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  • Listing Decisions

    Select By Rule or Topic: Download the consolidated index here

    Please visit Archive to view marked-up versions and versions that have been superseded or withdrawn. 

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

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

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

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

    • 2021

      Select By Rule or Topic: Download the consolidated index here

      Please visit Archive to view marked-up versions and versions that have been superseded or withdrawn.

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

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

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

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

      LD Series Number First
      Release
      Date (Last
      Update
      Date)
      (mm/yyyy)
      Listing Rules/ Topics Particulars
      LD131-2021 07/2021
       
      Main Board Rule 14.06B Whether the Exchange would waive Rule 14.06B so that the proposed acquisition of the Target Company by Company A would not be classified as a reverse takeover
      LD130-2021 07/2021
       
      Main Board Rules 14.06B and 14.06C Whether Company A's proposed acquisition of the Target Company constituted a reverse takeover

      • LD131-2021

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        HKEX LISTING DECISION
        HKEX-LD131-2021 (published in July 2021)

        Parties    Company A – a Main Board issuer

        Target Company – a company listed on a PRC stock exchange

        Company X – the controlling shareholder of Company A and the Target Company

        Company Y – a state-owned enterprise which indirectly held 51% interest in Company X

        The Provincial Government – a provincial government in the PRC which held 49% interest in Company X
         
        Issue    Whether the Exchange would waive Rule 14.06B so that the proposed acquisition of the Target Company by Company A would not be classified as a reverse takeover
         
        Listing Rules    Main Board Rule 14.06B
         
        Decision    The Exchange agreed to waive Rule 14.06B. The proposed acquisition was classified as a very substantial acquisition.
         
         
        FACTS
         
        1.    Company A operated port terminals in the PRC.
         
        2.    Company X (being the controlling shareholder of Company A and the Target Company) was originally wholly owned by the Provincial Government. About a year ago, Company Y acquired 51% equity interest in Company X from the Provincial Government. This constituted a change in control of Company A under the Takeovers Code.
         
          Proposed transaction
         
        3.    Company A proposed a merger with the Target Company which also operated port terminals in the PRC (the Proposed Merger). The Proposed Merger would constitute a reverse takeover (RTO) under the bright line test set out in Note 2 to Rule 14.06B as it was a very substantial acquisition from Company X, an associate of Company Y, within 36 months of Company Y gaining control of Company A through Company X. The profit ratio was about 120%. Other size tests were below 100%.
         
        4.    The Proposed Merger would allow Company A to expand its existing port terminal business by integrating its port-related resources with those held by the Target Company and bring synergy amongst the port operators controlled by Company X. Company A submitted that the Proposed Merger was not an attempt to achieve a listing of new business and sought a waiver from applying the bright line test of Rule 14.06B to the merger.
         
        APPLICABLE LISTING RULES
         
        5.    Rule 14.06B defines a "reverse takeover" as "an acquisition or a series of acquisitions of assets by a listed issuer which, in the opinion of the Exchange, constitutes, or is part of a transaction and/or arrangement or series of transactions and/or arrangements which constitute, an attempt to achieve a listing of the acquisition targets (as defined in rule 14.04(2A)) and a means to circumvent the requirements for new applicants set out in Chapter 8 of the Listing Rules." This is a principle based test.
         
        6.    Note 1 to Rule 14.06B sets out the factors that the Exchange will normally consider in assessing whether the acquisition or series of acquisitions is a RTO transaction under the principle based test.
         
        7.    Note 2 to Rule 14.06B contains two specific forms of RTOs (the bright line tests). It states that:

        "Without limiting the generality of rule 14.06B, the following transactions are normally reverse takeovers (the bright line tests):
          (a)    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 36 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. For the purpose of determining whether the acquisition(s) constitute(s) a very substantial acquisition,…"
         
        8.    The Exchange Guidance Letter (HKEX-GL104-19) on reverse takeovers explains that the RTO rules are principle based, anti-avoidance provisions designed to prevent the circumvention of new listing requirements for the assets acquired and/or to be acquired. Paragraph 6 of the guidance letter states that:

        "In applying the RTO Rules, the Exchange has regard to the following:
         
          •    The RTO Rules are principle based, anti-avoidance provisions designed to prevent the circumvention of new listing requirements for the assets acquired and/or to be acquired. As such, the Exchange would apply the RTO Rules purposively and the six assessment factors described in the Rules provide guidance to the market on factors that the Exchange would normally consider in a RTO assessment. The applications of these assessment factors would vary from case to case, depending on the specific circumstances of the issuer.
         
          •    As the RTO Rules are principle based, they should provide a framework for addressing backdoor listings and sufficient flexibility to address changing RTO structures, without imposing undue restrictions on legitimate business activities of issuers.
         
          •    The RTO Rules are not intended to restrict legitimate business activities of listed issuers, including business expansion or diversification that is part of the issuer’s business strategies related to its existing business, or is consistent with the issuer’s size and resources.
         
          •    When applying the RTO Rules, the Exchange’s approach is targeted towards transactions that represent an attempt to circumvent the new listing requirements, particularly those involving companies engaging in "shell" activities, as indicated by the factors (a) change in control or de facto control of the listed issuer and (b) fundamental change in the issuer’s principal business."
         
        ANALYSIS
         
        9.    The Proposed Merger fell under the bright line test of Rule 14.06B as it involved a very substantial acquisition from an associate of Company A’s controlling shareholder (i.e. Company Y) within 36 months from the change in control. Having considered the specific circumstances of this case, the Exchange agreed that the Proposed Merger was not a backdoor listing of new business by the incoming controlling shareholder:
         
          (a)    Company A’s existing port terminal business was of a substantial size. The Proposed Merger would not result in a fundamental change to Company A’s principal business as it was in line with Company A’s strategies to expand its port terminal business and the size of the merger was not significant to Company A.
         
          (b)    The Proposed Merger represented an internal restructuring of the port-related businesses held under Company X. Company Y, through Company X, controlled Company A and the Target Company before the Proposed Merger and would continue to do so after the merger. There was no injection of asset or business from Company Y.
         
        CONCLUSION
         
        10.    The Exchange agreed to waive Rule 14.06B. The Proposed Merger was classified as a very substantial acquisition and connected transaction.
         

      • LD130-2021

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        HKEX LISTING DECISION
        HKEX-LD130-2021 (published in July 2021)

        Parties Company A – a Main Board issuer

        Company B – the controlling shareholder of Company A

        Target Company – a company owned by Company B
         
        Issue Whether Company A's proposed acquisition of the Target Company constituted a reverse takeover
         
        Listing Rules    Main Board Rules 14.06B and 14.06C
         
        Decision The proposed acquisition constituted an extreme transaction.
         
         
        FACTS
         
        1.    Company A was principally engaged in leasing of properties, production and sale of education-related equipment and money lending. The leasing and education-related equipment businesses contributed over 95% of Company A’s revenue in recent years.
         
        2.    Company B had been the controlling shareholder of Company A for more than three years.
         
          Proposed Acquisition
         
        3.    Company A proposed to acquire the Target Company from Company B (the Proposed Acquisition). It would settle the consideration with cash and by issuing convertible bonds. The Proposed Acquisition would not result in a change in control of Company A.
         
        4.    The Target Company provided financial leasing and factoring services in the PRC. It was substantially larger than Company A, with percentage ratios between 10 and 35 times.
         
        APPLICABLE LISTING RULES
         
        5.    Rule 14.06B defines a "reverse takeover" as “an acquisition or a series of acquisitions of assets by a listed issuer which, in the opinion of the Exchange, constitutes, or is part of a transaction and/or arrangement or series of transactions and/or arrangements which constitute, an attempt to achieve a listing of the acquisition targets (as defined in rule 14.04(2A)) and a means to circumvent the requirements for new applicants set out in Chapter 8 of the Listing Rules.” This is a principle based test.
         
        6.    Note 1 to Rule 14.06B sets out the factors that the Exchange will normally consider in assessing whether the acquisition or series of acquisitions is a RTO transaction under the principle based test.
         
        7.    Rule 14.06C defines an “extreme transaction” as “an acquisition or a series of acquisitions of assets by a listed issuer, which individually or together with other transactions or arrangements, may, by reference to the factors set out in Note 1 to rule 14.06B, have the effect of achieving a listing of the acquisition targets, but where the issuer can demonstrate that it is not an attempt to circumvent the requirements for new applicants set out in Chapter 8 of the Listing Rules and that:
         
        (1)    (a)    the issuer (other than at the level of its subsidiaries) has been under the control or de facto control (by reference to the factors set out in Note 1(e) to rule 14.06B) of a person or group of persons for a long period (normally not less than 36 months), and the transaction would not result in a change in control or de facto control of the issuer; or
         
          (b) the issuer has been operating a principal business of a substantial size, which will continue after the transaction; and
         
        (2) the acquisition targets meet the requirements of rule 8.04 and rule 8.05 (or rule 8.05A or 8.05B) and the enlarged group meets all the new listing requirements set out in Chapter 8 of the Listing Rules (except rule 8.05).”
         
        8.    The Exchange Guidance Letter (HKEX-GL104-19) on RTO explains that the RTO rules are principle based, anti-avoidance provisions designed to prevent the circumvention of new listing requirements for the assets acquired and/or to be acquired. Paragraph 47 of the guidance letter states that “The Listing Committee may, in principle, allow the issuer to classify its proposed acquisition as an extreme transaction based on the information provided in its written submission and/or draft circular and any additional information requested by the Department. However, this classification is subject to the completion of the financial adviser’s due diligence work on the target business and its submission of a declaration to support that the acquisition target can meet Rule 8.04 and Rule 8.05...”
         
        ANALYSIS
         
        9.    In assessing the principle based test of Rule 14.06B, the Exchange will consider the six assessment factors and whether taken together, an acquisition would be considered an attempt to circumvent the new listing requirements and a means to achieve the listing of the acquisition targets. Where an acquisition has the effect of achieving a listing of the acquisition targets under the principle based test, but the issuer can demonstrate that the acquisition is not an attempt to circumvent the new listing requirement, the “extreme transaction” category may apply if the issuer can satisfy one of the eligibility criteria set out in Rule 14.06C(1).
         
        10.    In this case, the Exchange considered that the Proposed Acquisition would have the effect of achieving a listing of the Target Company’s business because:
         
        (a)    The size of Proposed Acquisition was extreme compared to Company A’s existing businesses (with the percentage ratios of 10 times or more). The existing businesses would become immaterial after the acquisition;
         
        (b)    The Target Company’s business was different from Company A’s core businesses in property leasing and production and sale of education-related equipment. Given the significant size of the Proposed Acquisition, the Proposed Acquisition would result in a fundamental change in Company A’s principal business; and
         
        (c)    Company A argued that the Proposed Acquisition was not an extreme case as it represented an expansion of Company A’s existing money lending business. However, the Exchange noted that the money lending business was small in scale. Further, the Target Company’s business was substantially different from Company A’s money lending business in terms of operating scale, business models and customer base. Company A would be substantially carrying on the Target Company’s business after the Proposed Acquisition.
         
        11.    Nevertheless, the Exchange agreed that the Proposed Acquisition could be classified as an extreme transaction (and not a RTO) under Rule 14.06C having regard to the following:
         
        (a)    Company A had demonstrated that the Target Company could meet the new listing track record requirements (Rule 8.05(1)) and the suitability for listing requirement (Rule 8.04) (subject to the completion of the financial adviser’s due diligence work on the Target Company). The Proposed Acquisition was not an attempt to circumvent the new listing requirements; and
         
        (b)    Company A met the eligibility criterion set out in Rule 14.06C(1)(a) as it had been under control of Company B for more than 36 months and the Proposed Acquisition would not result in a change in control of Company A.
         
        CONCLUSION
         
        12.    The Proposed Acquisition was classified as an extreme transaction under Rule 14.06C.
         

    • 2020

      Select By Rule or Topic: Download the consolidated index herehere

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

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

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

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

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

      LD Series Number First
      Release
      Date (Last
      Update
      Date)
      (mm/yyyy)
      Listing Rules/ Topics Particulars
      LD129-2020 09/2020
       
      Main Board Rules 17.01 and 17.03 Whether Company A's proposal to grant options to a discretionary trust under a share option scheme would meet the requirements under Chapter 17 of the Main Board Rules
      LD128-2020 09/2020
       
      GEM Rules 17.39, 17.41, 17.42 and 17.42B Whether Company X can seek a prior mandate from its shareholders on a one-off basis to issue new shares over a period of time under a share issuance proposal under GEM Rule 17.39
      LD127-2020 06/2020
       
      Main Board Rule 9.03(3)
      GEM Rules 12.09 and 12.14
      To provide guidance on why the Exchange returned certain listing applications
      LD126-2020 06/2020
       
      Main Board Rule 2.06 and Chapter 8
      GEM Rule 2.09 and Chapter 11
      To provide guidance on why the Exchange rejected certain listing applications
      LD125-2020 04/2020
       
      Main Board Rule 8.09(2) and Paragraph 3(c) of Practice Note 15 to the Main Board Rules Whether the Remaining Group could meet the minimum market capitalisation requirement under Rule 8.09(2)
      LD124-2020 04/2020
       
      Main Board Rule 8.09(2) and Paragraph 3(c) of Practice Note 15 to the Main Board Rules Whether the Remaining Group could meet the minimum market capitalisation requirement under Rule 8.09(2)

      • LD129-2020

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        HKEX LISTING DECISION
        HKEX-LD129-2020 (Published in September 2020)

        Parties Company A – a Main Board issuer
         
        Issue Whether Company A's proposal to grant options to a discretionary trust under a share option scheme would meet the requirements under Chapter 17 of the Main Board Rules
         
        Listing Rules    Main Board Rules 17.01 and 17.03
         
        Decision The proposed discretionary trust arrangements did not meet the requirements under Chapter 17
         
         
        FACTS
         
        1.    Company A proposed to adopt a new share option scheme. The participants of the scheme would include i) the employees of Company A; and ii) a discretionary trust (the Trust) whose beneficiaries were employees of Company A. The Trust would be administered by an independent professional trustee.
         
        2.    Under the proposal,
         
        •    Company A would grant a certain number of share options to the Trust, which would be reserved for future allocations to beneficiaries to be identified by its board of directors from time to time.
         
        •    Company A would also grant share options to the Trust that are earmarked to specific beneficiaries identified by its board of directors at the time of grant. It would inform those beneficiaries of the number of options allocated to them and the applicable vesting conditions. If any options granted to the Trust were not eventually vested for the benefit of any such beneficiaries, the trustee would continue to hold the unvested options for future allocations to other beneficiaries.
         
        3.    Company A was of the view that the proposed discretionary trust arrangements were permitted under Rule 17.01 which expressly provides that “participant” includes any discretionary object of a participant which is a discretionary trust. Further, it was an essential feature of a discretionary trust that its beneficiaries and their respective interests need not be fixed from the outset. Company A’s directors should have the discretion to allocate options to specific beneficiaries after the grant of the options to the Trust.
         
        APPLICABLE LISTING RULES
         
        4.    Rule 17.01 states that:
         
        “(1)    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 17.03 states that
         
        “The scheme document must include the following provisions and/or provisions as to the following (as the case may be):
         

         
        (2)    the participants of the scheme and the basis of determining the eligibility of participants;
         

         
        (9)    the basis of determination of the exercise price;
         
        Notes:  (1)    … the exercise price must be at least the higher of: (i) the closing price of the securities as stated in the Exchange’s daily quotations sheet on the date of grant, which must be a business day; and (ii) the average closing price of the securities as stated in the Exchange’s daily quotations sheets for the five business days immediately preceding the date of grant. …
         

         
        (17)    transferability of options; and
         
        Note:    Options granted under the scheme must be personal to the respective grantee. No options may be transferred or assigned.
         
        …”
         
        ANALYSIS
         
        6.    Under Rule 17.01, all schemes involving the grant of options over new shares of a listed issuer to, or for the benefit of, specified participants must comply with the requirements of Chapter 17. This means that, among others, the exercise price of the options cannot be set at a discount to the market price at the time of grant, and the options cannot be transferred to other persons.
         
        7.    Rule 17.01(1) provides that “participant” includes “any discretionary object of a participant which is a discretionary trust”, this clarifies that the requirements of Chapter 17 apply to schemes involving grant of share options to a discretion trust for the benefit of specified participants (e.g. directors or employees). In other words, any grant of options to the trust must comply with the requirements of Chapter 17 as if it were a grant to the beneficiaries directly.
         
        8.    In this case, share options granted to the Trust could be further allocated to beneficiaries to be identified by the board of directors from time to time. The proposal did not meet the requirements of Chapter 17 as the participants (for the benefit of whom the options were granted) were not specified at the time of grant. The Trust arrangement could be used to circumvent Rule 17.03(9) as the exercise price fixed at the time of grant to the Trust could be lower than the market price of the shares when the options were eventually allocated to the specific beneficiaries. It would also contravene Rule 17.03(17) which prohibits any transfer of options to other persons.
         
        CONCLUSION
         
        9.    The proposed discretionary trust arrangements for the new share option scheme did not meet the requirements under Chapter 17.
         

      • LD128-2020

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        HKEX LISTING DECISION
        HKEX-LD128-2020 (Published in September 2020)

        Parties Company X – a GEM issuer
         
        Issue Whether Company X can seek a prior mandate from its shareholders on a one-off basis to issue new shares over a period of time under a share issuance proposal under GEM Rule 17.39
         
        Listing Rules GEM Rules 17.39, 17.41, 17.42 and 17.42B
         
        Decision Company X cannot seek a prior mandate for the share issuance proposal on a one-off basis
         
         
        FACTS
         
        1. Company X entered with an independent investment fund a “share subscription facility” arrangement (the Facility). Under the Facility, Company X might request the fund to subscribe for new shares in Company X from time to time over a three-year period.
         
        2. The new shares would be issued at a 10% discount to Company X’s share price over the ten trading days following the request, subject to a fixed minimum price. The maximum number of shares issuable under the Facility was approximately two times Company X’s existing issued shares. Company X intended to utilize the proceeds for debt repayment, acquisitions of new businesses and expansion of existing businesses.
         
        3. Company X proposed to seek a one-off advance mandate from its shareholders to issue new shares under the Facility over the next three years under GEM Rule 17.39. Company X represented that the Facility would allow it to have control throughout the three-year period as to when and how to draw down the Facility under specified limits.
         
        APPLICABLE LISTING RULES
         
        4. GEM Rule 17.39 states that:

        Except in the circumstances mentioned in rule 17.41, the directors of an issuer (other than a PRC issuer, to which the provisions of rule 25.23 apply) shall obtain the consent of shareholders in general meeting prior to allotting, issuing or granting: -
         
          (1) 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 17.41 and 17.42."
         
        5. GEM Rule 17.41 states that:

        No such consent as is referred to in rule 17.39 shall be required:
         
          (1)
         
          (2) 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...
         
        6. GEM Rule 17.42 states that:

        A general mandate given under rule 17.41(2) shall only continue in force until:
         
          (1) 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
         
          (2) revoked or varied by ordinary resolution of the shareholders in general meeting, whichever occurs first.
         
        7. GEM Rule 17.42B states that:

        In the case of a placing or open offer of securities for cash consideration, the issuer may not issue any securities pursuant to general mandate given under rule 17.41(2) if the relevant price represents a discount of 20% or more to the benchmarked prices of the securities, such benchmarked price being the higher of:…
         
        ANALYSIS
         
        8. Under GEM Rule 17.39, a shareholder should be able to protect his proportion of total equity by having the opportunity to subscribe for all new issues of equity securities. This pre-emptive right may be waived by shareholders themselves on a general basis but only within the limits of GEM Rules 17.41 and 17.42 (these rules describe a general mandate and allow share issuance subject to limits on the number of new shares and other restrictions such as price limits).
         
        9. Accordingly, any issuance of new shares which exceeds the limits of GEM Rule 17.41(2) should be approved by shareholders on each occasion of share issuance under GEM Rule 17.39. The Exchange would not grant listing approval for the new shares if the mandate is in substance a "general" one and yet does not meet the requirements set out in GEM Rules 17.41(2) and 17.42B.
         
