Listing Rules and Guidance: Contents


 
 

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  • 2010

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    Please visit Archive to view listing decisions which have been superseded or are no longer applicable.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

    Since August 2007, we have adopted a thematic approach in preparing decision series for IPO cases. Grouping decisions on cases which discuss similar topics into a common series should help readers better understand the application of the Rules. To maintain the guidance value of the decisions, we will not report on every case. Instead, only decisions that discuss novel issues or are of general guidance value will be published.

    LD Series Number First Release Date (Last Update Date)
    (mm/yyyy)
    Listing Rules/ Topics Particulars
    LD114-1 12/2010

    (04/2017)
    Rule 19.20(2) Whether the Exchange would accept the Firm to act as Company A's auditors after listing under Rule 19.20(2)
    LD113-1 12/2010
    (07/2018)
    Main Board Rule 7.19A(1) Whether Company A's proposed rights issue of shares with bonus warrants required independent shareholder approval
    LD112-2 11/2010 Rules 14.48, 14.49 Whether the provisional liquidator must despatch a circular and obtain shareholder approval for the sale of Company X's business under Chapter 14
    LD112-1 11/2010 Rule 14.49 Whether Company A's proposal to seek a prior mandate from its shareholders for selling the Target's shares would meet the requirement of Rule 14.49
    LD111-1 11/2010 Rule 19.05 Whether the Exchange would consider the State of California an acceptable jurisdiction under Chapter 19 of the Main Board Listing Rules

    (Withdrawn, superseded by United States of America — California Country Guide in December 2013)
    LD110-1 10/2010 Rule 19.05 Whether the Exchange would consider Japan an acceptable jurisdiction under Chapter 19 of the Main Board Listing Rules

    (Withdrawn, superseded by Japan Country Guide in December 2013)
    LD109-1 10/2010 Rule 19.05 Whether the Exchange would consider Brazil an acceptable jurisdiction under Chapter 19 of the Main Board Listing Rules

    (Withdrawn, superseded by Brazil Country Guide in December 2013)
    LD108-1 10/2010 Rule 19.05 Whether the Exchange would consider the Isle of Man an acceptable jurisdiction under Chapter 19 of the Main Board Listing Rules

    (Withdrawn, superseded by Isle of Man Country Guide in December 2013)
    LD107-1 10/2010 Rule 8.04 Whether heavy reliance on a major customer would render Company A unsuitable for listing
    LD106-1 10/2010
    (01/2013)
    Rule 8.05B(3) Whether a new applicant operating under a jointly controlled entity structure was suitable for listing
    LD105-1 09/2010 Rule 6.12, Paragraphs 2 and 3(c) of Practice Note 15 Whether Company A's proposal was subject to Practice Note 15 and, if so, whether it was permissible under the Rules
    LD104-1 09/2010 Rule 3.10(2) Whether Mr X was qualified to act as Company A's independent nonexecutive director having appropriate professional qualifications or accounting or related financial management expertise
    LD103-1 09/2010 Rules 17.02(1) (b), 17.03(17) Whether the Exchange would allow proposed amendments to Company A's pre-IPO share option plan
    LD102-2 08/2010 Rules 13.39(6) (b), 13.82 Whether Company B was qualified to act as independent financial adviser
    LD102-1 08/2010
    (03/2011)
    Rule 5.08(2) (b), Practice Note 12 — paragraph 4.1 Whether Mr X and Mr Y who were not HKIS or RCIS members were qualified valuers for Mainland properties
    LD101-2 08/2010
    (04/2015)
    Rule 8.08(1)(a) Whether the Exchange would waive the public float requirement for Company A
    LD101-1 08/2010
    (04/2015)
    Rules 8.08(1) (a), 13.32(1) Whether the Exchange would give listing approval for shares to be issued through transactions that could result in Company A's public float falling below the minimum 25% requirement under the Rules
    LD100-1 07/2010 Rules 1.01 and 14A.11(4) Whether Company A is a connected person of Listco

    (Withdrawn in July 2014)
    LD99-5 07/2010 Rule 19A.38 Whether the Exchange would waive the class meeting requirement under Rule 19A.38 on Company A's bonus issue of shares
    LD99-4 07/2010
    (04/2015)
    Rules 2.03, 13.36 Whether Company X's proposal to seek a mandate from its shareholders to place new shares would meet Rule 13.36(1)(a)
    LD99-3 07/2010
    (07/2014)
    Rules 2.03(4), 14A.36, paragraph 4(3) of Appendix 3 Whether certain special rights available only to the Investor under the convertible bonds would comply with the general principles in Rule 2.03
    LD99-2 07/2010
    Main Board Rules 7.23, 13.36 Whether a proposed Open Offer with a condition to issue a minimum amount of new shares to Company B, and issue of the convertible bonds required shareholder approval

    (Withdrawn in July 2018)
    LD99-1 07/2010 Rule 10.06(3) Whether the Exchange would approve Company X's proposed issue of new shares under Rule 10.06(3) after its redemption of convertible bonds
    LD98-1 07/2010 Rules 4.11, 4.12 How Company A should account for JCE in its future annual and interim reports upon change of accounting method from the proportionate consolidation to the equity
    LD97-1 07/2010 Rules 8.04, 2.13 Whether Company A's regulatory non-compliance record made it unsuitable for listing
    LD96-1 07/2010 Rules 3.08, 3.09 Whether persons with past SFC disciplinary records would be suitable to be Company A's directors
    LD95-5 07/2010 Rule 14.06(6) (b) Whether Company A's proposed acquisition of a further interest in the Target from Mr X was a reverse takeover under Rule 14.06(6)(b)
    LD95-4 07/2010 Rule 14.06(6) Whether Company A's proposed acquisition constituted a reverse takeover under Rule 14.06(6)
    LD95-3 07/2010 Rules 14.06(6), 28.05 Whether the Exchange would consent to Company A's proposed change in the terms of its convertible notes issued to the Vendor
    LD95-2 07/2010 Rule 14.06(6) Whether Company A's proposed acquisition constituted a reverse takeover under Rule 14.06(6)
    LD95-1 07/2010 Rules 14.06(6) and 14.82 Whether Company A would become a cash company as a result of its proposed placing of convertible notes

    Whether the Exchange would treat Company A's proposed acquisition of the Target as a reverse takeover
    LD94-1 06/2010
    (04/2014)
    Rule 4.10 and Rule 2.13(2) Whether to grant a Rule 4.10 waiver to banking companies incorporated in Mainland China
    (Updated in April 2014)
    LD93-6 06/2010 Rules 14A.06, 14A.11(4)(a) Whether Company A must abstain from voting at Listco's general meeting on the disposal of the Target

    (Withdrawn in July 2014)
    LD93-5 06/2010 Rules 14.40, 14.49 Whether Company A must seek shareholder approval of an amended acquisition agreement
    LD93-4 06/2010
    (07/2014)
    Rules 2.03, 2.04, 14.04(1), 14A.24 Whether the Exchange would impose additional requirements under Rule 2.04 on Company A's proposed distribution in specie of Subsidiary B's shares
    LD93-3 06/2010
    (07/2014)
    Rules 14.62, 14.66(2), 14A.68(7), 14A.70(13), Paragraph 29 (2) of Appendix 1B Whether the Exchange would waive the profit forecast requirements under the Rules regarding a valuation report on the Target in Company A's announcement and circular
    LD93-2 06/2010 Rules 14.22, 14.23 Whether Company A must aggregate three work packages under a procurement agreement
    LD93-1 06/2010 Rule 14.04(1) (a) Whether Company A's payment of a deposit under an escrow agreement was a major transaction
    LD92-1 05/2010 Rule 8.04 Whether Company A was suitable for listing where it derived a significant portion of its turnover and net profit from transactions with closely related parties
    LD91-1 05/2010 Rule 4.04(1) Whether to waive Rule 4.04(1) for Company A

    (Withdrawn in September 2015)
    LD90-1 05/2010 Rules 10.03(1), (2); 10.04, Paragraph 5(2) of Appendix 6 Whether to allow Company X to allocate H-Shares under the placing tranche to its existing public A-Share holders

    (Withdrawn in January 2016)
    LD89-1 05/2010 Rule 2.07C(4) (c) Whether to waive Rule 2.07C(4)(c) to allow Company X to delay the publication of the Chinese version of any document required to be published after the English version had been published on the Exchange's website

    (Withdrawn in July 2018)
    LD88-1 05/2010 Rule 14A.35(1) &(2) Whether to allow a continuing connected transaction to exceed three years with an annual cap expressed as a percentage of Company A's gross revenues

    • LD114-1

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      HKEX LISTING DECISION
      HKEX-LD114-1 (December 2010) (Updated in April 2017)

      Parties Company A — a newly listed Main Board issuer, incorporated in Luxembourg

      The Firm — a firm of auditors in Luxembourg
      Issue Whether the Exchange would accept the Firm to act as Company A's auditors after listing under Rule 19.20(2)
      Listing Rules Main Board Rule 19.20(2)
      Decision The Exchange would accept the Firm to act as Company A's auditors after listing

      FACTS

      1. Company A, incorporated in Luxembourg, was required by law to engage a local accounting firm to be its statutory auditors. It had appointed the Firm as its statutory auditors for a number of years before its listing on the Exchange.
      2. Shortly after listing, Company A proposed to appoint the Firm as the auditors of its annual accounts prepared under the Listing Rules. As the Firm was not qualified under the Professional Accountants Ordinance, Company A asked the Exchange to accept the proposed appointment under Rule 19.20(2) given the following:
      a. The Firm was a member firm of the global network of a major and reputable international accounting company;
      b. It was a member of Institut des Réviseurs d'Entreprises (IRE). IRE is the legal accounting profession organisation in Luxembourg and a member of the International Federation of Accountants (IFAC), a global organisation for the accountancy profession; and
      c. It was a registered and approved statutory audit firm in Luxemburg, supervised and regulated by the Commission de Surveillance du Secteur Financier (CSSF). CSSF is a statutory regulator in Luxemburg with the power to investigate statutory auditors and audit firms in Luxembourg and to impose sanctions on those which have breached the legal or regulatory requirements or professional conduct. It is a member of the International Organisation of Securities Commissions (IOSCO) and has signed the Multilateral Memorandum of Understanding Concerning Consultation and the Exchange of Information (MMOU) with other IOSCO members (including the Securities and Futures Commission of Hong Kong (SFC)) to facilitate mutual cooperation and exchange of information for securities regulatory enforcement purposes. CSSF is also a member of the International Forum of Independent Audit Regulators (IFIAR).
      3. The Firm was independent from Company A under the statements on independence issued by IFAC.

      APPLICABLE LISTING RULES

      4. Rule 19.20 states that for overseas issuers:
      The annual accounts must be audited by a person, firm or company who must be a practising accountant of good standing. Such person, firm or company must also be independent of the overseas issuer to the same extent as that required of an auditor under the Companies Ordinance and in accordance with the statements on independence issued by the International Federation of Accountants and, if the overseas issuer's primary listing is or is to be on the Exchange, must be either:—
      (1) qualified under the Professional Accountants Ordinance for appointment of auditor of a company; or
      (2) a firm of accountants acceptable to the Exchange which has an international name and reputation and is a member of a recognised body of accountants.

      ANALYSIS

      5. Under Rule 19.20, the Exchange may allow an overseas issuer's annual accounts to be audited by a firm of accountants who is not qualified under the Professional Accountants Ordinance. In making the assessment, the Exchange will consider the circumstances of each case, including those factors set out in Rule 19.20(2).
      6. Here, the Exchange found the Firm acceptable under Rule 19.20 because:
      •   the Firm had an international name and reputation and was a member of a recognised body of accountants; and
      •   the Firm was subject to CSSF's oversight. CSSF has the statutory power to investigate auditors registered in Luxembourg and to impose sanctions for breach of legal or regulatory requirements or professional conduct. There are arrangements between CSSF and the SFC for mutual assistance and exchange of information for enforcing and securing compliance with the laws and regulations of Luxembourg and Hong Kong.

      CONCLUSION

      7. The Firm could act as Company A's auditors after listing under Rule 19.20(2).

    • LD113-1

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      HKEX LISTING DECISION
      HKEX-LD113-1 (Published in December 2010) (Updated in April 2015 and July 2018)

      Parties Company A — a Main Board issuer
      Issue Whether Company A's proposed rights issue of shares with bonus warrants required independent shareholder approval
      Listing Rules Main Board Rule 7.19A(1)
      Decision The proposal required independent shareholder approval

      FACTS

      1. Company A announced a rights issue of one rights share for every two existing shares, plus two bonus warrants for every five subscribed and fully paid rights shares. It had not conducted any rights issue or open offer during the past 12 months.
      2. The rights shares excluding the new shares convertible from the bonus warrants would represent 50% of Company A's existing issued share capital. They together with the new shares convertible from the bonus warrants would represent 70% of the existing share capital.
      3. Company A submitted that the rights issue was not subject to independent shareholder approval under Rule 7.19A(1) as the total amount of rights shares, excluding the new shares convertible from the bonus warrants, did not exceed the 50% threshold in the Rule. It excluded the bonus warrants because in its view, the Rule requires an issuer to take into account any bonus securities, warrants or other convertible securities granted as part of any rights issues and open offers in the past 12 months, but not those forming part of the proposed rights issue.

      APPLICABLE LISTING RULES

      4. 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... 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).
      5. 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

      6. 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.
      7. The Exchange disagreed with Company A's view on the application of Rule 7.19A(1) to the bonus warrants. Under the Rule, an issuer must take into account the proposed rights issue and any other rights issues or open offers made in the past 12 months, together with any bonus securities, warrants or other convertible securities "granted or to be granted to shareholders as part of such rights issues or open offers". These bonus securities, warrants or other convertible securities include those forming part of (1) the proposed rights issue and (2) any previous rights issues or open offers.
      8. Here, the bonus warrants formed part of the rights issue. When assessing the ownership dilution effect of the rights issue under Rule 7.19A(1), Company A should take into account the shares convertible from the bonus warrants.

      CONCLUSION

      9. As the rights issue would increase Company A's issued share capital by 70%, it required independent shareholder approval under Rules 7.19A(1) and 7.27A.

    • LD112-2

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      HKEx LISTING DECISION
      HKEx-LD112-2 (November 2010)

      Parties Company X — a Main Board issuer, incorporated in Bermuda
      Issue Whether the provisional liquidator must despatch a circular and obtain shareholder approval for the sale of Company X's business under Chapter 14
      Listing Rules Main Board Rules 14.48 and 14.49
      Decision The requirement to despatch a circular and obtain shareholder approval did not apply to the sale

      FACTS

      1. A creditor petitioned to wind-up Company X for its inability to pay debts. The High Court of Hong Kong appointed provisional liquidators to the company.
      2. The provisional liquidators agreed to sell Company X's principal business to an independent investor, and would use the proceeds to pay the debts. The sale would be a very substantial disposal.
      3. Under the law, completion of the sale was subject to a court order. The provisional liquidators considered that the sale should not require shareholder approval under Chapter 14 because Company X was insolvent and would not have residual assets for distribution to shareholders. The shareholders therefore had no interest left in the company.

      APPLICABLE LISTING RULES

      4. Rule 14.38A states that:
      ... A listed issuer which has entered into a major transaction must send a circular to its shareholders ...
      5. Rule 14.48 states that:
      In the case of a very substantial disposal ..., the listed issuer must comply with the requirements for all transactions for major transactions set out in rules 14.34 to 14.37 and 14.38A.
      6. Rule 14.49 states that:
      A very substantial disposal ... must be made conditional on approval by shareholders in general meeting. ...

      ANALYSIS

      7. Chapter 14 seeks to protect shareholders' interests by giving them the rights to participate in the decision process for material transactions through voting at shareholders' meetings. It does not specifically provide for the case where the issuer is insolvent and its assets have to be liquidated to repay creditors.
      8. In this case, the court appointed the provisional liquidators to take control of Company X and arrange for its restructuring. The sale was part of the restructuring process and would take place under a court order. The proceeds would be used to repay creditors. Under the law, creditors' claims ranked higher than shareholders' equity in terms of distribution by Company X. As Company X had insufficient assets to repay the creditors, its shareholders had no interest left in Company X. In these circumstances, the shareholders' interests would not be prejudiced in the absence of a shareholder meeting to approve the sale under Chapter 14.

      CONCLUSION

      9. The requirement to despatch a circular and obtain shareholder approval under Rules 14.48 and 14.49 did not apply to the sale. However, Company X should keep shareholders informed of the progress of the sale under Rule 13.09(1).

    • LD112-1

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      HKEx LISTING DECISION
      HKEx-LD112-1 (November 2010)

      Parties Company A and the Target — each a Main Board issuer
      Issue Whether Company A's proposal to seek a prior mandate from its shareholders for selling the Target's shares would meet the requirement of Rule 14.49
      Listing Rules Main Board Rule 14.49
      Decision The Exchange accepted the proposed mandate for the disposals would meet the requirement of Rule 14.49

      FACTS

      1. Company A held listed shares in the Target (the Shares) representing approximately 20% of the Target's share capital.
      2. It was Company A's intention to realise all its investments in the Target subject to market conditions. The disposals would be, in aggregate, a possible very substantial disposal for Company A and therefore subject to shareholders' approval.
      3. Company A proposed to seek a mandate from its shareholders for selling the Shares to independent third parties. It asked the Exchange to accept that the mandate would meet the shareholder approval requirement for the disposals under Chapter 14. Under the proposed mandate:
      •   The Shares would be sold within a period after the shareholders approved the mandate.
      •   The Shares would be sold (i) in the open market on the Exchange and/or (ii) through block trades by entering into placing agreements with reputable investment banks as placing agents. For any block trade, the terms and conditions of the sale would be negotiated on an arms' length basis.

