Listing Rules and Guidance: Contents


 
 

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  • Listing Decisions

    Select By Rule or Topic: Download the consolidated index here

    Please visit Archive to view marked-up versions and versions that have been superseded or withdrawn.

    This section comprises decisions on cases handled by the Listing Committee and/or the Listing Division, to enhance transparency and market understanding of their interpretation of the Listing Rules. Each decision was based on its specific circumstances and is not a precedent for future cases.

    Effective from 1 January 2011, listing decisions will be published under a new naming format as illustrated below:

    Before 1 January 2011 On or After 1 January 2011
     
    HKEx-LD100-1
    HKEx-LD100-2
    HKEx-LD101-1
     
    HKEx-LD1-2011
    HKEx-LD2-2011
    HKEx-LD3-2011

    Listing decisions published before 1 January 2011 continue to bear the old references.

    • 2018

      Select By Rule or Topic: Download the consolidated index here

      Please visit Archive to view marked-up versions and versions that have been superseded or withdrawn.

      This section comprises decisions on cases handled by the Listing Committee and/or the Listing Division, to enhance transparency and market understanding of their interpretation of the Listing Rules. Each decision was based on its specific circumstances and is not a precedent for future cases.

      Effective from 1 January 2011, listing decisions will be published under a new naming format as illustrated below:

      Before 1 January 2011 On or After 1 January 2011
       
      HKEx-LD100-1
      HKEx-LD100-2
      HKEx-LD101-1
       
      HKEx-LD1-2011
      HKEx-LD2-2011
      HKEx-LD3-2011

      Listing decisions published before 1 January 2011 continue to bear the old references.

      LD Series Number First
      Release
      Date (Last
      Update
      Date)
      (mm/yyyy)
      Listing Rules/ Topics Particulars
      LD120-2018 03/2018 Main Board Rule 9.03(3)
      GEM Rules 12.09 and 12.14
      To provide guidance on why the Exchange returned certain listing applications
      LD119-2018 03/2018 GEM Rule 2.09 and Chapter 11 To provide guidance on why the Exchange rejected certain listing applications
      LD118-2018 03/2018
      (08/2018)
      Main Board Rules 6.01(3), 6.10 and 13.24 Whether Company A had a sufficient level of operations or sufficient assets to meet Main Board Rule 13.24

      • LD120-2018

        View Current PDF

        HKEX LISTING DECISION
        HKEX-LD120-2018 (March 2018)

        Summary
        Parties Company A to Company D — Main Board and GEM listing applicants whose applications were returned by the Exchange in 2017
        Issue To provide guidance on why the Exchange returned certain listing applications
        Listing Rules Main Board Rule 9.03(3)
        GEM Rules 12.09 and 12.14
        Related Publications HKEX-LD84-2014, HKEX-LD91-2015, HKEX-LD101-2016 and HKEX-LD106-2017
        Decision The Exchange returned the listing applications

        PURPOSE

        1. This Listing Decision in the Appendix sets out the reasons why the Exchange returned certain listing applications from 1 January to 31 December 2017. For the reasons listing applications were returned before this period, please refer to the listing decisions stated in "Related Publications" above.

        APPLICABLE LISTING RULES

        2. Main Board Rule 9.03(3) (GEM Rule 12.09(1)) requires an applicant to submit a listing application form, an Application Proof and all other relevant documents under Main Board Rule 9.10A(1) (GEM Rules 12.22 and 12.23), and the information in these documents must be substantially complete except in relation to information that by its nature can only be finalised and incorporated at a later date.
        3. If the Exchange decides this information is not substantially complete, the Exchange will not continue to review any documents relating to the application. All documents, including Form A1 (Form 5A for GEM cases) (except for the retention of a copy of these documents for the Exchange's record) submitted to the Exchange will be returned to the sponsor (GEM Rule 12.09(2)).

        ****

        Returned cases in 2017
        Company Reasons for return
        Company A
        (a GEM Applicant)

        Company A had two businesses: (a) a trading business where it acted as a principal, bore the inventory and credit risks, and recorded revenue and cost of sales from the transactions; and (b) an agency business where it acted as an agent, did not bear any inventory and credit risks, and recorded agency income which was more profitable than the trading business.

        The application was returned because the disclosure in the Application Proof aggregated the two segments into the trading business and had very little disclosure on the agency business. The agency business was not clearly distinguished from the trading business and the different risks and business models were not explained. As such, a reasonable investor cannot appropriately assess Company A's two businesses and make a fully-informed investment decision.

        Company B
        (a Main Board Applicant)

        Company B provided brokerage and risk solutions services ("Brokerage Business").

        In the last year of its track record period ("Year 3"), Company B started to invest in equity and structured products for its own account ("Proprietary Trading Business"), which accounted for a majority of its revenue and profit in Year 3. The Proprietary Trading Business was also expected to be more material to Company B going forward because Company B planned to expand this business segment.

        The Application Proof was returned because there was insufficient disclosure on the Proprietary Trading Business in relation to (i) Company B's investment strategy; (ii) funding of investments; (iii) risk management; and (iv) the cost and the percentage level of interest in each investment and the actual performance/ return of the investments, to allow investors to make an informed assessment on Company B.

        Company C
        (a Main Board Applicant)

        Company C provided system related services. Its proposed listing date was 16 January 2018 and it provided a profit forecast memorandum covering the year ending 31 December 2017.

        The application was returned because Company C failed to provide, at the time of filing its Form A1, a profit forecast memorandum covering the period up to the forthcoming financial year end date after the date of listing, as required under Rule 9.11(10)(b). Based on its proposed listing timetable as stated in its Form A1, this period should have been the year ending 31 December 2018.

        This is the same reason two listing applications were returned in 2014 and 2015. See details of Company K in HKEX-LD91-2015 and Company C in HKEX-LD101-2016.

        Company D
        (a GEM Applicant)
        The information submitted by Company D was not substantially complete as required under GEM Rule 12.09(1) because Company D failed to include the required financial information in the Application Proof.

        Based on the proposed timetable set out in Company D's Form 5A, the expected final prospectus date and the expected dealing commencement date are in April 2018. Accordingly, the accountants' report must include the financial information for the two years ending 31 December 2017 according to GEM Rules 7.03(1) and 11.10.

        As the Application Proof only included financial information covering the two years ended 31 December 2016 and the seven months ended 31 July 2017, the information submitted by Company D was not "substantially complete".

        This is the same reason five listing applications were returned in 2014 and 2016. See details of Company B and Company J in HKEX-LD91-2015 and Company D, Company E and Company F in HKEX-LD106-2017.

      • LD119-2018

        View Current PDF

        HKEX LISTING DECISION
        HKEX-LD119-2018 (March 2018)

        Summary
        Parties Company A to Company C — GEM listing applicants whose listing applications were rejected by the Exchange in 20171
        Issue To provide guidance on why the Exchange rejected certain listing applications
        Listing Rules GEM Rule 2.09 and Chapter 11
        Related Publications HKEX-GL68-13, HKEX-GL68-13A, HKEX-LD92-2015, HKEX-LD100-2016, HKEX-LD107-1 and HKEX-LD107-2017
        Decision The Exchange rejected the listing applications

        PURPOSE

        1. This Listing Decision in the Appendix sets out the reasons why the Exchange rejected certain listing applications from 1 January to 31 December 2017. For the reasons listing applications were rejected before this period, please refer to the listing decisions and guidance letters stated in "Related Publications" above.

        APPLICABLE LISTING RULES

        2. Chapter 11 of the GEM Rules sets out detailed eligibility requirements which a new applicant must fulfill and state that both the applicant and its business must, in the opinion of the Exchange, be suitable for listing.
        3. GEM Rule 2.09 states that suitability for listing depends on many factors. Compliance with eligibility requirements under Listing Rules does not itself ensure an applicant's suitability for listing. You may refer to HKEX-GL68-13 and HKEX-GL68-13A which provide guidance on the factors that the Exchange would take into consideration when assessing whether an applicant and its business are suitable for listing under GEM Rule 11.06.

        ****

        Appendix

        Rejection cases in 2017
        Company Reasons for rejection
        Company A
        (a GEM Applicant)

        Company A operated a printing business.

        The application was rejected on suitability grounds on a number of factors:

        •   Company A's controlling and substantial shareholders had previously established, listed and disposed of a printing business. In particular, they sold their interests in this printing business shortly after their lock-up expired. This raised concern on whether the shareholders would be committed to nurture Company A in the long-run.
        •   Company A did not substantiate its business need to substantially expand its facilities and human resources. In addition, Company A could have funded its expansion plan with internal sources, and did not demonstrate that it seem to need external funding. The use of proceeds was not commensurate with its historical and future business strategies.
        Company B
        (a GEM Applicant)

        Company B operated restaurants in Hong Kong.

        The application was rejected on suitability grounds since the sustainability of Company B's business was extremely uncertain due to the following factors:

        Low and declining profit margin

        During the track record period, half of Company B's restaurants were loss-making and some closed down. Company B's profit-making restaurants also recorded declining operating margins mainly due to the slowing economy and increase in rental and labour costs. Despite the various measures implemented to reduce cost and improve revenue, Company B's net profit margins remained low and below inflation. Assuming restaurant operating costs and headquarter overhead further increased in line with inflation, Company B may not be able to sustain its business after listing.

        Susceptibility to escalating rental costs

        All of Company B's restaurants operated on leased properties and rental expenses as a percentage of Company B's revenue had been increasing during the track record period. Rental cost in Hong Kong remains high and is a market threat to restaurant operators. Company B is particularly sensitive to escalating rental expenses given that (a) it recently closed down a full service restaurant due to rental increase; and (b) restaurant operators generally have lower bargaining power when negotiating lease renewals given the significant capital expenditure incurred to set up restaurants and the reinstatement costs in the event of non-renewal.

        Short lease period

        Most of the lease agreements of Company B's restaurants were for two to three years only without an option for renewal. As at the latest practicable date, a majority of Company B's restaurants lease agreements will expire in less than one year and Company B had not been able to reduce its rent when renewing its leases after the track record period. There is an imminent risk that these leases may be renewed on unfavourable terms.


        Company C
        (a GEM Applicant)

        Company C was an entertainment content provider in Hong Kong which organised and produced concerts for its artistes and produced concerts for other concert organisers.

        The listing application was rejected on eligibility grounds because Company C was not able to comply with the ownership continuity and control requirement under GEM Rule 11.12A(2) based on the following:

        (i) during its most recent financial year, one of its three controlling shareholders (the "Former Controlling Shareholder") ceased to be a controlling shareholder. The sponsor failed to demonstrate that the Former Controlling Shareholder was a passive shareholder during the relevant track record period; and
        (ii) after its most recent financial year but before the date of listing, there was a material change in the voting interests between the two remaining controlling shareholders, who constitute a group of controlling shareholders .


        1 This does not include two GEM listing applications which were rejected by the Securities and Futures Commission under section 6(2) of the Securities and Futures (Stock Market Listing) Rules.

      • LD118-2018

        View Current PDF

        HKEX LISTING DECISION
        HKEX-LD118-2018 (published in March 2018) (Updated in August 2018)

        Party Company A — a Main Board issuer
        Issue Whether Company A had a sufficient level of operations or sufficient assets to meet Main Board Rule 13.24
        Listing Rules Main Board Rules 6.01(3), 6.10 and 13.24 (Updated in August 2018)
        Decision Company A had failed to maintain a sufficient level of operations or sufficient assets to meet Main Board Rule 13.24. Accordingly, the Exchange commenced the delisting procedures under Rule 6.10 (Updated in August 2018)

        FACTS

        1. Company A and its subsidiaries (Group) were principally engaged in retail sales of second-hand motor vehicles (the Second-hand Vehicles Business), involving the Group purchasing through sale agents second-hand motor vehicles and putting them up for sale in a showroom or on the internet in Hong Kong. It had also started a money lending business (the Money Lending Business) about two years ago. The Group operated these businesses by a small number of employees.
        2. Over the past five years, the Group's business performance and financial position had been deteriorating. The Group's revenue decreased by near 95% to less than HK$5 million. The Group had recorded net loss and negative operating cashflow. As at the latest financial year end, the Group had total assets and net assets of HK$50 million and HK$40 million respectively. Its assets comprised mostly cash, loan and interest receivables and a prepaid lease payment.
        3. The Exchange queried whether Company A was maintaining sufficient operations or assets as required under Main Board Rule 13.24.
        4. In response, Company A submitted that it was able to satisfy Rule 13.24 because:
        (a) Following relaxation of the relevant PRC regulation a few months ago, the Group commenced a business of wholesale distribution of new branded motor vehicles in the PRC (the Vehicles Wholesale Business). It sourced new branded motor vehicles in fleet from overseas suppliers and sold them to a small number of car dealers in the PRC on an indent basis.
        (b) According to Company A's forecasts, the Vehicles Wholesale Business would significantly increase Company A's revenue for the second half of the current financial year and the revenue from this business would triple for the next financial year. This was based on a few confirmed orders, non-legally binding framework agreements with a few customers, and an assumption about the average monthly increase in the sales volume during the forecast periods (for which Company A did not provide a clear basis). Company A expected to incur a loss for the current financial year and only record a minimal profit in the next financial year.
        (c) For the existing businesses, Company A would cease the Second-hand Vehicles Business and reallocate its resources to the Vehicles Wholesale Business. It would continue to generate minimal revenue from the Money Lending Business.

        APPLICABLE LISTING RULES AND GUIDANCE MATERIALS

        5. Main Board Rule 2.03 states that—
        "The Listing Rules reflect currently acceptable standards in the market place and are designed to ensure that investors have and can maintain confidence in the market and . . ."
        6. Main Board Rule 13.24 states that—
        "An issuer shall carry out, directly or indirectly, a sufficient level of operations or have tangible assets of sufficient value and/or intangible assets for which a sufficient potential value can be demonstrated to the Exchange to warrant the continued listing of the issuer's securities."
        7. Main Board Rule 6.01 states that—
        "Listing is always granted subject to the condition that where the Exchange considers it necessary for the protection of the investor or the maintenance of an orderly market, it may at any time direct a trading halt or suspend dealings in any securities or cancel the listing of any securities in such circumstances and subject to such conditions as it thinks fit, whether requested by the issuer or not. The Exchange may also do so where:—

        . . .
        (3) the Exchange considers that the issuer does not have a sufficient level of operations or sufficient assets to warrant the continued listing of the issuer's securities (see rule 13.24). . ."
        8. Main Board Rule 6.10 states that—
        "There may be cases where a listing is cancelled without a suspension intervening. Where the Exchange considers that any circumstances set out in rule 6.01 arise, it may:
        (1) publish an announcement naming the issuer and specifying the period within which the issuer must have remedied those matters which have given rise to such circumstances. Where appropriate the Exchange will suspend dealings in the issuer's securities. If the issuer fails to remedy those matters within the specified period, the Exchange will cancel the listing. The Exchange may treat any proposals to remedy those matters as if they were an application for listing from a new applicant for all purposes, in which case, the issuer must comply with the requirements for new listing applications as set out in the Listing Rules; or

        …" (Updated in August 2018)
        9. Listing Decisions (LD35-2012 and LD88-2015) describe the purpose behind Main Board Rule 13.24 and provide guidance on the application of the Rule:
        ". . .Rule 13.24 is intended to maintain overall market quality. Issuers that fail to meet this Rule are "blue sky companies" where public investors have no information about their business plans and prospects. This leaves much room for the market to speculate on their possible acquisitions in the future. To allow these issuers' shares to continue to trade and list may have an adverse impact on investor confidence.

        . . .

        When applying Rule 13.24 to issuers whose shares are trading on the Exchange, the Exchange generally allows their shares to continue to trade as long as they have an operation and meet the continuing disclosure obligations. If the Exchange were to suspend these issuers because of their low level of activities or assets values, public shareholders would have no access to the market for trading the issuers' shares. To balance the public shareholders' interests with the need to maintain market quality, the Exchange suspends trading only in extreme cases.

        . . ."
        10. Listing Decisions (LD115-2017 and LD116-2017) elaborate the criteria that the Exchange would consider to assess an issuer's compliance with the Rule:
        ". . .Rule 13.24 requires issuers to maintain a sufficient level of operations or assets of sufficient value to warrant the continued listing of their securities. Without quantitative criteria for sufficiency, this Rule calls for a qualitative test and is assessed based on the specific facts and circumstances of individual cases.

        . . . to balance public shareholders' ability to access the market to trade in the security with the need to maintain market quality, the Exchange would suspend trading only in an extreme case. When making the assessment, the Exchange takes into account the current regulatory concerns and the acceptable standards in the market."
        The Exchange treated cases with the following characteristics as extreme cases:
        ". . .
        (a) a very low level of operating activities and revenue; for example the issuer's business does not generate sufficient revenue to cover its corporate expenses, resulting in net losses and negative operating cashflows;
        (b) the current operation does not represent a temporary downturn, the issuer had been operating at a very small scale and incurring losses for years; and
        (c) the assets do not generate sufficient revenue and profits to support a continued listing.
        In these cases, the issuers are not operating substantive businesses, and the value of the businesses (excluding the listing status) is minimal, if any. There is a question whether the Rule requirement to carry on a sufficient level of operations or have assets of sufficient value is met. The Exchange considers it necessary to apply Rule 13.24 in these cases with a view to maintaining investors' confidence and overall market quality.

        Once suspended, the issuer would be given a remedial period to submit a resumption proposal to demonstrate that it has a viable and sustainable business to re-comply with Rule 13.24. If the issuer fails to do so, it would be delisted according to the delisting procedures under Rules 6.01(3) and 6.10. . ."
        (Updated in August 2018)

        ANALYSIS

        11. Rule 13.24 imposes a continuing obligation on an issuer to maintain a sufficient level of operations or assets to warrant its continued listing. To meet this obligation, an issuer must satisfy the Exchange that it has a viable and sustainable business. For this purpose, an issuer must provide the Exchange with sufficient empirical evidence or compelling supportive information to support its case (for example, a track record of its business).
        12. In this case, the Exchange considered that Company A had failed to comply with Rule 13.24 and this was an extreme case:
        (a) The Group's existing level of operations had, for years, remained very low and recorded net losses and negative operating cashflows. Company A would cease the Second-hand Vehicles Business and did not expect the Money Lending Business to grow substantially in the future.
        (b) Company A sought to rely on the Vehicles Wholesale Business and its revenue forecasts for the next two financial years to meet Rule 13.24. However, the Exchange noted that:
        (i) The business model of the Vehicles Wholesale Business was substantially different from that of the Second-hand Vehicles Business. The Vehicles Wholesale Business was a business of wholesale distribution of new branded motor vehicles in the PRC conducted on an indent basis relying on a small number of car dealers, compared to the Second-hand Vehicles Business involving retail sales in Hong Kong of second-hand motor vehicles selected and acquired by the Group. The Vehicles Wholesale Business was, therefore, a new business of Company A, which commenced only a few months ago and lacked a track record.
        (ii) The development of the Vehicles Wholesale Business was preliminary with uncertain potential. The customer base for the Vehicles Wholesale Business was limited. It was not clear how Company A would source new customers or enter into new sales agreements to support the business growth.
        (iii) A significant portion of the revenue projections from the Vehicles Wholesale Business was based on non-legally binding framework agreements and assumptions about the monthly increases in sale volume which were not supported by signed agreements, committed sales orders or otherwise.
        (c) Based on its latest financial report, the Group had total assets of HK$50 million and net assets of HK$40 million only, which comprised mainly cash, receivables and a prepayment. As noted above, the Group's assets had not generated sufficient revenue and profits to ensure Company A to operate a viable and sustainable business. Nor had Company A demonstrated that its assets would enable it to substantially improve its operations and financial performance.

        CONCLUSION

        13. The Exchange decided that Company A had failed to maintain a sufficient level of operations or assets of sufficient value to meet Rule 13.24. Accordingly, the Exchange commenced the delisting procedures under Rules 6.01(3) and 6.10. (Updated in August 2018)

        Subsequent development

        14. According to Company A's subsequent submissions, a significant portion of the committed sales orders under the Vehicles Wholesale Business (noted in paragraph 4(b) above) was not delivered on schedule. The actual revenue from the Vehicles Wholesale Business for the corresponding period was substantially lower than its projected sales.

    • 2017

      Select By Rule or Topic: Download the consolidated index here

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

      This section comprises decisions on cases handled by the Listing Committee and/or the Listing Division, to enhance transparency and market understanding of their interpretation of the Listing Rules. Each decision was based on its specific circumstances and is not a precedent for future cases.

      Effective from 1 January 2011, listing decisions will be published under a new naming format as illustrated below:

      Before 1 January 2011 On or After 1 January 2011
       
      HKEx-LD100-1
      HKEx-LD100-2
      HKEx-LD101-1
       
      HKEx-LD1-2011
      HKEx-LD2-2011
      HKEx-LD3-2011

      Listing decisions published before 1 January 2011 continue to bear the old references.

      LD Series Number First
      Release
      Date (Last
      Update
      Date)
      (mm/yyyy)
      Listing Rules/ Topics Particulars
      LD117-2017 11/2017 Main Board Rule 8.04 and Paragraph 3(c) of Practice Note 15 Whether Company A (excluding its interest in Newco) could meet the new listing requirements of Chapter 8 of the Main Board Rules
      LD116-2017 11/2017
      (08/2018)
      Main Board Rules 6.01(3), 6.10 and 13.24 Whether Company A had a sufficient level of operations or sufficient assets to meet Main Board Rule 13.24
      LD115-2017 11/2017
      (08/2018)
      Main Board Rules 6.01(3), 6.10 and 13.24 Whether Company A had a sufficient level of operations or sufficient assets to meet Main Board Rule 13.24
      LD114-2017 10/2017
      (08/2018)
      Main Board Rules 2.03, 2.06, 6.01, 6.04 and 6.10 Whether Company A was no longer suitable for listing
      LD113-2017 10/2017 Main Board Rules 2.04, 14.06(6) and 14.54 Whether the Exchange would impose additional requirements under Rule 2.04 on Company A's proposed disposal of its original business
      LD112-2017 10/2017 Main Board Rule 13.24 Whether Company A would have sufficient operations or assets under Rule 13.24 after a proposed major disposal
      LD111-2017 10/2017 Main Board Rules 14A.19 and 14A.20 Whether the Exchange would exercise its power to deem Company B as a connected person of Company A under Main Board Listing Rule 14A.19
      LD110-2017 06/2017
      (08/2018)
      Main Board Rules 6.01(2), 6.04, 6.10, 8.08, 13.32 Whether the Exchange would commence the procedures to cancel the listing of Company A whose shares had been suspended for a prolonged period due to insufficient public float
      LD109-2017 06/2017 Main Board Rule 14.06(6) Whether Company A would be required to aggregate the proposed acquisition with a previous acquisition, and whether these acquisitions would constitute a reverse takeover
      LD108-2017 06/2017 Main Board Rule 14.06(6) Whether Company A's proposed acquisition of the Target constituted a reverse takeover or an extreme VSA
      LD107-2017 05/2017 Main Board Rule 2.06 and Chapter 8
      GEM Rule 2.09 and Chapter 11
      To provide guidance on why the Exchange rejected certain listing applications
      LD106-2017 05/2017 Main Board Rule 9.03(3)
      GEM Rules 12.09 and 12.14
      To provide guidance on why the Exchange returned certain listing applications
      LD105-2017 04/2017 GEM Rules 9.04 and 17.26 Whether Company A has a sufficient level of operations or assets to meet GEM Rule 17.26
      LD104-2017 01/2017 Main Board Rule 2.04 and Paragraph 3(f) of Practice Note 15

      GEM Rule 2.07 and Paragraph 3(f) of Practice Note 3
      Whether the Exchange would waive the assured entitlement requirement for Company A's spin-off proposal

      • LD117-2017

        View Current PDF

        HKEX LISTING DECISION
        HKEX-LD117-2017 (published in November 2017)

        Parties Company A — a Main Board issuer

        Company B — a Main Board issuer in which Company A had a significant investment

        Newco — Company A's subsidiary wishing to seek a separate listing on the Exchange
        Issue Whether Company A (excluding its interest in Newco) could meet the new listing requirements of Chapter 8 of the Main Board Rules
        Listing Rules Main Board Rule 8.04 and Paragraph 3(c) of Practice Note 15 to the Main Board Rules
        Decision The Exchange rejected the spin-off proposal as Company A could not demonstrate that its remaining businesses would be sustainable and suitable for listing after the proposed spin-off

        FACTS

        1. Company A proposed to inject its business in manufacturing and sale of certain electronic products into Newco and seek a separate listing of Newco on the Exchange.
        2. After the proposed spin-off, Company A (excluding Newco) (Remaining Group) would continue to carry on the business in securities investment and trading (Securities Business) and a number of other businesses (Other Businesses) (together, the Remaining Businesses).
        3. Company A submitted that during the immediately preceding 3 year (track record) period, the Remaining Group recorded an aggregated profit of about HK$150 million for the first two years of the track record period, and a profit of about HK$300 million for the latest financial year.
        4. It was also noted that:
        (a) During the immediately preceding 3 year (track record) period, the Securities Business was the largest business segment of the Remaining Group in terms of revenue, profit and asset value. Its investment portfolio comprised primarily securities in Company B (which was a subsidiary of Company A until about three years ago). It also held a few other investments but the investment amounts were small.
        (b) The Remaining Group's revenues and profits during the track record period were mainly attributable to the gains derived from the investment in Company B in the last two financial years. The Other Businesses segments were small and were either loss-making or had only generated minimal profits.
        (c) Company A had sold all its investment in Company B during the track record period. The value of its investment portfolio therefore decreased significantly from about HK$10 billion to less than HK$20 million.
        (d) After the track record period, Company A had made further investments in two listed companies with an aggregated value of HK$10 million. It also set aside a budget of HK$300 million for future investments.
        5. Company A was of the view that the Remaining Group could independently satisfy the new listing requirements of Chapter 8 of the Rules, including the profit requirement of Rule 8.05(1)(a), and other requirements under Practice Note 15. It sought the Exchange's approval for the spin-off proposal.

        APPLICABLE LISTING RULES

        6. Rule 8.04 states that:

        "Both the issuer and its business must, in the opinion of the Exchange, be suitable for listing."
        7. Rule 2.06 states that:

        "Suitability for listing depends on many factors. Applicants for listing should appreciate that compliance with the Exchange Listing Rules may not of itself ensure an applicant's suitability for listing. The Exchange retains a discretion to accept or reject applications and in reaching their decision will pay particular regard to the general principles outlined in rule 2.03. Prospective issuers (including listed issuers) are therefore encouraged to contact the Exchange to seek informal and confidential guidance as to the eligibility of a proposed application for listing at the earliest possible opportunity."
        8. Paragraph 3(c) of Practice Note 15 to the Main Board Rules states that:

        "The Listing Committee must be satisfied that, after the listing of Newco, the Parent would retain a sufficient level of operations and sufficient assets to support its separate listing status. In particular, it would not be acceptable to the Listing Committee that one business (Newco's) supported two listing statuses (the Parent's and Newco's). In other words, the Parent itself would be required to retain, in addition to its interest in Newco, sufficient assets and operations of its own, excluding its interest in Newco, to satisfy independently the requirements of Chapter 8 of the Exchange Listing Rules. . ."

        ANALYSIS

        9. Rule 8.04 provides that both the issuer and its business must, in the Exchange's opinion, be suitable for listing. Rule 2.06 further states that suitability for listing depends on many factors. Compliance with the Rules may not of itself ensure an issuer's suitability for listing / continued listing.
        10. Suitability is a broad and flexible concept that applies in a wide range of circumstances. The Exchange has a broad discretion to interpret and apply this concept for maintaining market confidence with reference to the currently acceptable standards in the market place. This facilitates the Exchange to meet its regulatory objectives and its obligations to act in the best interest of the market as a whole and in the public interest.
        11. For example, the Exchange may question an issuer's suitability for listing if, given its specific business model and the specific facts and circumstances, the issuer may not be operating a business of substance, giving rise to a concern that the issuer is carrying on its activities for the purpose of maintaining a listing status rather than genuinely developing its underlying business. In these circumstances, the issuer may be a "blue sky" company1 susceptible of speculative activities and market manipulation. This raises a concern about the impact of such activities on the orderliness, quality and reputation of the market.
        12. In the case of a spin off, the Exchange retains its discretion to accept or reject the listed issuer's proposal having regard to, among other factors, the suitability of the remaining group and its business for listing under Rule 8.042.
        13. In this case, the Remaining Group would rely on its Securities Business to meet the new listing requirements under Paragraph 3(c) of Practice Note 15. The Exchange was not satisfied that the Remaining Group was suitable for listing because:
        (a) The Securities Business primarily invested in one company (i.e. Company B) during the track record period. Its investment portfolio was highly concentrated. The revenues and profits of the Securities Business segment were almost entirely generated from the investment in Company B. This business model raised a concern that the Remaining Group was not carrying on a business of substance. This impacted on the Remaining Group's suitability for listing.
        (b) In addition, the whole investment in Company B was sold during the track record period. Company A's subsequent investments in two listed companies amounted to HK$10 million only and there was no detail about its future investment plans. The Remaining Group's track record was not representative of its business performance going forward. This called into question whether investors had adequate information to make an informed assessment of the Remaining Group's business after the proposed spin-off.
        (c) The scale of the Other Businesses was small and could not have met the profit requirement under Rule 8.05(1)(a). Company A had not demonstrated that there would be substantial improvement in these businesses after the proposed spin-off.

        CONCLUSION

        14. The Exchange rejected the spin-off proposal as Company A could not demonstrate that the Remaining Businesses would be suitable for listing after the proposed spin-off.

        1 "Blue sky companies" are those where public investors have no or little information about their business plans and prospects, leaving much room for the market to speculate on their possible acquisitions. These activities create opportunities for market manipulation. See LD35-2012.

        2 In any case, a listed issuer must ensure that it and its business are suitable for continued listing, failing which the Exchange may cancel its listing under Rule 6.01(4).

      • LD116-2017

        View Current PDF

        HKEX LISTING DECISION
        HKEX-LD116-2017 (published in November 2017) (Updated in August 2018)

        Party Company A — a Main Board issuer
        Issue Whether Company A had a sufficient level of operations or sufficient assets to meet Main Board Rule 13.24
        Listing Rules Main Board Rules 6.01(3), 6.10 and 13.24 (Updated in August 2018)
        Decision Company A had failed to maintain a sufficient level of operations or sufficient assets to meet Main Board Rule 13.24, resulting in commencement of delisting procedures under under Rule 6.10 (Updated in August 2018)

        FACTS

        1. Company A and its subsidiaries (Group) were principally engaged in the manufacturing and sale of fashion accessories (Fashion Accessories Business) and the development and sale of software related applications (Software Business).
        2. Over the past few years, the Group had gradually scaled down the Fashion Accessories Business by disposing of its manufacturing arms, outsourcing such function to other subcontractors, and closing its retails shops. Revenues from this business segment decreased from about HK$200 million to HK$9 million during the last five financial years. Company A had decided to discontinue this business, and the revenue of HK$9 million in the latest financial year was mostly generated from the sale of obsolete inventories.
        3. The Group started the Software Business through its acquisition of a company (Acquisition) engaging in such business at a consideration of HK$160 million about a year ago. It was noted that:
        (a) In the latest financial year, the Group recorded revenue of around HK$6 million from this business and an impairment loss of HK$9 million on goodwill arising from the Acquisition. As at the year end date, the goodwill amounted to HK$140 million.
        (b) The Group's auditor had issued a disclaimer opinion on the Group's financial statements due to, among others, issues concerning the revenue recorded from the Software Business and the carrying value of the goodwill. In particular, the auditor had raised concern about the carrying value and recoverability of the goodwill having considered the short history of the Software Business, the difficulties faced by the management in executing the business plan and the lack of supporting information relating to the revenue from this business.
        (c) Towards the end of the latest financial year, all the staff for the development team of the Software Business left their employment, resulting in suspension of its operation. The operation resumed only after new staff were recruited three months later.
        4. As at the latest year end date, the Group had total assets of HK$280 million.
        (a) Its major assets included (i) goodwill of HK$140 million in relation to the Software Business (see paragraph 3 above); and (ii) a deposit of HK$31 million paid for the acquisition of certain trademarks relating to the Fashion Accessories Business under an agreement signed two years ago. The title of the trademarks had not been transferred to the Group and there was insufficient evidence to satisfy the auditors as to the recoverability of such deposit.
        (b) Other assets mainly included cash, trade and other receivables and prepayments.
        5. The Group had recorded net losses and negative operating cashflows for each of the last five financial years.
        6. The Exchange queried whether Company A was maintaining sufficient operations or assets as required under Main Board Rule 13.24.
        7. Company A submitted that it had plans to improve its business operations.
        (a) The Group had entered into sales contracts of about HK$16 million for the Software Business and was in discussion with potential customers on new contracts of HK$6 million. Company A expected a significant increase in revenues from this business to HK$23 million and HK$35 million in the current and the next financial year respectively, but did not provide details or basis for its business plans or forecasts.
        (b) The Group also planned to commence certain regulated activities under the Securities and Futures Ordinance (the Securities Business). It expected to obtain the relevant licenses within 3 months and record revenue of about HK$2.5 million from this business in the next financial year.
        (c) Based on the above, Company A expected that the Group would record net profits of about HK$2 million and HK$16 million in the current and next financial year respectively.

        APPLICABLE LISTING RULES AND GUIDANCE MATERIALS

        8. Main Board Rule 2.03 states that—

        "The Listing Rules reflect currently acceptable standards in the market place and are designed to ensure that investors have and can maintain confidence in the market and . . ."
        9. Main Board Rule 13.24 states that—

        "An issuer shall carry out, directly or indirectly, a sufficient level of operations or have tangible assets of sufficient value and/or intangible assets for which a sufficient potential value can be demonstrated to the Exchange to warrant the continued listing of the issuer's securities."
        10. Main Board Rule 6.01 states that—

        "Listing is always granted subject to the condition that where the Exchange considers it necessary for the protection of the investor or the maintenance of an orderly market, it may at any time direct a trading halt or suspend dealings in any securities or cancel the listing of any securities in such circumstances and subject to such conditions as it thinks fit, whether requested by the issuer or not. The Exchange may also do so where:—

        . . .
        (3) the Exchange considers that the issuer does not have a sufficient level of operations or sufficient assets to warrant the continued listing of the issuer's securities (see rule 13.24). . ."
        11. Main Board Rule 6.10 states that—

        "There may be cases where a listing is cancelled without a suspension intervening. Where the Exchange considers that any circumstances set out in rule 6.01 arise, it may:
        (1) publish an announcement naming the issuer and specifying the period within which the issuer must have remedied those matters which have given rise to such circumstances. Where appropriate the Exchange will suspend dealings in the issuer's securities. If the issuer fails to remedy those matters within the specified period, the Exchange will cancel the listing. The Exchange may treat any proposals to remedy those matters as if they were an application for listing from a new applicant for all purposes, in which case, the issuer must comply with the requirements for new listing applications as set out in the Listing Rules; or

        …" (Updated in August 2018)
        12. Listing Decisions (LD35-2012 and LD88-2015) describe the purpose behind Main Board Rule 13.24 and provide guidance on the application of the Rule:

        ". . .Rule 13.24 is intended to maintain overall market quality. Issuers that fail to meet this Rule are "blue sky companies" where public investors have no information about their business plans and prospects. This leaves much room for the market to speculate on their possible acquisitions in the future. To allow these issuers' shares to continue to trade and list may have an adverse impact on investor confidence.

        . . .

        When applying Rule 13.24 to issuers whose shares are trading on the Exchange, the Exchange generally allows their shares to continue to trade as long as they have an operation and meet the continuing disclosure obligations. If the Exchange were to suspend these issuers because of their low level of activities or assets values, public shareholders would have no access to the market for trading the issuers' shares. To balance the public shareholders' interests with the need to maintain market quality, the Exchange suspends trading only in extreme cases.

        . . ."

        ANALYSIS

        13. Main Board Rule 13.24 requires issuers to maintain a sufficient level of operations or assets of sufficient value to warrant the continued listing of their securities. Without quantitative criteria for sufficiency, this Rule calls for a qualitative test and is assessed based on the specific facts and circumstances of individual cases.
        14. An issuer that fails to meet Rule 13.24 is a "blue sky company" that would attract speculation on its possible acquisitions in the future and lead to opportunities for market manipulation, insider trading and unnecessary volatility in the market which are not in the interest of the investing public. As set out in paragraph 11 above, to balance public shareholders' ability to access the market to trade in the security with the need to maintain market quality, the Exchange would suspend trading only in an extreme case. When making the assessment, the Exchange takes into account the current regulatory concerns and the acceptable standards in the market.
        15. In recent period, the Exchange has tightened its approach in applying Rule 13.24 by treating cases with the following characteristics as extreme cases:—
        (a) a very low level of operating activities and revenue; for example the issuer's business does not generate sufficient revenue to cover its corporate expenses, resulting in net losses and negative operating cashflows;
        (b) the current operation does not represent a temporary downturn, the issuer had been operating at a very small scale and incurring losses for years; and
        (c) the assets do not generate sufficient revenue and profits to support a continued listing.
        In these cases, the issuers are not operating substantive businesses, and the value of the businesses (excluding the listing status) is minimal, if any. There is a question whether the Rule requirement to carry on a sufficient level of operations or have assets of sufficient value is met. The Exchange considers it necessary to apply Rule 13.24 in these cases with a view to maintaining investors' confidence and overall market quality.
        16. Once suspended, the issuer would be given a remedial period to submit a resumption proposal to demonstrate that it has a viable and sustainable business to re-comply with Rule 13.24. If the issuer fails to do so, it would be delisted according to the delisting procedures under under Rules 6.01(3) and 6.10. (Updated in August 2018)
        17. In this case, the Exchange considered that Company A had failed to comply with Rule 13.24 and this was an extreme case:
        (a) The Group had a very low level of operations. Its original business (the Fashion Accessories Business) had diminished substantially, causing the Group to record losses and negative operating cashflows in each of the last five years. This business generated revenue of HK$9 million only in the latest financial year, which was mostly generated from a one-off sale of obsolete inventories. Company A had decided to discontinue this business.
        (b) The Group sought to rely on new businesses (the Software Business and the Securities Business) to support its listing. However,
        -   The Software Business had a short operating history. It generated minimal revenue of HK$6 million in the latest financial year, which was insufficient to cover the corporate expenses of the Group.
        -   Company A expected to record total revenue of HK$58 million from the Software Business in the current and next financial years, of which the Group had entered into sale contacts of HK$16 million only. Company A had not provided any details of its business plans to support a substantial increase in the scale of operations of the Software Business as projected.
        -   The Securities Business was still in at the planning stage and had not commenced operations. Based on Company A's projection, even if the business would proceed to operate as planned, it would generate revenue of HK$2.5 million only in the next financial year.
        (c) In light of the above, Company A had failed to demonstrate that it had a viable and sustainable business to support its listing status.
        (d) Company A had also failed to demonstrate that it had assets of sufficient value to support its listing status. The Group's auditors had raised concerns about the recoverability of the goodwill relating to the Software Business and the deposit paid for acquisition of trademarks, which accounted for a majority of the Group's assets. Also, the operations of the Group's assets had not generated sufficient revenue and profits to ensure Company A to operate a viable and sustainable business.

        CONCLUSION

        18. The Exchange decided that Company A had failed to maintain a sufficient level of operations or assets of sufficient value to meet Rule 13.24. This resulted in commencement of delisting procedures under Rules 6.01(3) and 6.10. (Updated in August 2018)

      • LD115-2017

        View Current PDF

        HKEX LISTING DECISION
        HKEX-LD115-2017 (published in November 2017) (Updated in August 2018)

        Party Company A — a Main Board issuer
        Issue Whether Company A had a sufficient level of operations or sufficient assets to meet Main Board Rule 13.24
        Listing Rules Main Board Rules 6.01(3), 6.10 and 13.24 (Updated in August 2018)
        Decision Company A had failed to maintain a sufficient level of operations or sufficient assets to meet Main Board Rule 13.24, resulting in a share trading suspension and commencement of delisting procedures under Rule 6.10 (Updated in August 2018)

        FACTS

        1. Company A and its subsidiaries (Group) were engaged in coal mining and coal trading.
        -   The coal mining business had not generated any revenue since the Group acquired the mining rights of its coal mines about nine years ago. The Group's mining exploration activities had been restricted due to regulatory prohibitions and it had fully impaired the values of the mining right licenses.
        -   The coal trading business commenced about three years ago and the Group had a few customers only. Its revenue decreased from HK$30 million in the first year to about HK$11 million in each of the last two financial years. It recorded a segment loss over the last three years.
        -   The Group had discontinued its other business in the provision of some consumer products and related services for more than two years. In the preceding three financial years, it recorded annual revenue in the range of HK$9 million to HK$12 million from such business with a segment loss.
        2. The Group recorded substantial losses (in the range of HK$25 million to HK$140 million) and negative operating cash flows over the last five financial years. Its loss amounted to HK$50 million in the latest financial year.
        3. As at the latest year end date the Group had total assets of HK$20 million comprising mainly cash and bank balances and trade and other receivables. Its net liabilities amounted to HK$60 million.
        4. The Exchange queried whether Company A was maintaining sufficient operations or assets as required under Main Board Rule 13.24. Before a regulatory decision was made on this issue, trading in Company A's shares on the Exchange was continuing.
        5. Company A submitted that it had plans to improve its business operations and financial position.
        a. Company A intended to increase the number of customers to up to seven within two years to expand its coal trading business. It also planned to cut the administrative costs and expenses of the Group and raise funds through placing of new shares to repay outstanding indebtedness and reduce finance costs.

        Based on the above, Company A expected that the Group would record a significant increase in revenue from the coal trading business to more than HK$120 million and HK$140 million in the current and next financial year. It would start making net profits of about HK$6 million in the next financial year.
        b. Company A had also identified some potential acquisition targets for business expansion and diversification, and expected to complete one within 12 months.

        However, the Company did not provide details or basis to support its business plans or forecasts for the acquisition targets.

        APPLICABLE LISTING RULES AND GUIDANCE MATERIALS

        6. Main Board Rule 2.03 states that—

        "The Listing Rules reflect currently acceptable standards in the market place and are designed to ensure that investors have and can maintain confidence in the market and . . ."
        7. Main Board Rule 13.24 states that—

        "An issuer shall carry out, directly or indirectly, a sufficient level of operations or have tangible assets of sufficient value and/or intangible assets for which a sufficient potential value can be demonstrated to the Exchange to warrant the continued listing of the issuer's securities."
        8. Main Board Rule 6.01 states that—

        "Listing is always granted subject to the condition that where the Exchange considers it necessary for the protection of the investor or the maintenance of an orderly market, it may at any time direct a trading halt or suspend dealings in any securities or cancel the listing of any securities in such circumstances and subject to such conditions as it thinks fit, whether requested by the issuer or not. The Exchange may also do so where:—

        . . .
        (3) the Exchange considers that the issuer does not have a sufficient level of operations or sufficient assets to warrant the continued listing of the issuer's securities (see Rule 13.24). . ."
        9. Main Board Rule 6.10 states that—

        "There may be cases where a listing is cancelled without a suspension intervening. Where the Exchange considers that any circumstances set out in rule 6.01 arise, it may:
        (1) publish an announcement naming the issuer and specifying the period within which the issuer must have remedied those matters which have given rise to such circumstances. Where appropriate the Exchange will suspend dealings in the issuer's securities. If the issuer fails to remedy those matters within the specified period, the Exchange will cancel the listing. The Exchange may treat any proposals to remedy those matters as if they were an application for listing from a new applicant for all purposes, in which case, the issuer must comply with the requirements for new listing applications as set out in the Listing Rules; or

        …" (Updated in August 2018)
        10. Listing Decisions (LD35-2012 and LD88-2015) describe the purpose behind Main Board Rule 13.24 and provide guidance on the application of the Rule:

        ". . .Rule 13.24 is intended to maintain overall market quality. Issuers that fail to meet this Rule are "blue sky companies" where public investors have no information about their business plans and prospects. This leaves much room for the market to speculate on their possible acquisitions in the future. To allow these issuers' shares to continue to trade and list may have an adverse impact on investor confidence.

        . . .

        When applying Rule 13.24 to issuers whose shares are trading on the Exchange, the Exchange generally allows their shares to continue to trade as long as they have an operation and meet the continuing disclosure obligations. If the Exchange were to suspend these issuers because of their low level of activities or assets values, public shareholders would have no access to the market for trading the issuers' shares. To balance the public shareholders' interests with the need to maintain market quality, the Exchange suspends trading only in extreme cases.

        . . ."

        ANALYSIS

        11. Main Board Rule 13.24 requires issuers to maintain a sufficient level of operations or assets of sufficient value to warrant the continued listing of their securities. Without quantitative criteria for sufficiency, this Rule calls for a qualitative test and is assessed based on the specific facts and circumstances of individual cases.
        12. An issuer that fails to meet Rule 13.24 is a "blue sky company" that would attract speculation on its possible acquisitions in the future and lead to opportunities for market manipulation, insider trading and unnecessary volatility in the market which are not in the interest of the investing public. As set out in paragraph 9 above, to balance public shareholders' ability to access the market to trade in the security with the need to maintain market quality, the Exchange would suspend trading only in an extreme case. When making the assessment, the Exchange takes into account the current regulatory concerns and the acceptable standards in the market.
        13. In recent period, the Exchange has tightened its approach in applying Rule 13.24 by treating cases with the following characteristics as extreme cases:—
        (a) a very low level of operating activities and revenue; for example the issuer's business does not generate sufficient revenue to cover its corporate expenses, resulting in net losses and negative operating cashflows;
        (b) the current operation does not represent a temporary downturn, the issuer had been operating at a very small scale and incurring losses for years; and
        (c) the assets do not generate sufficient revenue and profits to support a continued listing.
        In these cases, the issuers are not operating substantive businesses, and the value of the businesses (excluding the listing status) is minimal, if any. There is a question whether the Rule requirement to carry on a sufficient level of operations or have assets of sufficient value is met. The Exchange considers it necessary to apply Rule 13.24 in these cases with a view to maintaining investors' confidence and overall market quality.
        14. Once suspended, the issuer would be given a remedial period to submit a resumption proposal to demonstrate that it has a viable and sustainable business to re-comply with Rule 13.24. If the issuer fails to do so, it would be delisted according to the delisting procedures under Rules 6.01(3) and 6.10. (Updated in August 2018)
        15. In this case, the Exchange considered that Company A had failed to comply with Rule 13.24 and this was an extreme case:
        a. The Group had a very low level of operations. In the latest financial year, the Group recorded revenue of HK$11 million only, which was solely generated from the coal trading business, with a minimal gross profit of HK$0.5 million. This was insufficient to cover the corporate expenses, resulted in a net loss of about HK$50 million.
        b. The level of the Group's business operations had remained low over the past five years. Its coal exploration activities had been restricted for more than eight years and had never generated any revenue. Whilst the Group commenced the coal trading business three years ago, it had a few customers only and the revenue decreased from HK$30 million in the first year to HK$11 million only in each of the last two financial years with a segment loss. Revenues from the business in the provision of consumer products and related services were also low before the business was discontinued two years ago (in the range of HK$9 million to HK$12 million during the preceding three years). The continuing net losses and operating cash outflows recorded in each of the last few years had suggested that this situation was not a temporary decline or downturn.
        c. Based on the latest financial report, the Group had total assets of HK$20 million only, which comprised mainly cash and receivables, with net liabilities amounted to HK$60 million. As mentioned above, the Group's assets had not generated sufficient revenue and profits to ensure Company A to operate a viable and sustainable business. Company A had not demonstrated that it had assets of sufficient value to warrant the continued listing of its shares.
        d. The Group's plans to improve its business operations and financial positions (paragraph 5 above) were preliminary and not substantiated. Company A had not provided any detailed information about the business plans or acquisition targets to support a substantial improvement of the Group's scale of operations and financial results as projected. Company A had failed to demonstrate that it had a viable and sustainable business to support its listing status.

        CONCLUSION

        16. The Exchange decided that Company A had failed to maintain a sufficient level of operations or assets of sufficient value to meet Rule 13.24. This resulted in a share trading suspension under Rule 6.01(3) and the commencement of delisting procedures under Rule 6.10. (Updated in August 2018)

      • LD114-2017

        View Current PDF

        HKEX LISTING DECISION
        HKEX-LD114-2017 (published in October 2017) (Updated in August 2018)

        Party Company A — a Main Board issuer
        Issue Whether Company A was no longer suitable for listing
        Listing Rules Main Board Rules 2.03, 2.06, 6.01, 6.04 and 6.10
        Decision The Exchange considered Company A to be no longer suitable for listing, and decided to serve a delisting notice on Company A. Under the notice, Company A had six months to remedy the matters, failing which the Exchange would proceed with cancellation of its listing.

        FACTS

        1. Trading in Company A's shares was suspended pending release of an announcement about a very substantial acquisition. The acquisition was terminated subsequently but trading remained suspended due to Company A's failure to publish audited annual results.
        2. Company A's auditors questioned the recognition of sales and trade receivables, the reasonableness of expenses relating to a distribution channel restructuring plan, and the rationale for providing guarantees to certain parties.
        3. As resumption conditions, the Exchange required Company A to conduct a forensic investigation into the audit issues, publish all outstanding financial results and address any auditors' qualifications, and inform the market of all material information.
        4. The forensic investigation found that:
        (a) Company A had not issued value added tax invoices for most of its domestic sales under PRC tax rules, casting doubts on whether the recognized sales were in fact made.
        (b) Company A had paid substantial cash rebates to four distributors, allegedly under the distribution channel restructuring plan agreed with the distributors. However, it was found not to have monitored whether the distributors used the rebates in accordance with the requirements set out in the plan. Without a plausible explanation, Company A was also found to have paid substantial cash rebates to entities which were not parties to the plan. The forensic accountants questioned the rationale and justification for the cash rebates.
        (c) Absent any internal controls or procedures, Company A had guaranteed loans granted to related parties by banks. The loans were subsequently in default and Company A had paid and made a full provision for the guaranteed debts.
        5. The forensic accountants encountered significant limitations that prevented it from conducting a proper investigation. As a result, they were unable to form a view on the audit issues.
        6. This gave rise to the following regulatory issues:
        (a) that Company A's financial statements and/or records were not accurate and complete in material respects or were materially misleading;
        (b) that investors had not been given the necessary information to make an informed assessment of Company A;
        (c) the integrity of Company A's management; and
        (d) the lack of adequate internal controls to safeguard Company A's assets and protect shareholders' interests.
        7. More than two years had lapsed since the trading suspension. Company A had yet to (i) resolve the audit issues or the forensic findings that resulted in its continued failure to publish financial results and the continued trading suspension; and (ii) fully comply with the resumption conditions.
        8. Given the above, the Exchange advised Company A of its (i) concern about the latter's suitability for continued listing and (ii) intention to commence procedures to cancel its listing.
        9. In response, Company A's special investigation committee (comprising of all the independent non-executive directors) confirmed that the management of the company had not taken or proposed any action to address the forensic findings and considered that the management was unable to resolve the relevant issues. As an attempt to resolve the issues, the committee then appointed a firm of legal advisers to understand the audit issues and the forensic findings and consider possible remedial measures.

        APPLICABLE LISTING RULES AND GUIDANCE

            Cancellation of listing
        10. Rule 6.01 states that:

        "Listing is always granted subject to the condition that where the Exchange considers it necessary for the protection of the investor or the maintenance of an orderly market, it may at any time direct a trading halt or suspend dealings in any securities or cancel the listing of any securities in such circumstances and subject to such conditions as it thinks fit, whether requested by the issuer or not. The Exchange may also do so where:—. . .

        . . .

        (4) the Exchange considers that the issuer or its business is no longer suitable for listing."
        11. Rule 6.04 states that:

        "Where dealings have been halted or suspended, the procedure for lifting the trading halt or suspension will depend on the circumstances and the Exchange reserves the right to impose such conditions as it considers appropriate. The issuer will normally be required to announce the reason for the trading halt or suspension and, where appropriate, the anticipated timing of the lifting of the trading halt or suspension…The continuation of a suspension for a prolonged period without the issuer taking adequate action to obtain restoration of listing may lead to the Exchange cancelling the listing."
        12. Rule 6.10 states that:

        "… Where the Exchange considers that any circumstances set out in rule 6.01 arise, it may:
        (1) publish an announcement naming the issuer and specifying the period within which the issuer must have remedied those matters which have given rise to such circumstances. Where appropriate the Exchange will suspend dealings in the issuer's securities. If the issuer fails to remedy those matters within the specified period, the Exchange will cancel the listing. The Exchange may treat any proposal to remedy those matters as if they were an application for listing from a new applicant for all purposes, in which case, the issuer must comply with the requirements for new listing applications as set out in the Listing Rules; or
        (2) cancel the listing of the issuers' securities following the Exchange's publication of an announcement notifying the cancellation of the listing." (Updated in August 2018)
            Suitability for listing
        13. Rule 2.03 states that:

        "The Listing Rules reflect currently acceptable standards in the market place and are designed to ensure that investors have and can maintain confidence in the market and in particular that:
        (1) applicants are suitable for listing;
        (2) the issue and marketing of securities is conducted in a fair and orderly manner and that potential investors are given sufficient information to enable them to make a properly informed assessment of an issuer. . .;
        (3) investors and the public are kept fully informed by listed issuers. . .of material factors which might affect their interests;
        (4) all holders of listed securities are treated fairly and equally;
        (5) directors of a listed issuer act in the interest of shareholders as a whole, particularly where the public represents only a minority of the shareholders; and
        (6) all new issues of equity securities by a listed issuer are first offered to the existing shareholders by way of rights unless they have agreed otherwise."
        14. Rule 2.06 states that:

        "Suitability for listing depends on many factors. Applicants for listing should appreciate that compliance with the Exchange Listing Rules may not of itself ensure an applicant's suitability for listing. The Exchange retains a discretion to accept or reject applications and in reaching their decision will pay particular regard to the general principles outlined in rule 2.03.  . . . "
        15. Guidance Letter GL68-13 sets out factors that the Exchange may consider when assessing whether an applicant or its business is suitable for listing. The Exchange may also take them into account when considering a listed issuer's suitability for continued listing.

        ANALYSIS

        16. Rule 6.01 provides that where the Exchange considers it necessary for the protection of investors or the maintenance of an orderly market, it may suspend trading or cancel the listing of any securities. The Rule also specifies certain circumstances under which the Exchange may suspend trading or cancel a listing, which include where the Exchange considers an issuer or its business to be no longer suitable for listing.
        17. Suitability for listing, as set out in Rule 2.06, depends on many factors. The Exchange has a broad discretion to interpret and apply the concept of suitability case by case for the purpose of maintaining market confidence with reference to the currently acceptable standards in the market place. It takes account of its underlying regulatory objectives to, as far as reasonably practicable, ensure an orderly, informed and fair market for the trading of securities listed on it and to act in the interest of the public, having particular regard to the interest of the investing public.
        18. The existence of issuers which are unsuitable for listing would undermine the quality of the market and bring it into disrepute. Rule 6.10 sets out the delisting procedures applicable to an issuer or its business which is no longer suitable for listing.
        19. In this case,
        (a) The audit issues and the forensic findings raised a serious question about the accuracy and credibility of Company A's financial statements or records in material respects, the integrity of its management, and the lack of adequate internal controls or procedures to safeguard its assets and protect shareholders' interests.
        (b) As the management failed to take actions to address the audit issues or the forensic findings, Company A was not able to properly comply with its financial reporting obligations under the Rules despite a prolonged period of suspension. This deprived shareholders and investors of the financial information necessary for appraising its position.
        20. The above issues were detrimental to maintaining confidence in the market and were not in the interest of the investing public. In these circumstances, there was a serious issue about Company A's suitability for continued listing.
        21. Having considered the facts and circumstances of this case and the special investigation committee's actions as described in paragraph 9, the Exchange commenced the delisting process and gave Company A six months to remedy the matters rendering it no longer suitable for listing.

        CONCLUSION

        22. The Exchange served a notice on Company A to commence the delisting process under Rule 6.01(4) on the ground that Company A was no longer suitable for listing. If Company A failed to remedy the matters within six months, the Exchange would proceed with cancellation of Company A's listing.

      • LD113-2017

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        HKEX LISTING DECISION
        HKEX-LD113-2017 (published in October 2017)

        Parties Company A — a Main Board issuer

        Company B — the former controlling shareholder of Company A

        Mr. X — the owner of Company B and a former director of Company A
        Issue Whether the Exchange would impose additional requirements under Rule 2.04 on Company A's proposed disposal of its original business
        Listing Rules Main Board Rules 2.04, 14.06(6) and 14.54
        Decision Company A terminated the proposed disposal after being informed of the Exchange's intention to treat it as if it were a new listing applicant under Rule 2.04 should it proceed with the proposed disposal

        FACTS

        1. Company A listed its original business (Original Business) four years ago. According to its IPO prospectus, it planned to expand and use the IPO proceeds for the Original Business only.
        2. At the time of its initial listing, Company A was owned as to 75% by Company B which was owned by Mr. X. Mr. X was the founder, the chairman and an executive director of Company A, and had some 20 years of experience in the Original Business.
        3. Within two years after Company A's initial listing,
        (a) Company B disposed of almost all of its equity interest in Company A.
        (b) All the directors of Company A at the time of its initial listing (including Mr. X) resigned.
        (c) New directors with experience in a business which was fundamentally different from and unrelated to the Original Business (New Business) were appointed. None had experience in the Original Business.
        (d) Company A started acquiring companies engaging in the New Business (Acquisitions). These companies had not generated revenue and had been loss making before the Acquisitions. One of the Acquisitions resulted in the vendor in question becoming Company A's single largest shareholder holding a 28% interest. In between these Acquisitions, Company A disposed of its 49% interest in the subsidiary operating the Original Business to Mr. X's private company (49% Disposal).
        Proposed transaction
        4. Company A proposed to dispose of its remaining 51% interest in the subsidiary operating the Original Business to Mr. X's private company (Proposed Disposal). This disposal was a major transaction. After completion, Company A's operations and revenue would be derived solely from the New Business.
        5. The Exchange questioned whether the Proposed Disposal, together with the Acquisitions and the 49% Disposal, formed part of a series of transactions to achieve the listing of the New Business and a means to circumvent the new listing requirements under Chapter 8 of the Rules and the reverse takeover rule under Rule 14.06(6).
        6. In response, Company A explained that there was a commercial reason for this proposal, with the Original Business facing keen competition and starting to record losses.

        APPLICABLE LISTING RULES AND GUIDANCE MATERIALS

        7. Rule 2.04 states 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. . .".
        8. Rule 14.06(6) defines "reverse takeover" as "an acquisition or a series of acquisitions of assets by a listed issuer which, in the opinion of the Exchange, constitutes, or is part of a transaction or arrangement or series of transactions or arrangements which constitute, an attempt to achieve a listing of the assets to be acquired and a means to circumvent the requirements for new applicants set out in Chapter 8 of the Exchange Listing Rules." This is a principle based test.
        9. Rule 14.54 states that—

        "The Exchange will treat a listed issuer proposing a reverse takeover as if it were a new listing applicant. The enlarged group or the assets to be acquired must be able to meet the requirements of rule 8.05 and the enlarged group must be able to meet all the other basic conditions set out in Chapter 8 of the Exchange Listing Rules. . .".
        10. The Exchange Guidance Letter (GL78-14) on reverse takeovers (RTO) explains that Rule 14.06(6) is an anti-avoidance provision designed to prevent circumvention of the new listing requirements. Paragraphs 7 to 9 of the guidance letter states that:
        "7. If a transaction falls outside the bright line tests, the Exchange will apply the principle based test to assess whether the acquisition constitutes an attempt to achieve a listing of the assets to be acquired and a means to circumvent the requirements for new listing. The transaction would be treated as a RTO under the principle based test if the Exchange considers it is an "extreme" case taking into account the following criteria:
        •   the size of transaction relative to the size of the issuer;
        •   the quality of the business to be acquired — whether it can meet the trading record requirements for listings, or whether it is unsuitable for listing (e.g. an early stage exploration company);
        •   the nature and scale of the issuer's business before the acquisition (e.g. whether it is a listed shell);
        •   any fundamental change in the issuer's principal business (e.g. the existing business would be discontinued or very immaterial to the enlarged group's operations after the acquisition);
        •   other events and transactions (historical, proposed or intended) which, together with the acquisition, form a series of arrangements to circumvent the RTO Rules (e.g. a disposal of the issuer's original business simultaneously with a very substantial acquisition); and
        •   any issue of Restricted Convertible Securities1 to the vendor which would provide it with de facto control of the issuer.
        8. A transaction would be treated as an extreme very substantial acquisition (extreme VSA) where the Exchange considers it "extreme" by reference to the criteria set out in paragraph 7, but the assets to be acquired can meet the minimum profit requirement under Rule 8.05 (the positive cash flow requirement under GEM Rule 11.12A) and circumvention of new listing requirements would not be a material concern. Extreme VSAs are presented to the Listing Committee for its decision.
        9. Where the Committee resolves that the RTO Rules will apply, the issuer will be treated as if it were a new listing applicant and will be subject to all applicable listing requirements for new applicants (see paragraph 4). Where the Committee resolves that the RTO Rules will not apply to an extreme VSA, the issuer will be required to prepare a transaction circular under an enhanced disclosure and vetting approach, and to appoint a financial adviser to conduct due diligence on the acquisition. . . ."

        ANALYSIS

        11. In this case, within two years after its initial listing, Company A underwent a complete change in control and management and started undertaking a series of transactions (including the Proposed Disposal) leading to a fundamental change in its business, from the Original Business to the New Business. This gave rise to the Exchange's concern on the cause(s) of these actions and their rationale which was fundamentally different from the disclosures in the IPO prospectus about Company A's business plan and developments.
        12. The Exchange applied the principle-based test to assess whether the Proposed Disposal, together with the previous transactions, would constitute a RTO. When applying the principle-based test, the Exchange would consider all the criteria set out in Guidance Letter 78-14 to assess whether a transaction or a series of transactions would constitute an attempt to achieve a listing of the assets acquired or to be acquired and a means to circumvent the Exchange's new listing requirements.
        13. In its assessment, the Exchange noted that:
        a. The Original Business was Company A's main business before the Acquisitions. Had Company A disposed of the Original Business before the Acquisitions, it would have been a listed shell at the time of the Acquisitions.
        b. Company A would cease to operate the Original Business after the Proposed Disposal. The Proposed Disposal, together with the Acquisitions, would effect a complete change in Company A's principal business to the New Business, which was fundamentally different from and unrelated to the Original Business.
        c. The New Business, before the Acquisitions taking place, had not generated revenue and had been loss making. It would not have met the initial listing requirements had it become the subject of a new listing application.
        14. Based on the above, had Company A fully disposed of the Original Business before conducting the Acquisitions, the Acquisitions would have been an extreme case and treated as a RTO under Rule 14.06(6). In such event Company A would have been treated as if it were a new listing applicant and hence required to meet all the initial listing requirements of Chapter 8 of the Rules.
        15. In light of the course of events described in paragraph 11, the Exchange considered that the Proposed Disposal, together with the Acquisitions and the 49% Disposal, was a blatant attempt to achieve the listing of the New Business and circumvent the new listing requirements. This was the same concern as set out in Rule 14.06(6) (which applies to acquisition(s) and not a disposal), that is, an attempt to achieve the listing of assets to be acquired and circumvention of the new listing requirements.
        16. Company A submitted that the Proposed Disposal was carried out for commercial reasons. However, the Exchange did not consider this sufficient to address its concern.

        CONCLUSION

        17. Therefore, the Exchange considered it appropriate, and informed Company A of its intention, to exercise the right to impose additional conditions on the Proposed Disposal under Rule 2.04, by treating Company A as if it were a new listing applicant and requiring it to comply with the additional requirements for a RTO.
        18. Before the Exchange making a decision, Company A announced its termination of the Proposed Disposal.

        1 Restricted Convertible Securities are highly dilutive convertible securities with a conversion restriction mechanism (e.g. restriction from conversion that would cause the securities holder to hold 30% interest or higher) avoid triggering a change of control under the Code on Takeovers and Mergers.

      • LD112-2017

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        HKEX LISTING DECISION
        HKEX-LD112-2017 (published in October 2017)

        Parties Company A — a Main Board issuer

        Subsidiary B — a company recently acquired by Company A from Mr. C and became a wholly owned subsidiary of Company A

        Mr. C — a director of Subsidiary B
        Issue Whether Company A would have sufficient operations or assets under Rule 13.24 after a proposed major disposal
        Listing Rules Main Board Rule 13.24
        Decision Company A would not meet Rule 13.24 upon completion of the proposed disposal

        FACTS

        1. Company A and its subsidiaries (Group) have been engaged in the manufacturing and sale of packaging products (Packaging Business) since its initial listing on the Exchange in 20x1. The Packaging Business had accounted for the Group's entire revenue and net profit until the Group's acquisition of a company (Subsidiary B) which operates an advisory business (Advisory Business) in November 20x6.
        2. Subsidiary B was acquired from Mr. C for cash, with the consideration of HK$250 million determined based on its business prospects and a profit guarantee of HK$30 million for the year ending 31 December 20x7.
        3. Before acquired by Company A, Subsidiary B had recorded total revenue of only HK$3 million for the 30 months from January 20x4 to June 20x6. This revenue was generated from providing corporate secretarial services. Subsidiary B recorded net losses in 20x4 and 20x5 with net liabilities as at 31 December 20x4 and 20x5 respectively.
        4. Subsidiary B's revenue increased significantly from July 20x6 onwards. For the 10 months between July 20x6 and April 20x7, it recorded total revenue of approximately HK$230 million, resulting in a net profit of HK$48 million for 20x6 and HK$19 million for the first four months in 20x7. Of such revenue of HK$230 million, only 2% was generated from recurring corporate secretarial services with the remaining 98% generated from different types of new services, mostly non-recurring in nature, including advice on financial accounting, valuation, international private merger and acquisition, loan referral, property agency, project agency services and strategic planning. Of such revenue of HK$230 million, 70% was derived from one transaction with one client whilst 10% was derived from another transaction with the second largest client.
        5. In April 20x7 Company A proposed to sell the Packaging Business to an independent third party for cash (Disposal), this was a major transaction and subject to shareholders' approval under the Listing Rules. Company A explained that the profitability of the Packaging Business had persistently decreased for the past three years, and the sale proceeds would be used to settle its liabilities. After the Disposal, the Group's operations and revenue would rely solely on the Advisory Business.
        6. Company A submitted that the Advisory Business is a viable and sustainable business such that the Group would meet the Rule 13.24 requirements upon completion of the Disposal because:
        a. The Advisory Business had recorded substantial revenue and profits since July 20x6;
        b. It had secured advisory contracts for over HK$50 million in the next two financial years which would ensure the stability and continuity of the Group's income stream; and
        c. The sustainability of the Advisory Business depends on its business reputation and the size of its client network, in particular, the established relationship with a number of new clients through Mr. C's personal network and referrals by those new clients.

        APPLICABLE LISTING RULES AND GUIDANCE MATERIALS

        7. Rule 13.24 states that

        "An issuer shall carry out, directly or indirectly, a sufficient level of operations or have tangible assets of sufficient value and/or intangible assets for which a sufficient potential value can be demonstrated to the Exchange to warrant the continued listing of the issuer's securities."
        8. Listing Decisions (LD35-2012 and LD88-2015) describe the purpose behind Rule 13.24 and provide guidance on the application of the Rule:

        ". . .
        •   Rule 13.24 is intended to maintain overall market quality. Issuers that fail to meet this Rule are "blue sky companies" where public investors have no information about their business plans and prospects. This leaves much room for the market to speculate on their possible acquisitions in the future. To allow these issuers' shares to continue to trade and list may have an adverse impact on investor confidence.
        •   Where an issuer's shares are trading on the Exchange, the Exchange generally allows those shares to continue to trade as long as the issuer has an operation and meets the continuing disclosure obligations. This is to allow shareholders to have access to the market for share trading as far as possible. The Exchange would exercise its suspension power only in an extreme case.
        •   However, if an issuer takes a corporate action, the Exchange is more likely to suspend the issuer's trading where the issuer fails to satisfy the Exchange that it would have a viable and sustainable business to justify its continued listing after completion of the corporate action. In this case, shareholders would have the opportunity to decide whether to allow the corporate action to proceed, knowing that the Exchange would exercise the suspension power should the corporate action proceed. In that way shareholders' interests are safeguarded through the shareholders' approval process. . ."