        10. In this case, Company X proposed to seek a prior mandate from its shareholders for the possible issuance of new shares under the Facility. The prior mandate would give the directors the discretion to issue new shares under the Facility from time to time, with the size and issue price for each share issuance to be determined as and when Company X exercised its rights under the Facility. However, this mandate did not meet the size and price limits set out in GEM Rules 17.41(2) and 17.42B.
         
        CONCLUSION
         
        11. Company X cannot seek a prior mandate for the Facility on a one-off basis.
         
        12.    Company X subsequently announced that it would issue new shares under the Facility using the general mandate available at the time of each issuance.
         

      • LD127-2020

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        HKEX LISTING DECISION
        HKEX-LD127-2020 (June 2020)

        Summary
        Parties Company A to Company D – Main Board listing applicants whose applications were returned by the Exchange in 2019 
         
        Issue To provide guidance on why the Exchange returned certain listing applications
         
        Listing Rules Main Board Rule 9.03(3)
        GEM Rules 12.09 and 12.14
         
        Related Publications HKEX-LD84-2014
        HKEX-LD91-2015
        HKEX-LD101-2016
        HKEX-LD106-2017
        HKEX-LD120-2018
         
        Decision The Exchange returned the applications

        PURPOSE

        1.    This Listing Decision sets out the reasons why the Exchange returned certain listing applications from 1 January to 31 December 2019. For the reasons listing applications were returned prior to this period, please refer to the listing decisions stated in “Related Publications” above. The Exchange did not return any listing applications in 2018.

        APPLICABLE RULES, REGULATIONS AND PRINCIPLES

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

        FURTHER GUIDANCE

        5.    Failure to include financial information required under Main Board Rule 4.04(1) (GEM Rule 7.03(1)) in the Application Proof
         
        (a)    Main Board Rule 4.04(1) requires a listing applicant to include in the accountants’ report its consolidated results for each of the three financial years1 immediately preceding the issue of the listing document (two financial years for GEM applicants under GEM Rules 7.03(1) and 11.10). As listing applicants who intend to issue listing documents shortly after the year end, usually experience practical difficulties in producing audited accounts for the latest financial year, HKEX Guidance Letter HKEX-GL25-11 provides guidance that the Exchange may grant waivers from strict compliance with these Rules if the applicant is to list on the Main Board within three months (two months for GEM) after the latest year end and complies with other conditions stated therein.
         
        (b)    As stated in paragraphs 2 and 3 above, an applicant must submit a listing application form, an Application Proof and all other relevant documents which must be substantially complete, or the Exchange will return its application. HKEX Guidance Letter HKEX-GL56-13 further sets out the conditions and examples when the Exchange will accept an Application Proof with an accountants’ report covering a period shorter than the period required under the Rules.
         
        (c)    As an applicant’s historical financial information forms an integral part of the Exchange’s vetting, failure to include financial information as required under the principles and practices cited in paragraphs 5(a) and (b) above would result in the Application Proof being not substantially complete. This assessment is a bright line test. In assessing whether the financial information included in an Application Proof is substantially complete, the Exchange will normally use the proposed listing date as indicated by the applicant to determine the corresponding track record period for which the accountants’ report should be included in the final prospectus.
         
        (d)    By way of example, if a Main Board applicant’s most recent financial year ends on 31 December 2019 and intends to list on or after 1 April 20202, Main Board Rule 4.04(1) requires that the accountants’ report to be included in the final prospectus should at least cover the three financial years ended 31 December 2019. For the purposes of the Application Proof, under HKEX Guidance Letter HKEX-GL56-13:
         
        (i)    If the applicant files its application before the end of the most recent financial year (i.e., before end of December 2019), the application will be returned for not being substantially complete. In this circumstance, the Exchange has no sufficient basis/ information to assess the listing application as the applicant has yet to have completed the last full financial year of its track record period as required under the Listing Rules.
         
        (ii)    If the applicant files its application between 1 January 2020 and 29 February 2020, the applicant can include an accountants’ report with a shorter period, i.e., the two financial years ended 31 December 2018 and nine months ended 30 September 2019 in the Application Proof, if it can meet the conditions set out in HKEX Guidance Letter HKEX-GL56-13. However, the applicant must submit a complete accountants’ report covering the three financial years ended 31 December 2019 at a later stage for the Exchange’s vetting.
         
        6.    Where the profit forecast memorandum submitted by an applicant does not meet the requirements of Main Board Rule 9.11(10)(b) (GEM Rule 12.22(14b))
         
        Where the Application Proof does not contain a profit forecast, Main Board Rule 9.11(10)(b) (GEM Rule 12.22(14b)) requires the applicant to submit, together with the listing application, a final or an advanced draft of the board’s profit forecast memorandum covering the period up to the forthcoming financial year end date after the date of listing. Potential applicants are reminded that the profit forecast memorandum to be submitted together with the listing application should use the proposed listing date as indicated by the applicant as the “date of listing”. Applying the example in paragraph 5(d)(ii) above, the applicant should submit a profit forecast memorandum covering the period from 1 October 2019 to 31 December 2020, i.e. the period including the three months ended 31 December 2019 that is not covered by the financial period in the Application Proof and up to the forthcoming financial year end after listing (31 December 2020). Failure to comply with this requirement forms a potential basis that the listing application is considered not substantially complete and may be returned.
         

        ****

        Appendix 1

        Applicants’ Background

        Company Reasons for return
        Company A
        (a Main Board Applicant)
        Company A is an IT digital solutions provider in the PRC.

        The application was returned due to the omission of material information in the Application Proof in relation to Company A and its business, namely, (i) the potential material impact on Company A as a result of license requirements on suppliers for the export, re-export and transfer of certain goods to Company A’s largest customer; (ii) the legal consequences and potential material impact on Company A in relation to potential complaints and claims (including infringement and passing off) in connection with the extreme similarity between Company A’s corporate name and that of another company al listed on the Exchange and operating in the same industry as Company A; and (iii) a sufficient description of Company A’s business model, including the major projects undertaken during the track record period and the difference between each of Company A’s business lines.

        The Exchange considered the omitted information to be material as (a) any adverse impact to the business of Company A’s largest customer is likely to adversely affect the sustainability of Company A’s business; (b) the similarity between Company A’s corporate name and that of another company listed on the Exchange may cause confusion amongst investors of either listed company, and could give rise to complaints and/or legal claims; and (c) investors cannot assess the company if the prospectus does not provide a clear and concise description of Company A’s business.

        Given the above, Company A’s application proof failed to enable the Exchange and potential investors to make a fully informed assessment on Company A and its business.
        Company B, C and D
        (Main Board applicants)
        Company B is a manufacturing company.
        Company C invests and produces films and drama series’ within the PRC.
        Company D is a pre-revenue biotech company seeking to list under Chapter 18A of the Main Board Rules.

        The listing applications were returned as each of Company B, Company C and Company D failed to include all required financial information in their respective Application Proofs.

        Each of Company B, Company C and Company D has the calendar year as its financial year. Based on the proposed listing date (i.e. after 31 March 2020) stated in their respective listing applications, the track record period of Company B and Company C should be the three years ended 31 December 2019, and the track record period of Company D should be the two years ended 31 December 2019. These applicants would also not be eligible for a waiver under Main Board Rule 4.04(1) which requires, among other things, the applicant lists on the Exchange within three months after the latest year end (i.e. lists on or before 31 March 2020). However, their Application Proofs only included financial information covering the three/ two years ended 31 December 2018 and the six months ended 30 June 2019.

        As stated in paragraph 5(c) above, inclusion of the required financial information is a bright line test, and failure to comply results in the Application Proof being not substantially complete and being returned. Based on their proposed listing date (i.e. after 31 March 2020), in order to qualify for the exemption provided under paragraph 3.09 of HKEX Guidance Letter HKEX-GL56-13, Company B, Company C and Company D would have had to (i) file their listing applications between 1 January 2020 and 29 February 2020; (ii) include in their Application Proof financial information covering the two years/ one year ended 31 December 2018 and the nine months ended 30 September 2019; and (iii) submit the updated financial information for the full year ended 31 December 2019 at a later stage for the Exchange’s vetting.

        As Company B, Company C and Company D filed their respective listing applications before the end of 2019, such applications were returned for not being substantially complete under paragraph 3.14 of HKEX Guidance Letter HKEX-GL56-13. In these circumstances, the Exchange had no sufficient basis/information to assess their listing applications as the applicants had yet to have completed the last full financial year of their track record period as required under the Listing Rules.

        ****


        1 For listing applicants under Chapter 18A of Main Board Rules, the requirement refers to the two financial years immediately preceding the issue of the listing document.

        2 If the applicant in the above example intends to list on or before 31 March 2020 instead and is eligible to apply for a waiver from Main Board Rule 4.04(1), the accountants’ report included in the Application Proof should at least cover the three financial years ended 31 December 2018 and six months ended 30 June 2019.

      • LD126-2020

        View Current PDF

        HKEX LISTING DECISION
        HKEX-LD126-2020 (June 2020)

        Summary
        Parties Company A to Company R – Main Board and GEM listing applicants whose listing applications were rejected by the Exchange in 2019 
         
        Issue To provide guidance on why the Exchange rejected certain listing applications
         
        Listing Rules
         
        Main Board Rule 2.06 and Chapter 8
        GEM Rule 2.09 and Chapter 11
         
        Related Publications HKEX-GL68-13, HKEX-GL68-13A, HKEX-GL99-18, HKEX-LD92-2015, HKEX-LD100-2016, HKEX-LD107-2017, HKEX-LD119-2018 and HKEX-LD121-2019
         
        Decision The Exchange rejected the listing applications
         

        BACKGROUND

        1.    In comparison with the previous year, the percentage of applications rejected in 2019 has remained stable (6 % versus 6.45% in 2018). 17 applications were rejected for suitability under guidance letter HKEX-GL68-13A in 2019 as compared to 20 in 2018.
         
        2.    The Exchange’s vetting process is qualitative and the review of the eligibility and suitability of each applicant is holistic. Whilst a number of factors are taken into account, a greater level of scrutiny is placed on an applicant’s commercial rationale for listing, which forms the bases for an applicant’s proposed use of listing proceeds, in cases where the Exchange has reason to believe that a listing applicant is listing for a purpose other than the development of its underlying business or assets, or that its size and prospects do not appear to justify the costs or purposes associated with a public listing, i.e., there is a likelihood of it becoming a “shell company”. It is in this context that the Exchange evaluates whether there is a genuine need for funding, rather than as a separate requirement.
         
        3.    This means that if a company is able to demonstrate a commercial rationale for its use of proceeds, the Exchange will not examine availability of internal sources of funding or banking facilities. Applicants with healthy balance sheets and/or strong cash flows will not be at a disadvantage so long as their commercial rationale for listing has been sufficiently substantiated.

        REASONS FOR REJECTION

        4.    A summary of the factors taken into consideration by the Exchange in rejecting the applications is set out below. Details as to the individual backgrounds of the rejected applications can be found at Appendix 1.
         
        5.    Suitability:
         
        (i)    No commercial rationale for listing with respect to 16 applicants, and thus no genuine funding needs
        Applicants failed to substantiate the commercial basis for their proposed expansion plans. Moreover, the applicants’ proposed use of listing proceeds were not commensurate with their previous business strategies and the deviation was not clearly explained.
         
        (ii)    Insufficient support for valuation for three applicants1
        Where an applicant has failed to substantiate its commercial rationale for listing, the Exchange may also consider its valuation as part of the determination on suitability. These applicants failed to justify why the forecast price-earnings (“P/E”) ratios were higher than those of industry peers, the basis on which the peers were chosen; and how such valuations were reasonable in light of the applicant’s historical financial performance and profit forecast.
         
        (iii)    Suitability of director/ person of substantial interest or controlling shareholder for one applicant
         
        6.    Eligibility:
         
        (i)    Failure to meet the minimum profit requirement after excluding non-ordinary course income for one applicant.
         

        ***

        Appendix 1

        Applicant backgrounds

        Consumer Goods
        Company Background Reasons for Rejection
        Company A   
        (a GEM Applicant)
        Company A sells lighting products and provides lighting support and installation services for building construction and building renovation projects in Hong Kong.

        It was raising funds to (i) acquire the supplier for a key component of emergency lighting products (the “Supplier”); (ii) acquire an additional production plant; and (iii) hire additional sales and marketing, and procurement of staff.

        Company A’s proposed expansion did not make commercial sense given that (i) the Supplier was only able to produce key components for one type of product sold by Company A, and the revenue contribution during the trading record period from sales of this product was relatively low (10% - 20%); (ii) the annual cost savings expected from the additional plant was marginal (less than 1% of the Company’s estimated net profit (after excluding the listing expenses) of the forecast for the forthcoming financial year) and (iii) the proposed hiring of additional staff, which would serve to almost double the number of employees in the relevant teams, was not justified based on the expected industry growth.

        As it failed to substantiate its use of proceeds, Company A was unable to demonstrate its commercial rationale for listing.
         
        No commercial rationale.
        Company B   
        (a Main Board Applicant)
        Company B is a motor vehicle dealer in Singapore. It proposed to use proceeds primarily for the acquisition of a new showroom to replace the current one, which would be twice as large as the current one.

        In light of the 5.9% decline in the automotive retail industry in Singapore from 2018 to 2022, Company B failed to substantiate there would be sufficient demand to support the expansion. As it failed to substantiate its use of proceeds, Company B was unable to demonstrate its commercial rationale for listing.
         
        No commercial rationale; insufficient support for valuation.
        Company C   
        (a GEM Applicant)
        Company C provides commercial and industrial kitchen equipment solutions in Singapore. Its shares are listed on the Singapore Stock Exchange and it sought a dual primary listing on GEM. It planned to use 90% of its listing proceeds to establish a new manufacturing facility in Malaysia to produce a certain product. In addition, a significant portion of the listing proceeds would be used to pay the Company’s listing expenses.

        As sales of that product had contributed to less than 5% of revenue during the trading record period, Company C did not adequately explain why it was pursuing an increase in production for such product. In addition, that product had a small market and low forecast industry growth. As such, it had not demonstrated a commercial rationale for listing.
         
        No commercial rationale.
        Company D   
        (a GEM Applicant)
        Company D operates three restaurants in Hong Kong. It planned to use a substantial portion of its listing proceeds to open two more restaurants in Hong Kong.

        Company D had only opened three restaurants during its long operating history of 12 years. It proposed to expand relatively aggressively by opening two restaurants despite the fact that its overall business performance from restaurant operations had remained relatively flat.

        Company D’s expected valuation was in line with its comparables, but questionable given that (i) Company D recorded minimal growth from its restaurant operations during the trading record period while its comparables were significantly larger in terms of operating scale and revenue; and (ii) its consultancy income – which was taken into account in arriving at the valuation – was non-recurring.

        As it failed to substantiate its use of proceeds, Company D was unable to demonstrate its commercial rationale for listing.
         
        No commercial rationale; insufficient support for valuation.

         

        Consumer Services
        Company Background Reasons for Rejection
        Company
        E   
        (a Main Board
        Applicant)
        Company E is a specialty chain store retailer selling apparel and houseware products in Malaysia.

        In addition to its retail sales income, the Company also generated rental income, which was determined to not be in the Company’s “ordinary and usual course of business”, as required under Main Board Rule 8.05(1)(a).

        After excluding such rental income and the relevant costs for its investment properties, the Company failed to comply with the minimum profit requirement.
         
        Failure to meet the minimum profit requirement.

         

        Industrials
        Company Background Reasons for Rejection
        Company F   
        (a Main Board Applicant)
        Company F (i) manufactures and sells cold-rolled steel bars and steel wire products; (ii) processes and sells hot-rolled steel bars; and (iii) trades building materials and accessories in Malaysia.

        Company F planned to establish new production facilities for steel bars and wires despite the fact that (i) the Company had forecast its revenue to grow at 5% in FY19, significantly slower than revenue growth of 27.5% in 2018; and (ii) it was unable to substantiate the projected increase in demand of steel bars and wires for the construction demand it was trying to capture through the new production facilities, and the projected increase in demand is in conflict with the flattish industry outlook. Therefore, Company F failed to demonstrate the commercial rationale for its expansion plan, and therefore its listing.

        In addition, Company F’s valuation did not sufficiently support the bases for its valuation, given the significant deceleration of Company F’s profit forecast, and its proposed valuation in terms of P/E ratio was 80% above the industry peers’ average P/E, as provided by the Company.
         
        No commercial rationale; insufficient support for valuation.
        Company G   
        (a Main Board Applicant)
        Company G supplies optical components in Singapore. Its proposed use of proceeds was to fund an expansion plan that included the purchase of additional machinery, recruitment of additional staff and acquisition of manufacturer suppliers.

        Company G was unable to justify its expansion plan as the proposal to acquire a supplier to reduce concentration risk was inconsistent with its disposal of the entire interest it held in a major supplier during the trading record period, and Company G was unable to explain the reasons for, and the circumstances leading to, such change in strategy. Additionally, Company G was unable to change manufacturer suppliers without prior approval from its customers. As such it was unclear why Company G wanted to pursue the proposed acquisition. Separately, Company G had made minimal additions to its plant and machinery and stated that this was due to a lack of financial resources. However, it was evident that Company G did have sufficient financial resources as it consistently generated operating cash flows during the trading record period, and it would only have taken six months for to generate sufficient funding for its proposed expansion plan. Company G also planned to increase its workforce by approximately 80% to devise new testing plans and equipment calibrations for new equipment. However, it failed to explain why there was a need to significantly increase the number of new technicians, given that the new testing plans and equipment calibration should not require substantial ongoing effort once set up.

        Company G could not demonstrate its commercial rationale for listing as it failed to substantiate its use of proceeds.
         
        No commercial rationale.
        Company H   
        (a Main Board Applicant)
        Company H is a subcontractor for electrical and mechanical engineering services for building service systems in Hong Kong. It planned to use its listing proceeds to (i) procure systems to allow for direct supply to its customers, rather than having subcontractors supply the systems, which had been the practice during the trading record period; and (ii) to enhance its internal capabilities through the acquisition of equipment and hiring of additional staff.

        Company H failed to substantiate sufficient demand for its expansion plan – it did not have a strong contract backlog and there was a downward trend in the value of new projects obtained during the trading record period. Company H was also unable to substantiate the projected cost savings from procuring the systems itself as compared to its previous practice. As such, Company H could not demonstrate its commercial rationale for listing.

        In addition, Company H’s valuation was not supported by its profit forecast, which projected a decline in adjusted net profit, and its forecast P/E ratio was higher than that of its peers.
         
        No commercial rationale; insufficient support for valuation.
        Company I   
        (a Main Board Applicant)
        Company I formulates, develops and supplies polymer materials used in the manufacturing of specialty cables in Southeast Asia.

        Company I planned to use its listing proceeds to pursue a strategic investment in an upstream compounder and establish an in-house product development centre. Company I had a stable supply of polymer compounds as it had long term relationships with upstream compounders and it is in a niche market with few players so customers and suppliers have relatively sticky relationships. During the trading record period, Company I’s sales volume of the relevant product was low (less than 200 tonnes) relative to the production capacity of the proposed acquisition (6,000 tonnes) and was forecast to decline. Company I had operated for over 18 years without its own in-house development centre and could not substantiate the material benefits of having one. Therefore, Company I did not seem to have a commercial rationale to invest in an upstream compounder and establish an in-house development centre, and therefore lacked commercial rationale for listing.
         
        No commercial rationale.
        Company J   
        (a GEM Applicant)
        Company J provides container depot management services and container maintenance services in Hong Kong and the PRC.

        Company J proposed use of its listing proceeds to replace machinery, recruit additional staff and establish a new depot in one city in the PRC, which would increase the total capacity of Company J’s existing depot in this city by 100%. Company J was unable to demonstrate that there would be sufficient demand for the new depot, and also was able to fund its expansion plans through deployment of its then-available cash or bank-borrowings. It therefore could not demonstrate its commercial rationale for listing as it failed to substantiate its use of proceeds.
         