      Company A submitted that it was a common market practice to sell a large quantity of securities through block trades where investment banks would procure independent buyers and close the deal overnight. In light of the substantial amounts of Shares held by Company A, it would be necessary and appropriate for the proposed mandate to cover block trades.
      •   The price for selling the Shares in an open market would be no less than a fixed dollar amount which was determined with reference to the market prices of the Shares in the past 12 months. Where Shares were to be sold through a block trade, the Company proposed a limit for the selling price based on the higher of (i) a fixed dollar amount and (ii) a small discount to the average closing price of the Shares for the 5 trading days immediately before the placing agreement.
      •   The proceeds would be used by Company A for general working capital.
      4. Company A considered the mandate, if approved by shareholders, would provide its directors with flexibility in selling the Shares and enable them to react promptly to changing market conditions. Whether the Shares were to be sold in an open market or through block trades, the transactions would need to be completed within a very short period. It would be impractical to make any such sales conditional on shareholders' approval.

      APPLICABLE LISTING RULES

      5. Rule 14.34 states that:
      As soon as possible after the terms of a share transaction, discloseable transaction, major transaction, very substantial disposal, very substantial acquisition or reverse takeover have been finalised, the listed issuer must in each case:—
      (1) inform the Exchange; and

      ...
      (2) publish an announcement in accordance with rule 2.07C as soon as possible. See also rule 14.37.
      6. Rule 14.49 states that:
      a very substantial disposal ... must be made conditional on approval by shareholders in general meeting. ...
      7. Rule 14.63(2)(a) states that if voting or shareholder approval is required, a notifiable transaction circular must:
      contain all information necessary to allow the holders of the securities to make a properly informed decision.

      ANALYSIS

      8. 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. Shareholders would vote on the agreement having considered its terms.
      9. Here, there was no transaction and the requirements of Chapter 14 were not triggered. Company A proposed to seek a prior mandate for selling its investments in listed securities to independent third parties. When considering whether to accept such an arrangement, the Exchange noted the following:
      •   Company A proposed to sell the Shares on the Exchange. It would be impractical, if not impossible, to seek shareholders' approval except by a prior mandate.
      •   The mandate would also cover block trades which were necessary for selling a large quantity of securities. Under the terms of the mandate, block trades would be conducted through reputable investment banks and the selling price would be determined based on the prevailing market price of the Shares subject to the restrictions approved by shareholders. The mandate would not result in undue risks to shareholders.
      •   Company A proposed thresholds for the selling price of the Share and specified the time period for the disposal. There was sufficient safeguard in the proposed mandate and information for the shareholders to make an informed assessment.

      CONCLUSION

      10. Company A's proposed mandate for selling the Shares would meet the shareholder approval requirement.

    • LD107-1

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      HKEx LISTING DECISION
      HKEx-LD107-1 (October 2010)

      Parties Company A — a Main Board listing applicant
      Customer X — Company A's major customer
      Issue Whether heavy reliance on a major customer would render Company A unsuitable for listing
      Listing Rules Rule 8.04
      Decision The Exchange considered that the reliance issue could be dealt with by way of disclosure

      FACTS

      1. Company A was mainly engaged in manufacturing products using the technology provided by Customer X. The products sold to Customer X would be assembled into electronic products. Sales to Customer X accounted for 98%, 93%, 99% and 79% of its revenue during the last four financial years.
      2. Company A had had a long-term business relationship with Customer X for over 10 years. However, there was no long term sale and purchase agreement between them. While there was a licence agreement to use Customer X's technology in manufacturing process, there was no arrangement for technology transfer from Customer X to Company A.
      3. The Exchange initially considered that Company A might not be suitable for listing.

      APPLICABLE LISTING RULES

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

      ANALYSIS

      5. There is no bright line test to determine whether an applicant's reliance on a single major supplier or customer is an extreme case which impacts on suitability for listing. In assessing a case of reliance on single supplier or customer, the Exchange will take into account:
      (a) whether the applicant's business model can be easily changed to reduce the level of reliance. For example, the Exchange will consider its ability to find substitute suppliers or customers and whether it has the necessary skill, technology or network to break off the reliance;
      (b) whether the level of reliance is likely to decrease in the future. For example, whether the applicant has plans to diversify its business focus to reduce its reliance on single supplier or customer;
      (c) whether the whole industry landscape is dominated by a few players (e.g. the computer technology industry) making it unlikely for companies in the same line of business as the applicant to break off reliance on a major supplier or customer. Under these circumstances, the Exchange will be more ready to deal with the issue by disclosure since the risk of reliance is not specific to the applicant;
      (d) whether the applicant can demonstrate that the reliance is mutual and complementary. For example, whether the supplier or the customer also relies heavily on the applicant; and
      (e) whether the applicant is capable of maintaining its revenue in the future in light of the reliance. The Exchange will take into account the overall prospects of the industry to assess the viability of the applicant's business. If the whole industry is showing a downward trend, the Exchange will have greater concerns about suitability.
      6. In response to the Exchange's concerns, Company A submitted that:
      a. its reliance on Customer X was decreasing and in the last quarter of the track record period, its revenue derived from sales to Customer X dropped to about 60% (as compared to over 90% in previous years). The decrease in sales had been due to: (i) increase in demand for other products from other customers; (ii) expansion of its production capacity for other products; and (iii) expansion of the sales and marketing force for other products;
      b. Customer X was the market leader for the electronic products using components provided by Company A, accounting for approximately 60% of the annual worldwide sales during Company A's track record period;
      c. it was Company A's commercial decision not to enter into any long term binding contract with Customer X to maintain flexibility with other customers, which was in line with the Customer X's industrial practice; and
      d. appropriate disclosure would be made in the prospectus regarding: (i) the business and mutual reliance relationship between Company A and Customer X; (ii) the profile and background of Customer X; (iii) the risk involved in reliance on Customer X; and (iv) the short track record of Company A's diversification into other new products.

      CONCLUSION

      7. The Exchange considered that the reliance issue could be dealt with by way of disclosure on the basis that:
      a. there was a decreasing trend in Company A's reliance on its single largest customer;
      b. Company A had made considerable effort to reduce its reliance on Customer X by adopting a diversification strategy and expanding its sales and marketing network; and
      c. sufficient disclosure about the reliance issue would be made in the summary, risk factors, business and financial information sections of the prospectus.

    • LD106-1

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      HKEx LISTING DECISION
      HKEx-LD106-1 (October 2010) (Updated in January 2013)

      Parties Company A — a Main Board listing applicant and its subsidiaries

      JCE X — an entity under the joint control of Company A and another venturer
      Issue Whether a new applicant operating under a jointly controlled entity structure was suitable for listing
      Listing Rules Rule 8.05B(3)
      Decision Company A's listing met the conditions the Exchange imposed for applicants operating under a jointly controlled entity framework. In light of the exceptional listing conditions, each future application should be decided on a case by case basis

      FACTS

      1. Company A manufactured and sold automobiles in the Mainland through JCE X.
      2. The Listing Rules currently do not have any provisions to regulate jointly controlled entitles (JCEs).
      3. Company A could not consolidate JCE X's results to satisfy Rules 8.05(1), (2) and (3). It applied for listing under Rule 8.05B(3).

      APPLICABLE LISTING RULES

      4. Rules 8.05(1), (2) and (3) only take into account the results of the issuer and its group. Results of associated companies and JCEs are excluded.
      5. Rule 8.05B(3) deals with exceptional circumstances where the issuer or its group has a trading record of at least two financial years if the Exchange is satisfied that the listing of the issuer is desirable in the interests of the issuer and investors and that investors have the necessary information available to arrive at an informed judgement concerning the issuer and the securities for which listing is sought.

      ANALYSIS

      6. In 2005, the Exchange developed a framework to assess the eligibility for a new applicant operating under a JCE framework. This framework consists of two parts:
      a. a set of exceptional circumstances for assessing the applicant's eligibility under Rule 8.05B(3); and
      b. conditions imposed on the applicant after listing.
      7. The principle is to regulate JCEs (including JCEs newly established after listing) in a manner consistent with regulating subsidiaries under the Listing Rules.
      8. This framework has been applied to a Mainland automobile manufacturer operating through JCEs.

      Eligibility criteria

      9. The Exchange will apply the following criteria to determine whether the "exceptional circumstances test" is met: -
      a. the applicant must be able to meet the large market capitalisation test in Rule 8.05(3) if the proportionate results of its JCEs are included;
      b. the JCEs structure must be common in the applicant's industry, or be the result of the regulatory environment;
      c. the joint venture partners must participate in the management of the JCEs together with the applicant;
      d. the applicant and the joint venture partners must be able to make contributions to the JCE's operation and growth, such as management expertise, production techniques, patents or production facilities;
      e. the joint venture agreement must contain safeguards to avoid the applicant's share of the JCE's profits flowing to other entities without the applicant's consent;
      f. the joint venture agreement must set out clear terms of distribution of the JCE's assets upon termination of the agreement;
      g. the listing document must contain disclosure of the historical dividend payment patterns and its future dividend policies;
      h. the listing document must include the terms of the joint ventures and disclose the risk factors of the JCE's structure and business; and
      i. the applicant must comply with the continuing obligations imposed as a condition of listing.

      Post-listing conditions

      10. The Exchange will impose the following continuing obligations to treat the JCEs as subsidiaries:
      a. The JCEs will be subject to the continuing obligations governing subsidiaries, including those in Chapters 13, 14, 14A, 15, 17 and Practice Note 15 subject to the modifications below.
      b. The JCE's activities will be treated as the applicant's activities and will be subject to the obligation to disclose information under Rule 13.09(1)1. However Rules 13.12 to 13.19 will not apply to JCEs. (Updated January 2013)
      c. The percentage ratio tests for classifying different transactions will be adjusted to take into account only the proportionate interest of the applicant's in the JCE. For example, in an acquisition by a 50/50 JCE, the applicant will only pick up 50% (being its proportionate share in the JCE) of the acquisition cost of the target in calculating the numerator of the consideration ratio.
      d. The percentage ratio tests for de minimis connected transactions with JCEs will be adjusted to take into account the proportionate interests of the applicant in the JCEs.
      e. Connected persons of the applicant will include the directors and joint venture partners of the JCEs and their respective associates. As a result, transactions between the applicant (including the JCEs) and i) the joint venture partners and their associates; ii) the directors of JCEs and their associates; or iii) the connected persons of the applicant (e.g. the substantial shareholder and its associates), will be considered connected transactions.
      f. The Exchange may deem transactions involving amending the terms of the joint venture to be connected transactions. The decision will involve an assessment of materiality and minority shareholders' protection.

      CONCLUSION

      11. The Exchange considered that Company A met all eligibility criteria and post-listing conditions under the JCE framework. The Exchange considered that its listing would be desirable to the company and investors and that the investors would have available the necessary information to arrive at an informed investment judgement.
      12. In light of the exceptional listing conditions, each future application should be decided on a case by case basis.

      Note
      1. Following the statutory backing of an issuer's continuing obligation to disclose inside information, consequential amendments were made to the Rules effective from 1 January 2013. The old Rule 13.09(1) is now replaced by Rules 13.09(1) and (2)(a) which require disclosure of (i) information necessary to avoid a false market and (ii) inside information which requires disclosure under the Inside Information Provisions. (Updated January 2013).

    • LD105-1

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      HKEx LISTING DECISION
      HKEx-LD105-1 (September 2010)

      Parties Company A — a Main Board issuer, incorporated overseas

      Company B — a company listed on a Mainland stock exchange
      Issue Whether Company A's proposal was subject to Practice Note 15 and, if so, whether it was permissible under the Rules
      Listing Rules Main Board Rule 6.12, Paragraphs 2 and 3(c) of Practice Note 15
      Decision Practice Note 15 applied to Company A's proposal and the Exchange did not consider the proposal acceptable

      FACTS

      1. Company A proposed to:
      a. sell its main business (the Business) to Company B in exchange for a controlling interest in Company B (the Disposal). This would be a very substantial disposal. After the Disposal, Company A would hold Company B as a subsidiary; and
      b. withdraw its listing from the Main Board under Rule 6.12 and list its shares on GEM.
      These arrangements would be inter-conditional.
      2. Company A submitted that the purpose of the Disposal was to achieve a listing of the Business on the Mainland stock exchange.
      3. After the Disposal, it would operate the Business through Company B and retain another business (the Remaining Business). The Remaining Business, acquired by Company A about a year ago, was substantially smaller than the Business.
      4. Company A acknowledged that the Disposal was a spin-off under PN15. The Remaining Business could not meet the profit requirements under Rule 8.05 and therefore paragraph 3(c) of PN15.
      5. However, Company A considered that PN15 should not apply in this case because it would cease to be a Main Board issuer upon completion of the proposal.

      APPLICABLE LISTING RULES

      6. Rule 6.12(4) states that subject to Rule 6.15, if an issuer has no alternative listing under 6.11, it may not voluntarily withdraw its listing on the Main Board without the Exchange's permission unless:
      the shareholders and holders of any other class of listed securities, if applicable, other than the directors (excluding independent non-executive directors), chief executive and controlling shareholders, are offered a reasonable cash alternative or other reasonable alternative.
      7. Paragraph 2 of PN15 states that:-
      ... This Practice Note sets out the principles which the Exchange applies when considering spin-off applications. Issuers are reminded that they are required to submit their spin-off proposals to the Exchange for its approval. ...
      8. Paragraph 3(c) of PN15 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. The Disposal was a spin-off under PN15. Company A, as a Main Board issuer, was required to submit its spin-off proposal to the Exchange for approval despite its intended withdrawal of listing. It had to satisfy the Exchange at the time of its spin-off application that it could comply with all the requirements in PN15. However, Company A was unable to do so.
      10. The reason for Company A's proposal to withdraw its listing from the Main Board and apply for a listing on GEM was to facilitate a spin-off without complying with the PN15 requirements. The Exchange considered this unacceptable and had a concern about the company's suitability for listing on GEM.

      CONCLUSION

      11. PN15 applied to Company A's proposal and the Exchange did not consider the proposal acceptable.

    • LD104-1

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      HKEx LISTING DECISION
      HKEx-LD104-1 (September 2010)

      Parties Company A — a Main Board issuer

      Mr. X — Company A's proposed independent non-executive director
      Issue Whether Mr. X was qualified to act as Company A's independent non-executive director having appropriate professional qualifications or accounting or related financial management expertise
      Listing Rules Main Board Rule 3.10(2)
      Decision Mr. X was qualified to act as Company A's independent non-executive director under Rule 3.10(2)

      FACTS

      1. Company A proposed to appoint Mr. X as an independent non-executive director.
      2. It submitted that Mr. X had the professional qualifications and accounting expertise required under Rule 3.10(2) because:
      a. He was a certified public accountant in the Mainland.
      b. He had worked as a principal accountant in a firm of certified public accountants in the Mainland (Mainland CPA firm) for 7 years and thereafter as a partner at another Mainland CPA firm for 8 years. He was the auditor-in-charge at a company listed on a stock exchange in the Mainland.

      APPLICABLE LISTING RULES

      3. Rule 3.10(2) states that:
      at least one of the independent non-executive directors must have appropriate professional qualifications or accounting or related financial management expertise.
      Note: With regard to "appropriate accounting or related financial management expertise", the Exchange would expect the person to have, through experience as a public accountant or auditor or as a chief financial officer, controller or principal accounting officer of a public company or through performance of similar functions, experience with internal controls and in preparing or auditing comparable financial statements or experience reviewing or analysing audited financial statements of public companies. It is the responsibility of the board to determine on a case-by-case basis whether the candidate is suitable for the position. In making its decision, the board must evaluate the totality of the individual's education and experience.

      ANALYSIS

      4. The Exchange accepted that Mr. X fulfilled Rule 3.10(2). Mr. X's qualification as a certified public accountant in the Mainland and experience in accounting and auditing in the Mainland were relevant for considering his suitability to act as Company A's independent non-executive director under Rule 3.10(2).

      CONCLUSION

      5. Mr. X was qualified to act as Company A's independent non-executive director under Rule 3.10(2).

    • LD103-1

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      HKEx LISTING DECISION
      HKEx-LD103-1 (September 2010)

      Parties Company A — a Main Board issuer
      Issue Whether the Exchange would allow proposed amendments to Company A's pre-IPO share option plan
      Listing Rules Main Board Rules 17.02(1)(b), 17.03(17)
      Decision The Exchange did not allow the proposed amendments

      FACTS

      1. At the listing of Company A, the Exchange approved the listing of, and permission to deal in, Company A's shares to be issued upon exercise of the options granted under a pre-IPO share option plan. This was conditional upon the following:
      a. There would be no material change to the rules of the plan without prior shareholder approval.
      b. Company A would promptly inform the Exchange of any modifications of the plan.
      2. The options under the plan were granted to Company A's directors, other senior management and other employees. The plan contained the following material terms:
      a. The purpose of the plan was to recognise the contribution to Company A by its employees and to retain those whose contributions were important to the company's long term growth and profitability.
      b. The options could only be exercised in phases as set out in the plan.
      c. The options were personal to the grantees and were not assignable.
      d. The options should lapse automatically upon the grantee ceasing to be Company A's employee.
      3. Company A proposed to amend the plan to allow them to transfer the options to persons independent of Company A and/or its connected persons before they became exercisable on condition that no transferees would be allowed to further transfer the options.

      APPLICABLE LISTING RULES OR PRINCIPLES

      4. Rule 17.01(1) states that:
      The following provisions apply, with appropriate modifications, 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 (and, for the purpose of this chapter, "participant" includes any discretionary object of a participant which is a discretionary trust). 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.
      5. Rule 17.02(1)(b) states that:
      A scheme adopted by a new applicant does not need to be approved by its shareholders after listing. However, all the terms of the scheme must be clearly set out in the prospectus. Where the scheme does not comply with the provisions of this chapter, options granted before listing may continue to be valid after listing (subject to the Exchange granting approval for listing of the new applicant's securities to be issued upon exercise of such options) but no further options may be granted under the scheme after listing. ... .