        ANALYSIS

        9. Rule 13.24 requires issuers to maintain a sufficient level of operations or assets of sufficient value to warrant the continued listing of their securities. Without quantitative criteria for sufficiency, this Rule is a qualitative test and is assessed case by case.
        10. The Exchange considered that Company A would not have sufficient operations or assets to meet Rule 13.24 upon completion of the Disposal. In particular, the Exchange questioned the viability and sustainability of the Advisory Business (which would become the Group's only remaining business after the Disposal):
        a. The history of Company A's operation and management of the Advisory Business is very short (less than 6 months when the Disposal was proposed).
        b. Although the Advisory Business had generated substantial revenue and net profits in recent months, it had recorded minimal revenue and net losses in previous years (i.e. prior to July 20x6). The recent and significant increase in revenue was attributed to a variety of advisory and agency services of different nature bearing no or little correlation with each other. They are operated by a few employees (including Mr. C) and rely on a very small number of clients. Almost all client contracts were one-off and non-recurring. A large majority of the revenue in 20x6 was derived from one client. The Exchange was concerned with the substance of this transaction, and the work performed by Subsidiary B to earn the substantial fees and the basis of determination of such fees.
        c. Subsidiary B relies heavily on Mr. C to source its clients and businesses. The Exchange queried Subsidiary B's ability to carry out the Advisory Business independently of Mr. C.
        d. Company A has failed to demonstrate the viability and sustainability of the Advisory Business. It has not provided the Exchange with a concrete business plan to develop the Advisory Business.
        11. The Exchange also considered that the Group would not have sufficient assets to justify a listing after the Disposal. Almost all of the Group's assets after completion of the Disposal would consist of goodwill from the acquisition of the Advisory Business, a vacant property and some cash. There are no details to demonstrate that these assets would enable the Group to have a viable and sustainable business to maintain a sufficient level of operations going forward.

        CONCLUSION

        12. The Exchange concluded that Company A would not comply with Rule 13.24 should it proceed with the Disposal.

      • LD111-2017

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        HKEX LISTING DECISION
        HKEX-LD111-2017 (published in October 2017)

        Parties Company A — a Main Board issuer

        Company B — a company engaged in the provision of payment services

        The Parent Company — Company A's controlling shareholder holding a majority of Company A's issued shares
        Issue Whether the Exchange would exercise its power to deem Company B as a connected person of Company A under Main Board Listing Rule 14A.19
        Listing Rules Main Board Rules 14A.19 and 14A.20
        Decision The Exchange determined that Company B should be deemed as a connected person of Company A under Main Board Listing Rule 14A.19. Accordingly, the Transactions would constitute connected transactions of Company A.

        FACTS

        1. Company A proposed to engage Company B to provide certain payment processing services for Company A's online sale of products (the Transactions).
        2. Company A submitted that Company B was not an associate of the Parent Company under Chapter 14A.
        3. Nevertheless, there were certain relationships between Company B and the Parent Company:
        (a) Company B was initially established by the Parent Company to operate its payment service business. In light of the subsequent changes in the relevant business licensing regulations in the PRC, the Parent Company divested all its interest in and control over Company B to PRC nationals and restructured Company B as a PRC domestic company to facilitate its application for the PRC regulatory approvals. As part of the divestment, the Parent Company also entered into various agreements with Company B and other relevant parties to govern the Parent Company's continuing financial and commercial relationship with Company B in the future.
        (b) At the time of the proposed Transactions, the Parent Company still maintained various arrangements with Company B to secure long-term economic participation in Company B, including that:
        (i) the Parent Company would receive royalty streams and a service fee amounting to the sum of an expense reimbursement plus a profit sharing of 38% of the consolidated pre-tax income of Company B (the Profit Sharing Arrangement) for the license of certain intellectual properties and provision of software technology services; and
        (ii) where Company B applies for, and receives, certain PRC regulatory approvals in the future and subject to certain conditions, it would issue new shares to the Parent Company for up to 33% of its equity capital.
        4. The issue was whether the Exchange would exercise its power to deem Company B as a connected person of Company A such that the Transactions would become connected transactions of Company A.
        5. Company A submitted that Company B should not be deemed as its connected person because:
        (a) The deeming power under Rule 14A.19 should only be exercised by the Exchange with reference to Rule 14A.20 which, in this case, did not apply because the Profit Sharing Arrangement was executed before (and thus not "with respect to") the Transactions.
        (b) The Transactions would be conducted in the ordinary course of Company A's business on an arm's length basis under normal commercial terms. The Parent Company was not able to influence the terms of the Transactions.
        (c) Neither the Parent Company nor Company A had an intention to circumvent the connected transaction Rules. As the Parent Company holds over 50% of the equity interest in Company A, but shares only 38% of the profit of Company B, there would be no incentive to manipulate the rates paid by Company A — the Parent Company would bear over 50% of any cost increase of Company A which would exceed the additional 38% profit it shares through the Profit Sharing Arrangement.

        APPLICABLE LISTING RULES

        6. Main Board Listing Rule 14A.19 provides that:

        "The Exchange has the power to deem any person to be a connected person."
        7. Main Board Listing Rule 14A.20 provides that:

        "A deemed connected person includes a person:
        (1) who has entered, or proposes to enter, into:
        (a) a transaction with the listed issuer's group; and
        (b) an agreement, arrangement, understanding or undertaking (whether formal or informal and whether express or implied) with a connected person described in rule 14A.07(1), (2) or (3) with respect to the transaction; and
        (2) who, in the Exchange's opinion, should be considered as a connected person."

        ANALYSIS

        8. The purpose of the connected transaction Rules is to guard against the transfer of benefits by persons who are able to exercise significant influence over the issuer. Rule 14A.19 provides that the Exchange has the specific power to deem a person to be connected. When applying the deeming provision, the Exchange considers all relevant facts and circumstances surrounding the transaction and has particular regard to the substance and not the form of the arrangement.
        9. In the present case, the Exchange noted that there was a close association between the Parent Company and Company B (see paragraph 3 above). The Exchange considered it appropriate to deem Company B as a connected person of Company A under Rule 14A.19 because:
        (a) The Parent Company, as a controlling shareholder of Company A, was in a position to exercise significant influence over Company A's transactions with Company B.
        (b) The Profit Sharing Arrangement would enable the Parent Company to stand to benefit from Company A's transactions with Company B and could effect a transfer of benefits from Company A to the Parent Company.
        10. The Exchange disagreed with Company A's view because:
        (a) Under Rule 14A.19, the Exchange may deem any person to be a connected person. Rules 14A.20 and 14A.21 set out certain specific circumstances where the Exchange may apply the deeming provision, which are not meant to be exhaustive.
        (b) The Profit Sharing Arrangement was part of the arrangements for the Parent Company to secure long-term economic participation in Company B. As the Parent Company was in a position to exercise significant influence over Company A and its transactions with Company B, there was a conflict of interests of Company A with those of the Parent Company. The Exchange's decision to apply the deeming provision was consistent with the policy intent of the connected transaction Rules, i.e. to guard against the transfer of benefits by persons with significant influence over a listed issuer.
        (c) Intention of circumvention and incentive for rates manipulation were not the tests in the present case; neither were they the only circumstances where a deeming provision should be invoked. Company A's argument that the Transactions were negotiated on an arm's length basis was also not the relevant test in the present case. Because of the concerns mentioned in paragraph 9 above, to deem Company B as a connected person of Company A would appropriately increase the transparency and oversight of the Transactions within the regulatory ambit of the connected transaction Rules.

        DECISION

        11. The Exchange determined that Company B should be deemed as a connected person of Company A under Rule 14A.19. Accordingly, the Transactions would constitute connected transactions of Company A.

      • LD110-2017

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        HKEX LISTING DECISION
        HKEX-LD110-2017 (published in June 2017) (Updated in August 2018)

        Party Company A — a Main Board issuer
        Issue Whether the Exchange would commence the procedures to cancel the listing of Company A whose shares had been suspended for a prolonged period due to insufficient public float
        Listing Rules Main Board Rules 6.01(2), 6.04, 6.10, 8.08, 13.32 (Updated in August 2018)
        Decision The Exchange decided to serve a delisting notice to Company A. Company A was given a remedial period of six months to restore its public float, failing which the Exchange would proceed with cancellation of Company A's listing.

        FACTS1

        1. Trading in Company A's shares had been suspended pending restoration of its public float.
        2. At the time of trading suspension, Company A had two major shareholders (each holding about 45% of Company A's issued shares) and its public float was below 10%. After the suspension, there were certain takeover related matters involving a possible general offer of Company A's shares which might have affected Company A's plans to resolve the public float issue.
        3. About eight months ago, Company A noted that those takeover related matters were resolved and there was no general offer of Company A's shares. Company A announced its intention to issue new shares to independent placees to restore the public float to at least 25%.
        4. Since then, Company A had some discussions with its financial advisers but there was no material development on the proposed placing. It also submitted an alternative proposal to the Exchange but the proposal could not satisfactorily address the public float issue and did not proceed. In response to the Exchange's concern about the prolonged suspension of Company A's shares, Company A requested for an extension of time to resolve the public float issue until the market conditions had improved. However, no concrete plan or timetable was provided.

        APPLICABLE LISTING RULES

        5. Rule 6.01 provides that:
        "Listing is always granted subject to the condition that where the Exchange considers it necessary for the protection of the investor or the maintenance of an orderly market, it may at any time direct a trading halt or suspend dealings in any securities or cancel the listing of any securities in such circumstances and subject to such conditions as it thinks fit, whether requested by the issuer or not. The Exchange may also do so where:— …



        (2) the Exchange considers there are insufficient securities in the hands of the public …

        …"
        6. Rule 6.04 provides that:
        "Where dealings have been halted or suspended, the procedure for lifting the trading halt or suspension will depend on the circumstances and the Exchange reserves the right to impose such conditions as it considers appropriate. The issuer will normally be required to announce the reason for the trading halt or suspension and, where appropriate, the anticipated timing of the lifting of the trading halt or suspension…The continuation of a suspension for a prolonged period without the issuer taking adequate action to obtain restoration of listing may lead to the Exchange cancelling the listing."
        7. Rule 6.10 states that—
        "There may be cases where a listing is cancelled without a suspension intervening. Where the Exchange considers that any circumstances set out in rule 6.01 arise, it may:
        (1) publish an announcement naming the issuer and specifying the period within which the issuer must have remedied those matters which have given rise to such circumstances. Where appropriate the Exchange will suspend dealings in the issuer's securities. If the issuer fails to remedy those matters within the specified period, the Exchange will cancel the listing. The Exchange may treat any proposals to remedy those matters as if they were an application for listing from a new applicant for all purposes, in which case, the issuer must comply with the requirements for new listing applications as set out in the Listing Rules; or

        …" (Updated in August 2018)
        8. Rule 8.08 provides that:
        "There must be an open market in the securities for which listing is sought. This will normally mean that:

        (1) (a) at least 25 % of the issuer's total number of issued shares must at all times be held by the public.

        …"
        9. Rule 13.32 provides that:
        "(1) Issuers shall maintain the minimum percentage of listed securities as prescribed by rule 8.08 at all times in public hands. …
        (2) Once the issuer becomes aware that the number of listed securities in the hands of the public has fallen below the relevant prescribed minimum percentage the issuer shall take steps to ensure compliance at the earliest possible moment.

        (3) If the percentage falls below the minimum, the Exchange reserves the right to require suspension of trading in an issuer's securities until appropriate steps have been taken to restore the minimum percentage of securities in public hands. In this connection, the Exchange will normally require suspension of trading in an issuer's securities where the percentage of its public float falls below 15%...

        …"

        ANALYSIS

        10. Rule 6.01 provides that where the Exchange considers it necessary for the protection of the investor or the maintenance of an orderly market, it may suspend trading or cancel the listing of any securities. The Rule also specifies certain circumstances under which the Exchange may suspend trading or cancel a listing, which include insufficient public float.
        11. The continuation of a suspension for a prolonged period is detrimental to maintaining order or confidence in the market. It deprives shareholders' right from trading their shares or realising their investments in the market; and is not in the interest of the investing public. Rule 6.04 sets out the general principle that the continuation of a suspension for a prolonged period without the issuer taking adequate action to obtain restoration of listing may lead to the Exchange cancelling the listing.
        12. For delisting under any of the circumstances set out in Rule 6.01, the Exchange may under Rule 6.10 specify a remedial period for the issuer to address the matter that gives rise to the trading suspension before delisting. The length of the remedial period will depend on the nature and complexity of the matter which the Exchange requires the issuer to rectify. Where trading is suspended due to insufficient public float, the Exchange will expect the issuer to address the matter within a reasonably short period of time. (Updated in August 2018)
        13. In this case, trading in Company A's shares had been suspended for a prolonged period due to insufficient public float. Whilst Company A had announced its intention to restore the public float through placing of new shares, there was no material development over a period of eight months. In its latest submission, Company A was still unable to put forward any concrete plan or timetable to address the public float issue. The Exchange considered that Company A had not taken adequate actions to address the public float issue for resumption of trading.
        14. Having considered the facts and circumstances of this case, the Exchange decided to commence the delisting process and gave Company A a six-month period to address the public float issue.

        CONCLUSION

        15. The Exchange served a notice to Company A on the commencement of the delisting process under Rules 6.01(2) and 6.10 on the ground that Company A had insufficient public float for a prolonged period. If Company A failed to address the public float issue within six months, the Exchange would proceed with cancellation of Company A's listing. (Updated in August 2018)

        Subsequent development
        16. Company A's public float had been restored to 25% within the six month period as a result of the issue of new shares by Company A and the sale of existing shares by its controlling shareholder to independent placees. As a result, trading in Company A's shares had resumed.

        1 Time reference is the time to date of the decision.

      • LD109-2017

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        HKEX LISTING DECISION
        HKEX-LD109-2017 (published in June 2017)

        Parties Company A — a Main Board issuer

        Mr. X and Mr. Y — directors of Company A
        Issue Whether Company A would be required to aggregate the proposed acquisition with a previous acquisition, and whether these acquisitions would constitute a reverse takeover
        Listing Rules Main Board Rule 14.06(6)
        Decision The acquisitions were aggregated and they constituted an extreme VSA

        FACTS1

        1. Company A was principally engaged in the manufacturing and sale of certain food products for many years.
        2. About two years ago, Mr. X ceased to be the controlling shareholder of Company A but remained as a director of Company A. A few months ago, Mr. Y acquired about 20% interest in Company A and was appointed as a director of Company A. It was disclosed that Mr. Y had experience in the internet gaming industry.

        Previous acquisition
        3. About 20 months ago, Company A announced a major transaction to acquire a company engaging in video gaming business (First Target) from independent third parties for cash consideration (First Acquisition). The First Acquisition had been completed.

        Proposed transactions
        4. Company A proposed the following transactions:
        •   Acquisition of another company engaging in video gaming business (Proposed Target) from independent third parties for cash consideration (Proposed Acquisition). Based on its size tests, the Proposed Acquisition would, on its own, constitute a major transaction.
        •   Disposal of its food business (Proposed Disposal) to Mr. X. The Proposed Disposal would constitute a very substantial disposal.
        5. There was an issue whether the Proposed Acquisition, together with the First Acquisition and the Proposed Disposal, formed a series of transactions to achieve a listing of the acquisition targets and constituted a reverse takeover under Rule 14.06(6).
        6. Company A was of the view that the reverse takeover Rule should not apply. It submitted that:
        •   The Proposed Acquisition and the First Acquisition should not be aggregated as they were separate transactions involving different counterparties. The targets had distinct businesses operated in different countries. They were owned and managed by different parties before the acquisitions.
        •   Video gaming business had been one of the principal activities of Company A after the completion of the First Acquisition a year ago. The Proposed Acquisition was an expansion of the company's video gaming business. The Proposed Disposal would enable the company to divest its loss-making food business and re-allocate its resources to the video gaming business.
        •   The First Target was able to meet the minimum profit requirement under Rule 8.05(1)(a). Its results, when combined with those of the Proposed Target, would still exceed the profit requirement.

        APPLICABLE LISTING RULES

        7. Rule 14.06(6) defines a "reverse takeover" as "… an acquisition or a series of acquisitions of assets by a listed issuer which, in the opinion of the Exchange, constitutes, or is part of a transaction or arrangement or series of transactions or arrangements which constitute, an attempt to achieve a listing of the assets to be acquired and a means to circumvent the requirements for new applicants set out in Chapter 8 of the Exchange Listing Rules…". This is a principle based test.
        8. Rule 14.54 states that "The Exchange will treat a listed issuer proposing a reverse takeover as if it were a new listing applicant. The enlarged group or the assets to be acquired must be able to meet the requirements of rule 8.05 and the enlarged group must be able to meet all the other basic conditions set out in Chapter 8 of the Exchange Listing Rules. …"
        9. The Exchange Guidance Letter (HKEX-GL78-14) on reverse takeovers (RTO) explains that Rule 14.06(6) is an anti-avoidance provision designed to prevent circumvention of the new listing requirements. Paragraphs 7 to 9 of the guidance letter states that:—
        "7. If a transaction falls outside the bright line tests, the Exchange will apply the principle based test to assess whether the acquisition constitutes an attempt to achieve a listing of the assets to be acquired and a means to circumvent the requirements for new listing. The transaction would be treated as a RTO under the principle based test if the Exchange considers it is an 'extreme' case taking into account the following criteria:
        •   the size of transaction relative to the size of the issuer;
        •   the quality of the business to be acquired—whether it can meet the trading record requirements for listings, or whether it is unsuitable for listing (e.g. an early stage exploration company);
        •   the nature and scale of the issuer's business before the acquisition (e.g. whether it is a listed shell);
        •   any fundamental change in the issuer's principal business (e.g. the existing business would be discontinued or very immaterial to the enlarged group's operations after the acquisition);
        •   other events and transactions (historical, proposed or intended) which, together with the acquisition, form a series of arrangements to circumvent the RTO Rules (e.g. a disposal of the issuer's original business simultaneously with a very substantial acquisition); and
        •   any issue of Restricted Convertible Securities2 to the vendor which would provide it with de facto control of the issuer.
        8. A transaction would be treated as an extreme very substantial acquisition (extreme VSA) where the Exchange considers it "extreme" by reference to the criteria set out in paragraph 7, but the assets to be acquired can meet the minimum profit requirement under Rule 8.05 (the positive cash flow requirement under GEM Rule 11.12A) and circumvention of new listing requirements would not be a material concern. Extreme VSAs are presented to the Listing Committee for its decision.
        9. Where the Committee resolves that the RTO Rules will apply, the issuer will be treated as if it were a new listing applicant and will be subject to all applicable listing requirements for new applicants (see paragraph 4). Where the Committee resolves that the RTO Rules will not apply to an extreme VSA, the issuer will be required to prepare a transaction circular under an enhanced disclosure and vetting approach, and to appoint a financial adviser to conduct due diligence on the acquisition. … "

        ANALYSIS

        10. In this case, the Exchange applied the principle based test to assess whether the acquisitions would constitute a RTO under Rule 14.06(6). When applying the principle based test, the Exchange would consider the criteria set out in Guidance Letter GL78-14 to assess whether, taking the criteria together, an acquisition or a series of acquisitions would constitute an attempt to achieve a listing of the assets acquired and to be acquired and a means to circumvent the Exchange's new listing requirements.
        11. When making the assessment, the Exchange had considered the following:
        a. As set out in Rule 14.06(6), the principle based test may apply to a series of acquisitions that constitutes an attempt to achieve a listing of the acquisition targets. The Rule does not prescribe a fixed time period for aggregating a series of acquisitions for the purpose of the principle based test. The assessment of a series of acquisitions is made based on the circumstances of individual cases.

        In this case, Company A entered into the Proposed Acquisition just over 12 months after the completion of the First Acquisition, and the acquisition targets were both engaged in video gaming business. The Exchange considered that the First Acquisition and the Proposed Acquisition (together the Acquisitions) constituted a series of acquisitions and should be aggregated for the purpose of the RTO Rule because they were made within a short period, and together would lead to a substantial involvement by Company A in a new video gaming business which was completely different form its principal business in the manufacturing and sale of food products.
        b. Company A would cease to operate its existing food business after the Proposed Disposal. The Acquisitions together with the Proposed Disposal would effect a complete change of Company A's principal business. They formed a series of transactions to list the video gaming businesses of the targets.
        12. Given the above, the Acquisitions were an extreme case by reference to the criteria set out in the RTO guidance letter. Nevertheless, Company A had provided information and the latest three year financial results relating to the acquisition targets to demonstrate that the acquisition targets could meet the profit requirement under Rule 8.05 and there was no material concern about circumvention of new listing requirements. The Exchange considered that the Acquisitions could fall into the situation of an extreme VSA under the RTO guidance letter.

        CONCLUSION

        13. The Exchange decided to require aggregation of the Acquisitions and treat them as an extreme VSA. Accordingly, the due diligence and enhanced disclosure requirements for extreme VSAs as set out in the RTO guidance letter applied to the Acquisitions.

        1 Time reference is the time to date of the decision.

        2 Restricted Convertible Securities are highly dilutive convertible securities with a conversion restriction mechanism (e.g. restriction from conversion that would cause the securities holder to hold 30% interest or higher) to avoid triggering a change of control under the Code on Takeovers and Mergers.

      • LD108-2017

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        HKEX LISTING DECISION
        HKEX-LD108-2017 (published in June 2017)

        Parties Company A — a Main Board issuer

        Target — a company that Company A proposed to acquire from Company B

        Company B — the owner of the Target
        Issue Whether Company A's proposed acquisition of the Target constituted a reverse takeover or an extreme VSA
        Listing Rules Main Board Rule 14.06(6)
        Decision The proposed acquisition was a reverse takeover

        FACTS1

        1. Company A was principally engaged in trading business.
        2. Company A proposed to acquire the Target from Company B. It would pay for the acquisition by issuing consideration shares to Company B. Upon completion of the acquisition, Company B would become a substantial shareholder of Company A (25% of the enlarged issued shares).
        3. The acquisition would be a very substantial acquisition based on the size tests. With an asset ratio of about 8 times and a revenue ratio of about 50 times, the Target was significantly larger than Company A.
        4. The Target was principally engaged in coal mining. It owned two coal mines (Target Mines) which had been under commercial production for a few years. The information provided by Company A showed that there were changes in the business model of the Target:
        •   During the track record period, the Target had been selling mixed coal by mixing the coal extracted from the Target Mines with different types of raw coal purchased from other coal mines owned by Company B (Other Mines). In light of the recent change in market conditions, the Target intended to sell coal produced from the Target Mines without mixing with raw coal from the Other Mines after completion of the proposed acquisition.
        •   It was also noted that the Target's coal products were mainly sold to Company B who then sold the products to ultimate customers at a mark-up price. Sales to Company B accounted for about 50% of the Target's revenue in the first year of the track record period, and over 90% in the last two financial years.

        Company A explained that historically Company B had performed the sales and distribution functions for coal products from the Target Mines and the Other Mines for the purpose of centralized management and planning. A few months ago, the Target had already set up its own sales and distribution team for selling its products directly to the ultimate customers.
        5. Company A submitted that the Target could meet the profit requirement for new listing applicants under Rule 8.05(1) and the acquisition should be treated as an extreme VSA as stated in Guidance Letter GL78-14. It sought the Exchange's confirmation that the acquisition would not constitute a reverse takeover.

        APPLICABLE LISTING RULES

        6. Rule 14.06(6) defines a "reverse takeover" as "… an acquisition or a series of acquisitions of assets by a listed issuer which, in the opinion of the Exchange, constitutes, or is part of a transaction or arrangement or series of transactions or arrangements which constitute, an attempt to achieve a listing of the assets to be acquired and a means to circumvent the requirements for new applicants set out in Chapter 8 of the Exchange Listing Rules…". This is a principle based test.
        7. Rule 14.54 states that "The Exchange will treat a listed issuer proposing a reverse takeover as if it were a new listing applicant. The enlarged group or the assets to be acquired must be able to meet the requirements of rule 8.05 and the enlarged group must be able to meet all the other basic conditions set out in Chapter 8 of the Exchange Listing Rules. …"
        8. The Exchange Guidance Letter (HKEX-GL78-14) on reverse takeovers (RTO) explains that Rule 14.06(6) is an anti-avoidance provision designed to prevent circumvention of the new listing requirements. Paragraphs 7 and 8 of the guidance letter states that:—
        "7. If a transaction falls outside the bright line tests, the Exchange will apply the principle based test to assess whether the acquisition constitutes an attempt to achieve a listing of the assets to be acquired and a means to circumvent the requirements for new listing. The transaction would be treated as a RTO under the principle based test if the Exchange considers it is an 'extreme' case taking into account the following criteria:
        •   the size of transaction relative to the size of the issuer;
        •   the quality of the business to be acquired—whether it can meet the trading record requirements for listings, or whether it is unsuitable for listing (e.g. an early stage exploration company);
        •   the nature and scale of the issuer's business before the acquisition (e.g. whether it is a listed shell);
        •   any fundamental change in the issuer's principal business (e.g. the existing business would be discontinued or very immaterial to the enlarged group's operations after the acquisition);
        •   other events and transactions (historical, proposed or intended) which, together with the acquisition, form a series of arrangements to circumvent the RTO Rules (e.g. a disposal of the issuer's original business simultaneously with a very substantial acquisition); and
        •   any issue of Restricted Convertible Securities2 to the vendor which would provide it with de facto control of the issuer.
        8. A transaction would be treated as an extreme very substantial acquisition (extreme VSA) where the Exchange considers it "extreme" by reference to the criteria set out in paragraph 7, but the assets to be acquired can meet the minimum profit requirement under Rule 8.05 (the positive cash flow requirement under GEM Rule 11.12A) and circumvention of new listing requirements would not be a material concern. Extreme VSAs are presented to the Listing Committee for its decision."
        9. Paragraph 2 of Practice Note 3 provides that
        "…In all cases the trading record period of a new applicant must enable the Exchange and investors to make an informed assessment of the management's ability to manage the applicant's business and the likely performance of that business in the future…".

        ANALYSIS

        10. In this case, the Exchange applied the principle based test to assess whether the proposed acquisition would constitute a RTO under Rule 14.06(6). When applying the principle based test, the Exchange would consider all the criteria set out in Guidance Letter GL78-14 to assess whether, taking the criteria together, a proposed acquisition would constitute an attempt to achieve a listing of the assets to be acquired and a means to circumvent the Exchange's new listing requirements.
        11. When making the assessment, the Exchange noted that:
        a. Company A's existing business had a small scale of operations. Based on the size tests for the proposed acquisition, the Target was significantly larger than Company A.
        b. The proposed acquisition would result in a fundamental change in Company A's business. The Target was engaged in coal mining which was different from Company A's existing trading business.
        c. Although Company A submitted that the Target would meet the profit requirement under Rule 8.05, the Exchange was concerned that the Target's historical financial information were not representative of its future performance due to the significant changes in its business model, including the type of coal sold and the sales and distribution arrangements. In particular, the Target's products were mixed with Company B's products and sold through Company B. The Target only developed its own sales functions for the purpose of selling its own products recently. As these changes only took place recently, the Target's trading record could not provide sufficient information to allow investors to make an informed assessment of the management's ability to manage the Target's business and the likely performance of that business in the future. The Exchange was concerned that Company A could not satisfy the new listing requirements under Paragraph 2 of Practice Note 3.
        12. Based on the above, the Exchange considered that the proposed acquisition was an extreme case and constituted a RTO under Rule 14.06(6).
        13. The Exchange disagreed with Company A's view that the acquisition should constitute an extreme VSA. As set out in the RTO guidance letter, an extreme VSA applies in situation where the assets to be acquired can meet the minimum profit requirement under Rule 8.05 and circumvention of new listing requirements would not be a material concern. In this case, the Exchange did not consider that the acquisition could fall into the situation of an extreme VSA under the guidance letter given its concern over the Target's ability to satisfy the new listing requirements as discussed in paragraph 11c above.

        CONCLUSION

        14. The proposed acquisition constituted a reverse takeover for Company A under Rule 14.06(6).

        1 Time reference is the time to date of the decision.

        2 Restricted Convertible Securities are highly dilutive convertible securities with a conversion restriction mechanism (e.g. restriction from conversion that would cause the securities holder to hold 30% interest or higher) to avoid triggering a change of control under the Code on Takeovers and Mergers.

      • LD107-2017

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        HKEX LISTING DECISION
        HKEX-LD107-2017 (published in May 2017)

        Summary
        Parties Company A to Company M — Main Board and GEM listing applicants whose listing applications were rejected by the Exchange in 2016
        Issue To provide guidance on why the Exchange rejected certain listing applications
        Listing Rules Main Board Rule 2.06 and Chapter 8
        GEM Rule 2.09 and Chapter 11
        Related Publications HKEX-GL68-13, HKEX-GL68-13A, HKEX-LD92-2015, HKEX-LD100-2016 and HKEX-LD107-1
        Decision The Exchange rejected the listing applications

        PURPOSE

        1. This Listing Decision in the Appendix sets out the reasons why the Exchange rejected certain listing applications from 1 January to 31 December 2016. For the reasons listing applications were rejected before this period, please refer to the listing decisions and guidance letters stated in "Related Publications" above.

        APPLICABLE LISTING RULES

        2. Chapter 8 of the Main Board Rules and Chapter 11 of the GEM Rules set out detailed eligibility requirements which a new applicant must fulfill and state that both the applicant and its business must, in the opinion of the Exchange, be suitable for listing.
        3. Main Board Rule 2.06 and GEM Rule 2.09 state that suitability for listing depends on many factors. Compliance with eligibility requirements under the Listing Rules does not itself ensure an applicant's suitability for listing. You may refer to HKEX-GL68-13 and HKEX-GL68-13A which provide guidance on the factors that the Exchange would take into consideration when assessing whether an applicant and its business are suitable for listing under Main Board Rule 8.04 (GEM Rule 11.06).

        ****

        Appendix

        Rejection cases in 2016
        Company Reasons for rejection
        Company A and
        Company B
        (Main Board Applicants)

        Company A was a financial services provider in the PRC. Under the relevant laws and regulations, operation of the largest of Company A's business segments (with revenue contribution of over 90% of Company A's total net profit) was subject to licensing. However, Company A did not obtain such license and the relevant income was considered as generated from non-compliant sources.

        Company B was a logistics company in the PRC. During the track record period, Company B's operating expenses were partly financed by an interest-free loan from its controlling shareholder ("Shareholder's Loan"). As the Shareholder's Loan was interest- free, it was not on normal commercial terms.

        These listing applications were rejected on eligibility grounds as each applicant did not meet the minimum profit requirement under Main Board Rule 8.05(1)(a) after (i) excluding income from non-compliant sources; or (ii) imputing notional interest expenses on the Shareholder's Loan.

        Company C
        (a GEM Applicant)

        Company C was a provider of vehicle services in Hong Kong. It applied for a spin-off listing on GEM by way of an introduction. As there would be no offering, it relied on its forecasted P/E ratio to demonstrate it would meet the minimum market capitalisation requirement of HK$100 million under GEM Rule 11.23(6).

        Company C originally submitted a forecasted P/E ratio of over 125 times. In response to the Exchange's comment on the basis of its forecasted P/E ratio, Company C adjusted its forecasted P/E ratio to over 40 times, which still met the minimum market capitalisation requirement under GEM Rule 11.23(6). The reduced market capitalisation was determined based on the historical P/E ratios of two companies that were not directly comparable with Company C and the assessment involved various assumptions and judgement. In particular, one comparable company was loss-making and Company C estimated this company's P/E ratio based on its valuation two years ago (when it was profitable) and adjusted the ratio by the percentage decrease in the Hang Seng Index thereafter. The other comparable company was listed on an overseas exchange and only one of its segments was similar to Company C's business. Furthermore, Company C's assessment did not account for the differences between historical and forecasted P/E ratio.

        In view of the significant changes of its forecasts and the fact that such assessment is highly subjective and discretionary, the Exchange was of the view that Company C had not satisfactorily demonstrated its ability to meet the eligibility requirement and therefore rejected the listing application.

        Company D
        (a GEM Applicant)

        Company D was a software solution provider in Hong Kong.

        The listing application was rejected on eligibility grounds since after its most recent financial year, one of its two controlling shareholders ceased to be a controlling shareholder and the management was no longer influenced by the same controlling shareholders. Although there was no packaging concern, the Exchange decided that Company D was not able to meet the ownership continuity and control requirement under GEM Rule 11.12A(2), since the sponsor did not demonstrate that influence over the management by the remaining controlling shareholder was not materially different than by two controlling shareholders. As such, an investor cannot assess how Company D will be managed under the sole influence of the remaining controlling shareholder based on the previous financial results.

        Company E
        (a Main Board Applicant)

        Company E was a microcredit company in the PRC. During the track record period, certain loans and guarantees provided by Company E to its customers did not follow local policies applicable to microcredit companies. Although such policies were not mandatory, Company E's business license was subject to revocation if such policies were not followed. In light of such consequences, the Exchange regards that these policies should have been followed as a matter of best practice. Also, the amount of such non-compliant loans was material (constituted 62% to 99% of the gross amount of total loans granted during each year of the track record period) and Company E would not be able to meet the minimum profit requirement under Main Board Rule 8.05(1)(a) if income from such non-compliant loans were excluded. The listing application was rejected on suitability grounds taking into account the consequences of the policies and the materiality of the difference in interest income if the policies had been followed.

        Company F and
        Company G
        (Main Board Applicants)

        Company F was an integrated excavation service provider in Asia. It sold unprocessed ore from Country A to the PRC during the track record period. Due to regulatory changes which prohibited the export of unprocessed ore, Company F planned to process the ore before selling them after listing.

        Company G was a trading company in the PRC. It outsourced the production of food for sale in the PRC during the track record period. Company G planned to change its business focus to the production and sale of a new product after listing.

        These listing applications were rejected on suitability grounds due to extreme uncertainty on the sustainability of their businesses, as follows:

        (i) the change in business model and/or product mix of these applicants would be a material change in their business model, cost structure, profitability and risk profile;
        (ii) the applicants' management had no experience in operating the new business, which was fundamentally different from their existing business; and
        (iii) the applicants could not demonstrate that their new business is sustainable.
        Company H
        (a GEM Applicant)

        Company H was a distributor of two brands of consumer products in Singapore.

        This listing application was rejected on suitability grounds because there was extreme uncertainty on the sustainability of Company H's business based on the following factors:

        (i) it solely relied on its bank facility to maintain a positive cash balance;
        (ii) it had high gearing and net current liability positions;
        (iii) its brands had small and declining market share;
        (iv) it had deteriorating financial performance after the supply of a major product was terminated by the manufacturer; and
        (v) the plan to turnaround the business required it to shift its business focus to its second brand, that had even smaller market share and less market prominence, after the track record period.
        Company I and
        Company J
        (Main Board Applicants)

        Company K
        (a GEM Applicant)

        Company I was a property management company providing property management services to one single housing estate in the PRC.

        Company J was a printing company in the PRC.

        Company K was a licensed software developer in Hong Kong.

        These listing applications were rejected on suitability grounds due to their extreme reliance on a single estate, customer or product (as the case may be), as follows:

        (i) during the track record period, over 90% of each applicant's revenue was generated from its largest customer and/or key product (as the case may be);
        (ii) while the applicants relied on their respective customers for the revenue generated during the track record period, the reliance was not mutual and complementary, i.e. their respective customers were not reliant on them; and
        (iii) Company J and Company K operated in an evolving technological and/or regulatory environment. However, Company J and Company K lacked experience in selling new/upgraded products and failed to attract new customers during the track record period to reduce the reliance, and failed to demonstrate they can do so after the track record period. Company I failed to demonstrate that it can reduce its reliance on its one single housing estate after the track record period since it did not bid for any other estate during the track record period.
        Company L
        (a Main Board Applicant)

        Company L was a utility provider in the PRC.

        The listing application was rejected on suitability grounds since during the track record period, a number of Company L's senior management had been convicted of bribery in relation to Company L's construction contracts and Company L also failed to obtain the relevant construction permits before the commencement of construction/ operation of the material plants. In view of such misconduct and non-compliances, Company L's directors were not considered suitable under Main Board Rules 3.08 and 3.09 and therefore, Company L was rendered not suitable for listing.

        Company M
        (a GEM Applicant)

        Company M was a restaurant operator in the PRC.

        The listing application was rejected on both eligibility and suitability grounds due to the following factors:

        Inability to meet the minimum cashflow requirement under GEM Rule 11.12A(1)

        (i) during the track record period, a significant portion of Company M's income was derived from unconditional grants from local government which were not directly related to its restaurant business. The Exchange considered the grants not to be derived from Company M's ordinary and usual course of business and it was unable to meet the minimum cashflow requirement under GEM Rule 11.12A(1) after deduction of such grants; and

        Unsustainable business model

        (ii) Company M's financial performance was deteriorating during the track record period as it failed to manage the impact of its increase in operating costs. Despite the implementation of cost-saving measures (such as a centralized kitchen) in the last year of the track record period, the deteriorating trend continued and management failed to demonstrate that they had the ability to turn around the business after the track record period.

      • LD106-2017

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        HKEX LISTING DECISION
        HKEX-LD106-2017 (published in May 2017)

        Summary
        Parties Company A to Company G — Main Board and GEM listing applicants whose applications were returned by the Exchange in 2016
        Issue To provide guidance on why the Exchange returned certain listing applications
        Listing Rules Main Board Rule 9.03(3)
        GEM Rules 12.09 and 12.14
        Related Publications HKEX-LD84-2014, HKEX-LD91-2015 and HKEX-LD101-2016
        Decision The Exchange returned the applications

        PURPOSE

        1. This Listing Decision in the Appendix sets out the reasons why the Exchange returned certain listing applications from 1 January to 31 December 2016. For the reasons listing applications were returned before this period, please refer to the listing decisions stated in "Related Publications" above.

        APPLICABLE RULES, REGULATIONS AND PRINCIPLES

        2. Main Board Rule 9.03(3) (GEM Rule 12.09(1)) requires an applicant to submit a listing application form, an Application Proof and all other relevant documents under Main Board Rule 9.10A(1) (GEM Rules 12.22 and 12.23), and the information in these documents must be substantially complete except in relation to information that by its nature can only be finalised and incorporated at a later date.
        3. If the Exchange decides this information is not substantially complete, the Exchange will not continue to review any documents relating to the application. All documents, including Form A1 (Form 5A for GEM cases) (except for the retention of a copy of these documents for the Exchange's record) submitted to the Exchange will be returned to the sponsor (GEM Rule 12.09(2)).

        ****

        Returned cases in 2016
        Company Reasons for return
        Company A
        (a Main Board Applicant)

        Company A operated an e-commerce business in the PRC through contractual arrangements.

        The application was returned because:

        (i) the Company used contractual arrangements to control certain entities, although the Application Proof disclosed that Company A's e-commerce business was not subject to foreign ownership restrictions. However, it was subsequently disclosed that Company A's e-commerce business was subject to foreign ownership restrictions;
        (ii) the Company's contractual arrangements failed to follow the principles under Listing Decision HKEX-LD43-3. In particular, Company A should have excluded those subsidiaries which were not engaged in restricted business from the operating companies controlled through contractual arrangements prior to the submission of the Application Proof; and
        (iii) the Application Proof did not disclose certain material information on Company A's business model such as (a) the revenue model, (b) material terms of agreements with promoters of its online shops, suppliers and payment collection agents, and (c) basis to determine whether to source the Company's products from independent suppliers or internally from the Company.
        Company B
        (a GEM Applicant)

        Company B was a consumer products company in the PRC. Approximately 80% of Company B's total revenue during the track record period was generated from sales to distributors.

        The application was returned because the description of Company B's business was materially inaccurate as evidenced by the significant changes in subsequent proofs. In the Application Proof, it stated that (i) most of Company B's distributors had entered into annual/ long-term distributorship agreements with Company B; and (ii) Company B had implemented measures to actively monitor the inventory levels of its distributors. It was subsequently disclosed that only around 1% of Company B's distributors (which accounted for only approximately 3% of Company's total revenue during the track record period) entered into such agreements and were subject to such measures.

        Company C
        (a GEM Applicant)

        Company C was an on-line marketing service provider in Hong Kong.

        The description of Company C's business model in the Application Proof did not provide investors with sufficient information to make an informed assessment of Company C's business. For example, it did not disclose:—

        (i) the scope of services and specific works performed by Company C under each business segment;
        (ii) the basis of Company C's claim that its big data system and marketing tool outperformed its peers;
        (iii) the material terms of the master agreements with its major suppliers;
        (iv) how Company C procured advertising space at a "lower bidding price";
        (v) details of performance bonuses and reseller's discounts received by Company C from its suppliers and those paid by Company C to its customers; and
        (vi) the different target customers, pricing policy, profitability, level of reliance on supplier discounts, and risk management challenges of the two types of services offered.

        In addition, where relevant information was given, it was scattered throughout the Application Proof making it challenging for investors to appreciate its importance.

        The overuse of jargon and acronyms also contributed to the difficulty of understanding its business model. It failed to explain key aspects of its business and industry in plain English, and/or use more detailed flowcharts and diagrams with narrative descriptions and illustrative examples to better explain the financial aspects of its material transactions. Taking into account all the factors discussed above, the case was returned.

        Company D
        (a GEM Applicant)

        Company D was a toy manufacturer in the PRC.

        The information submitted was not substantially complete because it did not include all required financial information in the Application Proof.

        According to the listing timetable, the track record period in the final prospectus was required to cover two financial years ended 31 December 2015 and a stub period of six months ended 30 June 2016. The financial information in the Application Proof covered the two financial years ended 31 December 2015 and a stub period of only four months ended 30 April 2016.

        Under Guidance Letter HKEX-GL6-09A, Company D may include less than the required financial information if the application was filed not later than 31 August 2016. However, Company D filed its listing application in September 2016 so it did not fall under this exemption.

        Company E
        and
        Company F
        (GEM Applicants)

        Company E was a printing company based in Hong Kong and Company F was an environmental hygiene service provider in Hong Kong.

        The information submitted was not substantially complete because both applicants failed to include all required financial information in their respective Application Proof.

        According to the respective listing timetable, the track record period in the final prospectus was required to cover two financial years ended 31 December 2016. Company E only included financial information for two financial years ended 31 December 2015 and a stub period of seven months ended 31 July 2016 and Company F only included financial information for two financial years ended 31 December 2015 and a stub period of six months ended 30 June 2016.

        Under Guidance Letter HKEX-GL6-09A, each of Company E and Company F may include less than the required financial information if the application was filed within two months after the end of 2016 and the Application Proof included financial information for the financial year ended 2015 and a stub period of nine months ended 30 September 2016. However, both applicants filed their respective listing application before the end of 2016 and their respective Application Proof included financial information covering the financial year ended 2015 and a stub period of less than nine months ended 30 September 2016 and therefore did not fall under this exemption.

        Company G

        (a Main Board Applicant)

        Company G was a bead wire manufacturer in the PRC.

        Company G submitted a renewed application, after its previous application lapsed, without fully addressing the Exchange's comments on its compliance with basic eligibility requirements under the Main Board Rules. Therefore, it did not comply with our Guidance Letters HKEX-GL56-13 and HKEX-GL7-09 and its renewed application was returned

      • LD105-2017

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        HKEX LISTING DECISION
        HKEX-LD105-2017 (published in April 2017)

        Parties Company A — a GEM issuer
        Issue Whether Company A has a sufficient level of operations or assets to meet GEM Rule 17.26
        Listing Rules GEM Rules 9.04 and 17.26
        Decision Company A had failed to maintain a sufficient level of operations or assets of sufficient value to meet Rule 17.26, resulting in a share trading suspension and commencement of the Exchange's delisting procedures

        FACTS

        1. Until recent months, Company A and its subsidiaries (Group) were principally engaged in trading of metals and trading of beverage products. It also held exploration rights of iron mines. The Group had been loss making for many years.
        2. About six months ago, the Group:
        a. failed to renew the exploration rights of iron mines and fully impaired its mining assets of about $150 million;
        b. discontinued its metal trading business after surrendering its related warehouse property. This business was the Group's main business and generated 90% of the Group's revenue (about $12 million) in the last financial year; and
        c. started a number of new businesses including trading of cosmetics and skincare products, stainless steel wire, nephrite, listed securities and chartering of vessel (New Businesses). The New Businesses had no correlation with each other. They were mostly trading businesses relying on one to two customers and each operated by a small number of employees.
        3. The remaining beverage trading business and the New Businesses together generated revenue of $30 million in the last six months. The Group recorded a gross profit of only $6 million, which was insufficient to cover its expenses, resulting in a net loss of $60 million. The Group had total assets of about $130 million, but its net liabilities amounted to $400 million.
        4. Given this, the Exchange questioned whether Company A was maintaining sufficient operations or assets as required under GEM Rule 17.26. Trading in Company A's shares on the Exchange was continuing.
        5. Company A took the view that it was able to meet GEM Rule 17.26 because the New Businesses would enable the expansion of its business portfolio, diversify its income sources and enhance its financial performance. It submitted that:
        a. the Group's revenue had increased to $50 million for the first nine months of the current financial year. The performance of the New Businesses was in line with the management's projection; and
        b. based on its financial forecast, the Group would continue to maintain growth in revenue from the New Businesses and exercise effective control over its corporate expenses. It expected to record revenue of about $100 million and a substantial loss in the coming 12 months.

        APPLICABLE LISTING RULES, LISTING DECISIONS AND GUIDANCES

        6. GEM Rule 17.26 imposes a continuing obligation on issuers:
        "An issuer shall carry out, directly or indirectly, a sufficient level of operations or have tangible assets of sufficient value and/or intangible assets for which a sufficient potential value can be demonstrated to the Exchange to warrant the continued listing of the issuer's securities."
        7. GEM Rule 9.04 states that:
        ". . .the Exchange may direct a trading halt or suspend dealings in an issuer's securities regardless of whether or not the issuer has requested the same and may do so in any circumstances, including:—

        . . .
        (3) Where the Exchange considers that the issuer does not have a sufficient level of operations or sufficient assets to warrant the continued listing of the issuer's securities (see rule 17.26); or
        (4) where the Exchange considers that the issuer or its business is no longer suitable for listing. . ."
        8. Listing Decisions (LD35-2012 and LD88-2015) describe the purpose behind Main Board Rule 13.24 (equivalent to GEM Rule 17.26) and provide guidance on the application of the Rule:
        ". . .Rule 13.24 is intended to maintain overall market quality. Issuers that fail to meet this Rule are "blue sky companies" where public investors have no information about their business plans and prospects. This leaves much room for the market to speculate on their possible acquisitions in the future. To allow these issuers' shares to continue to trade and list may have an adverse impact on investor confidence.

        . . .

        When applying Rule 13.24 to issuers whose shares are trading on the Exchange, the Exchange generally allows their shares to continue to trade as long as they have an operation and meet the continuing disclosure obligations. If the Exchange were to suspend these issuers because of their low level of activities or asset values, public shareholders would have no access to the market for trading the issuers' shares. To balance the public shareholders' interests with the need to maintain market quality, the Exchange suspends trading only in extreme cases.

        . . .
        "

        ANALYSIS

        9. GEM Rule 17.26 requires issuers to maintain a sufficient level of operations or assets of sufficient value to warrant the continued listing of their securities. Without quantitative criteria for sufficiency, this Rule calls for a qualitative test and is assessed based on the specific facts and circumstances of individual cases.
        10. Under GEM Rule 9.04, the Exchange may suspend trading in shares of an issuer which fails to meet GEM Rule 17.26. As set out in paragraph 8 above, to balance public shareholders' ability to access the market to trade in the security with the need to maintain market quality, the Exchange would suspend trading only in an extreme case1. This would likely involve circumstances where the actions of the issuer call into question issues about market quality or the creation of blue sky companies.
        11. Once suspended, an issuer would be subject to the delisting procedures under the GEM Rules. To avoid delisting and resume trading, it must, before the expiry of the delisting procedures, prepare a resumption proposal to demonstrate that it has a viable and sustainable business to re-comply with GEM Rule 17.26.
        12. The Exchange considered the circumstances of Company A to be an extreme case which warranted a trading suspension of Company A's shares under GEM Rule 9.04. In particular, the Exchange noted that Company A had substantially ceased its principal business activities, and immediately sought to commence a number of new businesses that have no relation with Company A's original principal activities. The new businesses are asset-light businesses with a low entry barrier. These events brought into question whether the resulting businesses warranted the continued listing of Company A's securities.
        13. The Exchange considered Company A failed to meet GEM Rule 17.26:

        Scale of operations
        a. The Group had substantially ceased all its principal businesses after discontinuing the metal trading business. The remaining beverage trading business generated revenue of $0.65 million only in the last six months, with a segment loss of $19 million.
        b. The Group sought to rely on a number of New Businesses. However,
        •   The New Businesses had no correlation with each other and involved a low level of activities. They were mostly trading businesses relying on a few customers and suppliers and operated by a few employees. In the last six months, the Group generated minimal revenue which was insufficient to cover its expenses. Despite projection of an increase in revenue, the Group would still record a loss during the forecast period.
        •   Company A had not provided any concrete business plan for the New Businesses or otherwise demonstrated the prospects of substantially improving the scale of its business operations. There was also a concern about the lack of management experience in the New Businesses.
        •   The Group had failed to demonstrate the viability and sustainability of these businesses.
        The Group's assets
        c. The Group did not have any significant non-cash assets after impairing its mining assets. Its remaining assets were insufficient to cover its liabilities. It had a significant net liabilities position. As noted above, the Group's assets could not generate sufficient revenue and profits to justify a listing.

        CONCLUSION

        14. The Exchange decided that Company A had failed to comply with GEM Rule 17.26. This resulted in a trading suspension of Company A's shares under GEM Rule 9.04 and a commencement of the Exchange's delisting procedures.


        1 Separately, where an issuer undertakes a corporate action that would substantially reduce its operations, the Exchange will evaluate whether the remaining business would meet GEM Rule 17.26/MB Rule 13.24. See Listing Decisions (LD35-2012 and LD88-2015), "if an issuer takes a corporate action, the Exchange is more likely to suspend the issuer's trading where the issuer fails to satisfy the Exchange that it would have a viable and sustainable business to justify its continued listing after completion of the corporate action. In this case, shareholders would have the opportunity to decide whether to allow the corporate action to proceed, knowing that the Exchange would exercise the suspension power should the corporate action proceed. In that way shareholders' interests are safeguarded through the shareholders' approval process. . ."

      • LD104-2017

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        HKEX LISTING DECISION
        HKEX-LD104-2017 (published in January 2017)

        Parties Company A — a Main Board issuer

        Company B — Company A's subsidiary proposed to be listed on a PRC stock exchange
        Issue Whether the Exchange would waive the assured entitlement requirement for Company A's spin-off proposal
        Listing Rules Main Board Rule 2.04 and Paragraph 3(f) of Practice Note 15 (GEM Rule 2.07 and Paragraph 3(f) of Practice Note 3)
        Decision The Exchange waived the requirement

        FACTS

        1. Company A proposed to spin-off Company B for listing on a PRC stock exchange. This would involve Company B offering new A shares in the Mainland under the PRC laws and regulations. The deemed disposal of interest in Company B would be a major transaction for Company A subject to the shareholders' approval.
        2. Company A would be able to comply with all the spin-off requirements except the requirement to provide its shareholders with an assured entitlement to the A shares of Company B. It submitted a waiver application from strict compliance with the assured entitlement requirement for the following reasons:
        •   Based on its PRC counsel's advice, non-PRC investors (other than certain qualified investors) were not permitted to acquire the A shares in Company B under the PRC laws and regulations. As many of its existing shareholders were not qualified investors, there was a legal impediment for it to provide these shareholders with an assured entitlement to the A shares of Company B under the proposed spin-off; and
        •   It would be burdensome for it to seek minority shareholders' approval to waive the assured entitlement at a general meeting as the legal restriction could not be overridden even if the resolution was voted down by its shareholders.

        APPLICABLE LISTING RULES

        3. Paragraph 3(f) of Practice Note 15 states that:
        "The Listing Committee expects the Parent to have due regard to the interests of its existing shareholders by providing them with an assured entitlement to shares in Newco, either by way of a distribution in specie of existing shares in Newco or by way of preferred application in any offering of existing or new shares in Newco. The percentage of shares in Newco allocated to the assured entitlement tranche would be determined by the directors of the Parent and by its advisers, and all shareholders of the Parent would be treated equally. There would be no bar to the controlling shareholder receiving his proportion of shares under such entitlement. Where Newco is proposed to be listed elsewhere than in Hong Kong, and where shares in Newco under the assured entitlement can only be made available to existing shareholders of the Parent by way of a public offering in Hong Kong, the Listing Committee would consider submissions as to why the assured entitlement requirement would not be for the benefit of the Parent or its shareholders. Further, the minority shareholders of the Parent may by resolution in general meeting resolve to waive the assured entitlement, even where Newco is to be listed in Hong Kong.

        Note: In case where Newco is made subject to this Practice Note by virtue of the Note to paragraph 2, the Parent should use its best endeavours to provide its shareholders an assured entitlement to the shares in Newco. Whether such assured entitlement is available will be taken into account by the Exchange when considering whether to approve the spin-off proposal."

        ANALYSIS

        4. Practice Note 15 sets out the Exchange's principles when considering proposals of issuers to effect separate listings on the Exchange or elsewhere of assets or businesses wholly or partly within their existing groups.
        5. The purpose of Paragraph 3(f) of Practice Note 15 is to ensure that the issuer would give due regard to the interests of its shareholders by providing them with an assured entitlement to shares in the entity to be spun. Paragraph 3(f) further provides that if the issuer does not propose to offer such entitlement to its shareholders, it would need to obtain its minority shareholders' approval in general meeting.
        6. When considering Company A's waiver application, the Exchange noted that Company B was proposed to be listed in the PRC and would need to comply with the PRC laws and regulation. It would be impractical for Company A to provide its shareholders with an assured entitlement to the A shares of Company B under the proposed spin-off.

        CONCLUSION

        7. The Exchange granted the waiver on the condition that Company A would disclose in its announcement for the proposed spin-off details of the waiver including the legal restrictions in providing the assured entitlement.

        GENERAL WAIVER FOR THE ASSURED ENTITLEMENT REQUIREMENT

        8. On 20 December 2016, the Exchange obtained the SFC's consent for granting waivers from Paragraph 3(f) of Practice Note 15 to the Main Board Rules (or Paragraph 3(f) of Practice Note 3 to the GEM Rules) to issuers who propose to spin-off their businesses for listing on the Shanghai Stock Exchange, the Shenzhen Stock Exchange or the National Equities Exchange and Quotations in the PRC. Such waiver will be granted on the conditions that:
        (i) the issuer has obtained a letter from its legal advisers to demonstrate that there are legal restrictions in providing its shareholders with assured entitlements to the spun-off entity's shares under the PRC laws and regulation;
        (ii) the board of directors of the issuer has provided a written confirmation to the issuer that the proposed spin-off and the waiver in respect of the assured entitlement requirement are fair and reasonable and in the interests of the issuer and its shareholders as a whole; and
        (iii) it will disclose in its announcement for the proposed spin-off details of the waiver including the reasons for not providing assured entitlement and the legal restrictions in providing the assured entitlement and the board of directors' confirmation as set out in paragraph 8(ii) above.
        9. In respect of spin-off proposals for listing in other jurisdictions where there are legal restrictions in providing assured entitlements, the Exchange will consider any waiver applications for the assured entitlement requirement based on the specific facts and circumstances of individual cases.

    • 2016

      Select By Rule or Topic: Download the consolidated index here

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

      This section comprises decisions on cases handled by the Listing Committee and/or the Listing Division, to enhance transparency and market understanding of their interpretation of the Listing Rules. Each decision was based on its specific circumstances and is not a precedent for future cases.

      Effective from 1 January 2011, listing decisions will be published under a new naming format as illustrated below:

      Before 1 January 2011 On or After 1 January 2011
       
      HKEx-LD100-1
      HKEx-LD100-2
      HKEx-LD101-1
       
      HKEx-LD1-2011
      HKEx-LD2-2011
      HKEx-LD3-2011

      Listing decisions published before 1 January 2011 continue to bear the old references.

      LD Series Number First
      Release
      Date (Last
      Update
      Date)
      (mm/yyyy)
      Listing Rules/ Topics Particulars
      LD103-2016 12/2016
      (07/2018)
      Main Board Rules 2.03, 2A.03, 13.64, 13.64A and 13.52B(1) Whether the Exchange would approve a share subdivision proposed by Company A
      LD102-2016 12/2016 Main Board Rules 2.03, 2A.03 and 7.19(6) Whether the Exchange would grant listing approval for the proposed rights issue of Company A

      (Withdrawn in July 2018)
      LD101-2016 04/2016 Main Board Rule 9.03(3)
      GEM Rules 12.09 and 12.14
      To provide guidance on why the Exchange returned certain listing applications
      LD100-2016 04/2016 Main Board Rules 2.06 and Chapter 8
      GEM Rules 2.09 and Chapter 11
      To provide guidance on why the Exchange rejected certain listing applications
      LD99-2016 03/2016 Main Board Rule 13.24 Whether Company A would have sufficient operations or assets under Rule 13.24 after the disposal
      LD98-2016 03/2016 Main Board Rule 13.24 Whether Company A would have sufficient operations or assets under Rule 13.24 after the disposal
      LD97-2016 03/2016 Main Board Rule 13.24 Whether Company A would have sufficient operations or assets under Rule 13.24 after the disposal
      LD96-2016 03/2016 Main Board Rule 14.06(6) Whether Company A's proposed acquisition of the Target would be a reverse takeover
      LD95-2016 03/2016 Main Board Rule 14.06(6) Whether Company A's proposed acquisition of an interest in the Target from Mr. B would be a reverse takeover
      LD94-2016 03/2016 Main Board Rule 14.06(6) Whether Company A's proposed subscription of an interest in the Fund would be a reverse takeover
      LD93-2016 03/2016 Main Board Rules 8.04, 8.05(1)(a) and Paragraph 3(c) of Practice Note 15 Whether the Company A (excluding its interest in Newco) could rely on the unrealised fair value gains on investment properties to meet the profit requirement under Rule 8.05(1)(a)

      • LD103-2016

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        HKEX LISTING DECISION
        HKEX-LD103-2016 (published in December 2016) (Updated in July 2018)

        Party Company A — a Main Board issuer
        Issue Whether the Exchange would approve a share subdivision proposed by Company A
        Listing Rules Main Board Rules 2.03, 2A.03, 13.64, 13.64A and 13.52B(1)
        Decision The Exchange did not approve the proposal.

        FACTS

        Background

        1. About 6 months ago, Company A announced a rights issue of shares at a discount to the market price. As the theoretical ex-right price would drop to about HK$0.1 based on the then share price, Company A also announced a 10 into 1 share consolidation to bring the theoretical price up proportionally with a view to ensuring compliance with Rule 13.64.
        2. About 5 months later after the announcement, the rights issue and share consolidation were completed. Between the announcement date and the completion date, Company A's shares were trading in the price range of HK$0.09 to HK$0.19 (or HK$0.9 to HK$1.9 after the price adjustments for the rights issue and share consolidation).

        Proposal

        3. One month after the completion of the share consolidation, Company A proposed a 1 into 5 share subdivision, and a change in trading board lot size from 2,000 shares to 8,000 shares. Its shares were then trading at prices of about HK$1.7 to HK$2.
        4. Company A was of the view that the liquidity in its shares was low due to the high trading price in its shares and board lot value when compared with those of other similar listed companies. Based on the then share price, after the proposed share subdivision, the adjusted share price would be reduced to HK$0.32 and the adjusted board lot value would exceed HK$3,200.
        5. Under Rule 13.52B(1), Company A consulted the Exchange on its proposed share subdivision and the related trading arrangements.

        LISTING RULES AND RELATED GUIDANCE MATERIAL

        6. Rule 2.03 states that:

        "The Listing Rules reflect currently acceptable standards in the market place and are designed to ensure that investors have and can maintain confidence in the market and in particular that:—

        (1) …;

        (2) the issue and marketing of securities is conducted in a fair and orderly manner …;



        (4) all holders of listed securities are treated fairly and equally;

        (5) directors of a listed issuer act in the interests of its shareholders as a whole — particularly where the public represents only a minority of the shareholders; and

        (6) …

        In these last four respects, the rules seek to secure for holders of securities, other than controlling interests, certain assurances and equality of treatment which their legal position might not otherwise provide."
        7. Rule 13.64 states that:

        "Where the market price of the securities of the issuer approaches the extremities of HK$0.01 or HK$9,995.00, the Exchange reserves the right to require the issuer either to change the trading method or to proceed with a consolidation or splitting of its securities."
        8. As set out in the Exchange's Guide on Trading Arrangements for Selected Types of Corporate Actions, for the purpose of Rule 13.64, the Exchange considers any trading price less than HK$0.1 to be approaching the extremity.
        9. Rule 13.52B(1) states that:

        "Where the subject matter of the document may involve a change in or relate to or affect arrangements regarding trading in the issuer's listed securities …, the issuer must consult the Exchange before the document is issued. The document must not include any reference to a specific date or specific timetable in respect of such matter which has not been agreed in advance with the Exchange."

        ANALYSIS

        10. Issuers may effect share consolidation or subdivision to change the numbers of their shares in issue, resulting in a corresponding increase or decrease in the market price per share. These changes may serve to facilitate trading activities and improve market efficiency. As these corporate actions affect the arrangements for trading shares on the Exchange, issuers must seek the Exchange's prior approval.
        11. While share consolidation or subdivision itself do not change shareholders' proportionate interests in an issuer, such corporate actions involve costs and they would result in existing shareholders holding odd lots or fractional shares, which are usually traded at prices lower than those in complete board lots. While some issuers would arrange for intermediaries to offer matching services, this could not eliminate the negative effect of such corporate actions for the shareholders, particularly for smaller shareholders holding one or a few board lots.
        12. In light of this, prior to proceeding with share consolidation or subdivision, directors should consider all the relevant factors and take reasonable steps to demonstrate that the proposal can serve its intended purpose and is in the best interest of the issuer and its shareholders. Factors that directors should take into account, which are not exhaustive:
        •   whether the proposed action is justifiable in light of the potential costs and negative impact arising from creation of odd lots to shareholders;
        •   that the frequency of any share consolidation or subdivision be kept to a reasonable level to minimize the costs arising from odd lots as a result of unnecessary repeated actions;
        •   whether a proposed share consolidation or subdivision may have an effect of offsetting the intention of any prior, or other simultaneous corporate action (e.g. share consolidation followed by share subdivision within a relatively short time span, or share subdivision made in conjunction with an increase in board lot size);
        •   whether there is a sufficient demonstration period to support that the share trading price is not temporary and a proposed share consolidation or subdivision is justified (e.g. a reasonable period of high trading price to justify a proposed share subdivision); and
        •   whether there is any other available alternative methods (e.g. change in board lot size instead of share subdivision).
        13. When considering the case of Company A, the Exchange noted that:
        •   Company A submitted that the purpose of the proposed 1 into 5 share subdivision was to increase trading liquidity. However, its proposal also involved an increase in board lot size by 4 times, and the adjusted board lot value would only be slightly below the current value. The combined effects of these corporate actions might not entirely support the purported reason for proposing the actions. Company A failed to justify the proposal and why it would be in the best interest of the shareholders as a whole, particularly taking into account the potential odd lots creation.
        •   While there was recent increase in Company A's share price to above HK$2, its shares were trading at most time during the last 6 months at the price of around HK$0.9 to HK$1 only (after the adjustment for share consolidation). Company A was unable to demonstrate that its shares were trading at fairly high prices over a reasonable period to justify its proposed share subdivision.
        •   The proposed share subdivision was put forward shortly after completion of the share consolidation. It is not clear how the two actions could be justified within a short period.
        •   Company A failed to consider other alternatives (e.g. reducing the board lot size to bring down the value each board lot for its intended purpose of increasing trading liquidity).
        14. In light of the above, the Exchange considered that Company A had not provided sufficient reasons to support its proposal at this time.

        CONCLUSION

        15. The Exchange did not approve the proposed share subdivision and increase in board lot size.

        SUBSEQUENT DEVELOPMENT (Updated in July 2018)

        16. Under Rule 13.64A (which became effective on 3 July 2018), an issuer must not undertake a subdivision (or bonus issue) of shares if its share price adjusted for the subdivision (or bonus issue) is less than HK$1 based on the lowest daily closing price of the shares during the six-month period before the announcement of the share subdivision (or bonus issue). Without prejudice to the requirements of Rule 13.64A, listed issuers proposing share subdivision or consolidation should continue to follow the Exchange's guidance set out in this Listing Decision.

      • LD101-2016

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        HKEX LISTING DECISION
        HKEX-LD101-2016 (published in April 2016)

        Summary
        Parties Company A to Company C – Main Board and GEM listing applicants whose applications were returned by the Exchange in 2015
        Issue To provide guidance on why the Exchange returned certain listing applications
        Listing Rules Main Board Rule 9.03(3)
        GEM Rules 12.09 and 12.14
        Related Publications HKEx-LD84-2014 and HKEx-LD91-2015
        Decision The Exchange returned the applications.

        PURPOSE

        1. This Listing Decision in the Appendix sets out the reasons why the Exchange returned certain listing applications from 1 January to 31 December 2015. For the reasons listing applications were returned before this period, please refer to the listing decisions stated in “Related Publications” above.

        APPLICABLE RULES, REGULATIONS AND PRINCIPLES

        2. Main Board Rule 9.03(3) (GEM Rule 12.09(1)) requires an applicant to submit a listing application form, an Application Proof and all other relevant documents under Main Board Rule 9.10A(1)(GEM Rules 12.22 and 12.23), and the information in these documents must be substantially complete except in relation to information that by its nature can only be finalised and incorporated at a later date.
        3. If the Exchange decides this information is not substantially complete, the Exchange will not continue to review any documents relating to the application. All documents, including the Form A1 (Form 5A for GEM cases) (except for the retention of a copy of these documents for the Exchange's record) submitted to the Exchange will be returned to the sponsor (GEM Rule 12.09(2)).

        ****

        Appendix

        Returned cases in 2015
        Company Reasons for return
        Company A

        (a Main Board Applicant)

        Company A provided financial services.

        The application was returned due to omission of material information of loans guaranteed by connected persons:

        Company A disclosed in its Application Proof that neither it nor its related parties had guaranteed any loan granted to its independent customers during the track record period.

        After receiving comments from the Exchange, Company A revised its draft listing document to disclose that connected persons had provided guarantees for loans to independent customers which accounted for 3.5% to 11.1% of the total amount of loans granted during the track record period.

        The Exchange considered that transactions involving connected persons should be subject to a higher level of scrutiny as they are normally in a position to significantly influence the management or the decision of the applicant. Material information does not necessarily require the amount involved to be large.

        There were also associated concerns on the effectiveness of Company A's corporate governance measures as there was no guarantee agreement between Company A and the connected persons, while Company A entered into guarantee agreements with non-connected persons. No information had been provided as to the applicable terms and conditions of the guarantees from the connected persons, including how they could be enforced in the absence of agreements. Further, there was no information on whether the guaranteed loans would continue and whether they would constitute connected transactions upon listing.

        Company B

        (a GEM Applicant)

        Company B provided conferencing services.

        The application was returned due to omission of the following material information in the Application Proof relating to a Company B's director, who was also its chairman and controlling shareholder (“Director A”):

        (i) a compulsory winding up order granted by the court against a company in which Director A was an executive director and a minority shareholder; and
        (ii) certain non-compliances of the Listing Rules by two Hong Kong listed companies during the period when Director A was a director of these companies.

        The Exchange considered the omitted information to be material as it would enable the Exchange and potential investors to assess the integrity, character and competency of Director A.

        Company C

        (a GEM Applicant)

        Company C was in the catering business.

        The application was returned because Company C failed to provide, at the time of filing its Form 5A, a profit forecast memorandum covering the period up to the year ending [year T+1] as required under GEM Rule 12.22(14b) based on its proposed listing timetable as stated in its Form 5A.

        GEM Rule 12.22(14b) requires where an Application Proof does not contain a profit forecast, an applicant to provide a final or an advanced draft of profit forecast memorandum covering the period up to the forthcoming financial year end date after the date of listing and cash flow forecast memorandum covering at least 12 months from the expected date of publication of the listing document. Company C's profit forecast memorandum only covered the year ending [year T].

        This is the same reason for a return in 2014. See details of Company K in HKEx-LD91-2015.

