arriving such profit figures, [Subsidiary X] has applied a preferential income tax rate of 15% instead of the normal income tax rate of 33% in the calculation of income tax expenses (including the current income tax expenses and the deferred tax expenses) throughout the Track Record Period.

        The applicable tax laws
        1.4. According to the PRC legal adviser to the Company (the "PRC Legal Adviser") and the local tax office which granted the 15% preferential income tax rate to [Subsidiary X], the applicable tax laws include the following:
        •   Article 72(1) of the "Implementation Rules of the Income Tax Law for Foreign Invested Enterprises and Foreign Enterprises (《外商投資企業和外國企業所得稅法實施細則》)" and [the local government rules] (the "Relevant Tax Regulations"); and
        •   Article 1(1) of the "Notice of the State Tax Bureau on Interpretation and Recognition of Foreign Invested Manufacturing Enterprises of Other Industries (《國家税務局關於其他行業生產性外商投資企業解釋認定的通知》)" (the "Interpretation Notice").
        1.5. According to the Relevant Tax Regulations, foreign invested manufacturing enterprises (生產性外商投資企業) established in [the relevant local district in the PRC] are entitled to the 15% preferential income tax rate. The enacted income tax rate for foreign invested enterprises not entitled to any preferential income tax rates is 33%.
        1.6. Further, Article 1(1) of the Interpretation Notice states that:-

        "Foreign invested enterprises specialized in the following businesses can be treated as foreign invested manufacturing enterprises: (1) Engineering design for construction, installation and assembling projects, and provision of labour services for construction projects (including consultancy and labour services); Consultancy and labour services include provision of technical assistance or instruction to construction projects or enterprises for the renovation of existing production technology, improvement of production and management, selection of technologies and the enhancement or improvement of function, efficiency and quality of existing production equipment or products of the enterprises" (專業從事下列業務的外商投資企業,可以認定為生產性外商投資企業:(一) 從事建築、安裝、裝配工程設計和為工程項目提供勞務 (包括諮詢勞務);諮詢勞務包括對工程建設或企業現有生產技術的改革、生產經營管理的改進和技術選擇以及對企業現有生產設備或產品,在改進或提高性能、效率、質量等方面提供技術協助或技術指導).

        The confirmations and the authority of various local tax offices
        1.7. The [relevant local tax bureau] issued a written confirmation recently on [*day* month* year] stating that [Subsidiary X], as a foreign invested enterprise under the authority of [the relevant local tax bureau] was granted the 15% preferential income tax rate according to the Relevant Tax Regulations and the Interpretation Notice. It is noted that the confirmation was silent on whether it regarded [Subsidiary X] as a manufacturing enterprise so that [Subsidiary X] might be granted the 15% preferential income tax rate.
        1.8. In addition, written confirmations have been issued by [four local tax offices] (all together, the "Relevant Local Tax Offices"). These confirmations, as listed below, confirmed that the applicable enterprise income tax rate of [Subsidiary X] is 15%, but did not provide the basis for the applicable income tax rate:-

        [dates of the written confirmations of the Relevant Local Tax Offices purposely omitted]

        Opinion of the PRC Legal Adviser
        1.9. At the time the Application was filed, the PRC Legal Adviser could not identify the legal basis for the preferential tax treatment granted to [Subsidiary X]. It was not until [recently] that the PRC Legal Adviser issued opinions on [*day*month*year] quoting the applicable tax laws for [Subsidiary X] to be entitled to the 15% preferential income tax rate.
        1.10. According to the [recent] legal opinion of the PRC Legal Adviser, the 15% preferential income tax rate has been granted to [Subsidiary X] by [one of the Relevant Local Tax Offices] in accordance with the Relevant Regulations and the Interpretation Notice (as set out in the written confirmation from [the relevant local tax office] dated [*day*month* year] ). The PRC Legal Adviser also advised that [the relevant local tax office], being the supervising tax authority of [Subsidiary X], has the requisite authority and power to determine the applicable income tax rate of [Subsidiary X] and such determination is proper and valid under the applicable PRC laws (i.e. the above mentioned Relevant Tax Regulations and the Interpretation Notice). Further, the above legal opinion stated that "Nevertheless, if the central government or superior local government views such applicable income tax rate as determined by the above mentioned local tax bureau as inappropriate, the central government or the superior local government may revoke or revise such preferential income tax rate granted by the above mentioned local tax bureau".
        1.11. According to the Sponsor's submission dated [*day*month* year], the Company and the PRC Legal Adviser are not in a position to give any interpretations with regard to what "consultancy and labour services" (諮詢勞務) means.
        1.12. It is also noted that neither the confirmations of the Relevant Local Tax Offices nor the legal opinion of the PRC Legal Adviser provided any statement on how [Subsidiary X] falls into the definition of "foreign invested manufacturing enterprise" set out in the Interpretation Notice.

        The authority of the Relevant Local Tax Offices
        1.13. As submitted by the Sponsor, the PRC Legal Adviser confirmed that the Relevant Local Tax Offices have been and are the relevant direct supervising tax authorities of [Subsidiary X]. [Subsidiary X] should comply with the instructions from its direct supervising tax authorities regarding, among other things, the applicable enterprise income tax rate, unless such instructions are revoked by the State government or the regional government of a higher hierarchy. Further, before the State government or the regional government of a higher hierarchy revokes the 15% preferential tax rate and orders [Subsidiary X] to pay for any shortfall in tax payment in the past, [Subsidiary X] does not have to pay income tax at rates higher than 15%. Even if [Subsidiary X] is required to make up for such shortfall, no additional penalty will be attached.
        1.14. As submitted by the Sponsor, the administrative function of the PRC government relating to taxation of [Subsidiary X] has been fully delegated to these Relevant Local Tax Offices. According to the current practice of the PRC tax authority, [Subsidiary X] could only obtain confirmation of prevailing and applicable income tax rate from the Relevant Local Tax Offices, which are its direct supervising tax authorities and the only communication channel between [Subsidiary X] and the PRC tax authority. There is no other practically possible way for [Subsidiary X] to obtain confirmation from the State government or the regional government of a higher hierarchy to ratify the applicable income tax rate for [Subsidiary X].

        No questions raised by any PRC authority so far
        1.15. So far [Subsidiary X's] preferential income tax rate of 15% has not been questioned by any PRC authority. [Subsidiary X] has not received any notice or heard from PRC tax authorities of any changes in enterprise income tax of 15% applicable to [Subsidiary X]. The 15% preferential income tax rate has been adopted by [Subsidiary X] in determining its distributable profit for dividend payment which is subject to the filing of tax return, issuance of tax clearance and approval from the Foreign Exchange Bureau, a State-level authority. During the Track Record Period, [Subsidiary X] has obtained approval from all the relevant government authorities for dividend payment of [approximately RMB*] million, which was determined with reference to the amount of distributable profit (which in turn was determined with reference to the then prevailing applicable income tax rate of 15%). The 15% preferential income tax rate has not been questioned by the Foreign Exchange Bureau. As far as the Directors and Sponsor are aware, there has not been any order by the State or [the relevant local] superior tax authority for any retrospective repayment of tax shortfall in respect of past periods after the issuance of tax clearance certificates by the relevant tax authority of [the relevant local district in the PRC].

        Compliance with relevant accounting standards
        1.16. The Company's reporting accountants are of the view that it is in compliance with relevant accounting standards to present the Group's results in the accountants' report based on the 15% preferential income tax rate and accordingly, the results of the Group as set out in the accountants' report have been prepared in accordance with Rule 4.13 of the Listing Rules so far as PRC enterprise income tax is concerned.
        1.17. Pursuant to paragraph 46 of Statement of Standard Accounting Practice 12 "Income Taxes" ("SSAP 12"), current tax liabilities for the current and prior periods shall be measured at the amount expected to be paid to the taxation authorities, using the income tax rates (and tax laws) that have been enacted or substantively enacted by the balance sheet date. Pursuant to paragraph 47 of SSAP 12, deferred tax assets and liabilities shall be measured at the income tax rates that are expected to apply to the period when the asset is realised or the liability is settled, based on income tax rates (and tax laws) that have been enacted or substantively enacted by the balance sheet date.
        1.18. The Reporting Accountants, the Directors and the Sponsor consider that the "applicable" income tax rate during the Track Record Period should be 15% because, according to the PRC legal opinion:-
        •   The local tax authorities have approved the 15% preferential income tax rate.
        •   The Relevant Local Tax Offices have been and are the relevant direct supervising tax authorities of [Subsidiary X].
        •   [Subsidiary X] should follow the instructions of the local tax authorities, including, among others, the applicable income tax rate unless such instructions are revoked by higher tax authorities.
        •   It is appropriate for [Subsidiary X] to pay income tax based on the income tax rate confirmed by the relevant local tax authorities before such tax rate is revoked by other higher tax authorities or other government authorities.
        Potential impact of such preferential income tax rate being revoked
        1.19. According to your submission of [*day*month*year], had the normal 33% income tax rate been applied to [Subsidiary X] throughout the Track Record Period, [Subsidiary X] would have incurred additional current income tax expenses of [figures purposely omitted], and additional deferred tax expenses of [figures purposely omitted], for [Year 1], [Year 2], and [Year 3] respectively. As a result, the net profit of the Group for the same period would have been decreased to [approximately HK$5 million], [approximately HK$20 million] and [approximately HK$33 million] respectively.