        No commercial rationale.

         

        Properties & Construction
        Company Background Reasons for Rejection
        Company K   
        (a Main Board Applicant)
        Company K rents and sells construction equipment in Southeast Asia. It planned to use 22% of the listing proceeds for the construction of integrated premises in Singapore.

        Company K failed to justify its business need for the integrated premises in light of (i) the declining revenue contributed from the relevant business; and (ii) the scale of the new premises was expected to be 70% larger than the existing premises, even though Company K only planned to expand its rental fleet by 12-13%. In addition, the increase in aggregate depreciation and amortization resulting from the integrated premises would be higher than the existing rental expenses borne by the Company.

        Company K could not demonstrate its commercial rationale for listing as it failed to substantiate its use of proceeds.
         
        No commercial rationale.
        Company L   
        (a Main Board Applicant)
        Company L is a main contractor focusing on public civil engineering projects in Singapore. The Company’s planned use of proceeds was to expand its operations through acquisition of new machinery and equipment, hiring of additional labour and payment for performance bonds.

        The Company’s expansion plan was not supported by demand. During the trading record period, Company L’s revenue grew at a CAGR of less than 3%, and its gross profit margin had remained relatively stable. The average project size of the contracts secured by the Company decreased over the trading record period. In addition, Company L’s backlog had decreased by around 40% over the course of the trading record period and it had not been awarded any new projects since the end of the latest financial year. As such, it did not demonstrate a commercial rationale for listing.
         
        No commercial rationale.
        Company M   
        (a GEM Applicant)
        Company M supplies fixtures and furniture, and decoration materials in Hong Kong. Its planned use of proceeds included establishment of a showroom, expansion into the PRC, and the payment of upfront costs for certain projects.

        Whilst Company M claimed that the new showroom would increase the sales of one product, it had previously recorded increasing sales of such product without the new showroom during the trading record period. Therefore, the claim that the benefits from the proposed establishment of a new showroom was unsubstantiated. Further, Company M’s expansion plan into the PRC was not supported by any customer feasibility study. Company M also consistently generated cashflows and was unable to explain why it required funding for payment of upfront costs of projects that had al commenced. As such, Company M failed to demonstrate a commercial rationale for listing.
         
        No commercial rationale.
        Company N   
        (a GEM Applicant)
        Company N sells and leases out real estate in Japan and planned to use its listing proceeds to expand its real estate portfolio.

        As real estate investment is capital intensive, Company N provided that the listing would significantly enhance its capital base and financial position. However, given that its net listing proceeds represented only 4% increase of the book value of Company N’s property portfolio, Company N’s claim that the listing would substantially enhance its capital base and financial position was unsubstantiated and Company N was unable to sufficiently demonstrate its commercial rationale for listing.
         
        No commercial rationale.
        Company O   
        (a Main Board Applicant)
        Company O provides property management services in Macau. It planned to use 41% of its listing proceeds to renovate certain existing car parks (the “Renovation”).

        Company O did not provide a reasonable explanation for the need for the Renovation as the relevant concession agreements did not require Company O to undertake the Renovation and none of the tenders it had won during the trading record period required any Renovation. Further, Company O was able to increase parking tariffs without the Renovation. As such, it did not appear that the Renovation would materially benefit Company O by increasing its chances of renewing its concession agreements, applying for parking tariff increments or increasing its overall competitiveness. Thus, Company O was unable to demonstrate a commercial rationale for the listing.
         
        No commercial rationale.
        Company P   
        (a Main Board Applicant)
        Company P is a contractor providing fitting-out and alteration and addition services in Macau. The Company proposed to use 60% of its listing proceeds to fund the acquisition of a mechanical and electrical (“M&E”) works contractor (the “Strategic Acquisition”) as well as acquire additional machinery and equipment.

        The Strategic Acquisition involved a change in business model and strategy from Company P’s previous role as a project manager to taking up the role of an M&E contractor – a role that was labour intensive, and which was not Company P’s expertise. Company P could not demonstrate how the benefits of the Strategic Acquisition outweighed the costs of outsourcing, or internally developing a stand-alone M&E practice.

        In addition, Company P did not substantiate the need to acquire machinery and equipment as utilization rates of the same type of machinery it al owned was low and it historically subcontracted work which required such machinery/equipment and required its subcontractors to provide them.

        Based on the above, Company P was unable to demonstrate a commercial rationale for its listing.
         
        No commercial rationale.
        Company Q   
        (a Main Board Applicant)
        Company Q (i) provides pavement supply and lay services, largely for infrastructure projects; and (ii) sells asphalt premix products in Singapore. Company Q planned to use about 25% of the listing proceeds to invest in a new asphalt plant and to purchase new machinery and equipment; and 65% of the listing proceeds to repay bank loans.

        Company Q commenced operations shortly before its trading record period and hence, had a short operating history. During the trading record period, a substantial portion of Company Q’s revenue was derived from one large-scale non-recurring project, which was approaching completion.

        Company Q had not secured other contracts of similar size after the trading record period. Further, due to a slowdown in the industry, there were fewer projects being tendered and the value of new projects secured after the trading record period had been steadily decreasing.

        As a result, Company Q did not expect its revenue and profit to grow in the near future due to the limited visibility in Company Q’s project pipeline.

        Given the uncertainty over Company Q’s business prospects, as these were dependent upon whether Company Q would win a potential project, Company Q was unable to demonstrate a commercial rationale for listing as it failed to explain its need for capital for business expansion.
         
        No commercial rationale.
        Company R   
        (a Main Board Applicant)
        Company R develops and sells residential properties in the PRC.

        During the trading record period, Company R created a number of short-term inter-company loans on which it subsequently defaulted. The inter-company lender then assigned such defaulted loans to a distressed asset lender (“Distressed Asset Lender”) with no discount on the principle. The Distressed Asset Lender could only purchase distressed debt (i.e., for which default has al occurred). The financing arrangements with the Distressed Asset Lender accounted for substantially all of Company R’s borrowings during the trading record period.

        Company R explained that when it first commenced operations, it was only able to obtain financing from the Distressed Asset Lender, but failed to explain why it continued to turn to the Distressed Asset Lender after its business was more established and it could obtain financing from other financial institutions. As borrowing from the latter did not require an associated default, there would be no adverse impact to Company R’s credit in that respect.

        Company R could not demonstrate that the Distressed Asset Lender provided better terms than other commercial lenders; nor that the Distressed Asset Lender was the only available lender. In fact, loans from the Distressed Asset Lender, incurred higher interest rates and additional financial advisory fees.

        Company R could not provide an explanation for the commercial rationale of these financing arrangements, which appeared to lack discernible benefit to the Company and seemed engineered to allow the Distressed Asset Lender to acquire the debts at the expense of Company R. Thus, Company R could not demonstrate its commercial rationale for listing.

        These issues also gave rise to concerns on the suitability of the directors and whether they had acted in the best interests of Company R and its shareholders when seeking financing for the Company.
         
        No commercial rationale; directors’ suitability.

        ***


        1 This was not the sole basis for rejection for any of the applications.

      • LD125-2020

        View Current PDF

        HKEX LISTING DECISION
        HKEX-LD125-2020 (published in April 2020)

        Parties Company A - a Main Board issuer

        Newco - Company A’s subsidiary proposing to seek a separate listing on the Exchange

        The Group – Company A and its subsidiaries

        The Remaining Group – the Group excluding Newco
         
        Issue Whether the Remaining Group could meet the minimum market capitalisation requirement under Rule 8.09(2)
         
        Listing Rules     Main Board Rule 8.09(2) and Paragraph 3(c) of Practice Note 15 to the Main Board Rules
         
        Decision The proposed spin-off did not satisfy Paragraph 3(c) of Practice Note 15 as the Remaining Group could not meet the minimum market capitalisation requirement under Rule 8.09(2)
         

        FACTS

        1.    The Group was principally engaged in the provision of software, platforms and related support services (the Software Business), IT solutions services (the Solutions Business), and investing activities including property investment and treasury investment in securities.
         
        2. Company A proposed to inject its Software Business into Newco and seek a separate listing of Newco on the Exchange. After the proposed spin-off, Newco would continue to be a subsidiary of Company A.
         
        3. The Remaining Group would continue the Solutions Business and investing activities.
         
        •     The Solutions Business was the core business of the Remaining Group, contributing approximately 98% of the total revenue of the Remaining Group in the latest financial year.
         
        The Remaining Group’s investing activities generated minimal income during the latest three financial years. Its investment portfolio comprised certain investment properties (the Investment Properties) and listed securities and other debt investments (the Financial Assets), with an aggregated value of about HK$90 million.
         
        The Remaining Group also retained cash reserves (excluding the cash required for operating the Solutions Business) of about HK$220 million (the Cash Surplus), representing more than 60% of the Remaining Group’s total assets as at the latest year end date. Company A submitted that the Group had maintained a substantial cash reserve for many years. The Cash Surplus would be retained by the Remaining Group and be applied towards potential mergers and acquisitions and other new business opportunities after the proposed spin-off.
         
        4. The Software Business represented the majority part of the Group’s business. The Exchange queried whether the Remaining Group could satisfy independently the minimum market capitalisation requirement of HK$500 million under Rule 8.09(2), having noted that the market capitalisation of Company A was in the range of HK$700 million to HK$1 billion in the last 12 months.
         
        5. Company A submitted that the Remaining Group could meet the market capitalisation requirement, relying on an independent valuation of the Remaining Group of about HK$600 million prepared using sum-of-parts approach comprising:
         
        (a)     a valuation of the Solutions Business of about HK$280 million using the market approach with reference to P/E and EV/EBIT multiples of comparable companies; and
         
        (b) the fair value of the non-operating assets (including the Cash Surplus, the Investment Properties and the Financial Assets) of HK$320 million.
         

        APPLICABLE LISTING RULES

        6.     Paragraph 3(c) of Practice Note 15 states that:-

        "The Listing Committee must be satisfied that, after the listing of Newco, the Parent would retain a sufficient level of operations and sufficient assets to support its separate listing status. In particular, it would not be acceptable to the Listing Committee that one business (Newco’s) supported two listing statuses (the Parent’s and Newco’s). In other words, the Parent itself would be required to retain, in addition to its interest in Newco, sufficient assets and operations of its own, excluding its interest in Newco, to satisfy independently the requirements of Chapter 8 of the Exchange Listing Rules…"
         
        7. Rule 8.09(2) provides that: -

        "The expected market capitalisation of a new applicant at the time of listing must be at least HK$500,000,000 which shall be calculated on the basis of all issued shares (including the class of securities for which listing is sought and such other class(es) of securities, if any, that are either unlisted or listed on other regulated market(s)) of the new applicant at the time of listing."
         

        ANALYSIS

        8.     The purpose of Paragraph 3(c) of Practice Note 15 is to ensure that one business will not support two listing statuses. Therefore, the Parent itself (i.e. the remaining group) must carry on a business with sufficient operations and assets to satisfy independently all the listing requirements under Chapter 8 of the Rules, including the minimum market capitalisation requirement under Rule 8.09(2).
         
        9. Based on the above, an issuer proposing a spin-off must demonstrate that the remaining group retains a substantive business to support a market capitalisation of at least HK$500 million as required under Rule 8.09(2). Assets that are not used to support its business operations are disregarded.
         
        10. In this case, the Remaining Group would carry on the Solution Business and retain a number of non-operating assets after the spin-off. Company A submitted that the Remaining Group could meet Rule 8.09(2) on the basis of a valuation of about HK$600 million for these business and assets. The Exchange disagreed because the non-operating assets (with a valuation of about HK$320 million) were not used to support the business operations of the Remaining Group and therefore should be disregarded when considering the market capitalisation of the Remaining Group. The Exchange also noted that the Solution Business (being the core business of the Remaining Group) had an estimated value of HK$280 million, which was substantially lower than the minimum market capitalisation requirement of HK$500 million. The Exchange did not consider that the Remaining Group could meet Rule 8.09(2).
         

        CONCLUSION

        11.     The proposed spin-off did not satisfy Paragraph 3(c) of Practice Note 15 as the Remaining Group could not meet the minimum market capitalisation requirement under Rule 8.09(2).

      • LD124-2020

        View Current PDF

        HKEX LISTING DECISION
        HKEX-LD124-2020 (published in April 2020)

        Parties    Company A - a Main Board issuer

        Newco - Company A’s subsidiary proposing to seek a separate listing on the Exchange

        The Group – Company A and its subsidiaries

        The Remaining Group – the Group excluding Newco
         
        Issue    Whether the Remaining Group could meet the minimum market capitalisation requirement under Rule 8.09(2)
         
        Listing Rules    Main Board Rule 8.09(2) and Paragraph 3(c) of Practice Note 15 to the Main Board Rules
         
        Decision    The proposed spin-off did not satisfy Paragraph 3(c) of Practice Note 15 as the Remaining Group could not meet the minimum market capitalisation requirement under Rule 8.09(2)
         

        FACTS

        1.    The Group operated two major businesses, being the development and sales of residential properties (the Residential Property Business) and investment in commercial and industrial properties.
         
        2.    Company A proposed to inject its Residential Property Business into Newco and seek a separate listing of Newco on the Exchange. After the proposed spin-off, Newco would continue to be Company A’s subsidiary. The Remaining Group would continue its business in investment of commercial and industrial properties.
         
        3.    In recent years, Company A’s shares had been traded at a significant discount to the net asset value of the Group, and its market capitalisation was below HK$500 million. As the Residential Property Business represented a material part of the Group’s businesses, the Exchange queried whether the Remaining Group could satisfy independently the minimum market capitalisation requirement of HK$500 million under Rule 8.09(2) as required by Paragraph 3(c) of Practice Note 15.
         
        4.    Company A submitted that under Paragraph 3(c) of Practice Note 15, “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 ...” (emphasis added). The reference to “sufficient assets and operations” inferred that the Parent was only required to satisfy the listing requirements of Chapter 8 with regard to its assets and operations after the spin-off. The minimum market capitalisation requirement under Rule 8.09(2) did not apply to the Remaining Group.
         
        5.    Company A also submitted that even if Rule 8.09(2) applied to the Remaining Group, it would be able to satisfy the requirement. In this regard, Company A submitted an independent valuation report which indicated that the valuation, using the asset-based approach, was substantially higher than HK$500 million.
         

        APPLICABLE LISTING RULES

        6.    Paragraph 3(c) of Practice Note 15 states that:-
         
        “The Listing Committee must be satisfied that, after the listing of Newco, the Parent would retain a sufficient level of operations and sufficient assets to support its separate listing status. In particular, it would not be acceptable to the Listing Committee that one business (Newco’s) supported two listing statuses (the Parent’s and Newco’s). In other words, the Parent itself would be required to retain, in addition to its interest in Newco, sufficient assets and operations of its own, excluding its interest in Newco, to satisfy independently the requirements of Chapter 8 of the Exchange Listing Rules…”
         
        7.    Rule 8.09(2) provides that: -
         
        The expected market capitalisation of a new applicant at the time of listing must be at least HK$500,000,000 which shall be calculated on the basis of all issued shares (including the class of securities for which listing is sought and such other class(es) of securities, if any, that are either unlisted or listed on other regulated market(s)) of the new applicant at the time of listing.”

        ANALYSIS

          Whether Rule 8.09(2) applied to the Remaining Group in a spin-off case
         
        8.    The purpose of Paragraph 3(c) of Practice Note 15 is to ensure that one business will not support two listing statuses. Therefore, the Parent itself (i.e. the remaining group) must carry on a business with sufficient operations and assets to satisfy independently all the listing requirements under Chapter 8 of the Rules, including the minimum market capitalisation requirement under Rule 8.09(2).
         
          Whether the Remaining Group could meet Rule 8.09(2)
         
        9.    Company A submitted that the Remaining Group would be able to meet Rule 8.09(2) on the basis of an independent valuation of the underlying business of the Remaining Group. However, the Exchange noted that the shares of Company A had been traded at a significant discount to the net asset value of the Group. The valuation submitted by Company A had not taken into account this discount to net asset value. Furthermore, the market capitalisation of Company A had been lower than HK$500 million before the proposed spin-off, and it was expected to decrease if the Residential Property Business (being a material part of the existing businesses) was excluded from the Group. The Exchange considered that a valuation of an entity’s underlying business or assets does not necessarily reflect the entity’s market capitalisation. The Exchange was not satisfied that the Remaining Group could meet the minimum market capitalisation requirement of HK$500 million.

        CONCLUSION

        10.    The proposed spin-off did not satisfy Paragraph 3(c) of Practice Note 15 as the Remaining Group could not meet the minimum market capitalisation requirement under Rule 8.09(2).

    • 2019

      Select By Rule or Topic: Download the consolidated index herehere

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

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

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

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

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

      LD Series Number First
      Release
      Date (Last
      Update
      Date)
      (mm/yyyy)
      Listing Rules/ Topics Particulars
      LD123-2019 07/2019
      (10/2019)
      Main Board Rules 2.04 and 6.01(4) Whether the Exchange would impose additional requirements under Rule 2.04 on Company A’s proposed continuing connected transaction with Company B
      LD122-2019 07/2019
      (10/2019)
      Main Board Rules 2.0414.06B and 14.54 Whether the Exchange would impose additional requirements under Rule 2.04 on Company A’s proposed termination of a lease agreement relating to its original entertainment business
      LD121-2019 03/2019 Main Board Rule 2.06 and Chapter 8
      GEM Rule 2.09 and Chapter 11
      To provide guidance on why the Exchange rejected certain listing applications

      • LD123-2019

        View Current PDF

        HKEX LISTING DECISION
        HKEX-LD123-2019 (published in July 2019) (updated in October 2019 (amendments to the reverse takeover Rules))

        Parties Company A – a Main Board issuer

        Mr. X – the former controlling shareholder of Company A 

        Mr. Y – the existing controlling shareholder of Company A

        Company B – a company controlled by Mr. Y and engaged in property business in the PRC
        Issue Whether the Exchange would impose additional requirements under Rule 2.04 on Company A’s proposed continuing connected transaction with Company B
        Listing Rules Main Board Rules 2.04 and 6.01(4)
        Decision The Exchange informed Company A that, should it proceed with the proposed continuing connected transaction, the Exchange would treat it as if it were a new listing applicant under Rule 2.04

        FACTS

        Background

        1.   At the time of its initial listing, Company A was principally engaged in the business of leasing and trading of construction machinery in Hong Kong (the Original Business). Mr. X was the founder, the chairman and an executive director of Company A.
         
        2.   Shortly after the 12 month lock-up period, Mr. X disposed of his 50% equity interest in Company A to Mr. Y, which triggered a general offer for all the remaining shares in Company A under the Takeovers Code.
         
        3.   Upon close of the offer, all the directors of Company A at the time of its initial listing resigned. The new directors (including Mr. Y) appointed to the board of Company A did not have experience in the Original Business. A majority of the new directors were also directors of Company B which was controlled by Mr. Y and engaged in property business in the PRC.
         
        4.   The first annual results released by Company A after listing showed that its revenue from the Original Business decreased by approximately 30% in that financial year. Company A disclosed that the industry of the Original Business would slow down. It intended to diversify its business by leveraging on the experience of its directors in the PRC.
         

        Proposed continuing connected transaction

        5.   A few months after the offer, Company A proposed to enter into a framework agreement with Company B for the provision of property management services (the New Business) in respect of properties controlled or being developed by Company B.
         
        6.   The transaction with Company B would constitute a continuing connected transaction (the Proposed CCT). Based on the highest annual cap proposed by Company A, the revenue contributed from the Proposed CCT would represent over 70% of Company A’s revenue in the first year after listing.
         
        7.   Company A also intended to further expand the New Business and was negotiating similar property management service agreements with independent third parties.
         

        APPLICABLE LISTING RULES AND GUIDANCE MATERIALS

        8.   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…”.
         