      Notes:
      (1) The Exchange reserves the right to review and consider these matters on a case-by-case basis.
      (2) ...
      6. Rule 17.03(17) states that the scheme document must include a provision on:
      transferability of options; ...

      Note: Options granted under the scheme must be personal to the respective grantee. No options may be transferred or assigned.

      ANALYSIS

      7. At the time of Company A's new listing application, the Exchange granted listing approval for shares to be issued under the pre-IPO plan. The plan did not need to comply with Chapter 17 as it was adopted before listing.
      8. The purpose of the plan was to reward and retain employees making contributions to Company A. This was reflected in the conditions that the options (i) could only be exercised in phases; (ii) could not be transferred or otherwise disposed of; and (iii) would automatically lapse upon the grantee ceasing to be Company A's employee or disposing of the options. The proposed amendments which permitted the transfer of the options and enabled the grantees to realise the benefit before they became exercisable would defeat the purpose of and fundamentally change the plan.
      9. As a result of the proposed amendments, the circumstances under which the listing approval was granted would be fundamentally changed and the listing approval no longer valid.
      10. The Exchange would not approve the proposed amendments to the pre-IPO plan because the amended plan would not comply with Chapter 17.
      11. Company A failed to satisfy the Exchange that the proposed amendments would be in the interest of Company A and its shareholders as a whole. The amendments would only benefit the grantees.

      CONCLUSION

      12. The Exchange did not allow the proposed amendments.

    • LD102-2

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      HKEx LISTING DECISION
      HKEx-LD102-2 (August 2010)

      Parties Company A — a Main Board issuer

      Company B — a newly formed company holding a Type 6 licence under the Securities and Futures Ordinance (SFO)

      Mr X and Mr Y — Company B's responsible officers
      Issue Whether Company B was qualified to act as independent financial adviser
      Listing Rules Main Board Rules 13.39(6)(b), 13.82
      Decision Company B was qualified to act on condition that Mr X and Mr Y remained its responsible officers

      FACTS

      1. Company A proposed to appoint Company B as independent financial adviser regarding its connected transactions.
      2. Company B had a SFO Type 6 licence (advising on corporate finance) with the condition that it could not act as sponsor in listing applications.
      3. Its two responsible officers, Mr X and Mr Y, each held a Type 6 licence without the condition and had more than 10 years of experience in corporate finance. In particular, each had provided financial advice in many transactions under the Rules.
      4. Company B asked whether it could accept Company A's appointment.

      APPLICABLE LISTING RULES AND PRINCIPLES

      5. Rule 13.39(6)(b) states that in relation to connected transactions,
      the issuer shall appoint an independent financial adviser acceptable to the Exchange to make recommendations to the independent board committee and the shareholders as to whether the terms of the relevant transaction or arrangement are fair and reasonable and whether such a transaction or arrangement is in the interests if the issuer and its shareholders as a whole and to advise shareholders on how to vote.
      6. Rule 13.82 states that:
      an independent financial adviser must be appropriately licensed by the Commission and must discharge its responsibilities with due care and skill.
      7. The Exchange's press release of 24 October 2006 states that a firm is acceptable as independent financial adviser if it:
      •   is appropriately licensed or registered to undertake sponsor work (i.e. it is licensed or registered under the SFO for Type 6 regulated activity and permitted under its licence or certificate of registration to undertake work as a sponsor); or
      •   meets the current Exchange practice as to what is acceptable i.e. it has completed two significant corporate finance transactions.

      ANALYSIS

      8. The role of an independent financial adviser is to advise independent shareholders on corporate finance transactions. The Exchange's press release cited above sets out non-exhaustive factors it would consider when assessing a company's suitability to act as independent financial adviser.
      9. Company B was not permitted to take up sponsor work under its Type 6 licence. However, its responsible officers, Mr X and Mr Y, were holders of a Type 6 licence and had significant relevant experience. The Exchange was prepared to consider the qualifications of the responsible officers in assessing if Company B was suitable to act as independent financial adviser. For this case, the Exchange was satisfied that they had the technical competence and experience necessary to advise shareholders on corporate finance transactions.

      CONCLUSION

      10. The Exchange accepted that with Mr X and Mr Y as its responsible officers, Company B was qualified to act as independent financial advisor.

    • LD102-1

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      HKEx LISTING DECISION
      HKEx-LD102-1 (August 2010) (Updated in March 2011)

      Parties Company A — a Main Board issuer, also listed on a Mainland stock exchange

      The Appraiser — a Mainland real estate appraising company

      Mr X and Mr Y — two real estate appraisers employed by the Appraiser
      Issue Whether Mr X and Mr Y who were not HKIS or RCIS members were qualified valuers for Mainland properties
      Listing Rules Main Board Rule 5.08(2)(b), paragraph 4.1 of Practice Note 12
      Decision Mr X and Mr Y were qualified valuers for Mainland properties

      FACTS

      1. Company A announced a disposal of its property, a commercial building, in Beijing (the Property) to its parent company. This was a connected transaction which required independent shareholder approval. The circular would include a valuation report on the Property issued by the Appraiser and prepared by Mr X and Mr Y.
      2. Mr X and Mr Y were the Appraiser's employees but were not members of the Hong Kong Institute of Surveyors (HKIS) or the Royal Institution of Chartered Surveyors.
      3. Company A submitted that Mr X and Mr Y were qualified to prepare the report under Rule 5.08(2)(b) and paragraph 4.1 of Practice Note 12 because:
      (1) The Appraiser was a member of China Institute of Real Estate Appraisers and Agents (CIREA) and subject to its professional discipline.
      (2) CIREA was a national self-disciplined professional body of real estate appraisers and real estate brokers in the Mainland. Its responsibilities include: promoting academic research and education, preparing and reviewing professional standards and ethics, holding national examinations for professional qualification of appraisers and brokers, and organizing continuing professional development activities for its members. CIREA may take disciplinary actions against members who breach its rules or practicing standards including a warning, public censure, or suspension or cancellation of membership. CIREA's practicing members are real estate appraisers registered under the Mainland regulations which require the appraisers to have relevant qualifications and experience and comply with certain continuing professional development standards.
      (3) CIREA and HKIS had signed a reciprocity agreement in relation to the recognition of qualifications of Mainland real estate appraisers and Hong Kong surveyors. Under the agreement, each institute's individual members who meet certain eligibility criteria and are nominated by the institute can apply for the other institute's membership through an examination organized by the other institute. Company A considered that CIREA was a professional body of similar standing to HKIS.
      (4) Mr X and Mr Y were not members of CIREA. The Appraiser, as a CIREA member, required its employees to comply with the professional discipline of CIREA when preparing a property valuation report.
      (5) Mr X and Mr Y were registered with the Ministry of Construction (MOC) as certified real estate appraisers and hence qualified to provide property valuation reports in the Mainland. They were required under the MOC rules and regulations to comply with the professional discipline and ethics regulations of the real estate appraisal industry in the Mainland (including those issued by CIREA), although membership of CIREA was not required for a certified real estate appraiser to provide property valuation reports.
      (6) Under the rules and regulations mentioned in (4) and (5) above, Mr X and Mr Y had to comply with the Code for Real Estate Appraisal issued by MOC. The Code was the main professional discipline of CIREA. It was also the highest national standard and comparable with the HKIS property valuation standards referred to in Rule 5.05.
      (7) Both Mr X and Mr Y had been working in Beijing as certified real estate appraisers and valuing commercial buildings for more than 10 years. They also attended continuous training on the CIREA standards as required under the relevant regulations.

      APPLICABLE LISTING RULES

      4. Rule 5.05 states that:
      All valuation reports must contain all material details of the basis of valuation which must follow the "Hong Kong Guidance Notes on the Valuation of Property Assets" published by The Royal Institution of Chartered Surveyors (Hong Kong Branch) and The Hong Kong Institute of Surveyors.
      5. Rule 5.08 states that
      Unless dispensation is obtained from the Exchange, all valuations of properties must be prepared by an independent qualified valuer and for this purpose:-
      (1) ...
      (2) a valuer is a qualified valuer only if:-
      (a) ...
      (b) for the purposes of valuation of properties situated outside Hong Kong, the valuer has the appropriate professional qualifications and experience of valuing properties in the same location and category to carry out the valuation.
      6. Para 4.1 of PN12 states that:
      for the purpose of valuing properties in developing property markets, a valuer would normally be regarded as having the appropriate professional qualifications and experience for valuing properties in developing property markets if he is subject to the discipline of the RICS or the HKIS (i.e. Hong Kong Institute of Surveyor) or professional body of similar standing to the RICS or HKIS and has a minimum of 2 years experience in valuing properties in the relevant location or has relevant experience to the satisfaction of the Exchange.

      ANALYSIS

      7. Under paragraph 4.1 of PN12, the Exchange would regard a valuer as having appropriate qualifications if he is subject to the discipline of the RICS or the HKIS or a professional body of similar standing to either of them. The Exchange was satisfied that Mr X and Mr Y had the required qualifications because:
      a. It considered that CIREA was a professional body of similar standing to the HKIS.
      b. The Appraiser was a CIREA member.
      c. Mr X and Mr Y were certified real estate appraisers in the Mainland. Although they were not CIREA members, they were required under the Appraiser's internal regulations and MOC rules and regulations to comply with the professional discipline of CIREA.
      8. Given their property valuation experience, the Exchange also considered that they had the experience required under paragraph 4.1 of PN12.

      CONCLUSION

      9. Mr X and Mr Y were qualified to prepare the valuation report for Company A's circular.

    • LD101-2

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      HKEx LISTING DECISION
      HKEx-LD101-2 (Published in August 2010) (Updated in April 2015)

      Parties Company A — a Main Board issuer

      The Investor — Company A's strategic partner
      Issue Whether the Exchange would waive the public float requirement for Company A
      Listing Rules Main Board Rule 8.08(1)(a)
      Decision The Exchange waived the requirement

      FACTS

      1. Company A was owned as to 70% by its controlling shareholder and as to 30% by public shareholders. Since its listing a year ago, it had had the minimum public float of 25% under Rule 8.08(1)(a). There was a PRC regulatory requirement imposed at the time of listing that the controlling shareholder had to own at least a 51% interest in Company A.
      2. The Investor was one of the world's leading manufacturers of the same products as those produced by Company A. Company A and the Investor proposed to form a long term strategic partnership (the Proposed Transaction). The Investor would inject funds and introduce advanced technologies to Company A to develop new products and cooperate in sales and distribution of the products globally.
      3. As a condition of the Proposed Transaction, the Investor required to acquire a 25% plus one share equity interest in Company A, through subscribing for new shares and/or acquiring existing shares from the controlling shareholder. This effectively gave the Investor veto rights over any special resolution which required support from shareholders holding at least a 75% interest under the applicable laws.
      4. After the Proposed Transaction, the controlling shareholder and the Investor would hold a 51% and a 25% plus one share equity interest in Company A respectively, and the public float would be 24% minus one share.
      5. Company A sought a waiver from the public float requirement under Rule 8.08(1)(a) because:
      a. Despite the 1% plus one share public float shortfall, the absolute number of shares in public hands would remain unchanged and there remained an open and highly liquid market in Company A's shares which were widely distributed among a large number of shareholders. Company A had approximately 480,000 shareholders immediately upon completion of its IPO. Its total market capitalisation was over $10 billion and the average daily trading volume of its shares since listing was approximately 7 million shares.
      b. The Proposed Transaction would be beneficial to Company A and its shareholders as a whole since it would bring to Company A new funds, experience and advanced technologies, and enhance its global competitiveness and earning capacity.
      c. Given the PRC regulatory requirement and the Investor's requirement, a public float representing 24% minus one share would be the highest achievable level of public float. Compliance with Rule 8.08(1)(a) would be unduly burdensome and impractical to Company A.
      d. At the time of listing, Company A, with a market capitalisation of over HK$29 billion, would have qualified for a waiver under Rule 8.08(1)(d) had it applied for it. No waiver was sought at that time because the Proposed Transaction had not been contemplated.

      APPLICABLE LISTING RULES

      6. Rule 8.08(1) states that:
      There must be an open market in the securities for which listing is sought. This will normally mean that:
      (a) at least 25% of the issuer's total number of issued shares must at all times be held by the public.
      ...
      (d) The Exchange may, at its discretion, accept a lower percentage of between 15% and 25% in the case of issuers with an expected market capitalization at the time of listing of over HK$10,000,000,000, where it is satisfied that the number of securities concerned and the extent of their distribution would enable the market to operate properly with a lower percentage .... Additionally, a sufficient portion (to be agreed in advance with the Exchange) of any securities intended to be marketed contemporaneously within and outside Hong Kong must normally be offered in Hong Kong.
      7. 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. ...

      Notes:
      (1) ...
      (2) The lower percentage of securities in public hands that the Exchange may at its discretion grant to eligible issuers under Rule 8.08(1)(d) may only be granted at the time of listing and will not be open for application post listing notwithstanding an issuer may after listing attain a market capitalisation of over HK$10,000,000,000.

      ANALYSIS

      8. The public float requirement seeks to ensure an open market in the securities for which listing is sought. To provide an open, fair and orderly market for the trading in the securities, it is essential to have available a minimum number of shares for trading.
      9. At the time of listing, the Exchange may accept a public float of between 15% and 25% if issuers have an expected market capitalisation of over HK$10 billion. Note 2 of Rule 13.32(2) clarifies that the Exchange may only allow the lower percentage under Rule 8.08(1)(d) to eligible issuers at the time of (and not after) listing. The Exchange will not accept an issuer's request to lower the minimum public float percentage threshold after listing simply because of its large market capitalisation.
      10. In this case, Company A sought to reduce the minimum public float requirement because of the Proposed Transaction.
      11. The Exchange noted the rationale for the Proposed Transaction submitted by Company A. When assessing Company A's waiver application, it considered the following factors:
      a. With the Investor's requirement to hold 25% plus one share in Company A, Company A and its controlling shareholder had shown their best endeavours to comply with the Rules by reducing the latter's interest to 51%, the minimum PRC regulatory requirement. The highest achievable public float for Company A would be 24% minus one share.
      b. The public float shortfall would be about 1%. The number of Company A's shares in the public hands would remain unchanged. The shortfall would unlikely affect the provision of an open, fair and orderly market for Company A's shares, having regard to (i) the large shareholder base and high liquidity of the shares; and (ii) the public market capitalisation which had been over HK$10 billion since listing.
      c. Had the Proposed Transaction been in place at the time of listing, Company A would have qualified for a public float waiver under Rule 8.08(1)(d).

      CONCLUSION

      12. The Exchange waived the public float requirement for Company A.

    • LD101-1

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      HKEx LISTING DECISION
      HKEx-LD101-1 (Published in August 2010) (Updated in April 2015)

      Parties Company A — a Main Board issuer

      The Investor — a party independent of Company A
      Issue Whether the Exchange would give listing approval for shares to be issued through transactions 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(1)
      Decision The Exchange gave the approval after Company A took measures to ensure compliance with the public float requirement

      FACTS

      1. Company A had financial difficulties. It proposed:
      a. to issue new shares to the Investor (the Subscription Shares) under a subscription agreement; and
      b. a rights issue, fully underwritten by the Investor.
      2. These transactions were conditional on approval of Company A's shareholders and the Exchange giving listing approval for the new shares.
      3. The Investor would be Company A's controlling shareholder upon completion of the subscription. If no shareholder took up the rights shares and the Investor fulfilled its underwriting obligation, the public float of Company A's shares would fall below the 25% requirement under Rules 8.08(1)(a) and 13.32(1).
      4. Company A stated in its announcement regarding the proposal that it would undertake to the Exchange that it would use reasonable endeavours to meet the minimum public float requirement upon completion of the transaction. However, no arrangement was put in place to ensure compliance with the requirement.

      APPLICABLE LISTING RULES

      5. Rule 8.08(1)(a) states that:
      There must be an open market in the securities for which listing is sought. This will normally mean that:
      (a) at least 25% of the issuer's total number of issued shares must at all times be held by the public.
      ...
      6. 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. ...

      ANALYSIS

      7. 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 a requirement under the Rule. It is the Exchange's practice to require the issuer to put in place adequate arrangements to prevent a breach of the Rules, for example, by entering into an irrevocable arrangement to place a sufficient number of shares to meet the minimum public float requirement.
      8. Here, the Investor's subscription and underwriting obligations could possibly result in the public float of Company A's shares being below the minimum public float 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 completion of the proposal, the Exchange was not prepared to give listing approval until the issue was addressed.
      9. To address the Exchange's concern, the parties took the following measures:
      a. The Investor and Company A agreed to limit the Investor's underwriting obligation so that it would not cause Company A to breach the requirement.
      b. Professional underwriters would underwrite the rights shares not underwritten by the Investor to avoid the issue of insufficient public float.

      CONCLUSION

      10. The Exchange accepted that the measures in paragraph 9 above addressed the issue of possible insufficient public float upon completion of the proposal.

    • LD99-5

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      HKEx LISTING DECISION
      HKEx-LD99-5 (July 2010)

      Parties Company A — a PRC issuer, listed on the Main Board and on a PRC stock exchange
      Issue Whether the Exchange would waive the class meeting requirement under Rule 19A.38 on Company A's bonus issue of shares
      Listing Rules Main Board Rule 19A.38
      Decision The Exchange waived the requirement

      FACTS

      1. Company A proposed a bonus issue of shares to its shareholders.
      2. Under its articles of association, Company A had to obtain shareholder approval for the bonus issue by a special resolution at a general meeting.
      3. Rule 19A.38 required the bonus issue to be approved by (i) shareholders at a general meeting and (ii) holders of A shares and H shares at separate class meetings. Company A asked the Exchange to waive the class meeting requirement for the proposed bonus issue because:
      a. According to PRC lawyers' opinion, no separate class meetings were required under the articles, the Mandatory Provisions for Companies Listing Overseas (the Mandatory Provisions), the PRC laws and/or the listing rules of the PRC stock exchange.
      b. The bonus shares would be issued to A and H shareholders pro rata to their shareholdings. No shareholders' rights would be affected or prejudiced by the bonus issue.