      • LD100-2016

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        HKEX LISTING DECISION
        HKEX-LD100-2016 (published in April 2016)

        Summary
        Parties Company A to Company G – Main Board and GEM listing applicants whose applications were rejected by the Exchange in 2015
        Issue To provide guidance on why the Exchange rejected certain listing applications
        Listing Rules Main Board Rules 2.06 and Chapter 8
        GEM Rules 2.09 and Chapter 11
        Related Publications HKEX-GL68-13, HKEX-LD92-2015
        Decision The Exchange rejected the applications.

        PURPOSE

        1. This Listing Decision in the Appendix sets out the reasons why the Exchange rejected certain listing applications from 1 January to 31 December 2015.

        APPLICABLE LISTING RULES

        2. Chapter 8 of the Main Board Rules and Chapter 11 of the GEM Rules set out detailed eligibility requirements which a new applicant must fulfill and state that both the applicant and its business must, in the opinion of the Exchange, be suitable for listing.
        3. Main Board Rule 2.06 and GEM Rule 2.09 state that suitability for listing depends on many factors. Applicants for listing should appreciate that compliance with Listing Rules may not itself ensure an applicant's suitability for listing. You may refer to HKEX-GL68-13 which provides guidance on the factors that the Exchange would take into consideration when assessing whether an applicant and its business are suitable for listing under Main Board Rule 8.04 (GEM Rule 11.06).

        ****

        Appendix

        Rejection cases in 2015
        Company Reasons for rejection
        Company A

        (a Main Board Applicant)

        Company A was a mining company whose principal operations and assets were in a high risk jurisdiction. The extreme uncertainties rendered Company A not suitable for listing and the application was rejected. The following factors, among other things, were taken into account:

        (i) Company A's principal assets and operations were located in a jurisdiction with legal and political uncertainties and a high Corruption Perceptions Index1 in accordance with Transparency International. These uncertainties and concerns gave rise to questions as to whether Company A could carry out its business in a viable manner or retain ownership of its assets; and
        (ii) there were repeated delays in the trial production schedule for a major project during and after the track record period, and its other mining projects had ceased operation after the track record period pending renewal of Company A's exploration licence which had been outstanding since Company A's listing application was submitted.
        Company B

        (a Main Board Applicant)

        Company B was in a gambling-related business. Company B received income from casino operators for introducing VIP players to designated VIP rooms at the casino operators' venues. The VIP players were sourced and introduced by junket agents; and Company B paid these agents a commission accordingly.

        The application was rejected on suitability ground due to the following factors:

        Deteriorating financial performance

        (i) Company B's deteriorating financial performance during the track record period was unlikely to be short-term in light of the industry outlook and keen competition among peers;

        Payments to a connected person were questionable

        (ii) concerns over the completeness, accuracy and genuineness of the lump sum service fees paid to a connected person which represented a material portion of Company B's selling, general and administrative expenses during the track record period; and

        Track record results not representative of future performance

        (iii) Company B's track record results were not representative of its future performance due to material changes in its revenue model since the third quarter of the second year of the track record period with respect to the basis of calculating (a) the income received from the casino operators; (b) the commission payable to the junket agents; and the charges payable to a connected person for the provision of human resources and administrative services after the track record period.
        Company C

        (a Main Board Applicant)

        Company C provided services in the construction industry.

        The application was rejected due to the following factors:

        Material Impact Non-compliances

        (i) during the track record period, Company C undertook projects that exceeded the permitted scope of its qualification (“Permitted Scope”) and its main operating subsidiaries also did not comply with the work safety licence requirement until shortly before the date of listing application (collectively, “Material Impact Non-compliant Business”);

        Inability to meet Main Board Rule 8.05(1)

        (ii) Company C had not demonstrated that after exclusion of the profit contributed by the Material Impact Non-compliant Business during the track record period, it could meet the minimum profit requirement under Main Board Rule 8.05(1)(a); and

        Directors' suitability under Main Board Rules 3.08 and 3.09

        (iii) Although Company C's directors had been aware of the breaches of the Permitted Scope before the track record period, Company C continued to enter into new contracts with contract values exceeding the Permitted Scope during the track record period. The directors were also aware that Company C was in breach of the work safety licence requirement but Company C continued to carry on its business without the work safety licences during most of its track record period. Company C and its sponsor did not satisfy the Exchange that Company C's directors had the integrity, competence and required level of skill, care and diligence as required under the Listing Rules.
        Company D

        (a Main Board Applicant)

        Company D was a mining company. Its mine commenced commercial production in 2014 and recorded immaterial revenue in 2014 and in the first half of 2015. Company D applied for a waiver from strict compliance with the requirements of Main Board Rule 8.05 under Main Board Rule 18.04.

        The application was rejected because of Company D's inability to meet the Main Board Rule 8.05(1). It was not qualified for the waiver under Main Board Rule 18.04 as it had not demonstrated that the mine had a clear path to commercial production and a demonstrable path to profitability based on the following factors:

        (i) there was insufficient justification for Company D's breakeven analysis to substantiate the mine's profitability;
        (ii) Company D had not demonstrated that it was able to generate sufficient funding for a planned increase of its annual designed mining capacity where approximately half of the required funding had to be derived from Company D's operating activities and/or future fund raisings. There were extreme uncertainties as to whether Company D had demonstrated its ability to sell its products as:
        (a) it only had four customers during the track record period and all the sales agreements would expire in 2016;
        (b) it had not fulfilled any of its existing sales commitments since it commenced commercial production in 2014;
        (c) it was not able to demonstrate there would be sufficient demand for its products;
        (d) it estimated an ambitious increase in sales volume of its low value by-product in 2017 by 17 times as compared with that in 2016 with no supporting data; and
        (iii) there were uncertainties as to whether Company D would be able to renew its mining permit as it might not have sufficient funds to design and/or construct the relevant facilities and measures and pay relevant fees and taxes due to the reasons in (ii) above.
        Company E

        (a Main Board Applicant)

        Company E was a property investment company.

        The application was rejected after taking into account the totality of the following factors:

        No track record of current business structure

        (i) during the track record period, Company E invested in retail properties and had a number of investment properties. The business was operated by the controlling shareholder who was assisted by one staff member. In preparation for its listing, Company E employed 11 staff. There was no track record of Company E having operated as a business with its own personnel and established systems and processes. Company E did not have a track record of the current structure to provide comfort on the effectiveness of its internal controls, management and operational systems which investors could rely on to assess Company E. In addition, there were questions on Company E's ability to comply with the management continuity requirement during the track record period;

        Extreme reliance on fair value gains from investment properties to meet minimum profit requirement

        (ii) Company E's reliance on the fair value gains from investment properties to meet minimum profit requirement was extreme as they accounted for more than 80% of its net profit during the track record period. Although reliance on fair value gains does no per se render an applicant engaged in a property business not suitable for listing (see paragraph 3.2(7) of HKEX-GL68-13), the Exchange was of the view that Company E's reliance on the fair value gains was extreme; and

        Deteriorating financial performance

        (iii) there was significant deterioration of Company E's financial performance after the track record period due to the poor market outlook; and increased finance costs and operating expenses. According to its forecast memorandum submitted to the Exchange, the downward trend would continue after listing and that Company E would continue to heavily rely on fair value gains rather than actual business operations. Company E had not satisfactorily demonstrated that its business was sustainable.
        Company F

        (a GEM Applicant)

        Company F was an exhibition organiser.

        The application was rejected on the basis that one of Company F's directors (“Director A”) was not considered suitable under GEM Rules 5.01 and 5.02 for the following reasons:

        Advances to third parties

        (i) Director A had failed to fulfill his fiduciary duties and acted in good faith in the interests of Company F in respect of two advances to third parties made by Company F's subsidiaries at his instruction. These advances were significant to Company F but all were unsecured, interest-free and with no fixed repayment terms. These advances exposed Company F to significant credit risks and were in violation of the relevant laws and regulations. Further, Director A had failed to notify the relevant Company F's subsidiaries of the partial repayments received by him and deposited them into his personal account. The failure of Director A to inform Company F of the partial repayments received by him had resulted in material misstatements in the Company F's group audited accounts; and

        Systemic Non-compliances

        (ii) Company F failed to comply with the relevant laws and regulations in six instances related to its core business during its track record period. The systemic non-compliances were of a serious nature and raised questions as to whether Company F's directors (including Director A) were suitable under GEM Rules 5.01 and 5.02; and
        (iii) Company F did not enhance its internal controls to prevent reoccurrence of the systemic non-compliances until the Exchange commented on them. The enhanced internal controls therefore had not been tested for effectiveness.
        Company G

        (a GEM Applicant)

        Company G provided printing services.

        The application was rejected on suitability ground due to concerns on the sustainability of Company G's business. The following factors were taken into account:

        (i) deteriorating financial performance - there was a significant decline in Company G's net profit during the track record period. After the track record period, Company G's largest customer, which had contributed significantly to Company G's revenue during the track record period, shifted its orders of a specific product to Company G's competitor, leading to a significant decrease in Company G's forecast sales;
        (ii) Company G's profit forecast could not be substantiated – although its profit forecast took into account the loss of its largest customer, it was uncertain whether orders from new customers could compensate for the lost orders, as only a small part of the forecast revenue was made up of confirmed orders from new customers. Further, there were questions on Company G's forecast of a significant growth in its revenue as compared with its industry peers, given the mature nature of the industry and Company G's market share;
        (iii) intense competition – Company G was believed to have lost its largest customer due to price competition with its competitor. Company G might face further pricing pressures in order to attract new customers and to retain its existing customers which would lead to further deterioration of its future profitability; and
        (iv) purchase of new machines – Company G planned to use more than 90% of its net IPO proceeds to acquire new machines for its business despite the fact that the utilisation rates of its existing major machines were only between 46% and 55% during the track record period. The resulting additional depreciation charges arising from any new machines and the related additional fixed costs (such as cost of additional staff required to operate them, maintenance cost, etc.) would negatively impact on the Company G's future profitability. Further, there was no clear explanation on its strategy and the need for the additional machines.

        1 Corruption Perceptions Index is prepared by Transparency International which is the global civil society organisation leading the fight against corruption. It ranks countries according to their perceived levels of public-sector corruption relating to the bribery of public officials, kickbacks in public procurement, embezzlement of public funds, and questions that probe the strength and effectiveness of public-sector anti- corruption efforts.

      • LD99-2016

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        HKEX LISTING DECISION
        HKEX-LD99-2016 (published in March 2016)

        Party Company A – a Main Board issuer

        Subsidiary B – a wholly owned subsidiary of Company A

        Mr. C – Company A's controlling shareholder

        Mr. D – a third party who agreed on condition to acquire all of Mr. C's shareholding in Company A
        Issue Whether Company A would have sufficient operations or assets under Rule 13.24 after the disposal
        Listing Rules Main Board Rule 13.24
        Decision Company A would not meet Rule 13.24 upon completion of the disposal

        FACTS

        1. Company A and its subsidiaries (Group) were engaged in the manufacturing and distribution of multimedia and communication products.
        2. Subsidiary B was engaged in the manufacturing and distribution of communication products of a major brand of the Group (Disposal Business). It accounted for about 90% and 75% of Company A's revenue and assets. It was loss making in the latest financial year and recorded a profit of over HK$30 million in each of the past few years.
        3. Company A and Mr. C proposed to enter into the following transactions:
        a. Company A would sell Subsidiary B to Mr. C for cash (Disposal). The Disposal constituted a very substantial disposal and connected transaction and was subject to independent shareholders' approval.
        b. Mr. C would sell his entire shareholding in Company A to Mr. D who would then make an offer to acquire all the remaining shares in Company A from other shareholders. This transaction was conditional on the completion of the Disposal.
        4. Upon completion of the Disposal, Company A would continue its existing business in the manufacturing and distribution of multimedia and communication products, excluding the product line owned by Subsidiary B (Remaining Business).
        5. Company A submitted that the product line of Subsidiary B was loss making and the Disposal would allow the Group to focus on other product lines with better prospect and more profitable.
        6. Company A would use the proceeds from the Disposal as general working capital and for future business opportunities. Company A would record a loss of about HK$4 million from the Disposal.
        7. There was an issue whether Company A would have sufficient operations or assets under Rule 13.24 after the Disposal.
        8. Company A was of the view that it would be able to meet Rule 13.24 upon completion of the Disposal because:
        a. For the latest financial year, the Remaining Business recorded revenue and profit of over HK$200 million and HK$4 million.
        b. Upon the Disposal, the Group would have total assets of about HK$450 million, including trade and other receivables, cash, inventories, fixed assets and trademark.
        c. Based on Company A's profit forecast, the Remaining Business would continue to record profit and grow steadily.
        d. The Group had been engaged in the Remaining Business and the Disposal Business since its listing on the Exchange. The Remaining Business comprised distinct product lines and operated independently from the Disposal Business with its own manufacturing and distribution teams.
        e. The Disposal would improve the Group's financial performance by disposing of the loss making business.

        APPLICABLE LISTING RULES

        9. Rule 13.24 states that-
        “An issuer shall carry out, directly or indirectly, a sufficient level of operations or have tangible assets of sufficient value and/or intangible assets for which a sufficient potential value can be demonstrated to the Exchange to warrant the continued listing of the issuer's securities.”
        10. Listing Decisions (LD35-2012 and LD88-2015) describe the purpose behind Rule 13.24 and provide guidance on the application of the Rule:
        Rule 13.24 is intended to maintain overall market quality. Issuers that fail to meet this Rule are "blue sky companies" where public investors have no information about their business plans and prospects. This leaves much room for the market to speculate on their possible acquisitions in the future. To allow these issuers' shares to continue to trade and list may have an adverse impact on investor confidence.



        … if an issuer takes a corporate action, the Exchange is more likely to suspend the issuer's trading where the issuer fails to satisfy the Exchange that it would have a viable and sustainable business to justify its continued listing after completion of the corporate action. In this case, shareholders would have the opportunity to decide whether to allow the corporate action to proceed, knowing that the Exchange would exercise the suspension power should the corporate action proceed. In that way shareholders' interests are safeguarded through the shareholders' approval process.”

        ANALYSIS

        11. Rule 13.24 requires issuers to maintain a sufficient level of operations or assets of sufficient value to warrant the continued listing of their securities. Without quantitative criteria for sufficiency, this Rule is a qualitative test and is assessed case by case.
        12. The Exchange considered that Company A would not have sufficient operations or assets to meet Rule 13.24 upon completion of the Disposal because:
        (a) Company A proposed to dispose of the Disposal Business, which accounted for 90% and 75% of Company A's revenue and assets. The Disposal would substantially reduce Company A's scale of operations and assets.
        (b) The Remaining Business recorded only minimal profit for the latest financial year and was loss making in the past few years. It could not demonstrate a proven track record of sustainability and viability. Its profit forecast also failed to show substantial improvement in its operations and financial performance after the Disposal.
        (c) The assets of the Remaining Business would be insufficient to meet Rule 13.24 because, as mentioned in (b) above, the operations of these assets could not generate sufficient revenue and profits to justify a listing. The other asset of the Group would be the cash proceeds from the Disposal, but Company A could not demonstrate how the cash retained by the Group would enable it to substantially improve its operations.
        (d) The Disposal formed part of the arrangements between Mr. C and Mr. D and was made to facilitate the sale of a controlling interest in Company A. Company A had been engaged in the Disposal Business and Remaining Business since its listing on the Exchange. The Disposal Business accounted for the bulk of Company A's existing businesses and had been profitable in the past except in the latest financial year. While Company A submitted that the Disposal would improve its financial performance, it failed to support its case or demonstrate that the Remaining Business was viable and sustainable.

        CONCLUSION

        13. The Exchange considered that Company A would not comply with Rule 13.24 should it proceed with the Disposal.

      • LD98-2016

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        HKEX LISTING DECISION
        HKEX-LD98-2016 (published in March 2016)

        Party Company A – a Main Board issuer

        Subsidiary B – a major subsidiary of Company A

        Company C – a third party proposing to acquire Subsidiary B from Company A
        Issue Whether Company A would have sufficient operations or assets under Rule 13.24 after the disposal
        Listing Rules Main Board Rule 13.24
        Decision Company A would not meet Rule 13.24 upon completion of the disposal

        FACTS

        1. Company A, through Subsidiary B, was principally engaged in event operation and entertainment business.
        2. Company A proposed to (i) sell a 25% interest in Subsidiary B to Company C (Disposal); and (ii) grant a call option (Call Option) to Company C over the remaining 75% interest in Subsidiary B upon completion of the Disposal. The Call Option would be exercisable 24 months after the Disposal.
        3. Company A intended to diversify into other businesses in the meantime.
        4. The Disposal would be a discloseable transaction for Company A. It together with the grant of the Call Option would be a very substantial disposal with the revenue and asset ratios of nearly 100%.
        5. There was an issue whether Company A would have sufficient operations or assets under Rule 13.24 upon completion of the proposal (i.e. the Disposal and the grant of the Call Option).
        6. Company A was of the view that it would be able to meet Rule 13.24 upon completion of the proposal because:
        a. Until and unless Company C exercised the Call Option, Company A would continue to control Subsidiary B and therefore its business operations and assets.
        b. The Call Option was not exercisable until 24 months after the Disposal. By the time it was exercised, Company A would have been expanded into other businesses.

        APPLICABLE LISTING RULES

        7. Rule 6.01 states that-
        "Listing is always granted subject to the conditions where the Exchange considers it necessary for the protection of the investor or the maintenance of an orderly market, it may at any time direct a trading halt or suspend dealings in any securities or cancel the listing of any securities in such circumstances and subject to such conditions as it thinks fit, whether requested by the issuer or not. The Exchange may also do so where:-
        (1) . . .;
        (2) . . .;
        (3) the Exchange considers that the issuer does not have a sufficient level or operations or sufficient assets to warrant the continued listing of the issuer's securities (see rule 13.24); or
        (4) the Exchange considers that the issuer or its business is no longer suitable for listing."
        8. Rule 13.24 states that-
        "An issuer shall carry out, directly or indirectly, a sufficient level of operations or have tangible assets of sufficient value and/or intangible assets for which a sufficient potential value can be demonstrated to the Exchange to warrant the continued listing of the issuer's securities."

        ANALYSIS

        9. Company A's business operations and assets were primarily carried out and held through Subsidiary B.
        10. It was Company A's view that it would continue to have sufficient operations and assets to justify its listing before the exercise of the Call Option. The Exchange disagreed because:
        •  The exercise of the Call Option was entirely at Company C's discretion. By granting the Call Option, Company A was prepared to lose its ownership and control over Subsidiary B. As Company A had no other material business operations or assets, it would no longer be suitable for listing upon completion of the proposal. Whether and when Company C would exercise the Call Option was irrelevant.
        •  Company A stated its intention to carry out other businesses, but it could not demonstrate that it would have a new business suitable for listing upon completion of the proposal.

        CONCLUSION

        11. The Exchange considered that upon completion of the proposal, Company A would fail to comply with Rule 13.24 and would become unsuitable for listing.

      • LD97-2016

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        HKEX LISTING DECISION
        HKEX-LD97-2016 (published in March 2016)

        Party Company A – a Main Board issuer

        Mr. B – a former controlling shareholder of Company A
        Issue Whether Company A would have sufficient operations or assets under Rule 13.24 after a major disposal
        Listing Rules Main Board Rule 13.24
        Decision Company A would not meet Rule 13.24 upon completion of the disposal

        FACTS

        1. Company A and its subsidiaries (Group) were engaged in the property construction and related business (Construction Business) since its listing on the Exchange. Since last year, the Group has diversified into property management business (Property Business) and trading of financial products (Trading Business).
        2. Company A proposed to sell the Construction Business to Mr. B for cash (Disposal). Mr. B was a director of certain subsidiaries of Company A that carried on the Construction Business. He ceased to be Company A's controlling shareholder about three years ago when he sold his entire interest in Company A to the existing controlling shareholder.
        3. Company A submitted that the Construction Business had been loss making in the last two years, and the Disposal would allow the Group to diversify into other businesses with growth potential. The sale proceed would be used by the Group as general working capital.
        4. The Disposal would reduce the Group's revenue and assets by about 70%. It constituted a major transaction and was subject to shareholders' approval.
        5. There was an issue whether Company A would have sufficient operations or assets under Rule 13.24 after the Disposal.
        6. Company A was of the view that it would be able to meet Rule 13.24 upon completion of the Disposal because:
        a. The Group would continue to carry out the Property Business and the Trading Business (together, Remaining Businesses).
        b. The Property Business involved the provision of management services to a number of small-scale property developers in the PRC and would provide a stable source of income to the Group in the coming years. The Group recorded minimal revenue and a segment loss from the Property Business in the last financial year because it only acquired this business for a few months. Company A expected the Property Business to generate revenue of about HK$20 million and a segment profit of over HK$10 million in the current financial year.
        c. The Group commenced the Trading Business last year and recorded revenue and a segment profit of over HK$500 million and HK$1 million. This business was expected to double its revenue and segment profit in the current financial year.
        d. Company A also held a residential property overseas (Property) with a book value of about HK$20 million. It planned to re-develop the Property for re-sale.

        APPLICABLE LISTING RULES

        7. Rule 13.24 states that-
        “An issuer shall carry out, directly or indirectly, a sufficient level of operations or have tangible assets of sufficient value and/or intangible assets for which a sufficient potential value can be demonstrated to the Exchange to warrant the continued listing of the issuer's securities.”
        8. Listing Decisions (LD35-2012 and LD88-2015) describe the purpose behind Rule 13.24 and provide guidance on the application of the Rule:
        Rule 13.24 is intended to maintain overall market quality. Issuers that fail to meet this Rule are "blue sky companies" where public investors have no information about their business plans and prospects. This leaves much room for the market to speculate on their possible acquisitions in the future. To allow these issuers' shares to continue to trade and list may have an adverse impact on investor confidence.



        … if an issuer takes a corporate action, the Exchange is more likely to suspend the issuer's trading where the issuer fails to satisfy the Exchange that it would have a viable and sustainable business to justify its continued listing after completion of the corporate action. In this case, shareholders would have the opportunity to decide whether to allow the corporate action to proceed, knowing that the Exchange would exercise the suspension power should the corporate action proceed. In that way shareholders' interests are safeguarded through the shareholders' approval process.”

        ANALYSIS

        9. Rule 13.24 requires issuers to maintain a sufficient level of operations or assets of sufficient value to warrant the continued listing of their securities. Without quantitative criteria for sufficiency, this Rule is a qualitative test and is assessed case by case.
        10. The Exchange considered that Company A would not have sufficient operations or assets to meet Rule 13.24 upon completion of the Disposal because:
        a. Company A proposed to dispose of the Construction Business, which was its main business since its listing on the Exchange and accounted for 70% of Company A's revenue and assets. The Disposal would substantially reduce Company A's scale of operations and assets.
        b. After the Disposal, the Group would be left with the Remaining Businesses that were acquired or established for less than one year. These businesses recorded a loss or minimal profit in the last financial year. Based on Company A's projections in the current year, the Property Business would record revenue of HK$20 million and a segment profit of HK$10 million only. This result had not yet taken into account Company A's corporate expenses. The segment profits from the Trading Business would also be minimal as the Group was only trading products on an indent basis with a very low profit margin. The Exchange considered that the scale of the Remaining Businesses was insufficient to justify a listing.
        c. The Exchange also considered that the Group would not have sufficient assets to justify a listing after the Disposal:-
        •  The assets of the Remaining Businesses were mainly cash and trade receivables. These assets were insufficient to meet Rule 13.24 because, as mentioned in (b) above, the operations of these assets could not generate sufficient revenue and profits to justify a listing.
        •  The Property was the only other asset of the Group and it had a value of only HK$20 million. While Company A submitted its intention to re-develop the property, there was no detail about the re-development plan. Company A did not demonstrate how it could substantially improve the Group's operations and financial performance after the Disposal.

        CONCLUSION

        11. The Exchange considered that Company A would not comply with Rule 13.24 should it proceed with the Disposal.

      • LD96-2016

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        HKEX LISTING DECISION
        HKEX-LD96-2016 (published in March 2016)

        Party Company A – a Main Board issuer

        Target – a company that Company A proposed to acquire from Company B

        Company B – the vendor of the Target
        Issue Whether Company A's proposed acquisition of the Target would be a reverse takeover
        Listing Rules Main Board Rule 14.06(6)
        Decision The acquisition was a reverse takeover

        FACTS

        1. Company A was principally engaged in trading of food and beverage products.
        2. Company A proposed to acquire the Target from Company B. It would settle the consideration by issuing convertible bonds to Company B (with a conversion restriction that prevented Company B from holding a 30% interest or higher). Assuming full conversion of the convertible bonds, Company B would be holding over 50% of issued shares of Company A as enlarged by the conversion shares.
        3. The Target was engaged in production and sale of certain types of organic fertilizers. It sold its products to end users through its own sale team and a number of distributors. It recorded profits of about HK$15 million to HK$20 million in the last three years.
        4. Company B was the Target's sole supplier of a major raw material (Material) necessary for producing the Target's products. Company B produced the Material using a unique technology developed and owned by it (Technology).
        5. The Target intended to produce the Material itself in the coming years. Company B would authorize the Target to use the Technology for producing the Material. It was expected that the Target could master the Technology and achieve full scale production of the Material within three years.
        6. The revenue, consideration and equity ratios of the proposed transaction were between 110% and 150%. The asset ratio was about 90%.
        7. Company A submitted that the Target was able to meet the minimum profit requirement under Rule 8.05 and the size of the acquisition was not extreme. It sought the Exchange's confirmation that the proposed acquisition would not constitute a reverse takeover.

        APPLICABLE LISTING RULES

        8. Rule 8.04 requires that both the issuer and its business "must, in the opinion of the Exchange, be suitable for listing".
        9. Rule 14.06(6) defines a "reverse takeover" as "an acquisition or a series of acquisitions of assets by an issuer which, in the opinion of the Exchange, constitutes, or is part of a transaction or arrangement or series of transactions or arrangements which constitute, an attempt to achieve a listing of the assets to be acquired and a means to circumvent the requirements for new applicants set out in Chapter 8 of the Exchange Listing Rules…". This is a principle based test.
        10. The Exchange Guidance Letter (HKEX-GL78-14) on reverse takeovers (RTOs) explains that Rule 14.06(6) is an anti-avoidance provision designed to prevent circumvention of the new listing requirements. Paragraph 7 of the guidance letter states that:-
        "If a transaction falls outside the bright line tests, the Exchange will apply the principle based test to assess whether the acquisition constitutes an attempt to achieve a listing of the assets to be acquired and a means to circumvent the requirements for new listing. The transaction would be treated as a RTO under the principle based test if the Exchange considers it is an 'extreme' case taking into account the following criteria:
        •  the size of transaction relative to the size of the issuer;
        •  the quality of the business to be acquired—whether it can meet the trading record requirements for listings, or whether it is unsuitable for listing (e.g. an early stage exploration company);
        •  the nature and scale of the issuer's business before the acquisition (e.g. whether it is a listed shell);
        •  any fundamental change in the issuer's principal business (e.g. the existing business would be discontinued or very immaterial to the enlarged group's operations after the acquisition);
        •  other events and transactions (historical, proposed or intended) which, together with the acquisition, form a series of arrangements to circumvent the RTO Rules (e.g. a disposal of the issuer's original business simultaneously with a very substantial acquisition); and
        •  any issue of Restricted Convertible Securities1 to the vendor which would provide it with de facto control of the issuer."

        ANALYSIS

        11. While the proposed acquisition fell outside the bright line tests, the Exchange applied the principle based test with reference to the criteria set out in Guidance Letter GL78-14 to assess whether, taking the criteria together, the acquisition would constitute an attempt to achieve a listing of the assets to be acquired and a means to circumvent the new listing requirements.
        12. The Exchange considered that the proposed acquisition would be a reverse takeover under Rule 14.06(6) because:-
        a. The proposed acquisition was a means to circumvent the new listing requirements.
        •  The Target was unsuitable for listing. It relied on Company B's supply of the Material which was critical to its business operations. There were no other suppliers or substitutes for the Material, and the Target did not have the Technology and expertise to produce the Material itself. Company A could not demonstrate that the Target was, or would upon completion of the proposed acquisition be, capable of carrying on its business independently from Company B.
        •  The proposal involved Company A in acquiring part, and not the whole, of an integrated business from Company B. While the Target had planned to manufacture the Material itself, it was uncertain as to whether and when the Target would be able to do so, and the impact of any such change in business model on its financial results. The Target's track record could not reflect its performance under the new business model.
        b. As set out in the RTO guidance letter, the Exchange does not prescribe an absolute threshold in determining whether the size of a transaction is extreme. When assessing the impact of an acquisition on an issuer, the Exchange would take into account the nature and scale of the issuer's existing business after the acquisition, and whether the acquisition would result in a fundamental change in the issuer's business.
        •  In this case, Company A was loss making in recent years. It only operated a trading business that had a low level of activities and generated minimal gross profit. The Target's business would be significant to Company A after the acquisition.
        •  The Target's business in manufacturing and sale of fertilizers was completely different from Company A's existing businesses. The acquisition would result in a fundamental change in Company A's principal business.
        c. The acquisition would be a means for Company B (who would acquire a de facto control of Company A using restricted convertible securities) to list the Target by injecting it into Company A.

        CONCLUSION

        13. The acquisition constituted a reverse takeover for Company A under Rule 14.06(6).

        1 Restricted Convertible Securities are highly dilutive convertible securities with a conversion restriction mechanism (e.g. restriction from conversion that would cause the securities holder to hold 30% interest or higher) avoid triggering a change of control under the Code on Takeovers and Mergers.

      • LD95-2016

        View Current PDF

        HKEX LISTING DECISION
        HKEX-LD95-2016 (published in March 2016)

        Party Company A – a Main Board issuer

        Target – a company holding inventories and production facilities

        Mr. B – the owner of the Target

        PRC Company – a company engaging in manufacturing and sale of beverage products in the PRC
        Issue Whether Company A's proposed acquisition of an interest in the Target from Mr. B would be a reverse takeover
        Listing Rules Main Board Rule 14.06(6)
        Decision The acquisition was a reverse takeover

        FACTS

        1. Company A was principally engaged in manufacturing and sale of household products. It proposed to acquire the Target to diversify its business into the beverage industry.
        2. The Target was newly set up by Mr. B to hold certain inventories, machinery and equipment for the production of beverage products (together, Target Assets).
        3. As the Target had not yet obtained a licence for manufacturing beverage products, it would enter into supply and sales contracts with the PRC Company for a term of three years upon completion of the proposed acquisition:
        •  under the supply contract, the PRC Company (which had a manufacturing licence) would manufacture beverage products for the Target using the Target Assets; and
        •  under the sales contract, the Target would sell the beverage products supplied under the supply contract to the PRC Company.
        4. These supply and sales contracts would allow the Target to commence operations before it obtained a licence for manufacturing beverage products, and to make use of the PRC Company's distribution channel to sell the products to customers.
        5. The consideration for the proposed acquisition was determined with reference to a preliminary valuation of the Target Assets. The asset ratio and the consideration ratio for the transaction was about 300% and 200% respectively.
        6. Company A would satisfy the consideration by issuing new shares (Consideration Shares) and convertible bonds (with a conversion restriction that prevented Mr. B from holding a 30% interest or higher) to Mr. B. As a result, Mr. B would become the single largest shareholder (28%) of Company A upon completion of the acquisition. Assuming full conversion of the convertible bonds, Mr. B would be holding about 78% of issued shares as enlarged by the issue of new shares and conversion shares.
        7. There was a question whether the proposed acquisition would constitute a reverse takeover for Company A.

        APPLICABLE LISTING RULES

        8. Rule 8.04 requires that both the issuer and its business "must, in the opinion of the Exchange, be suitable for listing".
        9. Rule 14.06(6) defines a "reverse takeover" as "an acquisition or a series of acquisitions of assets by an issuer which, in the opinion of the Exchange, constitutes, or is part of a transaction or arrangement or series of transactions or arrangements which constitute, an attempt to achieve a listing of the assets to be acquired and a means to circumvent the requirements for new applicants set out in Chapter 8 of the Exchange Listing Rules…". This is a principle based test.
        10. The Exchange Guidance Letter (HKEX-GL78-14) on reverse takeovers (RTOs) explains that Rule 14.06(6) is an anti-avoidance provision designed to prevent circumvention of the new listing requirements. Paragraph 7 of the guidance letter states that:-
        "If a transaction falls outside the bright line tests, the Exchange will apply the principle based test to assess whether the acquisition constitutes an attempt to achieve a listing of the assets to be acquired and a means to circumvent the requirements for new listing. The transaction would be treated as a RTO under the principle based test if the Exchange considers it is an 'extreme' case taking into account the following criteria:
        •  the size of transaction relative to the size of the issuer;
        •  the quality of the business to be acquired—whether it can meet the trading record requirements for listings, or whether it is unsuitable for listing (e.g. an early stage exploration company);
        •  the nature and scale of the issuer's business before the acquisition (e.g. whether it is a listed shell);
        •  any fundamental change in the issuer's principal business (e.g. the existing business would be discontinued or very immaterial to the enlarged group's operations after the acquisition);
        •  other events and transactions (historical, proposed or intended) which, together with the acquisition, form a series of arrangements to circumvent the RTO Rules (e.g. a disposal of the issuer's original business simultaneously with a very substantial acquisition); and
        •  any issue of Restricted Convertible Securities1 to the vendor which would provide it with de facto control of the issuer."

        ANALYSIS

        11. While the proposed acquisition fell outside the bright line tests, the Exchange applied the principle based test with reference to the criteria set out in Guidance Letter GL78-14 to assess whether, taking the criteria together, the acquisition would constitute an attempt to achieve a listing of the assets to be acquired and a means to circumvent the new listing requirements.
        12. The Exchange considered that the proposed acquisition would be a reverse takeover under Rule 14.06(6) because:-
        a. The proposed acquisition was a means to circumvent the new listing requirements:-
        •  The Target did not meet the new listing requirements. It had no trading record to meet the profit requirement under Rule 8.05(1).
        •  The Target would be unsuitable for listing under Rule 8.04. It would heavily rely on the PRC Company for both the production and sale of its products and would be unable to carry on its business independent from the PRC Company.
        b. The value of the Target Assets was significant to Company A, representing about 3 times of Company A's assets value. The Target's business in manufacturing and sale of beverage products was completely different from Company A's existing businesses. There would be a fundamental change in Company A's principal business following the completion.
        c. The proposed acquisition would be a means for Mr. B (who would become the single largest shareholder of Company A) to list the Target by injecting it into Company A.
        Revised proposal
        13. After the Exchange decided to treat the proposed acquisition as a reverse takeover, Company A submitted a revised proposal to acquire only a 30% interest in the Target. The consideration would be reduced accordingly and satisfied by the issue of the Consideration Shares and promissory notes to Mr. B. The asset ratio and the consideration ratio for the revised proposal would be about 80% and 90% respectively. Company A sought the Exchange's confirmation that the revised proposal would not constitute a reverse takeover.
        14. The Exchange noted that the revised proposal was made for the purpose of downsizing the acquisition to slightly below 100% (i.e. the threshold for very substantial acquisitions). Notwithstanding the change, the Exchange considered that the revised proposal would be a reverse takeover under Rule 14.06(6) because:-
        a. As set out in the RTO guidance letter, the Exchange does not prescribe an absolute threshold in determining whether the size of a transaction is extreme. When assessing the impact of an acquisition on an issuer, the Exchange would take into account the nature and scale of the issuer's existing business after the acquisition, and whether the acquisition would result in a fundamental change in the issuer's business.
        b. The revised proposal would still be a significant acquisition for Company A based on the asset and consideration ratios, and a means to circumvent the new listing requirements as the Target's business was completely different from Company A's existing business and was not suitable for listing. The revised proposal was still an extreme case based on a combination of these criteria.

        CONCLUSION

        15. The proposed acquisition constituted a reverse takeover for Company A under Rule 14.06(6).

        1 Restricted Convertible Securities are highly dilutive convertible securities with a conversion restriction mechanism (e.g. restriction from conversion that would cause the securities holder to hold 30% interest or higher) avoid triggering a change of control under the Code on Takeovers and Mergers.

      • LD94-2016

        View Current PDF

        HKEX LISTING DECISION
        HKEX-LD94-2016 (published in March 2016)

        Party Company A – a Main Board issuer

        The Fund – an investment fund
        Issue Whether Company A's proposed subscription for an interest in the Fund would be a reverse takeover
        Listing Rules Main Board Rule 14.06(6)
        Decision The proposed subscription was a reverse takeover

        FACTS

        1. Company A was principally engaged in the businesses of property investment, fund management, and fund and securities investment. Its available-for-sale investments included a number of fund investments with a total value of about HK$1.5 billion.
        2. Company A proposed to subscribe for an interest as a limited partner in the Fund with commitments of about HK$4.5 billion (which was about 80% of the size of the Fund). Company A would have no control over or right to participate in the management of the Fund and the investments to be made by the Fund. Its investment in the Fund would be accounted for as an available-for-sale investment in its financial statements.
        3. The proposed subscription represented about 80% of the asset value and over 900% of the market capitalization of Company A. Company A intended to finance the subscription using a loan facility granted to it by its controlling shareholder and its internal resources.
        4. The Fund was a newly established partnership. It did not have any investments, assets or liabilities, and had not recorded any income or expenses. Company A submitted that the Fund had a clear investment objective to invest in debt instruments of companies established to develop real estates in the PRC. Company A had considered the experience and track record of the directors of the Fund's general partners and was confident in the prospects of the Fund. The proposed subscription would allow Company A to leverage on the Fund's expertise, experience, relationship and resources to source and manage potential investments in the reviving PRC real estate market.
        5. There was a question whether the proposed subscription would constitute a reverse takeover for Company A.

        APPLICABLE LISTING RULES

        6. Rule 8.04 requires that both the issuer and its business "must, in the opinion of the Exchange, be suitable for listing".
        7. Rule 14.06(6) defines a "reverse takeover" as "an acquisition or a series of acquisitions of assets by an issuer which, in the opinion of the Exchange, constitutes, or is part of a transaction or arrangement or series of transactions or arrangements which constitute, an attempt to achieve a listing of the assets to be acquired and a means to circumvent the requirements for new applicants set out in Chapter 8 of the Exchange Listing Rules…". This is a principle based test.
        8. The Exchange Guidance Letter (HKEX-GL78-14) on reverse takeovers (RTOs) explains that Rule 14.06(6) is an anti-avoidance provision designed to prevent circumvention of the new listing requirements. Paragraph 7 of the guidance letter states that:-
        "If a transaction falls outside the bright line tests, the Exchange will apply the principle based test to assess whether the acquisition constitutes an attempt to achieve a listing of the assets to be acquired and a means to circumvent the requirements for new listing. The transaction would be treated as a RTO under the principle based test if the Exchange considers it is an 'extreme' case taking into account the following criteria:
        •  the size of transaction relative to the size of the issuer;
        •  the quality of the business to be acquired—whether it can meet the trading record requirements for listings, or whether it is unsuitable for listing (e.g. an early stage exploration company);
        •  the nature and scale of the issuer's business before the acquisition (e.g. whether it is a listed shell);
        •  any fundamental change in the issuer's principal business (e.g. the existing business would be discontinued or very immaterial to the enlarged group's operations after the acquisition);
        •  other events and transactions (historical, proposed or intended) which, together with the acquisition, form a series of arrangements to circumvent the RTO Rules (e.g. a disposal of the issuer's original business simultaneously with a very substantial acquisition); and
        •  any issue of Restricted Convertible Securities1 to the vendor which would provide it with de facto control of the issuer."

        ANALYSIS

        9. While the proposed subscription fell outside the bright line tests, the Exchange applied the principle based test with reference to the criteria set out in Guidance Letter GL78-14 to assess whether, taking the criteria together, the acquisition would constitute an attempt to achieve a listing of the assets to be acquired and a means to circumvent the new listing requirements.
        10. The Exchange considered that the proposed subscription in the Fund would be a reverse takeover under Rule 14.06(6) because:-
        a. The subscription was of a significant size to Company A based on the asset ratio of 80% and the consideration ratio of 900%. Should Company A proceed with the subscription, the investment in the Fund would represent a significant part of Company A's assets.
        b. The subscription was a means to circumvent the new listing requirements. The Fund was newly set up and did not have any investments or assets. It had no track record to meet the profit requirement under Rule 8.05.
        c. Although Company A would invest a significant amount of money in the Fund, it would have no control over or right to participant in the management of the Fund or the investments to be made by the Fund. This raised a concern about suitability of listing.

        CONCLUSION

        11. The subscription for an interest in the Fund constituted a reverse takeover for Company A under Rule 14.06(6).

        1 Restricted Convertible Securities are highly dilutive convertible securities with a conversion restriction mechanism (e.g. restriction from conversion that would cause the securities holder to hold 30% interest or higher) avoid triggering a change of control under the Code on Takeovers and Mergers.

      • LD93-2016

        View Current PDF

        HKEX LISTING DECISION
        HKEX-LD93-2016 (published in March 2016)

        Party Company A – a Main Board issuer

        Newco – Company A's subsidiary proposed to seek a separate listing on the Exchange
        Issue Whether the Company A (excluding its interest in Newco) could rely on the unrealised fair value gains on investment properties to meet the profit requirement under Rule 8.05(1)(a)
        Listing Rules Main Board Rules 8.04, 8.05(1)(a) and Paragraph 3(c) of Practice Note 15
        Decision The Exchange rejected the spin-off proposal as Company A could not demonstrate that its property business was a substantive and sustainable business

        FACTS

        1. Company A, through its subsidiaries, was engaged in a number of principal businesses, including the manufacture and sale of certain household products (Manufacturing Business) and property investment (Property Business).
        2. Company A proposed to inject the Manufacturing Business into Newco and seek a separate listing of Newco on the Exchange. Company A (excluding Newco) (Remaining Group) would continue to carry out the property investment and other principal businesses. Newco would continue to be Company A's subsidiary after the proposed spin-off.
        3. Company A submitted that the Remaining Group could satisfy independently the requirements of Chapter 8 of the Rules. In particular, it was of the view that the Remaining Group could meet the profit requirement under Rule 8.05(1)(a).
        4. The Exchange noted that the Remaining Group's profits during the track record period were mainly attributable to the unrealized fair value gains on investment properties retained by the Remaining Group. The other businesses retained by the Remaining Group were loss making or generated minimal profits.
        5. The Remaining Group held a number of properties in commercial, industrial and residential buildings in Hong Kong and the PRC for leasing and capital appreciation purposes. The Property Business generated rental income in the range of about HK$15 million to HK$30 million for each of the latest three financial years. The Remaining Group did not carry out property development or construction business during the track record period.
        6. Company A submitted its plan to expand the investment property portfolio in the next few years, including some potential property acquisitions under negotiation.
        7. There was an issue whether the Remaining Group could rely on the fair value gains on investment properties to meet the profit requirement under Rule 8.05(1)(a).

        APPLICABLE LISTING RULES

        8. Paragraph 3(c) of Practice Note 15 states that:-
        “The Listing Committee must be satisfied that, after the listing of Newco, the Parent would retain a sufficient level of operations and sufficient assets to support its separate listing status. In particular, it would not be acceptable to the Listing Committee that one business (Newco's) supported two listing statuses (the Parent's and Newco's). In other words, the Parent itself would be required to retain, in addition to its interest in Newco, sufficient assets and operations of its own, excluding its interest in Newco, to satisfy independently the requirements of Chapter 8 of the Exchange Listing Rules.”
        9. Rule 8.05(1)(a) provides that a new applicant must have:
        “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 million and, in respect of the two preceding years, be in aggregate not less than HK$30 million. 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”.
        10. Under Listing Decision LD66-1, for the purpose of the profit test under Rule 8.05(1)(a), the Exchange allows a new listing applicant to include unrealized fair value gains on investment properties as profits where the applicant is a property developer/investor, and the fair value gains are derived from the ordinary and usual course of business.
        11. In this connection, Guidance Letter GL68-13 sets out further guidance in situation where an applicant relied on unrealized fair value gains on investment properties to satisfy the profit test. The letter states that:-
        “The Exchange is of the view that even if an applicant is able to satisfy the profit test under Main Board Rule 8.05(1)(a) by relying on the unrealized fair value gains of its investment properties, if the applicant is loss making after such gains are excluded and it did not have a substantive business during its track record period, the applicant would have to demonstrate that it has a sustainable business before the Exchange considers it suitable for listing.

        The demonstration of a sustainable business can include the existence of property projects under development as at the date of the listing document, or significant recurring income (e.g. rental income) generated in the applicant's ordinary and usual course of business during the track record period which is expected to continue after listing.”

        ANALYSIS

        12. In this case, property investment was one of the principal businesses of the Remaining Group. However, the Exchange was not satisfied that the Remaining Group was suitable for listing by relying on the fair value gains on investment properties to meet Rule 8.05(1)(a) because:
        (a) As explained in the Exchange Listing Decision LD66-1 and Guidance Letter GL68-13, where an applicant (which is a property developer/investor) meets Rule 8.05(1)(a) by relying on unrealized fair value gains arising from its investment properties, it must demonstrate that it has a substantive property business during the track record period and the business is sustainable going forward before the Exchange considers it suitable for listing under Rule 8.04.
        (b) The Remaining Group held a number of properties for leasing and capital appreciation purposes, which only generated annual rental income of about HK$15 million to HK$30 million in the latest three years. The Exchange did not consider this business substantive during the track record period.
        (c) The Remaining Group did not have any property projects under developments or significant recurring income to demonstrate the sustainability of the Property Business as described in GL68-13. While Company A submitted that it planned to expand the property portfolio, this was preliminary and did not demonstrate that the Property Business would generate a significant level of recurring income in the future. Company A could not demonstrate that the Remaining Group had a substantive and sustainable property business.

        CONCLUSION

        13. The Exchange rejected the proposed spin-off because the Remaining Group could not satisfy Paragraph 3(c) of Practice Note 15.

    • 2015

      Select By Rule or Topic: Download the consolidated index here

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

      This section comprises decisions on cases handled by the Listing Committee and/or the Listing Division, to enhance transparency and market understanding of their interpretation of the Listing Rules. Each decision was based on its specific circumstances and is not a precedent for future cases.

      Effective from 1 January 2011, listing decisions will be published under a new naming format as illustrated below:

      Before 1 January 2011 On or After 1 January 2011
       
      HKEx-LD100-1
      HKEx-LD100-2
      HKEx-LD101-1
       
      HKEx-LD1-2011
      HKEx-LD2-2011
      HKEx-LD3-2011

      Listing decisions published before 1 January 2011 continue to bear the old references.

      LD Series Number First
      Release
      Date (Last
      Update
      Date)
      (mm/yyyy)
      Listing Rules/ Topics Particulars
      LD92-2015 06/2015 Main Board Rules 2.06 and Chapter 8
      GEM Rules 2.09 and Chapter 11
      To provide guidance on why the Exchange rejected certain listing applications
      LD91-2015 06/2015
      (05/2016)
      Main Board Rule 9.03(3) and GEM Rules 12.09 and 12.14 To provide guidance on why the Exchange returned certain listing applications
      LD90-2015 05/2015 Main Board Rules 13.36 and 15.02 Whether Company A was allowed to use the general mandate for placing of warrants to third party investors

      (Withdrawn in July 2018)
      LD89-2015 05/2015 Main Board Rules 15.01 and 17.01 Whether Company A's proposed issue of warrants to certain members of senior management was subject to the requirements of Chapter 17
      LD88-2015 05/2015
      (08/2018)
      Main Board Rule 13.24 Whether Company A would have sufficient operations or assets under Rule 13.24 after a very substantial disposal
      LD87-2015 05/2015
      (08/2018)
      Main Board Rules 6.05 to 6.07 and Paragraph 4 of Practice Note 11 Whether the Exchange would direct the resumption of trading in Company A's shares under Rule 6.07
      LD86-2015 04/2015 GEM Rule 11.12A(1) Whether Company A's cash flow generated during a period of non-compliance should be counted towards the calculation of minimum cash flow under GEM Rule 11.12A(1)
      LD85-2015 01/2015
      (11/2016)
      Main Board Rule 10.07(1) Whether Company B, which will cease to be a controlling shareholder of Company A shortly after listing, should be subject to a 12-month lock-up of its shares after Company A's listing under Listing Rule 10.07(1)

      • LD92-2015

        View Current PDF

        HKEx LISTING DECISION
        HKEx-LD92-2015 (published in June 2015)

        Summary
        Parties Company A to Company P — Main Board and GEM listing applicants whose applications were rejected in 2013 and 2014
        Issue To provide guidance on why the Exchange rejected certain listing applications
        Listing Rules Main Board Rules 2.06 and Chapter 8
        GEM Rules 2.09 and Chapter 11
        Decision The Exchange rejected the applications.

        PURPOSE

        1. This Listing Decision in the Appendix sets out the reasons why the Exchange rejected certain listing applications from 1 January 2013 to 31 December 2014.

        APPLICABLE LISTING RULES

        2. Chapter 8 of the Main Board Rules and Chapter 11 of the GEM Rules set out detailed eligibility requirements which a new applicant must fulfill and states that both the applicant and its business must, in the opinion of the Exchange, be suitable for listing.
        3. Main Board Rule 2.06 and GEM Rule 2.09 state that suitability for listing depends on many factors. Applicants for listing should appreciate that compliance with Listing Rules may not itself ensure an applicant's suitability for listing.

        ****

        Appendix

        Rejection cases in 2013
        Company Rejection reasons
        Company A

        (a Main Board Applicant)

        Company A was a mining company. Its principal asset was at an exploration stage of a mineral project ("Project") and had not generated any profit.

        Company A's first listing application was not approved due to, concerns on (i) its insufficient history and experience in bringing any mineral project to a production stage; and (ii) the early stage of the development of the Project.

        Company A completed a pre-feasibility study for the Project and re-submitted its listing application two years after its first application. In the renewed application, Company A had delayed most of its original development plan by more than two years and substantially revised the economic estimates of its Project. As a result, the total capital cost for the Project increased over 100%, with the estimated mine life reduced from 17 years to nine years with a payback period of seven years and an internal rate of return of 6.7%. In addition, Company A only had limited cash balance and had no banking facility which it expected would only be obtained when the Project had completed a bankable feasibility study.

        Inability to meet the Main Board Rules 8.05(1) and 18.04

        The application was rejected because Company A was not qualified for a waiver under Main Board Rule 18.04 as it had not demonstrated that its principal assets had a clear path to commercial production based on the following observations:

        (i) there was high risk concerning the project payback period as the Project was highly sensitive to variations in commodity prices, operating costs, the estimated lengthy payback period and low internal rate of return;
        (ii) the proposed funding plan was overly ambitious. The funds to be raised in the proposed offering was insufficient to bring the Project to a stage of commercial production and further fund raising exercises of a considerable scale would be required post-listing; and
        (iii) given the outstanding issue regarding the aboriginal rights which the provincial government would need to consult the indigenous groups on before approving or rejecting the Project, there was a high degree of uncertainty as to whether Company A was able to obtain the necessary mining permits and licenses to commence commercial production.
        Company B

        (a Main Board Applicant)

        Company B was engaged in money lending business.

        The application was rejected due to the following observations:

        Non-compliances

        (i) Company B had not rectified all its non-compliances with local money lending laws before it applied to renew its money lender licence which was still pending. It was therefore uncertain as to whether it would be able to renew its money lender licence;
        (ii) there was insufficient information on whether and how the newly implemented internal control measures were effective to prevent future breaches;

        Reliance on controlling shareholders

        (iii) during the track record period Company B had relied on its controlling shareholders for financial assistances, namely: (a) financing its operation; (b) referring customers with whom Company B had charged higher interest rates; and (c) undertaking to acquire the collaterals for defaulted loans at a consideration no less than the outstanding loans and interests;
        (iv) Company B's track record results did not reflect its true operating results given the undertaking by its controlling shareholders. Further, Company B could only secure financing at a high interest rate from a private lender, as opposed to a commercial bank; and

        Directors' suitability

        (v) there were concerns on Company B's directors' suitability under Main Board Rules 3.08 and 3.09 - two out of six executive directors ("EDs") had been involved in non-compliances with the Securities and Futures Ordinance (Cap. 571). Further, five out of six EDs were also directors or senior management of other listed companies and it was questionable whether they would be able to devote sufficient time to manage Company B's business.
        Company C

        (a Main Board Applicant)

        Company C was engaged in wholesaling and retailing of goods.

        Director's suitability

        The application was rejected due to concerns on director's suitability under Main Board Rules 3.08 and 3.09 - a director who was also a controlling shareholder had made payments to an ex-government official who was then convicted of receiving bribes by a PRC court. Although no charges had been laid against the director, he was considered unsuitable to be a director of a listed company given that the sponsor had not demonstrated to the Exchange's satisfaction that the director was able to meet the character and integrity standard requirements under the Main Board Rules based on the submitted facts and circumstances. Even if the director resigned from Company C, he would continue to exert significant influence on Company C's operation and management since one of the four EDs was his brother, and two out of the three senior management members had worked with the director for more than 10 years.

        Company D

        (a GEM Applicant)

        Company D was engaged in a regulated business.

        The application was rejected due to the following observations:

        Non-compliances

        (i) Company D breached the local regulations governing the operation of its business. Company D could not meet the minimum cash flow requirement under GEM Rule 11.12A(1) if the cash flow generated from the non-compliance income was excluded; and

        Unsustainable business model

        (ii) there were grave concerns on sustainability of business in light of its existing financial outlook: (a) heavy indebtedness with minimal cash at bank and unutilised banking facilities; (b) uncertainty as to whether Company D could obtain independent financing after using up the unutilised banking facilities and ceasing its reliance on its controlling shareholders to guarantee its borrowings after listing; (c) significant trade receivables, and deteriorating and long receivable turnover days; (d) minimal cash and cash equivalents due to cash flow mismatch between settlement of expenses and the long period taken before Company D would be able to bill its major customers; and (e) high concentration of customers which raised doubts as to Company D's bargaining powers with its customers.

        The combination of these factors raised concerns as to whether Company D was able to continue its business on a going concern basis. Further, there was insufficient disclosure on the competitive landscape to enable investors to understand the prospect of the industry.
        Company E

        (a GEM Applicant)

        Company E was a software solution provider.

        The application was rejected due to the following observations:

        Non-compliances

        (i) during the track record period, Company E's major subsidiary had been involved in a number of non-compliances which included, among other things, tax evasion; and

        Directors' suitability and inability to meet the management continuity requirement

        (ii) it was not demonstrated to the Exchange that Company E's directors did not have substantial involvement in the non-compliances. Given that the Exchange considers that tax evasion is a serious matter and the amount involved was material (over 35% of Company E's net assets), the Exchange had serious concerns on the suitability of the directors under GEM Rules 5.01 and 5.02 in overseeing the operation of its subsidiary. As one of the EDs who had been personally involved in the non-compliances was the most relevant person responsible for Company E's operation and management, his resignation from directorship would render Company E unable to satisfy the management continuity requirement under GEM Rule 11.12A(3).
        Company F

        (a GEM Applicant)

        Company F was engaged in the trading of commodities.

        The application was rejected due to the following observations:

        Reliance on a major customer

        (i) Company F had a short business relationship with the single largest customer, contributing to more than 20%, 60% and 75% of Company F's total revenue during the track record period; and reliance on this customer was not demonstrated to be mutual and complementary as there were other suppliers like Company F located at the same area where the customer was based;
        (ii) the credit period granted to the single largest customer was substantially longer than other customers and therefore it was not demonstrated to be on normal commercial terms, and this had an adverse impact on Company F's working capital sufficiency; and
        (iii) there was no proven record on Company F's ability to find new customers to reduce reliance on the single largest customer.


        Rejection cases in 2014
        Company Rejection reasons
        Company G

        (a Main Board Applicant)

        Company G was a mining company in the PRC. Company G had only one mine.

        The application was rejected because Company G was not qualified for a waiver under Main Board Rule 18.04 (i.e. a mineral company may still apply to be listed even if it is unable to satisfy the eligibility requirement under Main Board Rule 8.05) as it had not demonstrated a path to profitability given that the mine was already in commercial production. Accordingly, Company G failed to satisfy the eligibility requirement of Main Board Rule 8.05:

        Inability to meet the Main Board Rule 8.05

        (i) Company G's commercial production was suspended by the competent authority at the time of listing application submission due to serious accidents in other mines in the region. Its production had also been previously suspended during the track record period (i.e. 16 out of 36 months). Hence, there was a high degree of uncertainty as to the resumption of its normal operations. Even if Company G could resume its operation, it had failed to address the risks that the provincial government might suspend its operations again as it had in the past;
        (ii) as Company G had only one mine, any mandatory suspension because of accidents in its mine or other mines in the region would adversely affect its operations and financial position; and
        (iii) Company G had plans to improve its profitability by increasing the annual production capacity but the funds to be raised in the proposed offering were insufficient to finance its expansion plan. Hence, there was a high degree of uncertainty that its expansion plan could be completed.
        Company H

        (a Main Board Applicant)

        Company H's application involved a very substantial acquisition of two companies ("Target Groups") which would make up Company H's business upon listing. The Target Groups had been held by different controlling shareholders and managed by different individuals during the track record period.

        The application was rejected due to following observations:

        Inability to meet the Main Board Rule 8.05(1)(c)

        (i) Company H failed to demonstrate compliance with the ownership continuity and control requirement during the most recent financial year under Main Board Rule 8.05(1)(c) as (a) there were and would be changes in the legal ownership and control in the Target Groups during the relevant period and upon completion of the very substantial acquisition; and (b) there was no conclusive evidence that Company H's controlling shareholder had been exercising control over the Target Groups during the relevant period through cooperation with the controlling shareholders of the Target Groups; and
        (ii) Company H was not able to satisfy the profit requirement under Main Board Rule 8.05(1)(a). The Target Groups were able to comply with Main Board Rule 8.05(1)(a) only by aggregating their net profits during the track record period. However, given that (a) the Target Groups only had one common senior management member and did not share any support function during the track record period; and (b) the financial statements of the Target Groups during the track record period were presented in two separate accountants' reports, there was no information to show that the Target Groups had operated and managed as a single group during the track record period to justify the aggregation. Company H's reporting accountant stated that the Target Groups' financial information could not be presented in one accountant's report because there was no common control.

        The Exchange does not accept the aggregating of the results of separate groups of companies presented in separate accountants' reports for the purpose of Main Board Rule 8.05(1)(a). This is to prevent packaging of businesses where acquisitions are made by a listing applicant solely for the purpose of satisfying the listing requirements.
        Company I

        (a Main Board Applicant)

        Company I applied for a transfer of listing from GEM to Main Board.

        Inability to meet the Main Board Rule 9A.02(2)

        The application was rejected because Company I did not comply with Main Board Rule 9A.02(2), under which an issuer may apply for a transfer of listing of its securities from GEM to the Main Board if, among other things, it complies with GEM Rule 18.03 in sending the issuer's annual report to its shareholders in respect of its first full financial year's results commencing after the date of its initial listing. However, Company I's first full financial year had not ended at the time of its application, and hence its first full financial year's annual report had not been prepared.

        Company I was listed in January, [year T-1] and submitted its application to transfer to the Main Board in May, [year T]. As Company I's financial year end date was 31 December, its first full financial year would have ended on 31 December, [year T].

        Company J

        (a Main Board Applicant)

        Company J was engaged in money lending business.

        The application was rejected due to the following observations:

        Non compliance

        (i) there was systemic failure to conduct Company J's business in a compliant manner with regard to certain lending restrictions throughout the track record period and up to the latest practicable date;
        (ii) there was no compelling reason given why Company J appeared to be the only company given the preferential treatment that it would subject to a more relaxing lending restriction after listing by the local authority and whether this preferential treatment complied with PRC law;

        Directors' suitability

        (iii) concerns on directors' suitability under Main Board Rules 3.08 and 3.09 – in light of the systemic non-compliances practices in (i) above, the directors had not demonstrated they had the integrity and standard of competence and a level of skill, care and diligence that commensurate with their positions as directors of a listed company; and

        Inability to meet the Main Board Rule 8.05(1)

        (iv) Company J could not meet the profit requirement under Main Board Rule 8.05(1)(a) if the profits generated from the non-compliant business during the track record period were excluded.

        A demonstration period of 18 months (from the date of Company J's latest audited accounts) was imposed on Company J to demonstrate its ability to operate satisfactorily with the amended lending restrictions.

        Company K

        (a GEM Applicant)

        Company K was engaged in property leasing business.

        Non-compliances

        The application was rejected due to non-compliances with local building safety regulations with respect to the majority of Company K's properties. There was uncertainty as to when the building orders against these properties would be released before listing which may have an impact on its business.

        Company L

        (a GEM Applicant)

        Company L was engaged in gaming-related business which required a licence from the competent authority.

        The application was rejected due to the following observations:

        Unsustainable business model

        There were concerns over Company L's business sustainability:

        (i) Reliance on one head operator and a few business partners
        (a) the heavy reliance on one head operator for income based on spending of customers introduced by Company L at the head operator's venue. Further, the annual licence renewal was dependent on the continuation of the cooperation agreement with the head operator. Hence, the reliance on the head operator was not mutual given the competition among Company L's industry peers was keen; and
        (b) the heavy reliance on a few business partners to bring in customers whose credits were partly guaranteed by these business partners;
        (ii) Concerns on risk control - Company L earned interest income for providing loans to its customers, part of which were guaranteed by the business partners. There were concerns over Company L's credit risk control measures for ascertaining the creditworthiness of its business partners and customers. The measures were considered to be insufficient and therefore exposed Company L to high credit risk; and
        (iii) Deteriorating financial performance - there was a decrease in Company L's net profit margin during the track record period.
        Company M

        (a GEM Applicant)

        Company M was engaged in a regulated business.

        Sponsor's non-independence

        The application was rejected because Company M's sponsor was not independent under GEM Rule 6A.07. The sponsor group had subscribed for Company M's pre-IPO convertible bonds. This was not identified until the application was submitted.

        Company N

        (a GEM Applicant)

        Company N was a manufacturer and seller of consumer products.

        The application was rejected due to the following observations:

        Inability to meet the GEM Rule 11.12A

        (i) Company N's plant in the PRC which was owned by the controlling shareholder was significant to its business but it had title defect and therefore it was not compliant with GEM Rule 11.19 which requires any new applicant not being a property company or an infrastructure company, where its PRC property is otherwise significant to its activities, to have a long-term title certificate to its property;
        (ii) Company N was not able to meet the minimum cash flow requirement under GEM Rule 11.12A(1) if, among other things, an one-off income, the waived directors' emoluments and the waived rental of the plant were excluded;

        Unsustainable business model

        (iii) concerns over the sustainability of Company N's business in light of (a) the unpredictable non-recurring nature of sales as there had been less than ten transactions during the track record period; (b) the deteriorating financial performance - decreasing net profit and net profit margin during the track record period which Company N failed to explain the reasons for such deterioration; and (c) insufficient disclosure of Company N's future plans and prospects in light of the austerity measures by the local government which directly affect Company N's targeted customers; and

        Directors' suitability under GEM Rule 5.02

        (iv) four out of five EDs did not have relevant experience in the business before joining Company N and all of them had joined Company N for less than two years at the time of application.
        Company O

        (a GEM Applicant)

        Company O was engaged in property sub-leasing business.

        The application was rejected due to the following observations:

        Concerns on the business model

        (i) there were concerns on Company O's business model due to the following:
        (a) as the owner of Company O's leased properties had not obtained the relevant property ownership certificates, it was unclear whether Company O had entered into the lease agreement at a lower than market rent compared to leasing from a property owner with a similar size in the same area but with proper property ownership certificates. It was therefore doubtful whether Company O's track record results would be affected by the lack of property ownership certificates and therefore the results might not be representative of its future performance;
        (b) it was unusual that Company O was able to terminate the master lease agreement with a property owner without any penalty during the track record period and there was no compelling evidence that such practice was an industry norm; and
        (c) there were insufficient market comparables to assess the sustainability of Company O's business model; and

        Excess competition with controlling shareholder

        (ii) the competition between Company O and its controlling shareholder was considered extreme. Although competition between an applicant and its controlling shareholder is not a bar to listing, the Exchange expects effective corporate governance measures to regulate the process of tenant sourcing for the properties owned by the controlling shareholder and those of Company O, which was not evident in this case.
        Company P

        (a GEM Applicant)

        Company P was a hotel developer and owner.

        The application was rejected due to the following observations:

        Unsustainable business model

        (i) reliance on government discretionary interest subsidies to maintain sufficient cash to meet its debt payments;
        (ii) a loss-making history which would likely continue in the foreseeable future and would be further aggravated by its proposed business expansion plans;
        (iii) there was no clear path to profitability for its properties as Company P estimated a long break-even and payback period of over 15 years; and

        Deteriorating financial performance

        (iv) operating performance and financial results were deteriorating due to travel restriction in the area where Company P operated its business. It was unclear how Company P's marketing strategy and proposed expansion plan could help alleviate its deteriorating performance. Further, Company P did not provide a good basis for its upward trend forecast.

      • LD91-2015

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        HKEX LISTING DECISION
        HKEX-LD91-2015 (June 2015) (Updated in May 2016)

        (Updated due to withdrawal of guidance letters superseded by HKEX-GL86-16)

        Summary
        Parties Company A to Company L — Main Board and GEM listing applicants whose applications were submitted after the commencement of the new sponsor regulation and returned by the Exchange
        Issue To provide guidance on why the Exchange returned certain listing applications
        Listing Rules Main Board Rule 9.03(3) and GEM Rules 12.09 and 12.14
        Decision The Exchange returned the applications.

        Purpose

        1. This Listing Decision sets out the reasons why the Exchange returned listing applications from 1 October 2013 to 31 December 2014 after commencement of the new sponsor regulation.

        APPLICABLE RULES, REGULATIONS AND PRINCIPLES

        2. With effect from 1 October 2013 when the new sponsor regime was introduced, Main Board Rule 9.03(3) was amended to require an applicant to submit a listing application form, an Application Proof and all other relevant documents under Main Board Rule 9.10A(1), and the information in these documents must be substantially complete except in relation to information that by its nature can only be finalised and incorporated at a later date. If the Exchange decides this information is not substantially complete, the Exchange will not continue to review any documents relating to the application. All documents, including the Form A1 (Form 5A for GEM cases) (except for the retention of a copy of these documents for the Exchange's record) submitted to the Exchange will be returned to the sponsor (GEM Rule 12.09(1) and 12.09(2)).

        ****

        APPENDIX
        Listing Applications received from 1 October 2013 to 31 December 2014

            Company A (a GEM Applicant)
        1. Company A was engaged in the sale of consumer products.
        2. There was insufficient disclosure on the business model and insufficient information for the Exchange to assess the impact of the disputes and complaints relating to Company A's products, the suitability of directors, the sustainability of business and whether the management continuity requirement could be met.

        Insufficient disclosure on business model
        3. The disclosure in the Application Proof on the sales channels and customers was incomplete and did not follow the relevant provisions of Guidance Letter HKEX-GL36-12, HKEX-GL50-13 and Listing Decision HKEX-LD107-1.
        4. The disclosure in the Application Proof on the raw material and purchases was incomplete and did not follow the relevant provisions of Guidance Letter HKEX-GL50-13.
        5. The Application Proof lacked disclosure on the product life cycle and shelf life for each product/ product line. The disclosure did not support Company A's claim that all of its products were self-developed.

        Insufficient information to assess impact of disputes, complaints and negative comments
        6. The disclosure in the Application Proof did not follow the relevant provisions of Guidance Letters HKEX-GL30-12 and HKEX-GL50-13 on intellectual property rights and it lacked disclosure of the relevant risk factors to enable the Exchange to make assessment of how the trademark dispute impacted Company A's business.
        7. The Application Proof lacked disclosure on the directors' basis for concluding that the negative public comments on certain of Company A's products were unsubstantiated.

        Insufficient information to assess suitability of directors under GEM Rules 5.01 and 5.02
        8. A director was involved in personal bankruptcy and two directors were involved in winding up of companies of which they had been directors. One of the directors was also under investigation by the relevant authority for suspected breach of ethical conduct. However, the Application Proof did not have information of these incidents.