        9.   The Exchange Guidance Letter (GL68-13A) provides guidance on the suitability for listing of new applicants to help prevent shell creation through IPO. The Guidance Letter states that:
         
        “…  
         
        1.1   The Exchange notes that there have been a number of listed issuers where their controlling shareholders either changed or have gradually sold down their interests shortly after the regulatory lock-up period following listing. One explanation for this phenomenon is the perceived premium attached to the listing status of such issuers rather than the development of the underlying business or assets.
         
        1.2   The Exchange believes that such companies (often referred to as "shell companies") will invite speculative trading activities when identified by potential buyers. This can lead to opportunities for market manipulation, insider trading and unnecessary volatility in the market post-listing, none of which is in the interest of the investing public. Furthermore, activities by such companies may be structured so that they are not subject to regulatory scrutiny under Rules 14.06B to 14.06E, our Guidance Letters HKEX-GL104-19 on reverse takeovers, and HKEX-GL105-19 on large scale issues of securities. (See the Note below for the amendments to this paragraph)
         
         
         
        4.4   Once listed, an issuer must ensure that it and its business continues to be suitable for listing. Failing to meet this requirement may lead to the Exchange canceling the issuer’s listing under Main Board Rule 6.01(4) … The Exchange closely monitors the developments of listed issuers. It may have a concern about the suitability of an issuer or its business for continued listing if, for example, the issuer’s activities are found to deviate significantly from its original business model or strategy or the commercial rationale for its listing set out in its listing application.”
         
        10.   The Exchange Guidance Letter (GL96-18) on a listed issuer’s suitability for continued listing cited examples of circumstances where the Exchange may raise concerns about the suitability for continued listing of a listed issuer or its business:
         
        “…    
         
        9.   In Guidance Letter GL68-13A, the Exchange noted a number of newly listed issuers whose controlling shareholders either changed or gradually sold down their interests shortly after the regulatory lock-up period following listing. It questioned whether these issuers’ listing applications were driven by the perceived premium attached to the listing status rather than the development of their underlying business or assets. These issuers, when identified by potential buyers, would invite speculative trading and create opportunities for market misconduct (e.g. market manipulation or insider trading) and unnecessary volatility in the market post listing…”
         

        ANALYSIS

        11.   The Exchange considered that the Proposed CCT would be an attempt to circumvent the new listing requirements having regard to the following:
         
        (a)   The Exchange was concerned that Company A was engaging in shell activities as indicated by a change in control shortly after the lock-up period. The post-listing developments, including the change in its board of directors, the significant deterioration in the performance of the Original Business after listing and the commencement of the New Business unrelated to the Original Business, appeared to deviate significantly from the disclosures in Company A’s IPO prospectus about its business plans and the commercial rationale for its listing. This suggested that Mr. Y acquired Company A for its listing status rather than the developments of its underlying business.
         
        (b)   The New Business was completely different from the Original Business and its size would be significant to Company A based on the annual cap for the Proposed CCT. The Proposed CCT would lead to a fundamental change in Company A’s business and represent an attempt to achieve a listing of the New Business through greenfield operations which had no track record and would not meet the new listing requirements.
         
        12.   In response, Company A submitted that the Proposed CCT would not be its major operation based on its projected revenues of the Original Business for the next three years. However, the Exchange noted that such projection was made on the assumption that the Original Business would grow at a compound growth rate of at a certain percentage per annum, which was contrary to the performance of the Original Business after listing, and Company A had not provided any information to support the assumption. The Exchange did not consider this sufficient to address its concern.
         

        CONCLUSION

        13.   The Exchange considered it appropriate, and informed Company A of its intention, to exercise its right to impose additional conditions on the Proposed CCT under Rule 2.04, by treating Company A as if it were a new listing applicant and requiring it to comply with the requirements for a RTO.
         

        Note:

        Guidance Letter GL68-13A was updated to make reference to the amended Rules 14.06B to 14.06E and the new guidance letters on reverse takeovers and large scale issues of securities, which became effective on 1 October 2019. The Rule amendments would not change the analysis and conclusion in this case. 

      • LD122-2019

        View Current PDF

        HKEX LISTING DECISION
        HKEX-LD122-2019 (published in July 2019) (updated in October 2019 (amendments to the reverse takeover Rules))

        Parties Company A – a Main Board issuer

        Mr. X – the former controlling shareholder of Company A 

        Mr. Y – the existing controlling shareholder of Company A
        Issue Whether the Exchange would impose additional requirements under Rule 2.04 on Company A’s proposed termination of a lease agreement relating to its original entertainment business
        Listing Rules Main Board Rules 2.04, 14.06B and 14.54
        Decision The Exchange informed Company A that should it proceed with the proposal, the Exchange would treat it as if it were a new listing applicant under Rule 2.04

        FACTS

        Background

        1.   At the time of its initial listing, Company A was principally engaged in the business of operating entertainment venues at separate locations under different brand names (the Original Business). Mr. X was the founder, the chairman and an executive director of Company A.
         
        2.   Shortly after the 12 month lock-up period, Mr. X disposed of his 70% equity interest in Company A to Mr. Y, which triggered a general offer for all the remaining shares in Company A under the Takeovers Code.
         
        3.   Upon close of the offer, all the directors of Company A at the time of its initial listing resigned. The new directors (including Mr. Y) appointed to the board of Company A did not have experience in the Original Business. A few months later, Company A closed down two of its entertainment venues that were loss-making.
         

        The Acquisition

        4.   About two years after the offer, Company A acquired from Mr. Y a target company (the Acquisition) engaged in property management business (the New Business). The Acquisition was a major and connected transaction. Property management would become one of the principal activities of Company A upon completion of the Acquisition.
         
        5.   Company A stated that the Acquisition would enable it to diversify its income stream and it had no intention to dispose of or terminate the Original Business.
         

        The Proposal

        6.   A few months after the completion of the Acquisition, Company A proposed to terminate the lease agreement for one of its two remaining entertainment venues (the Proposal). That entertainment venue contributed a material part of Company A’s revenue from the Original Business but it was operated at a loss in the latest financial year.
         
        7.   Company A submitted that a new tenant had leased a venue in the same building to operate an entertainment business in competition with that of Company A. The Proposal was initiated by the landlord who offered Company A a rent-free period before the termination date in exchange for an early termination.
         

        APPLICABLE LISTING RULES AND GUIDANCE MATERIALS

        8.   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…”.
         
        9.   Rule 14.06(6) defines a “reverse takeover” as “an acquisition or a series of acquisitions of assets by a listed issuer which, in the opinion of the Exchange, constitutes, or is part of a transaction or arrangement or series of transactions or arrangements which constitute, an attempt to achieve a listing of the assets to be acquired and a means to circumvent the requirements for new applicants set out in Chapter 8 of the Exchange Listing Rules.” This is a principle based test.
         
        10.   Rule 14.54 states that -
         
            “The Exchange will treat a listed issuer proposing a reverse takeover as if it were a new listing applicant. The enlarged group or the assets to be acquired must be able to meet the requirements of rule 8.05 and the enlarged group must be able to meet all the other basic conditions set out in Chapter 8 of the Exchange Listing Rules…”.
         
        (Rule 14.06(6) (now Rule 14.06B) and Rule 14.54 were amended on 1 October 2019. See Note 1 below.)    
         
        11.   The Exchange Guidance Letter (GL68-13A) provides guidance on the suitability for listing of new applicants to help prevent shell creation through IPO. The Guidance Letter states that:
         
        “…  
         
        1.1   The Exchange notes that there have been a number of listed issuers where their controlling shareholders either changed or have gradually sold down their interests shortly after the regulatory lock-up period following listing. One explanation for this phenomenon is the perceived premium attached to the listing status of such issuers rather than the development of the underlying business or assets.
         
        1.2   The Exchange believes that such companies (often referred to as "shell companies") will invite speculative trading activities when identified by potential buyers. This can lead to opportunities for market manipulation, insider trading and unnecessary volatility in the market post-listing, none of which is in the interest of the investing public. Furthermore, activities by such companies may be structured so that they are not subject to regulatory scrutiny under Rules 14.06B to 14.06E, our Guidance Letters HKEX-GL104-19 on reverse takeovers, and HKEX-GL105-19 on large scale issuers of securities.
         
         
         
        4.4   Once listed, an issuer must ensure that it and its business continues to be suitable for listing. Failing to meet this requirement may lead to the Exchange canceling the issuer’s listing under Main Board Rule 6.01(4) … The Exchange closely monitors the developments of listed issuers. It may have a concern about the suitability of an issuer or its business for continued listing if, for example, the issuer’s activities are found to deviate significantly from its original business model or strategy or the commercial rationale for its listing set out in its listing application.”
         
        (Guidance Letter GL68-13A was updated to make reference to the reverse takeover Rules (as amended) and the new guidance letters on reverse takeovers and large scale issues of securities, which became effective on 1 October 2019. See Note 1 below.)  
         
        12.   The Exchange Guidance Letter (GL96-18) on a listed issuer’s suitability for continued listing cited examples of circumstances where the Exchange may raise concerns about the suitability for continued listing of a listed issuer or its business:
         
        “…    
         
        9.   In Guidance Letter GL68-13A, the Exchange noted a number of newly listed issuers whose controlling shareholders either changed or gradually sold down their interests shortly after the regulatory lock-up period following listing. It questioned whether these issuers’ listing applications were driven by the perceived premium attached to the listing status rather than the development of their underlying business or assets. These issuers, when identified by potential buyers, would invite speculative trading and create opportunities for market misconduct (e.g. market manipulation or insider trading) and unnecessary volatility in the market post listing…”
         

        ANALYSIS

        13.   The Exchange considered that the Proposal, together with the Acquisition, would be an attempt to circumvent the new listing requirements having regard to the following:
         
        (a)   The Exchange was concerned that Company A was engaging in shell activities as indicated by a change in control shortly after the lock-up period. The subsequent events, including the change in its board of directors, the injection of the New Business into Company A and the series of actions to scale down the Original Business, suggested that Mr. Y acquired Company A for its listing status rather than the developments of its underlying business.
         
        (b)   The Proposal would lead to the termination of a material part of the Original Business and the New Business would become the major operation of Company A. The Proposal, which was made shortly after the Acquisition, would be a means to “cleanse” the listed shell. It formed part of a series of arrangements to achieve a listing of the New Business that would not have otherwise met the new listing requirements.
         
        14.   Company A submitted that the Proposal was initiated by the landlord and was carried out for commercial reasons. However, the Exchange did not consider this sufficient to address the concerns.
         

        CONCLUSION

        15.   The Exchange considered it appropriate, and informed Company A of its intention, to exercise its right to impose additional conditions on the Proposal under Rule 2.04, by treating Company A as if it were a new listing applicant and requiring it to comply with the requirements for a RTO.
         

        Notes

        1.   The reverse takeover Rules were amended on 1 October 2019.
         
          Under the new Rule 14.06B (which incorporates former Rule 14.06(6) with certain modifications), a “reverse takeover” is defined as an acquisition or series of acquisitions by a listed issuer which, in the opinion of the Exchange, constitutes, or is part of a transaction and/or arrangement or series of transactions and/or arrangements which constitutes, an attempt to achieve a listing of the acquisition targets and a means to circumvent the requirements for new applicants as set out in Chapter 8 of the Listing Rules.
         
          Rule 14.54 (as amended) requires that in the case of a reverse takeover, the acquisition targets must meet the requirements of Rule 8.04 and Rule 8.05 (or Rule 8.05A or 8.05B), and the enlarged group must meet all the new listing requirements in Chapter 8 of the Rules (except Rule 8.05). Where the reverse takeover is proposed by an issuer that does not meet Rule 13.24, the acquisition targets must also meet the requirement of Rule 8.07.
         
        2.   The Rule amendments would not change the analysis and conclusion in this case.
         

      • LD121-2019

        View Current PDFView Current PDF

        HKEX LISTING DECISION
        HKEX-LD121-2019 (published in March 2019)

        Summary
        Parties Company A to Company X – Main Board and GEM listing applicants whose listing applications were rejected by the Exchange in 20181
        Issue To provide guidance on why the Exchange rejected certain listing applications
        Listing Rules Main Board Rule 2.06 and Chapter 8
        GEM Rule 2.09 and Chapter 11
        Related Publications HKEX-GL68-13, HKEX-GL68-13A, HKEX-GL99-18, HKEX-LD92-2015, HKEX-LD100-2016, HKEX-LD107-2017 and HKEX-LD119-2018
        Decision The Exchange rejected the listing applications

        BACKGROUND

        1. The Exchange notes that there has been a marked increase in the number of applications rejected in 2018 over previous years. This reflects the higher level of scrutiny by the Exchange in its assessment of suitability for listing, and exercise of its discretion to determine whether there are facts and circumstances to form a reasonable basis to believe that an applicant is likely to invite speculative trading upon listing or to be acquired for its listing status as discussed in our Guidance Letter HKEX-GL68-13A.
        2. The Exchange’s vetting process is qualitative and the review on the suitability of each applicant is holistic. Whilst a number of factors are taken into account, a greater level of scrutiny is now placed as to an applicant’s (i) commercial rationale for listing, and thus a genuine need for funding; and (ii) valuation and the methodology used.

        REASONS FOR REJECTION

        3. A summary of the factors taken into consideration by the Exchange in rejecting the applications is set out below. Details as to the individual backgrounds of the rejected applications can be found at Appendix 1.
        4. Suitability:
        (i) Lack of commercial rationale for listing with respect to 15 applicants and thus no genuine funding needs2
        a. Failure to substantiate the commercial basis for the proposed expansion. Moreover, the applicants' proposed expansion plans were not commensurate with their previous business strategies and financial performance.
        b. Failure to explain how application of the IPO proceeds makes commercial sense; where the applicants intended to use the net IPO proceeds to acquire land/property for use as a showroom, office premises or retail outlets, it was noted that the cost savings derived from owning versus leasing the properties was immaterial.
        c. Failure to demonstrate a genuine funding need as the applicants had previously relied upon internally generated funds to finance their operations during the track record period and would be able to fund its proposed expansion plans with internal resources and/or debt financing.
        (ii) Unsupported valuation for three applicants3
        Failure to justify why the forecasted price-earnings (“P/E”) ratios were higher than those of industry peers, the basis on which the peers were chosen; and how such valuations were reasonable in light of the applicant’s history and profit forecasts.
        (iii) Packaging
        Failure by one applicant to demonstrate that different companies recently restructured under the listing group had operated as a single economic unit during the track record period, leading to the view that the applicant’s reorganisation had been done solely to meet the eligibility requirements of the Listing Rules.
        (iv) Deterioration of financial performance
        One applicant had showed a significant deterioration in its financial performance during the track record period and there was insufficient basis to believe that its situation would improve as its diversification into a new segment was recent and long term prospects of the new business were uncertain.
        (v) Suitability of director/person of substantial interest or controlling shareholder with respect to three applicants
        The director/person of substantial interest or controlling shareholder of the respective applicants had previously been convicted of offences relating to dishonesty and as they had significant influence on the operations and management of the applicants during the track record period which rendered the applicants unsuitable for listing.
        (vi) Sustainability of business
        A substantial portion of the applicant’s revenue during the track record period was derived from a separate business operated by the applicant’s controlling shareholder. The delineation of the applicant’s business from its controlling shareholder did not conform with industry norms, the arrangements with the controlling shareholder were not on normal commercial terms and there was uncertainty whether arrangements with independent customers would generate similar amount of sales.
        5. Eligibility:
        (i) Failure to meet the minimum net profit requirements after excluding non-ordinary course income.
        (ii) Failure to meet the qualification requirements for transfer from GEM to Main Board.
        6. Others:
        (i) Failure by the sponsor to satisfy the independent requirement.

        * * *

        Appendix 1

        Applicant backgrounds

        Consumer Services
        Company Background Reasons for Rejection
        Company A Company A leases and operates a stand-alone high-end shopping centre in the PRC. Company A derived the majority of its income from (i) subleasing of retail units in the shopping centre; and (ii) providing property management services to tenants. In the last year of the track record period, Company A had also started offering consultancy services to property developers in the PRC.

        During the track record period there had been a significant deterioration in Company A’s performance. Company A’s attempts to turn around performance were ineffective as a result of the relatively inferior location of Company A’s shopping centre and there was also an expectation of increased competition from newer shopping centres. Although Company A had attempted to diversify its revenue streams, the relevant revenue contribution from its consultancy business was small, uncertain and highly volatile given its short operating history and project-based nature.
        Deterioration of financial performance during the track record period and insufficient basis to believe situation will improve.
        Company B Company B operates retail outlets of multi-brand maternity, baby and child-care products in Singapore. Its planned use of proceeds was to (i) partially fund its local expansion plans; (ii) pursue strategic acquisitions; and (iii) upgrade existing outlets. There was a view that listing in Hong Kong would raise Company B’s profile amongst Chinese tourists to Singapore.

        During the track record period, Company B’s revenue and profit had declined and there was a concern that its operations would continue to suffer as a result of falling market demand and competition from online retailers. Additionally, given its deteriorating financial performance, Company B failed to substantiate its need to significantly expand its retail network and pursue acquisitions and it had substantial cash and/or banking facilities available to fund its expansion plans.
        Lack of commercial rationale, thus no genuine funding needs.
        Company C Company C supplies electronic car parking systems in Singapore.

        Company C’s initial application lapsed without providing a satisfactory commercial basis for its proposed use of proceeds. In its renewed application, Company C amended its use of proceeds to include purchasing property in Hong Kong as part of its expansion into Hong Kong. In response to our comments, it subsequently decided to rent property in Hong Kong instead and amended its use of proceeds several times during the vetting process. The changes in use of proceeds and the failure of Company C to explain the rationale of such changes cast doubt on the veracity of Company C’s expansion strategy and its rationale for listing.
        Lack of commercial rationale.
        Company D Company D provides laundry and linen management services to customers in Singapore.

        Company D could not justify the basis of its significantly high forecast P/E ratio. During the track record period Company D recorded limited growth in revenue and profit and was unable to demonstrate its ability to grow at a level commensurate with that of the industry. In addition, Company D was unable to address questions around whether there would be an adequate market for its securities.
        Unsupported valuation.
        Company E Company E (i) leases vehicles to car-hailing service providers in the PRC; and (ii) assists car purchasers in their applications for license plates and mortgage loans (the “Agency Services”).

        Over 90% of Company E’s profits during the track record period was derived from the Agency Services. These Agency Services were primarily provided to customers of a dealership operated by Company E’s controlling shareholder (the “Connected Stores”). During the track record period, the Agency Services business relied on staff of the Connected Stores to solicit customers. Without the contribution from the Agency Services, Company E would have recorded net losses in the track record period. In addition, the Agency Services were common ancillary services provided by dealerships, rather than a separate entity.

        The delineation of the Agency Services did not conform with industry norms and the terms of the arrangement with the Connected Stores were not on normal commercial terms as evidenced by cooperation agreements Company E entered into with independent dealerships. As such, concerns regarding Company E’s sustainability were not resolved and Company E was determined to be not suitable for listing.
        Business sustainability concerns due to off-market arrangements.
        Company F Company F provides obstetrics and gynaecology healthcare services in Hong Kong.

        Mr. X (Company F’s controlling shareholder, founder, chairman, executive director and chief executive officer) had previously been investigated for tax evasion. Although he had reached a settlement with the relevant tax authorities, they nonetheless issued a letter stating that he had acted willfully with the intent to evade tax.

        In assessing the suitability of Mr. X, the Exchange considered the following: (i) the penalties levied by the relevant authority on Mr. X – representing 118% and 104% of the tax undercharged; and (ii) that the tax audit spanned a period of five years, during which time Mr. X was unable to substantiate to the tax authorities that he did not willfully intend to evade tax. In light of these facts, it was determined that Mr. X did not have the requisite level of honesty and integrity expected of company directors.
        Unsuitability of director due to prior misconduct.
        Company G Company G owns and operates one hotel in Hong Kong. Its proposed listing was by way of spin-off from its parent.

        Company G provided only boiler-plate reasons for its listing, including financing flexibility for any future acquisition or refurbishment. During the track record period, Company G had (i) sufficient operating cash flows; (ii) substantial cash and bank balances and (iii) unutilised banking facilities.
        Lack of commercial rationale.