        Indemnity provided by the controlling shareholders
        1.20. The controlling shareholders of the Company have jointly and severally undertaken to indemnify the Group in respect of any losses or expenses incurred by the Group on or before the Listing Date as a result of the abolishment or change of such preferential tax treatment currently accorded to the Group, or, as the case may be, as a result of any such local preferential tax policy being adjudicated to be not in compliance with the applicable State or [the relevant] local tax laws.
        2. The Applicable Listing Rule
        2.1. Rule 8.05(1)(a) requires that a new applicant must have "a trading record of not less than three financial years during which the profit attributable to shareholders must, in respect of the most recent year, be not less than HK$20,000,000 and, in respect of the two preceding years, be in aggregate not less than HK$30,000,000. The profit mentioned above should exclude any income or loss of the issuer, or its group, generated by activities outside the ordinary and usual course of its business".
        3. Issue
        3.1. The Listing Division has reviewed whether the Group is able to comply with the profit requirements of Rule 8.05(1)(a) in light of the uncertainty associated with the preferential income tax rate of [Subsidiary X] and its impact on the Group's profits during the Track Record Period.
        4. The Listing Division's Analysis and Conclusion
        4.1. The Listing Division views the minimum profit requirement under Rule 8.05(1)(a) of the Listing Rules as an effective indicator of the past performance of the management during the track record period and such requirement, together with appropriate disclosure, should enable investors to make an informed assessment of the listing applicant as contemplated by Rule 2.03(2). When reviewing whether a new listing applicant satisfies the requirements of Rule 8.05(1)(a), the Listing Division ordinarily considers the burden of proof to be on the sponsor and listing applicant to demonstrate compliance. In view of the importance of this listing eligibility standard, in areas where significant judgment is required by directors or their reporting accountants that affects the Listing Division's analysis of Rule 8.05(1)(a), the Listing Division does not rely solely on the judgment of the directors and/or accountants in reaching its conclusions. Instead the Listing Division may reach its own conclusion based on the information presented in order to ensure that the eligibility standards of Rule 8.05(1)(a) are interpreted in a consistent manner and not unduly affected by the views of individual boards of directors and/or reporting accountants.
        4.2. In the present case, the Listing Division has taken into account the following factors for and against the application of the preferential income tax rate of 15% for purposes of calculating profit pursuant to Rule 8.05(1)(a).
        4.3. Based on the submissions received, the Listing Division believes the factors which favor allowing use of the 15% preferential income tax rate by [Subsidiary X] for purposes of reviewing compliance with Rule 8.05(1)(a) are:-
        (1) The 15% preferential income tax rate has been approved and confirmed by the Relevant Local Tax Offices.
        (2) The PRC Legal Adviser has confirmed that the Relevant Local Tax Offices are the supervising tax authorities of [Subsidiary X] and it is appropriate for [Subsidiary X] to apply the income tax rate approved and instructed by the Relevant Local Tax Offices.
        (3) [Subsidiary X's] preferential income tax rate of 15% has not been questioned by any PRC authority.
        (4) The Company's board of directors and reporting accountants believe that it is in compliance with relevant accounting standards to present the Group's results in the accountants' report based on the 15% preferential income tax rate. Accordingly, the results of the Group as set out in the accountants' report have been prepared in accordance with Rule 4.13 of the Listing Rules so far as PRC enterprise income tax is concerned.
        (5) The controlling shareholders of the Company have provided indemnity in respect of the additional tax liability incurred by the Group on or before the Listing Date as a result of the abolishment or change of such preferential tax treatment so that the potential risk of paying tax shortfalls is outside the Group.
        4.4. Factors which support using the 33% statutory tax rate ordinarily applicable to companies such as [Subsidiary X] for purposes of reviewing compliance with Rule 8.05(1)(a) are:-
        (1) Given that the principal businesses of [Subsidiary X] are the provision of [certain professional] consultancy and agency services, the Company and its PRC Legal Adviser were not able to clarify how [Subsidiary X] qualifies as a "foreign invested manufacturing enterprises" based on the definitions set out in Article 1(1) of the Interpretation Notice (see paragraph 1.6 above).
        (2) Based on the Relevant Tax Regulations and the Interpretation Notice, a foreign invested enterprise which is not a manufacturing entity would be subject to an income tax rate of 33%. Based on the submissions of the Sponsor, [Subsidiary X] was granted the lower preferential income tax rate by the Relevant Local Tax Offices. However, as advised by the PRC Legal Adviser, if the central government or superior local government views such applicable income tax rate as determined by the Relevant Local Tax Offices as inappropriate, the central government or the superior local government may revoke or revise such preferential income tax rate. If that were to occur, a retrospective tax payment would be required for any shortfalls in tax payment during the Track Record Period.
        4.5. Having reviewed all the facts and the factors listed above, on balance, the Listing Division is of the view that the Company and the Sponsor have not demonstrated that there is a clear basis, having regard to the Relevant Tax Regulations, for the use of the 15% preferential income tax rate when assessing compliance with Rule 8.05(1)(a), given the absence of any assurance that the preferential income tax rate would not be revoked by the State or a higher tax bureau. Under these circumstances, it is the view of the Listing Division that a conservative view should be taken, and an effective indicator of the performance of the Group would be based on profit calculated by applying the 33% income tax rate provided for in the Relevant Tax Regulations.
        4.6. When applying the 33% statutory income tax rate in the case of [Subsidiary X], the Group does not meet the minimum profit requirement under Rule 8.05(1)(a) for the [Year 1] and [Year 2]. In light of the above, the Listing Division has decided to reject the listing application of the Company.
        4.7. For the avoidance of doubt, the Listing Division notes the submission of the Sponsor regarding the Group's compliance with the applicable accounting standard SSAP 12 and the presentation of the Group's results in the accountants' report based on a 15% income tax rate. The Listing Division generally interprets Rule 8.05 as an eligibility standard and considers the requirements of Chapter 4 of the Listing Rules relating to the contents of accountants' report separately. Accordingly, for the purpose of analyzing Rule 8.05(1)(a), the Listing Division has considered the accountants' report to have been appropriately prepared in accordance with the requirements of Chapter 4.
        5. Right To Be Reviewed By The Listing Committee
        5.1. Pursuant to Rule 2B.05 of the Listing Rules, the Company has the right to have the Listing Division's decision reviewed by the Listing Committee. As contemplated by Rule 2B.08, any such appeal is required to be filed within 7 business days of the receipt of this letter, or of the reasoned decision if one is requested.

        [Portion of Letter Purposely Omitted]

        Yours faithfully,
        For and on behalf of
        The Stock Exchange of Hong Kong Limited

        [Signed]

        Head of Listing

    • 2005

      This section contains extracts of Listing Division's letters to issuers, interpreting the Listing Rules on specific listing matters.

      Rejection Letter (RL) – This series comprises a selection of letters explaining the Division's rejection of specific listing applications.

      No Further Disciplinary Action (Guidance) Letter (LEGL) - This series comprises a selection of letters issued following investigation of suspected breaches of the Rules and where the Division decided not to pursue disciplinary action. The letters communicate the Division's interpretation or expectations as to the conduct of an issuer and its directors and are now published for general guidance and to promote transparency about the disposal of potential disciplinary matters.

      Please visit Archive to view marked-up versions and versions that have been superseded or withdrawn.

      Date (mm/yyyy) Reference Number Particulars Listing Rules Document Type Content Category
      03/2005 RL9-05 A Main Board listing applicant failing to satisfy the profit requirement of Rule 8.05 Rule 8.05 Rejection Letter New Applicants
      03/2005 RL8-05 A GEM listing application failing to satisfy that it had a business of substance and potential for the purposes of GEM Rule 11.12, and that the listing applicant and its business were suitable for listing under GEM Rule 11.06 GEM Rules 11.06, 11.12 Rejection Letter New Applicants
      03/2005 RL6-05 A Main Board listing applicant failing to (a) satisfy the minimum requirement of 300 shareholders as at the date of listing as required under Rule 8.08(2); and (b) meet the expected market capitalization at the time of listing of at least HK$200 million as required under Rule 8.09(2) Rules 8.08 (2), 8.09 (2) Rejection Letter New Applicants
      03/2005 RL5-05 A Main Board listing applicant failing to satisfy the "ownership continuity and control" requirement of Rule 8.05(1)(c)

      (Withdrawn in October 2017)
      Rule 8.05 (1)(c) Rejection Letter New Applicants
      03/2005 RL4-05 A GEM listing application raising concerns on consistency and reliability of information submitted to the Listing Division GEM Rule 11.01 Rejection Letter New Applicants

      • RL9-05

        View Current PDF

        HKEX REJECTION LETTER
        Cite as HKEx-RL9-05 (March 2005)

        Summary
        Listing Rule Listing Rule 8.05
        Reason for rejection Failure to satisfy the profit requirement of Listing Rule 8.05
        Contents Extracts of the response of the Executive Director-Listing, the Stock Exchange of Hong Kong Ltd

        [Date]

        [Name and Address of Sponsor and Co-sponsor]

        Dear Sirs,

        Re: Application for new listing of a Main Board listing applicant
        (the "Company" together with its subsidiaries, the "Group")

        We refer to your application form dated [*day*month* year] applying, on behalf of the Company, for the listing of the shares of the Company on the Main Board of the Exchange. We also refer to your submissions dated [*day*month*year] (the "Submissions") in response to our comments [*day*month*year]. Capitalized terms used in this letter have the same meanings as those defined in the [*] Proof of the Company's prospectus dated [*day*month*year] (the "Prospectus"), unless otherwise stated.