        Insufficient information to assess sustainability of business
        9. There was significant deterioration in the financial results. The cash flow from operating activities decreased by about 50% in the stub period, as compared to the previous corresponding period. There was no explanation on the substantial deterioration of the financial results during the track record period and the expected substantial improvement in the forecast period.
        10. The Application Proof lacked clear disclosure of the above in the "Summary" section with reference to the relevant provisions of Guidance Letters HKEX-GL27-121 and HKEX-GL41-12, and a relevant risk factor. (Updated in May 2016)

        Company B (a Main Board Applicant)
        11. Company B was a service provider in Hong Kong.
        12. The information submitted was not substantially complete because the financial information included in the Application Proof did not follow Guidance Letter HKEX-GL6-09A.
        13. Company B's trading record period comprised [year T-2], [year T-1] and [year T]. As set out in our Guidance Letter HKEX-GL6-09A, the Exchange would accept a listing application with financial information for the first two financial years and a stub period of at least nine months for the third financial year if the applicant files, among other things, an application within two calendar months after the end of its trading record period. The financial information in the Application Proof only covered the period [year T-3], [year T-2] and [year T-1] and stub period of six months of [year T].
        14. Further, Company B filed the application before the end of the trading record period. According to Guidance Letter HKEX-GL6-09A, the earliest time Company B could file its application is after the end of its three-year trading record period which it would be using for the purpose of its listing.

        Company C (a Main Board Applicant)
        15. Company C was a manufacturer in the PRC.
        16. The Application Proof and documents submitted together with Company C's application form were not substantially complete as substantial details of its non-compliant bill financing activities were not disclosed. This prevented the Exchange from assessing whether Company C was suitable for listing, given that the non-compliant transactions were material.

        Company D (a Main Board Applicant)
        17. Company D provided hygiene care products in the PRC.
        18. There was insufficient disclosure in Company D's Application Proof on the business model and material non-compliances.

        Business model
        19. The information in the Application Proof was skewed towards a small segment of its business and therefore the Exchange considered that the description of Company D's business to be inadequate, unclear and potentially misleading to investors.
        20. The Application Proof did not clearly and sufficiently highlight Company D's market position in respect of its export and domestic sales, ODM/ OEM and own-branded sales, respectively.
        21. Company D had two distinct business segments, but the Application Proof did not disclose any segment analysis on gross profit and gross profit margin, major product category, and pricing policy.

        Non-compliance
        22. Company D received excessive tax rebates due to its incorrect filing of goods exported during the track record period. It was under investigation by the relevant tax authority. However, the Application Proof lacked details of this non-compliance in accordance with the relevant provisions of Guidance Letter HKEX-GL63-13.

        Distributors
        23. Company D sold its products through distributors who then resold them to sub-distributors and/ or ultimate retailers. However, the Application Proof did not disclose material information on the distributorship business model as required by the relevant provisions of Guidance Letter HKEX-GL36-12.

        Others
        24. There was insufficient information in the Application Proof on Company D's hedging measures it used to monitor foreign exchange risks which was critical to its business. The Application Proof did not provide sufficient information on Company D's substantial reliance on its major customer, including (i) how it would reduce its reliance on the major customer or demonstrate it was not extreme as required under Listing Decision HKEX-LD107-1; (ii) material details of the long term agreement with such major customer as required under the relevant provisions of Guidance Letter HKEX-LD50-132; and (iii) the operational and financial impact of the major customer's proposed business plan, in particular, during the aforementioned contract period with the major customer. Further, there was no clear justification disclosed for the use of proceeds on a business segment which showed a declining trend in terms of revenue during the track record period. (Updated in May 2016)

        Company E (a Main Board Applicant)
        25. Company E offered financial services in the PRC.
        26. The Application Proof and the related documents submitted together with Company E's application form failed to disclose material guaranteed transactions entered into by the connected persons, borrowers and Company E, and the circumstances leading to the entering into these transactions. The details of these were only disclosed in the revised listing document. This material information should have been included in the Application Proof. The application was returned after the response to the Exchange's first comment letter which disclosed the material connected transactions for the first time.

        Company F (a GEM Applicant)
        27. Company F was a property company in the PRC. There was insufficient information for the Exchange to assess whether the competition with and reliance on the controlling shareholder had been properly addressed, the impact of an arrangement with the controlling shareholder and the implications of a leased property with defective title.

        Insufficient information to assess the competition with and reliance on its controlling shareholder
        28. Upon listing, the controlling shareholder would have interests in other properties and property-related businesses which would not be included in listing group.
        29. The Application Proof lacked (i) sufficient information for the Exchange and investors to assess the level of current and potential competition with the controlling shareholder (GEM Rule 11.04) and (ii) details of the properties operated by Company F and the controlling shareholder, how the non-competition undertaking given by the controlling shareholder would operate, and what were the measures to manage the current and potential competition between Company F and the controlling shareholder in area where the non-competition undertaking would not apply.

        Insufficient disclosure on the impact of an arrangement with the controlling shareholder after listing
        30. Some services were provided by Company F to the controlling shareholder without any charges during the track record period, whereas Company F would charge for these services after listing. The change in Company F's business model was not well articulated in the Application Proof and the Exchange had concerns on this arrangement. The Application Proof did not provide investors with any information to indicate Company F's financial position if it charged its controlling shareholder a fee in the normal and usual course of business for these services, and the basis of the annual fee after listing. The Exchange considered that the information included in the Application Proof was not substantially complete to enable a reasonable investor to make a fully-informed investment decision.

        Insufficient information to assess the implications of the leased property with a defective title
        31. Company F had a significant project with a property owner for sub-leasing the owner's properties. Some properties did not have property titles. There was no information on why the property owner did not obtain proper titles to the relevant properties, whether the rent paid to the property owner would have been more than it was if the relevant properties had proper titles, and hence, whether Company F's financial performance would have been significantly affected.

        Company G (a Main Board Applicant)
        32. Company G's application involved a very substantial acquisition of two companies ("Target Groups").
        33. The Exchange considered that the information disclosed in the Application Proof was not substantially complete, since the Application Proof failed to include such material information as (i) conviction of the controlling shareholder; (ii) sufficient information to demonstrate how ownership continuity requirement was satisfied; (iii) sufficient information to assess compliance with the minimum profit requirement; and (iv) updated liquidity disclosure.

        Mr. X's conviction
        34. Mr. X was disclosed as Company G's controlling shareholder but had no shareholding of the Target Groups. The Application Proof disclosed that the controlling shareholders of the Target Groups (Mr. X's relatives) followed the wishes of Mr. X in respect of the management and development of the Target Groups, and in exercising their rights as shareholders of the respective Target Groups. Given Mr. X's relationship with Company G and the Target Groups, Mr. X was considered to be a person with substantial influence.
        35. The Exchange noted from newspaper articles and the website of a local court that Mr. X was found guilty of violating certain laws and regulations before the track record period. Mr. X received a jail sentence and was prohibited from operating certain business. Although the decision was under appeal at the relevant time, there was no information regarding Mr. X's conviction disclosed in the Application Proof or other related documents.

        Rule 8.05(1)(c) — ownership continuity
        36. There was insufficient information to demonstrate Company G satisfied the ownership continuity requirement during the last year of the track record period. There was no information on how (i) the controlling shareholders of the Target Groups followed the wishes of Mr. X in exercising their rights as shareholders of the Target Groups; and (ii) Mr. X exercised control over the Target Groups through cooperation with the controlling shareholders of the Target Groups.

        Insufficient information to assess compliance with the minimum profit requirement under Rule 8.05(1)(a)
        37. The two Target Groups were two separate groups with different shareholdings and their historical financial information were included in two separate accountants' reports in the Application Proof. Although the sponsor had argued that the Target Groups aggregated net profits would be able to satisfy Rule 8.05(1)(a), there was no information in the Application Proof to show that the Target Groups operated and managed as a single group during the track record period.

        Liquidity disclosure
        38. According to the relevant provisions of the Guidance Letter HKEX-GL38-12, the liquidity disclosure in an Application Proof should be as of a date no more than two calendar months before the date of the Application Proof. The liquidity disclosure of the Target Groups in the Application Proof was more than two calendar months before the date of the Application Proof.

        Company H (a Main Board Applicant)
        39. Company H was a securities firm based in the PRC. The Application Proof did not include the required liquidity disclosure, and there was uncertainty as to Company H's issuance of corporate bonds.

        Liquidity disclosure
        40. Company H's liquidity disclosure was more than two calendar months old before the date of the Application Proof which was contrary to the relevant requirements of Guidance Letter HKEX-GL38-12.

        Insufficient disclosure on proposed issuance of corporate bonds
        41. Company H submitted in its pre-IPO enquiry that it planned to issue (over 35% of its net asset value) corporate bonds in the PRC to fund its working capital requirements, and that the controlling shareholder would provide a guarantee for the corporate bonds which would not be released before Company H's listing. However, no information on issuance of corporate bonds was disclosed in the Application Proof such as the terms and conditions, the amount to be issued etc., the cash flow forecast memorandum took into account the cash inflow from the issuance of the corporate bonds to demonstrate, among other things, sufficiency of working capital.
        42. It would appear that if Company H had no intention to issue the corporate bonds, the disclosure on its sufficiency on working capital which was based on the issuance of the corporate bonds would not be accurate. If Company H intended to issue the corporate bonds, material information was not included in the Application Proof on the issue. In either case, the Application Proof or the cash flow forecast memorandum was not substantially complete.

        Company I (a GEM Applicant)
        43. Company I was a service provider in the PRC. The Application Proof did not include the information as required by the 3-day checklist (see paragraph 44 for details). Further, the sponsor did not provide the confirmation requested by the Exchange in previous application to address cashflow concerns which was not reflected in the Application Proof.

        Liquidity and other disclosure
        44. The liquidity disclosure in the Application Proof was more than two calendar months before the date of the Application Proof, which was not in compliance with the requirement of the relevant provisions of Guidance Letter HKEX-GL38-12. In addition, the cover of the Application Proof did not include the sponsor's name and the company secretary's address as required in the 3-day checklist (Note: this 3-day checklist is no longer in use as of 1 October 2014).

        Insufficient information to assess compliance with minimum cash flow requirement under GEM Rule 11.12(A)
        45. Company I went through a reorganisation under which certain business (the "Excluded Business") was transferred to the controlling shareholder during the track record period. As such, the accountant's report included the financial information of the Excluded Business before the completion of the reorganisation. Given the cash flow of Company I's business was aggregated with that of the Excluded Business, there was no information to show Company I's cashflow independently and it was unclear whether Company I could meet the minimum cash flow requirement under GEM Rule 11.12A(1) if the contribution from the Excluded Business was excluded.

        Lacking sufficient disclosure on the business under GEM Rule 2.06(2)
        46. As Company I's accountant's report contained the financial information of the Excluded Business before the completion of the reorganisation, the Application Proof did not fully reflect the performance of Company I. Given that Company I's financial information before and after the exclusion of the Excluded Business were not comparable, additional disclosure should have been included to enable investors to assess the performance of Company I. The sponsor also failed to provide a confirmation previously requested by the Exchange to address cashflow concerns (see Guidance Letter HKEX-GL56-13).

        Company J (a GEM Applicant)
        47. Company J was a service provider with operations in Hong Kong and the PRC. The information submitted was not substantially complete because the financial information included in the Application Proof did not follow the relevant provisions of Guidance Letter HKEX-GL6-09A.
        48. The financial information in the Application Proof covered the two financial years T-2 and T-1 and a stub period of seven months of year T. Based on Company J's proposed listing timetable of which the listing date was three months after year T, Company J's trading record period in the Application Proof should cover the two financial years T-1 and T. As set out in the relevant provisions of Guidance Letter HKEX-GL6-09A, the Exchange would accept an application with financial information for the first financial year and for a stub period of at least nine months for the second financial year if an applicant files, among other things, an application within two calendar months after the end of its trading record period.

        Company K (a GEM Applicant)
        49. Company K was a manufacturer in the PRC. The document required to be submitted together with the listing application was not substantially complete because under GEM Rule 12.22(14b), Company K should provide a profit forecast memorandum covering the period up to year ending [year T+1] at the time of filing the Form 5A. However, its profit forecast memorandum only covered the year ending [year T].

        Company L (a Main Board Applicant)
        50. Company L was a mineral company under Chapter 18 of the Rules, engaging in exploration activities in the PRC.
        51. Company L did not comply with Rule 18.24(2) and the relevant provisions of Guidance Letter HKEX-GL56-13 which requires an applicant to provide a Competent Person's Report which must have an effective date (being the date when the contents of the Competent Person's Report are valid) less than six months before the date of publishing the listing document. Question 10B of the Exchange's Frequently Asked Questions Series 12 provided guidance that the validity date of the contents of a Competent Person's Report should be the date of the appraisal (i.e. the date when resources and reserves are estimated or valued) and not the date when the Competent Person's Report is signed.

        1 Withdrawn in May 2016. Superseded by Section A of Appendix 1 in HKEX-GL86-16.

        2 Withdrawn in May 2016. Superseded by Section E of Appendix 1 in HKEX-GL86-16.

      • LD89-2015

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        HKEx LISTING DECISION
        Cite as HKEx-LD89-2015 (published in May 2015)

        Party Company A — a Main Board issuer
        Issue Whether Company A's proposed issue of warrants to certain members of senior management was subject to the requirements of Chapter 17
        Listing Rules Main Board Rules 15.01 and 17.01
        Decision The requirements of Chapter 17 should apply

        FACTS

        1. Company A signed agreements with certain subscribers for issuing warrants to them at a nominal consideration. The subscribers were members of senior management of Company A. They would have the right to subscribe for new shares of Company A at the exercise price in accordance with the terms of warrants.
        2. It was disclosed that the warrants were to be issued to the subscribers as an incentive and reward for their contribution to Company A's business. Also Company A would receive additional funds from the exercise of the warrants for its business operations.
        3. Company A submitted that the issue of warrants to the subscribers was an one-off transaction. It would comply with the requirements applicable to warrants under Chapter 15 and where the subscribers were connected persons, the connected transaction requirements under Chapter 14A.
        4. There was an issue whether the requirements for share option schemes under Chapter 17 should apply to the warrant issue.

        APPLICABLE LISTING RULES

        5. Rule 15.01 states that:

        "This section applies both to options, warrants and similar rights to subscribe or purchase equity securities of an issuer which are issued or granted on their own by that issuer or any of its subsidiaries … but does not apply to any options which are granted under an employee or executive share scheme which complies with Chapter 17. …"
        6. Rule 17.01(1) states:

        "The following provisions apply, with appropriate modification, to all schemes involving the grant by a listed issuer or any of its subsidiaries of options over new shares or other new securities of the listed issuer or any of its subsidiaries to, or for the benefit of, specified participants of such schemes …. Any arrangement involving the grant of options to participants over new shares or other new securities of a listed issuer or any of its subsidiaries which, in the opinion of the Exchange, is analogous to a share option scheme as described in this rule 17.01 must comply with the requirements of this chapter."

        ANALYSIS

        7. Rule 17.01(1) expressly provides that any arrangement involving the grant of options over new shares of an issuer (or any of its subsidiaries) which, in the opinion of the Exchange, is analogous to a share option scheme must comply with the requirements of Chapter 17. This means that, among other things, the arrangement must be approved by shareholders in general meeting, the share options cannot be transferred to other persons, and the exercise price of the options cannot be set at a discount to the market price.
        8. The existing Chapter 17 were introduced following the market consultations in 1999 and 2000. The 1999 consultation paper clearly explained the policy intent of Chapter 17. In particular, it stated that "in the past, a number of listed issuers have proposed to adopt certain arrangements for granting share options to employees using general mandate or specific shareholders' approvals in order to circumvent the requirements of Chapter 17. It is the Exchange's view that these arrangements should also be covered by Chapter 17. In light of this, the proposed Rule 17.01(1) would require that any arrangement which, in the opinion of the Exchange, is analogous to a share schemes as described in Rule 17.01(1) must comply with the requirements of Chapter 17. Options and securities subject to any such arrangement must be issued in accordance with the provisions of Chapter 17".
        9. In this case, Company A proposed to issue the warrants, which were a form of share options, to certain members of senior management as incentive and reward for their contribution to Company A's business. The Exchange was of the view that this arrangement was analogous to a share option scheme envisaged under Rule 17.01(1), which was in line with the policy intent of Chapter 17.
        10. Company A submitted that the purpose of Chapter 17 is to address issues relating to the on-going dilution effect on the interest of existing shareholders and the abuse of share option schemes by directors to remunerate themselves. In its case, the warrant issue was an one-off transaction. It was also subject to the shareholder approval requirement under Chapter 14A as some subscribers were connected persons. There was no need to apply Chapter 17.
        11. The Exchange disagreed with Company A. It was apparent that the purpose of the warrant issue was to provide incentive and reward to the management, and whether it was an one-off transaction or operated under a formal scheme was irrelevant. Under Chapter 17, the warrant issue would be subject to the shareholder approval requirement as well as other restrictions e.g. the warrants could not be transferred to other persons, and the exercise price of the warrants could not set at a discount to the market price.

        CONCLUSION

        12. The requirements of Chapter 17 should apply to the proposed issue of warrants to the subscribers who were members of senior management of Company A.

      • LD88-2015

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        HKEX LISTING DECISION
        HKEX-LD88-2015 (published in May 2015) (Updated in August 2018)

        Parties Company A — a Main Board issuer
        Issue Whether Company A would have sufficient operations or assets under Rule 13.24 after a very substantial disposal
        Listing Rules Main Board Rule 13.24
        Decision Company A would not meet Rule 13.24 upon completion of the disposal

        FACTS

        1. Company A and its subsidiaries (the Group) were principally engaged in the manufacturing and sale of certain machinery and equipment (the Original Business) since its listing on the Exchange. The Group also carried out the production and sale of certain pharmaceutical products (the Remaining Business) through a subsidiary which Company A acquired a few months before the proposed transaction described in paragraph 2 below.
        2. Company A proposed to sell the Original Business to a third party purchaser for cash (the Disposal), leaving the Remaining Business as its principal business. The Disposal constituted a very substantial disposal and was subject to shareholders' approval.
        3. The Disposal would reduce Company A's revenue and net profits by over 80% and 95% respectively. Company A would record a significant loss of about HK$100 million from the Disposal, reducing its net assets by about 50%.
        4. The issue was whether Company A would have sufficient operations or assets under Rule 13.24 after the Disposal.
        5. Company A was of the view that it could meet Rule 13.24 after the Disposal based on the Remaining Business and the assets retained by the Group. It submitted, among other things, that:
        •   The Remaining Business had been operating for more than 10 years before it was acquired by Company A. It had its own production facilities and employed over 100 staff.
        •   It owned a number of trademarks and licenses for its products, and had recently obtained the good manufacturing practice (GMP) accreditation. It was also developing new products and taking steps to expand its sale network.
        •   For the latest financial year, the Remaining Business recorded revenue of over HK$50 million and net profits of about HK$0.4 million. Its net assets amounted to about HK$50 million.
        •   The Group would have pro forma tangible assets of about HK$400 million upon completion of the Disposal, of which about 40% were related to the Remaining Business. The other assets were mainly cash balances, including the proceeds from the Disposal.
        6. Company A also argued that the remaining Group would be able to meet Rule 13.24, compared to a number of issuers with lesser revenue, profit and/or assets whose shares were allowed to continue to trade on the Exchange.

        APPLICABLE LISTING RULES

        7. Rule 13.24 states that:

        "An issuer shall carry out, directly or indirectly, a sufficient level of operations or have tangible assets of sufficient value and/or intangible assets for which a sufficient potential value can be demonstrated to the Exchange to warrant the continued listing of the issuer's securities."
        8. Rule 6.01 states that:

        "Listing is always granted subject to the condition that where the Exchange considers it necessary for the protection of the investor or the maintenance of an orderly market, it may at any time direct a trading halt or suspend dealings in any securities or cancel the listing of any securities in such circumstances and subject to such conditions as it thinks fit, whether requested by the issuer or not. The Exchange may also do so where:—

        . . .
        (3) the Exchange considers that the issuer does not have a sufficient level of operations or sufficient assets to warrant the continued listing of the issuer's securities (see rule 13.24)…" (Updated in August 2018)
        9. Rule 6.04 states that:

        "… The continuation of a suspension for a prolonged period without the issuer taking adequate action to obtain restoration of listing may lead to the Exchange cancelling the listing"
        10. Listing Decision (LD35-2012) describes the purpose behind Rule 13.24 and provides guidance on the application of Rule 13.24:
        •   Rule 13.24 is intended to maintain overall market quality. Issuers that fail to meet this Rule are "blue sky companies" where public investors have no information about their business plans and prospects. This leaves much room for the market to speculate on their possible acquisitions in the future. To allow these issuers' shares to continue to trade and list may have an adverse impact on investor confidence.
        •   Where an issuer's shares are trading on the Exchange, the Exchange generally allows those shares to continue to trade as long as the issuer has an operation and meets the continuing disclosure obligations. This is to allow shareholders to have access to the market for share trading as far as possible. The Exchange would exercise its suspension power only in an extreme case.
        •   However, if an issuer takes a corporate action, the Exchange is more likely to suspend the issuer's trading where the issuer fails to satisfy the Exchange that it would have a viable and sustainable business to justify its continued listing after completion of the corporate action. In this case, shareholders would have the opportunity to decide whether to allow the corporate action to proceed, knowing that the Exchange would exercise the suspension power should the corporate action proceed. In that way shareholders' interests are safeguarded through the shareholders' approval process.

        ANALYSIS

        11. Rule 13.24 requires issuers to maintain a sufficient level of operations or assets of sufficient value to warrant the continued listing of their securities. Without quantitative criteria for sufficiency, this Rule is a qualitative test and is assessed case by case.
        12. Here, Company A proposed a corporate action that would substantially reduce its scale of operations, net profits and net assets.
        13. The Exchange considered that Company A would not have sufficient operations or assets to meet Rule 13.24 upon completion of the Disposal because:
        (a) Scale of operation of the Remaining Business
        •   The Remaining Business would be the principal business of the Group upon completion of the Disposal.
        •   The Exchange noted Company A's submission about the history and scale of operations of the Remaining Business, including its production facilities, the number of employees and the product licenses and trademarks. Despite all these, the revenue and profits of the Remaining Business were minimal. It only recorded revenue of HK$50 million with a net profit of less than a million in the latest financial year. This result had not yet taken into account Company A's corporate expenses.
        •   Company A said it was developing new products and sales network for the Remaining Business. However, it had not provided any credible financial forecasts or budgets to substantiate its future plan. It had not demonstrated a proven ability to expand the Remaining Business.
        •   Given the above, the Exchange considered that the scale of the Remaining Business was insufficient to justify a listing.
        (b) Assets of the Remaining Business
        •   The Remaining Business had a net asset value of about HK$50 million only. While Company A also mentioned its ownership of a number of trademarks and licenses and the GMP accreditation relating to the Remaining Business, it had not provided sufficient information to demonstrate their value.
        •   The Exchange also noted that the Remaining Business was acquired from a third party a few months before the proposed disposal at less than the fair value of its net assets. The arm's length market price transaction might indicate that the business did not command much or any intrinsic value.
        •   In any event, the Exchange considered that the assets (tangible and intangible) of the Remaining Business were insufficient to meet Rule 13.24 because, as mentioned in (a) above, the operations of these assets could not generate sufficient revenue and profits to justify a listing.
        (c) Other assets retained by the Group
        •   Other assets retained by the Group would mainly be cash, including the proceeds from the Disposal.
        •   Company A said that the proceeds would be used to reduce the Group's liabilities, and it was seeking new business opportunities to diversify its business scope and might use the cash to acquire other businesses. However, there were no concrete details to demonstrate that the cash retained by the Group would enable it to substantially improve its operations and financial performance after the Disposal.
        14. Company A also sought to prove its compliance with Rule 13.24 by comparing its revenue, profits and assets with those of other issuers. The Exchange disagreed with Company A because Rule 13.24 is a qualitative test and it is not meaningful to simply compare the revenue, profits and/or assets of different issuers. Each case must be considered on its own merits and with reference to the particular circumstances of the issuer concerned.

        CONCLUSION

        15. The Exchange considered that Company A would not comply with Rule 13.24 should it proceed with the Disposal.

      • LD87-2015

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        HKEX LISTING DECISION
        HKEX-LD87-2015 (published in May 2015) (Updated in August 2018)

        Parties Company A — a Main Board issuer

        The Group — Company A and its subsidiaries
        Issue Whether the Exchange would direct the resumption of trading in Company A's shares under Rule 6.07
        Listing Rules Main Board Rules 6.05 to 6.07 and Paragraph 4 of Practice Note 11
        Decision The Exchange directed the resumption of trading in Company A's shares

        FACTS

        1. At its request, trading in Company A's shares was suspended pending release of inside information about regulatory investigations in the PRC involving its director and controlling shareholder (Mr. A). It subsequently disclosed that:
        •   Mr. A was not contactable. Based on the information available to Company A, Mr. A was assisting regulatory authorities in the PRC in their investigations. The subject matter of the investigations and Mr. A's involvement in this matter were unknown to Company A. The regulatory authorities asked Company A about certain projects of the Group, took away certain books and records of the Group, and froze certain bank accounts of the Group.
        •   Company A failed to repay certain bank loans when due, which triggered cross-defaults of other bank loans.
        2. During the trading suspension, Company A continued to announce information available to it regarding the investigations, its assessment of the impact of the investigations on the Group, its negotiations on repayment schedules of outstanding bank loans and other actions taken to manage the Group's cash flow. Company A also published its audited financial results required by the Rules, which did not reveal any accounting irregularities or possible fraudulent activities on the part of the Group. The Group continued to operate its businesses and was able to secure new contracts with customers.
        3. Based on Company A's disclosures, the Exchange considered that the reasons for the initial trading suspension no longer applied and Company A had satisfied the conditions for trading resumption imposed on it (see also guidance on long suspension and delisting set out in the Exchange's Guidance Letter HKEX-GL95-18). (Updated in August 2018)
        4. In response, Company A sought to continue the trading suspension for these reasons:
        •   Exceptional circumstances of the case: Company A referred to Note 1 to Rule 6.05 which states that "The Exchange is under an obligation to maintain an orderly and fair market for the trading of all Exchange listed securities and listed securities should be continuously traded save in exceptional circumstances." It viewed "exceptional circumstances" as those not ordinarily encountered or anticipated and were beyond the control of the listed issuer concerned. It believed that its situation was exceptional and merited the Exchange allowing the continuing suspension.
        •   Trading resumption not in the best interests of shareholders: Company A submitted that with the benefit of the trading suspension, it had made significant progress in negotiating with banks for new repayment schedules of its outstanding loans. It was concerned that there would likely be panic selling of its shares by some shareholders after trading resumption, which would undermine the prospects of its negotiations with banks of the Group's credit facilities.
        •   Undisclosed information: Company A did not have the details of the investigations and was unable to make an informed view on the impact of the investigations on the Group's operations. It would be appropriate for the trading suspension to continue pending better understanding of these matters.

        APPLICABLE LISTING RULES

        5. Main Board Rules 6.05 to 6.07 and Paragraph 4 of Practice Note 11 states that:
        "6.05 The duration of any trading halt or suspension should be for the shortest possible period. It is the issuer's responsibility to ensure that trading in its securities resumes as soon as practicable following the publication of an appropriate announcement or when the specific reasons given by the issuer supporting its request for a trading halt or suspension of trading in its securities, under rule 6.02, no longer apply

        Note :
        (1) The Exchange is under an obligation to maintain an orderly and fair market for the trading of all Exchange listed securities and listed securities should be continuously traded save in exceptional circumstances.
        (2) The Exchange considers that the continuation of any trading halt or suspension beyond such period as is absolutely necessary denies reasonable access to the market and prevents its proper functioning.
        6.06 Where trading has been halted or suspended the issuer shall notify the Exchange of:
        (1) any change in circumstances affecting the reasons provided to the Exchange supporting the trading halt or suspension under rule 6.02; and
        (2) any additional reasons which the issuer wishes the Exchange to take into account in the Exchange's determination whether or not the trading halt or suspension should be continued.
        Note :
        (1) It is the issuer's responsibility to provide the Exchange with all relevant information, which is within the issuer's knowledge, to enable the Exchange to make an informed decision whether or not the trading halt or suspension of trading in the issuer's securities continues to be appropriate.
        6.07 The Exchange shall have the power to direct the resumption of trading of halted or suspended securities. In particular the Exchange may:
        (1) require an issuer to publish an announcement, in such terms and within such period as the Exchange shall in its discretion direct, notifying the resumption of trading in the issuer's halted or suspended securities, following the publication of which the Exchange may direct resumption of trading; and/or
        (2) direct a resumption of trading following the Exchange's publication of an announcement notifying the resumption of trading in the halted or suspended securities."
        Paragraph 4 of Practice Note 11

        "In the interest of a fair and continuous market, the Exchange requires a trading halt or suspension period to be kept as short as is reasonably possible. This means that an issuer must publish an appropriate announcement as soon as possible after the trading halt or suspension arises. Under normal circumstances, the Exchange will restore dealings as soon as possible following publication of an appropriate announcement, or after specific requirements have been met. Failure by an issuer to make an announcement when required, may, if the Exchange feels it to be appropriate, result in the Exchange issuing its own announcement and a restoration of dealings without an announcement by the issuer…"

        ANALYSIS

        6. The Exchange has a statutory duty to maintain a fair, orderly and informed market for the trading of securities and act in the interest of the investing public. The structure of the Listing Rules and the continuing obligations regime place the onus on listed issuers to avoid or minimise the duration of any suspension of trading. In the interest of promoting a continuous market for trading of listed securities, the duration of any suspension should be for the shortest possible period.
        7. The Exchange disagreed with the reasons provided by Company A for the continued suspension of trading:
        •   The Exchange did not consider Company A's circumstances to be "exceptional" to justify the trading suspension. Suspension is a tool to facilitate the Exchange's role to maintain a fair, orderly and efficient market for the trading of securities or for the protection of investors. "Exceptional circumstances" to justify continuing suspension must serve these purposes. Where Company A might consider its circumstances to be "exceptional" and continued trading suspension to be in its best interests, the Exchange must also consider the interest of the investing public.

        This case did not fall into any "exceptional circumstances" in the Rules that require trading suspension. Company A submitted that it did not have any unpublished information constituting inside information under the Securities and Futures Ordinance (SFO).
        •   A trading suspension should not be used as a means to facilitate negotiations of the Group's credit facilities. Issuers are not allowed to suspend trading in listed shares to artificially "maintain" a price which may not be reflective of the market price. Provided that investors are provided with all material information about the listed securities, the securities will be traded on an informed basis.
        •   While Company A did not have the details of the investigations and was unable to ascertain any future impact of the investigations on the Group, it had disclosed all available information regarding the investigations to the extent possible. The impact of the investigations on the Group had been revealed through its announcements and financial reports published after the trading suspension. Company A had admitted that it had no inside information disclosure obligation under the SFO. It was not appropriate to continue with the trading suspension pending future development in the investigation.
        •   Whether trading in Company A's shares was suspended or not, it was obliged to disclose inside information as soon as reasonably practicable to comply with the SFO.
        8. The Exchange considered that Company A had failed to provide sufficient reasons to justify the continued trading suspension. Having considered the circumstances of this case and the fact that Company A did not have any inside information yet to be disclosed, the Exchange decided to direct the resumption of trading in Company A's shares under Rule 6.07.

        CONCLUSION

        9. The Exchange directed the resumption of trading in Company A's shares under Rule 6.07.

      • LD86-2015

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        HKEx LISTING DECISION
        HKEx-LD86-2015 (published in April 2015)

        Summary
        Name of Party Company A — GEM Board listing applicant
        Subject Whether Company A's cash flow generated during a period of non-compliance should be counted towards the calculation of minimum cash flow under GEM Rule 11.12A(1)
        Listing Rule GEM Rule 11.12A(1)
        Decision The Exchange determined that the cash flow generated during the period of non-compliance should not be counted towards the calculation of minimum cash flow under GEM Rule 11.12A(1), and Company A was not eligible for listing

        FACTS

        1. Company A was in a business (the "Business") that required compliance with certain regulations (the "Regulations"). The Regulations specifically stipulated that no person shall carry on the Business unless all the requirements under the Regulations had been complied with. Any breach of the Regulations was an imprisonable offence. Company A did not comply with the Regulations for 22 months (the "Period of Non-compliance") during its track record period (the "Incidents").
        2. Company A would not meet the minimum cash flow requirement under GEM Rule 11.12A(1) if the cash flow generated from the Business during the Period of Non-compliance (the "Non-compliant Cash Flow") was excluded.
        3. Despite the fact that Company A did not comply with the Regulations, its legal advisers were of the view that the relevant income generated during the Period of Non-compliance was not illegal as:
        (i) the Regulations did not stipulate that income generated by an infringing party during the Period of Non-compliance was illegal or will be confiscated; and
        (ii) the relevant income generated during the Period of Non-compliance would not be rendered illegal under any other legislation.
        4. Company A's sponsor believed that the Incidents should not affect the suitability and competence of Company A's directors under GEM Rules 5.01 and 5.02 because:
        (i) the Incidents were mainly attributable to the directors being unfamiliar with the relevant rules and regulations, including the Regulations. The Incidents did not involve fraudulent act or dishonesty of the directors, and were unintentional. As such, they did not impugn on the directors' integrity or competence; and
        (ii) the directors had attended a seminar on relevant laws and regulations relating to the Business after the cessation of the Incidents.
        5. Company A had enhanced its internal controls, such as (i) engaging a consultant who had over 12 years of experience in the relevant industry to make sure all applicable rules and regulations were complied with; (ii) requiring approval by an executive director and a joint internal compliance coordinator in respect of the Business which were governed by the Regulations; and (iii) implementing specific measures which were to be reviewed by a member of senior management on a monthly basis to ensure compliance with the Regulations.

        ISSUE RAISED FOR CONSIDERATION

        6. Whether Company A's Non-compliant Cash Flow should be counted towards the calculation of minimum cash flow under GEM Rule 11.12A(1).

        APPLICABLE RULE

        7. GEM Rule 11.12A(1) states that an applicant 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. Such positive cash flow from operating activities carried out by the applicant must be of at least HK$20 million in aggregate for the two financial years immediately preceding the issue of the listing document.

        ANALYSIS

        8. The Exchange considered the following in assessing whether Company A was able to meet the minimum cash flow requirement under GEM Rule 11.12A(1):
        (i) the compliance of the Regulations was fundamental and a pre-requisite for the legal operation of the Business;
        (ii) any breach of the Regulations was an imprisonable offence, which rendered the breach of the Regulations serious in nature;
        (iii) operating activities in the ordinary and usual course of a business must be carried out generally in accordance with relevant laws and regulations by an applicant, and in the case of Company A, the Regulations; and
        (iv) the Period of Non-compliance lasted for a substantial part of the Track Record Period (being 22 months).
        9. Given that Company A did not comply with the Regulations during the Period of Non-compliance, the Regulations were fundamental to Company A's business, and the breach of Regulations was considered serious in nature which had occurred for a substantial part of the Track Record Period, the Non-compliant Cash Flow could not be regarded as being generated in the ordinary and usual course of Company A's business, and therefore be excluded from the calculation of minimum cash flow under GEM Rule 11.12A(1).

        DECISION

        10. Company A was not able to meet the minimum cash flow requirement under GEM Rule 11.12A(1) after excluding the Non-compliant Cash Flow. Therefore, Company A was not eligible for listing.

      • LD85-2015

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        HKEX LISTING DECISION
        HKEX-LD85-2015 (published in January 2015) (Updated in November 2016)

        Summary
        Name of Party Company A — Main Board listing applicant

        Company B — One of Company A's controlling shareholders at the time of the issuance of Company A's listing document
        Issue Whether Company B, which will cease to be a controlling shareholder of Company A shortly after listing, should be subject to a 12-month lock-up of its shares after Company A's listing under Listing Rule 10.07(1).
        Listing Rule Listing Rule 10.07(1)
        Decision The Exchange determined that Company B, despite ceasing to be Company A's controlling shareholder shortly after listing, was required to be subject to a 12-month lock-up of its shares after Company A's listing under Listing Rule 10.07(1).

        SUMMARY OF FACTS

        1. Company B was one of Company A's controlling shareholders interested in more than 30% of Company A's shares on the issue date of Company A's listing document. Company B was established for estate planning purpose by Company A's founder who was also an Executive Director and actively involved in the management of Company A, although Company B was owned by his son.
        2. An over-allotment option was granted to the global coordinator of Company A's IPO. Upon full exercise of the over-allotment option after Company A's listing, Company B's interest in Company A was diluted to less than 30% and it ceased to be a controlling shareholder of Company A as defined under the Listing Rules.

        THE ISSUE RAISED FOR CONSIDERATION

        3. Whether Company B, which will cease to be a controlling shareholder of Company A shortly after listing, should be subject to a 12-month lock-up of its shares after Company A's listing under Listing Rule 10.07(1).

        APPLICABLE LISTING RULES

        4. Chapter 1 to the Listing Rules defines "controlling shareholder" as any person who is or group of persons who are together entitled to exercise or control the exercise of 30% (or such other amount as may from time to time be specified in the Takeovers Code as being the level for triggering a mandatory general offer) or more of the voting power at general meetings of the issuer or who is or are in a position to control the composition of a majority of the board of directors of the issuer.
        5. Listing Rule 10.07(1) states that a person or group of persons shown by the listing document issued at the time of the issuer's application for listing to be controlling shareholders of the issuer shall not and shall procure that the relevant registered holder(s) shall not:-
        (a) in the period commencing on the date by reference to which disclosure of the shareholding of the controlling shareholders is made in the listing document and ending on the date which is 6 months from the date on which dealings in the securities of a new applicant commence on the Exchange, dispose of, nor enter into any agreement to dispose of or otherwise create any options, rights, interests or encumbrances in respect of, any of those securities of the issuer in respect of which he is or they are shown by that listing document to be the beneficial owner(s); or
        (b) in the period of 6 months commencing on the date on which the period referred to in Listing Rule 10.07(1)(a) expires, dispose of, nor enter into any agreement to dispose of or otherwise create any options, rights, interests or encumbrances in respect of, any of the securities referred to in Listing Rule 10.07(1)(a) if, immediately following such disposal or upon the exercise or enforcement of such options, rights, interests or encumbrances, that person or group of persons would cease to be a controlling shareholder.

        THE ANALYSIS

        6. Listing Rule 10.07(1) is to require any person or group of persons, being a controlling shareholder or group of controlling shareholders shown by the listing document issued at the time of the issuer's application for listing, to demonstrate (unless it is already clearly disclosed in the issuer's listing document that such person or group of persons intends to sell shares as part of the offering) its commitment to a new applicant and to protect investors by preventing a material change in the shareholding structure to the extent that a controlling shareholder no longer controls the applicant during the first year of the applicant's listing.
        7. Having considered the facts and circumstances of Company B and the intention of Listing Rule 10.07(1), Company B was required to be subject to a 12-month lockup of its shares after Company A's listing under Listing Rule 10.07(1) (i.e. maintaining at least the same number of shares as stated in Company A's listing document for 12 months after Company A's listing).

        THE DECISION

        8. The Exchange determined that Company B, despite ceasing to be Company A's controlling shareholder shortly after listing, was required to be subject to a 12-month lock-up of its shares after Company A's listing under Listing Rule 10.07(1).

    • 2014

      Select By Rule or Topic: Download the consolidated index here

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

      This section comprises decisions on cases handled by the Listing Committee and/or the Listing Division, to enhance transparency and market understanding of their interpretation of the Listing Rules. Each decision was based on its specific circumstances and is not a precedent for future cases.

      Effective from 1 January 2011, listing decisions will be published under a new naming format as illustrated below:

      Before 1 January 2011 On or After 1 January 2011
       
      HKEx-LD100-1
      HKEx-LD100-2
      HKEx-LD101-1
       
      HKEx-LD1-2011
      HKEx-LD2-2011
      HKEx-LD3-2011

      Listing decisions published before 1 January 2011 continue to bear the old references.

      LD Series Number First Release Date (Last Update Date)
      (mm/yyyy)
      Listing Rules/ Topics Particulars
      LD84-2014 02/2014
      (05/2016)
      Main Board Rule 9.03(3) and GEM Rules 12.09 and 12.14 To provide guidance on why the Exchange returned certain listing applications
      LD83-2014 01/2014 Main Board Rules 8.08(2) and 8.08(3) For Company A's proposed rights issue of shares with bonus warrants, whether the Exchange would waive the requirements on the minimum number and spread of warrantholders at the time of listing of the warrants
      LD82-2014 01/2014
      (04/2015)
      Main Board Rules 8.08, 10.06(3) and 13.32
      (i) Whether to allow Company A to proceed with a share repurchase offer which might result in a lack of open market in its shares
      (ii) Whether to give consent to Company A for issuing new shares within 30 days after completion of the offer under Rule 10.06(3) to meet the public float requirement
      LD81-2014 01/2014 Main Board Rules 9.20(1) and Paragraph 30 of Appendix 1B Whether the Exchange would waive the requirements relating to the inclusion of a statement of sufficient working capital in Company A's listing document for a rights issue
      LD80-2014 01/2014 Main Board Rules 14.15(2) and 14.22 Whether Company A's proposed guarantee for a bank loan to be granted to the Joint Venture should be aggregated with its initial capital contribution to the Joint Venture
      LD79-2014 01/2014
      (07/2014)
      Main Board Rules 14A.25, 14A.36, 14A.76 Whether the amendments to the non-competition undertaking given by the Holding Company to Company A would require independent shareholders' approval
      LD78-2014 01/2014
      (07/2014)
      Main Board Rules 14A.19, 14A.26, 14A.27 Whether the guarantee provided by Company A for a loan facility granted to the Borrower was subject to the connected transaction requirements
      LD77-2014 01/2014 Main Board Rules 2.13(2) and 11.07 Whether Company A's level of internal controls on its hedging activities was appropriate for a listed company

      (Withdrawn in July 2018)

      • LD84-2014

        View Current PDF

        HKEX LISTING DECISION
        HKEX-LD84-2014 (February 2014) (Updated in May 2016)

        (Updated due to withdrawal of guidance letters superseded by HKEX-GL86-16)

        Summary
        Party Company A to Company Q (the "Applicants")
        Issue To provide guidance on why the Exchange returned certain listing applications
        Listing Rules Main Board Rule 9.03(3) and GEM Rules 12.09 and 12.14
        Decision The Exchange returned the applications.
        1. This listing decision sets out the reasons the Exchange returned certain listing applications from May 2013 to September 2013. For the reasons listing applications were returned before this period, please refer to Listing Decisions HKEX-LD48-2013 and HKEX-LD75-2013.

        APPLICABLE RULES, REGULATIONS AND PRINCIPLES

        2. Main Board Rule 9.03(3)1 stated that the Exchange expected to receive an advanced proof of the prospectus with the listing application form that was not the initial proof to enable the Exchange's review was able to commence immediately upon lodgment of the application. The disclosure of the requisite information as set out in Chapter 11 must be substantially completed in the advanced proof of the prospectus. If the Exchange considered the draft prospectus submitted with the Form A1 not to be in an advanced form, the Exchange would not commence reviewing the application. All documents, including the Form A1 and the initial listing fee, submitted to the Exchange would be returned to the sponsor(s). The sponsor(s) would be required to resubmit a new Form A1 together with the advanced proof of the prospectus.
        3. GEM Rule 12.091 stated that the Sponsor must ensure that the draft listing document had been verified in all material respects prior to submission. Note 1 to GEM Rule 12.09 stated that if the Exchange considered that the draft listing document submitted with the listing application form was insufficiently finalised, the Exchange would not commence review of that or any other documents relating to the application.
        4. GEM Rule 12.141 required that the listing application form must be accompanied by certain documents. The Listing Department might return to the sponsor any application for listing which it considered to be incomplete, together with the initial listing fee.

        ANALYSIS

        5. Set out below are reasons the Exchange considered the applications not in an advanced form and returned certain listing applications during the period from May 2013 to September 2013.

        Company A

        6. Company A provided construction services. There were a number of deficiencies in disclosure:
        (i) Packaging of business

        The prospectus disclosed that Company A focused on Business Segment A, and that it would cease its business in Business Segment B upon completion of the last project in this segment although it contributed a significant amount of revenue during the track record period. The prospectus lacked sufficient details of Business Segment B, including why Business Segment B was included in the listing group given the focus on Business Segment A, and the impact on Company A's track record revenue and profit margin had Business Segment B been excluded in the first place.

        Moreover, the sponsor had not demonstrated that Company A was able to meet the minimum profit requirement under Rule 8.05(1)(a) after excluding the profit from Business Segment B, and that there was no packaging issue by including Business Segment B in the listing group.
        (ii) Connected and related party transactions

        Company A subcontracted the construction work to a connected party which resulted in a thin profit margin during the track record period and after listing. The prospectus lacked disclosure on how the pricing of sub-contracted work was determined and whether such continuing connected transaction was conducted on normal commercial terms. The prospectus also lacked disclosure on the basis of the recurring management fee income from a connected person.
        (iii) Workplace safety

        Company A had not disclosed sufficient information on its workplace safety and related regulatory compliance during the track record period, including:
        •   the number of accidents and workers involved during the track record period and up to the latest practicable date, the level of severity of the accidents, the amount of compensation paid, Company A's maximum liabilities for the existing and potential claims, and whether Company A's accident rate was comparable to its industry peers;
        •   the underlying factors leading to the respective accidents and the measures taken by Company A and its subcontractors to improve the safety standards and to prevent reoccurrence of similar accidents going forward; and
        •   how Company A monitored the performance and workplace safety of its subcontractors.
        (iv) Others

        The disclosure in the prospectus did not follow the Exchange's guidance letters, including Guidance Letter HKEX-GL27-122 on the Summary section, Guidance Letter HKEX-GL41-12 on recent development of an applicant's operational and financial performance, Guidance Letter HKEX-GL54-133 on risk factors, and Guidance Letter HKEX-GL33-124 on use of proceeds. (Updated in May 2016)

        Company B*

        7. Company B was engaged in the entertainment business. The Exchange had raised a number of issues in its reply to Company B's pre-IPO enquiry. However, Company B failed to satisfactorily address these concerns when it submitted its listing application. Non-exhaustive examples of issues raised include:
        •   the suitability for listing of Company B under GEM Rule 2.06;
        •   obtaining an affirmative regulatory assurance that Company B can renew its operation license upon its reorganization, and a legal opinion on whether Company B had to obtain any other approvals under the relevant laws and regulations for its reorganization;
        •   whether the contractual arrangements were legal and binding and that Company B had the ability to ensure the sound and proper operation of the contractual arrangements, and providing an explanation on how the contractual arrangements were in line with Listing Decision HKEX-LD43-3;
        •   the sponsor's view, with basis, on the adequacy and effectiveness of Company B's internal control measures to stay clear of anti-social forces and money laundering activities for a reasonable demonstration period; and
        •   details of Company B's credit arrangements and a legal opinion on whether the credit arrangements complied with the relevant laws and regulations.
        8. In addition, the prospectus had a number of deficiencies in disclosure:
        (i) Sustainability of business due to reliance on major customers and suppliers

        Company B relied heavily on its major customers and suppliers. It had a short operating history and had recently moved to a new business premise. The prospectus lacked sufficient disclosure on:
        •   Company B's sustainability of business taking into account its reliance on a few customers and suppliers;
        •   whether its track record results was reflective of its future performance given the potential impacts from the relocation; and
        •   information as required under Listing Decision HKEX-LD107-1, including details of the customer and the suppliers (e.g. background, profile, years of relationship with Company B, circumstances leading to the cooperation, etc.), whether the concentration of customers and suppliers was a common industry practice, plans and measures to mitigate the reliance, the contingency plan if Company B failed to renew the agreements with the customers and the suppliers, and the operational and financial impact of the relocation of the business premise.
        (ii) Liquidity and working capital management

        Company B recorded operating cash outflows and a substantial increase in accounts receivable and accounts receivable turnover days during the track record period. The prospectus lacked disclosure on:
        •   Company B's plan to service its indebtedness and development plans, and the basis on which the directors and the sponsor were satisfied that Company B had sufficient working capital to meet its present requirements and future development plans as per Guidance Letter HKEX-GL37-12;
        •   the subsequent settlement of accounts receivable as at the latest practicable date, reasons for the prolonged accounts receivable turnover days and Company B's provision policy and measures in place to expedite debt collection; and
        •   whether Company B had experienced any difficulty in obtaining credit facilities, default in its payment obligations or breach of financial covenants.
        (iii) Others

        The prospectus also lacked disclosure on the following:
        •   details of Company B's expansion plan and the latest status;
        •   the latest operational and/ or financial performance subsequent to the track record period, and a commentary on the impact of listing expenses on Company B's financial performance as per Guidance Letter HKEX-GL41-12; and
        •   details of biographies of the directors and senior management members as required under our standard comments SC4.5 and 4.65.

        Company C

        9. Company C was a financial service provider. There were a number of deficiencies in disclosure:
        (i) Non-compliances

        There were a significant number of non-compliance incidents related to Company C's core business and operations. However, there was insufficient disclosure on the details of these incidents as required under Guidance Letter HKEX-GL63-13, including:
        •   how and by whom the non-compliances were detected;
        •   the period in which the non-compliances occurred;
        •   the directors' involvement in the non-compliances;
        •   the operational and financial impacts;
        •   Company C's compliance record and results of regulatory inspections during the track record period and up to the latest practicable date;
        •   the rectification and precautionary measures implemented;
        •   the sponsor's and internal control adviser's views on the adequacy and effectiveness of these internal control measures;
        •   whether Company C was able to meet the minimum profit requirement under Rule 8.05(1)(a) after excluding the revenue and profit arising from the non-compliances; and
        •   the sponsor's view on directors' suitability under Rules 3.08 and 3.09.
        (ii) Business operations

        The prospectus lacked a comprehensive description of the key aspects of Company C's business operations:
        •   procedures for opening new accounts, including customers' credit assessment and collateral valuation, procedures and timing of trade execution and settlement, and the matching mechanism used for trading;
        •   details of business arrangements with customers, business partners and hedging partners;
        •   the number and amount of error trades, the loss incurred and the internal control measures adopted to prevent recurrence; and
        •   detailed arrangements for the referral of customers and the associated risks, in particular, the revenue model, roles and responsibilities of parties involved, and the internal control measures to monitor and identify high risk customers, abnormal trades and potential laundering activities.
        (iii) Hedging

        The prospectus lacked sufficient disclosure of Company C's hedging strategy and risk control measures, such as:
        •   factors considered in making hedging decisions, the effectiveness of the hedging activities during the track record period, the percentage of "exposure" to be hedged and whether the transactions entered into were for hedging or for "speculative" purpose;
        •   the internal control measures to manage hedging risks, experience of the relevant personnel, and details of the review and reporting system; and
        •   a detailed analysis of the underlying causes for the fluctuation in income despite the adoption of the hedging activities.
        (iv) Money laundering

        There were allegations concerning the source of funds used by a customer of Company C. Company C had failed to disclose:
        •   details and source of the allegations, the investigations conducted by Company C and the related findings, and whether Company C had reported these incidents to the regulatory authorities;
        •   how Company C settled the trading account, revenue and profit generated from the customer and clients referred to Company C, and the operational and financial impact to the Company C as a result of the termination of relationship with the customer;
        •   details of internal control measures and whether Company C had enhanced its internal control measures as a result of this incident, in particular, on know-your-clients procedures; and
        •   the sponsor's view on the adequacy and effectiveness of the enhanced internal control measures and its compliance with all relevant regulatory requirements.
        (v) Liquidity and working capital management

        Company C recorded operating cash outflow and a significant increase in trade receivables from hedging counterparties. Company C had failed to disclose:
        •   a detailed analysis of the reasons leading to an increase in receivables;
        •   the fluctuation in account receivables and accounts payables turnover days, subsequent settlements, and its financing capability to fund its working capital shortfalls; and
        •   its credit policy and account receivables provision policy.
        (vi) Future plans and use of proceeds

        Company C proposed to finance its business expansion to new geographical markets with the IPO proceeds. The prospectus lacked disclosure on:
        •   the expected timeframe of Company C's expansion plan;
        •   the source of funding in addition to IPO proceeds;
        •   how the expansion plan might affect Company C's business and risk exposure; and
        •   the basis of selecting new geographical markets, and the relevant regulatory requirements and compliance procedures.

        Company D*

        10. Company D was involved in the provision of financial services.
        11. Company D did not comply with the relevant laws and regulations applicable to its core business and operations during the track record period. Following the principles of Listing Decision HKEX-LD19-2011, we normally require a demonstration period of at least 12 months from the date the applicant ceased all non-compliances with the financial results during the demonstration period audited. There should also be full details of the independent consultant's reviews and conclusions on Company D's internal control measures in the prospectus. Company D did not meet the aforesaid requirements in Listing Decision HKEX-LD19-2011. Further, the prospectus also lacked sufficient information on Company D's non-compliances, such as the date of implementation of Company D's enhanced internal control measures, and the sponsor's view on the adequacy of internal control measures and suitability of directors under GEM Rules 5.01 and 5.02.
        12. The prospectus also lacked disclosure on:
        •   the reason for the change in auditor and whether there was any matter that had to be drawn to our attention to;
        •   reasons for the significant growth in a particular business segment during the track record period and how Company D generated fee and commission income from this segment;
        •   more information on the financial assets acquired by Company D at a discount during the track record period (e.g. nature of the financial assets and the acquisition criteria), the background of the party who purchased these financial assets from Company D subsequently and whether Company D recorded any gain/ loss from the disposal of the financial assets;
        •   specific risk management measures, such as frequency of evaluating the value of collaterals, action taken for any significant decrease in collateral value, value-to-loan ratios, risk management measures for unsecured loans, and details of internal control measures on anti-money laundering activities, etc.; and
        •   why Company D did not apply for a Main Board listing given that it would be able to meet the minimum profit requirement under Main Board Rule 8.05(1).

        Company E

        13. Company E was an equipment manufacturer. During the track record period, it sold products to a sanctioned country, and there was no disclosure on whether Company E or any parties involved in the listing would be subject to sanctions risk. Further, the directors, the sponsor and the legal advisers had not provided their views, with basis, on sanctions risk, and how it might affect Company E's suitability for listing.

        Company F

        14. Company F was a food manufacturer. It was involved in non-compliant financing activities but did not provide audited financial results for a demonstration period of at least 12 months from the date it ceased all non-compliant financing activities in accordance with Listing Decision HKEX-LD19-2011.
        15. In addition, there were a number of deficiencies in disclosure:
        (i) there was a lack of disclosure of an abandoned listing plan on another exchange, and the reasons for including different entities in the current proposed listing group; and
        (ii) Company F failed to make the required disclosure on its distributorship business model per Guidance Letter HKEX-GL36-12, such as the relationship and differences between different types of distributors, measures to avoid cannibalization and competition among distributors, and the risk of inventory accumulation at the distributors' level, etc.

        Company G*

        16. Company G was engaged in the processing, manufacturing and sale of certain products. There were a number of deficiencies in disclosure:
        (i) Customers

        The prospectus lacked sufficient disclosure on:
        •   the background of Company G's major customers, and there was no disclosure on the distributorship business model as per Guidance Letter HKEX-GL36-12;
        •   revenue breakdown by customer types and how the change in customer mix had affected/ would affect Company G's financial performance; and
        •   key terms of sales agreements and framework agreements with different types of customers.
        (ii) History and development

        The prospectus lacked details of the commercial rationale behind certain transactions and cooperation agreements between shareholders.

        In addition, some of the founders left Company G during the track record period. The directors and the sponsor had yet to demonstrate whether their departures would affect Company G's compliance with the management continuity requirement under GEM Rule 11.12A(3).
        (iii) Financial information

        The prospectus lacked meaningful discussion on Company G's fluctuating gross profit margin during the track record period, its cost control measures in managing fluctuations in raw material prices, and whether Company G was able to pass on the increase in purchase costs to its customers.

        Company G had significant inventory, prepayments and loans at year end. The prospectus lacked disclosure on the ageing analysis and the provision policy of Company G's inventories, the key terms of prepayments, and the background of the lenders of the loans.
        (iv) Use of proceeds

        Company G allocated about half of its IPO proceeds to enhance its production capacity despite a decreasing utilization rate during the track record period. The prospectus lacked disclosure on the justifications for the expansion plan, the current status of the expansion plan, the types of products to focus on, and the selection criteria for acquisition or co-operation target, etc.
        (v) Non-compliance incidents

        There was insufficient disclosure on Company G's internal control measures, the identity and qualification of the internal control adviser together with the key findings and recommendations, and whether Company G had implemented the recommendations.
        (vi) Industry overview

        The prospectus failed to provide market information on Company G's major products and a meaningful discussion on how these products compared with its substitutes in terms of pricing and usages.

        Company H*

        17. Company H was a manufacturer. It did not fully address the comments previously raised by the GEM Approval Group before the submission of a renewed listing application. Comments were raised in relation to the impact of certain litigations on the suitability of directors, the minimum cash flow requirement, the significant decline in net profit, the decline in profit margin of new customers, etc.

        Company I*

        18. Company I was a manufacturer.
        19. During the track record period, Company I was engaged in non-compliant financing arrangements. Based on Listing Decision HKEX-LD19-2011, we require a demonstration period of at least 12 months from the date the applicant ceased all non-compliances with the financial results during the demonstration period audited. Further, there should be full details of the independent consultant's reviews and conclusions on Company I's internal control measures in the prospectus. Company I did not meet the aforesaid requirements in Listing Decision HKEX-LD19-2011. Further, the disclosure on the non-compliant financing arrangements was limited and was not in line with the principles under Listing Decision HKEX-LD19-2011. Non-exhaustive examples of information which should be disclosed include:
        •   reasons for the non-compliance, the nature and the aggregate amount of non-compliant bills during the track record period and up to the date of cessation of such practice, and the background of the parties to which the bills were endorsed/ discounted;
        •   a PRC legal opinion on the legal consequences and maximum penalties to be imposed on Company I, and whether any regulatory assurance had been obtained from competent authorities;
        •   the amount of interest expenses saved by adopting the non-compliant financing arrangements, and whether Company I was able to meet the minimum cash flow requirement under GEM Rule 11.12A(1) it did not engage in the non-compliant financing arrangements;
        •   directors' and senior management's involvement in the non-compliance; and
        •   the sponsor's view on directors' suitability under GEM Rules 5.01 and 5.02 and Company I's suitability for listing under GEM Rule 11.06 taking into account the non-compliance.
        20. For Company I's other non-compliances, the following should be disclosed in addition to the information requested under Guidance Letter HKEX-GL63-13:
        •   the significance of each of the production facilities with title defects (e.g. revenue contribution, production capacity, GFA, etc.), and their respective carrying values at the end of the track record period; and
        •   the amount of non-compliance loans extended during the track record period.

        Company J

        21. Company J was a pharmaceutical company. There were a number of deficiencies in disclosure:
        (i) Business model — distributorship

        Company J distributed most of its products through distributors. The prospectus lacked sufficient information on the Group's distributorship business model as set out as per Guidance Letter HKEX-GL36-12.
        (ii) Transactions with sanctioned countries

        Company J planned to export its products to and commence sales activities in sanctioned countries. However, there was insufficient disclosure on the details of these transactions and whether these export activities/ sales would be subject to any sanctions in the prospectus.
        (iii) Relocation and subcontracting

        Company J engaged a third party subcontractor to produce certain pharmaceutical products due to the relocation of its production facilities. However, the prospectus lacked disclosure on the material details of the subcontracting arrangement and the relocation plan, such as:
        •   the amount of revenue from the sales of products produced by subcontractors;
        •   the quality control of subcontracted products and the protection of confidential information;
        •   salient terms of subcontracting agreements and the availability of alternative subcontractors; and
        •   reasons for the relocation, the expected timeframe, the capital expenditures incurred and to be incurred, the source(s) of funding, and the expected increase in production capacity.
        (iv) Summary

        The "Summary" section of the prospectus lacked sufficient information to provide a concise overview of Company J's business operations and to highlight significant matters as per Guidance Letter HKEX-GL27-122. Material information that was missing included: (Updated in May 2016)
        •   key aspects of the group's business by segments, including the respective product features, major customers, major suppliers, sales and distribution channels, and market share of each segment;
        •   a breakdown of operating income and gross margin by business segments, followed by a high-level discussion on the material changes during the track record period and up to the latest practicable date;
        •   business relationships with the controlling shareholder, which was also a major supplier, and a commentary on the fluctuation in the level of purchases during the track record period;
        •   impact of government price controls on Company J's pharmaceutical products;
        •   a brief summary of the material business risks faced by Company J;
        •   recent developments post track record period; and
        •   the industry and regulatory environments concerned.
        (v) Product Quality

        Based on the result of our desktop research, the Exchange noted that Company J had failed to disclose sufficient information on certain product quality issues in the prospectus, such as whether it received any complaints or requests for return, whether it had any product liability, the rectification measures taken/ to be taken, and whether the issues suggested poor quality control or reflected negatively on its directors' suitability.
        (vi) Bribery

        Based on the result of our desktop research, the Exchange noted that Company J failed to disclose in the prospectus details of a bribery incident, the financial and operational impact of the incident to Company J, the internal control and anti-bribery measures to prevent the reoccurrence of similar events, and the sponsor's view on directors' suitability under Rules 3.08 and 3.09.

        Company K

        22. Company K was a service provider in the PRC.
        23. Company K entered into a pre-IPO investment agreement with a number of pre-IPO investors, pursuant to which the pre-IPO investors might put back their shares to Company K or its controlling shareholder when certain conditions were not met. Under Guidance Letter HKEX-GL43-12, put or exit options are disallowed, except when the terms of the pre-IPO investment clearly states that the put or exit option could only be exercised when listing does not take place. To follow the Guidance Letter, Company K would have had to amend the terms of the pre-IPO investment and follow the 180-day requirement set out in the Guidance Letter HKEX-GL29-12 (unless there was a legal opinion that such amendment would not constitute a new agreement), or unwind the pre-IPO investment.
        24. In addition, there were a number of deficiencies in disclosure:
        (i) Restricted business

        Foreign investment in Company K's business in the PRC was restricted by laws and regulations. Company K should have, with the support of a legal opinion, stated clearly what the relevant regulatory requirements were, whether the authority providing an opinion on Company K's compliance with the requirements was the competent authority, and whether Company K had complied with the requirements during the track record period and as at the latest practicable date.
        (ii) Ownership of shareholding in subsidiary

        Company K had, during the track record period, transferred certain equity interest in a subsidiary to a related party but retained the related shareholder rights. Company K should have clarified, with the support of views from a PRC legal adviser and the reporting accountants, the ownership of the interests and the appropriate accounting treatment under the accounting standards.
        (iii) Competition with controlling shareholders

        The controlling shareholder of Company K held interest in a business that might compete with Company K. The prospectus lacked disclosure on the competing business as required under Rule 8.10, and on how the potential competition could be dealt with.
        (iv) Others

        The prospectus also lacked disclosure on:
        •   one of its business segments to reflect its actual operations;
        •   a concise overview of Company K's business and highlights of significant matters in the Summary section as per Guidance Letter HKEX-GL27-122; (Updated in May 2016)
        •   measures taken/ to be taken by Company K to monitor and control the quality of services, protect the environment, and maintain a healthy and safe environment for customers and employees;
        •   the experience of its staff and whether all professional employees performed their jobs within the permitted scope of their licenses;
        •   suppliers' concentration as per Listing Decision HKEX-LD107-1, whether certain rights provided under the terms of the agreements with suppliers was in accordance with industry practice and highlight the risk of losing such rights;
        •   a detailed analysis of how the government's regulation over pricing had affected Company K during the track record period;
        •   salient terms of certain management agreements, basis of determining the rights of each party, revenue/ management fee arrangement, etc.;
        •   the maximum exposure on short-term investments over the track record period, its treasury and investment policies and related risk control measures, management expertise and experience involved in the risk control measures, and the sponsors' view on whether these risk control measures were adequate and effective; and
        •   material details of the loan to be repaid by part of the IPO proceeds and the expansion plan.

        Company L

        25. Company L was a mining company. It had not satisfactorily addressed issues raised in the Exchange's guidance letters in response to its pre-IPO enquiries, including why it adopted a corporate structure which would result in numerous connected transactions after listing and why contractual arrangements were adopted when they were not necessary. Besides, Company L failed to follow the disclosure requirements set out in:
        (i) Listing Decision HKEX-LD43-3 on structured contracts. In particular, despite the PRC legal advisers had opined that certain aspects of the structured contracts may not be enforceable, Company L had not taken any action to mitigate or address the issue;
        (ii) Guidance Letter HKEX-GL52-13 for mineral companies;
        (iii) Main Board Rule 18.29 regarding the presentation of Company L's mineral resources and reserves;
        (iv) Guidance Letter HKEX-GL41-12 on the latest financial, operational and trading position; and
        (v) Guidance Letter HKEX-GL33-124 on the use of proceeds. (Updated in May 2016)
        26. In addition, there were a number of other deficiencies in disclosure:
        (i) Regulations

        The prospectus lacked a comprehensive overview of the key provisions of the rules and regulations specifically relevant to Company L and its compliance with such provisions. In addition, there was only minimal disclosure on how Company L intended to increase its production capacity given the restrictions under the regulations.
        (ii) Customer concentration

        Company L had a high concentration of customer. The prospectus lacked disclosure on the risk of reliance with reference to HKEX-LD107-1, measures to diversify the customer base, reasons for ceasing sales to a top five customer, and how the high level of/ change in customer concentration had affected Company L's business during the track record period.
        (iii) Financial information

        The accountants' report had not been updated to comply with Rule 8.06. Besides, the "Financial Information" section of the prospectus did not provide sufficient information for investors' assessment of Company L's financial performance and liquidity position, such as its net current liabilities, increasing net losses, high interest costs, reliance on controlling shareholders' guarantee, significant capital expenditures, explanation on the fluctuations in key financial indicators, and how it would secure sufficient funding for its operations and expansion plan.

        Company M

        27. Company M was a mining company.
        (i) Experience of core management team

        Among the 10 core management team members identified, we considered that only three of them possessed experience relevant to the exploration and/ or extraction activity of the mineral resource that Company M was pursuing. Company M failed to demonstrate how the experiences of other core management team members on other mineral resources were transferrable to the mineral resource that Company M was pursuing.
        (ii) Competition with controlling shareholder

        The controlling shareholder of Company M had interests in various other companies which were engaged in mining business. The prospectus lacked disclosure on:
        •   the extent of competition between Company M and the excluded business (e.g. scale and size of the mines, financial performance, marketing and sales channel, customers and suppliers base, etc.), whether and how Company M's business and products were delineated from those of the excluded business, whether the excluded business would become significant to Company M in the future, and Company M's intention to acquire them going forward; and
        •   more details on the basis of the proposed arrangements to delineate the businesses between Company M and the excluded business, and how the first right of refusal/ option to acquire the excluded business could work in practice (e.g. criteria to exercise the first right of refusal/ option to acquire, details of INEDs' expertise and experience in approving the exercise of the first right of refusal/ option to acquire, etc.).
        (iii) Working capital sufficiency and financial independence from controlling shareholder

        Company M recorded net loss, operating cash outflow and significant net current liabilities during the track record period. The controlling shareholder had advanced a substantial amount of funds to finance Company M's operation and provided personal guarantee for its banking facility. Given that part of the advance from the controlling shareholder would be repaid by IPO proceeds and the personal guarantee provided would only be released upon listing, Company M had yet to demonstrate that it could operate financially independently from the controlling shareholder at the time of listing under Listing Decision HKEx-LD69-1.

        Company N

        28. Company N was a service provider. There were a number of deficiencies in disclosure:
        (i) Competition with controlling shareholder

        The controlling shareholder had certain retained business which also provided the same type of service as Company N. Company N failed to disclose the reasons for excluding the retained business, the size of operation and key financial information of the retained business, whether the controlling shareholder intended to inject the relevant business into the group as required under Rule 8.10(1), the basis and the practicality of the proposed arrangements to delineate the businesses between Company N and the retained business, the corporate governance measures to manage the actual/potential competition, and the directors and sponsors' views on the adequacy of these measures.
        (ii) Structured Contracts

        Company N derived a portion of its revenue from online value-added services, which was subject to foreign ownership restriction and was therefore conducted through structured contracts. Besides the foreign ownership restriction, the relevant laws and regulations in the PRC also required foreign investors invested in the provision of online value-added services to meet certain qualification requirement. Based on the disclosure in the prospectus, Company N was unable to fulfill the qualification requirement and thus would not be able to unwind the structured contracts even if the foreign ownership restriction is removed in the future, i.e. unable to follow Listing Decision HKEX-LD43-3.

        The prospectus lacked disclosure on how Company N planned to meet the qualification requirement and whether there was any legal impediment for it to meet the qualification requirement, and other disclosure required under HKEX-LD43-3.
        (iii) Non-compliances

        Company N had a number of non-compliances during the track record period. However, it failed to make appropriate disclosure as required under the standard comment SC1.26 and Guidance Letter HKEX-GL63-13 including when the non-compliances will be fully rectified, internal control measures that were adopted specifically to address the non-compliances, and the sponsor's view on directors' suitability under Rules 3.08 and 3.09.