         

        Properties & Construction
        Company Background Reasons for Rejection
        Company H Company H manufactures and sells steel products for construction projects and provides related construction and ancillary services in Hong Kong and Macau. Its planned use of proceeds was for the acquisition of land to allow for expansion of its production facilities.

        During the track record period, Company H’s financial performance deteriorated and it had excess production capacity. Yet its use of proceeds was to fund expansion, which was not supported by increased demand. In addition, Company H’s valuation in relation to its peers was questionable and it had substantial cash and/or banking facilities available to fund its expansion plan.
        Lack of commercial rationale, thus no genuine funding needs; unsupported valuation.
        Company I Company I had previously been suspended and sought to resume trading through the acquisition of another company, that company being involved in the development and sale of residential and commercial properties in the PRC (the “Target Group”).

        Prior to the track record period, the Target Group had received a one-off subsidy from the PRC government for use in the development and operation of a training institute. However, demand for the training institute fell short of expectations and the Target Group sold part of the development to a third party and recognised a gain on this disposal (the “Disposal Gain”). The Disposal Gain was recorded as “Other Income”.

        As (i) the subsidy, construction of the training institute and subsequent disposal did not form a part of the Target Group’s ordinary course of business and were non-recurring; and (ii) the one-off subsidy and Disposal Gain were accounted for differently than the rest of the Target Group’s developments, the Disposal Gain was not included to satisfy the requirements of Main Board Listing Rule 8.05(1).
        Failure to meet the minimum net profit requirements.
        Company J Company J provides fit-out services for commercial and residential properties in Hong Kong and Macau. Its planned use of proceeds was for the acquisition of new commercial premises in Hong Kong and the PRC. It had previously leased such premises.

        Company J claimed, but could not substantiate, how the new properties will materially improve the Company’s tender success rates and the extent owning its premises would benefit its customers. Any cost savings from owning instead of leasing premises was uncertain as Company J’s analysis did not take into account repair and maintenance costs and interest expenses.
        Lack of commercial rationale, thus no genuine funding needs.
        Company K Company K is a sub-contractor of formwork erection works and ancillary services in Hong Kong. Its planned use of proceeds was for the acquisition of (i) new commercial premises; and (ii) equipment to facilitate its expansion plan.

        Company K claimed that owning its own premises would improve its image with its customers, but as customers would not know it owned its premises, Company K could not show a clear competitive advantage in owning a property. Other objectives, such as capturing market demand and enhancing its corporate governance practices, could be achieved without listing. In addition, net savings from owning its premises and certain equipment was unclear as Company K did not take into account relevant depreciation charges.
        Lack of commercial rationale, thus no genuine funding needs.
        Company L Company L is a sub-contractor for plumbing, sanitary and gas works in Singapore. Its planned use of proceeds was for the acquisition of (i) commercial premises; and (ii) equipment and machinery.

        Company L had a substantial cash balance, unutilised bank facilities and significant trade and other receivables. It was noted that the amounts immediately available to Company L from its own sources would be sufficient to pay the expenses incurred through its proposed expansion. In addition, (i) as the proposed property acquisition was not on the immediate horizon, Company L would have additional resources that could be used to fund its acquisition plan; and (ii) given that debt financing is available for the acquisition of property, in light of the low interest environment, the commercial rationale for listing was unconvincing.
        Lack of commercial rationale, thus no genuine funding needs.
        Company M Company M sells building and home furnishing products in Hong Kong and the PRC. It planned to use a substantial portion of the proceeds to diversify into new products and open new retail stores (the “Expansion Plan”).

        Company M failed to substantiate the basis of the Expansion Plan as (i) the quantum and magnitude of working capital required for the business in new products were uncertain; and (ii) the number of Company M’s retail stores was decreasing during the track record period and it had adopted a distributorship model which allowed it to expand its business in regions where it had no self-operated physical store without incurring significant cost.

        Company M expected its valuation at the time of listing to be higher than that of its peers. However, this was not supported considering its flat historical, flat forecasted profit growth and that during the track record period, the average revenue generated from each of Company M’s stores had decreased.
        Lack of commercial rationale and unsupported valuation.
        Company N Company N is a sub-contractor for foundation works in Hong Kong.

        Company N was jointly founded by Mr. and Mrs. Y in 1994. They collectively ran Company N until Mr. Y’s retirement in 2014. Post-retirement from Company N, Mr. Y maintained directorships of two of Company N’s operating subsidiaries and also served as a senior consultant to Company N.

        Mr. Y had previously been convicted of bribery and was imprisoned. Although the conviction had occurred over 20 years ago, the charges related to the provision of kick-backs to benefit Company N and reflected badly on Mr. Y’s character and integrity.

        In coming to its decision, the Exchange further considered that Mr. Y was: (i) the spouse of one of Company N’s executive directors; (ii) a co-founder of Company N; (iii) the settlor of the family trust that held Company N’s shares; and (iv) a director of Company N’s two major operating subsidiaries. Additionally he had maintained a position as a member of senior management of Company N and had long-standing work history with other members of Company N’s senior management.
        Unsuitability of director due to prior misconduct.
        Company O Company O provides plumbing and drainage services in Hong Kong. It proposed to use proceeds to acquire a large parcel of land as part of its expansion plan.

        Company O had previously provided its services on leased property and owning land for a warehouse was not commensurate with its past business strategies. It also failed to substantiate its claim that its expansion plan would result in additional revenue from emergency services and capture additional market share. In addition, Company O could not explain why it needed such a large parcel of land as it only had plans to use approximately half of the land.
        Lack of commercial rationale, thus no genuine funding needs.

         

        Industrials
        Company Background Reasons for Rejection
        Company P Company P provides electrical and mechanical engineering services in Macau. It proposed to use proceeds primarily for the expansion of its workforce and acquisition of premises for a warehouse and workshop.

        Company P had failed to substantiate the business need for expansion of its workforce or the acquisition of warehouse premises as (i) the industry outlook and Company P’s project backlog, the reasons for its proposed expansion were unclear; and (ii) it had historically been able to grow its business without providing the additional services that required having a workshop.
        Lack of commercial rationale, thus no genuine funding needs.
        Company Q Company Q provides port logistics services in Singapore.

        Mrs. Z was the founder, controlling shareholder, chairlady and executive director of Company Q. Mr. Z was the founder of Company Q’s sole operating subsidiary (the “Subsidiary”). Although he no longer had a role in Company Q or the Subsidiary, he had been a director for 15 years of and authorised to sign payment vouchers and cheques for the Subsidiary. In 2010, Mr. Z was convicted of an offence of dishonesty involving the misappropriation of funds of another company, giving rise to concerns regarding his integrity.

        Given Mr. Z’s various prior roles in the Subsidiary and his relationship with Mrs. Z and other senior management, the Exchange concluded that Mr. Z was a person of substantial interest. His misconduct rendered him unsuitable to be a director.
        Lack of suitability of director/person of substantial interest due to such person’s prior misconduct.
        Company R Company R is a Hong Kong based property agency that markets overseas properties to Hong Kong buyers. Its proposed use of proceeds was to fund expansion into the PRC.

        As Company R had no prior experience of operating in the PRC and did not provide any basis by which to determine (i) whether it would be able to overcome the entry barriers to operate in the PRC; or (ii) how the assumptions and breakeven analysis had been achieved.
        Lack of commercial rationale.
        Company S Company S leases out crane and platform lorries in Hong Kong. It proposed to use proceeds to acquire of a large parcel of land as part of its expansion plan (the “Expansion Plan”).

        Company S had historically operated its business without owning property and was unable to substantiate the financial benefits from owning a centralised parking space. In addition, the Expansion Plan was inconsistent with industry practice. Company S had relatively low debt-to-equity ratio. Taken together with its substantial cash balance, Company S had failed to demonstrate that the Expansion Plan could not be funded by other means.
        Lack of commercial rationale, thus no genuine funding needs.

         

        Consumer Goods
        Company Background Reasons for Rejection
        Company T Company T sources and sells integrated circuit products and provides application solutions and design services to customers in Hong Kong and the PRC. Company T had five major subsidiaries split between Hong Kong and the PRC, namely the “HK Group” and the “PRC Group”.

        Company T’s profit attributable to its controlling shareholders during the track record period marginally met the minimum requirements under Rule 8.05(1)(a) and neither of its HK Group or PRC Group was eligible for listing on a stand-alone basis.

        Prior to a reorganisation of Company T, the HK Group was wholly owned by Mr. A, whilst the PRC Group was wholly owned by Mr. and Mrs. B. Following a reorganisation in 2017, interests in the HK Group and the PRC Group were transferred to Company T; and Company T was owned 90% by Mr. A and 10% by Mrs. B.

        A confirmation deed was executed in the third year of the track record period (the “Confirmation Deed”) by Mr. A, Mr. B and Mrs. B, acknowledging their cooperative business arrangements since 2011 and that they had historically acted in concert in managing the affairs of each group.

        Notwithstanding the Confirmation Deed, the Company T could not otherwise demonstrate that the HK Group and the PRC Group had in fact been operating as an integrated group, given that the respective controlling shareholder of each group company did not hold any equity interest, directorship or managing role in the other group company, and no formal agreements were available to evidence the rights of either controlling shareholder in any profit / losses in the other group company.
        Packaging
        Company U Company U distributes vehicles and provides related services in Hong Kong and the PRC. It was listed on GEM and applied to transfer to the Main Board (the “Transfer Application”).

        In the 12 months prior to the Transfer Application, Company U had been the subject of a disciplinary investigation by the Exchange in relation to serious breaches of the GEM Listing Rules. Thus it did not meet the transfer qualification requirements under Main Board Listing Rule 9A.02(3).
        Failure to meet qualification requirements for transfer from GEM to Main Board.
        Company V Company V supplies electronic components and was listed on GEM. It applied to transfer to the Main Board.

        Sponsor Firm A acted as the sole sponsor in respect of Company V’s GEM Listing and thereafter also acted as Company V’s compliance adviser. Sponsor Firm A then acted as sole sponsor to Company V’s transfer application from GEM to the Main Board of the Exchange. Although Sponsor Firm A did not have any business relationships with Company V apart from acting as its compliance adviser, there would nonetheless be a perception that Sponsor Firm A cannot objectively assess the Company V’s compliance records role as this would require Sponsor Firm A to review its own work while it acted as Company V’s compliance adviser. This scenario is specifically discussed in our Guidance Letter HKEX-GL99-18.
        Lack of sponsor independence.

         

        Financials
        Company Background Reasons for Rejection
        Company W Company W’s primary business is providing financial advisory and taxation solution services in the PRC.

        During the track record period, Company W relied on internally generated funds to finance operations, with no bank borrowings for the three years prior to its listing application. Company W planned to use the listing proceeds to (i) acquire commercial premises in other cities in the PRC (the “Target Markets”) to establish a presence; (ii) produce a series of promotional videos; and (iii) establish a “knowledge hubs” nationwide to promote its services.

        Given that Company W had historically been able to develop a customer base in the Target Markets without representative offices and consistently generated positive operating cash flows throughout the track record period, it could not substantiate its rationale to acquire property and its funding needs.
        Lack of commercial rationale, thus no genuine funding needs.

         

        Materials
        Company Background Reasons for Rejection
        Company X Company X is a gold mining company with operations in Malaysia. Its shares are listed on a Singapore exchange and it sought a dual primary listing on the Main Board to expand its shareholder base and create meaningful liquidity in its shares.

        Company X asserted that Hong Kong investors would find it an attractive investment alternative to PRC mining companies as it offered investors an opportunity to diversify geographically. However, institutional investors in Hong Kong are al able to invest in Company X on its current exchange and shares to be listed in Hong Kong would be fungible with its existing listed shares. In addition, as compared to Company X’s profitable self-selected peers, it recorded lower net profit margin before interest and tax in 2017. This undermined its argument that it would be a more attractive investment.

        With respect to liquidity, Company X submitted that its average daily trading volume as a percentage to total issued shares was higher than the average of 12 PRC gold mining companies listed in Hong Kong. This obviously contradicts the explanation that listing in Hong Kong will increase the liquidity of its shares.
        Lack of commercial rationale.

        Notes:

        1 This does not include two GEM listing applications which were rejected by the Securities and Futures Commission under section 6(2) of the Securities and Futures (Stock Market Listing) Rules.
        2 This rationale did not apply to two rejected applicants — one was listing by introduction and not raising funds and the other cited shareholder diversification and increased liquidity as its rationale for listing.
        3 This was the sole basis for rejection for one applicant, while lack of commercial rationale also applied to the other two applicants.

    • 2018

      Select By Rule or Topic: Download the consolidated index herehere

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

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

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

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

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

      LD Series Number First
      Release
      Date (Last
      Update
      Date)
      (mm/yyyy)
      Listing Rules/ Topics Particulars
      LD120-2018 03/2018 Main Board Rule 9.03(3)
      GEM Rules 12.09 and 12.14
      To provide guidance on why the Exchange returned certain listing applications
      LD119-2018 03/2018 GEM Rule 2.09 and Chapter 11 To provide guidance on why the Exchange rejected certain listing applications
      LD118-2018 03/2018
      (10/2019)
      Main Board Rules 6.01(3), 6.10 and 13.24 Whether Company A had a sufficient level of operations or sufficient assets to meet Main Board Rule 13.24

      • LD120-2018

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

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

        PURPOSE

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

        APPLICABLE LISTING RULES

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

        ****

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

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

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

        Company B
        (a Main Board Applicant)

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

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

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

        Company C
        (a Main Board Applicant)

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

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

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

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

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

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

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

      • LD119-2018

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

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

        PURPOSE

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

        APPLICABLE LISTING RULES

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

        ****

        Appendix

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

        Company A operated a printing business.

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

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

        Company B operated restaurants in Hong Kong.

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

        Low and declining profit margin

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

        Susceptibility to escalating rental costs

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

        Short lease period

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


        Company C
        (a GEM Applicant)

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

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

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


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

      • LD118-2018

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        HKEX LISTING DECISION
        HKEX-LD118-2018 (published in March 2018) (Updated in August 2018, October 2019 (Rule amendments))

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

        FACTS

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

        APPLICABLE LISTING RULES AND GUIDANCE MATERIALS

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

        . . .

        (3) the Exchange considers that the issuer does not have a sufficient level of operations or sufficient assets to warrant the continued listing of the issuer's securities (see rule 13.24). . ."
         
        (Rules 6.01(3) and 13.24 were amended on 1 October 2019. See Note 1 below.)    
         
        8.   Main Board Rule 6.10 states that—
         
            "There may be cases where a listing is cancelled without a suspension intervening. Where the Exchange considers that any circumstances set out in rule 6.01 arise, it may:

        (1) publish an announcement naming the issuer and specifying the period within which the issuer must have remedied those matters which have given rise to such circumstances. Where appropriate the Exchange will suspend dealings in the issuer's securities. If the issuer fails to remedy those matters within the specified period, the Exchange will cancel the listing. The Exchange may treat any proposals to remedy those matters as if they were an application for listing from a new applicant for all purposes, in which case, the issuer must comply with the requirements for new listing applications as set out in the Listing Rules; or

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

        . . .

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

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

        . . . to balance public shareholders' ability to access the market to trade in the security with the need to maintain market quality, the Exchange would suspend trading only in an extreme case. When making the assessment, the Exchange takes into account the current regulatory concerns and the acceptable standards in the market."
         
        The Exchange treated cases with the following characteristics as extreme cases:
         
            ". . .

        (a) a very low level of operating activities and revenue; for example the issuer's business does not generate sufficient revenue to cover its corporate expenses, resulting in net losses and negative operating cashflows;

        (b) the current operation does not represent a temporary downturn, the issuer had been operating at a very small scale and incurring losses for years; and

        (c) the assets do not generate sufficient revenue and profits to support a continued listing.
         
        In these cases, the issuers are not operating substantive businesses, and the value of the businesses (excluding the listing status) is minimal, if any. There is a question whether the Rule requirement to carry on a sufficient level of operations or have assets of sufficient value is met. The Exchange considers it necessary to apply Rule 13.24 in these cases with a view to maintaining investors' confidence and overall market quality.

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

        ANALYSIS

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

        CONCLUSION

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

        Subsequent development

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

        Notes:

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

        …;

        (3) the Exchange considers that the issuer does not carry on a business as required under rule 13.24; or

        …”

        The amended Rule
        13.24 states that:
         
        “(1)   An issuer shall carry out, directly or indirectly, a business with a sufficient level of operations and assets of sufficient value to support its operations to warrant the continued listing of the issuer’s securities.
         
        Note:   Rule 13.24(1) is a qualitative test. The Exchange may consider an issuer to have failed to comply with the rule in situations where, for example, the Exchange considers that the issuer does not have a business that has substance and/or that is viable and sustainable.

        The Exchange will make an assessment based on specific facts and circumstances of individual issuers. For example, when assessing whether a money lending business of a particular issuer is a business of substance, the Exchange may consider, among other factors, the business model, operating scale and history, source of funding, size and diversity of customer base and loan portfolio and internal control systems of the money lending business of that particular issuer, taking into account the norms and standards of the relevant industry.

        Where the Exchange raises concerns with an issuer about its compliance with the rule, the onus is on the issuer to provide information to address the Exchange’s concerns and demonstrate to the satisfaction of the Exchange its compliance with the rule.

         
        (2)   …”
         
        2.   Rule 13.24(1) makes it clear that an issuer must carry out a business with a sufficient level of operations to warrant its continued listing. The issuer must also have sufficient assets to support its operations.

        The Rule amendments would not change the analysis and conclusion in this case.

         

    • 2017

      Select By Rule or Topic: Download the consolidated index herehere

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

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

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

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

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

      LD Series Number First
      Release
      Date (Last
      Update
      Date)
      (mm/yyyy)
      Listing Rules/ Topics Particulars
      LD117-2017 11/2017 Main Board Rule 8.04 and Paragraph 3(c) of Practice Note 15 Whether Company A (excluding its interest in Newco) could meet the new listing requirements of Chapter 8 of the Main Board Rules
      LD116-2017 11/2017
      (10/2019)
      Main Board Rules 6.01(3), 6.10 and 13.24 Whether Company A had a sufficient level of operations or sufficient assets to meet Main Board Rule 13.24
      LD115-2017 11/2017
      (10/2019)
      Main Board Rules 6.01(3), 6.10 and 13.24 Whether Company A had a sufficient level of operations or sufficient assets to meet Main Board Rule 13.24
      LD114-2017 10/2017
      (03/2019)
      Main Board Rules 2.03, 2.06, 6.01, 6.04 and 6.10 Whether Company A was no longer suitable for listing
      LD113-2017 10/2017
      (10/2019)
      Main Board Rules 2.04, 14.06B and 14.54 Whether the Exchange would impose additional requirements under Rule 2.04 on Company A's proposed disposal of its original business
      LD112-2017 10/2017
      (10/2019)
      Main Board Rule 13.24 Whether Company A would have sufficient operations or assets under Rule 13.24 after a proposed major disposal
      LD111-2017 10/2017 Main Board Rules 14A.19 and 14A.20 Whether the Exchange would exercise its power to deem Company B as a connected person of Company A under Main Board Listing Rule 14A.19
      LD110-2017 06/2017
      (08/2018)
      Main Board Rules 6.01(2), 6.04, 6.10, 8.08, 13.32 Whether the Exchange would commence the procedures to cancel the listing of Company A whose shares had been suspended for a prolonged period due to insufficient public float
      LD109-2017 06/2017
      (10/2019)
      Main Board Rule 14.06B Whether Company A would be required to aggregate the proposed acquisition with a previous acquisition, and whether these acquisitions would constitute a reverse takeover
      LD108-2017 06/2017
      (10/2019)
      Main Board Rule 14.06B Whether Company A's proposed acquisition of the Target constituted a reverse takeover or an extreme VSA
      LD107-2017 05/2017 Main Board Rule 2.06 and Chapter 8
      GEM Rule 2.09 and Chapter 11
      To provide guidance on why the Exchange rejected certain listing applications 
      LD106-2017 05/2017 Main Board Rule 9.03(3)
      GEM Rules 12.09 and 12.14
      To provide guidance on why the Exchange returned certain listing applications
      LD105-2017 04/2017
      (10/2019)
      GEM Rules 9.04 and 17.26 Whether Company A has a sufficient level of operations or assets to meet GEM Rule 17.26
      LD104-2017 01/2017 Main Board Rule 2.04 and Paragraph 3(f) of Practice Note 15

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

      • LD117-2017

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

        Parties Company A — a Main Board issuer

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

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

        FACTS

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

        APPLICABLE LISTING RULES

        6. Rule 8.04 states that:

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

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

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

        ANALYSIS

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

        CONCLUSION

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

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

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

      • LD116-2017

        View Current PDFView Current PDF

        HKEX LISTING DECISION
        HKEX-LD116-2017 (published in November 2017) (Updated in August 2018, October 2019 (Rule amendments))

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

        FACTS

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

        APPLICABLE LISTING RULES AND GUIDANCE MATERIALS

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

         
        (3)   the Exchange considers that the issuer does not have a sufficient level of operations or sufficient assets to warrant the continued listing of the issuer's securities (see rule 13.24)…”
         
            (Rules 6.01(3) and 13.24 were amended on 1 October 2019. See Note 1 below.)
         