      APPLICABLE LISTING RULES

      4. Rule 19A.38 states that the requirements of rule 13.36(1) and (2) are replaced in their entirety by the following provisions:
      13.36
      (1)
      (a) Except in the circumstances mentioned in rule 13.36(2), the directors of the PRC issuer shall obtain the approval by a special resolution of shareholders in general meeting, and the approvals by special resolutions of holders of domestic shares and overseas listed foreign shares (and, if applicable, H shares) (each being otherwise entitled to vote at general meetings) at separate class meetings conducted in accordance with the PRC issuer's articles of association, prior to:-
      (i) authorising, allotting, issuing or granting:-

      (A)shares;

      (B)securities convertible into shares; or

      (C)options, warrants or similar rights to subscribe for any shares or such convertible securities; and

      .....

      Notes: 1. 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 PRC issuer must be offered to the existing shareholders (and, where appropriate, to holders of other equity securities of the PRC 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).
      .....
      (2) No such approval as is referred to in rule 13.36(1)(a) shall be required in the case of authorising, allotting or issuing shares if, but only to the extent that,
      (a) the existing shareholders of the PRC issuer have by special resolution in general meeting given approval, either unconditionally or subject to such terms and conditions as may be specified in the resolution, for the PRC issuer to authorise, allot or issue, either separately or concurrently once every twelve months, not more than twenty per cent. of each of the existing issued domestic shares and overseas listed foreign shares of the PRC issuer; or
      (b) such shares are part of the PRC issuer's plan at the time of its establishment to issue domestic shares and overseas listed foreign shares and which plan is implemented within fifteen months from the date of approval by the State Council Securities Policy Committee or such other competent state council securities regulatory authority.

      ANALYSIS

      5. For a pro rata issue of shares, Rule 13.36(2)(a) exempts non-PRC issuers from the shareholder approval requirement. Similar exemption is not available to PRC issuers under Rule 19A.38, which requires PRC issuers to obtain shareholder approval by a special resolution at a general meeting and approvals by holders of A and H shares at separate class meetings before any allotment, issue or grant of shares (pro rata or not).
      6. Rule 19A.38 was drafted to align with the Mandatory Provisions, which govern PRC issuers' articles of association and provide that rights conferred on any class of shareholders in the capacity of shareholders may not be varied or abrogated by the company unless approved in separate class meetings.
      7. The Exchange considered it appropriate to waive the class meeting requirement because:
      a. Under the PRC lawyers' legal opinion, the Mandatory Provisions did not require approvals at class meetings for a PRC issuer's bonus or capitalisation issue of shares which did not involve fund raising.
      b. The legal opinion also confirmed that Company A was not required to obtain approval for the bonus issue at separate class meetings under its articles of association, the PRC laws and/or the listing rules of the PRC stock exchange.
      8. The Securities and Futures Commission has given consent under Rule 2.04 to the Exchange to grant waivers from compliance with Rule 19A.38 for PRC issuers proposing a bonus or capitalisation issue of shares to all its shareholders (see Listing Committee Annual Report 2008).

      CONCLUSION

      9. The Exchange waived the class meeting requirement.

    • LD99-4

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      HKEx LISTING DECISION
      HKEx-LD99-4 (Published in July 2010) (Updated in April 2015)

      Parties Company X — a Main Board issuer
      Issue Whether Company X's proposal to seek a mandate from its shareholders to place new shares would meet Rule 13.36(1)(a)
      Listing Rules Main Board Rules 2.03, 13.36
      Decision The proposal would meet Rule 13.36(1)(a)

      FACTS

      1. Company X entered into a very substantial acquisition of a target engaged in natural resources exploitation. The consideration would be in cash, consideration shares and convertible securities.
      2. It proposed to raise funds to finance the acquisition and the target's business by issuing new shares to independent placees (the Placing). It was discussing this with placing agents but had yet to enter into any agreement for the Placing.
      3. To facilitate the fund raising exercise, Company X proposed to seek a specific mandate from its shareholders for the Placing at the same general meeting to consider the acquisition. The Placing would be made under the following framework:
      a. There was a limit on the number of shares to be issued, which represented approximately 35% of Company X's then issued share capital.
      b. The issue price would be determined on an arm's length basis with reference to the prevailing market conditions. In any event, it would be no less than the higher of:
      •   a fixed amount; and
      •   80% of the higher of (i) the market price of the shares on the date of the relevant placing agreement; and (ii) the average market price of the shares for 5 trading days immediately before the Placing.
      c. Over 90% of the net proceeds were to be assigned to (i) settle the cash consideration for the acquisition; and (ii) finance the target's capital expenditure and specific expenses. Any remaining proceeds would be used for the target's working capital.
      d. Given the estimated time for Company X to negotiate and conclude the placing agreement and the timetable for the acquisition, the specific mandate was proposed to last three months.

      APPLICABLE LISTING RULES

      4. Rule 2.03 states that the 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:
      ...
      (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) ...
      (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) 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.
      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;
      ...

      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, ... 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 ...

      ...
      (3) A general mandate given under rule 13.36(2) shall only continue in force until:
      (a) the conclusion of the first annual general meeting of the issuer following the passing of the resolution at which time it shall lapse unless, by ordinary resolution passed at that meeting, the mandate is renewed, either unconditionally or subject to conditions; or
      (b) revoked or varied by ordinary resolution of the shareholders in general meeting, whichever occurs first.
      ...

      ANALYSIS

      6. Under the Rules, a shareholder should be able to protect his proportion of total equity by having the opportunity to subscribe for any new issue of equity securities, unless shareholders otherwise permit. The pre-emptive rights may be waived by shareholders on a general basis but only under Rules 13.36(2) and (3) (i.e. a general mandate) which restrict the size and price for the new shares that can be issued.
      7. Accordingly, any proposal to issue new shares which exceed the limits of Rule 13.36(2) should be considered by shareholders on a case by case basis under Rule 13.36(1). In seeking the specific approval, the issuer must give shareholders sufficient information to enable them to make an informed assessment of the issue. The Exchange would not grant listing approval for the new shares if the mandate is in substance a "general" one and a means to circumvent Rule 13.36(2).
      8. Here, Company X proposed to seek a mandate for the Placing with a specific purpose, i.e. to finance the acquisition and the target's business development. While Company X had yet to enter into any placing agreement, it had taken reasonable steps to ensure that sufficient information about the Placing would be provided to its shareholders to make an informed assessment, including the framework for determining the terms of the Placing and the specific use of proceeds. The case could be distinguished from a general mandate, which should follow the requirements under Rule 13.36(2).

      CONCLUSION

      9. The proposed specific mandate for the Placing would meet Rule 13.36(1)(a).

    • LD99-3

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      HKEx LISTING DECISION
      HKEx-LD99-3 (Published in July 2010) (Updated in July 2014)

      Parties Company X — a Main Board issuer

      The Investor — an institutional investor which proposed to subscribe for convertible bonds to be issued by Company X
      Issue Whether certain special rights available only to the Investor under the convertible bonds would comply with the general principles in Rule 2.03
      Listing Rules Main Board Rules 2.03(4), 14A.36, paragraph 4(3) of Appendix 3
      Decision The special rights available only to the Investor would contravene the general principle of fair and equal treatment of shareholders under Rule 2.03(4)

      FACTS

      1. Company X was in financial difficulties. It proposed to issue convertible bonds (the Bonds) to the Investor for general working capital and to redeem existing convertible bonds which were due for redemption within a year.
      2. Under the terms of the Bonds, the following events (the Events) would trigger Company X's obligation to redeem the Bonds early from the Investor at a substantial premium:
      a. Company X's shareholders exercising their right to remove any directors nominated by Company A (Event 1).
      b. Company X failing to obtain shareholder approval for renewal of certain continuing connected transactions (Event 2).
      3. Company X submitted that these terms were agreed on an arm's length basis taking into account its special circumstances at that time, and were necessary to attract new investors.

      APPLICABLE LISTING RULES

      4. Rule 2.03 states that the Rules are designed to ensure that investors have and can maintain confidence in the market and in particular that:
      ...
      (4) all holders of listed securities are treated fairly and equally ...
      5. 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.
      6. Appendix 3 to the Rules requires that the articles of association must conform with the following provisions:
      4(3) That, where not otherwise provided by law, the issuer in general meeting shall have power by ordinary resolution to remove any director ... before the expiration of his period of office.

      ANALYSIS

      7. Rule 2.03 describes the general principles and states that the Rules are designed to ensure that investors have and can maintain confidence in the market. It seeks to secure for shareholders certain assurances and equality of treatment which their legal position might not otherwise provide. One of the general principles is that all shareholders are treated fairly and equally (Rule 2.03(4)).
      8. Here, Company X proposed to issue the Bonds under a general mandate and hence no specific shareholder approval would be required under the Rules.
      9. The terms of the Bonds caused a concern that the rights and interests of Company X's shareholders might be prejudiced in that:
      a. Appendix 3 to the Rules requires that an issuer's articles of association give shareholders the right to remove directors by ordinary resolution in a general meeting. The terms of the Bonds did not expressly prohibit shareholders from exercising this right. However, given Company X's financial difficulties and the substantial financial compensation payable by it if the shareholders exercised their right to remove directors nominated by Company A (Event 1), the right was unreasonably fettered.
      b. The connected transaction rules seek to safeguard against connected persons taking advantage of their positions to the detriment of minority shareholders by requiring connected transactions to be disclosed and subject to independent shareholder approval. Similarly, the financial compensation payable by Company X if any of the continuing connected transactions were not renewed (Event 2) would effectively fetter shareholders' right to vote against those transactions.
      10. Given the implications of the redemption obligations in respect of the Events, the Investor would effectively be given special rights not available to other shareholders of Company X. This would contravene Rule 2.03(4).

      CONCLUSION

      11. The Exchange requested Company X to address the issue. In response, Company X and the Investor agreed to remove the early redemption requirements concerning the Events.

    • LD99-1

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      HKEx LISTING DECISION
      HKEx-LD99-1 (July 2010)

      Parties Company X — a Main Board issuer
      Issue Whether the Exchange would approve Company X's proposed issue of new shares under Rule 10.06(3) after its redemption of convertible bonds
      Listing Rules Main Board Rule 10.06(3)
      Decision The Exchange approved Company X's proposed issue of new shares under Rule 10.06(3)

      FACTS

      1. Company X exercised its option to redeem early all outstanding convertible bonds issued by it three years ago (the Early Redemption).
      2. It considered the Early Redemption to be in its interest and the interest of its shareholders as it would otherwise have had to pay 10% more to redeem the bonds on maturity a few months later.
      3. It proposed to enter into an agreement within 30 days of the Early Redemption to place new shares to independent third parties. The purpose was to raise funds to repay loans due within one year and for general working capital. It sought the Exchange's approval of the proposal under Rule 10.06(3).

      APPLICABLE LISTING RULES

      4. Rule 10.05 states that:
      Subject to the provisions of the Code on Share Repurchases, an issuer may purchase its shares on the Exchange or on another stock exchange recognised for this purpose by the Commission and the Exchange. All such purchases must be made in accordance with rule 10.06. Rules 10.06(1), 10.06(2)(f) and 10.06(3) apply only to issuers whose primary listing is on the Exchange while the rest of rule 10.06(2) and rules 10.06(4), (5) and (6) apply to all issuers. The Code on Share Repurchases must be complied with by an issuer and its directors and any breach thereof by an issuer will be a deemed breach of the Exchange Listing Rules and the Exchange may in its absolute discretion take such action to penalise any breach of this paragraph or the listing agreement as it shall think appropriate. It is for the issuer to satisfy itself that a proposed purchase of shares does not contravene the Code on Share Repurchases.
      5. 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.
      6. Rule 10.06(6)(c) states that
      for the purposes of rules 10.05, 10.06, 19.16 and 19.43 "shares" shall mean shares of all classes and securities which carry a right to subscribe or purchase shares, of the issuer provided that the Exchange may waive the requirements of those rules in respect of any fixed participation shares which are, in the opinion of the Exchange, more analogous to debt securities than equity securities. References to purchases of shares include purchases by agents or nominees on behalf of the issuer or subsidiary of the issuer, as the case may be.

      ANALYSIS

      7. Rule 10.06(3) requires that an issuer seek the Exchange's approval before issuing new shares or announcing a new issue of shares within 30 days after its purchase of its own shares. This is both to ensure that the issue of new shares does not take place at a market price that has been affected by the issuer's previous 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.
      8. Here, the convertible bonds fell within the definition of "shares" under Rule 10.06(6)(c) and the redemption within the meaning of "purchase of shares" under Rule 10.06(3). Therefore Company X had to obtain the Exchange's approval under Rule 10.06(3) for its proposed issue of new shares under the placing agreement and publication of the related announcement.
      9. The Exchange noted that the purpose of the Early Redemption and the proposed placing was to reduce Company X's debts. It was satisfied that the concern mentioned in paragraph 7 above did not arise.

      CONCLUSION

      10. Company X's proposed issue of new shares was acceptable under Rule 10.06(3).

    • LD98-1

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      HKEx LISTING DECISION
      HKEx-LD98-1 (July 2010)

      Parties Company A — a Main Board listing applicant and its subsidiaries

      JCE — an entity under the joint control of Company A and another venturer
      Issue How Company A should account for JCE in its future annual and interim reports upon change of accounting method from the proportionate consolidation to the equity
      Listing Rules Rules 4.11 and 4.12
      Decision The Exchange considered Company A's proposal on presenting JCE's financial information in its annual and interim reports upon adoption of the equity accounting method acceptable as it would provide sufficient information on JCE to allow investors to appraise its financial position

      FACTS

      1. Company A applied to list under Rule 8.05(3). Its business was principally operated by JCE. JCE was accounted for in its financial statements (drawn up under the Hong Kong Financial Reporting Standards (HKFRS) 1 ) as a joint venture using the proportionate consolidation method.
      2. Under HKFRS, jointly-controlled entities may be accounted for by the proportionate consolidation method or the equity method. However, HKFRS is expected to be amended to follow the amendments to International Accounting Standard 31 'Interest in Joint Ventures' (IAS 31)2 to allow only the equity method for jointly-controlled entities.
      3. Since the Hong Kong Institute of Certified Public Accountants had not yet announced the applicable standards for presenting information of jointly-controlled entities if HKFRS were to follow the amendments to IAS31, the Exchange had concerns that Company A's future financial statements might not contain comparable information following changes in the methods to account for jointly-controlled entities.

      APPLICABLE LISTING RULES

      Listing Rules requirements

      4. Rule 4.11 provides that the financial history of results and the balance sheet included in the accountants' report must normally be drawn up in conformity with:—
      (a) Hong Kong Financial Reporting Standards; or
      (b) International Financial Reporting Standards. Listed issuers and listing applicants, which adopt IFRS, are required:-
      (i) to disclose and explain differences of accounting practice between IFRS and HKFRS, which have a significant effect on their financial statements; and
      (ii) to compile a statement of the financial effect of any such material differences.
      Note: The issuer must apply one of these bodies of standards consistently and shall not change from one body of standards to the other.
      5. Rule 4.12 provides that any significant departure from such accounting standards must be disclosed and explained and, to the extent practicable, the financial effects of such departure quantified.

      HKFRS requirements:

      6. Paragraph 3 of Hong Kong Accounting Standard 31 'Interest in Joint Ventures' (HKAS 31) states that:
      •   Equity method is a method of accounting whereby an interest in a jointly-controlled entity is initially recorded at cost and adjusted thereafter for the post-acquisition change in the venturer's share of net assets of the jointly-controlled entity. The profit or loss of the venturer includes the venturer's share of the profit or loss of the jointly-controlled entity.
      •   Proportionate consolidation is a method of accounting whereby a venturer's share of each of the assets, liabilities, income, expenses of a jointly-controlled entity is combined line by line with similar items in the venturer's financial statements or reported as separate line items in the venturer's financial statement.
      7. A comparison of the different accounting methods for interests in jointly-controlled entities is set out below:-
        Information presented
      Proportional consolidation Equity method
      Income statement Line-by-line basis for the group's proportionate share of jointly-controlled entities including revenue, cost of sales, gross profit, selling & administrative expenses, etc Only a single line item showing the share of jointly-controlled entities' profits
      Balance sheet Line-by-line basis for the group's proportionate share of jointly-controlled entities including property, plant and equipment, land use rights, trade receivables, trade payables, etc Only a single line item showing the share of jointly-controlled entities' net assets
      Cash flow statement Line-by-line basis for the group's proportionate share of jointly-controlled entities including cash generated from operations, changes in working capital, etc Only dividend received from the jointly-controlled entities and amount due from/(to) jointly-controlled entities
      8. Paragraph 54 of HKAS 31 requires a venturer to disclose the aggregate amount of any contingent liabilities in relation to its interests in joint ventures, unless the probability of loss is remote, separately from the amount of other contingent liabilities.
      9. Paragraph 55 of HKAS 31 requires a venturer to disclose the aggregate amount of any capital commitments in relation to its interests in joint ventures separately from the amount of other capital commitments.
      10. Paragraph 56 of HKAS 31 requires a venturer who recognises its interests in joint ventures using the proportionate consolidation or the equity method to disclose the aggregate amounts of each of current assets, current liabilities, long-term liabilities, income and expenses related to its interests in joint ventures in a separate note to the financial statements.