        Based on the facts and submissions provided to us, the Listing Division is of the view that the Group is not able to demonstrate to our satisfaction that it has complied with the minimum profit requirement of HK$30 million in respect of the first two years [i.e. Year 1 and Year 2] of the Track Record Period [i.e. Year 1, Year 2 and Year 3] under Rule 8.05(1)(a) of the Listing Rules. We would like to take this opportunity to explain in detail our reasoning in reaching this conclusion.

        1 Background
        1.1 The Group's principal activities involve the provision of [*].
        1.2 [Subsidiary A] was the only operating subsidiary of the Group during the Track Record Period. The company was established in the PRC with limited liability on [* day* month* year] and was converted into a Sino-foreign cooperative joint venture [in the 9th month of Year 3]. [Mr. X] is the chairman of the Board and an executive Director of the Company. [Mr. X] and his elder brother, [Mr. Y], are the founders of [Subsidiary A].
        1.3 Based on the information provided in the Prospectus and the Submissions, we note that [Subsidiary A] has undergone the following shareholding changes during the Track Record Period:
        1.3.1 [From the beginning of Year 1 to immediately before the 1st Round of Equity Transfer (mentioned in para. 1.3.2) in the 6th month of Year 2]

        During the period from [the beginning of Year 1 to immediately before the 1st Round of Equity Transfer in the 6th month of Year 2], [Subsidiary A] was then owned as to 40% and 60% by [Mr. X] and [Mr. Y] respectively.

        1.3.2 [1st Round of Equity Transfer — in the 6th month of Year 2]

        [During the sixth month of Year 2], [Mr. Y] entered into an equity transfer agreement pursuant to which he agreed to transfer his 60% equity interest in [Subsidiary A] to [SinoCo]. [SinoCo] was then owned as to 80% and 20% by [Mr. X] and [Mr. Y] respectively. [With effect from the completion of the 1st Round Equity Transfer], the effective interests of [Mr. X] and [Mr. Y] in [Subsidiary A] were 88% and 12% respectively.



        * [SinoCo] does not form part of the Group during the Track Record Period and upon proposed listing
        1.3.3 [Immediately after the Capital Increase in [SinoCo] in the 7th month of Year 2 to immediately before the 2nd Round of Equity Transfer (mentioned in para.1.3.4) in the 8th month of Year 3]

        [In the 7th month of Year 2], [SinoCo's] registered capital was increased resulting in its shareholding interest owned as to [approximately 90%] and [approximately 10%] by [Mr. X] and [Mr. Y] ("Capital Increase in [SinoCo]") respectively. As a result, [Mr. X] and [Mr. Y] held approximately 94%] and [6%] effective interests respectively in [Subsidiary A].

        1.3.4 [Immediately after the 2nd Round of Equity Transfer in the 8th month of Year 3 to the present]

        [During Year 3], [Mr. X] and [SinoCo] entered into an equity transfer agreement with [ForeignCo] to acquire 40% equity interest in [Subsidiary A] from [Mr. X] and a 35% equity interest in [Subsidiary A] from [SinoCo]. [In the 8th month of Year 3], [Subsidiary A] obtained a foreign investment enterprise approval certificate from the People's Government of the PRC and [in the 9th month of Year 3], [Subsidiary A] was converted from a PRC limited liability company into a Sino-foreign co-operative joint venture. As of [day of completion of the 2nd Round of Equity Transfer in the 8th month of Year 3], [Subsidiary A] became owned as to 75% and 25% by [ForeignCo] and [SinoCo] respectively. As a result of this equity transfer, the effective interests of [Mr. X] and [Mr. Y] in [Subsidiary A] became approximately [97.5] and [2.5%] respectively.



        Pursuant to [Subsidiary A's] articles of association and a joint venture contract taking effect from [the completion of the 2nd Round of Equity Transfer in the 8th month of Year 3], all after-tax profits of [Subsidiary A] are distributed as to 90% to [ForeignCo] and as to 10% to [SinoCo]. The Sponsor and Co-sponsor (collectively the "Sponsors") submitted that while it was intended that the entire interests of [Subsidiary A] be injected into the Group, the [relevant PRC regulations on the management of foreign funded enterprises in the industry of Subsidiary A] limited the type of projects that could be undertaken by wholly-owned foreign enterprises. The regulations also required at least a 25% equity interest to be held by the Chinese party (i.e. [SinoCo] in this case) for Sino-foreign joint venture [enterprise in the relevant industry]. As such, the Group's stake in [Subsidiary A] is limited to 75% and a co-operative joint venture was set up to satisfy the PRC regulatory requirements. The profit sharing ratio was determined so as to reflect more closely the control of [Mr. X] in [Subsidiary A]. The Group may acquire the remaining equity interest of [Subsidiary A] currently held by [SinoCo] when such restriction is lifted.
        1.3.5 Upon completion of the Offering

        The diagram below illustrates the corporate structure of the Group immediately following the completion of the Offering.



        Note 1: [HoldCo 3] and [HoldCo] 4 are pre-IPO investors

        Note 2: [Subsidiary B] is a wholly-owned foreign investment enterprise and was established by [ForeignCo] [after the Track Record Period].
        [Portion of Letter Purposely Omitted]


        Control over [Subsidiary A]
        1.4 The Sponsors submitted that [Mr. X] has effective control over [Subsidiary A] (or the Group) both at the shareholder's level, as well as its day-to-day management, operations, organization, accounting, financial policies, personnel, marketing and related matters throughout the Track Record Period, notwithstanding that [Mr. X] only held a 40% equity interest in [Subsidiary A] [before the 1st Round of Equity Transfer in the 6th month of Year 2].
        1.5 Based on the Submissions and the Prospectus, [Mr. X] was the legal representative, sole director and general manager of [Subsidiary A] from [the beginning of Year 1 to immediately before the 2nd Round of Equity Transfer in the 8th month of Year 3]. He was in charge of both the operational and financial aspects of [Subsidiary A] including, among others, the formulation of its operational plans, investment plans and proposed annual financial budgets. On this basis, he had absolute control of [Subsidiary A] during this period. [Immediately after the 2nd Round of Equity Transfer to a few months after the Track Record Period], two additional directors were appointed, namely [Mr. Y] and [Mr. Z]. However, [Mr. Y] had not been involved in the day-to-day management of [Subsidiary A]. [Mr. X], with the assistance of [Mr. Z], managed and operated the business of [Subsidiary A] during this period.
        1.6 The Sponsors' submitted that on important matters regarding [Subsidiary A], [Mr. Y] acted in concert with [Mr. X] by voting in the same manner as his brother at the two shareholders' meetings held since [the beginning of Year 1 to immediately before the 1st Round of Equity Transfer in the 6th month of Year 2]. [Mr. X] and [Mr. Y] made a statement (the "Statement") [shortly prior to the submission of the listing application] to confirm that, during the period from the establishment of [Subsidiary A] to [immediately before the 1st Round of Equity Transfer in the 6th month of Year 2], [Mr. Y] was acting in concert with [Mr. X] in the shareholders' meetings of [Subsidiary A]. [Mr. Y] further confirmed that [Mr. X] had absolute control over [Subsidiary A] subsequent to its shareholding change [pursuant to the 1st Round of Equity Transfer in the 6th month of Year 2].