        Company O*

        29. Company O was engaged in the provision of certain types of products and services. There were a number of deficiencies in disclosure:
        (i) Non-compliances

        Company O had a significant number of non-compliances with laws and regulations applicable to its core business and operations. The disclosure on the non-compliance incidents was unclear and insufficient, and should be enhanced to include the causes and reasons for each non-compliance, the involvement of directors and senior management in the non-compliances, the operational and financial impacts on Company O, and the implementation of rectification and precautionary measures and their effectiveness.

        Given the significant number of non-compliances, the sponsor should have provided its view on whether the non-compliances had any impact on directors' suitability under GEM Rules 5.01 and 5.02 and Company O's suitability for listing under GEM Rule 11.06. Further, Company O had to demonstrate to our satisfaction that it was able to meet the minimum cash flow requirement under GEM Rule 11.12A(1) after excluding the relevant cash flow from the non-compliant sales.
        (ii) Serious deterioration in recent financial performance

        The prospectus lacked detailed discussion on the serious deterioration in Company O's financial performance, including how the changes in regulations and other economic factors would affect Company O's future business and profitability, and the sponsor and directors' views on whether Company O's business was sustainable and suitable for listing under GEM Rule 11.06.
        (iii) Strategic arrangements with customers

        Company O entered into sales agreements with a major customer and a related customer to sell products to them at a discount. The prospectus lacked sufficient information on these agreements including the duration of the agreements, ranges and basis of discount, payment terms, settlement method, major rights and obligations of the parties, and whether these agreements were entered into on normal commercial terms and in accordance with common industry practice.
        (iv) Money laundering

        During the track record period, some of Company O's overseas customers settled their invoices through a licensed money exchange house which then transferred the payments to Company O. Company O was not able to identify the source of funds and was therefore exposed to potential money laundering activities. Besides, some of Company O's sales were conducted in cash.

        The prospectus lacked detailed disclosure on the arrangements among Company O, its customers and the exchange house, the reasons for the arrangement and the risks involved, whether there were incidents where Company O was suspected or found to be involved in any illegal activities in relation to funds received from overseas, the amount of sales transactions settled in cash during the track record period, and the specific internal control measures adopted by Company O to detect and prevent its bank accounts being used for illicit purpose and cash misappropriation by its employees.
        (v) Transactions with related parties

        Company O sold and purchased products from a company owned by a shareholder during the track record period. Company O did not disclose in the prospectus whether the transactions with this company were entered into in the ordinary and usual course of its business and on normal commercial terms. The shareholder disposed of his interest in Company O subsequent to the track record period and there was no disclosure on whether the transactions with this company would continue after the disposal and what would be the financial impact on Company O going forward.

        Company P

        30. Company P was engaged in the sales of certain products.
        31. Company P entered into a pre-IPO investment agreement with a number of pre-IPO investors, pursuant to which the pre-IPO investors might request Company P to redeem all or a portion of their shares when certain conditions were not met. This did not follow Guidance Letter HKEX-GL43-12 under which any put or exit options are disallowed except when the terms of the pre-IPO investment clearly states that the put or exit option could only be exercised when listing does not take place. To follow the Guidance Letter HKEX-GL43-12, Company P would have had to amend the terms of the pre-IPO investment and follow the 180-day requirement in the Guidance Letter HKEX-GL29-12, unless there was a legal opinion that such amendment would not constitute a new agreement, or unwind the pre-IPO investment.
        32. In addition, there were a number of deficiencies in disclosure in relation to the sustainability of business and non-compliance matters:
        (i) Sustainability of business due to heavy reliance on a customer
        •   Company P relied heavily on one customer but there was no long-term contract with this customer. The prospectus lacked disclosure required under Listing Decision HKEX-LD107-1, including whether reliance was mutual and complementary, and what were the measures adopted to reduce reliance;
        •   industry organizations had imposed limits on the level of supply of the product. Company P failed to disclose whether it had complied with the limit and if not, the amount of revenue and profit generated from sales that exceeded the limit and the maximum potential penalty, the potential impact if more stringent measures were adopted to control the limit, Company P's strategy to maintain its business going forward, and why it would use a majority of the IPO proceeds to expand its capacity given the limit; and
        •   Company P failed to include a detailed analysis on the significant fluctuations of gross and net profit margins, the relevant sensitivity analysis, the latest operational and financial performance subsequent to the track record period, and the directors' and sponsor's views on Company P's sustainability of business.
        (ii) Non-compliances and suitability of directors

        During the track record period, Company P had a number of non-compliances. Company P failed to make disclosure as required under standard comment SC1.26 and Guidance Letter HKEX-GL63-13.

        Company Q*

        33. Company Q was a trading company. It had not fully addressed comments previously raised by the Exchange before the submission of a renewed listing application. Comments raised are related to the sustainability of business and the suitability for listing as a result of, among other things, its reliance on a major customer.

        THE DECISION

        34. The Exchange returned the applications.
        35. Subsequently, 11 out of the 17 applicants re-filed their listing applications between 4 to 56 days after the Exchange returned their previous applications. Except for one which was returned again (as certain information requested was still missing), the Exchange accepted the re-filed applications.

        ****


        1 The Main Board and GEM Rules were subsequently amended to complement the new sponsor regulation effective on 1 October 2013.

        2 Withdrawn in May 2016. Superseded by Section A of Appendix 1 in HKEX-GL86-16.

        3 Withdrawn in May 2016. Superseded by Section B of Appendix 1 in HKEX-GL86-16.

        4 Withdrawn in May 2016. Superseded by Section I of Appendix 1 in HKEX-GL86-16.

        5 With effect from 1 October 2013, the disclosure requirement on biographies of the directors and senior management members under standard comments SC4.5 and 4.6 were replaced by the requirements set out in paragraphs 3.2 and 3.3 of Guidance Letter HKEX-GL62-13, which was withdrawn in May 2016. Superseded by Section H of Appendix 1 in HKEX-GL86-16. (Updated in May 2016)

        6 With effect from 1 October 2013, the disclosure requirement on non-compliances under standard comment SC1.2 was replaced by the requirement set out in paragraph 3.1 of Guidance Letter HKEX-GL63-13.

        * GEM listing applicant

      • LD83-2014

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        HKEx LISTING DECISION
        HKEx-LD83-2014 (published in January 2014)

        Party Company A — a Main Board issuer
        Issue For Company A's proposed rights issue of shares with bonus warrants, whether the Exchange would waive the requirements on the minimum number and spread of warrantholders at the time of listing of the warrants
        Listing Rules Main Board Rules 8.08(2) and 8.08(3)
        Decision The Exchange waived the requirements

        FACTS

        1. Company A proposed a rights issue on the basis of one rights share for every 10 existing shares held, with 2 bonus warrants for each rights share subscribed. The rights issue would be fully underwritten by independent underwriters.
        2. Company A would apply for listing of the warrants on the Exchange.
        3. For a class of securities new to listing, Rules 8.08(2) and 8.08(3) require that at the time of listing, there must be at least 300 holders of the securities to be listed, and not more than 50% of the securities in public hands can be beneficially owned by the three largest public shareholders. The Rules provide an exemption for listing of warrants that are offered to the issuer's existing shareholders by way of bonus issue, subject to certain conditions.
        4. The exemption for bonus issue of warrants was not applicable in this case as the warrants were offered only to shareholders who would subscribe for the rights shares. The number and spread of warrantholders at the time of listing would depend on the results of the rights issue. Company A therefore sought a waiver from Rules 8.08(2) and (3).
        5. Company A submitted that there were over 600 registered shareholders and 300 CCASS participants holding its shares based on its register of members and the CCASS shareholding information. Further, about 70% of its shares were held in public hands, and there was no information indicating a high concentration of shareholdings. Given a wide spread of shareholders, a lack of open market in the warrants was unlikely to occur at the time of listing.

        APPLICABLE LISTING RULES

        6. Rule 8.08 states that

        "There must be an open market in the securities for which listing is sought. This will normally mean that:
        (1)
        (a) at least 25% of the issuer's total issued share capital must at all times be held by the public;
        ...
        (2) for a class of securities new to listing, at the time of listing there must be an adequate spread of holders of the securities to be listed, except where: (a) they are options, warrants or similar rights to subscribe for or purchase shares; (b) they are offered to existing holders of a listed issuer's shares by way of bonus issue; and (c) in the 5 years before the date of the announcement of the proposed bonus issue, there are no circumstances to indicate that the issuer's shares may be concentrated in the hands of a few shareholders. The number will depend on the size and nature of the issue, but in all cases there must be at least 300 shareholders; and
        (3) 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, save where: (a) the securities to be listed are options, warrants or similar rights to subscribe or purchase shares; (b) such securities are offered to existing holders of a listed issuer's shares by way of bonus issue; and (c) in the 5 years preceding the date of the announcement on the proposed bonus issue, there are no circumstances to indicate that the shares of the issuer may be concentrated in the hands of a few shareholders."

        ANALYSIS

        7. Rules 8.08(2) and (3) seek to ensure a broad base of holders of a new class of securities at the time of listing to support their secondary market liquidity.
        8. When assessing this waiver application, the Exchange noted that:
        •   The warrants were to be offered to Company A's existing shareholders under a rights issue. As Company A had a wide spread of shareholders, it was likely to have an open market in the warrants at the time of listing.
        •   Listing the warrants would provide a market for the shareholders to trade the warrants taken up by them.
        •   There was less concern on liquidity in the case of warrants as they could be exercised and converted into listed shares of Company A.
        9. The Exchange considered it acceptable to waive the requirements on the number and spread of warrantholders at the time of listing of the warrants. However, if there were only a small number of warrantholders upon completion of the rights issue, the Exchange had the right to request Company A and the underwriters to explore the opportunity for placing some warrants to independent placees to increase the number of warrantholders at the time of listing.

        CONCLUSION

        10. The Exchange granted the waiver to Company A.

      • LD82-2014

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        HKEx LISTING DECISION
        HKEx-LD82-2014 (published in January 2014) (Updated in April 2015)

        Parties Company A — a Main Board issuer dually listed in Hong Kong and an overseas stock exchange
        Issues
        (i) Whether to allow Company A to proceed with a share repurchase offer which might result in a lack of open market in its shares
        (ii) Whether to give consent to Company A for issuing new shares within 30 days after completion of the offer under Rule 10.06(3) to meet the public float requirement
        Listing Rules Main Board Rules 8.08, 10.06(3) and 13.32
        Decision
        (i) The Exchange allowed Company A to proceed with the share repurchase offer
        (ii) The Exchange gave consent to Company A for issuing new shares within 30 days after completion of the offer

        FACTS

        1. Company A was dually listed on the Exchange and an overseas stock exchange. It proposed to withdraw its listing in the overseas stock exchange by making a share repurchase offer to all existing public shareholders in Hong Kong and the overseas market (the Offer).
        2. It intended to maintain a listing on the Exchange. For any shareholders in the overseas market who did not accept the Offer, their shares would be transferred to the Hong Kong branch register.
        3. It would also issue new shares to certain independent institutional investors (the Investors) for cash to finance part of the funding requirement for the Offer.
        4. To ensure a minimum of 25% public float immediately after the Offer, Company A had obtained undertaking from the Investors and certain public shareholders not to accept the Offer.
        5. However, if there was a very high take up of the Offer, Company A's shares would be held by a small number of shareholders and there might not be an open market for trading in the shares in Hong Kong upon completion of the Offer. To address the concern, Company A submitted that:
        a. it had a wide spread of shareholders with over 2,000 shareholders in the overseas market and over 60 shareholders in Hong Kong including nominee companies. More than 60% of the overseas shareholders were institutional investors;
        b. the subscription of new shares in Company A by the Investors and the business cooperation with them would enhance the value of Company A. Company A did not expect a high uptake of the Offer; and
        c. in the event that there was a concern about the lack of an open market in Company A's shares after the offer, it would place new shares to independent placees (the Possible Placing) to ensure compliance with the public float requirement.
        6. Company A asked whether the Exchange would allow it to proceed with the proposed Offer. It also sought the Exchange's consent to conduct the Possible Placing within 30 days after the Offer under Rule 10.06(3).

        APPLICABLE LISTING RULES

        7. Rule 8.08 states that:

        "There must be an open market in the securities for which listing is sought. This will normally mean that:-
        (1)
        (a) at least 25% of the issuer's total number of issued shares must at all times be held by the public;
        ...
        (2) for a class of securities new to listing, 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 at least 300 shareholders; and
        (3) 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, ... ."
        8. Rule 13.32 states that:
        "(1) Issuers shall maintain the minimum percentage of listed securities as prescribed by rule 8.08 at all times in public hands. ...
        (2) Once the issuer becomes aware that the number of listed securities in the hands of the public has fallen below the relevant prescribed minimum percentage the issuer shall take steps to ensure compliance at the earliest possible moment...
        (3) If the percentage falls below the minimum, the Exchange reserves the right to require suspension of trading in an issuer's securities until appropriate steps have been taken to restore the minimum percentage of securities in public hands. In this connection, the Exchange will normally require suspension of trading in an issuer's securities where the percentage of its public float falls below 15% (or 10% in the case of an issuer that has been granted a lower percentage of public float under rule 8.08(1)(d) at the time of listing).
        (4) Where the percentage has fallen below the minimum, the Exchange may refrain from suspension if the Exchange is satisfied that there remains an open market in the securities...

        ..."
        9. Rule 10.06(3) states that:

        "An issuer whose primary listing is on the Exchange may not make a new issue of shares or announce a proposed new issue of shares for a period of 30 days after any purchase by it of shares, whether on the Exchange or otherwise (other than an issue of securities pursuant to the exercise of warrants, share options or similar instruments requiring the issuer to issue securities, which were outstanding prior to that purchase of its own securities), without the prior approval of the Exchange."

        ANALYSIS

        Public Float Requirements

        10. The public float requirement seeks to ensure an open market for trading in listed securities and require at least 25% of the securities be held by the public at all times. Where there are insufficient securities in the hands of the public, trading will be suspended if it is necessary to avoid a disorderly market.
        11. Company A proposed a withdrawal of listing in the overseas stock exchange by making a share repurchase offer to all existing shareholders. In the extreme case where all public shareholders accepted the Offer (other than those undertaken to Company A not to do so), Company A's shares would be held by a small number of shareholders and there might not be an open market in the shares in Hong Kong upon completion of the Offer. It was not in the interest of Company A's shareholders if trading suspension continued for a prolonged period due to the lack of an open market in the shares.
        12. The Exchange would allow Company A to proceed with the proposal taking into account the following:
        a. the purpose of the Offer was to facilitate the withdrawal of listing of Company A's shares from the overseas stock exchange. Company A intended to maintain a listing of its shares on the Exchange;
        b. Company A had a wide spread of shareholders, and a number of shareholders undertook not to accept the Offer. The concern about a lack of open market in its shares would arise only if there was a very high take up of the Offer; and
        c. Company A proposed to place new shares to independent places to ensure an open market for trading its shares in Hong Kong upon completion of the Offer.

        Possible Placing after the share repurchase offer

        13. Rule 10.06(3) requires that an issuer seeks the Exchange's consent before issuing new shares or announcing a new issue of shares within 30 days after the purchase of its own shares. This is both to ensure that the issuer does not affect the price of the new shares to be issued by the repurchase of its own shares and that the repurchased shares are not in practice being treated almost as if they are being held as treasury shares.
        14. In this case, the purpose of the Possible Placing was to ensure an adequate spread of shareholders in Hong Kong after the Offer. In Company A's announcement for the proposed Offer, there would be disclosure to inform the market of the Possible Placing after the Offer. The proposal did not raise concern on market manipulation.

        CONCLUSION

        15. The Exchange allowed Company A to proceed with the proposed Offer and gave consent for conducting the Possible Placing within 30 days after the Offer.

      • LD81-2014

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        HKEx LISTING DECISION
        HKEx-LD81-2014 (published in January 2014)

        Party Company A — a Main Board issuer
        Issue Whether the Exchange would waive the requirements relating to the inclusion of a statement of sufficient working capital in Company A's listing document for a rights issue
        Listing Rules Main Board Rules 9.20(1) and Paragraph 30 of Appendix 1B
        Decision The Exchange waived the requirements

        FACTS

        1. Company A was principally engaged in the business of providing insurance products in the PRC.
        2. Company A proposed to conduct a rights issue. Under the Rules, it was required to:
        •   include in its listing document for the rights issue a statement by the directors as to whether the group has sufficient working capital for its requirement for at least 12 months from the date of publication of the listing document; and
        •   provide the Exchange with a confirmation letter from its financial advisers or auditors that the working capital statement has been made by the directors after due and careful enquiry and the persons or institutions providing finance have stated in writing that such facilities exist (together, the Requirements).
        3. Company A applied for a waiver from the Requirements for the following reasons:
        •   It considered that the working capital statement would not provide significant information for its shareholders. Under the relevant PRC insurance laws and regulations, insurance companies were required to maintain sufficient capital commensurate with its risk exposure and scale of business to ensure a solvency margin ratio of no less than 100%. The solvency margin and capital adequacy would be more relevant for an insurance business as indicators of its financial condition, strength and ability to meet its capital needs or claims from policyholders as a going concern.
        •   Company A's solvency and capital adequacy were subject to prudential supervision by the China Insurance Regulatory Commission (CIRC). It was also required to file various periodic solvency reports with the CIRC based on the solvency assessment requirements.
        •   It would be burdensome for Company A to comply with the Requirements in light of the additional time and costs involved in preparing the working capital statement.
        •   Alternatively, Company A would include in the listing document: (i) the relevant solvency and capital adequacy requirements for insurance companies in the PRC; and (ii) Company A's solvency margin ratios for the latest three financial years.

        APPLICABLE LISTING RULES

        4. Rule 7.22 states that:

        "A rights issue must be supported by a listing document which must comply with the relevant requirements of Chapter 11."
        5. Rule 9.20(1) states that:

        "The following documents must be submitted to the Exchange before bulk-printing of the listing document:—
        (1) if the listing document contains a statement as to the sufficiency of working capital, a letter from the issuer's financial advisers or auditors, confirming that:
        (a) the statement has been made by the directors after due and careful enquiry; and
        (b) persons or institutions providing finance have stated in writing that such facilities exist; and
        ..."
        6. Rule 11.06 states that:

        "Subject to rule 11.09, listing documents must contain all of the specific items of information which are set out in either Part A, B, E or F of Appendix 1 (as the case may be). ..."
        7. Paragraph 30 of Appendix 1B requires a listing document to include:

        "A statement by the directors that in their opinion the working capital available to the group is sufficient for the group's requirements for at least 12 months from the date of publication of the listing document or, if not, how it is proposed to provide the additional working capital thought by the directors to be necessary. ..."
        8. In the case of a new listing application, Rule 8.21A(2) states that:

        "The Exchange will not require a working capital statement to be made by a new applicant, whose business is entirely or substantially that of the provision of financial services, provided the Exchange is satisfied that:
        (a) the inclusion of such a statement would not provide significant information for investors; and
        (b) the new applicant's solvency and capital adequacy are subject to prudential supervision by another regulatory body."

        ANALYSIS

        9. The working capital statement provides information for shareholders to assess the liquidity and financial position of the issuer.
        10. When deciding whether to grant a waiver from the Requirements, the Exchange will consider the circumstances and reasons outlined in the waiver application and all other relevant information supplied by the issuer. The Exchange will also apply the principles under Rule 8.21A(2) when assessing individual cases that fall under the circumstances specified in the Rule.
        11. In this case, the Exchange agreed to waive the Requirements taking into account the following:
        •   Company A was an insurance company, and its solvency and capital adequacy were subject to prudential supervision by the regulatory body for the insurance business in the PRC.
        •   The alternative disclosures proposed by Company A would enable its shareholders to assess the solvency and liquidity of the group. The Exchange agreed with Company A that a working capital statement would not provide significant information for investors in its case.

        CONCLUSION

        12. The Exchange granted the waiver to Company A.

      • LD80-2014

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        HKEx LISTING DECISION
        HKEx-LD80-2014 (published in January 2014)

        Parties Company A — a Main Board issuer

        Company B — a joint venture partner

        The Joint Venture — a 40:60 joint venture company set up by Company A and Company B
        Issue Whether Company A's proposed guarantee for a bank loan to be granted to the Joint Venture should be aggregated with its initial capital contribution to the Joint Venture
        Listing Rules Main Board Rules 14.15(2) and 14.22
        Decision The guarantee should be aggregated with the initial capital contribution

        FACTS

        1. Company A and Company B established a 40: 60 equity joint venture company (i.e. the Joint Venture) for the purpose of setting up the production facilities for certain chemical products. Under the joint venture agreement, the total investment amount for the Joint Venture was to be financed partly by the registered capital contributed by the joint venture partners and partly by bank borrowings.
        2. At that time, Company A was only obliged to contribute its share of the registered capital to the Joint Venture, and there was no agreement or commitment for Company A to provide guarantee or indemnity for any bank borrowings of the Joint Venture to satisfy the balance of total investment amount. Based on the capital contribution by Company A, the formation of the Joint Venture was a discloseable transaction.

        The proposed transaction

        3. After 15 months, Company A and Company B proposed that the Joint Venture would seek a bank loan facility to satisfy part of the total investment amount, and they would provide guarantee for the loan facility in proportion to their respective interests in the Joint Venture.
        4. The proposed guarantee itself would be a discloseable transaction for Company A. Company A enquired whether the guarantee would need to be aggregated with its capital contribution to the Joint Venture. If aggregation was required, the guarantee would constitute a major transaction.

        APPLICABLE LISTING RULES

        5. Rule 14.15 provides that when calculating the consideration ratio:

        "(2) where a transaction involves establishing a joint venture entity or other form of joint arrangement, the Exchange will aggregate:-
        (a) the listed issuer's total capital commitment (whether equity, loan or otherwise), including any contractual commitment to subscribe for capital; and
        (b) any guarantee or indemnity provided in connection with its establishment;

        Note: Where a joint venture entity or other form of joint arrangement is established for a future purpose, for example to develop a property, and the total capital commitment cannot be calculated at the outset, the Exchange will require the listed issuer to recalculate the relevant percentage ratios at the time when that purpose is carried out. The Exchange will look at the purpose of setting up the arrangement in terms of the initial transaction only. For example, the purpose could be the development of the property for which the arrangement was established. The Exchange will not look at subsequent transactions entered into under the arrangement for the purpose of calculating the total capital commitment in relation to the establishment of the arrangement."
        6. Rule 14.22 provides that:

        "... the Exchange may require listed issuers to aggregate a series of transactions and treat them as if they were one transaction if they are ... otherwise related..."

        ANALYSIS

        7. Under Rule 14.22, the Exchange may require an issuer to aggregate a series of transactions if they are related. In the case of a transaction involving the formation of a joint venture, Rule 14.15(2) states that the Exchange will aggregate the issuer's total capital commitment and any guarantee provided in connection with its establishment. The note to Rule 14.15(2) also provides that where a joint venture is established for a future purpose and the total capital commitment cannot be calculated at the outset, the Exchange will require the listed issuer to recalculate the relevant percentage ratios at the time when that purpose is carried out.
        8. In this case, the Joint Venture was established for the purpose of setting up certain production facilities. The capital contribution and the guarantee were provided by Company A to satisfy the total investment of the Joint Venture in connection with its establishment. They were related and should be aggregated.

        CONCLUSION

        9. Company A was required to aggregate the proposed guarantee with its capital contribution to the Joint Venture.

      • LD79-2014

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        HKEx LISTING DECISION
        HKEx-LD79-2014 (Published in January 2014) (Updated in July 2014)

        Parties Company A — a Main Board listed issuer

        Newco — a subsidiary of Company A before the proposed spin-off

        Holding Company — the controlling shareholder of Company A
        Issue Whether the amendments to the non-competition undertaking given by the Holding Company to Company A would require independent shareholders' approval
        Listing Rules Main Board Rules 14A.25, 14A.36, 14A.76
        Decision The amendments to the non-competition undertaking constituted a connected transaction for Company A and were subject to independent shareholders' approval

        FACTS

        1. Company A proposed to spin-off Newco for a separate listing on the Exchange. The proposal would involve Company A distributing all its interest in Newco in specie to the existing shareholders. Upon completion of the proposal, Company A would no longer hold any interest in Newco. Newco would become a connected person of Company A as the Holding Company would hold more than 50% interest in it.
        2. Newco was principally engaged in the manufacturing and sale of certain products (the Newco Business)
        3. At the time of Company A's new listing on the Exchange, the Holding Company and Company A had entered into a non-competition deed (the Original Non-Competition Deed), under which the Holding Company had undertaken to Company A not to, directly and indirectly, carry on or be engaged or interested in the principal businesses of Company A including the Newco Business.
        4. In order to delineate the businesses of the Holding Company, Company A and Newco upon completion of the proposed spin-off, the parties would enter into the following non-competition arrangement (the Revised Non-Competition Arrangement):
        •   the Holding Company and Company A would amend the Original Non-Competition Deed to exclude the Newco Business from the deed; and
        •   the Holding Company would undertake to Newco not to, directly and indirectly, carry on or be engaged or interested in the Newco Business. While Company A would not be a party to such undertaking, the Holding Company would exercise its influence on Company A so as to cause Company A to comply with the undertaking.
        5. There was an issue whether the Revised Non-Competition Arrangement would constitute a connected transaction for Company A, and if so, whether the de minimis exemption would apply as Company A considered that the arrangement was made on normal commercial terms and no consideration would be paid or received by it.

        APPLICABLE LISTING RULE

        6. Rule 14A.01 states that:

        " This Chapter applies to connected transactions entered into by a listed issuer or its subsidiaries. The connected transaction rules ensure that the interests of shareholders as a whole are taken into account by the listed issuer when the listed issuer's group enters into a connected transaction."
        7. Rule 14A.25 states that:

        "Any transaction between a listed issuer's group and a connected person is a connected transaction."
        8. Rule 14A.36 states that:

        "The connected transaction must be conditional on shareholders' approval at a general meeting held by the listed issuer. Any shareholder who has a material interest in the transaction must abstain from voting on the resolution."
        9. Rule 14A.76 states that:

        "This exemption applies to a connected transaction (other than an issue of new securities by the listed issuer) conducted on normal commercial terms or better as follows:
        (1) The transaction is fully exempt if all the percentage ratios (other than the profits ratio) are:
        (a) less than 0.1%;
        (b) ...; or
        (c) less than 5% and the total consideration...is less than HK$3,000,000.
        (2) The transaction is exempt from the circular (including independent financial advice) and shareholders' approval requirements if all the percentage ratios (other than the profits ratio) are:
        (a) less than 5%; or
        (b) less than 25% and the total consideration...is less than HK$10,000,000."

        ANALYSIS

        10. In this case, Company A and the Holding Company proposed to enter into the Revised Non-Competition Arrangement which would confer a benefit on the Holding Company and its associates. It was a connected transaction for Company A.
        11. The Revised Non-Competition Arrangement would restrict Company A from engaging in certain businesses, and the value of the transaction could not be quantified in monetary terms. The Exchange did not agree that the transaction would qualify for the de minimis exemption.

        CONCLUSION

        12. The Revised Non-Competition Arrangement required independent shareholders' approval under Chapter 14A.

      • LD78-2014

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        HKEx LISTING DECISION
        HKEx-LD78-2014 (Published in January 2014) (Updated in July 2014)

        Parties Company A — a Main Board issuer

        Company B — a 30%-owned associated company of Company A

        The Borrower — a non-wholly subsidiary of Company B

        The Substantial Shareholder — a substantial shareholder of each of Company A and the Borrower

        JV Partner — an independent third party holding a 70% interest in Company B
        Issue Whether the guarantee provided by Company A for a loan facility granted to the Borrower was subject to the connected transaction requirements
        Listing Rules Main Board Rules 14A.19, 14A.26, 14A.27
        Decision The guarantee was subject to the connected transaction requirements

        FACTS

        1. Company A proposed to provide a guarantee in favour of a bank for a loan facility to be granted to the Borrower (the Proposed Guarantee). The JV Partner would provide a counter-guarantee in favour of Company A against all its liabilities arising out of the Proposed Guarantee.
        2. The simplified shareholding structure is set out below:

        3. Company B and the Borrower were associated companies of Company A. Company B was an investment holding company and did not have any operating subsidiaries other than the Borrower.
        4. Company A enquired whether the Proposed Guarantee would be subject to the connected transaction requirements under Chapter 14A. It submitted that:
        •   the Borrower was not a connected person of Company A; and
        •   the Borrower was not a "commonly held entity" falling under Rule 14A.27. While the Substantial Shareholder owned 10% interest in the Borrower, neither Company A nor any of its subsidiaries was a shareholder of the Borrower. Company A only had an indirect interest in the Borrower through Company B.

        APPLICABLE LISTING RULES

        5. Rule 14A.19 states that:

        "The Exchange has the power to deem any person to be a connected person."
        6. Rule 14A.26 states that:

        "Financial assistance provided by a listed issuer's group to, or received by a listed issuer's group from, a commonly held entity is a connected transaction."
        7. Rule 14A.27 states that:

        "A "commonly held entity" is a company whose shareholders include:
        (1) a member of the listed issuer's group; and
        (2) any connected person(s) at the issuer level who, individually or together, can exercise or control the exercise of 10% or more of the voting power at the company's general meeting. This 10% excludes any indirect interest held by the person(s) through the listed issuer."
        8. Rule 14A.89 states that:

        "Financial assistance provided by a listed issuer's group to a connected person or commonly held entity is fully exempt if it is conducted:
        (1) on normal commercial terms or better; and
        (2) in proportion to the equity interest directly held by the listed issuer or its subsidiary in the connected person or the commonly held entity. Any guarantee given by the listed issuer's group must be on a several (and not a joint and several) basis.
        ..."

        ANALYSIS

        9. The connected transaction Rules seek to safeguard against connected persons taking advantage of their positions to the detriment of the issuer's minority shareholders. Under the Rules, the Exchange may deem a person to be connected in respect of a particular transaction. When applying the deeming provision, the Exchange considers all relevant facts and circumstances surrounding the transaction and has particular regard to the substance and not the form of the transaction and any arrangements designed to circumvent the spirit and intent of the connected transaction Rules.
        10. In this case, the Exchange considered that the Proposed Guarantee should be subject to the connected transaction requirements because:
        •   An issuer providing financial assistance to a commonly held entity is a connected transaction. A commonly held entity is a company whose shareholders include (i) the issuer or any of its subsidiaries; and (ii) any connected person(s) at the issuer level who can, individually or together, control the exercise of 10% or more of the voting power at the company's general meeting.
        •   The Borrower was held as to 10% by the Substantial Shareholder and over 50% by Company A and the JV Partner through Company B. As Company B was mainly a vehicle for holding shares in the Borrower, the Exchange considered it necessary to "see through" the structure of Company B and deem the Borrower as a commonly held entity.
        •   Company A would guarantee the entire loan facility to be granted to the Borrower. This would confer a benefit on the Substantial Shareholder through its substantial interest in the Borrower.

        CONCLUSION

        11. The Proposed Guarantee was subject to the connected transaction requirements under Chapter 14A.

      • LD77-2014

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        HKEx LISTING DECISION
        HKEx-LD77-2014 (published in January 2014)

        Summary
        Party Company A — a Main Board listing applicant
        Issue Whether Company A's level of internal controls on its hedging activities was appropriate for a listed company
        Listing Rules Main Board Rules 2.13(2) and 11.07
        Decision The Exchange was satisfied with Company A's internal controls on hedging and the disclosure in the listing document relating to hedging

        FACTS

        1. A type of commodities was used by Company A as major raw materials in its production process. For hedging purposes, Company A entered into forward purchase contracts with its suppliers which were settled by physical delivery within the next 12 months. The forward purchase contracts covered a majority of its production requirement while the remaining portion was covered by spot purchases. Mr. X, (Company A's controlling shareholder and executive director) was responsible for making decisions relating to forward purchase of the commodities based on his industry experience.
        2. Company A entered into forward purchase contracts with its suppliers directly and not through an organised and regulated exchange.
        3. As a matter of internal control on the hedging activities, Company A's finance department had to report details of all forward purchase contracts entered into on a monthly basis to Mr. Y (a non-executive Director ("NED")) and all three independent non-executive Directors ("INEDs"). However, neither the NED nor the INEDs had experience in hedging/trading of commodities.

        APPLICABLE RULES

        4. Rule 2.13(2) states that the information contained in the listing document must be accurate and complete in all material respects and not be misleading or deceptive. In complying with this requirement, an applicant must not, among other things, omit material facts of an unfavourable nature or fail to accord them with appropriate significance.
        5. Rule 11.07 states that as an overriding principle, all listing documents must contain such particulars and information as, according to the particular nature of the issuer and the securities for which listing is sought, is necessary to enable an investor to make an informed assessment of the activities, assets and liabilities, financial position, management and prospects of the issuer and of its profits and losses and of the rights attaching to such activities.

        ANALYSIS

        6. The Exchange considered that Company A's internal controls on hedging lacked the level of dynamic risk management that was customary for listed companies engaging in hedging activities which exposed them to the risks of price movement.
        7. There was also insufficient disclosure on the credit risk of the counterparties to the hedging activities, namely the suppliers of Company A.

        DECISION

        8. Company A was asked to consider, in addition to the existing internal control measures as described in paragraph 3 above,:
        •   establishing a formal risk management committee;
        •   setting position limits for the forward purchases;
        •   establishing formal procedures to approve positions exceeding limits;
        •   establishing formal procedures to set and vary counterparty limits, and to authorize any excesses over those limits;
        •   monitoring value at risk.
        9. The Exchange expected that appropriate disclosure be made in the prospectus as to which of the measures mentioned in paragraph 8 above were adopted by Company A, and if any of those measures were not adopted, the reason for not doing so.

        DISCLOSURE

        10. Company A subsequently implemented and disclosed in the prospectus the following measures:

        Established a risk management committee (the "Risk Management Committee")
        (i) Company A appointed an additional INED who had over six years of experience in trading of commodities. It established the Risk Management Committee which comprised the additional INED, two of the remaining INEDs and the NED. The finance department would provide relevant information on the hedging activities (e.g. amount of forward purchases, actual amount of commodities consumed, confirmed orders on hand, production schedule, inventory level, amount of expected export sales) to the Risk Management Committee which would hold monthly meetings to review whether the hedging policy has been complied with. Company A would disclose in its annual report the Risk Management Committee's confirmation on whether Company A has complied with its hedging policy;
        (ii) all the forward purchases would be handled by the hedging team (the Hedging Team") which was led by Mr. X and other members comprising the chief financial officer and heads of relevant departments (e.g. production department, sales and marketing department);

        Setting/approving position limits and counterparty limits
        (iii) the Hedging Team was allowed to forward purchase up to 50% of the monthly production requirement based on sales forecast up to a rolling 12-month period (the "Aggregate Position Limit"). However, if Company A secured confirmed orders, the Hedging Team was allowed to forward purchase the unhedged portion of the commodities required for the production of such confirmed orders in excess of the Aggregate Position Limit. Details of the corresponding confirmed orders had to be recorded and reviewed by the Risk Management Committee. In addition, the Hedging Team can make application to the Risk Management Committee to change the Aggregate Position Limit in view of any changes in the relevant markets such as the supply and demand situation of the commodity market. Such application has to be supported by relevant reasons and analyses on market figures and trends;
        (iv) the chief financial officer would calculate the position limit for each counterparty based on the counterparty's paid-up capital or net worth. The position limit for each counterparty had to be reviewed and approved by the Risk Management Committee annually and the position limit should not be changed unless it was approved by the Risk Management Committee;

        Monitoring value at risks
        (v) on a weekly basis, the finance department would prepare a mark-to-market calculation over the outstanding position of all forward purchases for review by the Hedging Team. The Risk Management Committee would comment on the performance of the Hedging Team in its monthly review meeting and make recommendation on the hedging activities (where necessary); and

        Monitoring counterparty risks
        (vi) Company A's finance department would conduct company searches and internet searches and its sales and marketing department would conduct market searches on the approved suppliers on a regular basis to find out if there is any adverse market news on the creditworthiness of Company A's counterparties. The procurement manager would also pay regular visits to the approved suppliers to understand their latest business development, financial and market position, and request for their latest financial statements and business registration certificates to keep track of their financial position.

        CONCLUSION

        11. Based on the above, the Exchange was satisfied with Company A's disclosure on its internal controls measures relating to hedging activities.

        *****

    • 2013

      Select By Rule or Topic: Download the consolidated index here

      Please visit Archive to view listing decisions which have been superseded or are no longer applicable.

      This section comprises decisions on cases handled by the Listing Committee and/or the Listing Division, to enhance transparency and market understanding of their interpretation of the Listing Rules. Each decision was based on its specific circumstances and is not a precedent for future cases.

      Effective from 1 January 2011, listing decisions will be published under a new naming format as illustrated below:

      Before 1 January 2011 On or After 1 January 2011
       
      HKEx-LD100-1
      HKEx-LD100-2
      HKEx-LD101-1
       
      HKEx-LD1-2011
      HKEx-LD2-2011
      HKEx-LD3-2011

      Listing decisions published before 1 January 2011 continue to bear the old references.

      LD Series Number First Release Date (Last Update Date) (mm/yyyy Listing Rules/Topics Particulars
      LD76-2013 12/2013 Main Board Rules 2.13(2) and 8.04 Whether the Applicants were suitable for listing under Rule 8.04 given that they had conducted businesses in certain countries which were subject to trade or economic sanctions imposed by overseas governments before and during the Track Record Period, and if so, how the issue could be addressed
      LD75-2013 07/2013
      (02/2018)
      Main Board Rule 9.03(3) and GEM Rules 12.09 and 12.14 To provide guidance on why the Exchange returned certain listing applications
      LD74-2013 06/2013 Main Board Rules 18.04 and 18.07 Whether Company A has satisfactorily demonstrated that its principal mineral asset has a clear path to commercial production under Rule 18.07

      (Withdrawn in September 2016)
      LD73-2013 05/2013 Main Board Rules 2.03, 2.04, 2.06 and 8.04 Whether Company A's non-compliances, uncertainties over the principal retail stores and deteriorating financial performance subsequent to the Track Record Period would render it unsuitable for listing
      LD72-2013 05/2013 Paragraph 3(f) of Practice Note 15 to the Main Board Rules Whether the Exchange would waive the assured entitlement requirement for Company A's proposal to spin-off Company B (Withdrawn; Superseded by LD104-2017 in January 2017)
      LD71-2013 05/2013
      (07/2018)
      Main Board Rules 7.19A and 7.27A Whether Company A's proposed rights issue required independent shareholder approval
      LD70-2013 05/2013
      (07/2018)
      Main Board Rules 7.21(1)(a) and 7.21(3)(a) Whether Company A's arrangements to dispose of the excess rights shares would comply with Rules 7.21(1)(a) and 7.21(3)(a)
      LD69-2013 05/2013 Main Board Rule 14.38A Whether the Exchange would waive the circular requirement for a major transaction of Company A
      LD68-2013 05/2013 Main Board Rules 14.58(2), 14.60(1), 14.60(2) Whether the Exchange would waive certain specific disclosure requirements for the announcement of a discloseable transaction
      LD67-2013 05/2013 Main Board Rules 13.13, 13.15, 14.58 Whether the Exchange would waive the requirements for disclosing certain information relating to a loan provided by Company A to the Borrower
      LD66-2013 05/2013 Main Board Rule 14.67(6) (b)(i) Whether the Exchange would waive the requirement for Company A's circular to include a 3-year profit and loss statement for the property to be acquired from the Vendor
      LD65-2013 05/2013 Main Board Rules 18.09(2), 18.09(3) Whether the Exchange would waive the requirements for Company A to produce a competent person's report (CPR) and a valuation report (VR) for its proposed acquisition of the Target
      LD64-2013 04/2013 Rules 19.05 and 19.30 and GEM Rule 24.05 Whether the Exchange would consider Labuan an acceptable jurisdiction under Chapter 19 of the Main Board Rules and Chapter 24 of the GEM Rules

      (Withdrawn, superseded by Labuan Country Guide in December 2013)
      LD63-2013 04/2013 (07/2014) Main Board Rule 14A.103 Whether the Exchange would waive the annual review and reporting requirements for a continuing connected transaction between Company A and Company B
      LD62-2013 04/2013 Main Board Rules 14.36, 14.49 Whether the Proposed Amendment was a material change to the terms of the Acquisition agreement
      LD61-2013 04/2013 (07/2014) Main Board Rule 14.20, 14A.80 Whether the Exchange would accept Company A's proposed alternative revenue ratio for classifying transactions under Chapters 14 and 14A
      LD60-2013 04/2013 (07/2014) Main Board Rule 14A.80 Whether the Exchange would accept Company A's proposed alternative revenue ratio for classifying certain continuing connected transactions with Company B
      LD59-2013 04/2013 Main Board Rule 14.06(6)(a) Whether the Exchange would waive Rule 14.06(6)(a) so that Company A's proposed acquisition of certain assets from Mr. X would be classified as a very substantial acquisition rather than a reverse takeover
      LD58-2013 04/2013 Main Board Rule 14.06(6) Whether the Exchange would waive Rule 14.06(6)(a) so that Company A's proposed acquisition of the Target would not be classified as a reverse takeover
      LD57-2013 04/2013 Main Board Rule 14.06(6) Whether Company A's proposed acquisition of an interest in the Target was a reverse takeover
      LD56-2013 03/2013
      (04/2015)
      Main Board Rules 8.08(1)(a), 13.32 Whether the Exchange would give listing approval for new shares to be issued upon conversion of the convertible notes that could result in Company A's public float falling below the minimum 25% requirement under the Rules
      LD55-2013 03/2013 Main Board Rule 14.04(1) Whether Company A was required to classify its subscription for convertible notes issued by Company B as if the notes were fully converted at the time of entering into the subscription agreement
      LD54-2013 03/2013
      (07/2018)
      Main Board Rules 13.36, 28.05 Whether the Exchange would approve the proposed changes to the terms of convertible bonds issued by Company A under a general mandate
      LD53-2013 03/2013 Main Board Rule 18.04 Whether Company A's directors and senior management, taken together, had "sufficient experience relevant to exploration and/ or extraction activity"?
      LD52-2013 03/2013 Main Board Rules 2.04, 4.01(1), 7.14, 7.15, 8.06, 8.08 (1)(b), 8.08(3), 19A.18(1) and paragraph 37 of Appendix 1A
      (i) Whether Company A's listing by way of introduction would be acceptable
      (ii) Whether Company A's requested waivers would be granted
      LD51-2013 02/2013 Main Board Rule 18.32 Whether NI 51-101 is an acceptable reporting standard under Rule 18.32
      LD50-2013 02/2013 Main Board Rule 18.03(1)(b) Whether Company A had adequate rights under the production sharing contracts which gave it sufficient influence in decisions over the exploration for and/or extraction of crude oil
      LD49-2013 01/2013 Main Board Rules 18.33(2) and 18.33(6)
      (1) Whether disclosure of net present values attributable to Proved Reserves, Proved plus Probable Reserves, Proved plus Probable plus Possible Reserves and Contingent Resources both on a pre-tax and post-tax basis is acceptable under Main Board Rule 18.33(2)
      (2) Whether to grant a waiver of Main Board Rule 18.33(6) to allow Company A to disclose estimated values of Possible Reserves, Contingent Resources and Petroleum-Initially-In-Place
      LD48-2013 01/2013
      (05/2016)
      Main Board Rule 9.03(3) and GEM Rules 12.09 and 12.14 To provide guidance on why the Exchange returned certain listing applications
      LD47-2013 01/2013
      (04/2015)
      Main Board Rule 3.28, HKEx-LD35-1 (July 2003) Whether Mr. X qualified to act as Company A's secretary after the waiver period
      LD46-2013 01/2013
      (04/2015)
      Main Board Rule 3.28 Whether Mr. X qualified to act as Company A's secretary
      LD45-2013 01/2013 Main Board Rules 18.09(2), 18.09(3) and 18.09(4) Whether the Exchange would grant a waiver such that Company A could defer the publication of the competent person's report (CPR), valuation report (VR) and other disclosures as required under Rules 18.09(2), (3) and (4)
      LD44-2013 01/2013 Main Board Rules 14.06(6) and 18.03(1) Whether the Target had the right to participate actively in the exploration for and/or extraction of natural resources
      LD43-2013 01/2013 Main Board Rules 14.06(6), 18.04 and 18.07 Whether the Target had a clear path to commercial production
      LD42-2013 01 /2013 Main Board Rule 18.09(2) Whether the Exchange would waive the requirement to produce a competent person's report (CPR) on the mineral resources to be disposed of by Company A
      LD41-2013 01/2013 Main Board Rules 14.06(6) and 18.03(2) Whether the Target had a portfolio of natural resources that was meaningful and of sufficient substance to justify a listing
      LD40-2013 01/2013 Main Board Rules 18.09(2) and (3) Whether the Exchange would waive the requirements to produce competent person's reports (CPR) and valuation reports on some of the mining interests held by the Target
      LD39-2013 01 /2013 Main Board Rules 14.06(6) and 18.03(2) Whether the Target had a portfolio of natural resources that was meaningful and of sufficient substance to justify a listing

      • LD76-2013

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        HKEx LISTING DECISION
        HKEx-LD76-2013 (published in December 2013)

        Summary
        Name of Party Company A and B — Main Board listing applicants
        Subject Whether the Applicants were suitable for listing under Rule 8.04 given that they had conducted businesses in certain countries which were subject to trade or economic sanctions imposed by overseas governments before and during the Track Record Period, and if so, how the issue could be addressed.
        Listing Rules Listing Rules 2.13(2) and 8.04
        Decision The Exchange determined that given the Applicants have undertaken measures to minimise sanctions risk, including terminating the relevant sanctionable activities or transferring the contracts in the Sanctioned Countries before listing, the Applicants' past business in the Sanctioned Countries would not render them unsuitable for listing, and the issue could be addressed by disclosure.

        SUMMARY OF FACTS

        1. Certain overseas governments such as the government of the United States (the "US"), the member states of European Union ("EU") and Australia impose trade or economic sanctions on certain countries (e.g. Iran, Cuba, Syria and Sudan) (the "Sanctioned Countries") by restricting their nationals from making assets or services available, directly or indirectly, to persons or entities that are subject to sanctions or are controlled by persons subject to sanctions.
        2. Some of the sanctions imposed by overseas governments are very wide in scope and may have (i) extra-territorial effect on persons who are not their own nationals; and (ii) implications on activities or investments which may, directly or indirectly, be regarded as financing, facilitating or contributing to the enhancement of a Sanctioned Country's ability to develop certain specific products or industries. Companies or individuals that enter into contracts with sanctions targets or persons connected with sanctions targets or have business in Sanctioned Countries may risk violating the relevant sanctions laws and regulations.
        3. In light of the above, the Exchange was concerned about whether listing applicants who had projects/businesses in the Sanctioned Countries, their potential investors, shareholders and other entities who may be involved in the listing process would be subject to sanctions risk.

        Case 1

        4. Company A, incorporated and based in the PRC, entered into several engineering or construction contracts with certain companies in a Sanctioned Country (the "Contracts") during the track record period. The revenue derived by Company A from its business in the Sanctioned Country accounted for less than 1% of its total revenue during the track record period.
        5. There was an issue as to whether the proposed listing of Company A's shares could be regarded as having the effect of facilitating or financing a sanctionable activity under applicable laws and regulations. Implications on approving Company A's listing application were raised with respect to the sanctions risk posed to Company A itself, its investors and shareholders (US and non-US investors alike) and persons who might, directly or indirectly, be involved in permitting the listing, trading and clearing of Company A's shares including the Exchange and related group companies (the "Relevant Persons"). To minimise sanctions risk, Company A terminated all the Contracts in the Sanctioned Country before listing. As the sanctions laws may change from time to time, Company A stated in its prospectus that it might undertake new businesses in the Sanctioned Countries if they would not expose it to any sanctions risk to maximize the interests of Company A and its shareholders. To achieve this, Company A had implemented a number of measures to control its exposure to sanctions risk.
        6. Company A undertook to the Exchange that it would under no circumstances use the IPO proceeds or any other funds raised through the Exchange (the "Monies"), directly or indirectly, to finance or facilitate any projects or businesses in the Sanctioned Countries, or pay any damages in case Company A was legally required to compensate the counterparty for terminating the Contracts. To ensure that this undertaking would be duly observed, Company A would deposit the Monies in a designated bank account separate from its other funds.
        7. Company A also undertook to the Exchange that it would not perform any of its obligations under the Contracts under any circumstances. It was prepared to pay damages (which were capped under the terms of the Contracts) if and when ordered by the court to pay such damages resulting from a breach of the Contracts.
        8. Furthermore, Company A implemented the following measures to control its exposure to sanctions risk, among other things:
        a. the risk management committee (the "RM Committee"), headed by Company A's chairman, would evaluate its sanctions risk, with the advice of external sanctions law legal counsel, to determine whether it should embark on new business opportunities with sanctioned targets;
        b. the RM Committee would ensure the IPO proceeds and any other funds raised through the Exchange would not be applied to the Contracts or any other business in the Sanctioned Countries;
        c. regular training programs would be provided by external sanctions law legal counsel to senior management and relevant personnel to assist them in evaluating the potential sanctions risk in Company A's daily operations; and
        d. the directors would disclose the status of Company A's future business, if any, in the Sanctioned Countries and its business intention relating to the Sanctioned Countries in the interim and annual reports, and make timely disclosure on the Exchange's website if it believed its business in the Sanctioned Countries would put investors and shareholders at risk.
        9. Company A disclosed in its prospectus that according to the legal opinions from U.S., EU, United Nations ("UN") and Australian advisers, sanctions risk to Company A, its investors and shareholders, and the Relevant Persons, as a result of the listing and trading of Company A's shares on the Exchange, would be very low based on the undertaking and measures in paragraphs 5 to 8 above. Company A's prospectus also disclosed the PRC legal opinion that Company A had not breached any PRC laws regarding the business in the Sanctioned Country.

        Case 2

        10. Company B, incorporated and based in the PRC, entered into several engineering contracts with companies in the Sanctioned Countries. Revenue generated from these Sanctioned Countries accounted for 3% to 8% of Company B's total revenue during the track record period.
        11. The same issues and implications as mentioned in 5 above were raised. Company B submitted that it:
        a. would carry out a restructuring to terminate or transfer to other parties all its ongoing projects and trading business in the Sanctioned Countries, and close all representative offices in the Sanctioned Countries before listing;
        b. would not engage in any activity in the Sanctioned Countries after listing and undertook to the Exchange that it would not, directly or indirectly, use any proceeds from the Global Offering, or make such proceeds available to any individual or entity, to fund any activities or business in connection with sanctions related activities. To ensure that this undertaking would be duly observed, Company B would open and maintain separate bank accounts which would be designated for the sole use of deposit and deployment of the proceeds from listing;
        c. had implemented the following measures, among other things, to control its exposure to sanctions risk:-
        (i) Company B's export control office (with three members who had all received education in law and legal training) would be responsible for project approval, risk management for compliance with export control regulations and day-to-day communication with domestic and foreign government departments relating to export control. Should the export control office identify any actual or potential sanctions risk in existing or potential businesses, it would report to Company B's operation and risk management committee (headed by an ED), which would then seek advice from an appropriate legal counsel and formulate risk management measures. The operation and risk management committee would also monitor the use of the net proceeds of the Global Offering;
        (ii) Company B had established an export control committee (headed by Company B's ED) which would be responsible for conducting compliance audit for Company B's export operations including its internal compliance program on export control;
        (iii) the export control office would organize regular training to senior management and relevant personnel on sanctions and export control laws of the PRC and the US, with the help of external legal advisers, relevant experts or non-governmental organizations which have expertise on the relevant topics; and
        (iv) Company B would disclose on the Exchange's and its own websites if there were any violation or potential violation of sanctions laws, and would disclose in the annual reports/ interim reports the efforts on monitoring its business exposure to sanctions risk.
        12. In respect of payments relating to some previously completed projects in the Sanctioned Countries (the "Deferred Payments"), Company B submitted that sanctions risk lay with the potential clearing of U.S. dollar payments within the U.S.. As Company B and the project owners concerned had in the past settled and would continue to settle the Deferred Payments in currencies other than U.S. dollars or have them transferred on the books of Chinese financial institutions without actions within U.S. jurisdiction, there would be no U.S. sanctions risk to Company B.
        13. Company B concluded that the above arrangements would substantially mitigate sanctions risk.

        THE ISSUE RAISED FOR CONSIDERATION

        14. Whether Company A and Company B (the "Applicants") were suitable for listing under Rule 8.04 given that they had conducted businesses in the Sanctioned Countries before and during the Track Record Period, and if so, how the issue could be addressed.

        APPLICABLE LISTING RULES

        15. Listing Rule 2.13(2) provides that the issuer must not, among other things, omit material facts of an unfavourable nature or fail to accord them with appropriate significance in the listing document.
        16. Rule 8.04 states that both the issuer and its business must, in the opinion of the Exchange, be suitable for listing.

        THE ANALYSIS

        17. In general, the sanctions risk is applicable only to listing applicants who have business relationships in the Sanctioned Countries. Given the broad scope of sanctions imposed on the Sanctioned Countries, there was a concern that apart from the listing applicant and its directors and controlling shareholders, other parties who might be involved in an initial public offering or the listing application process, including investors, shareholders and the Relevant Persons, may be exposed to sanctions risk or be subject to actual or potential sanctions under the relevant sanctions laws and regulations, where they apply extraterritorially.
        18. A listing applicant should obtain a confirmation from its legal advisers on whether it, its investors and shareholders, and the Relevant Persons would be subject to any sanctions risk. The applicant should also consider terminating the business relationship in the Sanctioned Countries that subject it to sanctions risk before listing where appropriate.
        19. When determining whether the Applicants were suitable for listing, the Exchange took into account, among other things:
        a. the Applicants' projects/businesses in the Sanctioned Countries would be terminated or transferred before listing, and there would be no material adverse impact on the Applicants as a result of the termination or transfer of these projects/businesses;
        b. the relevant advice given to or analysis made by listing applicants with respect to sanctions risk posed to the Applicants, its investors and shareholders, and the Relevant Persons was very low;
        c. the Applicants had enhanced their internal control measures and provided undertakings to the Exchange to ring-fence their exposure to sanctions risk; and
        d. the extent of the revenues derived from the Applicants' projects/businesses in the Sanctioned Countries as a percentage of their total revenue during the track record period may not necessarily be relevant if it is demonstrated that the Applicants would not be exposed to sanctions risk as a result of these projects/businesses. However, for projects/businesses that are subject to sanctions risk, the nature and size of these projects/businesses would be relevant in assessing the effectiveness of the measures that the Applicants have taken or will take to ring-fence/minimize sanctions risk, and the financial and operational impact of these measures on the Applicants' business operations and profitability.
        20. Having considered the facts and circumstances of the above two cases, the Exchange considered that the Applicants' businesses in the Sanctioned Countries would not render them unsuitable for listing under Rule 8.04. The issue could be dealt with by disclosure under Rule 2.13(2). However, what constitutes sanctionable activities or contracts which might be subject to sanctions under applicable laws and regulations depends on the circumstances of each case. Care should be taken to analyse each case and address sanctions risk of each listing applicant in light of the facts and circumstances involved.
        21. To enhance investors' understanding of the Applicants' exposure to sanctions risk, the Applicants have disclosed the following prominently in the listing document, including the "Summary", "Risk Factors" and "Business" sections:
        a. details of the Applicants' projects/businesses in the Sanctioned Countries, including the nature and size of the contracts, revenue recognized during the track record period, status of the projects, background of counterparties, whether the Applicants and/or its counterparties were or would be deemed as sanctioned targets, whether the Applicants' projects/businesses may be deemed to be prohibited activities under the relevant sanctions laws and regulations, etc.;
        b. the legal advisers' views, with basis, on whether there was any risk of sanctions violations (the legal opinions should cover sanctions in major countries or regions, including the U.S., EU, UN and Australia) as a result of the Applicants' projects/businesses in the Sanctioned Countries, and if so, the relevant impact and sanctions risk on the Applicants, their investors and shareholders, and the Relevant Persons;
        c. the facts that the Applicants would terminate or transfer the existing projects/businesses in the Sanctioned Countries before listing, and details of financial and operational impact on the Applicants as a result of the termination/transfer;
        d. details of legal consequences and maximum penalties (if any) for terminating or transferring to other parties these projects/businesses, particularly if the Applicants' act of terminating them or transferring them to other parties would be regarded as a breach of the terms of the relevant contracts;
        e. if the Applicants after listing intended to undertake any new businesses in the Sanctioned Countries which would not expose them to any sanctions risk, details of the Applicants' intention to embark on these new businesses, and the parameters or criteria that the Applicants would take into consideration when determining whether to embark on these business opportunities in the Sanctioned Countries;
        f. the Applicants' undertakings to the Exchange that (i) the IPO proceeds and any other funds raised through the Exchange would not be applied, directly or indirectly, to finance or facilitate any projects or businesses in the Sanctioned Countries or pay any damages for terminating or transferring the contracts in the Sanctioned Countries; (ii) the Applicants would not, directly or indirectly, perform any of the obligations under the relevant contracts under any circumstances, and details of the measures that the Applicants would put in place to ensure compliance with these undertakings; and (iii) the Applicants would disclose on the Exchange's and their own websites if they believed that the transactions they entered into in the Sanctioned Countries would put themselves or their investors and shareholders to risks of being sanctioned, and in the annual reports/ interim reports their efforts on monitoring their business exposure to sanctions risk, the status of future business, if any, in the Sanctioned Countries and its business intention relating to the Sanctioned Countries;
        g. the risk of possible delisting of the Applicants' shares should the Applicants be in breach of its undertakings to the Exchange; and
        h. details of internal control measures to control and monitor the Applicants' exposure to sanctions risk, and the views of sponsor(s) and directors on the adequacy and effectiveness of these measures to protect the interests of the Applicants, their investors and shareholders, and the Relevant Persons.

        THE DECISION

        22. Having considered the above facts and circumstances in totality, in particular that the Applicants have undertaken measures to minimize any risk of sanctions, including terminating or transferring the contracts in the Sanctioned Countries before listing, the Exchange determined that the Applicants' past business in the Sanctioned Countries would not render them unsuitable for listing, and the issue could be addressed by disclosure.
        23. An applicant can use a different approach, which is not the same as that set out above, in addressing such issue but it should early consult the Exchange.

      • LD75-2013

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        HKEX LISTING DECISION
        HKEX-LD75-2013 (July 2013) (Updated in April 2014, May 2016 and February 2018)

        Summary
        Party Company A, Company B, Company C, Company D, Company E, Company F, Company G, Company H, Company I, and Company J
        — Main Board listing applicants

        Company K, Company L, Company M, Company N, Company O, and Company P
        — GEM listing applicants

        (the "Applicants")
        Issue

        Listing Rules
        To provide guidance on why the Exchange returned certain listing applications

        Main Board Rule 9.03(3) and GEM Rules 12.09 and 12.14
        Decision The Exchange returned the applications.
        1. This listing decision sets out the reasons why the Exchange returned certain listing applications from December 2012 to April 2013. For the reasons of the return of listing applications before this period, please refer to HKEX-LD48-2013.

        APPLICABLE RULES, REGULATIONS AND PRINCIPLES

        2. Main Board Rule 9.03(3) states that the Exchange expects to receive an advanced proof of the prospectus with the listing application form that is not an initial proof to enable the Exchange's review is able to commence immediately upon lodgement of the application. The disclosure of the requisite information as set out in Chapter 11 must be substantially completed in the advanced proof of the prospectus.
        3. If the Exchange considers the draft prospectus submitted with the Form A1 is not in an advanced form, the Exchange will not commence reviewing the application. All documents, including the Form A1 and the initial listing fee, submitted to the Exchange will be returned to the sponsor(s). The sponsor(s) will be required to resubmit a new Form A1 together with the advanced proof of the prospectus.
        4. GEM Rule 12.09 states that the Sponsor must ensure that the draft listing document has been verified in all material respects prior to submission. Note 1 to GEM Rule 12.09 states that if the Exchange considers that the draft listing document submitted with the listing application form is insufficiently finalised, the Exchange will not commence review of that or any other documents relating to the application.
        5. GEM Rule 12.14 requires that the listing application form must be accompanied by certain documents. The Listing Department may return to the sponsor any application for listing which it considers to be incomplete, together with the initial listing fee.

        ANALYSIS

        6. Set out below are reasons why the Exchange considered the applications not in an advanced form and returned certain listing applications during the period from December 2012 to April 2013.

        Company A

        7. Company A was engaged in property development projects. There were a number of deficiencies in disclosure:
        (i) Business model

        Company A had two business segments, i.e. Segment A and Segment B. The disclosure placed significant emphasis on Segment B which did not accord with the fact that a majority of Company A's revenue during the track record period was from Segment A.

        Further, the disclosure on Company A's arrangements with sub-contractors was limited. It was unclear as to which part of the work was outsourced, its liabilities for sub-contractors' work and its control measures to monitor the performance of subcontractors.
        (ii) Future plans

        Company A planned to develop a building and a significant amount of the IPO proceeds would be used for this purpose. More concrete details of the plan should be disclosed in the prospectus including:
        •   Whether Company A had started the venue identification process;
        •   The expected timeframe of the development;
        •   The source of funding in addition to the IPO proceeds; and
        •   How the plan would affect Company A's business going forward.
        (iii) Non-compliances

        Company A was involved in a number of material non-compliances, civil claims, litigations and criminal prosecutions. However, the disclosure was unclear and insufficient. There should be enhanced disclosure on:
        •   Details and causes of the non-compliances;
        •   Maximum penalties and liabilities to Company A;
        •   Specific rectification measures and internal controls; and
        •   Sponsor's view on the non-compliances and their impact on Company A and its directors.
        (iv) Others

        The "Summary" section of the prospectus lacked sufficient information to provide investors with a concise overview of Company A's operation model and to highlight significant matters as per HKEX-GL27-121. (Updated in May 2016)

        Moreover, the prospectus did not provide a meaningful discussion on Company A's tight liquidity position and hedging policies.

        Company B

        8. Company B was a garment manufacturer. There were a number of deficiencies in the following disclosure:
        (i) Insufficient information on its major customers, including:
        •   Their identities and background;
        •   Salient terms of sales agreements;
        •   Pricing strategies; and
        •   Plan and measures to reduce reliance on its major customers.
        (ii) Information on suppliers and raw materials, including;
        •   Number of suppliers;
        •   Importance of its major suppliers and whether there were plans and measures to reduce reliance on them;
        •   Reasons for raw materials price fluctuations;
        •   Policies to manage exposure to rising costs; and
        •   Whether increases in costs could be passed to customers.
        (iii) Control measures on product design, intellectual property rights protection and the relevant risk exposure were not adequately disclosed.
        (iv) Reasons for the fluctuation of the utilization rate of production facilities during the track record period and details of the new production equipment to be purchased by the net proceeds from the global offering.
        (v) Descriptions on its transfer pricing arrangement and the regulatory, product quality and safety requirements which it may subject to in the major markets it operates in.
        (vi) Information on forward contracts including:
        •   Reasons for entering into forward contracts;
        •   Key terms of these contracts;
        •   Maximum potential exposure;
        •   Details of investment;
        •   Hedging and risk management policies and internal control procedures; and
        •   Personnel and senior management involved.
        (vii) The disposal of certain subsidiaries to the controlling shareholders, for example:
        •   Reasons for the disposal;
        •   Whether the disposed entities competed with Company B; and
        •   All the information required under Rules 8.10(1)(a) and 8.10(2) (where applicable).
        (viii) Details of the non-compliances were unclear and insufficient and the following should be disclosed:
        •   Root causes of the non-compliances;
        •   Rectification measures and internal controls; and
        •   Sponsor's view on the non-compliances and how they might impact on Company B and its directors.
        (ix) The "Summary" section lacked sufficient information to provide investors with a concise overview of Company B's operation model and to highlight significant matters as per HKEX-GL27-121. (Updated in May 2016)
        (x) In the "Financial Information" section, there was only a pure description of the quantitative changes in the underlying components and no meaningful discussion on Company B's financial position. There was also no information on how various factors (e.g. the change in product mix, the product pricing model, the fluctuation of prices of major production materials, etc.) affected Company B's business during the track record period.

        Company C

        9. Company C was involved in the processing of certain paper products. There was unclear and insufficient disclosure on:
        (i) Whether Company C was a manufacturer or a trading company based on the description of its business activities in the prospectus;
        (ii) Customers, such as the background and nature of customers, the degree of Company C's control over customers, details of rebates provided to customers, and a gross profit margin analysis by product types; and
        (iii) Average selling prices, sales volume and gross profit margin of new products for investors to assess their performance.
        10. Furthermore, Company C had only identified two INEDs.
        11. The "Summary" section lacked disclosure on material information, including the key operating indicators (e.g. production capacity, utilization rates and average selling prices of major products, etc.) and the recent significant drop in revenue from one of the products.
        12. As for the use of proceeds, there was no detailed disclosure on:
        (i) Implementation plan and the expected timeframe for the expansion of sales network;
        (ii) Details of the proposed acquisition (e.g. whether Company C had identified any target and the status of negotiation); and
        (iii) Products to be developed, the R&D activities involved and the expected time to launch the products.

        Company D

        13. Company D was involved in the entertainment business. There was insufficient disclosure in relation to:
        (i) The exact services provided and the extent of involvement in the entertainment operation; and
        (ii) Salient terms of major agreements, including the rights and obligations of different parties, the allocation of profit and expenses, the duration of the agreements, termination clauses, etc.
        14. There was insufficient disclosure to demonstrate that Company D had sufficient and effective risk management and internal control measures to manage its credit risk and that its operation remained clear of corruption and money laundering activities. The prospectus should include:
        (i) Details of the exposure to credit risks of advances/guarantees, the credit risk control measures and the relevant default rates;
        (ii) Control mechanism to actively manage the entertainment activities; and
        (iii) Details of anti-money laundering and anti-corruption policies and related procedures, and the professional qualification and industry experience of the relevant personnel who were in charge of internal control.
        15. Given the significant costs of its future plans and the tight liquidity position, there should be more disclosure on:
        (i) Whether the significant amount due from directors would be settled and the resulting impact on financial position;
        (ii) further details on Company D's liquidity management;
        (iii) Expected timing of payment for each of its future plan and the related source of financing;
        (iv) Details on how to manage its business expansion (e.g. sourcing of suitable expertise, the management of staff, etc.) and the contingency plan should it fail to complete the projects; and
        (v) Compliance records with all the bank covenants.
        16. The disclosure in relation to disputes and legal proceedings should be enhanced, including but not limited to:
        (i) Circumstances giving rise to each of the disputes and legal proceedings and the maximum potential impact on Company D's operation and financial position; and
        (ii) Details of control measures to prevent recurrence of these events in the future.
        17. The "Summary" section should include material information, including:
        (i) Company D's major acquisition;
        (ii) Its reliance on the largest customer;
        (iii) Its key operating data;
        (iv) A brief commentary on material fluctuations of revenue and profit;
        (v) Material disputes and legal proceedings;
        (vi) Major risks; and
        (vii) Recent development.
        18. Company D should update the accounts as required under Rule 8.06, or provide a sponsor's confirmation as set out in Guidance Letter HKEX-GL6-092 upon submission of the new listing application. (Updated in May 2016)

        Company E

        19. Company E was a service provider. There were a number of deficiencies in disclosure:
        (i) Business model

        The prospectus lacked a detailed description on:
        •   Whether the three business segments of Company E were inter-related or cross-selling;
        •   Why clients had to engage Company E instead of directly dealing with its operators;
        •   How products and services were priced;
        •   How revenue and costs were recognized;
        •   Sales and marketing strategies;
        •   Liability clauses for misleading/ inaccurate contents;
        •   Involvement and role in organizing competitions/ events;
        •   Salient terms of a major agreement; and
        •   How and the percentage of free and discounted advertising time slots it obtained.
        (ii) Future plans

        There was insufficient information on how Company E planned to utilize the proceeds from the global offering to fund its business plan.
        (iii) Relationship and reliance on the largest supplier

        The single largest supplier accounted for approximately a majority of the total purchases during the track record period. However, there was insufficient disclosure on the relationship with and reliance on this supplier, including:
        •   Whether it was an industry norm to rely on a single supplier;
        •   Measures taken/ to be taken to reduce reliance;
        •   Renewal status of the agreement with the supplier;
        •   Salient terms of the agreement; and
        •   Details of the public auction process to acquire the exclusive right of the advertising time slots.
        (iv) Structured Contracts

        The disclosure did not fully address the requirement under HKEX-LD43-3, including that:
        •   Structured contracts were narrowly tailored to achieve Company E's business purposes and to minimize the potential conflict with relevant PRC laws and regulations;
        •   Relevant regulatory assurance it obtained regarding their use;
        •   Details of any insurance purchased to covered the risks relating to the structured contracts;
        •   The reporting accountants concurred that Company E had the right to consolidate the relevant financial results under the prevailing accounting principles;
        •   Company E would unwind the structured contracts as soon as the relevant PRC law allowed it to do so;
        •   Economic risks it bore; and
        •   Circumstances under which it had to provide further financial support.
        (v) Other disclosure matters

        There was insufficient information on Company E's business model in the "Summary" section, including:
        •   Products/ services it produced/ provided in each business segment;
        •   Revenue breakdown by segments and a related commentary on material fluctuation;
        •   Reliance on a major supplier; and
        •   Update on the recent development of its operations and financial performance.
        The summary should omit a full list of risk factors and should provide a meaningful discussion on the fluctuation of Company E's track record results and financial positions during the track record period.
        20. Company E terminated Firm A as one of its experts and subsequently engaged Firm B. There should be a submission on the circumstances leading to the termination of Firm A's engagement, including:
        (i) Details of the disagreement;
        (ii) Firm A's clearance letter (if any);
        (iii) Firm B's confirmation (with basis) on how any disagreement/ unresolved matters with Firm A (if any) were resolved; and
        (iv) Whether there was any matter regarding the change of the expert which had to be brought to the Exchange's attention.