        11.   Main Board Rule 6.10 states that-
          
        “There may be cases where a listing is cancelled without a suspension intervening. Where the Exchange considers that any circumstances set out in rule 6.01 arise, it may:
         
        (1)   publish an announcement naming the issuer and specifying the period within which the issuer must have remedied those matters which have given rise to such circumstances. Where appropriate the Exchange will suspend dealings in the issuer's securities. If the issuer fails to remedy those matters within the specified period, the Exchange will cancel the listing. The Exchange may treat any proposals to remedy those matters as if they were an application for listing from a new applicant for all purposes, in which case, the issuer must comply with the requirements for new listing applications as set out in the Listing Rules; or
         
        …”
         
        12.   Listing Decisions (LD35-2012 and LD88-2015) describe the purpose behind Main Board Rule 13.24 and provide guidance on the application of the Rule:
          
        “ … Rule 13.24 is intended to maintain overall market quality. Issuers that fail to meet this Rule are "blue sky companies" where public investors have no information about their business plans and prospects. This leaves much room for the market to speculate on their possible acquisitions in the future. To allow these issuers' shares to continue to trade and list may have an adverse impact on investor confidence.
         

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

        ANALYSIS

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

        CONCLUSION

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

        Notes:

        1.   The amended Rule 6.01 states that:

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

        …;
        (3)   the Exchange considers that the issuer does not carry on a business as required under rule 13.24; or
        …;
            The amended Rule 13.24 states that:
         
        “(1)   An issuer shall carry out, directly or indirectly, a business with a sufficient level of operations and assets of sufficient value to support its operations to warrant the continued listing of the issuer’s securities.
         
        Note:   Rule 13.24(1) is a qualitative test. The Exchange may consider an issuer to have failed to comply with the rule in situations where, for example, the Exchange considers that the issuer does not have a business that has substance and/or that is viable and sustainable.

        The Exchange will make an assessment based on specific facts and circumstances of individual issuers. For example, when assessing whether a money lending business of a particular issuer is a business of substance, the Exchange may consider, among other factors, the business model, operating scale and history, source of funding, size and diversity of customer base and loan portfolio and internal control systems of the money lending business of that particular issuer, taking into account the norms and standards of the relevant industry.

        Where the Exchange raises concerns with an issuer about its compliance with the rule, the onus is on the issuer to provide information to address the Exchange’s concerns and demonstrate to the satisfaction of the Exchange its compliance with the rule.

         
        (2)   …”
        2.   Rule 13.24(1) makes it clear that an issuer must carry out a business with a sufficient level of operations to warrant its continued listing. The issuer must also have sufficient assets to support its operations.

        The Rule amendments would not change the analysis and conclusion in this case.
         

      • LD115-2017

        View Current PDFView Current PDF

        HKEX LISTING DECISION
        HKEX-LD115-2017 (published in November 2017) (Updated in August 2018, October 2019 (Rule amendments))

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

        FACTS

        1.   Company A and its subsidiaries (Group) were engaged in coal mining and coal trading.
         
        2.   The Group recorded substantial losses (in the range of HK$25 million to HK$140 million) and negative operating cash flows over the last five financial years. Its loss amounted to HK$50 million in the latest financial year.
         
        3.   As at the latest year end date the Group had total assets of HK$20 million comprising mainly cash and bank balances and trade and other receivables. Its net liabilities amounted to HK$60 million.
         
        4.   The Exchange queried whether Company A was maintaining sufficient operations or assets as required under Main Board Rule 13.24. Before a regulatory decision was made on this issue, trading in Company A’s shares on the Exchange was continuing.
         
        5.   Company A submitted that it had plans to improve its business operations and financial position.
          
        a.   Company A intended to increase the number of customers to up to seven within two years to expand its coal trading business. It also planned to cut the administrative costs and expenses of the Group and raise funds through placing of new shares to repay outstanding indebtedness and reduce finance costs.

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

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

        APPLICABLE LISTING RULES AND GUIDANCE MATERIALS

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

         
        (3)   the Exchange considers that the issuer does not have a sufficient level of operations or sufficient assets to warrant the continued listing of the issuer's securities (see rule 13.24)…”
         
            (Rules 6.01(3) and 13.24 were amended on 1 October 2019. See Note 1 below.)
         
        9.   Main Board Rule 6.10 states that-
          
        “There may be cases where a listing is cancelled without a suspension intervening. Where the Exchange considers that any circumstances set out in rule 6.01 arise, it may:
         
        (1)   publish an announcement naming the issuer and specifying the period within which the issuer must have remedied those matters which have given rise to such circumstances. Where appropriate the Exchange will suspend dealings in the issuer's securities. If the issuer fails to remedy those matters within the specified period, the Exchange will cancel the listing. The Exchange may treat any proposals to remedy those matters as if they were an application for listing from a new applicant for all purposes, in which case, the issuer must comply with the requirements for new listing applications as set out in the Listing Rules; or
         
        …”
         
        10.   Listing Decisions (LD35-2012 and LD88-2015) describe the purpose behind Main Board Rule 13.24 and provide guidance on the application of the Rule:
         
        “ … Rule 13.24 is intended to maintain overall market quality. Issuers that fail to meet this Rule are "blue sky companies" where public investors have no information about their business plans and prospects. This leaves much room for the market to speculate on their possible acquisitions in the future. To allow these issuers' shares to continue to trade and list may have an adverse impact on investor confidence.
         

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

        ANALYSIS

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

        CONCLUSION

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

        Notes:

        1.   The amended Rule 6.01 states that:

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

        …;
        (3)   the Exchange considers that the issuer does not carry on a business as required under rule 13.24; or
        …;
            The amended Rule 13.24 states that:
         
        (1)   An issuer shall carry out, directly or indirectly, a business with a sufficient level of operations and assets of sufficient value to support its operations to warrant the continued listing of the issuer’s securities.
         
        Note:   Rule 13.24(1) is a qualitative test. The Exchange may consider an issuer to have failed to comply with the rule in situations where, for example, the Exchange considers that the issuer does not have a business that has substance and/or that is viable and sustainable.

        The Exchange will make an assessment based on specific facts and circumstances of individual issuers. For example, when assessing whether a money lending business of a particular issuer is a business of substance, the Exchange may consider, among other factors, the business model, operating scale and history, source of funding, size and diversity of customer base and loan portfolio and internal control systems of the money lending business of that particular issuer, taking into account the norms and standards of the relevant industry.

        Where the Exchange raises concerns with an issuer about its compliance with the rule, the onus is on the issuer to provide information to address the Exchange’s concerns and demonstrate to the satisfaction of the Exchange its compliance with the rule.

         
        (2)   …”
        2.   Rule 13.24(1) makes it clear that an issuer must carry out a business with a sufficient level of operations to warrant its continued listing. The issuer must also have sufficient assets to support its operations.

        The Rule amendments would not change the analysis and conclusion in this case.
         

      • LD114-2017

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        HKEX LISTING DECISION
        HKEX-LD114-2017 (published in October 2017) (Updated in August 2018 and for audit terminology in March 2019)

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

        FACTS

        1. Trading in Company A's shares was suspended pending release of an announcement about a very substantial acquisition. The acquisition was terminated subsequently but trading remained suspended due to Company A's failure to publish audited annual results.
        2. Company A's auditors questioned the recognition of sales and trade receivables, the reasonableness of expenses relating to a distribution channel restructuring plan, and the rationale for providing guarantees to certain parties.
        3. As resumption conditions, the Exchange required Company A to conduct a forensic investigation into the audit issues, publish all outstanding financial results and address any auditors' modifications, and inform the market of all material information. (Updated in March 2019)
        4. The forensic investigation found that:
        (a) Company A had not issued value added tax invoices for most of its domestic sales under PRC tax rules, casting doubts on whether the recognized sales were in fact made.
        (b) Company A had paid substantial cash rebates to four distributors, allegedly under the distribution channel restructuring plan agreed with the distributors. However, it was found not to have monitored whether the distributors used the rebates in accordance with the requirements set out in the plan. Without a plausible explanation, Company A was also found to have paid substantial cash rebates to entities which were not parties to the plan. The forensic accountants questioned the rationale and justification for the cash rebates.
        (c) Absent any internal controls or procedures, Company A had guaranteed loans granted to related parties by banks. The loans were subsequently in default and Company A had paid and made a full provision for the guaranteed debts.
        5. The forensic accountants encountered significant limitations that prevented it from conducting a proper investigation. As a result, they were unable to form a view on the audit issues.
        6. This gave rise to the following regulatory issues:
        (a) that Company A's financial statements and/or records were not accurate and complete in material respects or were materially misleading;
        (b) that investors had not been given the necessary information to make an informed assessment of Company A;
        (c) the integrity of Company A's management; and
        (d) the lack of adequate internal controls to safeguard Company A's assets and protect shareholders' interests.
        7. More than two years had lapsed since the trading suspension. Company A had yet to (i) resolve the audit issues or the forensic findings that resulted in its continued failure to publish financial results and the continued trading suspension; and (ii) fully comply with the resumption conditions.
        8. Given the above, the Exchange advised Company A of its (i) concern about the latter's suitability for continued listing and (ii) intention to commence procedures to cancel its listing.
        9. In response, Company A's special investigation committee (comprising of all the independent non-executive directors) confirmed that the management of the company had not taken or proposed any action to address the forensic findings and considered that the management was unable to resolve the relevant issues. As an attempt to resolve the issues, the committee then appointed a firm of legal advisers to understand the audit issues and the forensic findings and consider possible remedial measures.

        APPLICABLE LISTING RULES AND GUIDANCE

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

        . . .

        (4) the Exchange considers that the issuer or its business is no longer suitable for listing."
        11. Rule 6.04 states that:
         
        "Where dealings have been halted or suspended, the procedure for lifting the trading halt or suspension will depend on the circumstances and the Exchange reserves the right to impose such conditions as it considers appropriate. The issuer will normally be required to announce the reason for the trading halt or suspension and, where appropriate, the anticipated timing of the lifting of the trading halt or suspension…The continuation of a suspension for a prolonged period without the issuer taking adequate action to obtain restoration of listing may lead to the Exchange cancelling the listing."
        12. Rule 6.10 states that:
         
        "… Where the Exchange considers that any circumstances set out in rule 6.01 arise, it may:
        (1) publish an announcement naming the issuer and specifying the period within which the issuer must have remedied those matters which have given rise to such circumstances. Where appropriate the Exchange will suspend dealings in the issuer's securities. If the issuer fails to remedy those matters within the specified period, the Exchange will cancel the listing. The Exchange may treat any proposal to remedy those matters as if they were an application for listing from a new applicant for all purposes, in which case, the issuer must comply with the requirements for new listing applications as set out in the Listing Rules; or
        (2) cancel the listing of the issuers' securities following the Exchange's publication of an announcement notifying the cancellation of the listing." (Updated in August 2018)
            Suitability for listing
        13. Rule 2.03 states that:
         
        "The Listing Rules reflect currently acceptable standards in the market place and are designed to ensure that investors have and can maintain confidence in the market and in particular that:
        (1) applicants are suitable for listing;
        (2) the issue and marketing of securities is conducted in a fair and orderly manner and that potential investors are given sufficient information to enable them to make a properly informed assessment of an issuer. . .;
        (3) investors and the public are kept fully informed by listed issuers. . .of material factors which might affect their interests;
        (4) all holders of listed securities are treated fairly and equally;
        (5) directors of a listed issuer act in the interest of shareholders as a whole, particularly where the public represents only a minority of the shareholders; and
        (6) all new issues of equity securities by a listed issuer are first offered to the existing shareholders by way of rights unless they have agreed otherwise."
        14. Rule 2.06 states that:
         
        "Suitability for listing depends on many factors. Applicants for listing should appreciate that compliance with the Exchange Listing Rules may not of itself ensure an applicant's suitability for listing. The Exchange retains a discretion to accept or reject applications and in reaching their decision will pay particular regard to the general principles outlined in rule 2.03.  . . . "
        15. Guidance Letter GL68-13 sets out factors that the Exchange may consider when assessing whether an applicant or its business is suitable for listing. The Exchange may also take them into account when considering a listed issuer's suitability for continued listing.

        ANALYSIS

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

        CONCLUSION

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

      • LD113-2017

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        HKEX LISTING DECISION
        HKEX-LD113-2017 (published in October 2017) (updated in October 2019 (amendments to the reverse takeover Rules))

        Parties Company A — a Main Board issuer

        Company B — the former controlling shareholder of Company A

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

        FACTS

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

        APPLICABLE LISTING RULES AND GUIDANCE MATERIALS

        7.   Rule 2.04 states that -

        “… the Exchange Listing Rules are not exhaustive and that the Exchange may impose additional requirements or make listing subject to special conditions whenever it considers it appropriate…”.
         
        8.   Rule 14.06(6) defines “reverse takeover” as “an acquisition or a series of acquisitions of assets by a listed issuer which, in the opinion of the Exchange, constitutes, or is part of a transaction or arrangement or series of transactions or arrangements which constitute, an attempt to achieve a listing of the assets to be acquired and a means to circumvent the requirements for new applicants set out in Chapter 8 of the Exchange Listing Rules.” This is a principle based test.
         
        9.   Rule 14.54 states that-

        “The Exchange will treat a listed issuer proposing a reverse takeover as if it were a new listing applicant. The enlarged group or the assets to be acquired must be able to meet the requirements of rule 8.05 and the enlarged group must be able to meet all the other basic conditions set out in Chapter 8 of the Exchange Listing Rules…”.
         
        10.   The Exchange Guidance Letter (GL78-14) on reverse takeovers (RTO) explains that Rule 14.06(6) is an anti-avoidance provision designed to prevent circumvention of the new listing requirements. Paragraphs 7 to 9 of the guidance letter states that:
         
        “7.   If a transaction falls outside the bright line tests, the Exchange will apply the principle based test to assess whether the acquisition constitutes an attempt to achieve a listing of the assets to be acquired and a means to circumvent the requirements for new listing. The transaction would be treated as a RTO under the principle based test if the Exchange considers it is an “extreme” case taking into account the following criteria:
         
          the size of transaction relative to the size of the issuer;
         
          the quality of the business to be acquired – whether it can meet the trading record requirements for listings, or whether it is unsuitable for listing (e.g. an early stage exploration company);
         
          the nature and scale of the issuer’s business before the acquisition (e.g. whether it is a listed shell);
         
          any fundamental change in the issuer’s principal business (e.g. the existing business would be discontinued or very immaterial to the enlarged group’s operations after the acquisition);
         
          other events and transactions (historical, proposed or intended) which, together with the acquisition, form a series of arrangements to circumvent the RTO Rules (e.g. a disposal of the issuer’s original business simultaneously with a very substantial acquisition); and
         
          any issue of Restricted Convertible Securities1 to the vendor which would provide it with de facto control of the issuer.
         
        8.   A transaction would be treated as an extreme very substantial acquisition (extreme VSA) where the Exchange considers it “extreme” by reference to the criteria set out in paragraph 7, but the assets to be acquired can meet the minimum profit requirement under Rule 8.05 (the positive cash flow requirement under GEM Rule 11.12A) and circumvention of new listing requirements would not be a material concern. Extreme VSAs are presented to the Listing Committee for its decision.
         
        9.   Where the Committee resolves that the RTO Rules will apply, the issuer will be treated as if it were a new listing applicant and will be subject to all applicable listing requirements for new applicants (see paragraph 4). Where the Committee resolves that the RTO Rules will not apply to an extreme VSA, the issuer will be required to prepare a transaction circular under an enhanced disclosure and vetting approach, and to appoint a financial adviser to conduct due diligence on the acquisition. …”
         
            (The reverse takeover Rules were amended on 1 October 2019. See Note 1 below.)
         

        ANALYSIS

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

        CONCLUSION

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

        Notes

        1.   The reverse takeover Rules were amended on 1 October 2019.
         
          Under the new Rule 14.06B (which incorporates former Rule 14.06(6) with certain modifications):
         
        -   A “reverse takeover” is defined as an acquisition or series of acquisitions by a listed issuer which, in the opinion of the Exchange, constitutes, or is part of a transaction and/or arrangement or series of transactions and/or arrangements which constitutes, an attempt to achieve a listing of the acquisition targets and a means to circumvent the requirements for new applicants as set out in Chapter 8 of the Listing Rules.
         
        -   Note 1 to Rule 14.06B sets out the factors that the Exchange will normally consider in assessing whether the acquisition or series of acquisitions is a reverse takeover, including:
        i)   the size of the acquisition or series of acquisitions relative to the size of the issuer;
        ii)   a fundamental change in the issuer’s principal business;
        iii)   the nature and scale of the issuer’s business before the acquisition or series of acquisitions;
        iv)   the quality of the acquisition targets;
        v)   a change in control (as defined in the Takeovers Code) or de facto control of the listed issuer (other than at the level of the subsidiaries); and/or
        vi)   other transactions or arrangements which, together with the acquisition or series of acquisitions, form a series of transactions or arrangements to list the acquisition targets.
         
        -   Note 2 to Rule 14.06B contains two specific forms of reverse takeovers involving a change in control (as defined in the Takeovers Code) of the listed issuer (other than at the level of the subsidiaries) and an acquisition or a series of acquisitions of assets from the new controlling shareholder and/or its associates at the time of, or within 36 months from, the change in control.
         
          The Exchange also added a new Rule 14.04(2A) to clarify that a reverse takeover may involve a series of acquisitions some or all of which may have been completed. Accordingly, Rule 14.06B may apply in circumstances where an issuer proposes to dispose of its existing business after the completion of an acquisition of a new business.
         
             
        2.   The Rule amendments would not change the analysis in this case, except that the Exchange would apply Rule 14.06B to treat the Acquisitions as a reverse takeover should Company A proceed with the Proposed Disposal.
         

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

      • LD112-2017

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        HKEX LISTING DECISION
        HKEX-LD112-2017 (published in October 2017) (updated in October 2019 (Rule amendments))

        Parties Company A — a Main Board issuer

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

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

        FACTS

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

        APPLICABLE LISTING RULES AND GUIDANCE MATERIALS

        7.   Rule 13.24 states that-

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

        (Rule 13.24 was amended on 1 October 2019. See Note 1 below.)
         
        8.   Listing Decisions (LD35-2012 and LD88-2015) describe the purpose behind Rule 13.24 and provide guidance on the application of the Rule:
           
        “ …
          Rule 13.24 is intended to maintain overall market quality. Issuers that fail to meet this Rule are "blue sky companies" where public investors have no information about their business plans and prospects. This leaves much room for the market to speculate on their possible acquisitions in the future. To allow these issuers' shares to continue to trade and list may have an adverse impact on investor confidence.
         