        Track record profit and accounting treatment
        1.7 The Group's accounts have been prepared in accordance with International Financial Reporting Standards ("IFRS"). Based on the Sponsors' Submissions, the Group's financial statements are prepared using the pooling of interests method as if the Group's structure (i.e. holding 75% equity interest in [Subsidiary A]) had been in existence throughout the Track Record Period. On the basis of the degree of control exercised by [Mr. X] during the Track Record Period, the Reporting Accountants, are of the view that the restructuring of [Subsidiary A's] shareholdings during the Track Record Period falls within the definition of "business combinations involving entities or businesses under common control" which is excluded from the scope of IFRS 3 (the "Common Control Exclusion"). As such, the Group's reorganization and the restructuring of [Subsidiary A's] shareholding was accounted for using the pooling of interests method, and [Subsidiary A] was accounted for as if it had been a subsidiary of the Group throughout the Track Record Period (see paragraph 1.9).
        1.8 The Reporting Accountants further submitted that in view of the fact that the 75% equity interest in [Subsidiary A] held by the Group has a 90% profit entitlement, this share of profit should be included in the accounts of the Group for the entire Track Record Period.
        1.9 The operating results of the Group during the Track Record Period as per the Accountants' Reports and your submission [*day*month*year] as follows:
          [Year 1] [Year 2] [Year 3]
        (HK$'000 equivalent)   [Before the 1st Round of Equity Transfer]

        [First six months]
        [After the 1st Round of Equity Transfer]

        [Second six months]
         
        Profit before minority interests [Approx.
        10,000]
        [Approx.
        13,000]
        [Approx.
        16,000]
        [Approx.
        57,000]
        Minority interests [Approx.
        (1,000)]
        [Approx.
        (1,300)]
        [Approx.
        (1,500)]
        [Approx.
        (5,700)]
        Net profits attributable to shareholders [Approx.
        9,000]
        [Approx.
        11,000]
        [Approx.
        14,000]
        [Approx.
        51,000]


        Note: The figures in the above table are based on figures denominated in RMB in the Prospectus translated at the rate of HK$1.00 to RMB1.06. 10% minority interests were assumed throughout the Track Record Period.
        2 Division's view in relation to Rule 8.05(1) of the Listing Rules

        Requirements under Rule 8.05(1) of the Listing Rules
        2.1 Rule 8.05(1) requires the new applicant to have an adequate trading record under substantially the same management and ownership. "This means that the issuer, or its group (excluding any associated companies and other entities whose results are recorded in the issuer's financial statements using the equity method of accounting) as the case may be, must satisfy each of the following:
        (a) a trading record of not less than three financial years (see Rule 4.04) during which the profit attributable to shareholders must, in respect of the most recent year, be not less than HK$20,000,000 and, in respect of the two preceding years, be in aggregate not less than HK$30,000,000. The profit mentioned above should exclude any income or loss of the issuer, or its group, generated by activities outside the ordinary and usual course of its business;
        (b) management continuity for at least the three preceding financial years; and
        (c) ownership continuity and control for at least the most recent audited financial year."
        2.2 The Division is of the view that the Company does not meet the minimum profit requirement under Rule 8.05(1)(a) of the Listing Rules, taking into account the profit attributable to the Group during the Track Record Period. It is the Division's view that in applying the minimum profits test, the Group's historical ownership interest in [Subsidiary A] at the relevant points in time would be taken into account. In particular, the profit attributable to shareholders of the Group for each of the three years under Rule 8.05(1)(a) would be limited by the Group's interest in [Subsidiary A] held by [Mr. X] . As [Mr. X] held 40% interest until [middle of Year 2], the profit attributable to the Group for this period is limited to 40% (on the basis that the Group may consolidate the results of [Subsidiary A] for this period, please refer to paragraph 3.7 below for further details). Together with [Mr. X's] indirect effective interests of approximately [31.5%] which are included in the potential listed group, the Group's aggregate profit for the [the first two years of the Track Record Period] would be approximately [HK$20.64 million] (see paragraph 3.8 below) which is below the minimum threshold of HK$30 million. On this basis, the Group fails the minimum profits test.
        2.3 In arriving at our view, the Division has the following consideration:
        (i) Rule 8.05(1)(a) applies to the group, being the issuer and its subsidiaries that is the subject of listing. In the present case it comprises [ForeignCo] and its 75% interest in [Subsidiary A]. The Group is ultimately held by [Mr. X]. The interest in [Subsidiary A] held by [SinoCo] remains outside the Group and thus does not form part of the issuer that is the subject of listing.
        (ii) The minimum profit test under Rule 8.05(1)(a) therefore refers to the historical profit attributable to the group based on the equity interests held by these entities during the three year period. In addition to the exclusion of profit attributable from the interest held by [SinoCo], it is also not appropriate to include the profit attributable to [Mr. Y] historically in the three year track record of the Group. This is because [SinoCo] does not form part of the Group and [Mr. Y's] interest has not been and will not be included in the Group before and after listing.
        (iii) In other words, the profit attributable to the Group would be calculated based on the rationale explained in paragraph 2.2 above. This treatment is consistent with the Division's interpretation of Rule 8.05(1)(a), for example, if the issuer held 51% interest in a subsidiary during the first two years and acquired the remaining 49% interest (from parties outside the Group) in the third year, the profit applicable under Rule 8.05(1)(a) would be the profit attributable to shareholders of 51% and 100% interest in the subsidiary for the first two years, and the third year respectively.
        (iv) The Group's accounts are currently presented on an as if basis taking into account its current 75% equity interest in [Subsidiary A] which is entitled to a 90% share of profit, applied retrospectively to the three years track record. The fact that the co-operative joint venture arrangement (with the 90% profit entitlement) only took effect from [the completion of the 2nd Round of Equity Transfer in the 8th month of Year 3] was disregarded. We are of the view that accounts prepared on this basis would be pro forma accounts. Rule 8.05(1)(a) makes reference to Rule 4.04 which requires the preparation of a set of historical accounts of the Group's financial performance and not pro-forma accounts.
        (v) While it is the Division's view that the accounts presented under Rule 4.04 do not necessarily represent the track record profit for the purposes of assessing Rule 8.05(1)(a), it would nevertheless present the historical picture of the Group during the three years, and is the starting point for our analysis. In the present case we can see no basis to adjust the track record profit in assessing Rule 8.05(1)(a) and to include 75% of the Group's interest in [Subsidiary A] (with 90% share of profit) throughout the three years [of the Track Record Period].
        2.4 Based on the above, it is our view that the minimum profits test should take into account the Group's historical ownership interest in [Subsidiary A] at the relevant points in time. Accordingly, the Group does not comply with the minimum profit requirement of HK$30 million in respect of the first two years of the Track Record Period under Rule 8.05(1)(a) of the Listing Rules.
        3 Current accounting treatment for the results of [Subsidiary A] during the Track Record Period
        3.1 In addition to the items discussed above, we would also like to set out our views on the accounting treatment adopted by the Group. The Exchange ordinarily interprets Rule 8.05 as an eligibility standard, while requirements of Chapter 4 of the Listing Rules relate to the contents of Accountants' Report. The requirements of Chapter 4 are therefore considered separately.
        3.2 Rule 4.08(3) requires accountants' report to be prepared in accordance with the Auditing Guideline — Prospectuses and the reporting accountant (AG 3.340) issued by the Hong Kong Institute of Certified Public Accountants. Rule 4.11 requires the financial history of results and the balance sheet included in the accountants' report must normally be drawn up in conformity with Hong Kong Financial Reporting Standards or IFRS.
        3.3 As the group reorganization of the Company for listing takes place after the Track Record Period prior to listing, the Division is of the view that accounting treatment should in the present case be accounted for in accordance with point 1(f) of Appendix 3 of AG 3.340, i.e. we agree that the combined basis could be used in accounting for the group reorganization to be taken place prior to listing. However, since the shareholding interests of the issuer changed or in substance changed throughout the Track Record Period, we are of the view that these changes should be accounted for historically in accordance with the relevant accounting standards at the relevant points in time, i.e. for the present case, IFRS. The interests that the Group could combine should be [Mr. X's] respective interest at the different points in time during the Track Record Period and should not include [Mr. X's] remaining indirect interests held through [SinoCo] as these interests remain outside the Group and do not form part of the issuer's interests. Therefore, the Division disagrees with the percentage of interests used by the Company for the combination accounts. Such treatment does not reflect [Mr. X's] interests during the relevant periods.
        3.4 Paragraph 11 of IFRS 3 "Business Combination" states that "A group of individuals shall be regarded as controlling an entity when, as a result of contractual arrangements, they collectively have the power to govern its financial and operating policies so as to obtain benefits from its activities. Therefore, a business combination is outside the scope of this IFRS when the same group of individuals has, as a result of contractual arrangements, ultimate collective power to govern the financial and operating policies of each of the combining entities so as to obtain benefits from their activities, and that ultimate collective power is not transitory".
        3.5 The Reporting Accountants consider that in view of the Statement and the control over [Subsidiary A] demonstrated by [Mr. X], the restructuring of [Subsidiary A's] shareholding is a business combination described under paragraph 11 of IFRS 3 and accordingly, is outside the scope of IFRS 3 which requires the adoption of acquisition accounting. The Division disagrees with the proposition that if a business combination falls within a business combination under common control in IFRS 3, the pooling of interests method could then be applied as a default. Further justification on why the pooling of interests method is appropriate having regard to the generally accepted principles supporting the pooling of interests method is required before applying such a basis of accounting.
        3.6 The Division also questions whether, given that [Mr. X] held a minority interest (i.e. 40%) in [Subsidiary A] up to [the middle of Year 2], the Group is in a position to consolidate the results of [Subsidiary A] or alternatively, whether its results should be accounted for under the equity accounting method.
        3.7 The Sponsors submitted that [Mr. X] has effective control over [Subsidiary A] (see paragraphs 1.4 and 1.5 above). IAS 27 defines control to be the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. While the Sponsors submitted that [Mr. X] has effective control, the question of whether he has the power to control [Subsidiary A] has not been established to our satisfaction. In particular, we are concerned that the Statement, which was only signed by [Mr. X] and [Mr. Y] [shortly prior to the submission of the listing application], represents an artificial means to provide evidence on the application of a retrospective basis to support a more favourable accounting treatment for the applicant in an attempt to meet the track record requirement. In the event that the Group could not meet the condition for consolidation under IAS 27, the Group would be unable to consolidate the results of [Subsidiary A] for the period until [the middle of Year 2]. Please also see our views quoted in paragraph 3.3 above regarding the application of the retrospective basis.
        3.8 Subject to the Sponsors and Reporting Accountants establishing the basis for consolidation of [Subsidiary A] throughout the Track Record Period, it is our view that the profit attributable to the Group would be calculated having regard to the Group's interest in [Subsidiary A] as follow:
        (i) 40% interest in [Subsidiary A] from [the beginning of Year 1 to immediately before the completion of the 1st Round of Equity Transfer in the 6th month of Year 2];
        (ii) upon acquisition of a 60% interest in [Subsidiary A] by [SinoCo] [pursuant to the 1st Round of Equity Transfer in the 6th month of Year2], it is arguable that an additional indirect interest in [Subsidiary A] of 28% held through [SinoCo] is included (i.e. 80% of (60% -25%)). Given that 25% interest in [Subsidiary A] held by [SinoCo] remained outside the Group after the proposed listing, only [Mr. X's] indirect interest in the 35% interest acquired would be included;
        (iii) [Approximately 71.5%] [upon completion of the 1st Round of Equity Transfer in the 6th month of Year 2], taking into account the additional capital injection by [Mr. X] which increased his interest in [SinoCo] to [approximately 90%] (i.e. an additional 10 % of 35%); and
        (iv) based on profit attributable to 75% equity interest (i.e. 90%) from [the 8th month of Year 3], after acquisition of the interest by [ForeignCo] and its conversion into a co-operative joint venture.
        Profit attributable to shareholders for [the first two years of the Track Record Period] would then be shown as follows and would equal approximately [HK$20.64 million] in aggregate:
          [Year 1] [Year 2]
        (HK$'000 equivalent)   [Before the 1st Round of Equity Transfer]