        Company F

        21. Company F was a wholesaler and retailer of consumer goods. There were a number of deficiencies in disclosure:
        (i) Suitability of director

        Mr. A, Company F's controlling shareholder, chairman and ED, was implicated in an incident which gave rise to the Exchange's concern on his suitability. The sponsor had not demonstrated to the Exchange's satisfaction that the incident did not affect Mr. A's suitability as a director under Rules 3.08 and 3.09.
        (ii) Change in business focus and future plans

        The revenue contribution from the property investment segment decreased significantly. However, this business segment, including the fair value gain, accounted for a majority of its net profit. The prospectus did not highlight this issue, and lacked detailed disclosure on the reason(s) for the change in business strategy, and how this change had affected Company F's business risk profile (e.g. cost structure, profitability, liquidity, and credit risks, etc.).

        There were also insufficient details on:
        •   how Company F would expand its wholesale and retail business (e.g. timing and scale of expansion, investment budget, expected time to recoup invested capital, etc.);
        •   its future intention on the property investment segment; and
        •   how it would manage its business expansion (e.g. procurement of customers, suppliers and skilled labour, quality control, internal control, etc.).
        (iii) Property investment segment

        The profit generated by the property investment segment was volatile due to the fair value change. There were deficiencies in disclosure and the following should be included in the prospectus:
        •   A commentary on the fair value gains during the track record period (e.g. methodology adopted to appraise fair value of assets);
        •   Adjusted profits excluding the fair value gains;
        •   Details of acquisition of the property (e.g. consideration, source of funding, conditions attached to the acquisition, property usage before/ after the acquisition, any major construction activity conducted for the current use).
        •   Salient terms of the lease of property from the government and the cooperative agreements;
        •   How the cooperative agreements correctly reflected the nature of Company F's operations; and
        •   The cooperative agreements' impact on Company F's business and financial position with meaningful analysis (e.g. average rental per sq.m. and a commentary on material fluctuations, years of relationship with occupiers and their respective gross floor areas rented and rental contribution based on the existing leases).
        (iv) Wholesale and retail businesses
        •   Company F considered its membership with Association A in the PRC as one of its competitive strengths but there was no disclosure on the background of Association A, categories of membership and their basic requirements, obligations and annual fees, the total number of members, and whether Company F's membership was subject to annual review and conditions.
        •   There was no analysis on the gross profit margin of different types of consumer goods, the proportion of the different types of raw materials used by manufacturing contractors and a detailed cost breakdown by business segment.
        •   There were no details on Company F's preferential pricing arrangement with one of its largest customers, and the pricing details.
        •   There should be disclosure on the background information of its top five customers, the salient terms of cooperation with them, reason for the high customer concentration in the wholesale segment and the plan to mitigate the risk of reliance.
        •   There was no information on the salient terms of the subcontracting arrangement.
        •   There were insufficient details on Company F's internal controls.
        •   There was no background information on the largest and top five suppliers;
        •   There were insufficient details of the framework agreements and the compensation for either contract parties failing to supply or purchase the minimum purchase amount.
        •   There was no disclosure on the grades of the inventory, Company F's intention for its inventory and how long it could support its current operations and/or future business expansion, the historical price trends for its raw materials, and whether Company F would need to make any provision for the inventory.
        (v) Disclosure not in accordance with Guidance Letters

        The disclosure should follow published Guidance Letters, including but not limited to HKEX-GL27-121 on the Summary section, HKEX-GL30-12 on intellectual property rights, HKEX-GL33-123 on use of proceeds, HKEX-GL36-12 on distributors and HKEX-GL37-12 on indebtedness and liquidity. (Updated in May 2016)

        Company G

        22. Company G was a mining company. It submitted a renewed application without fully addressing the issues the Exchange raised when the previous application lapsed. Non-exhaustive examples included:
        (i) Non-compliant incidents

        •   Company G had not yet obtained the revised production licenses with increased permitted annual mining capacity.
        •   The mines continued to operate at a capacity in breach of the production volume limit stipulated in its production licenses.
        •   There was no analysis on why Company G's application for increasing the permitted production volume would not be negatively affected by the government policies to reduce carbon emission and curb coal production.
        •   There was no information on why the excess production during the track record production would not adversely affect its application for further increases in the permitted annual capacity and renewal of production licenses for the mines.
        •   The requested disclosure on the operational and financial impact in the worst case scenario (e.g. the application for land use rights was rejected, the production schedule was delayed, applications for increases in production capacities were rejected), and alternative plans remained outstanding.
        •   Information demonstrating that Company G would be able to meet the minimum profit requirements under Rule 8.05 after excluding revenue from excess coal production had not yet been provided.
        •   The prospectus had also not disclosed Company G's maximum financial exposure in respect of each of the non-compliance incidents.
        (ii) Working capital sufficiency
        •   The Sponsor and the Reporting Accountants had yet to provide the detailed basis, with the support of a working capital forecast, on which they were satisfied that Company G would have sufficient working capital for 125% of its requirements under Rule 18.03(4).
        •   The worst case scenario analysis and sensitivity analysis of changes in major assumptions also remained outstanding.
        (iii) Tax issues
        •   The full amount of the tax not yet reported was not disclosed.
        •   The question on whether Company G had breached any rules of the other exchange on which it was listed was also not yet addressed.
        (iv) Others
        •   Reasons for the resignation of the three INEDs and the change in the legal advisor were not provided.
        •   The question on whether there was any matter which had to be brought to our attention was not yet addressed.

        Company H

        23. Company H was engaged in the automobile industry. It did not fully address comments previously raised by the Exchange before the submission of a renewed application. Non-exhaustive examples include:
        (i) Non-compliances and directors' suitability
        •   Certain subsidiaries had yet to rectify their non-compliances with the relevant PRC laws, rules and regulations to obtain approvals and licenses for carrying out part of its business.
        •   Although Company H obtained confirmations from city-level authorities, the authority to order its business suspension rested on authorities of county level or above.
        •   The sponsor should disclose:
        (a) Root causes of each non-compliances;
        (b) Sponsors' views (with basis) on directors' suitability under Rules 3.08 and 3.09;
        (c) Adequacy and effectiveness of Company H's internal control measures to ensure ongoing compliance with the PRC laws and regulations; and
        (d) Basis of the directors' view that the business authorizations were unlikely to be revoked by its suppliers as a result of the non-compliance incidents.
        (ii) Inventory risks, working capital management and business sustainability
        •   Company H sold certain inventories at prices lower than the procurement costs and reduced selling prices of its products. It was unclear whether these arrangements were in breach of the pricing guidelines of its suppliers and their effect to inventory valuation was not disclosed.
        •   There were significant increases in inventory and inventory turnover days and the material decreases in gross and net profit margin during the track record period.
        •   A showroom was closed after operating for only one year due to market uncertainty. However, on the other hand, Company H planned to open extensive outlets in the next few years. The financial and operational impact to Company H was not disclosed.
        •   The above factors, in totality, posed concerns on Company H's inventory risks, working capital management and business sustainability which had yet to be addressed.
        •   The directors and the sponsors had yet to provide the detailed basis, with the support of a working capital forecast, on how they were satisfied that Company H would have sufficient working capital to meet its present requirements under Rule 8.21A, particularly in light of the issues mentioned above.
        •   A sensitivity analysis (with basis) of changes in major revenue/cost drivers and interest rates on the forecast profit remained outstanding.

        Company I

        24. Company I was a consumer goods manufacturer. The Exchange had previously accepted its listing application for vetting.
        25. Company I planned to purchase more supplies from independent sources (instead of from a connected supplier), and reduce the extent of connected transactions.
        26. The Exchange issued a letter requesting Company I to demonstrate whether its track record results had been cushioned by the connected supplier, which might have absorbed the counterparty risks, including volatile prices, late deliveries and cancelled orders, etc. Company I also had to demonstrate whether it had sufficient expertise and whether systems were in place to manage the risk of price volatility and counterparty default risk.
        27. The application subsequently lapsed and Company I submitted a new listing application. The Exchange considered that the concerns raised had not yet been satisfactorily addressed.
        28. In addition to paragraph 26 above, Company I should disclose details of long supply framework agreements signed or to be signed with the connected supplier and other independent suppliers, the impact of the change to Company I's risk profile, financial position and profitability, and the resulting competition with the controlling shareholders, if any.

        Company J

        29. Company J was a supplier of consumer products.
        30. The Exchange had previously accepted Company J's listing application for vetting. However, Company J repeatedly refused to disclose certain information for reasons of commercial sensitivity ("Relevant Information").
        31. The Exchange issued a letter stating its intention to reject the listing application on the grounds that the disclosure of the Relevant Information could adversely affect Company J's relationship with its existing customers and the omission might mislead investors.
        32. Also, given that the excluded companies were under the same management and control as the group during the track record period, the Exchange requested the reporting accountants' views on the reasons why the excluded companies' results were not included in Company J's consolidated financial statements during the track record period. However, this was not provided. In addition, certain significant information provided was inaccurate and incomplete.
        33. The Exchange issued a letter to the sponsor stating its intention to reject the listing application unless the above issues were resolved and updated accounts were provided.
        34. The listing application subsequently lapsed. Company J re-submitted a new listing application. The Exchange considered that Company J had not provided sufficient information to fully address the concerns raised in its previous letter. In particular, Company J had yet to demonstrate whether its profitability would be affected if the Relevant Information was disclosed to its customers, which would in turn affect the sustainability of its business.

        Company K

        35. Company K was engaged in a heavily regulated business. There were a number of deficiencies in the filing of the listing application, for example, documents required under GEM Rule 12.22 were outstanding and sufficient independent non-executive directors had to be appointed as required under GEM Rule 5.05(1).
        36. There were also a number of deficiencies in the disclosure in the prospectus:
        (i) The disclosure in the "Summary" section on the distribution of products manufactured by Company K and its parent group before and after the delineation was unclear and confusing. Furthermore, reasons for the proposed spin-off were not disclosed.
        (ii) Company K and its parent group underwent certain steps to better delineate Company K from other members of the parent group and to enhance its independence. However, the prospectus lacked detailed disclosure on how these changes would affect Company K's future operating performance, cost structure and working capital management.
        (iii) The sponsor's views, with basis, on whether Company K could still meet the minimum cashflow requirement under GEM Rule 11.12A(1)4 should the changes stated in item (ii) above took place throughout the track record period, and whether the track record results were meaningful for investors to assess Company K's future should also be disclosed. (Updated in February 2018)
        (iv) Company K planned to significantly increase the manufacturing capacities for certain products. However, there was insufficient disclosure on Company K's expansion plan (e.g. the amount and timing of the estimated capital expenditure and the amount committed as at the latest available date, sources of funding, procurement of sales orders, raw materials and skilled labour, etc.), reasons for this expansion and how the expansion plan would affect its business going forward.
        (v) Given that Company K was engaged in a heavily regulated business, the prospectus lacked disclosure on details of its internal control measures to ensure compliance with all applicable laws and applications, the quality control measures, the exposure to product liability claims and the scope and extent of its product liability insurance coverage.
        (vi) There should be a more detailed qualitative and quantitative analysis of major factors affecting Company K's revenue, gross profit and operating profit during the track record period with related sensitivity analysis (where appropriate), and a meaningful analysis of major financial ratios in the "Financial Information" section.

        Company L

        37. Company L was engaged in the provision of certain services. There were a number of deficiencies in disclosure:
        (i) Company L had only completed a few contracts during the track record period. All projects on hand as at the latest practicable date were expected to complete soon. The prospectus lacked information on whether Company L would be able to secure new projects and sustain its business.
        (ii) Company L was loss making in previous years with net operating cash outflow and net current liabilities. It relied on its controlling shareholder to finance its operations throughout the track record period. The prospectus contained insufficient analysis on whether Company L would be able to raise sufficient independent funding to finance its significant short-term funding needs.
        (iii) Company L had no previous experience in its business in places other than Hong Kong, but the largest project on hand was non-Hong Kong based. However, there was only minimal disclosure on this project in the prospectus. Moreover, Company L had yet to complete certain registration with the relevant authority in the other country. The prospectus lacked disclosure on the directors' and senior management's previous experience in its business in places other than Hong Kong, Company L's plan with respect to the financing and management of the project, and the likelihood of success and the expected timing of completion of the registration.
        (iv) The risk factors relating to competition in its industry was very general and the "Business — Competition" section lacked sufficient information to provide investors with an overview of the industry's competitive landscape.

        Company M

        38. Company M was a service operator. Enhanced disclosure was required for the following areas:
        (i) How the deed of non-competition could be effectively implemented as (a) the retained group5 was a listed company and would not be under the controlling shareholders' absolute control and (b) the retained group had the right to decide whether certain products, which might compete with Company M.
        (ii) How Company M's business could be delineated from the retained group in terms of customer and supplier bases, and the scope of products and services offered.
        (iii) The basis on which Company M could operate independently from the retained group given the amount of transactions with the retained group going forward, and the respective roles and responsibilities of Company M's two directors in Company M and the retained group.
        (iv) A detailed quantitative and qualitative analysis of the significant fluctuations of Company M's track record results, and the background information of its major suppliers and advertising customers, together with the salient terms of the agreements with them.
        (v) Details of the non-compliant short-term financing and the potential maximum penalty.
        (vi) Details of complaints and/or writs, the remedial actions, the relevant internal control measures, and the disclosure as required in HKEX-GL30-12 regarding Company M's intellectual property rights.
        (vii) Details of the industry outlook and competitive landscape and how Company M would be able to sustain its business going forward.
        (viii) Details of Company M's structured contract arrangement as required in HKEX-LD43-3.

        Company N

        39. Company N was engaged in the development and sale of certain products. It did not submit all the documents required under GEM Rule 12.22 at the time of the filing of its listing application. Moreover, there were a number of deficiencies in disclosure:
        (i) Business model and future plans
        •   Given the changes in the percentage contribution of Company N's revenue streams, it was uncertain whether it had changed its business focus and if so, how this change would affect its business and risk profile.
        •   There was also no information on whether the introduction of a new product might change Company N's business model, subject it to a different regulatory environment, and result in potential competition with its customers and the controlling shareholders.
        •   The prospectus lacked disclosure on Company N's strategy to ensure the renewal of contracts and the historical renewal rates.
        •   Details on how Company N's business strategies will be executed, the source of funding, and how these plans would affect its business and risk profile going forward should be disclosed.
        (ii) Products/ services and various business arrangements
        •   There was insufficient disclosure on the functionality of principal products, the revenue model, the business arrangements with strategic partners and customers.
        (iii) Customers and suppliers

        There should be further disclosure in relation to:
        •   Major customers and suppliers (e.g. background and business profile of its top five customers and suppliers, number of years of business relationship, salient terms of agreements); and
        •   Sales and marketing strategies (e.g. how it secured customers, the number of "active" customers, how these strategies would allow Company N to expand its customer base).
        (iv) Research and development

        The prospectus lacked disclosure on Company N's product development plans, including:
        •   How it planned to enhance its existing products;
        •   Whether the research and development process of various new products had commenced;
        •   Expected timeframe of development and project milestones;
        •   Estimated and incurred costs;
        •   Qualification and experience of development employees;
        •   Measures to retain qualified personnel; and
        •   Relevant risk factors.
        (v) Intellectual property

        Given the business nature of Company N, the prospectus lacked discussion on:
        •   Whether the current practice of Company N in safeguarding its intellectual property was in line with industry practice;
        •   Whether it suffered any infringement of its technology in the past;
        •   Basis on which it concluded that its current level of protection was sufficient, and
        •   Whether Company N planned to patent any of its products.
        (vi) Investment strategy

        There was insufficient disclosure on:
        •   Details of the investments;
        •   Treasury and investment strategy; and
        •   Relevant risk control measures (e.g. factors considered in selecting financial instruments, the identity and role of the personnel who approved the investment transactions, his/her qualification and experience).
        (vii) Non-compliances under the Hong Kong Company Law requirement (Updated in April 2014)

        The prospectus had insufficient information on:
        •   Identity, qualification and experience of the external consultants, their scope of work, key findings and recommendations;
        •   How the internal controls would ensure ongoing compliance; and
        •   Sponsors' view (with basis) on the sufficiency and effectiveness of these measures.
        (viii) Other disclosure
        •   The disclosure in various sections of the prospectus did not follow published Guidance Letters HKEX-GL27-121 on the "Summary" section, HKEX-GL48-136 on "Industry Overview" section, HKEX-GL49-136 on the "History and Development" section, HKEX-GL50-138 on the "Business" section, and lacked sufficient information to provide investors a concise overview of Company N's business model, history and major events, significant matters and relevant risks. (Updated in May 2016)

        Company O

        40. Company O was engaged in the sales of certain consumer products and related services.
        (i) Guidance Letter HKEX-GL6-092 (Updated in May 2016)

        Company O had not updated the Accountants' Report in accordance with the principles in the Guidance Letter HKEX-GL6-092.
        (ii) Sustainability of the Group's business
        •   Company O derived over 80% revenue from its top five customers during the track record period. However, there was a substantial decrease in revenue from one of the top five customers recently and a net loss was expected for the current financial year. There should be disclosure on whether it was common industry practice to rely on only a few major customers and not enter into long term contracts.
        •   Details of Company O's plan and measures to reduce reliance on the top five customers after listing, the latest financial performance subsequent to the track record period (reviewed by the reporting accountants), and the directors' and the sponsor's view on the future prospects of Company O's business and its sustainability going forward should be disclosed.
        •   There was a significant trade receivables balance, and receivables turnover days were substantially longer than the credit period granted to its customers. Company O should disclose the aging analysis, the subsequent settlements and the view of the sponsor and the reporting accountants (with basis) on the recoverability of receivables.
        •   Company O relied on three independent suppliers without any long-term agreement. It should disclose the exposure to counterparty risk and the availability and number of other independent suppliers.
        •   Company O should disclose reasons for the significant decrease in the Group's forecasted cash and cash equivalents, the worsening gearing and debt to equity ratios, details of plans to improve its working capital, the latest amount of unutilized banking facilities, detailed terms of the financial covenants of the existing bank borrowings, and the compliance record with these covenants. Also the forecast memorandum should be updated to include the latest actual figures.
        (iii) Non-compliances and directors' suitability
        •   Company O was involved in a number of non-compliances during the track record period. The non-compliances had taken place for a prolonged period.
        •   The Exchange had serious concern on the suitability/ competence of the directors under GEM Rules 5.01 and 5.02 and the suitability of the directors listing on GEM given that the above non-compliance was related to Company O's fundamental operation and business. The sponsor's view, with basis, on the directors' suitability under GEM Rules 5.01 and 5.02 and Company O's suitability for listing should be provided and, where applicable, disclosed.
        •   There should also be detailed disclosure on the root causes of each non-compliance, reasons for a prolonged period of oversight of the relevant rules and regulations, the maximum amount of penalty/ fine, the background and experience of the internal control consultant, when each of the enhanced internal control policies was implemented and the sponsor's view on the adequacy and effectiveness of the enhanced internal control policies, etc.
        (iv) Others
        •   The "Summary" and "Business" sections should contain more disclosure on Company O's operation during the track record period and explain the reasons for any material fluctuations.
        •   The "Business" section should disclose the registration status of trademarks, and the internal control measures including measures to monitor compliance with the relevant laws and regulations.
        •   The "Regulation Overview" section should cover all relevant rules and regulations.

        Company P

        41. Company P was engaged in the provisions of certain services in the PRC.
        42. Company P was not in compliance with, among others, certain laws applicable to its business in the PRC during the track record period. Although Company P had ceased all non-compliant transactions, it had yet to complete a demonstration period of at least 12 months from the date it ceased all non-compliances with the financial results during the demonstration period audited following the principles of HKEX-LD19-2011.
        43. In addition, there was unclear and insufficient disclosure in relation to information set out in HKEX-LD43-3 regarding contractual agreement, including arrangements to protect Company P's interests and arrangements to share losses.

        THE DECISION

        44. The Exchange returned the applications.
        45. Subsequently, twelve out of the 16 applicants re-filed listing applications 6 to 70 days after the Exchange returned their previous applications. As they had disclosed and/ or provided the missing information/ documents, the Exchange accepted the re-filed applications.

        ****


        1 Withdrawn in May 2016. Superseded by Section A of Appendix 1 in HKEX-GL86-16.

        2 Withdrawn in February 2014. Superseded by HKEX-GL6-09A.

        3 Withdrawn in May 2016. Superseded by Section C of Appendix 1 in HKEX-GL86-16.

        4 The minimum cashflow requirement has been increased from HK$20,000,000 to HK$30,000,000 with effect from 15 February 2018.

        5 The group of companies held by the controlling shareholders but not injected into the group to be listed.

        6 Withdrawn in May 2016. Superseded by Section C of Appendix 1 in HKEX-GL86-16.

        7 Withdrawn in May 2016. Superseded by Section D of Appendix 1 in HKEX-GL86-16.

        8 Withdrawn in May 2016. Superseded by Section E of Appendix 1 in HKEX-GL86-16.

      • LD73-2013

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        HKEx LISTING DECISION
        HKEx-LD73-2013 (published in May 2013)

        Parties Company A — a Main Board listing applicant
        Issue Whether Company A's non-compliances, uncertainties over the principal retail stores and deteriorating financial performance subsequent to the Track Record Period would render it unsuitable for listing
        Listing Rules and Regulations Main Board Rules 2.03, 2.04, 2.06 and 8.04
        Decision The Exchange considered that the cumulative effect of the number of uncertainties would impact Company A's future performance which could not be adequately addressed by disclosure in the prospectus. Company A was considered not suitable for listing for the time being.

        FACTS

        1. Company A was a retailer and had three principal retail stores (Stores A, B and C), all of which were leased properties. The three stores contributed around 80% of Company A's revenue during the Track Record Period. Company A's prospectus included its financial results from Year 1 to Year 3 and a stub period of five months in Year 4 which met the profit test requirement under Rule 8.05(1)(a).
        2. The Exchange noted the following material issues in its listing application:

        Non-compliances and uncertainty over Store A

        3. Store A contributed over 30% of Company A's revenue during the Track Record Period. The use of five out of the six floors in Store A was not the ones permitted under the occupation permit of the building and there were also unauthorized building works in Store A (the "Breach"). Company A had been operating Store A for over 30 years and was leasing Store A at below the prevailing market rate for shops.
        4. The Breach relating to three out of Store A's five floors was regarded as a material breach under the relevant building laws. Company A surrendered these three floors to the landlord after the Track Record Period. The Directors estimated that Store A's annual revenue would reduce by 10% as a result of the surrender of the three floors.
        5. Company A submitted an alteration work proposal (the "Proposal") to the relevant authority for the rectification of the unauthorized building works on the remaining floors after the Track Record Period. Pending approval of the Proposal by the relevant authorities, the proposed alteration work would commence in the first half of Year 5 and would take six months to complete. During this period, Store A's sales was expected to reduce by 50%. If the Proposal were rejected, Store A would need to move to another location. The renovation of the new retail store was expected to take approximately four months, and revenue to be derived from the new retail store was expected to reduce by 20% as compared to Store A during its first three months of operation.

        Deteriorating financial performance

        6. Company A's financial performance deteriorated significantly subsequent to Year 3, recorded a net profit of HK$1 million during the first five months of Year 4 and forecasted a full year net profit of approximately HK$9 million in Year 4. The Directors explained that the decline was due to general economic slowdown, the closure of another two retail stores during the period and listing expenses, and considered that the impact of these factors to be short term or one-off. The revenue and net profit (excluding the effect of listing expenses) in Year 4 were expected to decrease by over 10% and over 30%, respectively comparing with Year 3.
        7. The Directors confirmed that Company A would have sufficient working capital for at least 12 months after the date of the prospectus.

        Others

        8. The leases of Stores B and C were due to expire in the first half of Year 5. Company A only secured a lease renewal of Store B but had yet to commence negotiation with the landlord of Store C on renewal. Company A estimated that Store C's rental would increase by 10% to 20% upon lease renewal.

        APPLICABLE LISTING RULES

        9. Rule 2.03 states that the Listing Rules are designed to ensure that investors have and can maintain confidence in the market and in particular that, applicants are suitable for listing.
        10. Rule 2.04 states that the 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.
        11. Rule 2.06 states that suitability for listing depends on many factors. Applicants for listing should appreciate that compliance with the Listing Rules may not itself ensure an applicant's suitability for listing. The Exchange has the discretion to accept or reject applications and in reaching its decision will pay particular regard to the general principles outlined in Rule 2.03.
        12. Rule 8.04 states that both the issuer and its business must, in the opinion of the Exchange, be suitable for listing.

        ANALYSIS

        Non-compliances and uncertainty over Store A

        13. The Exchange considers that breaches of laws and regulations may affect an applicant's suitability for listing. Where a substantial part of the profits are derived from operations that are in breach of law, it casts doubt on whether the applicant's historical results is a reasonable and fair basis for assessing whether profit requirement is met. The Exchange takes into account the following factors in determining the impact of non-compliances on an applicant's listing:-
        a. the nature, the extent and the seriousness of the breaches, for example, whether the breaches involve dishonesty and fraud, whether the breaches involved newly established laws and regulations which may be subject to different interpretations by legal professionals;
        b. the impact of the breaches on the applicant's operations; and
        c. the rectification and precautionary measures adopted and how promptly these measures were carried out.
        14. The Exchange may request the sponsor to provide the basis of its view that the applicant has adequate and sufficient procedures, systems and controls under Rule 3A.15(5) taking into consideration the non-compliances. The Exchange may request the sponsor's view be disclosed in the prospectus.
        15. The Exchange has expressed concerns over listing applicants with serious non-compliances and only approved listing after these applicants had demonstrated compliance for a reasonable period of time.
        16. The Exchange noted that Company A had demonstrated that it could satisfy the profit test under Rule 8.05(1)(a) after adjusting the track record period's results with market rent payable for Store A or assuming Store A had been operating without the three floors involving the Breach. However, the outcome of Company A's Proposal remained uncertain. Company A's future operation would be seriously affected irrespective of whether the relevant authority approved the Proposal or not (see paragraph 5).
        17. Directors' conduct was also a factor for consideration. During the previous lease terms of Store A (more than 30 years), the Exchange did not consider that the Directors had taken sufficient steps to identify or rectify the Breach. Professionals were hired to perform inspections in Store A shortly before the listing application and a full assessment was performed only after the listing application was filed. Further, Company A submitted the Proposal to the relevant authority only towards the end of Year 4, months after the Exchange had raised comments on the Breach.
        18. While the Exchange acknowledged that pre-mature negotiation with the landlord on lease renewal might not be in the best interest of Company A, the Exchange noted the importance of renewing material leases for assessing Company A's sustainability after listing in light of the uncertainties over the continuing occupation in Store A.

        Deteriorating financial performance

        19. The Exchange is of the view that the assessment of suitability is a continuous process and an applicant must remain suitable for listing at the point of listing. Even if an applicant satisfies the profit test under Rule 8.05(1), if its results decline after the track record period or is very likely to decline substantially after listing, the applicant must explain and justify the reasons for the decline.
        20. With the information provided which normally includes a profit forecast memorandum submitted to the Exchange for this purpose, the Exchange will be able to understand whether there is a continuing concern that affects suitability for listing, and assess the applicant's sustainability with a greater degree of reliability. This is particularly the case where the financial year following the end of the track record period is well advanced when a listing hearing takes place.
        21. In Company A's case, the Exchange noted substantial decline in results during the first five months of Year 4. This coupled with the uncertainties over the physical condition of Store A (had it been operating under the Proposal or relocated) and the lease renewal of Store C (both of which had contributed significantly to Company A's revenue during the Track Record Period) cast doubt on the reliability of the track record performance for meeting the profit requirement.
        22. Accordingly, the Exchange considered that the inclusion of a profit forecast in Company A's prospectus could not sufficiently address the doubt on sustainability, while the Exchange may consider this method acceptable in less extreme cases by providing meaningful information about an applicant's future performance in light of a temporary deterioration of financial performance before listing.

        CONCLUSION

        23. The Exchange considered that the cumulative effect of the number of uncertainties would impact Company A's future performance and these uncertainties could not be adequately addressed by disclosure in the prospectus. Company A was considered not suitable for listing for the time being.

      • LD71-2013

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        HKEX LISTING DECISION
        HKEX-LD71-2013 (published in May 2013) (Updated in April 2015 and July 2018)

        Parties Company A — a Main Board issuer
        Issue Whether Company A's proposed rights issue required independent shareholder approval
        Listing Rules Main Board Rules 7.19A and 7.27A
        Decision The proposal required independent shareholder approval

        FACTS

        1. Company A signed an underwriting agreement for a proposed rights issue and published the announcement after the market closed on Day X. It had not conducted any other rights issue or open offer in the past 12 months.
        2. The rights issue would be made on the basis of one rights share for every two existing shares. It would increase Company A's issued share capital by 50%.
        3. The issue price for the rights shares was determined by Company A and the underwriter with reference to the recent market price of Company A's shares. It represented a small discount to the average closing price of the shares in the five trading days ended on Day X, and a premium of about 10% to the closing price on Day X.
        4. There was an issue whether the rights issue would increase Company A's market capitalization by more than 50% and therefore require independent shareholder approval under Rule 7.19A(1). Company A submitted that the rights issue would not exceed the 50% threshold based its market capitalisation calculated using the average closing price of its shares in the five trading days ended on Day X.

        APPLICABLE LISTING RULES

        5. Rule 7.19A(1) states that:
        A proposed rights issue must be made conditional on minority shareholders' approval in the manner set out in rule 7.27A if the proposed rights issue would increase either the number of issued shares or the market capitalisation of the issuer by more than 50% (on its own or when aggregated with any other rights issues or open offers announced by the issuer (i) within the 12 month period immediately preceding the announcement of the proposed rights issue or (ii) prior to such 12 month period where dealing in respect of the shares issued pursuant thereto commenced within such 12 month period, together with any bonus securities, warrants or other convertible securities (assuming full conversion) granted or to be granted to shareholders as part of such rights issues or open offers).
        6. Rule 7.27A states that:
        Where minority shareholders' approval is required for a rights issue ... under rule 7.19A ... :
        (1) the rights issue ... must be made conditional on approval by shareholders in general meeting by a resolution on which any controlling shareholders and their associates or, where there are no controlling shareholders, directors (excluding independent non-executive directors) and the chief executive of the issuer and their respective associates shall abstain from voting in favour;
        ...

        ANALYSIS

        7. The purpose of Rule 7.19A(1) is to protect minority shareholders' interests when the potential dilution effect of a proposed rights issue (individually or together with any similar fund raising exercise(s) made in the previous 12 months) is material.
        8. Under the Rule, a proposed rights issue that would increase the issuer's market capitalisation by more than 50% is subject to independent shareholder approval. The assessment should be made with reference to the issuer's market capitalisation at the time of the proposed rights issue. For this purpose, the Exchange generally considers it acceptable for the issuer to calculate its market capitalisation using the closing price of its shares on the date on which the terms of the rights issue are finalised.
        9. Here the rights issue would exceed the 50% threshold based Company A's market capitalisation calculated using the closing price of its shares on Day X.

        CONCLUSION

        10. The rights issue required independent shareholder approval under Rule 7.19A(1).

      • LD70-2013

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        HKEX LISTING DECISION
        HKEX-LD70-2013 (published in May 2013) (Updated in July 2018)

        Summary
        Parties Company A — a Main Board listed issuer
        Issue Whether Company A's arrangements to dispose of the excess rights shares would comply with Rules 7.21(1)(a) and 7.21(3)(a)
        Listing Rules Main Board Rules 7.21(1)(a) and 7.21(3)(a)
        Decision The Exchange considered that the arrangements would comply with the Rules

        FACTS

        1. Company A announced a rights issue on the basis of one rights share for every two existing shares. The issue price represented a substantial discount to the recent trading price of its shares.
        2. According to Company A's announcement and listing document for the rights issue, qualifying shareholders would be entitled to apply for any excess rights shares not subscribed by the allottees under the provisional letters of allotment or their renouncees. The board of directors would allocate the excess rights shares being applied for at its discretion and on a fair and equitable basis under the following principles:
        (i) preference will be given to applications to top-up holdings to board lots ("Top-up Applications") where it appears to the directors that the applications are not made with the intention to abuse such mechanism; and
        (ii) if any excess shares are available after allocation under principle (i), they will be allocated to other applicants based on a sliding scale with reference to the number of the excess shares applied for by them.
        3. The rights issue was over-subscribed. Company A noted unusual patterns of excess applications and had reasons to believe that certain applications might have been made with the intention to abuse the mechanism to top-up holdings to board lots. The number of shareholders had increased significantly after the rights issue announcement, and there were over 10,000 excess applications for rights shares representing about 20 times the total number of rights shares available under the rights issue. It appeared that certain shareholders had split their shareholdings into odd lots to enable them to submit multiple Top-up Applications.
        4. After reviewing the excess applications and related shareholding changes, Company A's board of directors found that only a small portion of the Top-up Applications did not appear to be made with an intention to abuse the mechanism to top-up holdings to board lots. The board decided to exercise its discretion to allocate the excess rights shares in full only to these Top-up Applications. The remaining excess rights shares would then be allocated to other applicants based on a sliding scale with reference to the number of excess rights shares applied by them.
        5. Company A enquired if the arrangements to dispose of the excess rights shares would comply with Rules 7.21(1)(a) and 7.21(3)(a).

        APPLICABLE LISTING RULES

        6. Rule 7.21(1) states that:

        "In every rights issue the issuer must make arrangements to:-
        (a) dispose of securities not subscribed by allottees under provisional letters of allotment or their renouncees by means of excess application forms, in which case such securities must be available for subscription by all shareholders and allocated on a fair basis; or
        (b) ...
        The arrangements described in rule 7.21(1)(a) or (b) must be fully disclosed in the rights issue announcement, listing document and other circular."
        7. Rule 7.21(3) states that:

        "Where arrangements described in rule 7.21(1)(a) are made:
        (a) the basis of allocation of the securities available for excess applications must be fully disclosed in the rights issue announcement, listing document and any circular; and
        (b) ..."

        ANALYSIS

        8. An issuer is required to treat its shareholders fairly and equally. In the case of a rights issue, Rule 7.21(1)(a) requires that if there is an arrangement to dispose of any excess rights shares through excess application forms, the directors must allocate the excess rights on a fair basis. If the issuer has identified any problems which may indicate a possible abuse of the mechanism for allocating the excess rights shares, it must look into the problems and take appropriate steps to avoid the abuse and to ensure fair treatment of shareholders. Rule 7.21(3)(a) also requires the issuer to fully disclose the intended basis of allocation to ensure that sufficient information is provided to shareholders to make an informed decision before they apply for the rights shares.
        9. Here Company A had disclosed the intended basis of allocation of excess rights shares in its announcement and listing document, including that preference will be given to Top-up Applications where it appears to the directors that the applications are not made with the intention to abuse such mechanism. The Exchange noted the special circumstances of this case and was satisfied that Company A had taken reasonable steps to ensure the excess shares were allocated to its shareholders on a fair basis. It considered the allocation was made consistent with the principles disclosed in the company's documents.

        CONCLUSION

        10. The Exchange considered that Company A's arrangements to dispose of the excess rights shares complied with Rules 7.21(1)(a) and 7.21(3)(a).

      • LD69-2013

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        HKEx LISTING DECISION
        HKEx-LD69-2013 (published in May 2013)

        Parties Company A — a Main Board issuer

        Company B — another Main Board issuer and a non-wholly owned subsidiary of Company A
        Issue Whether the Exchange would waive the circular requirement for a major transaction of Company A
        Listing Rules Main Board Rule 14.38A
        Decision The Exchange waived the requirement

        FACTS

        1. Company A recently announced a disposal of its interests in Company B (the Disposal). The Disposal did not require shareholders' approval, and would be completed when the parties obtained the necessary regulatory approvals. Upon completion, Company B would cease to be a subsidiary of Company A.
        2. Company B now proposed to acquire a target company (the Acquisition) from certain independent third parties, which would be a very substantial acquisition for Company B. It would also be a major transaction for Company A as Company B was still a subsidiary of Company A.
        3. Company A submitted that the Disposal and the Acquisition were separate transactions. Completion of the Disposal was expected to take place before Company B issued its circular and the notice of general meeting for the approval of the Acquisition.
        4. Company A requested a waiver from the circular requirement for the Acquisition because:
        •   Company B would no longer be Company A's subsidiary upon completion of the Disposal. Information about the Acquisition and the target company would be irrelevant to Company A and its shareholders.
        •   Company A would not convene a general meeting for the approval of the Acquisition as its parent company would provide a written approval of the transaction according to Rule 14.44. The circular, if required, would be issued to Company A's shareholders for information only.

        APPLICABLE LISTING RULE

        5. Rule 14.38A requires that:-
        "... a listed issuer which has entered into a major transaction must send a circular to its shareholders and the Exchange and arrange for its publication in accordance with the provisions of Chapter 2 of the Exchange Listing Rules."

        ANALYSIS

        6. Under Chapter 14, an issuer proposing a material transaction must issue a circular containing all information that is necessary for its shareholders to make an informed assessment of the assets to be acquired or disposed of and the impact of the transaction on the issuer.
        7. Having considered the circumstances of this case, the Exchange agreed that it would be unduly burdensome to require Company A to issue a circular for the Acquisition as required under the Rules if at that time Company B was no longer a subsidiary of Company A.

        CONCLUSION

        8. The Exchange agreed to grant the waiver to Company A on the basis that the Disposal would be completed before Company B issued its circular for the Acquisition.

      • LD68-2013

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        HKEx LISTING DECISION
        HKEx-LD68-2013 (published in May 2013)

        Summary
        Parties Company A — a Main Board listed issuer

        Vendors — third parties independent from Company A
        Issue Whether the Exchange would waive certain specific disclosure requirements for the announcement of a discloseable transaction
        Listing Rules Main Board Rules 14.58(2), 14.60(1), 14.60(2)
        Decision The Exchange waived the requirements

        FACTS

        1. Company A was principally engaged in hotel investment and operation. It intended to acquire a building situated in Hong Kong (the Target Property) for redevelopment into a hotel property. The Target Property comprised a number of residential and commercial units owned by various Vendors.
        2. Company A submitted that it had entered into provisional sale and purchase agreements with some of the Vendors for acquiring their units in the Target Property (the Acquisitions), which in aggregate constituted a discloseable transaction.
        3. Rules 14.58(2), 14.60(1), 14.60(2) requires an announcement for a notifiable transaction to contain, among other things, a description of the principal business activities of the counterparty if it is a company or entity, the general nature of the transaction, and brief details of the assets being acquired including the name of any company or business or the actual assets or properties where relevant.
        4. Company A applied for a waiver from the above Rules so that it would not be required to disclose the following information (the Relevant Information) in its announcement for the Acquisitions:
        •   the principal business activities of the Vendors which are companies;
        •   the name and address of the Target Property and the units subject to the Acquisitions;
        •   the conditions precedents for completion of the Acquisitions.
        5. It proposed to make the following alternative disclosure in the announcement:
        •   the Vendors are individuals and companies which are independent of Company A and its connected persons;
        •   the district where the Target Property is located and the gross area of the units it proposed to acquire; and
        •   a statement that completion of the Acquisitions are subject to the satisfaction of a number of conditions.
        6. Company A submitted that the terms of each Acquisition were determined after arm's length negotiation between Company A and the Vendor. As it was uncertain whether the Acquisitions could proceed to completion and Company A was still negotiating with other Vendors for acquiring the remaining units in the Target Property, the Relevant Information was commercially sensitive. Disclosure of the information at this stage would be prejudicial to the interests of Company A and would affect the on-going negotiations with other Vendors.
        7. Company A considered that with the alternative disclosure, the announcement would provide sufficient information for investors to appraise the Acquisitions. It would also publish a further announcement to disclose the Relevant Information upon completion of the Acquisitions.

        APPLICABLE LISTING RULES

        8. Rule 14.58 provides that:

        "The announcement for a share transaction, discloseable transaction, major transaction, very substantial disposal, very substantial acquisition or reverse takeover must contain at least the following information:
        (1) ...
        (2) a description of the principal business activities carried on by the listed issuer and a general description of the principal business activities of the counterparty, if the counterparty is a company or entity; ..."
        9. Rule 14.60 provides that:

        "In addition to the information set out in rule 14.58, the announcement for a discloseable transaction, major transaction, very substantial disposal, very substantial acquisition or reverse takeover must contain at least brief details of the following:
        (1) the general nature of the transaction ...
        (2) brief details of the asset(s) being acquired or disposed of, including the name of any company or business or the actual assets or properties where relevant ..."

        ANALYSIS

        10. Chapter 14 governs an issuer's transactions, principally acquisitions and disposals having material impacts on its financial position. Depending on the size of the transaction, the Rules require the issuer to disclose the terms of the transaction and/or obtain shareholder approval.
        11. When deciding whether to grant a waiver, the Exchange will take into account the circumstances and reasons outlined in the waiver application and all other relevant information supplied by the issuer.
        12. The Exchange considered that concerns about commercial sensitivity of the details of a transaction should not override the disclosure obligations of the issuer where the information was material to investors. When assessing Company A's waiver application, the Exchange took into account the following factors:
        a. The Acquisitions constituted a discloseable transaction only and was not significant to Company A.
        b. The alternative disclosure would allow investors to understand the nature of the Acquisitions. The waiver would not result in an omission of material information in the initial announcement for the Acquisitions.
        c. Disclosure of the Relevant Information at this stage might be prejudicial to the interests of Company A.

        CONCLUSION

        13. The Exchange granted the waiver to Company A.

      • LD67-2013

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        HKEx LISTING DECISION
        HKEx-LD67-2013 (published in May 2013)

        Summary
        Parties Company A — a Main Board listed issuer

        The Borrower — a company independent from Company A
        Issue Whether the Exchange would waive the requirements for disclosing certain information relating to a loan provided by Company A to the Borrower
        Listing Rules Main Board Rules 13.13, 13.15, 14.58
        Decision The Exchange waived the requirements

        FACTS

        1. Company A was a financing service provider. It operated a pawn loan business in the Mainland and a money lending business in Hong Kong.
        2. It proposed to provide a secured entrusted loan to the Borrower (the "Loan Transaction") on normal commercial terms. The Loan Transaction was a discloseable transaction for Company A under Chapter 14, and an advance to the Borrower subject to the disclosure requirement under Rule 13.13.
        3. Under Rules 14.58(4) and (8), the announcement for a notifiable transaction must disclose the aggregate value of the consideration and the benefits which are expected to accrue to the issuer as a result of the transaction. In the case of an advance to an entity Rule 13.15 requires the issuer to disclose the identity of the debtor group and the interest rate.
        4. Company A applied for a waiver from disclosing the identity of the Borrower, the interest rate and the amount of interest and service fee receivable from the Borrower under the Loan Transaction. It submitted the following reasons:
        •   Provision of financing service was the principal business of Company A. Disclosing the actual interest rates and service fees for its loan transactions with customers might undermine its competitiveness in the market.
        •   Company A's customers would be unwilling to allow it to disclose their identities in public documents as it might create unnecessary negative impact on their business operations.
        •   It would be unduly burdensome and impractical for Company A to strictly comply with the disclosure requirement.
        5. Company A proposed to provide the following alternative disclosure in the announcement:
        •   the Borrower's principal activity, its business relationship with Company A, and any default in the past;
        •   the range of interest rates and service fees payable by the Borrower for the Loan Transaction;
        •   details of the collateral and other terms of the Loan Transaction; and
        •   Company As assessment of the credit risk relating to the Loan Transaction.

        APPLICABLE LISTING RULES

        6. Main Board Rule 13.13 states that:
        "Where the relevant advance to an entity exceeds 8% under the assets ratio defined under rule 14.07(1), the issuer must announce the information in rule 13.15 as soon as reasonably practicable. For the avoidance of doubt, an advance to a subsidiary of the issuer will not be regarded as an advance to an entity."
        7. Main Board Rule 13.15 states that:
        "Under rule 13.13 or 13.14, issuers must announce details of the relevant advance to an entity, including details of the balances, the nature of events or transactions giving rise to the amounts, the identity of the debtor group, interest rate, repayment terms and collateral."
        8. Main Board Rule 14.58 states that
        "The announcement for a share transaction, discloseable transaction, major transaction, very substantial disposal, very substantial acquisition or reverse takeover must contain at least the following information:-
        ...
        (4) the aggregate value of the consideration, how it is being or is to be satisfied and details of the terms of any arrangements for payment on a deferred basis. If the consideration includes securities for which listing will be sought, the listed issuer must also include amounts and details of the securities being issued;
        ...
        (8) the reasons for entering into the transaction, the benefits which are expected to accrue to the listed issuer as a result of the transaction, and a statement that the directors believe that the terms of the transaction are fair and reasonable and in the interests of the shareholders as a whole; and
        ..."

        ANALYSIS

        9. Chapter 14 governs an issuer's transactions having material impacts on its financial position. It seeks to ensure that shareholders are informed of these transactions and, if they are material, have an opportunity to vote on them. Rules 13.13 to 13.15A require an issuer to make proper disclosure to allow investors to assess the risks and exposure of its material advances to other entities.
        10. When deciding whether to grant a waiver, the Exchange will take into account the circumstances and reasons outlined in the waiver application and all other relevant information supplied by the issuer.
        11. In this case, the Exchange noted the practical difficulties which Company A might encounter if it was required to strictly comply with the specific disclosure requirements. When assessing the waiver application, the Exchange considered the following:
        (i) The Loan Transaction was a discloseable transaction only and was not significant to Company A. If the Loan Transaction constituted a major transaction, Company A should make full disclosure of the transaction and comply with the shareholders' approval requirement.
        (ii) The Loan Transaction was collaterised, and there would be meaningful alternative disclosure to allow investors to assess the creditworthiness of the Borrower and the risks and exposure of the Loan Transaction. If the Loan Transaction was unsecured, Company A would need to produce a satisfactory credit agency report on the Borrower to the Exchange and disclose the Borrower's credit rating in the announcement.

        DECISION

        12. The Exchange granted the waiver to Company A.

      • LD66-2013

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        HKEx LISTING DECISION
        HKEx-LD66-2013 (published in May 2013)

        Summary
        Party Company A — a Main Board listed issuer

        The Vendor — an independent third party
        Issue Whether the Exchange would waive the requirement for Company A's circular to include a 3-year profit and loss statement for the property to be acquired from the Vendor
        Listing Rules Main Board Rule 14.67(6)(b)(i)
        Decision The Exchange waived the requirement

        FACTS

        1. Company A proposed to acquire from the Vendor a commercial building in Hong Kong (the Property) for investment purposes. The acquisition would be a major transaction for Company A.
        2. Before the proposed transaction, the Vendor had leased the units in the Property to third parties for rental income. Under Rule 14.67(6)(b)(i), as the Property was a revenue-generating asset with an identifiable income stream, Company A's circular for the acquisition would need to include a profit and loss statement for the Property's identifiable net income stream for the 3 preceding financial years, and the statement would need to be reviewed by the auditors or reporting accountants.
        3. Company A applied for a waiver from Rule 14.67(6)(b)(i) because:
        (a) Despite Company A's request, the Vendor refused to provide the underlying books and records of the Property to Company A, except the subsisting tenancy agreements for various units in the Property (the Tenancy Agreements) and some information on the expenses related to the Property. Company A was unable to properly compile the profit and loss statement for the Property's net income stream in the last 3 years given the limited information available from the Vendor.
        (b) Company A arrived at the consideration for the acquisition after arm's length negotiation with the Vendor taking into account the market value of the Property and other nearby properties. The circular would include a valuation report on the Property prepared according to the Rule requirements.
        (c) It would make alternative disclosures in the circular to enable shareholders to assess the transaction:
        (i) a summary of the Tenancy Agreements including the monthly rental income;
        (ii) the gross rental income for the Property for the period from the commencement of the earliest Tenancy Agreement to the latest financial year end date; and
        (iii) an estimate of the monthly expenses for the Property payable by the landlord based on the terms of the Tenancy Agreement and the experience of Company A's management in the property industry.
        (d) Its directors were of the view that omission of a profit and loss statement for the Property's net income stream in the past would not render the circular materially incomplete or misleading or deceptive.

        APPLICABLE LISTING RULES

        4. Rule 14.67 requires that:
        "... a circular issued in relation to an acquisition constituting a major transaction must contain:
        ...
        (6)(b) on an acquisition of any revenue-generating assets (other than a business or company) with an identifiable income stream or assets valuation:
        (i) a profit and loss statement and valuation (where available) for the 3 preceding financial years (or less, where the asset has been held by the vendor for a shorter period) on the identifiable net income stream and valuation in relation to such assets which must be reviewed by the auditors or reporting accountants to ensure that such information has been properly compiled and derived from the underlying books and records. The financial information on which the profit and loss statement is based must relate to a financial period ended 6 months or less before the circular is issued. The financial information on the assets being acquired as contained in the circular must be prepared using accounting policies which should be materially consistent with those of the listed issuer; ..."

        ANALYSIS

        5. Under the Listing Rules an issuer must ensure that the information in its circular for a notifiable transaction is accurate and complete in all material respects and not be misleading or deceptive. The circular must contain all information necessary to allow shareholders to make a properly informed decision on how to vote on a transaction.
        6. In this case, Company A had no access to the accounting records and supporting documents to properly compile a profit and loss statement for the Property's net income stream as required. The Exchange considered that Company A had taken reasonable steps to provide alternative information to its shareholders for assessing the impact of the transaction on Company A, and the waiver would not result in an omission of material information in the circular.

        CONCLUSION

        7. The Exchange granted the waiver to Company A.

      • LD65-2013

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        HKEx LISTING DECISION
        HKEx-LD65-2013 (published in May 2013)

        Party Company A — a Main Board issuer

        The Target — a company listed on the Toronto Stock Exchange and the New York Stock Exchange
        Issue Whether the Exchange would waive the requirements for Company A to produce a competent person's report (CPR) and a valuation report (VR) for its proposed acquisition of the Target
        Listing Rules Main Board Rules 18.09(2), 18.09(3)
        Decision The Exchange waived the requirements

        FACTS

        1. The Target was a global oil and gas exploration and development company.
        2. Under the agreement between Company A and the Target, Company A would acquire all the shares in the Target through a plan of arrangement subject to the court's approval. Upon completion, the Target would become a subsidiary of Company A.
        3. The acquisition was a major transaction for Company A. Under Rule 18.09(2) and 18.09(3), Company A's circular must include a CPR on the Target's oil and gas reserves and a VR on its petroleum assets. Company A sought a waiver from these requirements for the following reasons:
        (a) It would be unduly burdensome to produce a CPR on the Target's oil and gas reserves because:
        •   The Target was an overseas listed company. It had regularly published information on its oil and gas reserves in accordance with the overseas regulatory requirements.
        •   The Target's petroleum assets were extensive and located in various countries around the world. Substantial time and costs would be required to prepare the CPR.
        •   Company A had obtained a written approval of the acquisition from its parent company according to Rule 14.44. The circular would be issued to its shareholders for information only.
        (b) Alternatively, the circular would include information on the Target's reserves estimates contained in its latest annual filings with the overseas stock exchanges (the Reserves Information). Company A believed that this would provide sufficient information for its shareholders' assessment because:
        •   The Reserves Information was prepared and reported on by technical experts with relevant qualifications and experience.
        •   The Target had adopted strict internal procedures for preparing the Reserves Information to ensure compliance with the overseas regulatory requirements. The responsible officer, who prepared the information, possessed relevant qualifications and had extensive experience in the oil and gas industry. He was able to satisfy the eligibility requirements for a Competent Person under Chapter 18 of the Rules.
        •   Further, over 90% of the reserves estimates had been reported on by independent reserves evaluators with international names and reputation.
        •   The circular would include (i) the qualifications and experience of the responsible officer, and the primary technical persons of the independent reserves evaluators; and (ii) the opinion letters from the independent reserves evaluators.
        •   The Reserves Information was disclosed under NI 51-1011 which was a well recognised international standard adopted by international oil and gas companies.
        •   Taking into account the Target's disclosure since the last annual filings and its recent review on the reserves estimates, Company A confirmed that there had been no material change to the Reserves Information.
        (c) It would also be unduly burdensome to produce a VR on the Target's petroleum assets because:
        •   Company A was to acquire the Target's shares which were listed and traded on two overseas stock exchanges. It believed that the share trading price and market capitalisation of the Target would serve as a reasonable reference in assessing the Target's market value.
        •   The consideration for the acquisition was determined with reference to the market price of the Target's shares and Company A's view on the value of the Target's business and assets. The consideration was not based on an asset valuation approach.

        APPLICABLE LISTING RULES

        4. Rule 18.09 states that
        "A mineral company proposing to acquire or dispose of assets which are solely or mainly Mineral or Petroleum Assets as part of a Relevant Notifiable Transaction must:-
        (1) comply with Chapter 14 and Chapter 14A, if relevant;
        (2) produce a Competent Person's Report, which must form part of the relevant circular, on the Resources and/or Reserves being acquired or dispose of as part of the Relevant Notifiable Transaction;

        Note: ...
        (3) in the case of a major (or above) acquisition, produce a Valuation Report, which must form part of the relevant circular, on the Mineral or Petroleum Assets being acquired as part of the Relevant Notifiable Transaction; and...
        (4) ....
        Note: ..."
        5. Rule 18.10 states that:
        "A listed issuer proposing to acquire assets which are solely or mainly Mineral or Petroleum Assets as part of a Relevant Notifiable Transaction must comply with rule 18.09."

        ANALYSIS

        6. Under the Listing Rules, an issuer must ensure that the information in its circular for a notifiable transaction is accurate and complete in all material respects and not misleading or deceptive. The circular must contain all information necessary to allow the issuer's shareholders to make a proper assessment of the transaction and if voting is required, how to vote.
        7. Where the transaction involves an acquisition or disposal of material mineral or petroleum assets, the issuer must comply with the additional disclosure requirements under Chapter 18.
        8. When assessing Company A's waiver application, the Exchange noted that:
        (a) the Target was listed on recognised overseas exchanges, and the Reserves Information was subject to supervision by regulatory authorities;
        (b) the Reserves Information was prepared and reported on by technical experts with relevant qualifications and experience;
        (c) NI 51-101 was an acceptable reporting standard for the Target's reserves estimates (see also HKEx-LD51-2013);
        (d) Company A would provide a no material change statement for the Reserve Information in the circular for the acquisition.
        9. The Exchange agreed that compliance with the CPR requirements would be unduly burdensome in this case. The proposed alternative disclosure would provide relevant and reliable information on the Target's oil and gas reserves comparable to that required under Chapter 18 of the Rules.
        10. The Exchange also noted that the Target's share price and market capitalisation would represent its fair value, and the consideration for the acquisition was not based on a valuation of the Target's assets. Granting a waiver from the VR requirement would be unlikely to result in undue risks to the shareholders.

        CONCLUSION

        11. The Exchange granted the waiver to Company A.

        1 National Instrument 51-101 "Standards of Disclosures for Oil and Gas Activities", which was implemented in September 2003 by the Canadian Securities Administrators, provides comprehensive rules for reserves disclosure by relevant oil and gas companies in Canada. It requires oil and gas companies to report annually on their reserves and oil and gas activities, and where a material change occurs in a company's reserves after an annual filing is made, a company is required to disclose the changes to their reserves to the Canadian Securities Administrators and the public before the next required annual filing.

      • LD63-2013

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        HKEx LISTING DECISION
        HKEx-LD63-2013 (published in April 2013) (Updated in July 2014)

        Summary
        Parties Company A — a Main Board listed issuer

        Mr. X — an independent non-executive director of Company A

        Company B — a company indirectly owned as to 30% by Mr. X
        Issue Whether the Exchange would waive the annual review and reporting requirements for a continuing connected transaction between Company A and Company B
        Listing Rules Main Board Rule 14A.103
        Decision The Exchange waived the requirements

        FACTS

        1. Company A proposed to enter into an agreement with Company B to supply certain goods to Company B for a three-year period (the Transaction). As Company B was an associate of Mr. X, the Transaction was a continuing connected transaction for Company A and subject to the announcement and annual review and reporting requirements.
        2. Company A applied for a waiver from the annual review and reporting requirements for the Transaction under Rule 14A.103 because:
        •   the Transaction was connected only because of Mr. X' s interests in Company B;
        •   Mr. X was only an independent non-executive director of Company A. He did not control Company A and his principal business interests were not related to Company A;
        •   the Transaction would be conducted on normal commercial terms and in the ordinary and usual course of business of both Company A and Company B;
        •   the size of the Transaction was not significant to Company A with the highest percentage ratio slightly over 0.1%. It would be unduly burdensome to require the independent non-executive directors and the auditors to review the immaterial Transaction annually.
        3. It would disclose the Transaction and the waiver, if granted, by way of an announcement.

        APPLICABLE LISTING RULE

        4. Rule 14A.103 states that:
        The Exchange may waive all or some of the connected transaction requirements for a connected transaction with a non-executive director of the listed issuer or its subsidiaries if:
        (1) a transaction is connected only because of the interest of a nonexecutive director; and
        (2) the director does not control the listed issuer's group, and his principal business interest is not the listed issuer's group.

        Where a waiver is granted from the shareholders' approval requirement under this rule, the Exchange may require the listed issuer's auditor or an acceptable financial adviser to give the opinion that the transaction is fair and reasonable to the shareholders as a whole. "

        ANALYSIS

        5. The connected transaction Rules seek to safeguard against connected persons taking advantage of their positions to the detriment of the issuer's minority shareholders.
        6. To reduce issuers' compliance burden, exemptions and waivers from all or some of the connected transaction requirements are available for transactions that are immaterial or specific circumstances where the risk of abuse by connected persons is low.
        7. Here Mr. X was only an independent non-executive director and the Transaction met all waiver conditions set out in Rule 14A.103. It was unlikely that Mr. X could exert undue influence over Company A to obtain a benefit through the Transaction. In light of the remote relationship and the immaterial size of the Transaction, the Exchange agreed to waive the annual review and reporting requirements.

        CONCLUSION

        8. The Exchange granted the waiver to Company A.

      • LD62-2013

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        HKEx LISTING DECISION
        HKEx-LD62-2013 (published in April 2013)

        Parties Company A — a Main Board issuer

        The Target — a company to be acquired by Company A under a very substantial acquisition
        Issue Whether the Proposed Amendment was a material change to the terms of the Acquisition agreement
        Listing Rules Main Board Rules 14.36, 14.49
        Decision The Proposed Amendment was a material change to the terms of the Acquisition agreement, and should be made conditional on shareholders' approval

        FACTS

        Background

        1. Company A entered into an agreement to acquire the Target from a third party vendor (the Acquisition). It would settle the consideration by cash and by issuing consideration shares, convertible bonds and promissory notes to the vendor. The Acquisition was a very substantial acquisition.
        2. While the Target had a limited operating history, it had recently developed its own energy saving system for business operations. Company A considered that the Acquisition would allow it to diversify into a new line of business with significant growth potential.
        3. Company A disclosed in its circular details of the business plans and working capital requirements for the Target in the coming years. It also disclosed its proposal to conduct a placing of new shares and the minimum dollar amount to be raised (the Placing). About 90% of the proceeds would be used to finance the cash consideration for the Acquisition and part of the Target's working capital requirements. Under the Acquisition agreement, completion of the Acquisition was conditional on the completion of the Placing (the Condition). The pro forma financial information on the enlarged group reflected the impact of the Acquisition and the Placing.
        4. Company A's shareholders approved the Acquisition.
        5. Company A then entered into agreements with placing agents for the Placing. While the Placing was approved by the shareholders, it was not completed due to adverse market conditions.

        Proposed amendment to the Acquisition agreement

        6. Company A proposed to postpone the Placing after completion of the Acquisition in light of the deteriorating market conditions. It would sign a supplemental agreement with the vendor to waive the Condition (the Proposed Amendment).
        7. Company A considered that the Proposed Amendment would be in the interests of the company and its shareholders as a whole. It would not change the consideration, the asset to be acquired or other key terms of the Acquisition, and should not be regarded as a material change to the terms of the Acquisition agreement.

        APPLICABLE LISTING RULES

        8. Rule 14.36 states that
        "Where a transaction previously announced pursuant to this Chapter is terminated or there is any material variation of 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 published in accordance with rule 2.07C. This requirement is without prejudice to the generality of any other provisions of the Exchange Listing Rules and the listed issuer must, where applicable, also comply with such provisions."
        9. Rule 14.49 state that
        "A very substantial disposal and a very substantial acquisition must be made conditional on approval by shareholders in general meeting. ..."

        ANALYSIS

        10. Rule 14.36 ensures that shareholders are notified by the issuer of any material change to the terms of its notifiable transaction. Under Rules 14.36 and 14.49, if the transaction is classified as a major (or above) transaction, the material change should be subject to shareholders' approval.
        11. In this case, the Exchange considered that the Proposed Amendment was a material change to the terms of the Acquisition agreement because:
        •   The shareholders were informed that the Acquisition was conditional on the completion of the Placing, and the cash consideration and a substantial part of the working capital required for the Target's new business would be funded by the Placing. The circular also disclosed how the Acquisition together with the Placing would affect the financial position of Company A. The financing arrangement was material information for the shareholders to decide on how to vote on the Acquisition.
        •   The Proposed Amendment would remove the Condition so that Company A could complete the Acquisition without the Placing. This would change the financing arrangement for the Acquisition previously presented in the circular. Shareholders should have the right to reconsider whether it is in the interests of Company A and its shareholders as a whole to complete the Acquisition before raising sufficient funds to finance the Acquisition.

        CONCLUSION

        12. The Exchange considered that the Proposed Amendment was a material change to the terms of the Acquisition, and should be made conditional on shareholders' approval at general meeting.

      • LD61-2013

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        HKEx LISTING DECISION
        HKEx-LD61-2013 (Published in April 2013) (Updated in July 2014)

        Summary
        Parties Company A — a Main Board listed issuer

        JCEs — entities under the joint control of Company A and other venturers
        Issue Whether the Exchange would accept Company A's proposed alternative revenue ratio for classifying transactions under Chapters 14 and 14A
        Listing Rules Main Board Rules 14.20, 14A.80
        Decision The Exchange accepted the proposed alternative revenue ratio

        FACTS

        1. Company A manufactured and sold automobiles in the Mainland through various JCEs. At the time of new listing of Company A, the Exchange imposed certain post-listing conditions on it with a view to regulating the JCEs (including new JCEs established after listing) in a manner consistent with regulating subsidiaries under the Rules (see LD106-1 for guidance on the Exchange's framework to deal with issuers operating under a jointly controlled entity structure).
        2. In the last financial year, Company A changed its accounting policy and accounted for the JCEs using the equity method of accounting. Before the change, Company A had recognized its investments in the JCEs using the proportionate consolidation method (that is, the group combined its share of the JCEs' individual income and expenses, assets and liabilities and cash flows on a line-by-line basis).
        3. As a result of the change in accounting policy, the revenue shown in Company A's latest published consolidated accounts ("Published Revenue") no longer included its share of the JCEs' revenue.
        4. Company A submitted that as it operated its business under a jointly controlled entity structure, using the Published Revenue as the denominator for calculating the revenue ratio would produce anomalous results and would not properly reflect the materiality of a transaction to Company A.
        5. It therefore proposed to adopt an alternative revenue ratio for classifying its transactions where the denominator would be the sum of the Published Revenue and its share of the JCEs' revenue, with adjustments to eliminate the revenue from transactions between the JCEs and Company A (or its subsidiaries) ("Alternate Revenue"). This would assimilate the group's revenue as if the JCEs were still accounted for using the proportionate consolidation method. The figures used to calculate the Alternative Revenue would be disclosed in Company A's published accounts.

        APPLICABLE LISTING RULES

        6. Main Board Rule 14.04(9) states that:
        "percentage ratios" means the percentage ratios set out in rule 14.07, and "assets ratio", "profits ratio", "revenue ratio", "consideration ratio" and "equity capital ratio" shall bear the respective meanings set out in rule 14.07;"
        7. Main Board Rule 14.07(3) states that:
        "Revenue ratio — the revenue attributable to the assets which are the subject of the transaction divided by the revenue of the listed issuer (see in particular rules 14.14 and 14.17);"
        8. Main Board Rule 14.14 states that:
        "Revenue" normally means revenue arising from the principal activities of a company and does not include those items of revenue and gains that arise incidentally. In the case of any acquisition or disposal of assets (other than equity capital) through a non wholly owned subsidiary, the revenue attributable to the assets being acquired or realised (and not the listed issuer's proportionate interest in such revenue) will form the numerator for the purpose of the revenue ratio (See also rule 14.17)."
        9. Main Board Rule 14.17 states that:
        "The profits (see rule 14.13) and revenue (see rule 14.14) figures to be used by a listed issuer for the basis of the profits ratio and revenue ratio must be the figures shown in its accounts..."
        10. Main Board Rule 14.20 states that:
        "The Exchange may, where any of the calculations of the percentage ratios produces an anomalous result or is inappropriate to the sphere of activity of the listed issuer, disregard the calculation and substitute other relevant indicators of size, including industry specific tests. The listed issuer must provide alternative tests which it considers appropriate to the Exchange for consideration."
        11. Main Board Rule 14A.80 provides that:
        "If any percentage ratio produces an anomalous result or is inappropriate to the activity of the listed issuer, the Exchange may disregard the ratio and consider alternative test(s) provided by the listed issuer. The listed issuer must seek prior consent of the Exchange if it wishes to apply this rule."
        12. Main Board Rule 14A.06(30) states that:
        "percentage ratios" has the meaning set out in rule 14.04(9);"

        ANALYSIS

        13. Rule 14.07 sets out five percentage ratios for assessing the impact of a transaction on a listed issuer. They form the basis for classifying the transaction which determines whether the transaction is subject to any disclosure and/or shareholders' approval requirements under Chapter 14 and 14A of the Listing Rules.
        14. The revenue ratio measures the materiality of a transaction by reference to the listed issuer's latest revenue figure as shown in the annual accounts.
        15. Here the substantial decrease in revenue as shown in Company A's consolidated accounts was due to the change in accounting policy. There was no change in its principal business or operating model.
        16. Company A's business was mainly carried out under a jointly control entity structure, and the JCEs were treated and regulated as if they were Company A's subsidiaries for the purpose of the Rules. When assessing the materiality of a transaction using the revenue ratio, it would be reasonable to take into account the group's share of the JCEs' revenue.

        CONCLUSION

        17. The Exchange accepted Company A's proposal to use the Alternative Revenue in place of the Published Revenue when calculating the revenue ratio.