          Where an issuer's shares are trading on the Exchange, the Exchange generally allows those shares to continue to trade as long as the issuer has an operation and meets the continuing disclosure obligations. This is to allow shareholders to have access to the market for share trading as far as possible. The Exchange would exercise its suspension power only in an extreme case.
         
          However, if an issuer takes a corporate action, the Exchange is more likely to suspend the issuer's trading where the issuer fails to satisfy the Exchange that it would have a viable and sustainable business to justify its continued listing after completion of the corporate action. In this case, shareholders would have the opportunity to decide whether to allow the corporate action to proceed, knowing that the Exchange would exercise the suspension power should the corporate action proceed. In that way shareholders' interests are safeguarded through the shareholders' approval process…”
         

        ANALYSIS

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

        CONCLUSION

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

        Notes:

        1.   The amended Rule 13.24 states that:
          
        “(1)   An issuer shall carry out, directly or indirectly, a business with a sufficient level of operations and assets of sufficient value to support its operations to warrant the continued listing of the issuer’s securities.
          
        Note:   Rule 13.24(1) is a qualitative test. The Exchange may consider an issuer to have failed to comply with the rule in situations where, for example, the Exchange considers that the issuer does not have a business that has substance and/or that is viable and sustainable.

        The Exchange will make an assessment based on specific facts and circumstances of individual issuers. For example, when assessing whether a money lending business of a particular issuer is a business of substance, the Exchange may consider, among other factors, the business model, operating scale and history, source of funding, size and diversity of customer base and loan portfolio and internal control systems of the money lending business of that particular issuer, taking into account the norms and standards of the relevant industry.

        Where the Exchange raises concerns with an issuer about its compliance with the rule, the onus is on the issuer to provide information to address the Exchange’s concerns and demonstrate to the satisfaction of the Exchange its compliance with the rule.
         
        (2)   …”
         
        2.   Rule 13.24(1) makes it clear that an issuer must carry out a business with a sufficient level of operations to warrant its continued listing. The issuer must also have sufficient assets to support its operations.

        The Rule amendments would not change the analysis and conclusion in this case.
         

      • LD111-2017

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

        Parties Company A — a Main Board issuer

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

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

        FACTS

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

        APPLICABLE LISTING RULES

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

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

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

        ANALYSIS

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

        DECISION

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

      • LD110-2017

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

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

        FACTS1

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

        APPLICABLE LISTING RULES

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



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

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

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

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

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

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

        …"

        ANALYSIS

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

        CONCLUSION

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

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

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

      • LD109-2017

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        HKEX LISTING DECISION
        HKEX-LD109-2017 (published in June 2017) (updated in October 2019 (amendments to the reverse takeover Rules))

        Parties Company A — a Main Board issuer

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

        FACTS1

        1.   Company A was principally engaged in the manufacturing and sale of certain food products for many years.
         
        2.   About two years ago, Mr. X ceased to be the controlling shareholder of Company A but remained as a director of Company A. A few months ago, Mr. Y acquired about 20% interest in Company A and was appointed as a director of Company A. It was disclosed that Mr. Y had experience in the internet gaming industry.
         
            Previous acquisition
         
        3.   About 20 months ago, Company A announced a major transaction to acquire a company engaging in video gaming business (First Target) from independent third parties for cash consideration (First Acquisition). The First Acquisition had been completed.
         
            Proposed transactions
         
        4.   Company A proposed the following transactions:
         
          Acquisition of another company engaging in video gaming business (Proposed Target) from independent third parties for cash consideration (Proposed Acquisition). Based on its size tests, the Proposed Acquisition would, on its own, constitute a major transaction.
         
          Disposal of its food business (Proposed Disposal) to Mr. X. The Proposed Disposal would constitute a very substantial disposal.
         
        5.   There was an issue whether the Proposed Acquisition, together with the First Acquisition and the Proposed Disposal, formed a series of transactions to achieve a listing of the acquisition targets and constituted a reverse takeover under Rule 14.06(6).
         
        6.   Company A was of the view that the reverse takeover Rule should not apply. It submitted that:
         
          The Proposed Acquisition and the First Acquisition should not be aggregated as they were separate transactions involving different counterparties. The targets had distinct businesses operated in different countries. They were owned and managed by different parties before the acquisitions.
         
          Video gaming business had been one of the principal activities of Company A after the completion of the First Acquisition a year ago. The Proposed Acquisition was an expansion of the company’s video gaming business. The Proposed Disposal would enable the company to divest its loss-making food business and re-allocate its resources to the video gaming business.
         
          The First Target was able to meet the minimum profit requirement under Rule 8.05(1)(a). Its results, when combined with those of the Proposed Target, would still exceed the profit requirement.
         

        APPLICABLE LISTING RULES

        7.   Rule 14.06(6) defines a “reverse takeover” as “an acquisition or a series of acquisitions of assets by a listed issuer which, in the opinion of the Exchange, constitutes, or is part of a transaction or arrangement or series of transactions or arrangements which constitute, an attempt to achieve a listing of the assets to be acquired and a means to circumvent the requirements for new applicants set out in Chapter 8 of the Exchange Listing Rules…”. This is a principle based test.
         
        8.   Rule 14.54 states that “The Exchange will treat a listed issuer proposing a reverse takeover as if it were a new listing applicant. The enlarged group or the assets to be acquired must be able to meet the requirements of rule 8.05 and the enlarged group must be able to meet all the other basic conditions set out in Chapter 8 of the Exchange Listing Rules. …
         
        9.   The Exchange Guidance Letter (HKEX-GL78-14) on reverse takeovers (RTO) explains that Rule 14.06(6) is an anti-avoidance provision designed to prevent circumvention of the new listing requirements. Paragraphs 7 to 9 of the guidance letter states that:-
         
        “7.   If a transaction falls outside the bright line tests, the Exchange will apply the principle based test to assess whether the acquisition constitutes an attempt to achieve a listing of the assets to be acquired and a means to circumvent the requirements for new listing. The transaction would be treated as a RTO under the principle based test if the Exchange considers it is an ‘extreme’ case taking into account the following criteria:
         
          the size of transaction relative to the size of the issuer;
         
          the quality of the business to be acquired—whether it can meet the trading record requirements for listings, or whether it is unsuitable for listing (e.g. an early stage exploration company);
         
          the nature and scale of the issuer's business before the acquisition (e.g. whether it is a listed shell);
         
          any fundamental change in the issuer's principal business (e.g. the existing business would be discontinued or very immaterial to the enlarged group's operations after the acquisition);
         
          other events and transactions (historical, proposed or intended) which, together with the acquisition, form a series of arrangements to circumvent the RTO Rules (e.g. a disposal of the issuer's original business simultaneously with a very substantial acquisition); and
         
          any issue of Restricted Convertible Securities2 to the vendor which would provide it with de facto control of the issuer.
         
        8.   A transaction would be treated as an extreme very substantial acquisition (extreme VSA) where the Exchange considers it "extreme" by reference to the criteria set out in paragraph 7, but the assets to be acquired can meet the minimum profit requirement under Rule 8.05 (the positive cash flow requirement under GEM Rule 11.12A) and circumvention of new listing requirements would not be a material concern. Extreme VSAs are presented to the Listing Committee for its decision.
         
        9.   Where the Committee resolves that the RTO Rules will apply, the issuer will be treated as if it were a new listing applicant and will be subject to all applicable listing requirements for new applicants (see paragraph 4). Where the Committee resolves that the RTO Rules will not apply to an extreme VSA, the issuer will be required to prepare a transaction circular under an enhanced disclosure and vetting approach, and to appoint a financial adviser to conduct due diligence on the acquisition. … ”
         
            (The reverse takeover Rules were amended on 1 October 2019. See Note 1 below.)
         

        ANALYSIS

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

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

        CONCLUSION

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

        Notes

        1   The reverse takeover Rules were amended with effect from 1 October 2019.
         
          Under the new Rule 14.06B (which incorporates former Rule 14.06(6) with certain modifications):
         
        -   A “reverse takeover” is defined as an acquisition or series of acquisitions by a listed issuer which, in the opinion of the Exchange, constitutes, or is part of a transaction and/or arrangement or series of transactions and/or arrangements which constitutes, an attempt to achieve a listing of the acquisition targets and a means to circumvent the requirements for new applicants as set out in Chapter 8 of the Listing Rules.
         
        -   Note 1 to Rule 14.06B sets out the factors that the Exchange will normally consider in assessing whether the acquisition or series of acquisitions is a reverse takeover, including: 
        a)   the size of the acquisition or series of acquisitions relative to the size of the issuer;
        b)   a fundamental change in the issuer’s principal business;
        c)   the nature and scale of the issuer’s business before the acquisition or series of acquisitions;
        d)   the quality of the acquisition targets;
        e)   a change in control (as defined in the Takeovers Code) or de facto control of the listed issuer (other than at the level of the subsidiaries); and/or
        f)   other transactions or arrangements which, together with the acquisition or series of acquisitions, form a series of transactions or arrangements to list the acquisition targets.
         
            As set out in Note 1(f) to Rule 14.06B, the Exchange may regard acquisitions and other transactions or arrangements as a series if they take place in a reasonable proximity to each other (which normally refers to a period of 36 months or less) or are otherwise related.
         
        -   Note 2 to Rule 14.06B contains two specific forms of reverse takeovers involving a change in control (as defined in the Takeovers Code) of the listed issuer (other than at the level of the subsidiaries) and an acquisition or a series of acquisitions of assets from the new controlling shareholder and/or its associates at the time of, or within 36 months from, the change in control.
         
          Rule 14.54 (as amended) requires that in the case of a reverse takeover, the acquisition targets must meet the requirements of Rule 8.04 and Rule 8.05 (or Rule 8.05A or 8.05B), and the enlarged group must meet all the new listing requirements in Chapter 8 of the Rules (except Rule 8.05). Where the reverse takeover is proposed by an issuer that does not meet Rule 13.24, the acquisition targets must also meet the requirement of Rule 8.07.
         
          The Exchange also added a new Rule 14.06C to (i) codify the “extreme VSAs” requirements in Guidance Letter GL78-14 and rename this category of transactions as “extreme transactions”; and (ii) impose additional eligibility criteria on the issuer that may use this transaction category.

        Under Rule 14.06C, an “extreme transaction” is defined as an acquisition or a series of acquisitions of assets by a listed issuer, which individually or together with other transactions or arrangements, may, by reference to the factors set out in Note 1 to Rule 14.06B, have the effect of achieving a listing of the acquisition targets, but where the issuer can demonstrate to the satisfaction of the Exchange that it is not an attempt to circumvent the requirements for new applicants set out in Chapter 8 of the Listing Rules and that:
          (1)   (a) the issuer must have been under the control or de facto control of the same person(s) for a long period (normally not less than 36 months) and the transaction will not result in a change in control or de facto control of the issuer; or (b) the issuer must operate a principal business of substantial size, which will continue after the transaction; and
          (2)   the acquisition targets meet the requirements of Rule 8.04 and Rule 8.05 (or Rule 8.05A or 8.05B) and the enlarged group meets all the new listing requirements set out in Chapter 8 of the Listing Rules (except Rule 8.05).
         
        2   In this case, the Rule amendments would not change the analysis, except the assessment of whether the Acquisitions would qualify as an extreme transaction.

        Under Rule 14.06C, an issuer proposing to use the extreme transaction category must satisfy one of the additional eligibility criteria set out in Rule 14.06C(1). However, the facts of this case indicated that there was a change in de facto control of Company A within the last 36 months and Company A would cease to operate its existing food business after the transactions. Should the amended Rules apply, Company A would not meet the additional eligibility criteria under Rule 14.06C(1). Accordingly, the Acquisitions would be classified as a reverse takeover (and not an extreme transaction).

         

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

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

         

      • LD108-2017

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        HKEX LISTING DECISION
        HKEX-LD108-2017 (published in June 2017) (updated in October 2019 (amendments to the reverse takeover Rules))

        Parties Company A — a Main Board issuer

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

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

        FACTS1

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

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

        APPLICABLE LISTING RULES

        6.   Rule 14.06(6) defines a "reverse takeover" as "… an acquisition or a series of acquisitions of assets by a listed issuer which, in the opinion of the Exchange, constitutes, or is part of a transaction or arrangement or series of transactions or arrangements which constitute, an attempt to achieve a listing of the assets to be acquired and a means to circumvent the requirements for new applicants set out in Chapter 8 of the Exchange Listing Rules…". This is a principle based test.
         
        7.   Rule 14.54 states that "The Exchange will treat a listed issuer proposing a reverse takeover as if it were a new listing applicant. The enlarged group or the assets to be acquired must be able to meet the requirements of rule 8.05 and the enlarged group must be able to meet all the other basic conditions set out in Chapter 8 of the Exchange Listing Rules. …"
         
        8.   The Exchange Guidance Letter (HKEX-GL78-14) on reverse takeovers (RTO) explains that Rule 14.06(6) is an anti-avoidance provision designed to prevent circumvention of the new listing requirements. Paragraphs 7 and 8 of the guidance letter states that:—
         
        “7.   If a transaction falls outside the bright line tests, the Exchange will apply the principle based test to assess whether the acquisition constitutes an attempt to achieve a listing of the assets to be acquired and a means to circumvent the requirements for new listing. The transaction would be treated as a RTO under the principle based test if the Exchange considers it is an ‘extreme’ case taking into account the following criteria:
         
          the size of transaction relative to the size of the issuer;
         
          the quality of the business to be acquired—whether it can meet the trading record requirements for listings, or whether it is unsuitable for listing (e.g. an early stage exploration company);
         
          the nature and scale of the issuer's business before the acquisition (e.g. whether it is a listed shell);
         
          any fundamental change in the issuer's principal business (e.g. the existing business would be discontinued or very immaterial to the enlarged group's operations after the acquisition);
         
          other events and transactions (historical, proposed or intended) which, together with the acquisition, form a series of arrangements to circumvent the RTO Rules (e.g. a disposal of the issuer's original business simultaneously with a very substantial acquisition); and
         
          any issue of Restricted Convertible Securities to the vendor which would provide it with de facto control of the issuer.
         
        8.   A transaction would be treated as an extreme very substantial acquisition (extreme VSA) where the Exchange considers it "extreme" by reference to the criteria set out in paragraph 7, but the assets to be acquired can meet the minimum profit requirement under Rule 8.05 (the positive cash flow requirement under GEM Rule 11.12A) and circumvention of new listing requirements would not be a material concern. Extreme VSAs are presented to the Listing Committee for its decision.”
         
            (The reverse takeover Rules were amended on 1 October 2019. See Note 1 below.)
         
        9.   Paragraph 2 of Practice Note 3 provides that
         
            “…In all cases the trading record period of a new applicant must enable the Exchange and investors to make an informed assessment of the management’s ability to manage the applicant’s business and the likely performance of that business in the future…”.
         

        ANALYSIS

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

        CONCLUSION

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

        Notes

        1.   The reverse takeover Rules were amended on 1 October 2019.
         
          Under the new Rule 14.06B (which incorporates former Rule 14.06(6) with certain modifications):
         
        -   A “reverse takeover” is defined as an acquisition or series of acquisitions by a listed issuer which, in the opinion of the Exchange, constitutes, or is part of a transaction and/or arrangement or series of transactions and/or arrangements which constitutes, an attempt to achieve a listing of the acquisition targets and a means to circumvent the requirements for new applicants as set out in Chapter 8 of the Listing Rules.
         
        -   Note 1 to Rule 14.06B sets out the factors that the Exchange will normally consider in assessing whether the acquisition or series of acquisitions is a reverse takeover, including:
        i)   the size of the acquisition or series of acquisitions relative to the size of the issuer;
        ii)   a fundamental change in the issuer’s principal business;
        iii)   the nature and scale of the issuer’s business before the acquisition or series of acquisitions;
        iv)   the quality of the acquisition targets;
        v)   a change in control (as defined in the Takeovers Code) or de facto control of the listed issuer (other than at the level of the subsidiaries); and/or
        vi)   other transactions or arrangements which, together with the acquisition or series of acquisitions, form a series of transactions or arrangements to list the acquisition targets.
        -   Note 2 to Rule 14.06B contains two specific forms of reverse takeovers involving a change in control (as defined in the Takeovers Code) of the listed issuer (other than at the level of the subsidiaries) and an acquisition or a series of acquisitions of assets from the new controlling shareholder and/or its associates at the time of, or within 36 months from, the change in control.
         
          Rule 14.54 (as amended) requires that in the case of a reverse takeover, the acquisition targets must meet the requirements of Rule 8.04 and Rule 8.05 (or Rule 8.05A or 8.05B), and the enlarged group must meet all the new listing requirements in Chapter 8 of the Rules (except Rule 8.05). Where the reverse takeover is proposed by an issuer that does not meet Rule 13.24, the acquisition targets must also meet the requirement of Rule 8.07.
         
          The Exchange also added a new Rule 14.06C to (i) codify the “extreme VSAs” requirements in Guidance Letter GL78-14 and rename this category of transactions as “extreme transactions”; and (ii) impose additional eligibility criteria on the issuer that may use this transaction category.

        Under Rule 14.06C, an “extreme transaction” is defined as an acquisition or a series of acquisitions of assets by a listed issuer, which individually or together with other transactions or arrangements, may, by reference to the factors set out in Note 1 to Rule 14.06B, have the effect of achieving a listing of the acquisition targets, but where the issuer can demonstrate to the satisfaction of the Exchange that it is not an attempt to circumvent the requirements for new applicants set out in Chapter 8 of the Listing Rules and that:
        (1)   (a) the issuer must have been under the control or de facto control of the same person(s) for a long period (normally not less than 36 months) and the transaction will not result in a change in control or de facto control of the issuer; or (b) the issuer must operate a principal business of substantial size; and
        (2)   the acquisition targets meet the requirements of Rule 8.04 and Rule 8.05 (or Rule 8.05A or 8.05B) and the enlarged group meets all the new listing requirements set out in Chapter 8 of the Listing Rules (except Rule 8.05).
         
        2.   The Rule amendments would not change the analysis and conclusion in this case.
         

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

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

      • LD107-2017

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

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

        PURPOSE

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

        APPLICABLE LISTING RULES

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

        ****

        Appendix

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

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

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

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

        Company C
        (a GEM Applicant)

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

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

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

        Company D
        (a GEM Applicant)

        Company D was a software solution provider in Hong Kong.

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

        Company E
        (a Main Board Applicant)

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

        Company F and
        Company G
        (Main Board Applicants)

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

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

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

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

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

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

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

        Company K
        (a GEM Applicant)

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

        Company J was a printing company in the PRC.

        Company K was a licensed software developer in Hong Kong.

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

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

        Company L was a utility provider in the PRC.

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

        Company M
        (a GEM Applicant)

        Company M was a restaurant operator in the PRC.

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

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

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

        Unsustainable business model

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

      • LD106-2017

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

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

        PURPOSE

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

        APPLICABLE RULES, REGULATIONS AND PRINCIPLES

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

        ****

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

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

        The application was returned because:

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

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

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

        Company C
        (a GEM Applicant)

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

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

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

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

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

        Company D
        (a GEM Applicant)

        Company D was a toy manufacturer in the PRC.

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

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

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

        Company E
        and
        Company F
        (GEM Applicants)

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

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

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

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

        Company G

        (a Main Board Applicant)

        Company G was a bead wire manufacturer in the PRC.

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

      • LD105-2017

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        HKEX LISTING DECISION
        HKEX-LD105-2017 (published in April 2017) (updated in October 2019 (Rule amendments))

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

        FACTS

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

        APPLICABLE LISTING RULES, LISTING DECISIONS AND GUIDANCES

        6.   GEM Rule 17.26 imposes a continuing obligation on issuers:
         
            “An issuer shall carry out, directly or indirectly, a sufficient level of operations or have tangible assets of sufficient value and/or intangible assets for which a sufficient potential value can be demonstrated to the Exchange to warrant the continued listing of the issuer's securities.”
         