        [First six months]
        [After the 1st round of Equity Transfer]

        [Second six months]
        Profit before minority interests [Approx.
        10,000]
        [Approx.
        13,000]
        [Approx.
        16,000]
        Minority interests [Approx.
        (6,000)]


        [60% of 10,000]
        [Approx.
        (7,800)]


        [60%of 13,000]
        [Approx.
        (4,560)]


        [28.5% of 16,000]
        Net profit attributable to shareholders [Approx.
        4,000]
        [Approx.
        5,200]
        [Approx.
        11,440]


        Note: The figures in the above table are based on figures denominated in RMB in the Prospectus and your submission dated [*day*month*year] translated at the rate of HK$1.00 to RMB1.06.
        4 Conclusion
        4.1 The Division has decided to reject the listing application of the Company as it fails to meet the minimum profit requirement under Rule 8.05(1)(a) of the Listing Rules [for the first two years of the Track Record Period].
        4.2 In relation to the accounting treatment adopted by the Group, the Division is of the following views:
        (i) the Group's accounts should be presented on a combined basis showing [Mr. X's] respective interest at the different points in time during the Track Record Period; and
        (ii) the Group has yet to demonstrate that it has the power to control [Subsidiary A] , and on that basis it is not clear whether the consolidation of the Group's 40% interest in [Subsidiary A] for the period up to [the middle of Year 2] is appropriate.

        Please note that the above does not represent the only material issue identified by the Listing Division which may affect the proposed listing of the Company.

        Please also note that, pursuant to Rule 2B.05 of the Listing Rules, the Company has the right to have the Listing Division's decision reviewed by the Listing Committee.

        [Portion of Letter Purposely Omitted]

        Yours faithfully
        For and on behalf of
        The Stock Exchange of Hong Kong Limited

        [Signed]

        Head of Listing

      • RL8-05

        View Current PDF

        HKEx REJECTION LETTER
        Cite as HKEx-RL8-05 (March 2005)

        Summary
        Listing Rule GEM Listing Rules 11.06 and 11.12
        Reasons for rejection Failure to satisfy that the Company had a business that satisfied the substance and potential requirements of GEM Listing Rule 11.12.

        Failure to demonstrate that the Company and its business were suitable for listing under GEM Listing Rule 11.06.
        Contents LETTER 1: Extracts of the response of the Head of Listing, the Stock Exchange of Hong Kong Ltd

        LETTER 2: Extracts of the response of the Acting Secretary to the GEM Listing Committee on hearing the application of the Company to review the decision of the Listing Division

        LETTER 1

        [Date]

        [Name and Address of Sponsor]

        Dear Sirs,

        Re: Application for new listing of a GEM listing applicant
        (the "Company" together with its subsidiaries, the "Group")

        We refer to your Form 5A dated [*date*month*year] applying, on behalf of the Company, for the listing of the shares of the Company on the Growth Enterprise Market, draft proofs of the Company's prospectus and the related documents submitted. Terms used in this letter have the same respective meanings as defined in the draft prospectus dated [*date*month*year], unless the context requires otherwise.

        Background

        The Company, principally through its major operating subsidiary, [Subsidiary A], is engaged in the [*] industry. [The industry that the Company is engaged in] is a restricted industry in the PRC under [applicable regulations in the PRC] (the "Relevant Regulation"). [Subsidiary A] was converted from a PRC domestic enterprise into a sino-foreign equity joint venture in [September 2003] and further converted into a sino-foreign contractual joint venture in [September 2003] (the "Conversion"). [Subsidiary A] accounted for substantially all of the group's turnover and profits during the active business pursuit period.

        Based on the draft prospectus and the information submitted to date:-

        (a) [Subsidiary A] was established as a sino-foreign contractual joint venture enterprise by way of conversion, which was approved by the [city level of the relevant] Foreign Investment Office [in the PRC] in [September 2003]. Under the terms of the joint venture, the Company being a foreign party, and the PRC party share [Subsidiary A's] profits 90% and 10% respectively in the first 10 years and 10% and 90% respectively in the following 10 years (the "Profit Sharing Arrangement").
        (b) According to the Regulations on the Direction Guidance to the Foreign Investment promulgated by the State Council, the [Relevant Regulation] applies to all forms of foreign investments in the PRC, including contractual joint ventures. Under the [Relevant Regulation], the portion of the foreign investment may not, prior to 11 December 2003, be more than 49% of an entity [engaging in the restricted industry in the PRC]. We understand that, in the case of a contractual joint venture, this restriction is normally interpreted as meaning that the contractual joint venture must be controlled by the PRC party.
        (c) The Conversion was approved by the [city level of the relevant] Foreign Investment Office in [September 2003].
        (d) At the Division's request, the Company [Portion of Letter Purposely Omitted] was informed by the Ministry of Commerce that it should, pursuant to new regulations which had come into force in the interim (which had extended the relevant approval power to the provincial authorities) apply to the [provincial level of the relevant] Department of Commerce [in the PRC] for approval.
        (e) In [mid-2004], the Company obtained from the [provincial level of the relevant] Department of Commerce the necessary regulatory approval for the establishment of [Subsidiary A] as a contractual joint venture.

        Issues

        Given the terms of the Profit Sharing Agreement:

        (1) Does the Company's business satisfy the substance and potential requirements of GEM Listing Rule 11.12?
        (2) Are the Company and its business suitable for listing under GEM Listing Rule 11.06?

        GEM Listing Rules

        Substance and Potential

        Under GEM Listing Rule 11.12(1), a new applicant must demonstrate that, throughout the period specified in GEM Listing Rule 11.12(2), it has actively pursued one focused line of business and must make a statement in the listing document concerning that business which complies with the requirements of GEM Listing Rules 14.15 to 14.18.

        Note 3 to GEM Listing Rule 11.12 further provides that a new applicant must be able to demonstrate that it has a business of both substance and potential. A business will, subject to GEM Listing Rule 11.14, only be regarded as having the requisite substance if the applicant can show that it has spent at least the 24 month period prior to the issue of the listing document, making substantial progress in building up that business. Examples of measurements of progress have been given under Note 4 to GEM Listing Rule 14.15. Among other things, item (j) under Note 4 to GEM Listing Rule 14.15 cites obtaining relevant regulatory approvals as a relevant measure of progress.

        Where the company responsible for carrying on the active business is not the new applicant itself, GEM Listing Rule 11.13 requires such business to be carried on by a subsidiary or subsidiaries of the new applicant and that, among other things, the new applicant must have an effective economic interest of no less than 50% in any such subsidiary.

        Suitability for Listing

        GEM Listing Rule 11.06 requires that both the Company and its business must, in the opinion of the Exchange, be suitable for listing.