      • LD60-2013

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        HKEx LISTING DECISION
        HKEx-LD60-2013 (Published in April 2013) (Updated in July 2014)

        Summary
        Parties Company A — a Main Board listed issuer

        The Target — a subsidiary of Company A

        Company B — a substantial shareholder of certain subsidiaries of the Target
        Issue Whether the Exchange would accept Company A's proposed alternative revenue ratio for classifying certain continuing connected transactions with Company B
        Listing Rules Main Board Rule 14A.80
        Decision The Exchange accepted the proposed alternative revenue ratio

        FACTS

        1. Company A recently completed the acquisition of the Target (the Acquisition) and accounted for it as a subsidiary. As Company B was the substantial shareholder of certain subsidiaries of the Target, it became a connected person of Company A.
        2. After the Acquisition, the Target and its subsidiaries (the Target Group) would continue to purchase certain raw materials from Company B (the Procurement Transactions). Based on the annual cap for these continuing connected transactions, the revenue ratio was about 11% while the asset ratio and consideration ratio were less than 4%.
        3. Company A submitted that its group had been substantially enlarged as a result of the Acquisition. However, the revenue ratio was calculated using the revenue shown in its latest published audited consolidated accounts and did not take into account the Target's results. This contrasted with the asset ratio where Company A could adjust its total assets to include the value of the Acquisition based on the information published according to the Rules.
        4. Company A considered that the revenue ratio was anomalous. It proposed an alternative revenue ratio using the enlarged group's revenue shown in the pro forma consolidated income statement published in the circular for the Acquisition (the Circular) under Chapter 14 of the Rules. The pro forma information was derived from Company A's latest published audited consolidated accounts and the accountants' report on the Target Group, with pro forma adjustments relating to the Acquisition.
        5. Based on the alternative revenue ratio of about 2% and the other size test calculations, the Procurement Transactions were exempt from the independent shareholder approval requirement under the de minimis exemption.

        APPLICABLE LISTING RULES

        6. Rule 14.07(3) provides the calculation of a revenue ratio as follows:
        the revenue attributable to the assets which are the subject of the transaction divided by the revenue of the listed issuer (see in particular rule 14.14 and 14.17);
        7. Rule 14.20 provides that:
        the Exchange may, where any of the calculations of the percentage ratios produces an anomalous result or is inappropriate to the sphere of activity of the listed issuer, disregard the calculation and substitute other relevant indicators of size, including industry specific tests. The listed issuer must provide alternative tests which it considers appropriate to the Exchange for consideration.
        8. Rule 14A.80 provides that:
        if any percentage ratio produces an anomalous result or is inappropriate to the activity of the listed issuer, the Exchange may disregard the ratio and consider alternative test(s) provided by the listed issuer. The listed issuer must seek prior consent of the Exchange if it wishes to apply this rule.

        ANALYSIS

        9. Rule 14.07 sets out five percentage ratios for assessing the impact of a transaction on an issuer. They form the basis for classifying the transaction which determines whether the transaction is subject to any disclosure, reporting and/or shareholders' approval requirements under Chapter 14 or 14A.
        10. The revenue ratio measures the materiality of a transaction by reference to the issuer's latest revenue figure as shown in its annual accounts.
        11. In this case, the Exchange noted that:
        •   The Procurement Transactions were conducted by the Target Group in the ordinary and usual course of business. They constituted continuing connected transactions for Company A as a result of the Acquisition. It would be reasonable to take into account the Target Group's results when assessing the materiality of the Procurement Transactions.
        •   The pro forma financial information of the enlarged group was prepared in respect of the most recently completed financial year and published in the Circular according to the Rules. The alternative revenue ratio calculated using the revenue shown in the pro forma income statement would be acceptable.

        CONCLUSION

        12. The Exchange accepted Company A's proposal to disregard the revenue ratio and to use the alternative size test for classifying the Procurement Transactions.

      • LD59-2013

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        HKEx LISTING DECISION
        HKEx-LD59-2013 (published in April 2013)

        Summary
        Parties Company A — a Main Board listed issuer

        Mr. X — Company A's executive director and substantial shareholder
        Issue Whether the Exchange would waive Rule 14.06(6)(a) so that Company A's proposed acquisition of certain assets from Mr. X would be classified as a very substantial acquisition rather than a reverse takeover
        Listing Rules Main Board Rule 14.06(6)(a)
        Decision The Exchange granted the waiver to Company A

        FACTS

        1. Company A was principally engaged in the development and sale of electronic gaming systems.
        2. It proposed to acquire from Mr. X a number of patents in an overseas market (the Patents) in relation to certain technological know-how applied in a computerized betting terminal system (the System). The consideration for the acquisition would include cash and consideration shares to be issued by Company A to Mr. X.
        3. The acquisition was a very substantial acquisition based on the asset ratio of about 150% and the consideration ratio of about 300%. It was also a connected transaction as Mr. X was a director and substantial shareholder of Company A.
        4. Mr. X had been the single largest shareholder of Company A for some years. As he would hold more than 30% of Company A's enlarged issued share capital following the acquisition, he would apply for a whitewash waiver under the Takeovers Code so that no mandatory general offer would need to be made.
        5. As the acquisition was a very substantial acquisition and Mr. X would become a controlling shareholder of Company A as a result of the acquisition, it would be a reverse takeover under Rule 14.06(6)(a).
        6. Company A sought a waiver from Rule 14.06(6)(a) because:
        •   the reason for acquiring the Patents was to expand its existing gaming business to the overseas market. It had engaged in the gaming business for some years and used similar patents for the sale of the System in the local market;
        •   the existing business had a substantive scale of operation and was making profits. The acquisition was not significantly larger than Company A.
        7. Company A submitted that it would enhance the disclosure in its circular for the acquisition to a standard comparable to an IPO prospectus. The circular would also contain details of Company A's due diligence work on the Patents and a valuation report on them.

        APPLICABLE LISTING RULES

        8. Rule 14.06(6) defines a "reverse takeover" as:
        "an acquisition or a series of acquisitions of assets by an issuer which, in the opinion of the Exchange, constitutes, or is part of a transaction or arrangement or series of transactions or arrangements which constitute, an attempt to achieve a listing of the assets to be acquired and a means to circumvent the requirements for new applicants set out in Chapter 8 of the Exchange Listing Rules. A "reverse takeover" normally refers to:
        (a) an acquisition or a series of acquisitions (aggregated under rules 14.22 and 14.23) of assets constituting a very substantial acquisition where there is or which will result in a change in control (as defined in the Takeovers Code) of the listed issuer (other than at the level of its subsidiaries); or
        (b) acquisition(s) of assets from a person or a group of persons or any of his/their associates pursuant to an agreement, arrangement or understanding entered into by the listed issuer within 24 months of such person or group of persons gaining control (as defined in the Takeovers Code) of the listed issuer (other than at the level of its subsidiaries), where such gaining of control had not been regarded as a reverse takeover, which individually or together constitute(s) a very substantial acquisition. ..."

        ANALYSIS

        9. Rule 14.06(6) seeks to prevent circumvention of the new listing requirements. Its introductory paragraph defines "reverse takeover" as an acquisition or a series of acquisitions which represents, in the Exchange's opinion, an attempt to list the assets to be acquired and circumvent the new listing requirements.
        10. In addition, paragraphs (a) and (b) of Rule 14.06(6) refer to two specific forms of reverse takeovers which involve a change in control of the issuer and injection of significant assets into it. They are bright line tests to determine a change in control based on the Takeovers Code and to assess an asset injection based on size tests.
        11. Here the acquisition was a reverse takeover under Rule 14.06(6)(a). When assessing the waiver application, the Exchange was satisfied that the Patents were related to Company A's existing principal business, and would enable an expansion of the business in an overseas market. Circumvention of the new listing requirements was not a material concern in this case.

        CONCLUSION

        12. The Exchange agreed to waive Rule 14.06(6)(a). The acquisition was classified as a very substantial acquisition and connected transaction.

      • LD58-2013

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        HKEx LISTING DECISION
        HKEx-LD58-2013 (published in April 2013)

        Parties Company A — a Main Board issuer under the delisting procedures of Practice Note 17

        Target — a company that Company A proposed to acquire under its resumption proposal

        Vendor — the owner of the Target and an independent third party
        Issue Whether the Exchange would waive Rule 14.06(6)(a) so that Company A's proposed acquisition of the Target would not be classified as a reverse takeover
        Listing Rules Main Board Rule 14.06(6)
        Decision The Exchange refused to waive the Rule

        FACTS

        1. Company A was a long suspended company under the delisting procedures of Practice Note 17. It had ceased most of its business operations and failed to maintain sufficient assets or operations to meet Rule 13.24.
        2. Under its resumption proposal, Company A would acquire the Target from the Vendor. The Target's principal business was similar to that of Company A before its trading suspension.
        3. The acquisition would be a very substantial acquisition based on the size tests. As a result of the issue of consideration shares to the Vendor under the acquisition, the Vendor would hold more than 90% of Company A's issued share capital and become its controlling shareholder. The Vendor intended to place down its shares in Company A before resumption to meet the public float requirement.
        4. As the acquisition was a very substantial acquisition and the Vendor would become a controlling shareholder of Company A, it would be a reverse takeover under Rule 14.06(6)(a).
        5. Company A asked the Exchange not to treat the acquisition as a reverse takeover as it believed that the Target would be able to meet the trading record requirements for new listing applicants under Rule 8.05. It referred to the Listing Decision (LD95-1) where the Exchange did not apply the reverse takeover Rules to an issuer's acquisition of a company that could meet Rule 8.05.

        APPLICABLE LISTING RULES

        6. Rule 14.06(6) defines a "reverse takeover" as:
        "an acquisition or a series of acquisitions of assets by an issuer which, in the opinion of the Exchange, constitutes, or is part of a transaction or arrangement or series of transactions or arrangements which constitute, an attempt to achieve a listing of the assets to be acquired and a means to circumvent the requirements for new applicants set out in Chapter 8 of the Exchange Listing Rules. A "reverse takeover" normally refers to:
        (a) an acquisition or a series of acquisitions (aggregated under rules 14.22 and 14.23) of assets constituting a very substantial acquisition where there is or which will result in a change in control (as defined in the Takeovers Code) of the listed issuer (other than at the level of its subsidiaries); or
        (b) acquisition(s) of assets from a person or a group of persons or any of his/their associates pursuant to an agreement, arrangement or understanding entered into by the listed issuer within 24 months of such person or group of persons gaining control (as defined in the Takeovers Code) of the listed issuer (other than at the level of its subsidiaries), where such gaining of control had not been regarded as a reverse takeover, which individually or together constitute(s) a very substantial acquisition. ... ..."

        ANALYSIS

        7. Rule 14.06(6) seeks to prevent circumvention of the new listing requirements. Its introductory paragraph defines "reverse takeover" as an acquisition or a series of acquisitions which represents, in the Exchange's opinion, an attempt to list the assets to be acquired and circumvent the new listing requirements.
        8. In addition, paragraphs (a) and (b) of Rule 14.06(6) refer to two specific forms of reverse takeovers which involve a change in control of the issuer and injection of significant assets into it. They are bright line tests to determine a change in control based on the Takeovers Code and to assess an asset injection based on size tests.
        9. In this case, the Exchange refused to waive Rule 14.06(6)(a) because:-
        a. The acquisition was a very substantial acquisition which would result in a change in control of Company A. It fell within the bright line tests of Rule 14.06(6)(a).
        b. Company A had ceased operations and was a listed shell. The acquisition was an attempt by the Vendor, the new controlling shareholder of Company A, to achieve a listing of its business (i.e. the Target) by injecting it into Company A.
        c. This case was different from the circumstances in Listing Decision LD95-1 quoted by Company A where there was no asset injection by the investor who also obtained control of the listed issuer concerned.

        CONCLUSION

        10. The acquisition was a reverse takeover under Rule 14.06(6)(a). Company A must submit a new listing application for its resumption proposal.

      • LD57-2013

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        HKEx LISTING DECISION
        HKEx-LD57-2013 (Published in April 2013)

        Parties Company A — a Main Board issuer

        Target — a company which Company A proposed to acquire
        Issue Whether Company A's proposed acquisition of an interest in the Target was a reverse takeover
        Listing Rules Main Board Rule 14.06(6)
        Decision The acquisition was a reverse takeover

        FACTS

        1. Company A proposed to acquire some shares in the Target (the Target Shares) representing 50% of the Target's issued share capital. Upon completion, the Target Shares would be accounted for as an interest in an associated company or an investment in Company A's financial statements.
        2. Company A would pay for the acquisition in cash and by issuing consideration shares and convertible bonds to the vendor. The consideration shares and the conversion shares would in aggregate represent over 1.8 times Company A's existing issued share capital. However, the terms of the convertible bonds did not allow any conversion which would trigger a mandatory general offer under the Takeovers Code.
        3. The Target's principal business was principally engaged in the manufacturing and trading of sanitary ware products, which was different from Company A's principal businesses. Company A submitted that the Target could meet the profit requirement for new listing applicants under Rule 8.05(1).
        4. The acquisition would be a very substantial acquisition based on the size tests. With an asset ratio of about 40 times and a revenue ratio of about 11 times, the Target was significantly larger than Company A.
        5. There was an issue whether the acquisition would be treated as a reverse takeover under Rule 14.06(6).

        APPLICABLE LISTING RULES

        6. Rule 8.05(1) states that:
        "To meet the profit test, a new applicant must 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. ..."
        7. Rule 14.06(6) defines a "reverse takeover" as:
        "an acquisition or a series of acquisitions of assets by an issuer which, in the opinion of the Exchange, constitutes, or is part of a transaction or arrangement or series of transactions or arrangements which constitute, an attempt to achieve a listing of the assets to be acquired and a means to circumvent the requirements for new applicants set out in Chapter 8 of the Exchange Listing Rules. A "reverse takeover" normally refers to:
        (a) an acquisition or a series of acquisitions (aggregated under rules 14.22 and 14.23) of assets constituting a very substantial acquisition where there is or which will result in a change in control (as defined in the Takeovers Code) of the listed issuer (other than at the level of its subsidiaries); or
        (b) acquisition(s) of assets from a person or a group of persons or any of his/their associates pursuant to an agreement, arrangement or understanding entered into by the listed issuer within 24 months of such person or group of persons gaining control (as defined in the Takeovers Code) of the listed issuer (other than at the level of its subsidiaries), where such gaining of control had not been regarded as a reverse takeover, which individually or together constitute(s) a very substantial acquisition. ... ..."
        8. Rule 14.54 states that:
        "The Exchange will treat a listed issuer proposing a reverse takeover as if it were a new listing applicant. The enlarged group or the assets to be acquired must be able to meet the requirements of Rule 8.05 and the enlarged group must be able to meet all the other basic conditions set out in Chapter 8 of the Exchange Listing Rules. ..."

        ANALYSIS

        9. Rule 14.06(6) seeks to prevent circumvention of the new listing requirements. Its introductory paragraph defines "reverse takeover" as an acquisition or a series of acquisitions which represents, in the Exchange's opinion, an attempt to list the assets to be acquired and circumvent the new listing requirements. Rules 14.06(6)(a) and (b) provide bright line tests which apply two specific forms of reverse takeovers. They are not meant to be exhaustive. Therefore, transactions which are in substance backdoor listings but fall outside sub-rules (a) and (b) could still be treated as reverse takeovers. This, in practice, has been applied only to extreme cases (see the Listing Committee Annual Report 2009).
        10. Here Rules 14.06(6)(a) and (b) did not apply because (i) the acquisition would not trigger the change in control test under sub-rule (a); and (ii) the vendor did not gain control of Company A within 24 months before the acquisition would be completed.
        11. When determining whether the acquisition should be classified as a reverse takeover under Rule 14.06(6), the Exchange noted that:
        •   The acquisition would be a very substantial acquisition and, in terms of size, would be significant to Company A. Upon completion, Company A's existing businesses and assets would be relatively immaterial to the enlarged group. The acquisition was a means to achieve the listing of the Target Shares.
        •   Neither the assets to be acquired nor the enlarged group would be able to meet Rule 8.05:
        •   It was Company A's view that the Target could meet Rule 8.05(1). However, as Company A would account for the Target Shares as an interest in an associated company or an investment, the Exchange considered that the Target's trading record should be excluded for the purpose of Rule 8.05(1).
        •   Company A had recorded losses in recent years. The enlarged group (excluding the Target Shares) could not meet Rule 8.05.

        CONCLUSION

        12. The Exchange considered that the acquisition was a transaction intended to list the Target Shares and circumvent the new listing requirements. It was an extreme case and should be classified as a reverse takeover under Rule 14.06(6).

      • LD56-2013

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        HKEx LISTING DECISION
        HKEx-LD56-2013 (Published in March 2013) (Updated in April 2015)

        Parties Company A — a Main Board issuer

        Company B — an investor who agreed to subscribe for new shares and convertible notes to be issued by Company A
        Issue Whether the Exchange would give listing approval for new shares to be issued upon conversion of the convertible notes that could result in Company A's public float falling below the minimum 25% requirement under the Rules
        Listing Rules Main Board Rules 8.08(1)(a), 13.32
        Decision The Exchange gave the approval after Company A took satisfactory measures to ensure compliance with the public float requirement

        FACTS

        1. Company A proposed to issue certain new shares (the Subscription Shares) and convertible notes to Company B under a subscription agreement. The convertible notes would be convertible into new shares of Company A (the Conversion Shares) after the issue date according to the terms of the notes.
        2. The proposed issue was conditional on approval of Company A's shareholders and the Exchange giving listing approval for the Subscription Shares and the Conversion Shares.
        3. Upon completion of the subscription agreement, Company B would become a substantial shareholder of Company A, and the public float of Company A's shares would still meet the 25% requirement. However, based on the shareholding structure of Company A at that time, the public float would fall below 25% if Company B exercised its rights to convert some or all of the convertible notes.
        4. Company A proposed to undertake to the Exchange that it would take appropriate measures to ensure the compliance with the public float requirement at all times. For example, it would consider placing new shares to independent third parties to maintain a 25% public float as a result of any conversion of the convertible notes, or redeeming some of the convertible notes.
        5. Alternatively, Company A proposed to limit the maximum number of Conversion Shares that it might issue to Company B to be 25% of Company A's issued share capital at the time of completion of the subscription agreement.

        APPLICABLE LISTING RULES

        6. Rule 8.08(1)(a) provides that

        "at least 25% of the issuer's total number of issued shares must at all times be held by the public."
        7. Rule 13.32(1) states that

        "Issuers shall maintain the minimum percentage of listed securities as prescribed by rule 8.08 at all times in public hands..."

        ANALYSIS

        8. The public float requirement seeks to ensure an open market in the securities for which listing is sought. The Exchange would not give listing approval for an issue of new shares which would cause or facilitate a breach of the requirement.
        9. In this case, the issue of the convertible notes to Company B could possibly result in the public float of Company A's shares falling below the minimum 25% requirement. The Exchange did not consider that Company A's undertaking to use reasonable endeavours to meet the requirement would adequately address its concern. Without any concrete arrangements to ensure a minimum 25% public float for Company A upon conversion of the convertible notes, the Exchange was not prepared to give listing approval until the issue was addressed.
        10. The Exchange also did not consider the alternative proposal acceptable as it only took into account the shareholding structure of Company A at the time of the completion of the subscription agreement and not the conversion of the notes. It would be possible for Company A to issue Conversion Shares resulting in a breach of minimum public float requirement, as a result of changes to Company A's share capital (e.g. share repurchase) after the completion of the subscription agreement.
        11. To address the Exchange's concern, Company A and Company B agreed to revise the terms of the convertible notes so that a conversion of the notes could not take place if it would result in Company A failing to meet the minimum public float requirement under the Rules.

        CONCLUSION

        12. The Exchange accepted that the action taken by Company A in paragraph 11 above addressed the issue of possible insufficient public float upon completion of the subscription agreement.

      • LD55-2013

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        HKEx LISTING DECISION
        HKEx-LD55-2013

        Parties Company A — a Main Board issuer

        Company B — another Main Board issuer independent from Company A
        Issue Whether Company A was required to classify its subscription for convertible notes issued by Company B as if the notes were fully converted at the time of entering into the subscription agreement
        Listing Rules Main Board Rule 14.04(1)
        Decision The subscription of the notes would be classified as a transaction for Company A based on the percentage ratio calculations for providing financial assistance to Company B. It would not be classified as if the notes were fully converted given that the conversion of the notes was at Company A's discretion.

        FACTS

        1. Company A proposed to subscribe for certain convertible notes to be issued by Company B (the Subscription). Under the terms of the notes, Company A had the right to convert the notes into new shares of Company B any time during the conversion period. Any outstanding amount would be redeemed by Company B at the maturity date of the bonds.
        2. The Subscription was a transaction for Company A under Chapter 14 as it involved provision of financial assistance to Company B. There was an issue whether Company A would also need to classify the Subscription as if the notes were fully converted.
        3. Company A submitted that it had the sole discretion on the conversion of the notes, and it had yet to decide whether and when to exercise its conversion rights. If it proposed to convert the notes, it would comply with the notifiable transaction requirements for acquiring an interest in Company B.

        APPLICABLE LISTING RULES

        4. Rule 14.04(1) provides that:
        "any reference to a "transaction" by a listed issuer:
        (a) includes the acquisition or disposal of assets, ...;
        (b) includes any transaction involving a listed issuer writing, accepting, transferring, exercising or terminating (in the manner described in rule 14.73) an option (as defined in rule 14.72) to acquire or dispose of assets or to subscribe for securities;
        (c) ...;
        (d) ...;
        (e) includes granting an indemnity or a guarantee or providing financial assistance by a listed issuer, ...
        ..."
        5. Rule 14.12 states that:
        "Where the transaction involves granting an indemnity or guarantee or providing financial assistance by a listed issuer, the asset ratio will be modified such that the total value of the indemnity, guarantee or financial assistance plus in each case any monetary advantage accruing to the entity benefiting from the transaction shall form the numerator of the assets ratio. The "monetary advantage" includes the difference between the actual value of consideration paid by the entity benefiting from the transaction and the fair value of consideration that would be paid by the entity if the indemnity, guarantee or financial assistance were provided by entities other than the listed issuer."
        6. Rule 14.26 states that:
        "In an acquisition or disposal of equity capital, the numerators for the purposes of the (a) assets ratio, (b) profits ratio and (c) revenue ratio are to be calculated by reference to the value of the total assets, the profits attributable to such capital and the revenue attributable to such capital respectively."
        7. Rule 14.74 states that:
        "The following apply to an option involving a listed issuer, the exercise of which is not at the listed issuer's discretion:-
        (1) on the grant of the option, the transaction will be classified as if the option had been exercised. For the purpose of the percentage ratios, the consideration includes the premium and the exercise price of the option; and
        (2) on the exercise or transfer of such option, such exercise or transfer must be announced by the listed issuer by means of an announcement published in accordance with rule 2.07C as soon as reasonably practicable if the grant of the option has previously been announced pursuant to the requirements of this Chapter."
        8. Rule 14.75 states that:
        The following apply to an option involving a listed issuer, the exercise of which is at the listed issuer's discretion:-
        (1) on the acquisition by, or grant of the option to, the listed issuer, only the premium will be taken into consideration for the purpose of classification of notifiable transactions. Where the premium represents 10% or more of the sum of the premium and the exercise price, the value of the underlying assets, the profits and revenue attributable to such assets, and the sum of the premium and the exercise price will be used for the purpose of the percentage ratios; and
        (2) on the exercise of such option by the listed issuer, the exercise price, the value of the underlying assets and the profits and revenue attributable to such assets, will be used for the purpose of the percentage ratios. Where an option is exercised in stages, the Exchange may at any stage as the Exchange may consider appropriate require the listed issuer to aggregate each partial exercise of the option and treat them as if they were one transaction (see rules 14.22 and 14.23).

        ANALYSIS

        9. The Subscription would be a transaction for Company A that involved provision of financial assistance to Company B and accepting an option to convert the notes into Company B's shares. The Exchange agreed that when Company A entered into the subscription agreement:
        •   it should classify the Subscription by calculating the percentage ratios for the provision of financial assistance to Company B; and
        •   it was not necessary to classify the Subscription as if the notes were fully converted given that the conversion was at Company A's discretion. If Company A subsequently proposed to exercise the conversion rights, it would be required to classify the conversion as a transaction at that time taking into account the conversion price and Company B' total assets, revenue and profits. This was in line with the approach applicable to transactions involving options under Chapter 14.

        CONCLUSION

        10. The Subscription would be classified as a transaction of Company A based on the percentage ratio calculations for providing financial assistance to Company B.

      • LD54-2013

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        HKEX LISTING DECISION
        HKEX-LD54-2013 (Published in March 2013) (Updated in April 2015 and July 2018)

        Parties Company A — a Main Board issuer
        Issue Whether the Exchange would approve the proposed changes to the terms of convertible bonds issued by Company A under a general mandate
        Listing Rules Main Board Rules 13.36, 28.05
        Decision Company A was required to comply with Rule 13.36 for the proposals

        FACTS

        Background

        1. Two years ago, Company A issued certain convertible bonds to an independent third party (the investor) under a general mandate (the original general mandate). Assuming full conversion of the bonds at the initial conversion price, the conversion shares would represent 10% of the then issued shares of Company A.
        2. The original general mandate allowed Company A to issue new shares of not more than 20 per cent. of its issued shares until the conclusion of the next annual general meeting. Except for the issue of the convertible bonds, Company A had not used the mandate to issue any other securities.

        Proposals

        3. In light of the change in market conditions after the issue of the convertible bonds, Company A and the investor proposed to revise the terms of the bonds:
        (a) The parties proposed to reduce the initial conversion price of the bonds. Based on the revised conversion price, the maximum number of conversion shares would not exceed the number of new shares issuable under the original general mandate.
        (b) Alternatively, the parties would extend the conversion period and the maturity date of the bonds for one year. There would not be any change to the conversion price of the bonds and therefore the number of conversion shares issuable by Company A.
        4. Company A submitted that the original general mandate would be sufficient to cover the conversion shares issuable under the revised terms of the bonds. It sought the Exchange's approval for the proposed changes to the terms of the bond.

        APPLICABLE LISTING RULES

        5. Rule 13.36 states that:
        (1)
        (a) Except in the circumstances mentioned in rule 13.36(2), the directors of the issuer ... shall obtain the consent of shareholders in general meeting prior to allotting, issuing or granting:
        (i) shares;
        (ii) securities convertible into shares; or
        (iii) options, warrants or similar rights to subscribe for any shares or such convertible securities.

        Note: Importance is attached to the principle that a shareholder should be able to protect his proportion of the total equity by having the opportunity to subscribe for any new issue of equity securities. Accordingly, unless shareholders otherwise permit, all issues of equity securities by the issuer must be offered to the existing shareholders (and, where appropriate, to holders of other equity securities of the issuer entitled to be offered them) pro rata to their existing holdings, and only to the extent that the securities offered are not taken up by such persons may they be allotted or issued to other persons or otherwise than pro rata to their existing holdings. This principle may be waived by the shareholders themselves on a general basis, but only within the limits of rules 13.36(2) and (3).
        (b) ...
        (2) No such consent as is referred to in rule 13.36(1)(a) shall be required:
        (a) ...
        (b) if, but only to the extent that, the existing shareholders of the issuer have by ordinary resolution in general meeting given a general mandate to the directors of the issuer, either unconditionally or subject to such terms and conditions as may be specified in the resolution, to allot or issue such securities or to grant any offers, agreements or options which would or might require securities to be issued, allotted or disposed of, whether during the continuance of such mandate or thereafter, subject to a restriction that the aggregate number of securities allotted or agreed to be allotted must not exceed the aggregate of (i) 20% of the number of issued shares of the issuer as at the date of the resolution granting the general mandate (or in the case of a scheme of arrangement involving an introduction in the circumstances set out in rule 7.14(3), 20% of the number of issued shares of an overseas issuer following the implementation of such scheme) and (ii) the number of such securities repurchased by the issuer itself since the granting of the general mandate (up to a maximum number equivalent to 10% of the number of issued shares of the issuer as at the date of the resolution granting the repurchase mandate), provided that the existing shareholders of the issuer have by a separate ordinary resolution in general meeting given a general mandate to the directors of the issuer to add such repurchased securities to the 20% general mandate.

        ...
        ...
        6. Rule 28.05 states that:
        Any alterations in the terms of convertible debt securities after issue must be approved by the Exchange, except where the alterations take effect automatically under the existing terms of such convertible debt securities.

        ANALYSIS

        7. The Exchange considered that each of the proposals described in paragraph 3 would constitute a material change to the terms of the convertible bonds. They should be regarded as new arrangements for Company A to issue convertible securities to the investor. It could not use the original general mandate for the new arrangements.
        8. Accordingly, Company A was required to comply with Rule 13.36 for the proposals. It should obtain a specific mandate for issuing the conversion shares under the revised terms of the bonds unless it had an existing general mandate that was valid and sufficient to cover these conversion shares. If Company A failed to do so, the Exchange would not approve the proposed changes to the terms of the bonds.

        CONCLUSION

        9. Company A was required to comply with Rule 13.36 for the proposals.

        SUBSEQUENT DEVELOPMENT (Updated in July 2018)

        10. Under Rule 13.36(6) (which became effective on 3 July 2018), an issuer may not issue securities convertible into new shares of the issuer for cash consideration pursuant to a general mandate under Rule 13.36(2)(b), unless the initial conversion price is not lower than the benchmarked price (as defined in Rule 13.36(5)) of the shares at the time of the placing.
        11. In this case, the convertible bonds were issued to the investor for cash consideration two years ago and Company A was required to comply with Rule 13.36 for the proposals described in paragraph 3. Under the amended Rules, Company A should obtain a specific mandate for issuing the conversion shares under the revised terms of the bonds unless (i) it had an existing general mandate that was valid and sufficient to cover these conversion shares; and (ii) the conversion price of the bonds as revised was not lower than the benchmarked price of the shares at the time of the proposal.

      • LD53-2013

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        HKEx LISTING DECISION
        HKEx-LD53-2013 (published in March 2013)

        Summary
        Party Company A — a Main Board listing applicant
        Issue Whether Company A's directors and senior management, taken together, had "sufficient experience relevant to exploration and/ or extraction activity"?
        Listing Rules Rule 18.04
        Decision Company A's directors and senior management, taken together, were considered to have "sufficient experience relevant to exploration and/ or extraction activity" under Rule 18.04 as:-
        (i) the experiences of some directors and senior management in the polymetallic base metal mining industry generally was relevant and could be transferred to the area of lead and zinc ore mining; and
        (ii) five out of nine core management members possessed sufficient experience relevant to Company A's exploration and/ or extraction activity.

        FACTS

        1. Company A engaged in the exploration and mining of zinc and lead in a mine in South Africa. The Competent Person Report prepared under the SAMREC Code indicated that there were Measured and Indicated Resources of zinc and lead.
        2. Company A was not able to satisfy the profit test under Rule 8.05 as it had not yet started commercial production during the Track Record Period. Hence, it applied for a Rule 8.05 waiver under Rule 18.04.
        3. Company A's core management team comprised four executive directors and five senior management members. Of the four executive directors ("Mr. W", "Mr. X", "Mr. Y" and "Mr. Z"),
        (i) Mr. W was Company A's founder and managing director possessing more than 20 years' experience in the mining industry including nickel and platinum. He had in-depth knowledge in mining projects' development, execution, construction and operation, and was an architect of a base metal sulphides' mining technology. He obtained a Bachelor of Science degree majoring in metallurgy, and was a member of The Southern African Institute of Mining and Metallurgy.
        (ii) Mr. X was Company A's chairman. He obtained a Bachelor of Science degree majoring in geology, and was a fellow of The Southern African Institute of Mining and Metallurgy. He had over 30 years practical experience in the production, exploration and technical skills in large scale open pit and underground mining operations, particularly in the fields of asset evaluation, mine project implementation and operational management. In addition, he was experienced in managing the large scale earth moving, blasting and crushing contracts, and the mining operations. Together with Mr. W, he was responsible for the implementation of all geological and mining aspects of the base metal sulphides' mining technology.
        (iii) Mr. Y was Company A's chief executive. He obtained a Bachelor of Science degree majoring in metallurgy, and had more than 20 years' experience in strategic, operational and corporate levels in the minerals and mining industry. Prior to joining the company, he was a director and president of a Toronto Stock Exchange listed company where he was responsible for a number of mining exploration and development projects.
        (iv) Mr. Z had more than 20 years' experience in the minerals and mining industry focusing on accounting, human resources, and social and labour portfolios.
        4. Of the management team members,
        (i) two were experienced (17 years and 6 years) in conducting feasibility studies for polymetallic base metal projects including platinum, nickel and copper. They led teams to develop new mines from start-ups, were experienced in the control of financial, technical and operational disciplines, and managed exploration programmes which led to the declaration of the initial inferred resources;
        (ii) one was experienced (20 years) in selling refined metals and sourcing raw materials (including coal, platinum, gold, coal bed methane, oil and gas, rare earths and base metals); and
        (iii) two were experienced in corporate finance services including private and public capital raising for project development, and the progression of projects through resource delineation and feasibility study phases.

        ISSUE

        5. Whether Company A's directors and senior management, taken together, had "sufficient experience relevant to exploration and/ or extraction activity" under Rule 18.04?

        APPLICABLE LISTING RULES

        6. Rule 18.04 states that if a Mineral Company is unable to satisfy the listing eligibility requirements in Rule 8.05, it may still apply to be listed if it can establish to the Exchange's satisfaction that its directors and senior managers, taken together, have sufficient experience relevant to the exploration and/ or extraction activity that the Mineral Company is pursing. Individuals relied on must have a minimum of five years relevant industry experience. Details of the relevant experience must be disclosed in the new applicant's listing document.

        THE ANALYSIS

        7. We consider that compliance with Rule 18.04 is a question of fact. In assessing whether the mineral company's directors and senior managers, taken together, have sufficient experience relevant to the exploration and/ or extraction activity that the mineral company is pursuing, we will take various factors into consideration, including but not limited to:-
        (i) their practical responsibilities and experience in the exploration and/ or extraction activity that is relevant to the applicant's mining activity. Their experience may not necessarily be in the same commodities or minerals as the applicant's operations. They can be experienced in other commodities or minerals which have mining processes that do not differ materially from that of the applicant and their skills are transferable to the applicant's mining activity;
        (ii) their academic and professional qualifications, significant achievements/ awards received that are mining related, and significant contribution to the mining industry and/ or any mineral companies; and
        (iii) whether the majority of the applicant's core management team involved in its daily operations has sufficient experience in the exploration and/ or extraction activity which the mineral company is pursuing. Emphasis will be placed on practical experience in relevant exploration and/ or extraction activity, rather than general management and marketing experience that is ancillary to the exploration and/ or extraction activity.
        8. In the case of Company A, we noted that:-
        (i) the characteristics of various ores within the polymetallic base metal group (including lead, zinc, nickel, platinum and gold) were substantially similar, and the exploration, mine planning, ore extraction and production, ore handling and processing, and safety measures were also similar. Hence, the experiences of Company A's directors and senior management in the polymetallic base metal mining industry generally was relevant and could be transferred to the area of lead and zinc ore mining; and
        (ii) as five out of nine core management members possessed sufficient experience relevant to Company A's exploration and/ or extraction activity, Company A's directors and senior management, taken together, was able to meet the requirements under Rule 18.04.

        DECISION

        9. We determined that Company A's directors and senior managers, taken together, have sufficient experience relevant to the exploration and/ or extraction activity that Company A is pursing, subject to detailed disclosure of relevant experience in Company A's listing document.

      • LD52-2013

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        HKEx LISTING DECISION
        HKEx-LD52-2013 (published in March 2013)

        Summary
        Party Company A — a company listed on a PRC stock exchange which proposed to convert its entire B Shares into H Shares and sought a listing of the H Shares on the Main Board of the Exchange by way of introduction
        Issue
        (i) Whether Company A's listing by way of introduction would be acceptable
        (ii) Whether Company A's requested waivers would be granted
        Listing Rules Rules 2.04, 4.01(1), 7.14, 7.15, 8.06, 8.08(1)(b), 8.08(3), 19A.18(1) and paragraph 37 of Appendix 1A
        Decision The Exchange considered that:
        (i) Company A's listing by way of introduction was acceptable; and
        (ii) the waivers were granted to Company A based on its particular facts and circumstances and should not be treated as precedents for other companies seeking to convert their B shares into H shares. Waiver applications of future cases will be considered on a case-by-case basis.

        FACTS

        1. Company A was incorporated in the PRC and both its A shares ("A Shares") and its B shares ("B Shares") had been listed on a PRC stock exchange for more than ten years.
        2. Company A proposed to convert its entire B Shares into H shares ("H Shares") and sought a listing of the H Shares on the Main Board of the Exchange by way of introduction (the "Proposed Introduction"). Its B Shareholders could choose to become H Shareholders or sell their B Shares before the Proposed Introduction to an independent third party (the "Third Party") to be arranged by Company A (the "Cash Offer").
        3. Company A considered that the Proposed Introduction was an appropriate method of listing. It would undertake the Proposed Arrangement detailed in paragraph 14(iii) to ensure that a sufficient number of public shareholders deposited their H Shares with Hong Kong brokers ready for trading upon the Proposed Introduction.
        4. Company A was able to comply with the profit test requirement under Rule 8.05(1). It applied for waivers from strict compliance with certain requirements under the Rules, including the following:
        (i) Minimum public float requirements1 (in the event of non-compliance with those requirements after the Cash Offer):
        (a) Rule 8.08(1)(b) to allow a minimum H Share public float of 10% with a market capitalisation of about HK$3 billion; and
        (b) Rule 8.08(3) so that the aggregate shareholding of the three largest public shareholders would not exceed 65% of the total H Share public float upon the Proposed Introduction;
        (ii) Financial statements requirements:
        (a) Rule 4.01(1) and paragraph 37 of Appendix 1A to the Rules so that the accountants' report would be replaced by Company A's published financial statements for the latest three financial years (the "Historical Financial Information"); and
        (b) Rule 8.06 to disclose interim financial information for the current financial year which had not been audited or reviewed by the reporting accountants ("Interim Financial Information"); and
        (iii) Residency of independent non-executive director ("INED"):
        (a) Rule 19A.18(1) so that Company A was not required to have an INED ordinarily resident in Hong Kong until its next annual general meeting ("AGM").

        APPLICABLE RULES AND PRINCIPLES

        Listing by way of introduction

        5. Rule 7.14 states that introductions will normally be appropriate where, among others, the securities for which listing is sought are already listed on another stock exchange.
        6. Rule 7.15 states that an introduction will only be permitted in exceptional circumstances if there has been a marketing of the securities in Hong Kong within the six months prior to the proposed introduction where such marketing was made conditional on listing being granted for those securities. Furthermore, there may be other factors, such as a pre-existing intention to dispose of securities, a likelihood of significant public demand for the securities or an intended change of the issuer's circumstances, which would render an introduction unacceptable to the Exchange.
        7. In addition, the Exchange announced in December 2009 that it would only consider an application for listing by way of introduction if the new applicant and its sponsor could satisfy the Exchange that there would be adequate precautionary measures in place on and from the first day of listing on the Exchange to ensure that the new applicant's shares would be traded on an orderly, informed and fair basis.

        Waivers

        8. Rule 2.04 states that the Exchange may waive, modify or not require compliance with the Rules in individual cases (to suit the circumstances of a particular case), as a variety of circumstances may exist which require it to make decisions in particular cases.
        9. Rule 8.08(1)(b) states that where an issuer has one class of securities or more apart from the class of securities for which listing is sought, the total securities of the issuer held by the public (on all regulated market(s) including the Exchange) at the time of listing must be at least 25% of the issuer's total issued share capital. However, the class of securities for which listing is sought must not be less than 15% of the issuer's total issued share capital, having an expected market capitalisation at the time of listing of not less than HK$50,000,000.
        10. Rule 8.08(3) requires 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.
        11. Rule 4.01(1) and paragraph 37 of Appendix 1A to the Rules require accountants' reports to be included in a listing document issued by a new applicant.
        12. Rule 8.06 states that in the case of a new applicant, the latest financial period reported on by the reporting accountants must not have ended more than six months before the date of the listing document.
        13. Rule 19A.18(1) states that at least one of the INEDs must be ordinarily resident in Hong Kong for a PRC issuer.

        ANALYSIS

        Listing by way of introduction

        14. The Exchange considered Company A's listing by way of the Proposed Introduction acceptable after taking into account:
        (i) both its A Shares and its B Shares had been listed on the PRC stock exchange for more than ten years;
        (ii) all the H Shares (representing about 50% of Company A's total issued shares) would be registered on the Hong Kong share register, and apart from the H Shares held by the existing substantial shareholders (representing about 30% of Company A's total issued shares) which were subject to voluntary lock-up, all the H Shares would be available for trading on the Exchange;
        (iii) to ensure adequate liquidity in the trading of H Shares upon the Proposed Introduction, Company A proposed to procure at least 300 public B Shareholders to deposit the converted H Shares in broker accounts opened in Hong Kong, and those converted H Shares would have a minimum market capitalisation of HK$1 billion and be ready to trade on the Exchange upon the Proposed Introduction (the "Proposed Arrangement"). These H Shares would be well above the latest 30-day accumulated trading volume of the B Shares on the PRC stock exchange and the required minimum market capitalisation of shares held by the public of HK$50 million under Rule 8.09(1);
        (iv) the Cash Offer was not considered marketing activities of Company A's shares in Hong Kong before listing given that it would be completed in the PRC before the Proposed Introduction. In addition, the Cash Offer was to protect the B Shareholders' interests if they did not intend to convert their B Shares into H Shares, and therefore it should not be deemed as a situation involving "marketing" or "pre-existing intention to dispose of securities" under Rule 7.15; and
        (v) Company A would disclose:
        (a) in its listing document the Proposed Arrangement and a risk factor that its effectiveness might be subject to limitations, and the historical share price and trading volume of the B Shares by month for the last five years; and
        (b) by way of announcements on the websites of both the Exchange and the PRC stock exchange, the closing prices of the A Shares and B Shares on each of the three trading dates immediately before the Proposed Introduction.

        Waivers

        15. The Exchange agreed to grant the requested waivers to Company A having considered, among others, that:

        Minimum public float requirements
        (i) the Proposed Arrangement as set out in paragraph 14(iii) indicated that there would be sufficient liquidity in the H Shares;
        (ii) if the requested 10% H Share public float waiver was granted, the market capitalisation of the 10% H Share public float would be about HK$3 billion. If the requested waiver to allow the aggregate shareholding of the three largest public shareholders not exceeding 65% of the total H Share public float was granted, the market capitalisation of H Share public float excluding the three largest public H Shareholders would be about HK$2 billion. The market capitalisation of the relevant H Share public float under both circumstances would be well above the minimum public float market capitalisation of HK$50 million under Rules 8.08(1)(b) and 8.09(1);
        (iii) Company A had a B Share public float of about 20%, more than 60% of them were held by investors outside the PRC;
        (iv) Company A had undertaken to increase the H Share public float to 15% as required under Rule 8.08(1)(b) within one year from the Proposed Introduction, subject to the China Securities Regulatory Commission's approval; and
        (v) Company A is a listed company with a market capitalisation of about HK$30 billion;

        Financial statements requirements
        (vi) the Proposed Introduction would not involve any new investors and all the existing shareholders had already been provided with the Historical Financial Information 2 . The same financial information would be provided to Hong Kong investors as to Company A's existing shareholders. If an accountants' report were to be prepared for Company A, no adjustment to the Historical Financial Information was expected;
        (vii) Company A and its sponsor considered that the Historical Financial Information would provide adequate and sufficient information on its performance and financial position during the track record period to its existing shareholders and Hong Kong investors. In addition, Company A would disclose in its listing document a directors' confirmation that all material information had been included in the listing document and the information contained was accurate and complete in all material respects and not misleading or deceptive; and
        (viii) Company A's auditors and reporting accountants would provide it and its sponsor with a comfort letter with respect to the Interim Financial Information based on certain agreed upon procedures performed under China Standards on Related Services 41013 and the Interim Financial Information was for the interim period ended two months before Company A's listing document;

        Residency of INED
        (ix) Company A required more than three months to appoint an additional INED ordinarily resident in Hong Kong. The term of the current board would expire in the forthcoming AGM to be held within five months after the Proposed Introduction and Company A undertook to appoint an INED ordinarily resident in Hong Kong at the AGM; and
        (x) Company A proposed to appoint professional parties which are familiar with business, legal and regulatory issues in Hong Kong such as a Hong Kong legal adviser so long as Company A was listed on the Exchange.
        16. Company A subsequently withdrew the public float waiver applications as soon as it became aware that it had sufficient public float under Rules 8.08(1)(b) and 8.08(3) after the Cash Offer.
        17. These waivers were granted based on the particular facts and circumstances of Company A. All waivers granted to Company A will not be treated as precedents for other companies seeking to convert their B shares into H shares.

        CONCLUSION

        18. The Exchange considered that:
        (i) Company A's listing by way of introduction was acceptable; and
        (ii) the waivers were granted to Company A based on its particular facts and circumstances and should not be treated as precedents for other companies seeking to convert their B shares into H shares. Waiver applications of future cases will be considered on a case-by-case basis.

        ****


        1 Company A had a B Share public float of about 20% of its total issued Shares. For the avoidance of doubt, Company A only needed one of these two waivers after completion of the Cash Offer:

        (i) if the Third Party acquired 10% or more of the total issued Shares, it would not be regarded as a public shareholder. Company A would have a H Share public float of about 10% and would require a minimum public float (Rule 8.08(1)(b)) waiver; or
        (ii) if the Third Party acquired 9.99% or less of the total issued Shares, it would be regarded as a public shareholder. Company A would maintain a H Share public float of about 20% but it would require a waiver for the aggregate shareholding of the three largest public H Shareholders (Rule 8.08(3)).

        2The Historical Financial Information had been prepared under China Accounting Standards for Business Enterprises (acceptable accounting standards for PRC issuers under Rule 4.11) and audited by an approved PRC auditor under Rule 19A.08.

        3China Standards on Related Services 4101 is a comparable standard to that required by the Hong Kong Institute of Certified Public Accountants and the International Federation of Accountants.

      • LD51-2013

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        HKEx LISTING DECISION
        HKEx-LD51-2013 (published in February 2013)

        Summary
        Name of Party Company A — a Main Board listing applicant and a Mineral Company under Chapter 18 of Main Board Rules
        Subject Whether NI 51-101 is an acceptable reporting standard under Rule 18.32
        Listing Rules Rule 18.32
        Decision The Exchange determined that NI 51-101 is an acceptable reporting standard for Company A under Rule 18.32

        FACTS

        1. Company A was a mineral company under Chapter 18 of the Main Board Rules. Company A's shares were listed on a foreign stock exchange (the "Foreign Exchange"). Company A sought a secondary listing on the Main Board of the Exchange.
        2. Company A reported its oil and gas reserves in accordance with NI 51-1011 for its filings with the Foreign Exchange.
        3. Company A submitted that:
        (i) disclosure of oil and gas reserves under NI 51-101 provides a comparable standard of disclosure to Chapter 18 of the Listing Rules and a sufficient assessment of Company A's oil and gas reserves; and
        (ii) reporting its oil and gas reserves under the Petroleum Resources Management System ("PRMS", an acceptable reporting standard under Rule 18.32) would only provide potential investors with minimal benefits from such additional disclosure compared with the cost and time to provide such information. Company A had already been subject to the high reporting standards under NI 51-101.
        4. Company A proposed to disclose in the prospectus all the information which was in its latest annual information filing (a report filed with the relevant securities regulators annually on reserves), including Company A's reserves and resources. Company A also agreed to confirm in the prospectus that there was no material adverse change in valuation of Company A's oil and gas reserves and resources since the last valuation as stated in its 2010 annual information filing which would not be more than six months old at the expected time of issuing the prospectus.

        ISSUE

        5. Whether NI 51-101 is an acceptable reporting standard under Rule 18.32.

        APPLICABLE LISTING RULES

        6. Rule 18.32 requires that a mineral company must disclose information on petroleum resources and reserves either under PRMS or other codes acceptable to the Exchange if it is satisfied that they give a comparable standard of disclosure and sufficient assessment of the underlying assets.

        THE ANALYSIS

        7. During the Exchange's consultation on the new rules for mineral and exploration companies in 2009 and 2010, the Canadian standard under NI 51-101 had been identified as a well recognised international standard adopted by international mineral and gas companies.
        8. The Consultation Paper on New Listing Rules for Mineral and Exploration Companies dated September 2009 (the "Consultation Paper") stated that "there are two main systems for reporting oil and gas resources commonly in use, the Canadian NI 51-101 and the SEC's Oil and Gas Disclosure standards, the recently updated version of which will come into effect on 1 January 2010. Both of these systems are based on or in broad agreement with PRMS, which may be considered the globally-recognised yardstick for making oil and gas evaluations."
        9. However, the Consultation Paper further stated that "PRMS provides the basis for both the SEC and the Canadian standards and provides a common reference point for the international petroleum industry. The adoption of PRMS by the Exchange will ensure that oil and gas companies are able to report on their complete portfolios of resources (including reserves) to shareholders under a recognised framework. This will be particularly important to junior oil and gas exploration companies."
        10. The Exchange considered the relevant facts and circumstances, among other things:
        (i) Company A's adoption of NI 51-101 is comparable to the requirements of Chapter 18 of the Listing Rules;
        (ii) the prospectus would include Company A's latest published reserves and resources information; and
        (iii) Company A's shares had been listed on the Foreign Exchange.

        DECISION

        11. Taking the totality of factors into consideration, the Exchange was of the view that NI 51-101 is an acceptable reporting standard for Company A under Rule 18.32.

        1 National Instrument 51-101 "Standards of Disclosures for Oil and Gas Activities", which was implemented in September 2003 by the Canadian Securities Administrators, provides comprehensive rules for reserves disclosure by relevant oil and gas companies in Canada. It requires oil and gas companies to report annually on their reserves and oil and gas activities, and where a material change occurs in a company's reserves after an annual filing is made, a company is required to disclose the changes to their reserves to the Canadian Securities Administrators and the public before the next required annual filing.

      • LD50-2013

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        HKEx LISTING DECISION
        HKEx-LD50-2013 (published in February 2013)

        Summary
        Party Company A — a Main Board listing applicant

        Company B — a state-owned oil company
        Issue Whether Company A had adequate rights under the production sharing contracts which gave it sufficient influence in decisions over the exploration for and/or extraction of crude oil
        Listing Rules Main Board Rule 18.03(1)(b)
        Decision Company A had established to the Exchange's satisfaction that it had the right to participate actively in the exploration for and/or extraction of crude oil from the oilfields in light of:
        (i) Company A's influence in the joint management committee; and
        (ii) Company B's right to take over the oilfield operations would not affect Company A's right under Rule 18.03(1)(b).

        FACTS

        1. A foreign company has to operate with authorised state-owned enterprises to conduct exploitation of onshore oil and gas resources in the PRC.
        2. Company A entered into a production sharing contract ("PSC") for each of the three oilfields where it acted as the sole operator and a foreign contractor with Company B. These oilfields had entered into the commercial production phase and the PSCs would only expire after more than 23 years.
        3. Company B was a state-owned oil company and held the exploitation permits for the exploration, development and production of crude oil at the three oilfields.
        4. Under the PSCs:
        (i) Company A was solely responsible for, among others, applying appropriate technology and managerial experience for, and procuring equipment, supplies and subcontracting services relating to the oilfield operations;
        (ii) Company B was responsible for, among others, submitting the overall development plan for the oilfields for relevant PRC governmental approval;
        (iii) the crude oil was first allocated between Company A and Company B to recover the operating and development costs. After these costs were fully recovered, the crude oil would be allocated between Company A and Company B for profit-sharing; and
        (iv) Company B had the right to take over the oilfield operations at the earlier of (a) the expiration of the PSCs; (b) when Company A had recovered all of its development costs and there was no additional approved overall development plan which required Company A to incur additional development costs; or (c) before the full recovery of Company A's development costs if agreed by the joint management committee (the "JMC").
        5. Company A had recovered all of its development costs for one of the three oilfields but not for the other two.
        6. If Company B took over the oilfield operations, Company A would still be entitled to its allocation of crude oil for the purposes of cost recovery and profit-sharing during the remaining terms of the PSCs and would continue to participate in the JMC. However, Company A would not be able to invest in additional capital expenditure for further oil production and revenue generated.
        7. The JMC was comprised of eight members, four of whom were appointed by each of Company A and Company B. The JMC's chairman and vice chairman were designated by Company B and Company A respectively. The JMC should reach a unanimous decision on matters that it considered. During the track record period, the JMC was able to agree on all material matters concerning the oilfields.

        APPLICABLE RULES AND PRINCIPLES

        8. Rule 18.03(1)(b) states that a mineral company must establish to the Exchange's satisfaction that it has the right to participate actively in the exploration for and/or extraction of natural resources. One way is through adequate rights (arising under arrangements acceptable to the Exchange) which give the mineral company sufficient influence in decisions over the exploration for and/or extraction of the natural resources.
        9. Frequently Asked Questions Series 12 states that "[c]ompanies may rely on exploration and extraction rights held by third parties if they participate in mineral and/or exploration activity under joint ventures, product sharing agreements or other valid arrangements if they can demonstrate the agreements give them sufficient influence over the exploration for and extraction of Resources and Reserves."

        ANALYSIS

        10. The Exchange considered that the JMC allowed Company A to have adequate rights which gave it sufficient influence in decisions over the exploration for/or extraction of crude oil from the oilfields under Rule 18.03(1)(b) given that the JMC's decisions had to be made unanimously and Company A's representatives with half of the JMC's voting rights could vote down any resolution that Company B proposed which were not in Company A's interests.
        11. In addition, the Exchange considered that Company B's right to take over the oilfield operations would not affect Company A's rights under Rule 18.03(1)(b) because it did not pose any risk to Company A's continued oilfield operations or the risk was remote as:
        (i) the PSCs for the oilfields would not expire until more than 23 years later which was expected to be sufficiently long to extract most of the economic interests of the oilfields;
        (ii) Company A had not reached the limits set in the overall development plans for one of the oilfields for which it had recovered all of its development costs and continued to invest in that oilfield under the development programs approved by the JMC. In addition, Company B did not have the legal right to take over the remaining two oilfields' operation because Company A had not recovered all of its development costs; and
        (iii) all the PSCs that Company B entered into with other parties had the same standard takeover clause, and Company B had never exercised the right to take over the operations of any of these oilfields. In addition, Company B had confirmed that it would not exercise its rights to take over the three oilfield operations of Company A.

        CONCLUSION

        12. Based on the above, the Exchange was satisfied that Company A had adequate rights which gave it sufficient influence in decisions over the exploration for and/or extraction of crude oil from the oilfields under Rule 18.03(1)(b).

        *****

      • LD49-2013

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        HKEx LISTING DECISION
        HKEx-LD49-2013 (published in January 2013)

        Summary
        Name of Party Company A — a Main Board listing applicant and a Mineral Company under Chapter 18 of Main Board Rules
        Subject
        (1) Whether disclosure of net present values attributable to Proved Reserves, Proved plus Probable Reserves, Proved plus Probable plus Possible Reserves and Contingent Resources both on a pre-tax and post-tax basis is acceptable under Main Board Rule 18.33(2)
        (2) Whether to grant a waiver of Main Board Rule 18.33(6) to allow Company A to disclose estimated values of Possible Reserves, Contingent Resources and Petroleum-Initially-In-Place
        Listing Rules Main Board Rules 18.33(2) and 18.33(6)
        Decision
        (1) The Exchange determined that disclosure of net present values attributable to Proved Reserves, Proved plus Probable Reserves, Proved plus Probable plus Possible Reserves and Contingent Resources both on a pre-tax and post-tax basis is acceptable under Main Board Rule 18.33(2)
        (2) The Exchange agreed to waive Main Board Rule 18.33(6)

        FACTS

        1. Company A, incorporated in Canada, was principally engaged in the development and production of oil sands. Company A sought a primary listing on the Main Board of the Exchange.
        2. Company A proposed to disclose in the prospectus and on an ongoing basis the net present values ("NPVs") attributable to its Proved Reserves, Proved plus Probable Reserves, Proved plus Probable plus Possible Reserves and Contingent Resources, both on a pre-tax and post-tax basis, in accordance with NI 51-101 F11.
        3. Company A also proposed to disclose in the prospectus and on an ongoing basis estimated volumes and values of Possible Reserves, Contingent Resources and Petroleum-Initially-In-Place ("PIIP") in accordance with both NI 51-101 and Petroleum Resources Management System ("PRMS", an acceptable petroleum reporting standard under Main Board Rule 18.32).
        4. Following the listing, Company A would remain benchmarked to its peer group in Canada, which are allowed to disclose the NPVs attributable to their reserves and resources on both a pre-tax and post-tax basis, and estimated values on Possible Reserves, Contingent Resources and PIIP under NI 51-101. Company A considered that it would be difficult to compare its resource base against its competitors if it would not report in a way that was consistent with its peer group.

        ISSUES

        5. Whether disclosure of NPVs attributable to Proved Reserves, Proved plus Probable Reserves, Proved plus Probable plus Possible Reserves and Contingent Resources both on a pre-tax and post-tax basis is acceptable under Main Board Rule 18.33(2); and whether to grant Company A a waiver of Main Board Rule 18.33(6).

        APPLICABLE LISTING RULES

        6. Main Board Rule 18.33(2) requires that if the NPVs attributable to Proved Reserves and Proved plus Probable Reserves are disclosed, they are presented on a post-tax basis at varying discount rates or a fixed discount rate of 10%.
        7. Main Board Rule 18.33(6) requires that economic values are not attached to Possible Reserves, Contingent Resources or Prospective Resources.

        THE ANALYSIS

        8. The Consultation Conclusions on New Listing Rules for Mineral Companies dated May 2010 stated that the Exchange does not propose to prescribe further information to be provided in connection with future operating costs or tax horizons. If there are material matters to be disclosed relating to these issues, companies should disclose them in any event.
        9. In determining the issues, the Exchange considered the following:
        (i) the proposed disclosure of NPVs on both pre-tax and post-tax basis is in accordance with the requirements of NI 51-101, provide additional information to investors, and is in line with disclosure made by comparable companies listed in Canada;
        (ii) as opined by Company A's competent person and the Exchange's independent mineral consultant, the existence or recoverability of oil sand resources is less uncertain than oil and gas resources because the location and quantum of bitumen volumes is generally very high in Canada. Company A's Contingent Resources are largely dependent upon its commitment to develop the resources (such as filing of a regulatory application seeking approval to proceed with a development project) rather than uncertainty in recoverability. Upon filing of an application, the estimated volumes of Contingent Resources can be reclassified as Probable or Possible Resources; and
        (iii) the proposed disclosure of Possible Reserves and Contingent Resources for oil sands (including the basis upon which the Contingent Resources are economically viable and the discount rate applied) is in accordance with the requirements of NI 51-101 (which is a widely adopted standard in Canada and is well known internationally in the mineral and oil industry), and in line with disclosure made by comparable companies listed in Canada.

        THE DECISION

        10. The Exchange, having considered the totality of factors in paragraph 9 above and based on the specific facts and circumstances, was of the view that the relevant disclosure of NPVs on both pre-tax and post-tax basis in the prospectus and on an ongoing basis would be acceptable under Main Board Rule 18.33(2); and agreed to waive the requirement under Main Board Rule 18.33(6).

        1 "National Instrument 51-101 Standards of Disclosure for Oil and Gas Activities" (NI 51-101), which was implemented in September 2003 by the Canadian Securities Administrators, provides comprehensive rules for reserves disclosure by relevant oil and gas companies in Canada. NI 51-101 FI is the Statement of Reserves Data and Other Oil and Gas Information stipulated under NI 51-101. Under NI 51-101 F1, the reporting issuers in Canada are required to disclose the NPVs attributable to their reserves and resources on both a pre-tax and post-tax basis. NI 51-101 also allows the reporting issuers in Canada to disclose estimates of both the volumes and values of all reserves and resources, including Possible Reserves, Contingent Resources and Petroleum-Initially-In-Place.

      • LD48-2013

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        HKEX LISTING DECISION
        HKEX-LD48-2013 (January 2013) (Updated in May 2016)

        (Updated due to withdrawal of guidance letters superseded by HKEX-GL86-16)

        Summary
        Party Company A, Company B, Company C, Company D, Company E and Company F
        — Main Board listing applicants

        Company G, Company H, Company I, Company J and Company K
        — GEM listing applicants
        Issue To provide guidance on why the Exchange returned certain listing applications
        Listing Rules Main Board Rule 9.03(3) and GEM Rules 12.09 and 12.14
        Decision The Exchange returned the applications

        APPLICABLE RULES, REGULATIONS AND PRINCIPLES

        1. Main Board Rule 9.03(3) states that the Exchange expects to receive an advanced proof of the prospectus with the listing application form that is not the initial proof to enable the Exchange's review to commence immediately upon lodgement of the application. The disclosure of the requisite information as set out in Chapter 11 must be substantially completed in the advanced proof of the prospectus. If the Exchange considers the draft prospectus submitted with the Form A1 is not in an advanced form, the Exchange will not commence reviewing the application. All documents, including the Form A1 and the initial listing fee, submitted to the Exchange will be returned to the sponsor(s). The sponsor(s) will be required to resubmit a new Form A1 together with the advanced proof of the prospectus.
        2. GEM Rule 12.09 states that the Sponsor must ensure that the draft listing document has been verified in all material respects prior to submission. Note 1 to GEM Rule 12.09 states that if the Exchange considers that the draft listing document submitted with the listing application form is insufficiently finalised, the Exchange will not commence review of that or any other documents relating to the application.
        3. GEM Rule 12.14 requires that the listing application form must be accompanied by certain documents. The Listing Department may return to the sponsor any application for listing which it considers to be incomplete, together with the initial listing fee.

        ANALYSIS

        4. The following set out the reasons why the Exchange considered the applications were not in an advanced form and returned certain listing applications during the period from January 2012 to November 2012.

        Company A

        5. Company A provided certain maintenance works. There were several deficiencies in disclosure:
        (i) Business model

        It was unclear whether Company A acted as a main contractor or a sub-contractor in its completed projects during the track record period and in future projects. For the service segment, there was no information on whether Company A obtained service projects through bidding or negotiation; and how it carried out its services (e.g. whether special approval from the government and traffic arrangement were required). For the equipment segment, there was no detail on whether Company A participated in tender bidding.
        (ii) Financial position

        The discussion of Company A's trade and bills receivables was too general. There was no meaningful explanation on (i) why Company A accumulated significant amounts of trade and bills receivables given that it required advanced deposits from new customers and did not generally grant credit to new customers; (ii) circumstances giving rise to the increasing amount of impairment of trade receivables during the track record period; and (iii) underlying reasons for delays in settlement from certain customers. There was no meaningful explanation for Company A's delay in settlement of certain payments for raw materials and subcontracting costs and the significant increase in trade payables aged over 1 year.
        (iii) Future plans and business strategies

        There was insufficient justification for the 100% increase in production capacity and the expansion plan given that Company A's current geographic coverage in the relevant country appears extensive.
        (iv) Others

        The "Summary" section of the prospectus lacked sufficient information to provide investors with a concise overview of Company A's operation model and highlights of significant matters. Company A did not use HKEX-GL27-121 as guidance. (Updated in May 2016)

        Company B

        6. Company B submitted its listing application in August 2012. The audited financial information included in the prospectus covered each of the three financial years ended 31 December 2011 and therefore the Company did not comply with the requirement of Rule 8.06 which states that the latest financial period reported on by the reporting accountants must not have ended more than six months before the listing document. The sponsor also had not provided the confirmation under paragraph 4.6 of Guidance Letter HKEX-GL6-092 for the Exchange to accept early filing. (Updated in May 2016)
        7. The PRC legal opinion revealed that Company B's controlling shareholder and executive director was implicated in two bribery convictions which might have implications for his suitability as a director. These concerns were not brought to the Exchange's attention in the documents submitted together with the listing application form (e.g. under paragraph 27 of Checklist I.B. — confirmation that there are no other material issues which could detrimentally affect the suitability of listing). There was also no submission from the sponsor on why it considered the individual as suitable to be a director under the Listing Rules.

        Company C

        8. Company C was engaged in the production of a certain metal. There were several deficiencies in disclosure:
        (i) Company C did not use HKEX-GL27-121 as guidance for disclosure in the "Summary" section of the prospectus; and (Updated in May 2016)
        (ii) although the price of the relevant metal fluctuated heavily during the track record period, there was no sensitivity analysis on how the movement in the price impacted Company C's profits during the track record period, and the basis to support its profit forecast.
        9. An article revealed that a company with a similar name to Company C's operating subsidiary was accused of emitting hazardous gas and discharging waste water into a drinking water protection area and causing lead-related pollution. No information on the allegation was provided in the listing application.

        Company D

        10. Company D was a mining company operating in a country subject to sanctions from the United Nations and the European Union. It was a mineral company under Chapter 18 of the Listing Rules and sought a waiver from the minimum profits requirement.
        11. In response to pre-IPO enquiries raised by the sponsors on behalf of Company D, the Exchange requested the sponsors and Company D to critically assess the issues of (i) suitability for listing and (ii) competition with controlling shareholder before submitting a listing application.
        12. Company D subsequently submitted the listing application. In relation to sanctions, there was a directors' confirmation which was brief and did not state the basis of the directors' view. There was also no view provided by the sponsors.
        13. On competition, the disclosure did not fully comply with the requirement under Rule 8.10(1)(a), including reasons for the exclusion of the excluded business, size of such business and how such business may compete with Company D's business, etc.
        14. Other disclosure deficiencies:
        (i) Company D did not have any customers and had not entered into any legally-binding sales or off-take agreements. There was lack of details on how new customers were to be procured.
        (ii) The "Industry Overview" section did not provide any outlook or forecast information on the industry in certain countries in which Company D operated.
        (iii) Based on the biographies of the directors and senior management, it appeared that they lacked experience in operating mining businesses in overseas countries. The prospectus did not give sufficient information for readers to appraise the future outlook of Company D, and that Company D's business was sustainable.
        (iv) The prospectus did not provide any information on Company D's future business model after commencing commercial production. In addition, certain aspects of Company D's operation were unclear, including: (i) details of the outstanding permits, approvals and licenses for commercial production and (ii) which activities would be carried out by Company D or contractors, and where the functions are outsourced, details of these functions and experience of the contractors.

        Company E

        15. Company E was a property development company.
        16. The Exchange had previously accepted its listing application for vetting. The Exchange issued a letter to the sponsor stating its intention to reject the listing application on the ground that Company E had not demonstrated its working capital sufficiency and its ability to meet its profit forecast. The Exchange issued a letter to the sponsor upon the lapse of the application stating that unless the sponsor had resolved to the Exchange's satisfaction the issues stated in the letter and provided updated accounts, the Exchange would not accept Company E's renewed listing application.
        17. Company E re-submitted a new listing application. The Exchange considered that the sponsor had not provided sufficient information to fully address the concerns raised in its previous letter. In particular, Company E had not provided an updated profit forecast and working capital forecast memorandum and the audited accounts had not been updated.

        Company F

        18. Company F engaged in the property businesses.
        19. Company F's accountants' report covered the three financial years ended 31 December 2011 and the six months ended 30 June 2012. Whilst Company F reported net profits attributable to shareholders for financial years 2009 to 2011, it incurred a net loss for the six months ended 30 June 2012.
        20. Company F applied for a waiver from the requirement of Rule 4.04(1) such that it would not be required to update its accountants' report to cover the year ended 31 December 2012. If the waiver was not granted, it was doubtful whether Company F could meet the minimum profits requirement for the latest financial year (i.e. 2012) given the net loss incurred in the first half of 2012.
        21. The Exchange considered it not appropriate to recommend the requested waiver.
        22. There were also several deficiencies in disclosure:
        (i) Summary section

        The disclosure did not follow the guidance in the Guidance Letter HKEX-GL27-121. Missing information included: (Updated in May 2016)
        •   a detailed discussion of Company F's fair value gains of the investment properties and realized gain on disposal of an investment property holding subsidiary, their contribution to the profit of Company F and relevant sensitivity analysis;
        •   breakdown of Company F's revenue contribution and key operating data during the track record period, with commentary on material fluctuations;
        •   historical non-compliances;
        •   identities, background and relationships with major customers and suppliers; and
        •   an update on the recent development of Company F's operations and financial performance in accordance with Guidance Letter HKEX-GL41-12.
        (ii) Business model and future plans
        •   details of the properties held by the Company F;
        •   in respect of the land/properties acquired by Company F, details of the tendering process and the decision making process and the measures/ policies to monitor the Company F's leasing business, occupancy rates, rental yield and liquidity and financial positions;
        •   how Company F's development plan would affect Company F's business risk profile and highlight the associated risks and impact in the "Summary" and "Risk Factors" sections; and
        •   how Company F's strategy of developing residential projects aligned with its policy, the commercial rationale for this strategy and how Company F planned to achieve the relevant strategy.
        (iii) Non-compliance incidents

        The disclosure on non-compliance incidents was unclear and insufficient. The rectification measures and internal controls were not specific and could not be aligned to the non-compliances. There was also limited disclosure on the maximum penalties and liabilities.
        (iv) Regulatory overview

        The prospectus lacked disclosure on the relevant rules and regulations applicable to Company F's business and operations.
        (v) Disclosure of the financial position

        Company F had net current liabilities and negative operating cash flow. The prospectus should have provided more meaningful discussion on Company F's tight liquidity position and how the Group would improve its liquidity position and finance its purchase of land/ properties.