      ANALYSIS

      11. Irrespective of the methods used to account for jointly-controlled entities, issuers' financial information must enable investors to easily understand their business, financial position, management and prospects, etc. The Exchange encourages issuers to disclose financial information of material jointly-controlled entities (for example, revenue and key balance sheet items) in listing documents and annual reports beyond those required under the applicable accounting standards.
      12. To address the Exchange's concern about the effect of the change of accounting method on presentation of financial information of jointly-controlled entities, Company A confirmed that even upon adoption of the equity method to account for JCE, Company A would provide sufficient information to enable investors to assess its operating results.
      13. Company A proposed that:
      a. in the "Summary", "Risk Factors" and "Financial Information" sections of its listing document, there would be disclosure on:
      (i) the likely amendments to HKFRS on changes in accounting methods for jointly-controlled entities;
      (ii) the potential impact of the changes in accounting methods for JCE on its financial statements; and
      (iii) how it would disclose JCE's financial information in its annual and interim reports after adopting the equity accounting method (see b below);
      b. in its annual or interim report following listing:
      (i) in the management discussion and analysis section of the annual or interim report, the analysis of financial results would be presented at a similar level to what was presented in the "Financial Information" section of the listing document. That is, disclosure would focus on its key business drivers and include the analysis of its performance by segment and by key financial figures, such as revenue in terms of sales value and sales volume, cost of sales and gross profit margin; and
      (ii) in a separate note to the financial information, there would be disclosures on:
      •   key financial information of JCE including aggregate amounts of current/non-current assets, current/non-current liabilities, total income and total expenses under HKFRS;
      •   JCE's capital commitment and contingent liabilities and its proportionate interest under HKFRS;
      •   key balance sheet items of JCE which Company A would consider appropriate, e.g. property, plant and equipment, inventories, trade and other receivables, short-term borrowings, trade and other payables and long-term borrowings, etc; and
      •   the prior year's comparative figures for all the above items.

      CONCLUSION

      14. The Exchange considered Company A's proposal on presenting JCE's financial information in its annual and interim reports upon adoption of the equity accounting method and considered it acceptable as it would provide sufficient information on JCE to allow investors to appraise its financial position.

      1HKFRS comprise (i) Hong Kong Financial Reporting Standards, (ii) Hong Kong Accounting Standards; and (iii) interpretations.

      2The International Accounting Standards Board issued an 'Exposure Draft 9 Joint Arrangements' in September 2007 which would be followed by amendments to IAS 31. However, as this Listing Decision goes to print, the IASB has not yet published the amendments.

    • LD97-1

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      HKEx LISTING DECISION
      HKEx-LD97-1 (July 2010)

      Parties Company A — a Main Board listing applicant and its subsidiaries
      Issue Whether Company A's regulatory non-compliance record made it unsuitable for listing
      Listing Rules Rules 8.04 and 2.13
      Decision Company A's regulatory non-compliance was not so serious as to render it unsuitable for listing and the issue could be dealt with by disclosure

      FACTS

      1. Company A was mainly engaged in mining, processing and producing minerals. It breached certain laws and regulations of the place of its operation during the track record period.

      APPLICABLE LISTING RULES

      2. Rule 8.04 requires both the issuer and its business, in the opinion of the Exchange, to be suitable for listing.
      3. Rule 2.13 requires information contained in the listing document to be accurate and complete in material aspects and not be misleading or deceptive.

      ANALYSIS

      Factors to consider

      4. The Exchange considers that intentional, repeated breaches of laws and regulations by an issuer may affect its suitability for listing. The Exchange will take into account the following factors in determining the impact of non-compliance on an issuer's listing:
      a. the nature, the extent and the seriousness of the breaches, for example, whether the breaches involve dishonesty, or whether the breaches involved newly established laws and regulations which may be subject to different interpretations by legal professionals;
      b. the reasons for the breaches: whether the breaches were intentional or due to negligence or recklessness;
      c. the impact of the breaches on the issuer's operations;
      d. the rectification measures adopted; and
      e. the precautionary measures put in place to avoid future breaches.
      5. The Exchange will normally require the issuer to provide:
      a. a detailed account of the involvement of the directors and senior management in the breaches; and
      b. an explanation of whether the directors involved possess the expected qualities to the standard required under Rules 3.08 and 3.09.
      6. The Exchange will also request the sponsor to provide the basis of its view that the applicant has sufficient internal controls under Rule 3A.15(5) given the regulatory non-compliance matters. On a case by case basis, the Exchange may request the sponsor's view to be disclosed in the prospectus.
      7. While the Exchange has accepted issuers with non-compliance records for listing, it has also expressed concerns over the applicants' listing where the non-compliance had been more serious and only approved listing after the applicants had demonstrated steady compliance for a reasonable period of time.

      Precedent case

      8. In one case, during the track record period, the applicant had obtained trade financing from banks by providing invoices which were not supported by actual purchases in order to take advantage of the lower interest rate offered by the banks. Advised by its legal advisers, the applicant stopped the illegal practice when it prepared for listing.
      9. The Exchange considered that the illegal financing raised serious concerns about suitability for listing. The Exchange also expressed concerns about the directors' suitability to act as directors and the applicant's standard of business conduct.
      10. The Exchange determined that the applicant's application would only be considered in the future if it could demonstrate that it could operate without the illegal financing for a considerable period of time.
      11. When the applicant came back to the Exchange in a renewed application to demonstrate continuing compliance, the Exchange was provided with submissions that: (i) the breach was not criminal in nature; (ii) the applicant received confirmation from its PRC legal counsel and the relevant government agencies that the applicant, its directors and senior management would not be subject to any liabilities or penalties in the Mainland as a result of the non-compliance; and (iii) the banks gave confirmation that they would not claim against the applicant for any liabilities arising from the illegal practice. Listing approval was granted on the condition that the applicant adopted a series of measures to strengthen its internal controls.

      Present Case

      12. The Exchange noted that Company A was unable to rectify all the regulatory non-compliance before listing:-
      Details of Non-compliance Rectification measures
      Failure to provide information and reports as required by the regulator and the condition under its operating licence Company A undertook to rectify this non-compliance by providing the relevant information to the regulator.
      Failure to hold all the licences and permits required to conduct its operation Company A undertook to obtain the required licences and permits. The directors view was that there was no legal impediment to obtain them.
      Failure to start site production as required under the licence The delay was justified due to the sites' complex nature and Company A expected to commence production in the relevant sites in due course.
      Failure to maintain sufficient net assets in one subsidiary in accordance with the laws where it operated Company A would replenish the insufficient net assets by cash injection before listing
      13. The Exchange also noted that:-
      a. the sponsor considered that Company A's internal control was adequate to ensure compliance with the applicable legal and regulatory requirements;
      b. the sponsor was satisfied that the non-compliance incidents did not cast doubt on the suitability of the directors;
      c. the directors had attended training sessions on directors' duties conducted by legal advisers;
      d. additional personnel were hired to Company A's legal department to ensure compliance with the licence agreements and all applicable laws and regulations;
      e. Company A undertook to provide updates in its interim and annual results/ reports on the progress of obtaining the outstanding licences and permits, and would publish announcements upon obtaining those licences and permits; and
      f. the listing document would disclose in tabular form:
      (i) the details of and reasons for the non-compliance incidents;
      (ii) the legal opinion on the potential maximum penalty and impact on Company A; and
      (iii) remedial actions taken, expected timeframe for the non-compliance to be rectified and the measures undertaken to avoid future non-compliance.

      CONCLUSION

      14. Having considered that the remaining non-compliance incidents could be rectified within a reasonable time frame and they were not so serious as to affect Company A's business viability, the Exchange considered that they would not render Company A unsuitable for listing and the issue could be dealt with by disclosure.

    • LD96-1

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      HKEx LISTING DECISION
      HKEx-LD96-1 (July 2010)

      Parties Company A — a Main Board listing applicant and its subsidiaries
      Issue Whether persons with past SFC disciplinary records would be suitable to be Company A's directors
      Listing Rules Rules 3.08 and 3.09
      Decision
      •   Director X would only be accepted as a director of Company A on condition that he was licensed by the SFC to act as a fit and proper person to carry out regulated activities; and
      •   Director Y would be accepted as a director of Company A provided that the listing document clearly disclosed the non-compliance incidents, remedial actions taken and corporate governance measures.

      FACTS

      1. Company A operated a securities related business which required licences issued by the Securities & Futures Commission (SFC).
      2. Two of its directors had been reprimanded by the SFC before the track record period:
      a. Director X, as the then financial controller, had failed to implement written procedures and diligently review Company A's capital requirement under Financial Resources Rules (FRR). SFC had then concluded that Director X was not "fit and proper" to carry out regulated activities.
      b. Director Y had recklessly misrepresented that he witnessed clients signing account opening documents and inspected their original identity documents.
      3. The sponsor submitted that both directors would be suitable to act as directors under Rules 3.08 and 3.09 because:
      a. the non-compliance incidents did not involve fraudulent acts; and
      b. both directors had carried out rectification measures since the incidents:
      (i) Director X had enhanced Company A's internal control system to prevent further FRR breaches. His licence to carry out regulated activities had not been revoked by the SFC. Instead he gave up his licence voluntarily as his current role as the Company's financial controller did not require him to be licensed.
      (ii) Director Y had enhanced the procedures for witnessing client signatures and since then there had been no further breach. Director Y was considered a "fit and proper" person to carry out regulated activities and acted as Company A's responsible officer.

      APPLICABLE LISTING RULES

      4. Rule 3.08 states that the Exchange expects the directors to fulfill fiduciary duties and to have duties of skill, care and diligence to a standard at least commensurate with the standard under Hong Kong law.
      5. Rule 3.09 provides 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.

      ANALYSIS

      6. The SFO does not require every director of a licensed corporation to be a licensed person1.
      7. However, the Exchange may adopt a different eligibility standard for directors of an issuer engaging in a SFC-regulated business.
      8. Given the past non-compliance record of Director X and his current role in Company A, it would be important that if Director X applied for a SFC licence he would be granted one.
      9. The Exchange does not consider that having a past non-compliance record necessarily means that a person could not be accepted as the issuer's director. Suitability of that person to act as director of a listed issuer will be assessed by considering a number of factors:
      •   whether the non-compliance incidents raise serious concern on an individual's integrity;
      •   whether the issuer can demonstrate and the sponsor can confirm that the proposed director has carried out rectification measures to avoid recurrence;
      •   whether the issuer's internal control is sufficient to ensure due compliance with all laws and regulations going forward and is not susceptible to undue influence of any one director; and
      •   whether adequate disclosure has been made to enable investors to appreciate that person's character.
      10. A director must perform his duties to a standard reasonably expected of directors and is answerable to shareholders and other stakeholders. Where a person is likely to exert influence over the issuer as a director, investors are better protected by requiring him to take full responsibility as a director.
      11. Where a person is likely to exert substantial influence on the issuer after listing and has had a past record of serious dishonest misconduct or criminal conviction, there would be concern about the issuer's suitability for listing which could not be solved by the person refraining from acting as the issuer's director.

      CONCLUSION

      12. The Exchange concluded that:
      a. Director X would only be accepted as a director of Company A on condition that he was licensed by the SFC to act as a fit and proper person to carry out regulated activities; and
      b. Director Y would be accepted as a director of Company A provided that the listing document clearly disclosed the non-compliance incidents, remedial actions taken and corporate governance measures.

      1 SFO requires a licensed corporation to appoint at least 2 responsible officers for each type of regulated activities. One of them must be an "executive officer" under the SFO meaning who must be responsible for directly supervising the business of regulated activities of the licensed corporation.

    • LD95-5

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      HKEx LISTING DECISION
      HKEx-LD95-5 (July 2010)

      Parties Company A — a Main Board issuer

      Mr X — Company A's controlling shareholder and owner of a 70% interest in the Target

      The Target — a company in which Company A acquired a 30% interest from Mr X two years ago
      Issue Whether Company A's proposed acquisition of a further interest in the Target from Mr X was a reverse takeover under Rule 14.06(6)(b)
      Listing Rules Main Board Rule 14.06(6)(b)
      Decision Company A's proposed acquisition was a reverse takeover under Rule 14.06(6)(b)

      FACTS

      Background

      1. Mr X subscribed for Company A's new shares, and became its controlling shareholder. The Securities and Futures Commission granted him a whitewash waiver from the requirement to make a general offer to acquire all Company A's shares not already owned by him.

      Proposed Acquisition

      2. Six months later, Company A proposed to acquire a further interest in the Target from Mr X (the Acquisition). This would be a connected and very substantial acquisition. The consideration would be in cash and convertible preference shares. The terms of the convertible preference shares did not allow any conversion which would trigger a mandatory general offer under the Takeovers Code (the Conversion Restriction).
      3. To fund the cash consideration for the Acquisition, Company A would place new shares to independent third parties. The Acquisition and the placing would be conditional upon each other.
      4. After completion of the placing and the Acquisition, Mr X's interest in Company A would drop below 30% and he would cease to be Company A's controlling shareholder but remain its single largest shareholder.
      5. Company A sought the Exchange's confirmation whether the Acquisition would be a reverse takeover under Rule 14.06(6)(b). Company A considered that it was not because:
      a. Given (i) the conditionality of the Acquisition and the placing and (ii) the Conversion Restriction, Mr X would cease to be the controlling shareholder on their completion.
      b. It was implicit under Rule 14.06(6)(b) that for the Rule to apply, the issuer's controlling shareholder from whom the issuer was acquiring an asset had to remain in control of the issuer after the acquisition. Accordingly, the Rule would not apply because of paragraph 5a above.
      c. The Acquisition would expand, and not change, Company A's business activities.

      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:
      ...
      (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 (i) list the assets to be acquired and (ii) circumvent the new listing requirements. Rules 14.06(6)(a) and (b) provide bright line tests which apply to two specific forms of reverse takeover. They are not meant to be exhaustive.
      8. Sub-rule (b) applies if (i) an issuer's acquisition(s) of assets constitute(s) a very substantial acquisition; and (ii) the assets were acquired from the incoming controlling shareholder within 24 months after his gaining control of the issuer (as defined under the Takeovers Code).
      9. The Exchange considered that the Acquisition would be a reverse takeover under Rule 14.06(6)(b) because it:
      a. would take place within 24 months after Mr X's gaining of control of Company A (as defined under the Takeovers Code); and
      b. was a very substantial acquisition.
      10. Company A submitted that for Rule 14.06(6)(b) to apply, Mr X had to remain in control of Company A after the Acquisition. The Exchange disagreed. Rule 14.06(6)(b) is a bright line test and both conditions specified in the Rule were met. The fact that Mr X would cease to be Company A's controlling shareholder on completion was irrelevant.

      CONCLUSION

      11. Rule 14.06(6)(b) would apply to the proposed Acquisition.

    • LD95-4

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      HKEx LISTING DECISION
      HKEx-LD95-4 (July 2010)

      Parties Company A — a Main Board issuer

      The Target — a company to be acquired by Company A from the Vendor, an independent third party
      Issue Whether Company A's proposed acquisition constituted a reverse takeover under Rule 14.06(6)
      Listing Rules Main Board Rule 14.06(6)
      Decision The proposed acquisition constituted a reverse takeover

      FACTS

      1 Company A was in the business of selling machinery and equipment (the Existing Business).
      2 It proposed to acquire the Target from the Vendor (the Acquisition). The transaction would be a very substantial acquisition. Company A would pay for the Acquisition in cash and by issuing consideration shares and convertible bonds. The terms of the convertible bonds did not allow any conversion which would trigger a mandatory general offer under the Takeovers Code (the Conversion Restriction).
      3 The Target was engaged in oil and natural gas exploration, extraction and processing. It had exploration and extraction rights in two gas fields. One gas field was in a preliminary exploration stage and had resources classified as "Prospective Resources" under the Petroleum Resources Management System (PRMS). The Target had yet to commence any exploration work in the other gas field.
      4 Company A intended to continue the Existing Business after the Acquisition.
      5 There was an issue whether the Acquisition would constitute a reverse takeover under Rule 14.06(6).

      APPLICABLE LISTING RULES AND PRINCIPLES

      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. ... ...".
      7 Rule 18.02(1)(in force before 3 June 2010) states that an application for listing from a company whose current activities consist solely of exploration will not normally be considered, unless the issuer is able to establish:
      the existence of adequate economically exploitable reserves of natural resources, which must be substantiated by the opinion of an expert, in a defined area over which the issuer has exploration and exploitation rights.
      8 At the time of this case, the Exchange was consulting the market on proposed new Rules for mineral and exploration companies. The consultation conclusions were published on 20 May 2010 and the new Rules became effective on 3 June 2010. New Rule 18.03(2) states that a mineral company must establish to the Exchange's satisfaction that it has at least a portfolio of (a) Indicated Resource (for minerals); or (b) Contingent Resources (for oil and gas).

      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 (i) list the assets to be acquired and (ii) circumvent the new listing requirements. Rules 14.06(6)(a) and (b) provide bright line tests which apply to two specific forms of reverse takeover. 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 Rules 14.06(6)(a) and (b) did not apply here 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 Nevertheless the Exchange classified the proposed Acquisition as a reverse takeover under Rule 14.06(6). In its determination, the Exchange considered that:
      a. The Acquisition would be a very substantial acquisition and, in terms of size, would be significant to Company A. The Target's business, completely different from the Existing Business, would form a substantial part of Company A's business upon completion. The Acquisition would be a means to achieve the listing of the Target's business.
      b. The Target had yet to generate revenue, and could not meet the profit test for new applicants under Rule 8.05(1).
      c. The Target was an early stage exploration company. It was unsuitable for listing because Company A had not been able to show that the gas fields had oil and gas reserves required under the then Rule 18.02(1).
      12 The new Chapter 18 sets out the listing requirements for mineral companies. One requirement is that mineral companies must have at least a portfolio of identifiable resources (Rule 18.03(2)). For oil and gas companies, this would mean Contingent Resources as defined in the new Chapter 18. The Target would still fail to meet this requirement under the new Rules.

      CONCLUSION

      13 The proposed Acquisition was a transaction intended to list the Target's business and circumvent the new listing requirements. It was an extreme case and should be classified as a reverse takeover under Rule 14.06(6).