        Analysis

        Substance and Potential

        Profit Sharing Arrangement

        By entering into the Profit Sharing Arrangement, the Company has created an arrangement which will reduce the revenue stream from its principal business by 80%. Such arrangement creates the certainty of a substantial decrease in its operating revenues in the future in a manner likely to be disruptive, given the current absence of an alternative revenue stream. The pre-arranged decrease in the Company's economic interest in its principal operating subsidiary is also inconsistent with the principle of GEM Listing Rule 11.13, notwithstanding that it will occur some time in the future. Despite the availability of other legal structures that do not create volatility in the revenue stream, such as one involving a fixed profit sharing percentage during the entire contractual term, the Company opted for an arrangement involving substantial future volatility.

        In light of the contractual term of the joint venture, the present substance of the Company's business does not reflect the substance of the Company after the change in the Profit Sharing Arrangement. The Listing Division considers that the Profit Sharing Arrangement therefore negatively affects both the present substance of the Company's operations as well as its future potential for purposes of Rule 11.12 in that the only certainty under the Profit Sharing Arrangement is a substantial future reduction in the revenue stream from its principal business.

        Further, in our view no satisfactory explanation has been offered for the Profit Sharing Arrangement. The sponsor has submitted that the law allows parties to a cooperative joint venture to agree on a profit shareholding arrangement that may not reflect their relative equity interests. The sponsor has also submitted that the Profit Sharing Arrangement was entirely a "commercial decision" between the parties [Portion of Letter Purposely Omitted]. We consider the reasons given for the Profit Sharing Arrangement to be unpersuasive and not adequate to account for the choice made by the Company to substantially reduce the future revenue stream from its principal business. The fact that the Company may at a future time be able to convert [Subsidiary A] into a wholly-owned foreign enterprise does not detract from our present concern that no satisfactory explanation for the arrangement has been offered regarding the arrangement as it exists today.

        Approval for Conversion

        GEM Listing Rule 11.12 requires that a new applicant have, for the purpose of making substantial progress in building up that business, obtained the regulatory approvals "prior to the issue of the listing documents", rather than at some time in the future. GEM Listing Rule 12.09 also requires documents submitted to the Exchange with the listing application, including the draft listing document, to be in what the sponsor and the issuer believe to be "anticipated final form", save for certain matters relating to the offering. Therefore, the Exchange normally expects, among other things, that a listing applicant should have obtained all relevant regulatory approvals, licences and permits prior to submitting its listing application to the Exchange.

        In this case, the necessary approval for the Conversion was only obtained after the Listing Division raised queries on this issue.

        [Portion of Letter Purposely Omitted]

        Thus, the necessary regulatory approval, being the yardstick laid down in Note 4(j) to GEM Listing Rule 14.15 for measuring progress during the active business pursuit period, was not obtained during that period and in the manner contemplated by GEM Listing Rule 12.09.

        Conclusion

        In light of the analysis set forth above, in our view the Company has not demonstrated that it satisfies the substance and potential requirements under GEM Listing Rule 11.12 as:

        •   the only certainty under the Profit Sharing Arrangement is a substantial future reduction in the revenue stream from its principal business, and
        •   the Company had not obtained all relevant regulatory approvals, licences and permits prior to submitting its listing application to the Exchange.

        Suitability for Listing

        The Company's Form 5A contained, among other things, a declaration by the Company and sponsor that all the qualifications for listing set out in the relevant chapters of the GEM Listing Rules had, insofar as applicable and required to be met or fulfilled prior to application, been met or fulfilled. This includes GEM Listing Rule 11.06 which requires the Company and its business to be suitable for listing. It was a formal statement for which the Company's directors also assume responsibility.

        It is incumbent upon the Company and its sponsor to take all reasonable steps to satisfy themselves that all necessary approvals have been obtained and that the entity is legally and validly established. Respect for formal processes and the ability to demonstrate compliance with legal requirements in a timely manner are key attributes that distinguish public companies from private companies. In the present case, [Subsidiary A] was established before all necessary approvals had been obtained. The manner in which the necessary approval for the Conversion was obtained was in the view of the Exchange most unsatisfactory in that it occurred as a direct result of the Listing Division raising queries on the matter. The basis upon which the Conversion was originally presented to the Exchange as having been duly approved proved to be fundamentally flawed. Rather than resolving the problem prior to submission of the application to the Exchange for vetting, the problem was rectified by virtue of the vetting process itself. Had it not been for the vetting process and the queries raised by the Listing Division in this regard, the necessary approval for the Conversion might well have remained outstanding.

        In view of the fact that [Subsidiary A] accounted for substantially all of the group's turnover and profits during the active business pursuit period and having regard to the unsatisfactory timing and manner in which the necessary approval for its establishment was obtained, the Listing Division has concluded that the Company and its business are not suitable for listing as required under GEM Listing Rule 11.06.

        In light of the facts and circumstances of the case as presented to us to date and the analysis set forth above, the Listing Division has decided to reject the Company's listing application.

        Pursuant to Chapter 4 of the GEM Listing Rules, the Company has the right to have this decision reviewed by the GEM Listing Committee.

        [Portion of Letter Purposely Omitted]

        Yours faithfully,
        For and on behalf of
        The Stock Exchange of Hong Kong Limited

        [Signed]

        Head of Listing

        *********************************************************************

        LETTER 2

        [Date]

        [Name and Address of Sponsor]

        Dear Sirs,

        Re: Review Hearing of the GEM Listing Committee
        (the "Review Hearing") regarding the Company
        Date of the Review Hearing: [* date * month * year]

        On [* date * month * year], the GEM Listing Committee of The Stock Exchange of Hong Kong Limited conducted a review hearing (the "Review Hearing") to consider an application from the Company for a review of the decision of the Listing Division set out in Division's letter dated [* date * month * year], (the "Decision").

        The Review Hearing was conducted before the GEM Listing Committee comprising [names of members purposely omitted] (the "Committee").

        Note: Terms and expressions used and defined in the written submission of the Listing Division shall have the same meanings when used herein unless otherwise defined.

        Decision

        The Committee considered the submissions (both written and oral) made by the Company and the Listing Division. The Committee decided to uphold the Decision to reject the Company's listing application on the basis that the Company has failed to comply with Rule 11.06 of the GEM Listing Rules.

        Reasons

        The Committee arrived at its decision for the following reasons:

        1. The principal activities of the Company were conducted through [Subsidiary A] which was a sino-foreign cooperative joint venture entity in the PRC.

        Under the relevant PRC laws and regulations in force at the time of the establishment of the joint venture, the Company's economic interest in the joint venture was limited to 50%.

        The Profit Sharing Arrangement of the cooperative joint venture provided for the Company to be entitled to 90% of the distributable profits of [Subsidiary A] for the first 10 years whereas, the Company's entitlement would be reduced to 10% for the next 10 years of the cooperative joint venture period.

        The Committee did not consider that these arrangements, which had the effect of distorting the underlying economic substance of the joint venture in the initial period of listing, to be acceptable for a company listed on the GEM Board.
        2. The Committee noted that [Parentco X] was a shareholder of [the other joint venture partner] of [Subsidiary A], which was owned as to 51% by [Mr. X] and 49% by [Mr. Y]. The Committee further noted that [Parentco X] agreed to transfer all its interests in [Subsidiary A] to the Group at a consideration calculated by reference to the net assets value of the latest audited financial statements of [Subsidiary A] and the percentage of capital contribution by [Parentco X] to the establishment of [Subsidiary A] (being [less than 2%] of the total registered capital of [Subsidiary A]) as and when the relevant PRC laws and regulations were relaxed to permit 100% foreign ownership of [Subsidiary A].

        The Committee was of the view that, in view of the involvement of connected parties and the fact that the purchase opinion was not based on the fair value of the interests in the joint venture at the time when the purchase opinion was to be exercised, there was no certainty that the purchase option would be exercised.
        3. Given the above, the Committee was of the view that the Company and its business were unsuitable for listing under Rule 11.06 of the GEM Listing Rules.

        The Company had failed to produce cogent reasons or to illustrate exceptional circumstances to convince the Committee to overturn the Decision.

        Yours faithfully
        For and on behalf of
        The Stock Exchange of Hong Kong Limited

        [Signed]

        Acting Secretary to the GEM Listing Committee

      • RL6-05

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        HKEx REJECTION LETTER
        Cite as HKEx-RL6-05 (March 2005)

        Summary
        Listing Rules Listing Rules 8.08(2) and 8.09(2)
        Reasons for rejection Failure to satisfy the minimum requirement of 300 shareholders as at the date of listing as required under Rule 8.08(2);

        Failure to meet the expected market capitalization at the time of listing of at least HK$200 million as required under Rule 8.09(2)
        Contents Extracts of the response of the Secretary to the Listing Committee, the Stock Exchange of Hong Kong Ltd

        [Date]

        [Name and Address of Sponsor]

        Dear Sirs

        Re: Application for new listing on the Main Board
        by an applicant which is a GEM Board listed issuer
        (the "Company" together with its subsidiary, the "Group")

        We refer to your advance booking form dated [* date * month * year] made on behalf of the Company (the "Application") and the hearing proof of the Company's prospectus dated [* date * month * year] (the "Prospectus"). Capitalized terms used herein shall have the same meanings as those defined in the Prospectus, unless otherwise stated.