        Company G

        23. There were several deficiencies in disclosure:
        (i) Description of business model

        The disclosure on Company G's principle businesses was unclear and delineation between different segments was vague. It was not clear when and how Company G derived and recognized revenue for each business segment. It was unclear whether the agent customers served as the Group's distributors or end-customers.

        There was inadequate disclosure on how Company G priced its products and/or services and no disclosure on the renewal status of Company G's operating license.
        (ii) Summary section

        The disclosure did not follow the guidelines in the Guidance Letter HKEX-GL27-121. (Updated in May 2016)
        (iii) Potential Tax Liabilities

        Company G's subsidiary might be exposed to additional tax liabilities due to non-compliance with the relevant laws and regulations and might also be subject to penalty. However, the disclosure on details of the non-compliances was unclear and convoluted. The prospectus also lacked information on the root causes of the non-compliances. The sponsor also did not provide its view on these non-compliances and how they might impact on Company G and whether its directors have the character and competency to run a listed company.
        24. There was no sponsor's view on Company G's executive director and non-executive director who served in another company which a number of articles had criticized on human rights abuses, ignoring indigenous people's human rights, perpetrating political corruption and neglecting the environment in relation to its forestry logging activities.

        Company H

        25. Company H did not submit, together with the listing application form, the anticipated final draft of the sponsor's letter on working capital sufficiency as required under GEM Rule 12.22(13).

        Company I

        26. Company I was a distributor of certain products. There were several deficiencies in disclosure:
        (i) Summary section

        The "Summary" section of the prospectus lacked sufficient information to provide investors with a concise overview of Company I's operation model and highlights of significant matters. Company I did not use HKEX-GL27-121 as guidance. Examples of material information missing included description of the usage of Company I's main products, the classification of distributors, how Company I determined the pricing of its products with its suppliers and distributors, the price control under the relevant PRC laws and regulations and legal proceedings against Company I. (Updated in May 2016)
        (ii) Competition with the Controlling Shareholder

        The prospectus did not provide details to demonstrate (i) how the distribution businesses of Company I and its controlling shareholder could be delineated, and (ii) that there were adequate and effective corporate governance measures to manage conflicts of interest and competition between them.
        (iii) Distributorship

        There was insufficient disclosure on the relationship between the different types of distributor customers and measures to address the potential conflict of interests. The degree of Company I's control over its distributors with respect to compliance with the national pricing policy, sales and avoidance of cannibalisation and the competition between different types of distributors were unclear.

        The prospectus should have also included information to address the issue of independence of distributors according to Guidance Letter HKEX-GL36-12. The prospectus should have provided an explanation on what value-added services Company I provided to its distributor customers to sustain its level of gross profit margin which was particularly high when compared to its peers.
        (iv) Industry and Regulatory Overview

        The prospectus lacked information about the regulations on price control. There was no detailed analysis of the extent to which Company I was affected by the controlled price changes during the track record period, the measures taken to mitigate the adverse impact of price reductions, and an update on relevant laws and regulations applicable to Company I and their impact.
        (v) Future plans and business objectives

        There was insufficient information on Company I's plan to expand its distribution network by obtaining new exclusive distribution rights for new products. There was also insufficient information on why Company I needed to enhance the development of products through alliance or partnership, given that Company I was only engaged in distribution, but not research and development.

        Company J

        27. Company J did not highlight matters which might have significant adverse impact on its operation and financial position in the foreseeable future in the "Summary" and other relevant sections as required under Guidance Letter HKEX-GL27-121. For example, there was no discussion regarding the potential significant decrease in revenue resulting from the recent reorganization and massive layoff plan of one of Company J's top five customers, and the anticipated substantial decline in net profit. (Updated in May 2016)
        28. There was insufficient disclosure of the key terms of agreements with major customers.
        29. Certain information requested in the Exchange's pre-IPO guidance letter had not been adequately disclosed.

        Company K

        30. There were several deficiencies in disclosure:
        (i) There was no disclosure on the reason for the absence of title certificates for Company K's production facilities, the estimated impact on Company K in case of forced eviction, the legality of the lease agreement in respect of collectively-owned land, and analysis on the adequacy and sufficiency of contingency measures.
        (ii) The risks associated with Company K's business in international-sanctioned countries had not been adequately highlighted.
        (iii) There was inadequate disclosure on Company K's arrangements with subcontractors.
        (iv) There was limited information on Company K's business rationale to raise significant bank borrowings to acquire numerous properties from the controlling shareholders shortly before submitting the listing application.
        (v) The commentary on the year-on-year fluctuation on financial statement items and financial ratios was framed in very general terms.
        31. Company K submitted the listing application shortly after the latest audited financial period end date. Given such a limited period of time, there were concerns on whether adequate and sufficient audit work and due diligence had been performed by the reporting accountants and the sponsor on the financial information.

        THE DECISION

        32. The Exchange returned the applications.
        33. Subsequently, all but 2 applicants re-filed listing applications 3 to 119 days after the Exchange returned their previous applications. As they had disclosed and/ or provided the missing information/ documents, the Exchange accepted the re-filed applications.

        ****


        1 Withdrawn in May 2016. Superseded by Section A of Appendix 1 in HKEX-GL86-16.

        2 Withdrawn in February 2014. Superseded by HKEX-GL6-09A.

      • LD47-2013

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        HKEx LISTING DECISION
        HKEx-LD47-2013 (Published in January 2013) (Updated in April 2015)

        Parties Company A — a Main Board issuer

        Mr. X and Mr. Y — Company A's joint company secretaries
        Issue Whether Mr. X qualified to act as Company A's secretary after the waiver period
        Listing Rules Main Board Rule 3.28
        HKEx-LD35-1 (July 2003)
        Decision Mr. X qualified to act as Company A's secretary under Rule 3.28

        FACTS

        Background

        1. About three years ago, Company A proposed to appoint Mr. X and Mr. Y as its joint secretaries. Mr. Y fulfilled the then Rule 8.17(2) but Mr. X did not.
        2. At that time, the Exchange granted a 3-year waiver to Company A for the appointment of Mr. X as its secretary on the condition that Mr. X would be assisted by Mr. Y during the waiver period. The Exchange also informed Company A that it would revisit the situation at the end of the waiver period and would expect Mr. X to have acquired relevant experience to discharge the functions of a company secretary by that time.

        The issue

        3. Before the end of the waiver period, Company A provided information to the Exchange to demonstrate that Mr. X was capable of discharging the function of its secretary under Rule 3.28:
        a. Mr. X had been one of the joint secretaries of Company A for about three years. He was familiar with Company A's business and operations.
        b. Mr. X had been working closely with Mr. Y in handling Company A's secretarial and administrative matters. Mr. X had participated in various corporate actions of Company A including fundraising exercises and connected transactions, and assisted the directors in handling compliance issues.
        c. He had regularly attended training courses relating to a company secretary's duties during the waiver period.

        APPLICABLE LISTING RULES

        4. Rule 3.28 states that:
        The issuer must appoint as its company secretary an individual who, by virtue of his academic or professional qualifications or relevant experience, is, in the opinion of the Exchange, capable of discharging the functions of company secretary.
        Notes: 1 The Exchange considers the following academic or professional qualifications to be acceptable:
        (a) a Member of The Hong Kong Institute of Chartered Secretaries;
        (b) a solicitor or barrister (as defined in the Legal Practitioners Ordinance);and
        (c) a certified public accountant (as defined in the Professional Accountants Ordinance).
        2 In assessing "relevant experience", the Exchange will consider the individual's:
        (a) length of employment with the issuer and other issuers and the roles he played;
        (b) familiarity with the Listing Rules and other relevant law and regulations including the Securities and Futures Ordinance, Companies Ordinance, Companies (Winding Up and Miscellaneous Provisions) Ordinance and the Takeovers Code;
        (c) relevant training taken and/or to be taken in addition to the minimum requirement under rule 3.29; and
        (d) professional qualifications in other jurisdictions."
        5. Rule 8.17 states that:
        The issuer must appoint a company secretary who satisfies rule 3.28."
        6. The existing Rules 3.28 and 8.17 have been effective since 1 January 2012. Before the Rule amendments, Rule 8.17 stated that:
        The secretary of the issuer must be a person who is ordinarily resident in Hong Kong and who has the requisite knowledge and experience to discharge the functions of secretary of the issuer and who:-
        (1) in the case of an issuer which was already listed on 1st December 1989 held the office of secretary of the issuer on that date;
        (2) is an Ordinary Member of The Hong Kong Institute of Chartered Secretaries, a solicitor or barrister as defined in the Legal Practitioners Ordinance or a professional accountant; or
        (3) is an individual who, by virtue of his academic or professional qualifications or relevant experience, is, in the opinion of the Exchange, capable of discharging those functions."

        ANALYSIS

        7. When the Exchange granted the waiver, its expectation was that Mr. X would have acquired the "relevant experience" required under the then Rule 8.17 (now Rule 3.28) during the waiver period, and no extension of the waiver would be necessary.
        8. Based on Company A's submission at the end of the waiver period, the Exchange accepted that Mr. X was capable of discharging the functions of Company A's secretary. It had taken into account Mr. X's work experience at Company A, his role in handling the company's secretarial and Rule compliance matters and the relevant training taken by him in the past. It also noted that Company A had not committed any material breach of the Rules during the waiver period.

        CONCLUSION

        9. Mr. X qualified to act as Company A's secretary under Rule 3.28 after the waiver period.

      • LD46-2013

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        HKEx LISTING DECISION
        HKEx-LD46-2013 (Published in January 2013) (Updated in April 2015)

        Parties Company A — a Main Board issuer

        Mr. X — an appointee of Company A's secretary
        Issue Whether Mr. X qualified to act as Company A's secretary
        Listing Rules Main Board Rule 3.28
        Decision Mr. X qualified to act as Company A's secretary under Rule 3.28

        FACTS

        1. Company A proposed to appoint Mr. X as its company secretary and chief financial officer.
        2. Mr. X did not have the academic or professional qualifications set out in Note 1 to Rule 3.28. That said, Company A considered that Mr. X, by virtue of his professional qualification and relevant experience, was capable of discharging the functions of its company secretary:
        a. Mr. X was a member of a reputable overseas professional body of accountants.
        b. Before joining Company A, Mr. X was the chief financial officer of another listed issuer. In addition to financial management and reporting matters, he also participated in the preparation of the company's regulatory announcements and circulars.
        c. He had regularly attended training courses relating to corporate governance, accounting and financial reporting, the Listing Rules and company law.

        APPLICABLE LISTING RULES

        3. Rule 3.28 states that:
        "The issuer must appoint as its company secretary an individual who, by virtue of his academic or professional qualifications or relevant experience, is, in the opinion of the Exchange, capable of discharging the functions of company secretary.

        Notes:
        1 The Exchange considers the following academic or professional qualifications to be acceptable:
        (a) a Member of The Hong Kong Institute of Chartered Secretaries;
        (b) a solicitor or barrister (as defined in the Legal Practitioners Ordinance);and
        (c) a certified public accountant (as defined in the Professional Accountants Ordinance).
        2 In assessing "relevant experience", the Exchange will consider the individual's:
        (a) length of employment with the issuer and other issuers and the roles he played;
        (b) familiarity with the Listing Rules and other relevant law and regulations including the Securities and Futures Ordinance, Companies Ordinance, Companies (Winding Up and Miscellaneous Provisions) Ordinance and the Takeovers Code;
        (c) relevant training taken and/or to be taken in addition to the minimum requirement under rule 3.29; and
        (d) professional qualifications in other jurisdictions."

        ANALYSIS

        4. In light of Mr. X's professional qualifications, his working experience and the relevant training taken by him, the Exchange accepted that Mr X was capable of discharging the functions of Company A's secretary.

        CONCLUSION

        5. Mr. X qualified to act as Company A's secretary under Rule 3.28.

      • LD45-2013

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        HKEx LISTING DECISION
        HKEx-LD45-2013 (Published in January 2013)

        Party Company A — a Main Board issuer

        The Target — a company listed on the Australian Stock Exchange
        Issue Whether the Exchange would grant a waiver such that Company A could defer the publication of the competent person's report (CPR), valuation report (VR) and other disclosures as required under Rules 18.09(2), (3) and (4)
        Listing Rules Main Board Rules 18.09(2), 18.09(3) and 18.09(4)
        Decision The Exchange agreed to grant the waiver

        FACTS

        1. The Target was an iron ore development company and its principal assets were some iron mines in Australia.
        2. Company A proposed to make a conditional offer to acquire all interests in the Target not already held by it (the Offer). The Offer price was determined with reference to the Target's share price. The Offer was conditional on Company A acquiring at least a 50.1% interest in the Target.
        3. The Offer was a major transaction for Company A. Company A submitted that it would defer complying with the financial and other disclosure requirements in accordance with Rule 14.67A as it could meet the conditions set out in the Rule:
        (i) the Offer was not invited by the Target's board. Company A did not have access to the Target's non-public information and records necessary for complying the disclosure requirements under the Rules;
        (ii) ASX is a regulated, regularly operating and open stock exchange recognized by the Exchange; and
        (iii) the Target would become a subsidiary of Company A.
        4. According to Rule 14.67A, Company A would publish an initial circular to seek shareholders' approval for the Offer. It would publish a supplemental circular to include the outstanding information within 45 days of the earlier of it being able to (i) gain access to the Target's books and records; and (ii) exercise control over the Target.
        5. As the Offer was a Relevant Notifiable Transaction under Chapter 18, Company A's initial circular for the Offer should also contain a CPR and a VR on the Target's natural resources and other disclosures required under Rules 18.09(2), (3) and (4). For the same reasons set out in paragraph 3, Company A would have practical difficulty in obtaining the Target's non-public information for making the disclosures in the initial circular.
        6. Company A therefore sought a waiver from Rules 18.09(2), (3) and (4) so that it could defer the disclosure of information to the supplemental circular for the Offer. It submitted that it would summarise and reproduce the public statements and reports on the Target's mineral assets and other material information published by the Target in the initial circular to enable shareholders to make an informed voting decision on the Offer.

        APPLICABLE LISTING RULES

        7. Rule 18.05(2) to (6) provides that "a Mineral Company must include in its listing document:-
        ...
        (2) a statement that no material changes have occurred since the effective date of the Competent Person's Report. Where there are material changes, these must be prominently disclosed;
        (3) the nature and extent of its prospecting, exploration, exploitation, land use and mining rights and a description of the properties to which those rights attach, ... . Details of material rights to be obtained must also be disclosed;
        (4) a statement of any legal claims or proceedings that may have an influence on its rights to explore or mine;
        (5) disclosure of specific risks and general risks. Companies should have regard to Guidance Note 7 on suggested risk analysis; and
        (6) if relevant and material to the Mineral Company's business operations, information on the following:-
        (a) project risks arising from environmental, social, and health and safety issues;
        (b) any non-governmental organisation impact on sustainability of mineral and/or exploration projects;
        (c) compliance with host country laws, regulations and permits, and payments made to host country governments in respect of tax, royalties and other significant payments on a country by country basis;
        (d) sufficient funding plans for remediation, rehabilitation and, closure and removal of facilities in a sustainable manner;
        (e) environmental liabilities of its projects or properties;
        (f) its historical experience of dealing with host country laws and practices, including management of differences between national and local practice;
        (g) its historical experience of dealing with concerns of local governments and communities on the sites of its mines, exploration properties, and relevant management arrangements; and
        (h) any claims that may exist over the land on which exploration or mining activity is being carried out, including any ancestral or native claims."
        8. Rule 18.09 requires that "A mineral company proposing to acquire or dispose of assets which are solely or mainly Mineral or Petroleum Assets as part of a Relevant Notifiable Transaction must:-
        (1) comply with Chapter 14 and Chapter 14A, if relevant;
        (2) produce a Competent Person's Report, which must form part of the relevant circular, on the Resources and/or Reserves being acquired or dispose of as part of the Relevant Notifiable Transaction;
        ...
        (3) in the case of a major (or above) acquisition, produce a Valuation Report, which must form part of the relevant circular, on the Mineral or Petroleum Assets being acquired as part of the Relevant Notifiable Transaction; and...
        (4) comply with the requirements of rules 18.05(2) to 18.05(6) in respect of the assets being acquired."
        9. Rule 18.10 states that "a listed issuer proposing to acquire assets which are solely or mainly Mineral or Petroleum Assets as part of a Relevant Notifiable Transaction must comply with rule 18.09".

        ANALYSIS

        10. Under the Listing Rules, an issuer must ensure that the information in its circular for a notifiable transaction is accurate and complete in all material respects and not misleading or deceptive. The circular must contain all information necessary to allow the issuer's shareholders to make a properly informed decision on how to vote on the transaction.
        11. Rule 14.67A addresses issuers' practical difficulties in disclosing non-public financial and other information of the target companies in hostile takeover situations. The Exchange considers that the same principle may also apply to the disclosure requirements under Chapter 18 based on the circumstances of each case.
        12. Here the Exchange agreed to grant the waiver because:
        •   The Offer could meet the conditions set out in Rule 14.67A.
        •   The Target was listed on an overseas stock exchange, and had been providing regular updates on its mineral assets. The disclosures were subject to supervision by regulatory authorities. Company A would include material public information of the Target in the initial circular to enable shareholders to make an informed voting decision.

        CONCLUSION

        13. Company A was granted a waiver to defer the CPR, the VR and other disclosures as required under Rules 18.09(2), (3) and (4) to the supplement circular.

      • LD44-2013

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        HKEx LISTING DECISION
        HKEx-LD44-2013 (published in January 2013)

        Parties Company A — a Main Board issuer

        The Target — a company which Company A proposed to acquire from certain independent third parties
        Issue Whether the Target had the right to participate actively in the exploration for and/or extraction of natural resources
        Listing Rules Main Board Rules 14.06(6) and 18.03(1)
        Decision The Exchange accepted that the Target had the right to participate actively in the exploration of natural resources through an earn-in arrangement

        FACTS

        1. Company A proposed to acquire the Target which participated in a gold mining project (the Project).
        2. At the time of the acquisition, the Target did not have any interest in the Project, but it had entered into certain agreements (the Agreements) with the owner of the Project (the Owner) to "earn" an interest in it. Under the Agreements, the Target provided funding and technical expertise for the exploration activities of the Project. When the Target achieved the performance targets set out in the Agreements (including the completion of the scoping study, the pre-feasibility study and the feasibility study), the Owner would transfer 52% of its interest in the Project to the Target. Upon completion of the exploration works, the Target and the Owner would form a joint venture to develop the Project and share the profits of the mining activities.
        3. The size of the acquisition was very significant to Company A. When assessing whether the acquisition would constitute a reverse takeover, one of the factors that the Exchange considered was whether the Target could meet the new listing requirements (see Listing Decisions 95-1, 95-2 and 95-4 for guidance on the application of the reverse takeover Rules). There was an issue whether the Target could meet Rule 18.03(1) which requires a new applicant mineral company to have the right to participate actively in the exploration for and/or extraction of natural resources.
        4. Company A submitted that earn-in arrangements were common for exploration activities in the mining industry. While the Target did not yet own an interest in the Project, it had actively participated in the Project and could exercise sufficient influence in the decisions over the exploration activities through the Agreements given that:
        •   The Agreements gave the Target the sole and exclusive rights to explore for minerals over the Project areas. All the required licenses, permits and approvals had been obtained for the Target to conduct the exploration activities.
        •   The Target was the manager of the Project and was responsible for executing the scoping study, the pre-feasibility study and the feasibility study. It also had the right to appoint other contractors and consultants to assist it in carrying out the activities.
        •   The Target and the Owner had set up a committee to oversee the exploration activities of the Project, including monitoring the progress of the scoping study, the pre-feasibility study and the feasibility study of the Project, assessing whether the studies met the required technical standards, and making recommendation as to whether the Project should proceed to the next stage. A majority of the committee members were appointed by the Target.
        •   The Owner did not have right to unilaterally terminate the Agreements unless the Target materially breached the Agreement terms.

        APPLICABLE LISTING RULES

        5. Rule 18.03(1) requires that "A mineral company must establish to the Exchange's satisfaction that it has the right to participate actively in the exploration and/or extraction of natural resources, either:—
        (a) through control over a majority (by value) of the assets in which it has invested together with adequate rights over the exploration for and/or extraction of natural resources; or

        Note: 'control over a majority' means an interest greater than 50%.
        (b) through adequate rights (arising under arrangements acceptable to the Exchange), which give it sufficient influence in decisions over the exploration for and/or extraction of the natural resources;"
        6. Paragraph 9 under Part B of Consultation Conclusions on New Listing Rules for Mineral Companies published in May 2010 states that "The natural resources industry is characterized by enforceable arrangements which may not give a company control of its assets but will give it a right to participate in the exploration for and/or extraction of Natural Resources. These agreements include joint ventures, production sharing contracts or specific government mandates, which are all legitimate ways of participating in the exploration for and/or extraction of Natural Resources. Companies adopting these arrangements will accordingly be eligible under Chapter 18 provided that their rights give them sufficient influence over the exploration for and/or extraction of Natural Resources."
        7. FAQ Series 12, No. 3 states that "Companies may rely on exploration and extraction rights held by third parties if they participate in mineral and/or exploration activity under joint ventures, product sharing agreements or other valid arrangements if they can demonstrate the agreements give them sufficient influence over the exploration for and extraction of Resources and Reserves. Ordinarily we would expect that applicants have an interest of at least 30% in assets relevant to extraction of Reserves. However, we will consider other arrangements where companies have interests smaller than 30% but actively operate mining projects. Rights granted under specific government mandates will be recognized..."

        ANALYSIS

        8. In this case, the Target did not have any interest in the Project at the time of the acquisition and could not meet Rule 18.03(1)(a).
        9. Rule 18.03(1)(b) states that the Exchange may accept other arrangements which give a company adequate rights to actively operate mining projects. Here, the Target had entered into the Agreements which allowed it to explore for minerals in the Project areas using its own resources and to secure an interest in the Project by completing the exploration works. Company A had demonstrated that the Agreements gave the Target the rights to exercise significant influence in the decisions over the exploration activities of Project.

        CONCLUSION

        10. The Exchange considered that the Target had the right to participate actively in the exploration of natural resources as required under Rule 18.03(1)(b).

      • LD43-2013

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        HKEx LISTING DECISION
        HKEx-LD43-2013 (published in January 2013)

        Parties Company A — a Main Board issuer

        The Target — a company which Company A proposed to acquire from a third party
        Issue Whether the Target had a clear path to commercial production
        Listing Rules Main Board Rules 14.06(6), 18.04 and 18.07
        Decision The Target was able to demonstrate a clear path to commercial production

        FACTS

        1. Company A proposed to acquire the Target. The Target had interests in certain mining companies in the PRC (the Mining Companies) which held the mining licenses of a number of coal mines (the Coal Mines) in a province (the Province) in the PRC.
        2. There was a substantial amount of resources at the Coal Mines. However, the operations of the Coal Mines had been suspended for some years to undertake reconstruction and improvement works required by the government authorities. The Mining Companies had not yet completed the improvement works and had not obtained all the necessary permits and licenses for the Coal Mines to commence commercial production.
        3. The size of the Acquisition was very significant to Company A. When assessing whether the acquisition would constitute a reverse takeover, one of the factors that the Exchange considered was whether the Target could meet the new listing requirements (see Listing Decisions 95-1, 95-2 and 95-4 for guidance on the application of the reverse takeover Rules). There was an issue whether the Target could demonstrate a clear path to commercial production.
        4. To address the issue, Company A submitted details of the reconstruction and improvement works of the Coal Mines and its plans for the mines to proceed to production with indicative dates and costs. It also submitted additional information to demonstrate that the Coal Mines would be able to resume operations as planned:
        •   The Target was one of the entities delegated by the government authorities to undertake the merger and reorganisation of coal mines in the Province. Under the government policies at the relevant time, coal mines which were not able to meet the required standard of safety and minimum production capacity were closed until the necessary reconstruction and improvement works had been undertaken. The Target acquired the Mining Companies to undertake the merger and reorganisation of the Coal Mines according to the policies.
        •   When Company A acquired the Target, most of the reconstruction and improvement works of the Coal Mines had been completed. Company A would also disclose all the outstanding permits and licenses necessary for commercial production of the Coal Mines and the status of the relevant applications. The PRC legal advisers confirmed that there was no impediment for the Target group to obtain the outstanding permits and licenses.
        •   The competent person was of the view that the schedule for the reconstruction and improvement works of the Coal Mines and the expected timetable for the commencement of commercial production were attainable.

        APPLICABLE LISTING RULES

        5. Rule 18.03(1) states that "A Mineral Company must:—
        (1) establish to the Exchange's satisfaction that it has the right to participate actively in the exploration for and/or extraction of Natural Resources ..."
        6. Rule 18.04 states that "if a Mineral Company is unable to satisfy either the profit test in rule 8.05(1), ... , it may still apply to be listed if it can establish to the Exchange 's satisfaction that its directors and senior managers, taken together, have sufficient experience relevant to the exploration and/or extraction activity that the Mineral Company is pursuing."
        7. HKEx HKEx-GL22-10 and paragraph 6 under the Executive Summary of Consultation Conclusions on New Listing Rules for Mineral Companies published in May 2010 states that, "While we expect most applicants taking advantage of Rule 18.04 will still be at the development stage, those who are already in the production stage are not necessarily precluded. This is because Mineral Companies in production may have junior assets that are yet to be developed. Waivers from the financial standard requirements are only likely to be considered favourably where Mineral Companies demonstrate a clear path to commercial production".
        8. Rule 18.07 states that "if a Mineral Company has not yet begun production, it must disclose its plans to proceed to production with indicative dates and costs. These plans must be supported by at least a Scoping Study, substantiated by the opinion of a Competent Person. If exploration rights or rights to extract Resources and/or Reserves have not yet been obtained, relevant risks to obtaining these rights must be prominently disclosed."

        ANALYSIS

        9. In this case, the Target did not meet the track record requirements for new listing as required under Rule 8.05.
        10. As stated in the guidance materials published by the Exchange, waivers from the financial standard requirements are only likely to be considered favourably where mineral companies demonstrate a clear path to commercial production. In this case, there was concern whether the Target's plan for commercial production could be achieved in light of the prolonged suspension of operations of the Coal Mines and that the Mining Companies had not obtained all the necessary permits and licenses for coal production.
        11. However, the Exchange also considered the special circumstances of the case, and Company A's submission to demonstrate that the Coal Mines would be able to commence commercial production within a reasonable period. The risks to obtaining regulatory approval for commercial production of the Coal Mines would be prominently disclosed.

        CONCLUSION

        12. The Exchange considered that the Target had demonstrated a clear path to commercial production.

      • LD42-2013

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        HKEx LISTING DECISION
        HKEx-LD42-2013 (Published in January 2013)

        Party Company A — a Main Board issuer
        Issue Whether the Exchange would waive the requirement to produce a competent person's report (CPR) on the mineral resources to be disposed of by Company A
        Listing Rules Main Board Rule 18.09(2)
        Decision The Exchange did not grant the waiver

        FACTS

        1. Company A proposed to sell its interest in one of its mining projects (Mine Y) to a third party, which would be a very substantial disposal. The consideration was determined with reference to the value of the reserves and resources of the mine. The Rules required Company A to include a CPR on Mine Y in the circular for the disposal.

        Background

        2. Mine Y was acquired by Company A some years ago (before the current Chapter 18 came into effect). At that time, a technical report for Mine Y (the Technical Report) was included in the transaction circular. The report was prepared by an expert (the Expert) using the Chinese Standard. The Expert provided a comparison between the Chinese Standard and the JORC Code, and quoted the resources and reserves using categorization under the JORC Code. However, the resources and reserves were not reported as JORC Code compliant resources and reserves because certain information required for such conversion was not available to the Expert.
        3. After the completion of the acquisition, Company A updated Mine Y's resources and reserves in accordance with the Chinese Standard in its subsequent annual reports.

        Waiver application

        4. For the proposed disposal, Company A sought a waiver from producing a CPR on Mine Y in the circular. It was of the view that its shareholders would have sufficient information to assess the proposed disposal based on the Technical Report previously provided, and a "no material change statement" by Company A and the Expert to be included in the circular for the disposal. It would be unduly burdensome to engage a competent person to prepare a new CPR on Mine Y given the substantial time and costs required.

        APPLICABLE LISTING RULES

        5. Rule 2.13 provides that "... any announcement or corporate communication required pursuant to the Exchange Listing Rules must be prepared having regard to the following general principles:
        ...
        (2) the information contained in the document must be accurate and complete in all material respects and not be misleading or deceptive. ..."
        6. Chapter 18 defines that:
        "Mineral Company" ... a listed issuer that completes a Relevant Notifiable Transaction involving the acquisition of Mineral or Petroleum Assets.
        7. Rule 18.09 requires that "A mineral company proposing to acquire or dispose of assets which are solely or mainly Mineral or Petroleum Assets as part of a Relevant Notifiable Transaction must:
        ...
        (2) produce a Competent Person's Report, which must form part of the relevant circular, on the Resources and/or Reserves being acquired or dispose of as part of the Relevant Notifiable Transaction;

        Note: The Exchange may dispense with the requirement for a Competent Person's Report on disposals where shareholders have sufficient information on the assets being disposed of.

        ..."
        8. Rule 18.29 states that "A Mineral Company must disclose information on mineral Resources, Reserves and/or exploration results either:—
        (1) under:
        (a) the JORC Code;
        (b) NI 43-101; or
        (c) the SAMREC Code,
        ..."

        ANALYSIS

        9. In this case, the Exchange noted the Technical Report was issued some years ago and was out-dated. It was prepared under the Chinese standard which however is not a recognised reporting standard acceptable by the Exchange under the current Chapter 18. The Exchange did not agree that Company A's proposed disclosure would provide accurate and complete information on the resources of Mine Y for the shareholders to make an informed voting decision on the disposal.

        CONCLUSION

        10. The Exchange refused the waiver.

      • LD41-2013

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        HKEx LISTING DECISION
        HKEx-LD41-2013 (published in January 2013)

        Parties Company A — a Main Board issuer

        The Target — a company which Company A proposed to acquire from an independent third party
        Issue Whether the Target had a portfolio of natural resources that was meaningful and of sufficient substance to justify a listing
        Listing Rules Main Board Rules 14.06(6) and 18.03(2)
        Decision The Target could not demonstrate that it had a portfolio of natural resources as required solely based on the resources and reserves identified under the Chinese Standard

        FACTS

        1. Company A proposed to acquire the Target. The Target held mining rights of certain iron mines in the PRC (the Mines) and had not yet commenced production.
        2. The size of the Acquisition was very significant to Company A. When assessing whether the acquisition would constitute a reverse takeover, one of the factors that the Exchange considered was whether the Target could meet the new listing requirements (see Listing Decisions 95-1, 95-2 and 95-4 for guidance on the application of the reverse takeover Rules). There was an issue whether the Target could meet Rule 18.03(2) which requires a new applicant mineral company to have at least a portfolio of Indicated Resources, and the portfolio must be meaningful and of sufficient substance.
        3. To address the issue, Company A provided the estimate of resources and reserves for the Mines identifiable under the Chinese standard. Company A would appoint a competent person to report on the resources and reserves under the JORC Code when preparing the circular for the acquisition at a later stage.

        APPLICABLE LISTING RULES

        4. Rule 18.03(2) states that "A Mineral Company must:-
        ...
        (2) establish to the Exchange's satisfaction that it has at least a portfolio of:-
        (a) Indicated Resources; or
        (b) Contingent Resources,
        identifiable under a Reporting Standard and substantiated in a Competent Person's Report. This portfolio must be meaningful and of sufficient substance to justify a listing;"
        5. Rule 18.01(3) defines "Reporting Standard" as:
        "a recognised standard acceptable to the Exchange, including:
        (1) the JORC Code, NI 43-101, and the SAMREC Code, with regard to mineral Resources and Reserves;
        (2) PRMS with regard to Petroleum Resources and Reserves; and
        (3) CIMVAL, the SAMVAL Code, and the VALMIN Code, with regard to valuations."
        6. Rule 18.29 states that "A Mineral Company must disclose information on mineral Recourses, Reserves and/or exploration results either:
        (1) under:
        (a) the JORC Code;
        (b) NI 43-101; or
        (c) the SAMREC Code,
        as modified by this Chapter; or
        (2) under other codes acceptable to the Exchange as communicated to the market from time to time, provided the Exchange is satisfied that they give a comparable standard of disclosure and sufficient assessment of the underlying assets.

        Note: The Exchange may allow presentation of Reserves under other reporting standards provided reconciliation to a Reporting Standard is provided. A Reporting Standard applied to specific assets must be used consistently."
        7. As to the issue on the acceptance of other reporting standards, paragraph 5.14 of Consultation Paper on New Listing Rules for Mineral Companies published in September 2009 states that: "We propose to recognise Russian and Chinese standards when they are more widely accepted. The current concerns over comparability of these standards with those internationally recognised and a lack of global recognition necessitate a transitional period where reconciliations to JORC-type codes will protect the interests of investors." As set out in paragraph 77 and 81 under Part B of the Consultation Conclusions published in May 2010 (the Consultation Conclusions), the Exchange decided to implement the proposal to request reconciliation to one of the Reporting Standards where information is presented in accordance with Russian or Chinese standards, until such time as they achieve widespread recognition or efforts at convergence between these standards and JORC-type codes are sufficiently advanced.
        8. Paragraphs 83 under Part B of the Consultation Conclusion further states that "The crucial difference between Chinese or Russian standards and the JORC-type Codes is that the former standards are based on in-situ estimates, while the latter are focused on commercial extractability, taking account of mining dilution and losses. Listing applicants should be cautioned that owing to the difference between Chinese/Russian resource estimates and those estimated under JORC, a resource under Chinese/Russian standards may not be categorized as such under a JORC-type Code. A "Reserve" referred to by a Russian or Chinese estimate is only a Resource under the JORC Code as it does not include economic and technical factors."
        9. Paragraph 4 under the Executive Summary of Consultation Conclusions elaborated our view on early stage exploration company: "Given the importance of retail investors in the Hong Kong IPO market and the significantly higher investment risks involved in investing in early stage or pure-play exploration companies, we consider it is not appropriate to list early stage exploration companies at this time."
        10. Paragraph 224 under Part B of Consultation Conclusions further states that "Early stage exploration companies are considered speculative by nature. The requirement for Indicated or Contingent Resources together with a production plan should also ensure that the market is less susceptible to potential abuse."

        ANALYSIS

        11. As stated in the Consultation Conclusion, the Exchange considers it inappropriate to list early exploration companies. To ensure the market is less susceptible to abuse, the Rules require new applicant mineral companies to have Indicated or Contingent resources together with a production plan.
        12. In this case, when the Exchange determined the transaction classification at the announcement stage, Company A could only provide the estimate on resources and reserves under the Chinese standard. However, Chinese standards are not yet recognized as acceptable reporting standards for the purpose of the Chapter 18 requirements. As the basis for information presentation under Chinese standards and JORC-like codes are fundamentally different, resources and reserves presented under Chinese standards may not be recognized as such under JORC-like codes.

        CONCLUSION

        13. The Target could not meet Rule 18.03(2) solely based on the estimate of resources and reserves under the Chinese standard.

      • LD40-2013

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        HKEx LISTING DECISION
        HKEx-LD40-2013 (published in January 2013)

        Parties Company A — a Main Board issuer

        The Target — a company which Company A proposed to acquire from a third party vendor
        Issue Whether the Exchange would waive the requirements to produce competent person's reports (CPR) and valuation reports on some of the mining interests held by the Target
        Listing Rules Main Board Rules 18.09(2) and (3)
        Decision The Exchange waived the requirements

        FACTS

        1. Company A proposed to acquire the Target.
        2. The Target was in the business of exploration and mining of minerals. Its primary asset was the interest in a mining project (Mine X) and it held the mining licence for the mine. The Target also held the exploration licences for two other mines (the Other Mines)
        3. Under the Rules, Company A was required to include CPRs and valuation reports covering all the mines held by the Target in its circular for the acquisition. It sought a waiver from producing the CPRs and valuation reports on the Other Mines for the following reasons:
        •   The Target had not undertaken any exploration or mining activities at the Other Mines. There was not much geological information or resources data for these mines. To prepare CPRs, the competent person would need to conduct substantial work and spend a long time to complete the process.
        •   Based on the due diligence work performed by Company A, resources in the Other Mines appeared to be mainly inferred resources. Their economic values were expected to be immaterial and no valuation on these resources would be allowed under the Rules.
        •   The reason for Company A to acquire the Target was to obtain a controlling interest in Mine X which had a substantial amount of reserves and resources. Company A had no intention to explore or exploit the Other Mines after completion of the acquisition. When determining the consideration for the acquisition, it did not take into account the value of the Other Mines. Based on the preliminary valuation, the value of Mine X represented over 90% of the consideration.
        4. In light of the above, Company A considered the Other Mines were insignificant to the portfolio of mineral resources to be acquired under the acquisition. It would be unduly burdensome to require Company A to produce CPRs and valuation reports on the Other Mines in the circular.

        APPLICABLE LISTING RULES

        5. Rule 2.13 provides that "... any announcement or corporate communication required pursuant to the Exchange Listing Rules must be prepared having regard to the following general principles:
        ... ...
        (2) the information contained in the document must be accurate and complete in all material respects and not be misleading or deceptive. ..."
        6. Rule 18.09 requires that "A mineral company proposing to acquire or dispose of assets which are solely or mainly Mineral or Petroleum Assets as part of a Relevant Notifiable Transaction must:
        ...
        (2) produce a Competent Person's Report, which must form part of the relevant circular, on the Resources and/or Reserves being acquired or dispose of as part of the Relevant Notifiable Transaction;

        ...
        (3) in the case of a major (or above) acquisition, produce a Valuation Report, which must form part of the relevant circular, on the Mineral or Petroleum Assets being acquired as part of the Relevant Notifiable Transaction; and... "
        7. Rule 18.10 states that "a listed issuer proposing to acquire assets which are solely or mainly Mineral or Petroleum Assets as part of a Relevant Notifiable Transaction must comply with rule 18.09".

        ANALYSIS

        8. In this case, the Exchange was satisfied with Company A's explanation that the Other Mines were only a minor part of the Target's portfolio of mineral resources under the acquisition, and the waiver would not result in an omission of material information in the circular. The Exchange agreed that it would be unduly burdensome for Company A to produce the CPRs and valuation reports on the Other Mines.

        CONCLUSION

        9. The Exchange agreed to waive the requirements for producing CPRs and valuation reports on the Other Mines.

      • LD39-2013

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        HKEx LISTING DECISION
        HKEx-LD39-2013 (published in January 2013)

        Parties Company A — a Main Board issuer

        The Vendor — an independent third party

        The Target — a company which Company A proposed to acquire from the Vendor
        Issue Whether the Target had a portfolio of natural resources that was meaningful and of sufficient substance to justify a listing
        Listing Rules Main Board Rules 14.06(6) and 18.03(2)
        Decision The Target did not have a portfolio of natural resources as required

        FACTS

        1. Company A proposed to acquire the Target that was engaged in the exploration, exploitation and processing of mineral resources in some offshore areas (the Areas). The acquisition was subject to disclosure and shareholder approval requirement under Chapter 14 of the Rules.
        2. The consideration for the acquisition would include cash and consideration shares and convertible bonds to be issued by Company A. It was agreed that:
        •   Company A would pay 10% of the consideration to the Vendor upon completion of the acquisition on the basis that the Vendor produced a valuation report showing that the Areas had Indicated Resources of value not less than 10% of the consideration.
        •   Company A would deliver to an escrow agent the convertible bonds representing the remaining 90% of the consideration. After completion of the acquisition, the Vendor could perform extra works in the Areas during a specified period, and the escrow agent would release an amount of convertible bonds to the Vendor according to the value of any additional Indicated Resources discovered. After the specified period, Company A would cancel any convertible bonds that had not been released to the Vendor, and the consideration for the acquisition would be reduced accordingly.
        3. The size of the acquisition was very significant to Company A. When assessing whether the acquisition would constitute a reverse takeover, one of the factors that the Exchange considered was whether the Target could meet the new listing requirements (see Listing Decisions 95-1, 95-2 and 95-4 for guidance on the application of the reverse takeover Rules). There was an issue whether the Target could meet Rule 18.03(2) which requires a new applicant mineral company to have at least a portfolio of Indicated Resources, and the portfolio must be meaningful and of sufficient substance.
        4. Company A submitted that it would only pay the consideration based on the value of the Indicated Resources identified under a reporting standard acceptable by the Rules. The portfolio of mineral resources to be acquired was meaningful and of sufficient substance.

        APPLICABLE LISTING RULES

        5. Rule 18.03(2) states that "A Mineral Company must:-
        ...
        (2) establish to the Exchange's satisfaction that it has at least a portfolio of:-
        (a) Indicated Resources; or
        (b) Contingent Resources,
        identifiable under a Reporting Standard and substantiated in a Competent Person's Report. This portfolio must be meaningful and of sufficient substance to justify a listing;"
        6. Paragraph 4 under the Executive Summary section of Consultation Conclusions on New Listing Rules for Mineral Companies published in May 2010 (the Consultation Conclusion) elaborated our view on early stage exploration company: "Given the importance of retail investors in the Hong Kong IPO market and the significantly higher investment risks involved in investing in early stage or pure-play exploration companies, we consider it is not appropriate to list early stage exploration companies at this time."
        7. Paragraph 224 under Part B of Consultation Conclusions further states that "Early stage exploration companies are considered speculative by nature. The requirement for Indicated or Contingent Resources together with a production plan should also ensure that the market is less susceptible to potential abuse."

        ANALYSIS

        8. As stated in the Consultation Conclusion, the Exchange considers it inappropriate to list early exploration companies. To ensure the market is less susceptible to abuse, the Rules require new applicant mineral companies to have Indicated or Contingent Resources together with a production plan.
        9. When Company A acquired the Target, the parties could only prove the existence of Indicated Resources of value representing 10% of the consideration, and a substantial part of the Target's portfolio of minerals was not substantiated in the competent person's report. The Vendor was given a long period after completion of the acquisition to ascertain whether there were any additional Indicated Resources in the Areas. The circumstances of the case indicated that the Target was an early exploration company at the time of the acquisition.

        CONCLUSION

        10. The Target did not have a portfolio of natural resources required under Rule 18.03(2).

    • 2012

      Select By Rule or Topic: Download the consolidated index here

      Please visit Archive to view listing decisions which have been superseded or are no longer applicable.

      This section comprises decisions on cases handled by the Listing Committee and/or the Listing Division, to enhance transparency and market understanding of their interpretation of the Listing Rules. Each decision was based on its specific circumstances and is not a precedent for future cases.

      Effective from 1 January 2011, listing decisions will be published under a new naming format as illustrated below:

      Before 1 January 2011 On or After 1 January 2011
       
      HKEx-LD100-1
      HKEx-LD100-2
      HKEx-LD101-1
       
      HKEx-LD1-2011
      HKEx-LD2-2011
      HKEx-LD3-2011

      Listing decisions published before 1 January 2011 continue to bear the old references.

      LD Series Number First Release Date (Last Update Date)
      (mm/yyyy)
      Listing Rules/ Topics Particulars
      LD38-2012 10/2012 Main Board Rules 13.48(1), 13.49(6); Paragraph 3 of Practice Note 10 of the Rules Whether to grant a waiver from strict compliance with the requirement to issue an interim report under Rule 13.48(1)
      LD37-2012 09/2012 GEM Rules 2.06, 2.07, 2.09 and 11.06 Whether Company A's deteriorating financial performance and uncertain business prospects would render it unsuitable for listing
      LD36-2012 08/2012 Rules 19.05 and 19.30 and GEM Rule 24.05 Whether the Exchange would consider South Korea an acceptable jurisdiction under Chapter 19 of the Main Board Rules and Chapter 24 of the GEM Rules

      (Withdrawn, superseded by South Korea Country Guide in December 2013)
      LD35-2012 07/2012
      (08/2018)
      Main Board Rule 13.24 Whether Company A would have sufficient operations or assets under Rule 13.24 after the Proposed Transactions
      LD34-2012 07/2012 Main Board Rules 3.08, 3.09 and 8.15 Whether Mr. A's and Mr. B's conduct at the Predecessor affected their suitability under Listing Rules 3.08 and 3.09 and Company's A ability to comply with Listing Rule 8.15
      LD33-2012 07/2012
      (09/2013)
      GEM Rules 14.08(7) and 17.56(2) (Equivalent to Main Board Rules 11.07 and 2.13(2)) Disclosure requirements for two applicants engaged in the pawn loan business in the People's Republic of China ("PRC")
      LD32-2012 06/2012 Main Board Rules 18.03 and 18.05 Whether Company A must prepare a competent person's report ("CPR") for mining interests it intended to acquire or develop
      LD31-2012 05/2012 Listing Rules 2.13(2)(a), 8.04, 8.05(1) and 18.04 Whether disclosures relating to the allegations in the complaint against certain person(s) whose surname(s) was/ were identical to those of Company A's previous management members were adequate and whether a waiver from Rule 18.04 should be granted to Company A in view of the lack of a clear path to commercial production
      LD30-2012 04/2012 Main Board Rule 8.04; Paragraph 27A of Appendix 1A of the Rules Whether Company A's financial and operational reliance on Parent Company rendered Company A not suitable for listing
      LD29-2012 03/2012 Rule 14.06(6)(b) Whether Company A's proposed acquisition of the Target from Company B was a reverse takeover
      LD28-2012 03/2012 Rule 14.67(6)(a)(i) Whether the Exchange would grant a waiver to Company A from the requirements for an accountants' report on the Target in the circular
      LD27-2012 03/2012
      (03/2018)
      Rules 19.05 and 19.30 and GEM Rule 24.05 The basis for accepting Company X's incorporation in the State of Maryland, USA under Chapter 19 of the Main Board Rules
      (Updated in April 2014 and March 2018)
      LD26-2012 02/2012
      (07/2018)
      Main Board Rules 7.19A(1) and 7.27A Whether Company A could seek a prior mandate from its shareholders for conducting a rights issue under Rules 7.19A(1) and 7.27A
      LD25-2012 02/2012
      (07/2018)
      Main Board Rules 13.36 and 19A.38 Whether Company A's proposal to issue rights shares under a general mandate would comply with the Listing Rules
      LD24-2012 02/2012 Rules 19.05 and 19.30 and GEM Rule 24.05 Whether the Exchange would consider the State of Delaware an acceptable jurisdiction under Chapter 19 of the Main Board Listing Rules and Chapter 24 of the GEM Listing Rules

      (Withdrawn, superseded by United States of America — Delaware Country Guide in December 2013)

      • LD38-2012

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        HKEx LISTING DECISION
        HKEx-LD38-2012 (published in October 2012)

        Summary
        Name of Party Company A — a Main Board listing applicant whose A-shares were also listed on a PRC stock exchange
        Subject Whether to grant a waiver from strict compliance with the requirement to issue an interim report under Rule 13.48(1)
        Listing Rules Rules 13.48(1), 13.49(6); Paragraph 3 of Practice Note 10 of the Rules
        Decision The Exchange agreed to waive Rule 13.48(1) subject to the conditions in paragraph 10

        SUMMARY OF FACTS

        1. The A-shares of Company A were listed on a stock exchange in the People's Republic of China (the 'PRC'). Its prospectus would include an accountants' report for the three financial years ended 31 December of Year 3 and the three months ended 31 March of Year 4. It intended to list on the Exchange in September of Year 4.
        2. Company A published its interim results and report for the six months ended 30 June of Year 4 (prepared under PRC Generally Accepted Accounting Principles) on the website of the PRC stock exchange in August of Year 4. Company A was not required to send a hard copy of its interim report to its A-share shareholders under A-share regulatory requirements. Under HKEx-LD54-41, Company A would include the following information on its interim results in its prospectus:
        a. its unaudited interim results for the six months ended 30 June of Year 4 with comparative figures for the six months ended 30 June of Year 3 prepared under International Financial Reporting Standards, and the corresponding management discussion and analysis; and
        b. the Reporting Accountants‟ review report on the interim results in accordance with the standard 2 promulgated by Hong Kong Institute of Certified Public Accountants.
        3. Company A submitted that full compliance with Rule 13.48(1) would not provide any new information to its shareholders or potential investors but would incur unnecessary costs, given that the relevant financial information for the six months ended 30 June of Year 4 in the interim report would be disclosed in its prospectus. Accordingly, it applied for a waiver of Rule 13.48(1).

        THE ISSUE RAISED FOR CONSIDERATION

        4. Whether to grant Company A a waiver of Rule 13.48(1)

        APPLICABLE LISTING RULES OR PRINCIPLE

        5. Rule 13.48(1) requires an issuer to send to its shareholders an interim report or a summary interim report in respect of the first six months of the financial year within three months after the end of that period.
        6. Rule 13.49(6) requires an issuer to publish an interim results announcement in respect of the first six months of the financial years within two months after the end of that period.
        7. Paragraph 3 of Practice Note 10 of the Rules provides that in the event that the results for the interim period (containing financial information required for interim results announcements under paragraph 46(1) of Appendix 16) have been included in the prospectus for the purpose of applying for a listing on the Exchange, there will be no obligation to separately publish the results.

        THE ANALYSIS

        8. Paragraph 3 of Practice Note 10 of the Rules only exempts Company A from publishing an interim results announcement under Rule 13.49(6). However, Company A was still required under Rule 13.48(1) to send to its shareholders an interim report or a summary interim report given that its listing date was within three months after the interim period.
        9. In determining whether a Rule 13.48(1) waiver should be granted, the Exchange noted Company A's submission that the relevant financial information for the six months ended 30 June of Year 4 in the interim report would be disclosed in its prospectus.

        THE DECISION

        10. Having considered the submission mentioned in paragraph 3 above, the Exchange granted a Rule 13.48(1) waiver in respect of its Year 4 interim report provided that Company A:
        a. included in its prospectus (i) the unaudited financial information in respect of the six months ended 30 June of Year 4 with comparative figures for the six months ended 30 June of Year 3 prepared under International Financial Reporting Standards, and the corresponding management discussion and analysis; and (ii) the Reporting Accountants' review report on the above interim financial information;
        b. was not in breach of its articles or laws and regulations of its place of incorporation or other regulatory requirements, regarding its obligation to publish and distribute interim reports and accounts; and
        c. included in its prospectus a statement that it would comply with the Model Code for Securities Transactions and Code on Corporate Governance set out in Appendices 10 and 14 to the Rules respectively for the year ending 31 December of Year 4.

        1 HKEx-LD54-4 is about the financial information that a listing applicant is required to include in its prospectus if it has published unaudited interim results on another exchange on which its shares are listed.

        2 Hong Kong Standard on Review Engagements 2410 "Review of Interim Financial Information Performed by the Independent Auditor of the Entity".

      • LD37-2012

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        HKEx LISTING DECISION
        HKEx-LD37-2012 (published in September 2012)

        Summary
        Party Company A — a GEM listing applicant
        Issue Whether Company A's deteriorating financial performance and uncertain business prospects would render it unsuitable for listing
        Listing Rules GEM Rules 2.06, 2.07, 2.09 and 11.06.
        Decision Given the concerns over Company A's sustainability, uncertainty on the prospect of the bulk sales and packaged sales businesses and to a lesser extent, the competition and reliance on its controlling shareholder, the Exchange considered that these concerns could not be appropriately addressed by way of disclosure and decided to reject Company A's application.

        FACTS

        1. Company A principally engaged in a processing business in the PRC with ancillary trading in raw materials.
        2. Its prospectus included its financial results from Year 1 to Year 3. It submitted to the Exchange for vetting its forecast results for Year 4. It satisfied the minimum cash flow requirement under GEM Rule 11.12A(1) and submitted that it would have sufficient working capital for at least 12 months after the date of prospectus.

        Deteriorating financial performance

        3. Company A had recorded a continuously declining gross profit margin from over 6% to less than 2.5% from Year 1 to Year 3, with a net loss of over HK$2 million in Year 3. It projected a loss of HK$5 million in Year 4, despite revenue continuing to increase in Year 2 (60% growth) and Year 3 (10% growth). Excluding the listing expenses, there was still a decreasing trend of net profit margin from 1.5% in Year 1 to 0.2% in Year 3, and a projection of 0.1% in Year 4.
        4. Raw material costs had accounted for over 95% of its cost of goods sold during the track record period. The raw materials prices which were quoted in open commodity markets had fluctuated substantially during the track record period (with a year-on-year increase of 40% and 25% between Year 1 and Year 3). Company A had not been able to fully pass the increase in raw materials costs to its customers. Previous measures to hedge raw materials prices had been ineffective and had resulted in a loss that took up about 30% of its pre-tax profit in Year 1.
        5. The gross profit margin from selling its finished goods had been even lower than that from trading of its excess raw materials during the track record period (e.g. 2% compared to 4% in Year 3).
        6. It had recorded significant net foreign exchange gains on financing activities in Year 2 and Year 3. Excluding these foreign exchange gains, Company A would have recorded an even slimmer net profit in Year 2 and a more substantial loss in Year 3.
        7. Its interest coverage ratio declined from over 2.5 times to less than one time during the track record period, and its weighted average interest rates increased from about 2% to over 5% during the same period. Interest expenses had continued to increase during the track record period. It had also obtained substantial interest-free loans from its controlling shareholder.
        8. Based on Company A's breakeven analysis, it would only be able to return to profit in Year 4 if it could secure an over 20% increase in selling price or sales quantity. However, according to its forecast, it only expected a 2% increase in revenue in Year 4.

        Uncertainty over the prospects of Company A's bulk sales and packaged sales businesses

        9. Company A's products were available in packaged and bulk form. During the track record period, Company A had mainly sold its products in bulk form. In view of the industry trend to shift to packaged products, Company A had begun to produce packaged products since Year 1 and planned to substantially expand the production scale going forward.
        10. Certain local governments had placed restrictions on sales in bulk form since Year 2. Certain of Company A's sales during the track record period fell under these restrictions.
        11. Packaged sales accounted for 1%, 1% and 2% of revenue in Year 1 to Year 3, and were forecast to increase to about 3% in Year 4. They contributed less than HK$1 million gross profit in each of Year 1 and Year 2, and recorded a gross loss in Year 3 and a forecast loss in Year 4.
        12. The sponsor and Company A's directors considered that Company A's business would be sustainable after listing. They also considered that Company A's proposed expansion plan was feasible and appropriate.

        APPLICABLE RULES

        13. GEM Rule 2.06 states that the GEM Rules are designed to ensure that investors have and can maintain confidence in the market and in particular that, applicants are suitable for listing.
        14. GEM Rule 2.07 states that the GEM Rules are not exhaustive and that the Exchange may impose additional requirements or make listing subject to special conditions whenever it considers it appropriate.
        15. GEM Rule 2.09 states that suitability for listing depends on many factors. Applicants for listing should appreciate that compliance with the GEM Rules may not itself ensure an applicant's suitability for listing. The Exchange retains a discretion to accept or reject applications and in reaching its decision will pay particular regard to the general principles outlined in GEM Rule 2.06. Informal and confidential guidance may be sought from the Exchange concerning the eligibility of any proposed application for listing.
        16. GEM Rule 11.06 stipulates that both the issuer and its business must, in the opinion of the Exchange, be suitable for listing.

        ANALYSIS

        17. While no profit requirement is imposed on companies seeking to list on GEM, uncertainty over a company's future financial performance may cast doubt on its sustainability. Where a company's business model is believed to be unsustainable, the Exchange will consider it unsuitable for listing.
        18. The Exchange took into account the following factors (and to a lesser extent competition and reliance on the controlling shareholder) when considering Company A's suitability for listing:-

        Deteriorating financial performance
        (a) Company A had shown a deteriorating financial performance during the track record period and there was no sign of improvement in the Year 4 forecast.
        (b) It had not shown it had effective measures to manage its exposure to raw materials price fluctuation during the track record period and going forward.
        (c) The gross profit margin of its manufacturing activities had been even lower than that of its trading activities. It was doubtful that Company A could sustain itself at such a gross profit margin.
        (d) It had benefited from the recent appreciation of RMB against USD during the track record period. However, foreign exchange rates can fluctuate volatilely. The track record results would be worse than disclosed in its financial statements if the foreign exchange gains were excluded.
        (e) It relied on borrowings to support its daily working capital, and had been subject to increasingly high borrowing costs during the track record period, even after taking into account the substantial interest-free loans from its controlling shareholder. Given the low profit margin, any increase in borrowing costs in the future could easily wipe out its net profit.
        (f) It would be unlikely to return to a breakeven position based on its forecast increase in revenue.

        Uncertainty over the prospect of Company A's bulk sales and packaged sales
        (g) According to the management accounts for Q1 of Year 4, revenue had decreased significantly (a 42% decline based on the annualised figure for Year 4 compared to Year 3). The decrease in bulk sales had not been compensated by an increase in packaged sales as it had expected.
        (i) The past and projected performance of packaged sales was even worse than bulk sales (e.g. packaged sales recorded gross loss in Year 3 and Q1 of Year 4).
        (h) Packaged sales had only accounted for about 1% of its total revenue during the track record period. Company A projected its packaged sales for Year 4 would be increased to 3% of its revenue. Based on this projection, it remained doubtful how packaged sales could turn around Company A's overall financial performance or bring sufficient income going forward.

        CONCLUSION

        19. Given the concerns over Company A's sustainability, uncertainty on the prospect of the bulk sales and packaged sales businesses and to a lesser extent, the competition and reliance on its controlling shareholder, the Exchange considered that these concerns could not be appropriately addressed by way of disclosure and decided to reject Company A's application.

      • LD35-2012

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        HKEX LISTING DECISION
        HKEX-LD35-2012 (published in July 2012) (Updated in August 2018)

        Parties Company A — a Main Board listed company

        Subsidiary B — a wholly owned subsidiary of Company A

        The Parent Shareholder — Company A's controlling shareholder

        The Investor — a third party who proposed to acquire all the Parent Shareholder's shareholding in Company A
        Issue Whether Company A would have sufficient operations or assets under Rule 13.24 after the Proposed Transactions
        Listing Rules Main Board Listing Rule 13.24
        Decision Company A would fail to meet Rule 13.24 upon completion of the Proposed Transactions

        FACTS

        1. Company A was principally engaged in a certain line of business.
        2. Company A and the Parent Shareholder proposed to enter into the following transactions and arrangements (together the Proposed Transactions):
        •   Company A would inject the bulk of its existing business into Subsidiary B and distribute all Subsidiary B's shares in specie to Company A's shareholders on a pro-rata basis (the Distribution).
        •   Following the Distribution, the Parent Shareholder would make a voluntary cash offer to acquire all the remaining shares in Subsidiary B that were held by its other shareholders (the Privateco Offer).
        •   The Parent Shareholder would also sell its controlling interest in Company A to the Investor who would then make an offer to acquire all the remaining shares in Company A that were held by its other shareholders (the Listco Offer).
        3. The Distribution was conditional on approval by Company A's shareholders (excluding the Parent Shareholder). The sale of the controlling interest in Company A by the Parent Shareholder was conditional on the shareholders' approval of the Distribution. The Listco Offer and the Privateco Offer would be subject to the Takeovers Code.
        4. After the Proposed Transactions, Company A would continue to engage in the Remaining Business. The Remaining Business recorded a loss and negative operating cash flow in the latest financial year. Its total assets and revenue represented about 6% of that of Company A before the Proposed Transactions.
        5. The investor had no intention to inject capital into Company A or carry out fund raising activities. Company A would further expand the Remaining Business by broadening its customer base. While the Investor intended to explore new business opportunities and investments for Company A, no targets had been identified.
        6. There was an issue whether Company A upon completion of the Proposed Transactions would have sufficient level of operations or assets of sufficient value to warrant its continued listing on the Exchange under Rule 13.24.

        APPLICABLE LISTING RULES

        7. Rule 13.24 states that
        "An issuer shall carry out, directly or indirectly, a sufficient level of operations or have tangible assets of sufficient value and/or intangible assets for which a sufficient potential value can be demonstrated to the Exchange to warrant the continued listing of the issuer's securities."
        8. Rule 6.01 states that:
        "Listing is always granted subject to the condition that where the Exchange considers it necessary for the protection of the investor or the maintenance of an orderly market, it may at any time direct a trading halt or suspend dealings in any securities or cancel the listing of any securities in such circumstances and subject to such conditions as it thinks fit, whether requested by the issuer or not. The Exchange may also do so where:—

        . . .
        (3) the Exchange considers that the issuer does not have a sufficient level of operations or sufficient assets to warrant the continued listing of the issuer's securities (see rule 13.24). . ." (Updated in August 2018)
        9. Rule 6.04 states that
        "...The continuation of a suspension for a prolonged period without the issuer taking adequate action to obtain restoration of listing may lead to the Exchange cancelling the listing."

        ANALYSIS

        10. Rule 13.24 imposes a continuing obligation for issuers to carry out a sufficient level of operations or have assets of sufficient value to warrant the continued listing of the issuers' securities.
        11. Issuers that fail to meet the Rule are suspended and may be delisted. In these circumstances, trading can only be resumed if the issuer can demonstrate to the Exchange's satisfaction that it has a viable and sustainable business to support its continued listing. To enable the Exchange to make the assessment, the issuer must present its case in sufficient detail, including forecasts and clear and detailed plans for the future development of its businesses.
        12. Rule 13.24 is intended to maintain overall market quality. Issuers that fail to meet this Rule are "blue sky companies" where public investors have no information about their business plans and prospects. This leaves much room for the market to speculate on their possible acquisitions in the future. To allow these issuers' shares to continue to trade and list may have an adverse impact on investor confidence.
        13. In this case, Company A proposed to dispose of most of its existing businesses and assets. The Exchange noted that the Proposed Transactions were in effect privatizations of the company's existing business, but structured with the intention to allow the company to maintain its listing status. Company A would be left with minimal operations and this raised issues about market quality. Its submissions failed to demonstrate that it would have a viable and sustainable business upon completion of the Proposed Transactions. In making the assessment, the Exchange took into account the following:
        •   The Remaining Business was immaterial compared to Company A's business operations and asset value before the Proposed Transactions.
        •   The absolute size of the Remaining Business was also small. It only had asset value and annual turnover of HK$20 million or less in recent financial years. It also recorded net losses and negative operating cash flow.
        •   Company A's business plan lacked concrete details to show any substantial growth or improvement in the Remaining Business' scale of operations or financial position in the near future. The financial forecasts indicated that the Remaining Business would continue to record a net loss and a negative operating cash flow in the next year.
        14. It was Company A's view that it could meet Rule 13.24 after the Proposed Transactions as it would continue to have an operation. It also made reference to some other listed issuers which had a low level of activities and/or asset value, and whose shares were still trading on the Exchange.
        15. The Exchange disagreed with Company A because:
        •   When applying Rule 13.24 to issuers whose shares are trading on the Exchange, the Exchange generally allows their shares to continue to trade as long as they have an operation and meet the continuing disclosure obligations. If the Exchange were to suspend these issuers because of their low level of activities or asset values, public shareholders would have no access to the market for trading the issuers' shares. To balance the public shareholders' interests with the need to maintain market quality, the Exchange suspends trading only in extreme cases.
        •   In the present case, the Rules and the Takeovers Code afforded shareholder protection:
        •   The Proposed Transactions were subject to Company A's shareholders approving the Distribution and the Parent Shareholder could not vote because of its different interest in the proposal. The minority shareholders would have the opportunity to decide whether to allow the Proposed Transactions to proceed.
        •   The Listco Offer and the Privateco Offer would be governed by the Takeovers Code. The minority shareholders could cash out of the listed vehicle and the distributed business, or alternatively continue to hold shares in Company A and Subsidiary B.
        •   As noted in paragraph 13 above, Company A would be left with minimal operations as a result of the Proposed Transactions. This raised issues about market quality and should be discouraged.

        CONCLUSION

        16. The Exchange determined that Company A upon completion of the Proposed Transactions would not have a sufficient level of operations or assets of sufficient value to warrant its continued listing on the Exchange under Rule 13.24.
        17. Should Company A proceed with the Proposed Transactions, it would fail to comply with Rule 13.24 and would be suspended and might be delisted upon completion of the transactions.

      • LD34-2012

        View Current PDF

        HKEx LISTING DECISION
        HKEx-LD34-2012 (published in July 2012)

        Parties Company A — a Main Board listing applicant

        The Group — Company A together with its subsidiaries

        The Predecessor — the company holding the Group's business prior to its disposal to Company A

        Mr. A and Mr. B — Company A's executive directors

        Mr. X — a member of Predecessor's senior management
        Issue Whether Mr. A's and Mr. B's conduct at the Predecessor affected their suitability under Listing Rules 3.08 and 3.09 and Company A's ability to comply with Listing Rule 8.15.
        Listing Rules Main Board Listing Rules 3.08, 3.09 and 8.15
        Decision The Exchange considered that Mr. A's and Mr. B's conduct at the Predecessor had not demonstrated the standard of competence expected of directors of listed companies under Listing Rule 3.09 and that Company A had not yet met the standard required to comply with Listing Rule 8.15.

        The Exchange determined that a robust monitoring of transactions should be introduced before it would further consider any Company A's listing application.

        FACTS

        1. The Predecessor was listed on an overseas stock exchange and Mr. A and Mr. B were its only executive directors. Company A was incorporated and acquired the entire business of the Group from the Predecessor for the purpose of the Hong Kong listing. Company A's management was essentially the same as that of the Predecessor and Mr. A and Mr. B were also Company A's only executive directors in the listing application.
        2. The Predecessor incurred significant losses in Year 3 from certain transactions that were unrelated to its core business (the "Transactions") although it recorded moderate gains from those transactions in Year 1 and Year 2. It announced that the significant losses in Year 3 were incurred because its internal stop-loss policy was not complied with by Mr. X.
        3. Mr. X was the Predecessor's senior management member responsible for the execution and control of the Transactions. He did not communicate the related losses to the Predecessor's board timely and subsequently resigned.
        4. Mr. B and Mr. X held monthly meetings to monitor the Transactions and there were no checks between the monthly meetings. The Predecessor's directors had not sought any external advice (e.g. from the auditors) in respect of these Transactions.
        5. The Sponsor submitted that Mr. A and Mr. B were suitable to act as directors because:
        (i) Mr. A and Mr. B did not obtain any personal benefit from the Transactions and entering into the Transactions neither constituted fraudulent or criminal activities nor breach of the overseas stock exchange's rules. Mr. A and Mr. B also did not have any criminal record or record of breaching any overseas stock exchange's rules;
        (ii) Mr. A and Mr. B had many years of experiences in Company A's industry and the finance industry respectively. They devoted themselves to running the Group's business which was supported by the growth of the Group's revenue during the track record period; and
        (iii) the Group had adopted certain internal control measures to ensure the Group would not enter into unauthorized transactions in the future.

        APPLICABLE RULES AND PRINCIPLES

        6. Listing Rule 3.08 states that the board of directors of a listed issuer is collectively responsible for the management and operations of the listed issuer. The directors, both collectively and individually, are expected to fulfill fiduciary duties and duties of skill, care and diligence to a standard at least commensurate with the standard established by Hong Kong law.
        7. Listing Rule 3.09 states that every director of a listed issuer 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 a listed issuer.
        8. Listing Rule 8.15 states that without prejudice to the specific requirements for management experience under Listing Rules 8.05A, 8.05B(2) and 18.04, the persons proposed to hold office as directors of the issuer must meet the requirements of Chapter 3 to the satisfaction of the Exchange.

        ANALYSIS

        9. The Exchange considered that:-
        (i) the circumstances leading to the losses from the Transactions were a very significant issue for the potential investors. Mr. A and Mr. B had been the only executive directors at the Predecessor when it had incurred the losses and it was therefore important to assess whether their role was to such as to affect their suitability as directors and hence whether Company A would be suitable for listing;
        (ii) as executive directors of the Predecessor, Mr. A and Mr. B bore responsibility for the significant losses arising from the Transa