    • LD95-3

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      HKEx LISTING DECISION
      HKEx-LD95-3 (July 2010)

      Parties Company A — a Main Board issuer

      The Target — a company acquired by Company A from the Vendor

      The Vendor — the vendor of the Target
      Issue Whether the Exchange would consent to Company A's proposed change in the terms of its convertible notes issued to the Vendor
      Listing Rules Main Board Rules 14.06(6), 28.05
      Decision The Exchange did not consent to the proposed change

      FACTS

      Background

      1 About a year ago, Company A acquired the Target from the Vendor (the Acquisition). The Target's principal business was different from that of Company A before the Acquisition. The Acquisition was a very substantial acquisition.
      2 The consideration was paid in (i) cash, (ii) convertible notes and (iii) consideration shares.
      3 The convertible notes were redeemable only upon maturity three years after issue. Their terms did not allow any conversion which would trigger a mandatory general offer under the Takeovers Code (the Conversion Restriction). The consideration shares and the new shares fully converted from the convertible notes would have represented 60% of Company A's enlarged issued share capital.

      The proposed open offer and related arrangements

      4 Company A proposed an open offer, fully underwritten by the Vendor, to raise funds for its business operations. The subscription price represented about a 2% discount to the prevailing market price of Company A's shares and a 6% premium to their net asset value. If no shareholders took up their entitlements and the Vendor took up all the offer shares, the Vendor's interest in Company A would increase from 18% to approximately 40%.
      5 Under the underwriting agreement, the Vendor would fulfil its underwriting obligation partly in cash and partly by offsetting the convertible notes. To facilitate this offsetting arrangement, the parties proposed to change the terms of the convertible notes to make them redeemable before maturity. This would require the Exchange's prior approval.

      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. ... ...".
      7 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

      8 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 (i) list the assets to be acquired and (ii) circumvent the new listing requirements. Rules 14.06(6)(a) and (b) provide bright line tests which apply to two specific forms of reverse takeover. 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).
      9 In this case, the Acquisition adopted a convertible note structure with a restriction on conversion so that the change in control test under Rule 14.06(6)(a) was not triggered. But for the Conversion Restriction, the Acquisition would have resulted in the Vendor taking control of Company A and constituted a reverse takeover under the rule.
      10 At the time of the Acquisition, the Exchange did not exercise its discretion to classify the transaction as a reverse takeover under 14.06(6) given the structure and terms of the Acquisition.
      11 In considering whether to approve the proposed change in the redemption clause of the convertible notes, the Exchange was concerned that its purpose was to circumvent the reverse takeover Rule because:
      a. The proposed change was to facilitate the offsetting arrangement which, together with the open offer, would allow Company A to repay the convertible notes by issuing new shares to the Vendor and result in the Vendor taking control of Company A. This would effectively change the structure based on which the Acquisition had not been treated as a reverse takeover under Rule 14.06(6)(a).
      b. Company A had no other reason to immediately redeem the convertible notes which would mature in two years.
      12 In response to the Exchange's concern, Company A and the Vendor agreed to revise the open offer structure as follows:
      a. They agreed not to change the terms of the convertible notes.
      b. The Vendor would only underwrite offer shares that would not trigger a mandatory general offer and pay for the offer shares underwritten by it in cash.
      c. Another underwriter would underwrite the offer shares not underwritten by the Vendor.
      13 Under the revised structure of the open offer, there would be no change in the terms of the convertible notes and the Vendor would not be in a position to take control (as defined under the Takeovers Code) of Company A.

      CONCLUSION

      14 The Exchange did not consent to the proposed change in the terms of the convertible notes. It allowed Company A to proceed with the open offer under the revised structure.

    • LD95-2

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      HKEx LISTING DECISION
      HKEx-LD95-2 (July 2010)

      Parties Company A — a Main Board issuer

      The Acquisition Target — a company to be acquired by Company A from the Vendor

      The Vendor — the vendor of the Acquisition Target

      The Disposal Target — a company wholly owned by Company A and to be sold to Mr X

      Mr X — Company A's former chairman and controlling shareholder
      Issue Whether Company A's proposed acquisition constituted a reverse takeover under Rule 14.06(6)
      Listing Rules Main Board Rule 14.06(6)
      Decision The proposed acquisition constituted a reverse takeover under Rule 14.06(6)

      FACTS

      Background

      1 Company A's principal business was designing, manufacturing and selling toys (the Original Business).
      2 Company A made an open offer to raise funds for general working capital. Mr X did not take up any offer shares. As a result, his interest in Company A decreased from 40% to 8% on completion of the offer. He also retired as director and chairman at Company A's annual general meeting.
      3 At about the same time, Company A commenced the business of property holding and research and development of electric bus batteries, which were minimal in scale and insignificant to Company A.

      Proposed acquisition and disposal

      4 Four months after the completion of the open offer, Company A proposed to:
      a. acquire the Acquisition Target from the Vendor (the Acquisition). The Acquisition Target was in the business of manufacturing equipment for the production of thin film solar modules. The Acquisition would be a very substantial acquisition, its completion was not conditional on the Disposal; and
      b. sell the Original Business to Mr X (the Disposal). This would be a very substantial disposal and conditional on completion of the Acquisition.
      5 The Acquisition Target, established less than a year earlier, had yet to generate any revenue.
      6 Company A would pay for the Acquisition by issuing consideration shares and convertible bonds to the Vendor. The consideration shares and the shares convertible from the bonds would represent about 17% and 70% of Company A's enlarged share capital respectively. The terms of the convertible bonds would not allow any conversion which would trigger a mandatory general offer under the Takeovers Code (the Conversion Restriction).
      7 Company A would use the disposal proceeds to (i) repay shareholder loans; and (ii) pay a special dividend to shareholders.
      8 Company A considered that the Acquisition would enable it to change its business into a new area with high potential growth whereas the Disposal would realise its investment in a loss making business.
      9 There was an issue of whether the Acquisition would constitute a reverse takeover under Rule 14.06(6).
      10 Company A submitted that the Acquisition would not be a reverse takeover under the Rule because:
      a. the Acquisition and the Disposal would not result in a change in control of Company A (as defined under the Takeovers Code); and
      b. no vendor gained control of Company A within 24 months before the agreements for the proposed Acquisition and Disposal.

      APPLICABLE LISTING RULES

      11 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

      12 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 (i) list the assets to be acquired and (ii) circumvent the new listing requirements. Rules 14.06(6)(a) and (b) provide bright line tests which apply to two specific forms of reverse takeover. 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).
      13 Rules 14.06(6)(a) and (b) did not apply here 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.
      14 In considering whether the Acquisition would be a reverse takeover defined under Rule 14.06(6) and an extreme case, the Exchange considered that:
      a. The Acquisition and Disposal would effect a complete change of Company A's principal business. Through the Disposal, Company A would sell the Original Business to its former controlling shareholder, Mr X, whereas the Acquisition would result in an injection of a new business from the Vendor. This would be a listing of the Acquisition Target's business.
      b. The Acquisition Target had no trading record and could not meet the profit test for new applicants under Rule 8.05(1)(a).
      15 Company A submitted that the Acquisition would not be a reverse takeover as it would not result in a change in control of Company A (as defined under the Takeovers Code). The Exchange considered this fact irrelevant. An acquisition is a reverse takeover under the introductory paragraph of Rule 14.06(6) if the Exchange is satisfied that it is an attempt to (i) list the assets to be acquired and (ii) circumvent the new listing requirements. This is irrespective of whether it would result in a change in control. In this case, the Exchange considered that (i) and (ii) were satisfied given the factors in paragraph 14.

      CONCLUSION

      16 The Acquisition constituted part of a series of transactions intended to circumvent the requirements for new applicants and was an extreme case.

    • LD95-1

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      HKEx LISTING DECISION
      HKEx-LD95-1 (July 2010)

      Parties Company A — a Main Board issuer

      The Target — Company A's acquisition target
      Issue Whether Company A would become a cash company as a result of its proposed placing of convertible notes

      Whether the Exchange would treat Company A's proposed acquisition of the Target as a reverse takeover
      Listing Rules Main Board Rules 14.06(6) and 14.82
      Decision Company A would not be a cash company if it revised its proposal for placing convertible notes

      The Exchange did not treat the acquisition of the Target as a reverse takeover once Company A had complied with additional conditions

      FACTS

      1 Company A was principally engaged in security investments and manufacturing and trading battery products.
      2 It announced a proposal to place new shares to independent placees to raise funds for general working capital and potential investment opportunities (the First Placing). The new shares represented over 30 times its existing share capital. Based on the information then available, Company A's assets would substantially consist of cash upon completion of the placing and it would become a cash company under Rule 14.82.
      3 Shortly after the announcement, Company A agreed to acquire the Target, an insurance company, from an independent vendor in cash (the Acquisition). This was a very substantial acquisition. The Target would be Company A's subsidiary upon completion.
      4 The Target's total assets and turnover for its latest financial year exceeded $300 billion and $100 billion respectively. With an asset ratio of about 300 times and a revenue ratio of about 5,000 times, the Target was significantly larger than Company A. Thus, there was an issue whether the Acquisition should be treated as a reverse takeover under Rule 14.06(6).
      5 To address the cash company issue, Company A decided not to proceed with the First Placing. Instead, it proposed to issue convertible notes to raise funds (the Second Placing) for the Acquisition. The notes would be redeemed within two weeks if the Acquisition fell through.
      6 Company A submitted that Rule 14.06(6) should not apply to the Acquisition because:
      a. the Second Placing and the Acquisition would not result in a change in control of Company A; and
      b. the vendor was not attempting to circumvent the new listing requirements. The sale was a forced sale by the vendor of its major assets with no pre-requisite as to the listing status of the purchaser.

      APPLICABLE LISTING RULES

      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 provides 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 Rule 14.82 provides that:
      Where for any reason (including immediately after completion of a notifiable transaction or connected transaction) the assets of a listed issuer ... consist wholly or substantially of cash or short-dated securities, it will not be regarded as suitable for listing and trading in its securities will be suspended. "Short-dated securities" means securities such as bonds, bills or notes which have less than 1 year to maturity.
      10 Rule 14.84 states that:
      The listed issuer may apply to the Exchange to lift the suspension once it has a business suitable for listing. The Exchange will treat its application for lifting of the suspension as if it were an application for listing from a new applicant. The listed issuer will be required, among other things, to issue a listing document containing the specific information required by Appendix I Part A, and pay the non-refundable initial listing fee. The Exchange reserves the right to cancel the listing if such suspension continues for more than 12 months or in any other case where it considers it necessary. It is therefore advisable to consult the Exchange at the earliest possible opportunity in each case.

      ANALYSIS

      Whether Company A was a cash company

      11 Rule 14.82 defines a cash company as an issuer whose assets consist wholly or substantially of cash or short-dated securities for any reason.
      12 Despite the revised fund raising method, Company A's assets would still substantially consist of cash immediately after completion of the Second Placing. Company A's proposal to redeem the convertible notes if the Acquisition failed to complete would not address the Exchange's concern as the company would have already become a cash company. Under Rule 14.83, trading in its shares would be suspended.
      13 In view of this, Company A revised the terms of the Second Placing to ensure that it would not become a cash company at any time. Under the revised terms, the Second Placing was conditional on completion of the Acquisition.

      Whether the Exchange would treat the Acquisition as a reverse takeover

      14 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 (i) list the assets to be acquired and (ii) circumvent the new listing requirements. Rules 14.06(6)(a) and (b) provide bright line tests which apply to two specific forms of reverse takeover. 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).
      15 The Exchange noted that the size of the Acquisition was very significant to Company A, and the Target was in a completely different business. Despite Company A's stated intention to continue its existing businesses, they would become immaterial after the Acquisition. The Acquisition would result in a change in Company A's dominant business and was a means to achieve the listing of the Target's business. The Acquisition was an extreme case.
      16 Company A submitted that the Acquisition was not a reverse takeover as the Vendor would not acquire shares through the Acquisition. The Exchange did not consider this fact relevant. An acquisition is a reverse takeover under the introductory paragraph of Rule 14.06(6) if the Exchange is satisfied that it is an attempt to (i) list the assets to be acquired and (ii) circumvent the new listing requirements. In this case, the Exchange considered that the Acquisition was a attempt to achieve a listing of the Target's business.
      17 Nevertheless, the Exchange took into account the following factors when assessing whether the Acquisition was "a means to circumvent the requirements for new applicants set out in Chapter 8 of the Exchange Listing Rules".
      a. The Target would have been able to meet the profit requirement for new applicants under Rule 8.05(1)(a) but for the substantial loss it suffered in the latest financial year as a result of a global economic downturn. The Target's results showed that there was no significant deterioration in its revenue generating ability in the latest financial year and that its trading record was only adversely affected temporarily by the economic downturn.
      b. Given its substantial asset value and revenue for its latest financial year, the Target should be able to meet the capitalisation/revenue test under Rule 8.05(3).
      18 On balance, the Exchange decided not to treat the Acquisition as a reverse takeover on the following conditions:
      a. Company A would publish the circular with a disclosure standard comparable to an IPO prospectus.
      b. In the circular, Company A would fully explain, to the Exchange's satisfaction, the Target's loss in the latest year to show that it was temporary in nature and was not due to a fundamental deterioration of commercial or operational viability of the Target; and
      c. Company A would appoint an adviser acceptable to the Exchange to conduct due diligence on the Target and to fulfill duties and obligations equivalent to those of a sponsor for a new listing application under the Rules including Practice Note 21.
      19 Given this, the Exchange considered that the purpose of the reverse takeover rule was satisfied.

      CONCLUSION

      20 Company A was not a cash company after revising the terms of the Second Placing.
      21 The Exchange did not treat the Acquisition as a reverse takeover subject to the conditions in paragraph 18.

    • LD94-1

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      HKEx LISTING DECISION
      HKEx-LD94-1 (June 2010) (Updated in April 2014)

        Summary
      Parties Company A — a Main Board listing applicant and its subsidiaries
      Subject Whether to grant a Rule 4.10 waiver to banking companies incorporated in Mainland China
      Listing Rules Rule 4.10 and Rule 2.13(2)
      Decision The Exchange granted Company A a waiver from the disclosure requirements for banking companies under Rule 4.10.

      Nonetheless, Company A would continue to be required to comply with the bank disclosure requirement under Rule 4.10 to the extent such information was available to ensure that disclosure was made on a consistent basis by all banks listed on the Exchange. The 'best practice' requirements of Rule 4.10 and the general disclosure requirements under Rule 2.13(2) would continue to apply.

      SUMMARY OF FACTS

      1. Company A was a bank incorporated in Mainland China seeking a primary listing in Hong Kong. Its accountants' report was drawn up in conformity with International Financial Reporting Standards (IFRS).
      2. Company A was principally supervised by the China Banking Regulatory Commission (the CBRC) and the People's Bank of China (the PBOC).
      3. Company A sought a waiver from Rule 4.10.

      THE ISSUE RAISED FOR CONSIDERATION

      4. Whether to grant a Rule 4.10 waiver to banking companies incorporated in Mainland China?

      APPLICABLE LISTING RULES OR PRINCIPLE

      5. Rule 2.13(2) provides that:
      The information contained in the document must be accurate and complete in all material respects and not be misleading or deceptive.
      6. Rule 4.10 provides that:
      The information to be disclosed in respect of rules 4.04 to 4.09 must be in accordance with best practice which is at least that required to be disclosed in respect of those specific matters in the accounts of a company under the Companies Ordinance 1 and HKFRS or IFRS and, in the case of banking companies, the Financial Disclosure by Locally Incorporated Authorized Institutions issued by the Hong Kong Monetary Authority (the "HKMA").

      THE ANALYSIS

      Applicability of Rule 4.10

      7. The purpose of Rule 4.10 is to ensure that listing applicants' financial disclosures adhere to best practice under the HKMA standards. Since 1 January 2007, the Banking (Disclosure) Rules (Chapter 155M of the Laws of Hong Kong) have replaced the Financial Disclosure by Locally Incorporated Authorized Institutions as the applicable disclosure requirements. Since then, the Exchange has applied Rule 4.10 to reflect the replacement accordingly. This is to ensure that the disclosure standards for banks in Hong Kong are honoured by all banking applicants and reflected in their applications, prospectuses and other materials filed with the Exchange.
      8. Rule 4.10 waivers have only been granted sparingly and, when granted, they were narrowly tailored to the needs of the applicant in question. However, where an overseas banking applicant is primarily regulated by a foreign regulator with functions similar to the HKMA and the Exchange is satisfied that the foreign regulator provides adequate supervision to the applicant, it may grant relief from Rule 4.10.
      9. In considering whether to waive the requirements for banks in Rule 4.10, the Exchange normally takes into account:
      a. whether the omitted information is relevant and material to investors;
      b. whether the applicant is required to maintain the information by the foreign regulator, such as the CBRC and PBOC; and
      c. whether the information is available to the applicant and, if not, what efforts are required to obtain the information.

      Standards of Disclosure under Rules 2.13(2) and 4.10

      10. When considering the 'best practice' financial disclosure standard for Mainland banking applicants, the Exchange will refer to all relevant facts and circumstances, including a review of the applicable accounting standards, the rules and regulations of other jurisdictions, and international and Hong Kong market practices.
      11. The Exchange will not normally review the reasonableness of the Mainland regulatory requirements. However, where the Exchange considers that the disclosure practices both in Hong Kong and other jurisdictions indicate that greater details should be provided on particular requirements of the PBOC/ CBRC or the applicant's interpretation of the applicable regulations, the Exchange may request additional disclosure.
      12. The Exchange has identified four areas of financial disclosure to be material for compliance with Rule 2.13 and Rule 4.10:
      a. capital adequacy;
      b. loan quality (including non-performing loans, restructured loans and overdue loans);
      c. loan provisioning; and
      d. guarantees, contingencies and other commitments.
      13. The Exchange will normally require Mainland bank applicants to demonstrate that:
      a. the judgment underlying the presentation of a report made in conformity with the adopted accounting standards is reasonable and appropriate in light of established international market practice. Particular attention should be paid to areas where there may be a significant gap between international market practices and Mainland practices; and
      b. the inclusion of side by side accounting and PRC regulatory disclosure is not materially misleading. Reasons for material differences and similarities between the accounting and PRC regulatory disclosures should be disclosed in the prospectus.
      14. When presenting statistical data in prospectuses, the Exchange will require applicants to raise investors' awareness:
      a. where Mainland bank applicants and their reporting accountants and accountants in other jurisdictions may have substantially different interpretations on the same accounting standard; and
      b. where amendments to or interpretations of the applicable accounting standards which relate to Mainland banks are under active consideration by accounting professionals.