        At the Listing Committee meeting held on [* date * month * year] (the "Listing Committee hearing date"), at which [names of members purposely omitted] had attended to consider the Application, the Listing Committee is of the view that the Group is not able to demonstrate to the satisfaction of the Listing Committee that it has complied with Rules 8.08(2) and 8.09(2) of the Listing Rules. We would like to take this opportunity to explain in detail the reasoning of the Listing Committee in reaching this conclusion.

        Rule 8.09(2) of the Listing Rules

        It is stated in Rule 8.09(2) of the Listing Rules that "the expected market capitalization of a new applicant at the time of listing must be at least HK$200 million".

        The Listing Committee noted that based on the closing price of the Shares [as at the date of the Listing Committee hearing] of [HK$*] per Share, the market capitalization of the Company is approximately [an amount less than HK$200 million] , which does not meet the requirement under Rule 8.09(2). The Listing Committee noted the following arguments of the Sponsors to justify that the Company would be able to comply with Rule 8.09(2) at the time of listing (which was tentatively scheduled to be [approximately 6 weeks after the date of the Listing Committee hearing]:

        •   that the Directors believed that institutional investors preferred investing in shares listed on the Main Board. Thus, institutional investors might increase their interests in investing in the Shares after the enhancement of the Company's profile as a result of the listing on the Main Board; and
        •   that the Company estimated that its results for the first three quarters of the year were better than in the corresponding previous period. The Company was prepared to announce its third quarter results [approximately 4 weeks after the date of the Listing Committee hearing]. After that announcement, the Shares may reflect this positive growth of the Company.

        However, despite the above, the Listing Committee noted that the Company's free float was approximately [over 100 million] Shares (being [approximately 30%] public float on [* number of] ordinary Shares in issue). Further, over the past twelve months, the average daily trading volume was between [100,000 to 200,000] Shares. As such, the Listing Committee characterized trading in the Shares as thin. In order to meet the minimum market capitalization requirement under Rule 8.09(2), the Company's share price should be at least [115% of the closing price of the Shares as of the date of the Listing Committee hearing]. The Company's share price had ranged from [approximately 60% of the closing price of the Shares as of the date of the Listing Committee hearing] to [over 140% of the closing price of the Shares as of the date of the Listing Committee hearing] during the last twelve months. On the basis of the past trading, the Listing Committee considered that the Company and the Sponsors had not demonstrated that the Company would be able to meet the requirement of Rule 8.09(2).

        Rule 8.08(2) of the Listing Rules

        It is stated in Rule 8.08(2) that "at the time of listing there must be an adequate spread of holders of the securities to be listed. The number will depend on the size and nature of the issue, but in all cases ... there must be a minimum of 300 shareholders". It is also stated in Rule 8.08(3) that "not more than 50% of the securities in public hands at the time of listing can be beneficially owned by the three largest public shareholders".

        The Listing Committee noted that the Company had approximately [less than 350] shareholders (i.e. more than the required minimum of 300) [approximately 6 weeks before the date of Listing Committee hearing]. However, this included [over 200] employees of the Company who had acquired their shares by exercising the share options that had been granted by the Company [approximately 6 weeks before the date of the Listing Committee hearing]. The Listing Committee commented that what the Company had done was a very artificial way of meeting the requirement for a minimum number of shareholders. The Listing Committee considered that the Company had not demonstrated that it complied with the spirit of the Listing Rules in relation to Rule 8.08(2).

        Conclusion reached by the Listing Committee

        On the basis of the Company's past trading on the Exchange, the Company had not demonstrated that it would be able to meet the minimum market capitalization requirement under Rule 8.09(2). The Company had also not demonstrated that it complied with the spirit of the Listing Rules in relation to Rule 8.08(2), dealing with the spread of shareholders. In light of these conclusions, the Listing Committee determined to reject the Application.

        Please also note that, pursuant to Rule 2B.07(1) of the Listing Rules, the Company has the right to a further review of the Application by the Listing (Review) Committee.

        [Portion of Letter Purposely Omitted]

        Yours faithfully
        For and on behalf of
        The Stock Exchange of Hong Kong Limited

        [Signed]

        Secretary to the Listing Committee

      • RL4-05

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        HKEx REJECTION LETTER
        Cite as HKEx-RL4-05 (March 2005)

        Summary
        Listing Rule GEM Listing Rule 11.01
        Reason for rejection Concerns on consistency and reliability of information submitted to the Listing Division
        Contents Extracts of the response of the Head of Listing, the Stock Exchange of Hong Kong Ltd

        [Date]

        [Name and Address of Sponsor]

        Dear Sirs,

        Re: Application for new listing of a GEM listing applicant
        (the "Company" together with its subsidiaries, the "Group")

        We refer to the Company's applications dated [*day*month* year] and [*day *month* year] 2003, draft proofs of the prospectus, related documents and submissions made to the Division.

        At the GEM Listing Committee held in [mid 2003], the Committee noted the concerns of the former reporting accountants of the Company (the "Former Reporting Accountants"), raised in their resignation letter of [early] 2003 over certain sales transactions conducted by the Group for [financial year 2002] (the "Sales Transactions"). In this regard, the Committee requested the following:-

        1) A submission from the Former Reporting Accountants on whether they have withdrawn or will withdraw their opinion on the audited financial statements of the major operating subsidiary of the Company (the "Major Subsidiary"), for [financial year 2002] and whether the true and fair view expressed by the Former Reporting Accountants is still appropriate. If the Former Reporting Accountants have not withdrawn or will not withdraw their opinion and consider that the true and fair view is still appropriate, the submission should include the reason therefor.
        2) A consent letter from the Former Reporting Accountants on the information disclosed in the Company's draft prospectus (the "Prospectus") as regards, in particular, the inclusion of the statement in the Prospectus that "the Former Reporting Accountants have not withdrawn their opinion that the financial statements of the Major Subsidiary for [financial year 2002] ... give a true and fair view of the state of affairs of the Major Subsidiary as at [the financial year end of 2002] and of its profit for such year."

        We have been given to understand that the Former Reporting Accountants were unable to complete their work on the Sales Transactions before they were asked to resign in [early] 2003 and on this basis, could not conclude whether or not their audit opinion issued on [a day several months after financial year 2002] on the financial statements of the Major Subsidiary for [financial year 2002] should be revised. Accordingly, the Division is of the view that the Company cannot address the requirements of the Committee.

        In the course of our review of the Sales Transactions, the Division has noted with concern certain inconsistencies in the facts presented in the submissions, including the following:

        1) Discrepancies between the Former Reporting Accountants' representation and your representation on the method of settlement of the Sales Transactions. The Former Reporting Accountants were given to understand that certain Sales Transactions were settled by customers' cheques written to a director of the Company. The Former Reporting Accountants requested copies of customers' cheques as part of their audit procedure, which were not made available to them. Subsequent explanation to the Division indicated that the Sales Transactions were settled by the customers by cash paid directly to the director, and not by cheques as understood by the Former Reporting Accountants.
        2) Upon further review of the Sales Transactions by the Division, certain representations were made which were not, in the Division's view, adequately explained or consistent with facts. For example:
        •   Upon our enquiry of the reason for cash settlement by customers (as opposed to cheques or other means) in the Sales Transactions, you submitted that the Major Subsidiary is a small private company in an industry where cash settlement for small transactions is common. We noted that your explanation was not supported by the Company's settlement method used in other sales, given confirmations by the Group's current Reporting Accountants (the "Current Reporting Accountants"), that all transactions, other than the Sales Transactions, were settled by cheques to the Company directly. We also noted that the amounts of the Sales Transactions ranged from HK$[*] to HK$[*].
        •   Your explanation that "since the director was responsible for, among others, customer relationship and collection of sales proceeds from customers, it is considered more convenient for the director to collect cash from customers directly to offset the amount due to him by the Major Subsidiary does not explain the unique treatment of the Sales Transactions, in particular, why the arrangement for customers' settlement through current account with the Group was limited to (i) the Sales Transactions only; and (ii) only with [Mr. X], one of the directors of the Company and not the other directors or senior management of the Company.
        •   Upon our enquiries you submitted that the director had received consent from the Board of directors for the settlement of the Sales Transactions in cash to him directly. However, we were subsequently informed that the item was orally agreed before the settlement and ratified in [*] 2003, after our request for evidence of the Board's consent.
        3) We also reiterate our concerns on the consistency and reliability of information previously provided to the Division:
        •   You submitted, in your letter of [early] 2003, that the reason for postponing the listing was that the Former Reporting Accountants had been unable to issue their accountants' report in time due to a change of their then partner-in-charge. When the listing application was later resubmitted, you continued to be not forthcoming with the real reason. On the contrary, you confirmed that there were no major issues that ought to be brought to our attention. The real reason for the Former Reporting Accountants' resignation as stated in their letter of [early] 2003 was not revealed until [almost three months later] after persistent enquiries by the Division.
        •   You failed to identify and bring to our attention the connected transaction between the Group and an associate of the Company's controlling shareholder which formed part of the Sales Transactions.

        Having regard to the concerns raised above, the Division has decided to reject the listing application of the Company.

        [Portion of Letter Purposely Omitted]

        Pursuant to Chapter 4 of the GEM Listing Rules, the Company has the right to have this decision review by the GEM Listing Committee.

        [Portion of Letter Purposely Omitted]

        Yours faithfully,
        For and on behalf of
        The Stock Exchange of Hong Kong Limited

        [Signed]

        Head of Listing

    • 2004

      This section contains extracts of Listing Division's letters to issuers, interpreting the Listing Rules on specific listing matters.

      Rejection Letter (RL) – This series comprises a selection of letters explaining the Division's rejection of specific listing applications.

      No Further Disciplinary Action (Guidance) Letter (LEGL) - This series comprises a selection of letters issued following investigation of suspected breaches of the Rules and where the Division decided not to pursue disciplinary action. The letters communicate the Division's interpretation or expectations as to the conduct of an issuer and its directors and are now published for general guidance and to promote transparency about the disposal of potential disciplinary matters.

      Please visit Archive to view marked-up versions and versions that have been superseded or withdrawn.

      Date (mm/yyyy) Reference Number Particulars Listing Rules Document Type Content Category
      12/2004 RL3-04 A Main Board listing applicant failing to satisfy the profit requirements of Rule 8.05 Rule 8.05 Rejection Letter New Applicants

      • RL3-04

        View Current PDF

        Summary
        Category Interpretive Letters- Rejection Letter (RL3-04)
        Listing Rule Rule 8.05
        Reason for rejection Failure to satisfy the profit requirements of Rule 8.05
        Contents Extracts of the response of the Head of Listing, the Stock Exchange of Hong Kong Ltd

        [Name and Address Sponsor]

        Dear Sirs,

        Re: Application for new listing of a Main Board listing applicant
        (the "Company" together with its subsidiaries, the "Group")

        We refer to the listing application of the Company dated [*day*month*year], your letters dated [*day*month*year] (the "Letters") and 1A Proof of the prospectus of the Company dated [*day*month*year] (the "Prospectus").

        Based on the facts and submissions provided to us, the Division is of the view that the Group is not able to demonstrate that it has complied with the profit requirements of HK$20 million in respect of the most recent year (i.e. for financial year 2003) under Rule 8.05 of the Listing Rules. We would like to take this opportunity to explain in detail our reasoning in reaching this conclusion.

        As stated in the Prospectus and the Letters, we understand the following:

        1. The Group's business

        The Group's business is provision of distribution and value-added services to [*] industry in the [certain Asia regions].
        2. Other interest income — under "other revenue"
        2.1. Profit attributable to shareholders of the Group was [over HK$100 million], [over HK$100 million], and [approximately HK$22 million] respectively for the three financial years ended [*day*month] 2003 ("Track Record Period").
        2.2. During financial year 2003, other interest income ("Interest Income") of [approximately HK$8 million] which was included under "other revenue" had been recognized by the Group for the purpose of Rule 8.05.
        2.3. Company X from which the Interest Income is derived, is a fellow subsidiary of the Company, and serves as a vehicle for the central treasury function of Parent X, the parent company of the Group, and its subsidiaries ("Parent X Group").
        2.4. It has been the practice of the Group to maintain cash balances with Parent X Group since [a date well beyond the Track Record Period]. The cash advanced to Company X was under normal commercial terms and the interest rate charged by the Group for financial year 2003 was approximately [*] per cent, representing 3-month prevailing LIBOR plus a [*] per cent margin. Such rate has not been changed since [the commencement of the cash deposit practice with Company X].
        2.5. The cash flows relating to the advances to Company X were classified as investing activities and not operating activities during the Track Record Period in the combined cash flow statements in the Prospectus.
        2.6. It is the view of the directors of the Company that cash advances to Company X in connection with Parent X Group's central treasury function (i.e. cash deposited with Company X) constitute the ordinary and usual course of business of the Group.
        2.7. According to a memorandum from the legal advisers to the sponsor of the Company and the underwriters, it seems clear to the legal advisers that, from a legal stand point, the placing of deposits (and the receipt of interests thereon) constitutes the ordinary and usual course of business of the Group.
        3. Royalty fees — under "corporate charges"
        3.1. Royalty fees ("Royalty Fees") were the payments made to Parent X Group for the use of certain trademarks, logos and domain names. The amount of the Royalty Fees decreased significantly from approximately [HK$40 million] in financial year 2002 to [approximately HK$11 million] in financial year 2003.
        3.2. Parent X Group engaged professional advisers to advise the rate of the Royalty Fees. The objective of engaging professional advisers to do so was to determine the arm's length level of royalties to be charged by Parent X to its subsidiaries in order to comply with applicable transfer pricing regulations of the [certain foreign tax authorities]. By following the recommendations made by these professional advisers, Parent X can satisfy itself that the Royalty Fees it charges its subsidiaries have been set at an arm's length level, thus reducing the likelihood of the [relevant] tax authorities making transfer pricing adjustments to the income of Parent X.
        3.3. Prior to financial year 2003, the Royalty Fees were charged at a rate of 0.5 per cent of the Group's turnover ("Old Rate"). This rate was based on the recommendation of Adviser [W], an adviser engaged by Parent X Group in 2000. The Royalty Fees were charged at this rate for financial years 2000, 2001 and 2002.
        3.4. Adviser [Y] has been engaged by Parent X Group since [the last quarter] of financial year 2002 to advise it on its transfer pricing policy. The Group continued to accrue for the Royalty Fees at the Old Rate in financial year 2003. Adviser [Y] was specifically requested to review the level of Royalty Fees charged by Parent X Group in [the early part] of financial year 2004 and the new range of 0 per cent to 0.7 per cent of the Group's turnover was recommended by them in [the early part] of financial year 2004. The new level of 0.2 per cent of the Group's turnover was fixed in [the early part of] financial year 2004 upon further negotiation between the Group and Parent X Group. Such new level of the Royalty Fees was retroactively applied with effect from the beginning of financial year 2003 by adjusting the amount of Royalty Fees in the last quarter of financial year 2003.

        After reviewing the information stated in the Prospectus and the Letters, the Division offers the following comments and views:

        4. Other interest income — under "other revenue"
        4.1. It is stated under Rule 8.05 that the profit should "exclude" any income or loss of the issuer, or its group, generated by activities "outside the ordinary and usual course of its business".
        4.2. The business of the Group is the provision of distribution and value-added services to [*] industry in the [certain Asia regions], which does not include any form of lending activities such as money lending and/or provision of financing to third parties. In other words, the money lending activity should not be considered as part of the Group's principal business or of the ordinary and usual course of its business for the purposes of interpretation of Listing Rule 8.05.
        4.3. Having considered your submissions, we are of the view that the Group has not demonstrated that the Interest Income should be considered as part of the income generated from the ordinary and usual course of business of the Group for the purpose of Rule 8.05. Accordingly the Interest Income should be disregarded for purposes of the calculation of attributable profits under Rule 8.05. Once the Interest Income of [approximately HK$8 million] (net of the related tax effect, if any) is excluded, the net profit of the Group for financial year 2003 is not able to satisfy the minimum profit requirement of HK$20 million in respect of the most recent year under Rule 8.05 of the Listing Rules.
        5. Royalty Fees — under "corporate charges"

        We note that the charge rate for Royalty Fees in financial year 2003 was fixed in [early part of financial year] 2004 by reference to the recommendation from Adviser [Y] and in addition upon further negotiation between the Group and Parent X Group taking into account the substantial decrease in turnover, gross profit margin and operating profit of the Group in financial year 2003. We are concerned about the retrospective basis of determination of Royalty Fees for financial year 2003, and the positive adjustment to the Group's trading record arising from the reduction of the Royalty rate from 0.5% to 0.2% after the period end. The effect of this adjustment again makes a significant difference to compliance with the profit requirement under Rule 8.05.

        Based on the observations above and having considered the information submitted, the Division is of the view that the Group is not able to demonstrate that it has complied with the profit requirement under Rule 8.05 of the Listing Rules for financial year 2003. On this basis, Division has decided to reject the listing application of the Company.

        Please note that the above does not represent the only material issue identified by the Division which may affect the proposed listing of the Company's shares on the Exchange. In fact, as set out in our earlier correspondence, the Division has not considered it appropriate to proceed any further with the listing application of the Company as the above fundamental issue on the profit requirement under Rule 8.05 has not been resolved to our satisfaction.

        [Portion of Letter Purposely Omitted]

        Yours faithfully,
        For and on behalf of
        The Stock Exchange of Hong Kong Limited

        [signed]

        Head of Listing