      Company A's Waiver Application

      15. Company A requested relief from the bank disclosure requirements under Rule 4.10, principally based on the following reasons:
      a. certain bank disclosure requirements under Rule 4.10 were based on fundamental concepts which did not exist under IFRS. It would be unduly burdensome to require Company A to include those disclosures in its accountants' report;
      b. by complying with the PBOC/ CBRC standards and the IFRS standards, Company A's accountants' report would substantially meet the bank disclosure requirements under Rule 4.10. For those areas where Company A was not able to comply with bank disclosure requirements under Rule 4.10, it would be unnecessary, impracticable and unduly burdensome for Company A to provide the relevant disclosures; and
      c. Company A, being a Mainland bank with no or with few business activities in Hong Kong, was not obliged by the HKMA to fulfil the bank disclosure requirements under Rule 4.10.
      16. Company A provided the following information in its waiver application:
      a. areas where there were major differences between the bank disclosure requirements under Rule 4.10 and IFRS, and Company A's comments and proposed alternative disclosure in respect of such differences;
      b. areas where there were major differences between the bank disclosure requirements under Rule 4.10 and CBRC/ PBOC regulatory disclosure requirements, and Company A's comments and proposed alternative disclosure in respect of such differences; and
      c. information that was currently unavailable in compliance with the bank disclosure requirements under Rule 4.10; how Company A justified the departure and when and how Company A could commit to complying with such requirements in the future.
      17. The Exchange specifically reviewed the disclosure in the proposed Company A's prospectus:-
      Disclosure area Details
      (i) Capital adequacy
      Company A's capital adequacy ratio was calculated according to CBRC regulations. The relevant regulations and how it calculated the ratio had been disclosed.
      (ii) Loan quality
      Non-performing loans

      Company A classified loans using five-category loan classification system promulgated by the PBOC. The relevant quantitative and qualitative loan classification criteria had been disclosed.

      Restructured and overdue loans

      Company A's definition and treatment of restructured and overdue loans had been disclosed.
      (iii) Loan loss reserves
      There was no difference between the methodology and amount of allowance for impairment losses prepared under IFRS and PRC GAAP.

      The difference between the impairment loss calculated according to IFRS and PBOC guidelines was not material.

      Company A's objective criteria used in assessing the loan impairment had been disclosed.
      (iv) Guarantees, contingencies and other commitments
      Details of the Company A's off-balance sheet items including guarantees, contingencies and other commitments, together with the credit-risk weighted amount, had been disclosed.
      18. The Exchange noted that Company A had established a representative office in Hong Kong approved by the HKMA under the Banking Ordinance (Cap. 155), which meant that Company A was considered by the HKMA to be adequately supervised by the relevant banking supervisory authorities of its home jurisdiction (i.e. the CBRC and the PBOC) (see sections 46(1) and (3) of the Banking Ordinance).
      19. The Exchange also noted that Company A had confirmed that by complying with the IFRS, the CBRC/ PBOC regulatory disclosure requirements and the bank disclosure requirements under Rule 4.10 to the extent possible, and subjecting itself to the proposed alternative disclosure as mentioned in paragraph 16 above, the financial information disclosed in the prospectus was sufficient for potential investors to make a fully informed investment decision.
      20. Having regard Company A's submissions and its commitment that the bank disclosure requirements under Rule 4.10 would be complied with in the next financial year to the extent possible, the Exchange considered the waiver application favourably.

      THE DECISION

      21. The Exchange granted Company A a waiver from strict compliance with the disclosure requirements for banking companies under Rule 4.10.
      22. Nonetheless, Company A would continue to be required to comply with the bank disclosure requirements under Rule 4.10 to the extent such information was available to ensure that disclosure was made on a consistent basis by all banks listed on the Exchange. The 'best practice' requirements of Rule 4.10 and the general disclosure requirements under Rule 2.13(2) would continue to apply.

      1 Retitled as the Companies Ordinance (Cap. 622) with effect from March 2014 (Updated in April 2014).

    • LD93-5

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      HKEx LISTING DECISION
      HKEx-LD93-5 (June 2010)

      Parties Company A — a Main Board issuer

      The Vendor — the vendor of the Target

      The Target — Company A's acquisition target
      Issue Whether Company A must seek shareholder approval of an amended acquisition agreement
      Listing Rules Main Board Rules 14.40, 14.49
      Decision Company A must seek shareholder approval of the amended acquisition agreement

      FACTS

      1. Company A was in the gaming business.
      2. It agreed with the Vendor to acquire the Target (the Agreement). The Target's main asset was a profit stream from acting as a gaming promoter. Under the Agreement, the Vendor would provide Company A with profit guarantees.
      3. The acquisition was a very substantial acquisition for Company A and had been approved by its shareholders.
      4. After obtaining shareholder approval but before completing the Agreement, Company A's directors became aware of the adverse effect of the global financial crisis on the Target's profitability. This effect was not considered when the Agreement was signed or when it was approved by the shareholders. The directors and the Vendor agreed to reduce the consideration and the profit guarantees substantially, and to extend the long stop date. Based on these amendments, the acquisition would remain a very substantial acquisition for Company A.
      5. Company A considered that no shareholder approval of the amended Agreement was required because:
      a. The amendments would not change the subject matter of the acquisition (i.e. the Target and its profit stream) or the projected yield in percentage terms.
      b. No reasonable shareholder would object to the amendments which would reduce Company A's investment costs.
      c. Company A would remain contractually obliged to complete the acquisition based on the original Agreement even if the shareholders did not approve the amendments.

      APPLICABLE LISTING RULES AND PRINCIPLES

      6. Rule 14.40 states that:
      A major transaction must be made conditional on approval by shareholders.
      7. Rule 14.49 states that:
      ... a very substantial transaction must be made conditional on approval by shareholders in general meeting ... .

      ANALYSIS

      8. For an agreement approved by an issuer's shareholders, the issuer may be required to seek prior shareholder approval of an amendment to the agreement, depending on the nature and materiality of the amendment (see Frequently Asked Questions on Rule Requirements relating to Notifiable Transactions, Connected Transactions and Issues of Securities by Listed Issuers (Series 7), No.16).
      9. Company A renegotiated material terms of the Agreement. The Exchange considered the proposed amendments to be material changes to the Agreement and, in substance, a new transaction. The shareholders should be given an opportunity to consider whether, in light of the change in the circumstances (i.e. the financial crisis), the amended Agreement was in the interest of the company as a whole and to vote on it.

      CONCLUSION

      10. Company A should seek shareholder approval of the amended Agreement.

    • LD93-4

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      HKEx LISTING DECISION
      HKEx-LD93-4 (Published in June 2010) (Updated in July 2014)

      Parties Company A — a Main Board issuer

      Subsidiary B — Company A's non-wholly owned subsidiary, incorporated and listed overseas

      Shareholders — Company A's shareholders
      Issue Whether the Exchange would impose additional requirements under Rule 2.04 on Company A's proposed distribution in specie of Subsidiary B's shares
      Listing Rules Main Board Rules 2.03, 2.04, 14.04(1), 14A.24
      Decision The Exchange did not impose additional requirements under Rule 2.04 on the proposed distribution

      FACTS

      1. Company A was engaged in a number of businesses including (i) retail services through department stores; and (ii) information technology services through Subsidiary B.
      2. To streamline its business activities and develop a more focused line of business, Company A proposed a group reorganisation through distribution in specie of all its equity interest in Subsidiary B (the Shares) to its Shareholders. After the distribution, Company A would cease to have any interest in Subsidiary B. The simplified shareholding structures before and after the distribution are below:

      Before the distribution



      After the distribution

      3. The distribution required shareholder approval under Company A's articles of association and applicable laws. Company A submitted that the distribution would be in the Shareholders' interest and that all the Shareholders would be treated fairly and equally because:
      a. The Shares would be distributed to the Shareholders pro rata to their respective shareholding in Company A. Therefore the distribution would not dilute their interest in Subsidiary B.
      b. There was an adequate market in the Shares, which were listed on a stock exchange in Subsidiary B's place of incorporation. As supported by a legal opinion, the Shares could be freely owned and transferred by the Shareholders as foreigners and their transferability would not be unreasonably restricted. Any transfer of the Shares and/or dividend payment would be subject to reasonable tax.
      c. Company A would bear all the costs and duties payable by the Shareholders upon the transfer of the Shares to them, and would arrange for brokers to provide each Shareholder with custodian services free of account opening and monthly holding charges for two years or until all his Shares were disposed of, whichever was earlier.

      APPLICABLE LISTING RULES

      4. Rule 2.03 states that:
      The Exchange 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:
      ...
      (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; ...
      5. 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. ...
      6. Rules 14.04(1) and 14A.24 provide guidance on the scope of "transactions" subject to the notifiable transaction rules and connected transaction rules.

      ANALYSIS

      7. The Exchange will normally consider a dividend distribution to shareholders as falling outside Chapters 14 and 14A. However, in the case of a distribution in specie, the Exchange may be concerned about whether the distribution is fair to all shareholders, particularly where unlisted assets are being distributed and there will be no liquid market for minority shareholders to realise a value from the distribution. The Exchange may impose additional requirements under Rule 2.04 to ensure compliance with Rule 2.03. (see Listing Decision LD75-4)
      8. Here, the Shares were not listed on the Exchange and the proposal did not provide a cash alternative to the Shareholders. Nevertheless, the Exchange considered the following factors:
      a. The Shares were listed on an overseas exchange and could be freely owned and transferred by the Shareholders and there would be a liquid market for the Shareholders to realise a value from the distribution.
      b. Company A had made appropriate arrangements to facilitate the Shareholders' owning and holding of the Shares.
      c. The distribution was subject to shareholder approval.

      CONCLUSION

      9. The Exchange did not impose additional requirements under Rule 2.04 on the proposed distribution.

    • LD93-3

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      HKEx LISTING DECISION
      HKEx-LD93-3 (Published in June 2010) (Updated in July 2014)

      Parties Company A — a PRC issuer listed on the Main Board

      The Purchaser — a company listed on a PRC exchange

      The Parent — the ultimate controlling shareholder of each of Company A and the Purchaser

      The Target — a subsidiary of Company A proposed to be sold to the Purchaser
      Issue Whether the Exchange would waive the profit forecast requirements under the Rules regarding a valuation report on the Target in Company A's announcement and circular
      Listing Rules Main Board Rules 14.62, 14.66(2), 14A.68(7), 14A.70(13), Paragraph 29(2) of Appendix 1B
      Decision The Exchange waived the requirements

      FACTS

      1. Company A proposed to sell the Target to the Purchaser in return for new A shares to be issued by the Purchaser (the Transaction). This was a major and connected transaction for Company A.
      2. Since the Transaction involved a transfer of state-owned assets, the PRC regulations required the Purchaser to engage an appraiser to prepare a valuation report on the Target to determine the consideration. The valuation was partly based on the projections of the Target's earnings. A subsidiary of the Parent (but not Company A) would indemnify the Purchaser for any shortfall in the Target's profits compared to the forecasted profits in the valuation report.
      3. Company A would disclose the Target's valuation prepared by the appraiser and the basis for determining the consideration in its announcement and circular for the Transaction.
      4. As the valuation was based on projections of the Target's earnings, Company A would need to comply with the disclosure and reporting requirements on profit forecasts under the Rules. It requested the Exchange to waive these requirements because:
      a. It was the Purchaser, and not Company A, which was obliged to prepare the valuation report.
      b. Company A was not involved in preparing the report, except for providing the Purchaser with historical financial information. The accounting principles and policies used by the appraiser differed from those used by Company A.
      c. While the consideration was based on the valuation report under PRC regulations, Company A's board had considered other factors when assessing the Transaction, including the historical earnings and dividend distributions of the Target and Company A.
      d. The Target would cease to be part of Company A after the Transaction so the profit forecast was irrelevant to its future financial position.
      e. Therefore, it would be unduly burdensome for Company A to comply with the requirements.

      APPLICABLE LISTING RULES

      5. Rule 14.61 defines a "profit forecast" to mean:
      ... any forecast of profits or losses, however worded, and includes any statement which explicitly or implicitly quantifies the anticipated level of future profits or losses, either expressly or by reference to previous profits or losses or any other benchmark or point of reference. It also includes any profit estimate, being any estimate of profits or losses for a financial period which has expired but for which the results have not yet been published. Any valuation of assets (other than land and buildings) or businesses acquired by a listed issuer based on discounted cash flows or projections of profits, earnings or cash flows will also be regarded as a profit forecast.
      6. Rule 14.62 states that if an announcement contains a profit forecast for the issuer or a company which is or is proposed to become its subsidiary, the issuer must provide the Exchange with the following no later than the publication of the announcement:
      (1) details of the principal assumptions, including commercial assumptions, upon which the forecast is based;
      (2) a letter from the listed issuer's auditors or reporting accountants confirming that they have reviewed the accounting policies and calculations for the forecast and containing their report; and
      (3) a report from the listed issuer's financial advisers confirming that they are satisfied that the forecast has been made by the directors after due and careful enquiry. If no financial advisers have been appointed in connection with the transaction, the listed issuer must provide a letter from the board of directors confirming they have made the forecast after due and careful enquiry.
      7. Rules 14.66(2) and 14A.70(13) state that a circular relating to a major transaction/ connected transaction must contain information in paragraph 29(2) of Appendix 1B if there is a profit forecast.
      8. Rule 14A.68(7) states that a connected transaction announcement must contain the information set out in rule 14.62 if the announcement contains a profit forecast of the listed issuer's group or a company which is, or will become, the listed issuer's subsidiary.
      9. Paragraph 29(2) of Appendix 1B states that
      ... Where a profit forecast appears in any listing document, it must be clear, unambiguous and presented in an explicit manner and the principal assumptions, including commercial assumptions, upon which it is based, must be stated. The accounting policies and calculations for the forecast must be examined and reported on by the reporting accountants or auditors, as appropriate, and their report must be set out. The financial adviser must report in addition that they have satisfied themselves that the forecast has been stated by the directors after due and careful enquiry, and such report must be set out. ...

      ANALYSIS

      10. The reason for preparing the Target's valuation was to comply with the PRC regulations. Company A was not involved in preparing the valuation report. This was different from the circumstances contemplated under Rules 14.62 and 14A.68(7) which assume that the issuer's directors made the forecast. Company A had practical difficulty in complying with the requirements.

      CONCLUSION

      11. The Exchange waived the requirements.

    • LD93-2

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      HKEx LISTING DECISION
      HKEx-LD93-2 (June 2010)

      Parties Company A — a Main Board issuer
      Issue Whether Company A must aggregate three work packages under a procurement agreement
      Listing Rules Main Board Rules 14.22, 14.23
      Decision Company A must aggregate the three work packages, and treat them as if they were one transaction

      FACTS

      1. Company A was engaged in the telecommunication business.
      2. It entered into a procurement agreement with an independent contractor to provide it with a turnkey delivery for network expansion in Country X. The agreement was divided into three work packages based on different work locations. Company A could terminate any part of the agreement at any time.
      3. Company A considered that, although all three work packages were awarded to one contractor under one procurement agreement, each was a separate transaction and should not be aggregated because:
      a. Each work package was distinct and separate from the others, entailing different types of work, covering different locations, involving different technologies and calling for a different pace of expansion. Also, each had an individual contract value. Company A would need to issue individual orders under each work package before the contractor was obliged to provide services.
      b. During the tender process, bidders were invited to submit a tender for each of the three work packages or any combination.
      c. The procurement agreement was only a framework agreement and did not affect the distinctiveness and separateness of each work package. The purpose of using one agreement for all three work packages was to enhance efficiency and minimise costs and duplication of documents. It could also help lock in the contractor on terms favourable to Company A.

      APPLICABLE LISTING RULES

      4. Rule 14.22 states 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 all completed within a 12 month period or are otherwise related. ...
      5. Rule 14.23 further states that:
      Factors which the Exchange will take into account in determining whether transactions will be aggregated include whether the transactions:
      (1) are entered into by the listed issuer with the same party or with parties connected or otherwise associated with one another;
      (2) involve the acquisition or disposal of securities or an interest in one particular company or group of companies;
      (3) involve the acquisition or disposal of parts of one asset; or
      (4) together lead to substantial involvement by the listed issuer in a business activity which did not previously form part of the listed issuer's principal business activities.

      ANALYSIS

      6. Under Rule 14.22, the Exchange may require an issuer to aggregate a series of transaction if they are completed within a 12 month period or are otherwise related.
      7. Rule 14.23 sets out a non-exhaustive list of factors which the Exchange will consider in applying the aggregation rule. The Rule is intended to provide guidance on the circumstances where aggregation may be required. When determining whether aggregation is required in a particular case, the Exchange will consider all relevant facts and circumstances.
      8. In this case, the Exchange considered that all three work packages were related because:
      a. Despite the differences identified by Company A, the three work packages were all related to the telecommunication network expansion in Country X and awarded to the same contractor.
      b. The value of each individual contract was pre-agreed under the same procurement agreement.
      c. The terms of the procurement agreement (including pricing) were negotiated and agreed with the same contractor as one package which, Company A submitted, could lock in the contractor on terms favourable to the company. This indicated that Company A considered the terms of all the work packages as a whole.

      CONCLUSION

      9. The Exchange required the three work packages to be aggregated.

    • LD93-1

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      HKEx LISTING DECISION
      HKEx-LD93-1 (June 2010)

      Parties Company A — a Main Board issuer and a shareholder of the Target

      The Target — Company A's acquisition target
      Issue Whether Company A's payment of a deposit under an escrow agreement was a major transaction
      Listing Rules Main Board Rule 14.04(1)(a)
      Decision The deposit payment was a major transaction under Chapter 14 and should have required prior approval of Company A's shareholders

      FACTS

      1. Company A announced a general offer to acquire all the Target's shares it did not already own. If all the offerees accepted the offer, the acquisition would be a very substantial acquisition for Company A and would require shareholder approval.
      2. A day before the announcement, Company A had entered into an escrow agreement with the Target which was not conditional on approval by Company A's shareholders. Under the agreement, Company A would pay a deposit to an escrow agent upon irrevocable undertakings from the Target's other major shareholders to accept the offer in respect of 50% of the Target's existing share capital. The deposit represented approximately 30% of Company A's total assets. It would be applied to partially pay for the acquisition if the offer became unconditional before a deadline, and was refundable upon a breach of the undertakings. However, the Target would be entitled to the deposit if the offer did not materialise before the deadline for example, if Company A failed to obtain shareholder approval for the acquisition.
      3. Company A submitted that the escrow agreement formed part of the commercial arrangement for the offer, and was not a separate transaction. It therefore did not require separate shareholder approval.

      APPLICABLE LISTING RULES

      4. Rule 14.04(1)(a) states that for the purposes of Chapter 14:
      (1) any reference to a "transaction" by a listed issuer:
      (a) includes the acquisition or disposal of assets, including deemed disposals as referred to in rule 14.29 ...
      5. Rule 14.06(3) states that:
      major transaction — a transaction or a series of transactions (aggregated under rules 14.22 and 14.23) by a listed issuer where any percentage ratio is 25% or more, but less than 100% for an acquisition or 75% for a disposal ...
      6. Rule 14.40 states that:
      A major transaction must be made conditional on approval by shareholders.

      ANALYSIS

      7. Chapter 14 governs certain transactions of an issuer, principally acquisitions and disposals having a material impact on its financial position. It seeks to ensure that shareholders are being informed of these transactions and, if they are material, have an opportunity to vote on them.
      8. Rule 14.04(1)(a) defines a "transaction" to include an acquisition or disposal of assets. In this case, the purpose of the deposit was to secure an undertaking from certain existing shareholders of the Target to accept the offer. The deposit would be forfeited if Company A failed to obtain shareholder approval and complete the acquisition. This was different from cases where a deposit was refundable upon termination or non-completion of an acquisition for whatever reason.
      9. In the circumstances, the deposit payment could be viewed as an acquisition of an intangible asset (i.e. the undertaking to accept) or a disposal of asset (i.e. parting with the deposit to the Target). In either case, it was itself a transaction under Rule 14.04(1)(a).

      CONCLUSION

      10. Since the size of the deposit exceeded the threshold for a major transaction, the agreement to pay the deposit should have required prior approval of Company A's shareholders.

    • LD92-1

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      HKEx LISTING DECISION
      HKEx-LD92-1 (May 2010)

      Summary
      Parties Company A — a Main Board listing applicant and its subsidiaries
      Subject Whether Company A was suitable for listing where it derived a significant portion of its turnover and net profit from transactions with closely related parties
      Listing Rules and Other Reference Materials Rule 8.04; HKEx-LD8-2
      Decision The Exchange doubted Company A's suitability for listing because of its heavy reliance on transactions with closely related persons during the track record period and after listing. This issue could not be addressed by corporate governance measures and disclosure alone

      SUMMARY OF FACTS

      1. Company A provided securities trading brokerage and margin financing services. It derived its income mainly from brokerage commission and margin financing interest.
      2. During the track record period (Year 1 to Year 3), a significant portion of turnover and net profit were derived from transactions with the group's directors and employees. Transactions with these directors would constitute connected transactions after listing.

      Table — transactions with directors and employees expressed as approximate percentages of Company A's turnover, net profit and net profit margin:
        Turnover (%) Net profit (%) Net profit margin (%)
      Year 1 90% 90% 50%
      Year 2 45% 40% 60%
      Year 3 60% 40% 35%
      3. If profits from transactions with directors were excluded, Company A would barely meet the profit requirement. If profits from transactions with directors and employees were excluded, it would not meet the minimum profit threshold of HK$20 million for the latest financial year.
      4. Company A proposed to have substantial continuing connected transactions after listing:-
      a. brokerage services to directors would have an aggregated annual cap for each of the three years after listing representing approximately 50% of Company A's total brokerage commission income in Year 3; and
      b. margin financing to directors would have an aggregated annual cap for each of the three years after listing representing over 50% of Company A's total assets as at the end of Year 3.

      THE ISSUE RAISED FOR CONSIDERATION

      5. Whether Company A was suitable for listing where it derived a significant portion of its turnover and net profit from transactions with closely related parties?

      APPLICABLE LISTING RULES OR PRINCIPLE

      6. Rule 8.04 requires both the issuer and its business, in the opinion of the Exchange, to be suitable for listing.
      7. HKEx-LD8-2 recorded a case where a substantial portion of the issuer's profits was derived from connected transactions without which it could not meet the profit requirement. It was decided that the issuer's application should be postponed until it was able to fulfil the profit requirement without including the profits from those connected transactions.

      THE ANALYSIS

      Reliance on Transactions with Connected Persons and Related Parties

      8. There is no rule that profits from transactions with connected persons or closely related parties must be disregarded in assessing whether the profit requirement under the Listing Rules is met. The Exchange normally considers that this issue can be addressed by disclosure in the listing document.
      9. However, where these transactions are excessive during the track record period, this may raise a concern whether the issuer is suitable for listing. First, it will be uncertain whether the issuer can carry on business without these transactions given that the risks of connected transactions could be substantially different from those with independent third parties. Second, where the issuer marginally meets the profits requirement, there is concern whether the connected transactions are designed to enable it to meet the profit requirement. The issue was discussed in HKEx-LD8-2.
      10. Based on the following findings, the Exchange had serious concerns on Company A's suitability for listing:
      a. Company A did not have a proven track record of carrying on its business independently of the transactions with connected persons and employees. It would not meet the profit requirement if transactions with connected persons and employees were excluded. The Exchange considered that the principle underlying HKEx-LD8-2 extended to situations where an issuer derived its profits from transactions with closely related parties, e.g. employees in Company A's case;
      b. Its ability to obtain finance from independent financial institutions for its margin financing business was dependent on its historical revenue profile generated from transactions with connected persons and employees. But it had not shown its ability to carry on business without these transactions, and hence its ability to raise independent finance was uncertain; and
      c. reliance on connected persons was expected to continue after listing. Transactions with employees had made up 20% to 30% of its turnover during the track record period and were expected to continue after listing. There was no objective information to substantiate that income would be generated from new clients.

      Conflicts of Interest Dealings Raised Further Doubts

      11. Heavy reliance on transactions with the issuer's officers, may give rise to higher risk of them overriding internal control procedures and breaching their fiduciary duties to further their own interests. In reviewing these cases, the Exchange will adopt a risk-based approach. The Exchange will examine the issuer's corporate governance measures to handle conflicts of interest and may apply a higher standard of review to ensure the issuer's eligibility for listing. The Exchange may not accept that disclosure is sufficient to address the conflicts of interest issue.
      12. Because conflicted dealings occurred frequently in this case, the Exchange considered that a high level of assurance would be appropriate. However, the Exchange did not consider that the conflicts of interest issue had been addressed because:
      a. the SFC had discovered internal control weaknesses in five years before the track record period. Company A proposed to deal with these internal weaknesses by disclosure in the prospectus. It provided no information on how the corporate governance measures it introduced would be able to address the conflicts of interest. There was no information on whether internal guidelines and policies had been adhered to and whether conflicts of interest had been avoided during the track record period; and
      b. the proposed independent non-executive directors were not shown to have sufficient industry experience to advise on conflicted dealings.

      THE DECISION

      13. The Exchange doubted Company A's suitability for listing because of its heavy reliance on transactions with closely related persons during the track record period and after listing. This issue could not be addressed by corporate governance measures and disclosure alone.

    • LD89-1

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      HKEx LISTING DECISION
      HKEx-LD89-1 (May 2010)

      Summary
      Party Company X — a listing applicant primary listed on the Toronto Stock Exchange (TSX) seeking a secondary listing on the Main Board
      Subject Whether to waive Rule 2.07C(4)(c) to allow Company X to delay the publication of the Chinese version of any document required to be published after the English version had been published on the Exchange's website
      Listing Rules Rule 2.07C(4)(c)
      Decision The Exchange rejected the waiver

      SUMMARY OF FACTS

      1. Company X sought a secondary listing on the Main Board. Its shares were primary listed on the TSX.
      2. Company X applied for a waiver of Rule 2.07C(4)(c). It proposed to publish the Chinese version of documents no later than the close of the electronic submission window on the business day after the English version was published.

      THE ISSUES RAISED FOR CONSIDERATION

      3. Whether to waive Rule 2.07C(4)(c) to allow Company X to delay the publication of the Chinese version of any document required to be published after the English version had been published on the Exchange's website?

      APPLICABLE LISTING RULES

      4. Rule 2.07C(4)(c) requires an issuer to submit to the Exchange for publication on the Exchange's website a ready-to-publish electronic copy of any document required to be published (listing document and annual reports excepted) in the English and Chinese languages together.

      ANALYSIS

      5. The Exchange considered the following when determining whether to grant the requested waiver:
      a. Chinese language is the preferred medium for Hong Kong retail investors. The Exchange considered that most retail investors would prefer to access issuers' information in Chinese. A delay in the publication of Chinese announcements would result in investors not being provided with information in a timely manner.
      b. The scope of the requested waiver was unprecedented. In a previous case involving an issuer seeking secondary listing in Hong Kong, the waiver enabled it to file the English version of the document in the morning electronic submission window (9:00 a.m. to 12:00 a.m.) and the Chinese version of the document no later than the close of the evening submission window on the same day (4:15 p.m. to 11:00 p.m.). The requested waiver was therefore more extensive than the previous waiver.
      c. No reasonable steps were taken. Company X had not demonstrated to the Exchange that it had taken reasonable steps to shorten the publication time lag between the Chinese and English versions of the document.

      THE DECISION

      6. The Exchange rejected the waiver.

    • LD88-1

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      HKEx LISTING DECISION
      HKEx-LD88-1 (May 2010)

      Summary
      Parties Company A — a Main Board listing applicant

      Parentco — the parent company of Company A, a connected person of Company A
      Subject Whether to allow a continuing connected transaction to exceed three years with an annual cap expressed as a percentage of Company A's gross revenues
      Listing Rules Rule 14A.35(1)& (2)
      Decision The Exchange granted Company A a waiver of Rule 14A.35(1) & (2) on the condition that Company A would modify the terms of the continuing connection transaction and directors and sponsors would give confirmations that the transaction was fair and reasonable to Company A and the shareholders as a whole

      SUMMARY OF FACTS

      1. Company A was granted a 20-year licence by the local government for its operation. The unexpired term of the licence was over 10 years when Company A applied for listing.
      2. Company A proposed to continue a licence agreement with Parentco for the use of certain trade names and intellectual property for an indefinite term for a monthly royalty fee based on Company A's gross revenues.
      3. Company A submitted that the trade names and other intellectual property were crucial to its business and an agreement that guaranteed the use of those rights indefinitely would provide stability. It applied for a waiver of Rule 14A.35.
      4. Company A indicated that it would re-structure the terms of the licence agreement to meet the Exchange's criteria for granting a Rule 14A.35 waiver.

      THE ISSUE RAISED FOR CONSIDERATION

      5. Whether to allow a continuing connected transaction to exceed three years with an annual cap expressed as a percentage of Company A's gross revenues?

      APPLICABLE LISTING RULES OR PRINCIPLE

      6. Rule 14A.42 provides that the Exchange will consider granting waivers for the following transactions:
      ...
      (3) upon an application by a new applicant, specific continuing connected transactions. Such waivers will be from the announcement and independent shareholders' approval requirements of this Chapter. General waivers will not be granted. The applicant's sponsor is required to state in the listing document whether the continuing connected transactions for which the waivers are sought are in the ordinary and usual course of business of the listed issuer, on normal commercial terms, are fair and reasonable and in the interests of the shareholders as a whole. In addition, the issuer is required to comply with rules 14A.35(1), 14A.35(2), 14A.36, 14A.37, 14A.38, 14A.39 and 14A.40.
      7. Rule 14A.35 provides that when an issuer enters into a non-exempt continuing connected transactions, it must:
      (1) in respect of each connected transaction, enter into written agreement(s) with the connected person. The agreement must set out the basis of the calculation of the payments to be made. The period for the agreement must be fixed and reflect normal commercial terms and, except in special circumstances, must not exceed 3 years. Special circumstances are limited to cases where the nature of the transaction requires the contract to be of a duration longer than 3 years. In such cases, the independent financial adviser will need to explain why a longer period for the agreement is required and to confirm that it is normal business practice for contracts of this type to be of such duration;
      (2) in respect of each connected transaction, set a maximum aggregate annual value ("cap"), the basis of which must be disclosed. This annual cap must be expressed in terms of monetary value rather than a percentage of the issuer's annual revenue as derived from its latest published audited accounts or, where consolidated accounts have been prepared, its latest published audited consolidated accounts. The cap must be determined by reference to previous transactions and figures which are readily ascertainable from published information of the issuer. If there are no previous transactions, the cap must be made based on reasonable assumptions, details of which must be disclosed.

      Note: Reference to annual revenue and other bases may help to determine the monetary value of the cap.

      THE ANALYSIS

      Continuing Connected Transactions over 3 years

      8. Rule 14A.35(1) contemplates that continuing connected transactions may have a term beyond 3 years. The burden is on the issuer and its sponsor to explain why a longer term is justified in the circumstances.
      9. Before the Listing Rules amendment in 2004 to require continuing connected transactions to normally be of a fixed term of no more than 3 years under a monetary cap, the Exchange had allowed annual caps to be expressed as percentages of the listing applicants' revenue or costs of sales. See example in Case 1.

      Case 1

      10. In 2002 a waiver was granted to a new issuer, an airport operator, for the use of a runway owed by its parent for a term of 20 years and the cap was set as a fixed percentage of the issuer's revenue.
      11. After the 2004 Listing Rules amendment, issuers were still entering into continuing connected transactions for grants of intellectual property rights by their parents for a term significantly longer than three years or even for an indefinite term. Two examples are illustrated below.

      Case 2

      12. The issuer was engaged in the financial service industry. The licensing agreement for the use of brand names owned by its parent had the following terms:-
      a. royalty free;
      b. indefinite term;
      c. only terminable by the parent if it ceased to be the issuer's holding company, or by either party upon breach of the agreement or winding-up.

      Case 3

      13. The issuer was a provider of information technology software and services. The licensing agreement for the continuous use of the parent's brand name had the following terms:-
      a. an initial term of 10 years renewable for a further 10 years at the issuer's discretion;
      b. royalty free; and
      c. if there were a change in control, the parent would continue the agreement for three more years for an annual payment fixed as the higher of a percentage of the issuer's revenue and a fixed amount. At the end of the three years, the licence would continue at fair market value determined by an internationally recognised brand consultant.
      14. Since the licensing agreements in Case 2 and Case 3 were royalty free, the de-minimis exemption applied and no continuing connected transaction waiver was required.

      Monetary Cap Requirement

      15. In 2007 the Exchange was asked to waive the monetary cap requirement (effective since 2004) for issuers in the oil and gas business. The reason was that volatility in the commodity prices of oil and gas had given rise to concerns about insufficient provision of caps for normal business use. The Exchange agreed to waive the monetary cap requirement to these issuers provided that the annual cap was disclosed as a fixed quantum (expected transaction volume) with a sensitivity analysis on the correlation of the annual cap with the respective commodity prices, and how changes to the commodity prices (which is public information) would affect the value of the connected transaction.
      16. Taking into account the precedent cases, the Exchange was of the view that it might not be in Company A's best interest to tie royalty fee to its gross revenues for too long.

      THE DECISION

      17. The Exchange granted Company A a waiver from announcement and independent shareholder's approval under Rule 14A.35 (1) and (2) on the basis that:
      a. while the licence agreement would remain an indefinite arrangement with Parentco, the waiver granted would be for a fixed term co-terminus with the remaining term of the licence that Company A had obtained from the local government. Upon expiry of the waiver, the licence agreement would only continue if approved by Company A. Company A would then need to comply with the Listing Rules requirements for continuing connected transactions or obtain fresh waiver;
      b. Parentco would need Company A's prior consent if it wanted to terminate the head agreement that granted Parentco the intellectual property rights. Company A's directors who would be Parentco's directors must not vote on any resolution to give consent to the termination of the head agreement;
      c. the prospectus would clearly disclose the basis of the royalty fee calculation during the track record period and going forward; Company A would separately disclose in its future interim and annual financial statements the royalty fee calculation and related amounts;
      d. any change to the basis of calculating the gross revenues would be subject to the approval of shareholders;
      e. the setting of the annual cap expressed as a percentage of Company A's gross revenues was reviewed by an independent appraisal agent using market comparables;
      f. directors including independent non-executive directors confirmed that the long duration of the licence agreement and the non-monetary annual cap were fair and reasonable to Company A and shareholders as a whole;
      g. the sponsor confirmed in the prospectus that:
      (i) the non-monetary annual cap of the licence agreement was fair and reasonable in the interests of the shareholders as a whole;
      (ii) it was normal business practice for agreements in the nature of the licence agreement to have a long duration and the incorporation of an initial fixed term was normal business practice to provide stability to Company A's business;
      (iii) the terms of the licence agreement were in the ordinary and usual course of Company A's business, on normal commercial terms, and the terms were fair and reasonable and in the interest of shareholders as a whole reasonable and it was normal business practice.