        7.   GEM Rule 9.04 states that:
          " "
          “…the Exchange may direct a trading halt or suspend dealings in an issuer’s securities regardless of whether or not the issuer has requested the same and may do so in any circumstances, including:-
         
         
         
          (3) Where the Exchange considers that the issuer does not have a sufficient level of operations or sufficient assets to warrant the continued listing of the issuer's securities (see rule 17.26); or
         
          (4) where the Exchange considers that the issuer or its business is no longer suitable for listing…”
         
            (GEM Rules 9.04(3) and 17.26 were amended on 1 October 2019. See Note 1 below.)
         
        8.   Listing Decisions (LD35-2012 and LD88-2015) describe the purpose behind Main Board Rule 13.24 (equivalent to GEM Rule 17.26) and provide guidance on the application of the Rule:
         
          “… Rule 13.24 is intended to maintain overall market quality. Issuers that fail to meet this Rule are "blue sky companies" where public investors have no information about their business plans and prospects. This leaves much room for the market to speculate on their possible acquisitions in the future. To allow these issuers' shares to continue to trade and list may have an adverse impact on investor confidence.
         
         
         
          When applying Rule 13.24 to issuers whose shares are trading on the Exchange, the Exchange generally allows their shares to continue to trade as long as they have an operation and meet the continuing disclosure obligations. If the Exchange were to suspend these issuers because of their low level of activities or asset values, public shareholders would have no access to the market for trading the issuers’ shares. To balance the public shareholders’ interests with the need to maintain market quality, the Exchange suspends trading only in extreme cases.
         
          …”
         

        ANALYSIS

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

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

        CONCLUSION

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

        Notes:

        1.   The amended GEM Rule 9.04 states that:

        “…the Exchange may direct a trading halt or suspend dealings in an issuer’s securities regardless of whether or not the issuer has requested the same and may do so in any circumstances, including:-
         
           
         
        (3)   Where the Exchange considers that the issuer does not carry on a business as required under rule 17.26; or
         
            …”

        The amended GEM Rule 17.26 states that:
         
        “(1)   An issuer shall carry out, directly or indirectly, a business with a sufficient level of operations and assets of sufficient value to support its operations to warrant the continued listing of the issuer’s securities.
         
        Note:   Rule 17.26(1) is a qualitative test. The Exchange may consider an issuer to have failed to comply with the rule in situations where, for example, the Exchange considers that the issuer does not have a business that has substance and/or that is viable and sustainable.

        The Exchange will make an assessment based on specific facts and circumstances of individual issuers. For example, when assessing whether a money lending business of a particular issuer is a business of substance, the Exchange may consider, among other factors, the business model, operating scale and history, source of funding, size and diversity of customer base and loan portfolio and internal control systems of the money lending business of that particular issuer, taking into account the norms and standards of the relevant industry.

        Where the Exchange raises concerns with an issuer about its compliance with the rule, the onus is on the issuer to provide information to address the Exchange’s concerns and demonstrate to the satisfaction of the Exchange its compliance with the rule.
         
            (2) …”
         
        2.   GEM Rule 17.26(1) makes it clear that an issuer must carry out a business with a sufficient level of operations to warrant its continued listing. The issuer must also have sufficient assets to support its operations.

        In this case, the Exchange’s analysis and conclusion would remain unchanged, but an assessment of “sufficiency of assets to justify a listing” would not be required.
         

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

      • LD104-2017

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

        Parties Company A — a Main Board issuer

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

        FACTS

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

        APPLICABLE LISTING RULES

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

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

        ANALYSIS

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

        CONCLUSION

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

        GENERAL WAIVER FOR THE ASSURED ENTITLEMENT REQUIREMENT

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

    • 2016

      Select By Rule or Topic: Download the consolidated index herehere

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

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

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

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

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

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

      (Withdrawn in July 2018)
      LD101-2016 04/2016 Main Board Rule 9.03(3)
      GEM Rules 12.09 and 12.14
      To provide guidance on why the Exchange returned certain listing applications
      LD100-2016 04/2016 Main Board Rules 2.06 and Chapter 8
      GEM Rules 2.09 and Chapter 11
      To provide guidance on why the Exchange rejected certain listing applications
      LD99-2016 03/2016
      (10/2019)
      Main Board Rule 13.24 Whether Company A would have sufficient operations or assets under Rule 13.24 after the disposal
      LD98-2016 03/2016
      (10/2019)
      Main Board Rule 13.24 Whether Company A would have sufficient operations or assets under Rule 13.24 after the disposal
      LD97-2016 03/2016
      (10/2019)
      Main Board Rule 13.24 Whether Company A would have sufficient operations or assets under Rule 13.24 after the disposal
      LD96-2016 03/2016
      (10/2019)
      Main Board Rule 14.06B Whether Company A's proposed acquisition of the Target would be a reverse takeover
      LD95-2016 03/2016
      (10/2019)
      Main Board Rule 14.06B Whether Company A's proposed acquisition of an interest in the Target from Mr. B would be a reverse takeover
      LD94-2016 03/2016
      (10/2019)
      Main Board Rule 14.06B Whether Company A's proposed subscription of an interest in the Fund would be a reverse takeover
      LD93-2016 03/2016 Main Board Rules 8.04, 8.05(1)(a) and Paragraph 3(c) of Practice Note 15 Whether the Company A (excluding its interest in Newco) could rely on the unrealised fair value gains on investment properties to meet the profit requirement under Rule 8.05(1)(a)

      • LD103-2016

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

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

        FACTS

        Background

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

        Proposal

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

        LISTING RULES AND RELATED GUIDANCE MATERIAL

        6. Rule 2.03 states that:

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

        (1) …;

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



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

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

        (6) …

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

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

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

        ANALYSIS

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

        CONCLUSION

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

        SUBSEQUENT DEVELOPMENT (Updated in July 2018)

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

      • LD101-2016

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

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

        PURPOSE

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

        APPLICABLE RULES, REGULATIONS AND PRINCIPLES

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

        ****

        Appendix

        Returned cases in 2015
        Company Reasons for return
        Company A

        (a Main Board Applicant)

        Company A provided financial services.

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

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

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

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

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

        Company B

        (a GEM Applicant)

        Company B provided conferencing services.

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

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

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

        Company C

        (a GEM Applicant)

        Company C was in the catering business.

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

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

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

      • LD100-2016

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

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

        PURPOSE

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

        APPLICABLE LISTING RULES

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

        ****

        Appendix

        Rejection cases in 2015
        Company Reasons for rejection
        Company A

        (a Main Board Applicant)

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

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

        (a Main Board Applicant)

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

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

        Deteriorating financial performance

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

        Payments to a connected person were questionable

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

        Track record results not representative of future performance

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

        (a Main Board Applicant)

        Company C provided services in the construction industry.

        The application was rejected due to the following factors:

        Material Impact Non-compliances

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

        Inability to meet Main Board Rule 8.05(1)

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

        Directors' suitability under Main Board Rules 3.08 and 3.09

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

        (a Main Board Applicant)

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

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

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

        (a Main Board Applicant)

        Company E was a property investment company.

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

        No track record of current business structure

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

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

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

        Deteriorating financial performance

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

        (a GEM Applicant)

        Company F was an exhibition organiser.

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

        Advances to third parties

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

        Systemic Non-compliances

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

        (a GEM Applicant)

        Company G provided printing services.

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

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

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

      • LD99-2016

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        HKEX LISTING DECISION
        HKEX-LD99-2016 (published in March 2016) (updated in October 2019 (Rule amendments))

        Party Company A – a Main Board issuer

        Subsidiary B – a wholly owned subsidiary of Company A

        Mr. C – Company A's controlling shareholder

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

        FACTS

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

        APPLICABLE LISTING RULES

        9.   Rule 13.24 states that-
         
        “An issuer shall carry out, directly or indirectly, a sufficient level of operations or have tangible assets of sufficient value and/or intangible assets for which a sufficient potential value can be demonstrated to the Exchange to warrant the continued listing of the issuer's securities.”
         
        (Rule 13.24 was amended on 1 October 2019. See Note 1 below.)
         
        10.   Listing Decisions (LD35-2012 and LD88-2015) describe the purpose behind Rule 13.24 and provide guidance on the application of the Rule:

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



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

         

        ANALYSIS

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

        CONCLUSION

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

        NOTES:

        (A)   Amendments to Rule 13.24
         
        1.   The amended Rule 13.24 states that:
         
        “(1)   An issuer shall carry out, directly or indirectly, a business with a sufficient level of operations and assets of sufficient value to support its operations to warrant the continued listing of the issuer’s securities.
         
        Note:   Rule 13.24(1) is a qualitative test. The Exchange may consider an issuer to have failed to comply with the rule in situations where, for example, the Exchange considers that the issuer does not have a business that has substance and/or that is viable and sustainable.

        The Exchange will make an assessment based on specific facts and circumstances of individual issuers. For example, when assessing whether a money lending business of a particular issuer is a business of substance, the Exchange may consider, among other factors, the business model, operating scale and history, source of funding, size and diversity of customer base and loan portfolio and internal control systems of the money lending business of that particular issuer, taking into account the norms and standards of the relevant industry.

        Where the Exchange raises concerns with an issuer about its compliance with the rule, the onus is on the issuer to provide information to address the Exchange’s concerns and demonstrate to the satisfaction of the Exchange its compliance with the rule.

         
        (2)..."    
         
        2.   Rule 13.24(1) makes it clear that an issuer must carry out a business with a sufficient level of operations to warrant its continued listing. The issuer must also have sufficient assets to support its operations.

        In this case, the Exchange’s analysis and conclusion would remain unchanged, but an assessment of “sufficiency of assets to justify a listing” would not be required.

         
        (B)   Amendments to Rule 14.06E (disposal restrictions)
         
        3.   With effect from 1 October 2019, an issuer must also comply with Rule 14.06E (which incorporates former Rules 14.92 and 14.93 with certain modifications) if it proposes a disposal of all or a material part of its existing business at the time of, or within 36 months from, a change in control.

        Rule 
        14.06E states that:
         
        “(1)   A listed issuer may not carry out any disposal or distribution in specie (or a series of disposals and/or distributions in specie) of all or a material part of its existing business:
        (a)      where there is a proposed change in control (as defined in the Takeovers Code) of the listed issuer (other than at the level of its subsidiaries); or
        (b)   for a period of 36 months from a change in control (as defined in the Takeovers Code),
        unless the remaining group, or the assets acquired from the person or group of persons gaining such control or his/their associates and any other assets acquired by the listed issuer after such change in control, can meet the requirements of Rule 8.05 (or Rule 8.05A or 8.05B).    
        …”    
         
        4.   Rule 14.06E would apply in the circumstances described in this case.
         

      • LD98-2016

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        HKEX LISTING DECISION
        HKEX-LD98-2016 (published in March 2016) (updated in October 2019 (Rule amendments))

        Party Company A – a Main Board issuer

        Subsidiary B – a major subsidiary of Company A

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

        FACTS

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

        APPLICABLE LISTING RULES

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

        (1) . . .;

        (2) . . .;

        (3) the Exchange considers that the issuer does not have a sufficient level or operations or sufficient assets to warrant the continued listing of the issuer's securities (see rule 13.24); or

        (4) the Exchange considers that the issuer or its business is no longer suitable for listing."
         
        8.   Rule 13.24 states that-
         
        "An issuer shall carry out, directly or indirectly, a sufficient level of operations or have tangible assets of sufficient value and/or intangible assets for which a sufficient potential value can be demonstrated to the Exchange to warrant the continued listing of the issuer's securities."

        (Rules 6.01(3) and 13.24 were amended on 1 October 2019. See Note 1 below.)
         

        ANALYSIS

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

        CONCLUSION

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

        Notes:

        1.   The amended Rule 6.01 states that:

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

        …;

        (3) the Exchange considers that the issuer does not carry on a business as required under rule 13.24; or

        …”


        The amended Rule 13.24 states that:
         
        “(1)   An issuer shall carry out, directly or indirectly, a business with a sufficient level of operations and assets of sufficient value to support its operations to warrant the continued listing of the issuer’s securities.
         
        Note:   Rule 13.24(1) is a qualitative test. The Exchange may consider an issuer to have failed to comply with the rule in situations where, for example, the Exchange considers that the issuer does not have a business that has substance and/or that is viable and sustainable.

        The Exchange will make an assessment based on specific facts and circumstances of individual issuers. For example, when assessing whether a money lending business of a particular issuer is a business of substance, the Exchange may consider, among other factors, the business model, operating scale and history, source of funding, size and diversity of customer base and loan portfolio and internal control systems of the money lending business of that particular issuer, taking into account the norms and standards of the relevant industry.

        Where the Exchange raises concerns with an issuer about its compliance with the rule, the onus is on the issuer to provide information to address the Exchange’s concerns and demonstrate to the satisfaction of the Exchange its compliance with the rule.

         
        (2)   …”
         
        2.   Rule 13.24(1) makes it clear that an issuer must carry out a business with a sufficient level of operations to warrant its continued listing. The issuer must also have sufficient assets to support its operations.

        The Rule amendments would not change the analysis and conclusion in this case.
         

      • LD97-2016

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        HKEX LISTING DECISION
        HKEX-LD97-2016 (published in March 2016) (updated in October 2019 (Rule amendments))

        Party Company A – a Main Board issuer

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

        FACTS

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

        APPLICABLE LISTING RULES

        7.   Rule 13.24 states that-
         
        “An issuer shall carry out, directly or indirectly, a sufficient level of operations or have tangible assets of sufficient value and/or intangible assets for which a sufficient potential value can be demonstrated to the Exchange to warrant the continued listing of the issuer's securities.”
         
        (Rule 13.24 was amended on 1 October 2019. See Note 1 below.)
         
        8.   Listing Decisions (LD35-2012 and LD88-2015) describe the purpose behind Rule 13.24 and provide guidance on the application of the Rule:
         
        “Rule 13.24 is intended to maintain overall market quality. Issuers that fail to meet this Rule are "blue sky companies" where public investors have no information about their business plans and prospects. This leaves much room for the market to speculate on their possible acquisitions in the future. To allow these issuers' shares to continue to trade and list may have an adverse impact on investor confidence.



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

         

        ANALYSIS

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

        CONCLUSION

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

        Notes:

        1.   The amended Rule 13.24 states that:
         
        “(1)   An issuer shall carry out, directly or indirectly, a business with a sufficient level of operations and assets of sufficient value to support its operations to warrant the continued listing of the issuer’s securities.
         
        Note:   Rule 13.24(1) is a qualitative test. The Exchange may consider an issuer to have failed to comply with the rule in situations where, for example, the Exchange considers that the issuer does not have a business that has substance and/or that is viable and sustainable.

        The Exchange will make an assessment based on specific facts and circumstances of individual issuers. For example, when assessing whether a money lending business of a particular issuer is a business of substance, the Exchange may consider, among other factors, the business model, operating scale and history, source of funding, size and diversity of customer base and loan portfolio and internal control systems of the money lending business of that particular issuer, taking into account the norms and standards of the relevant industry.

        Where the Exchange raises concerns with an issuer about its compliance with the rule, the onus is on the issuer to provide information to address the Exchange’s concerns and demonstrate to the satisfaction of the Exchange its compliance with the rule.

         
        (2)   …”
         
        2.   Rule 13.24(1) makes it clear that an issuer must carry out a business with a sufficient level of operations to warrant its continued listing. The issuer must also have sufficient assets to support its operations.

        In this case, the Exchange’s analysis and conclusion would remain unchanged, but an assessment of “sufficiency of assets to justify a listing” would not be required.
         

      • LD96-2016

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        HKEX LISTING DECISION
        HKEX-LD96-2016 (published in March 2016) (updated in October 2019 (amendments to the reverse takeover Rules))

        Party Company A – a Main Board issuer 

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

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

        FACTS

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

        APPLICABLE LISTING RULES

        8.   Rule 8.04 requires that both the issuer and its business “must, in the opinion of the Exchange, be suitable for listing”.
         
        9.   Rule 14.06(6) defines a “reverse takeover” as “an acquisition or a series of acquisitions of assets by an issuer which, in the opinion of the Exchange, constitutes, or is part of a transaction or arrangement or series of transactions or arrangements which constitute, an attempt to achieve a listing of the assets to be acquired and a means to circumvent the requirements for new applicants set out in Chapter 8 of the Exchange Listing Rules…”. This is a principle based test.
         
        10.   The Exchange Guidance Letter (HKEX-GL78-14) on reverse takeovers (RTOs) explains that Rule 14.06(6) is an anti-avoidance provision designed to prevent circumvention of the new listing requirements. Paragraph 7 of the guidance letter states that:-
         
            “If a transaction falls outside the bright line tests, the Exchange will apply the principle based test to assess whether the acquisition constitutes an attempt to achieve a listing of the assets to be acquired and a means to circumvent the requirements for new listing. The transaction would be treated as a RTO under the principle based test if the Exchange considers it is an ‘extreme’ case taking into account the following criteria:
         
          the size of transaction relative to the size of the issuer;
         
          the quality of the business to be acquired—whether it can meet the trading record requirements for listings, or whether it is unsuitable for listing (e.g. an early stage exploration company);
         
          the nature and scale of the issuer's business before the acquisition (e.g. whether it is a listed shell);
         
          any fundamental change in the issuer's principal business (e.g. the existing business would be discontinued or very immaterial to the enlarged group's operations after the acquisition);
         
          other events and transactions (historical, proposed or intended) which, together with the acquisition, form a series of arrangements to circumvent the RTO Rules (e.g. a disposal of the issuer's original business simultaneously with a very substantial acquisition); and
         
          any issue of Restricted Convertible Securities1 to the vendor which would provide it with de facto control of the issuer.”
         
            (Rule 14.06(6) (now Rule 14.06B) was amended on 1 October 2019. See Note 1 below.)
         

        ANALYSIS

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

        CONCLUSION

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

        Notes

        1.   The reverse takeover Rules were amended on 1 October 2019. Under the new Rule 14.06B (which incorporates former Rule 14.06(6) with certain modifications):
         
          A “reverse takeover” is defined as an acquisition or series of acquisitions by a listed issuer which, in the opinion of the Exchange, constitutes, or is part of a transaction and/or arrangement or series of transactions and/or arrangements which constitutes, an attempt to achieve a listing of the acquisition targets and a means to circumvent the requirements for new applicants as set out in Chapter 8 of the Listing Rules.
         
          Note 1 to Rule 14.06B sets out the factors that the Exchange will normally consider in assessing whether the acquisition or series of acquisitions is a reverse takeover, including:
        i)   the size of the acquisition or series of acquisitions relative to the size of the issuer;
        ii)   a fundamental change in the issuer’s principal business;
        iii)   the nature and scale of the issuer’s business before the acquisition or series of acquisitions;
        iv)   the quality of the acquisition targets;
        v)   a change in control (as defined in the Takeovers Code) or de facto control of the listed issuer (other than at the level of the subsidiaries); and/or
        vi)   other transactions or arrangements which, together with the acquisition or series of acquisitions, form a series of transactions or arrangements to list the acquisition targets.
         
          Note 2 to Rule 14.06B contains two specific forms of reverse takeovers involving a change in control (as defined in the Takeovers Code) of the listed issuer (other than at the level of the subsidiaries) and an acquisition or a series of acquisitions of assets from the new controlling shareholder and/or its associates at the time of, or within 36 months from, the change in control.
         
        2.   The Rule amendments would not change the analysis and conclusion in this case.
         

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

      • LD95-2016

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        HKEX LISTING DECISION
        HKEX-LD95-2016 (published in March 2016) (updated in October 2019 (amendments to the reverse takeover Rules))

        Party Company A – a Main Board issuer 

        Target – a company holding inventories and production facilities

        Mr. B – the owner of the Target

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

        FACTS

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

        APPLICABLE LISTING RULES

        8.   Rule 8.04 requires that both the issuer and its business “must, in the opinion of the Exchange, be suitable for listing”.
         
        9.   Rule 14.06(6) defines a “reverse takeover” as “an acquisition or a series of acquisitions of assets by an issuer which, in the opinion of the Exchange, constitutes, or is part of a transaction or arrangement or series of transactions or arrangements which constitute, an attempt to achieve a listing of the assets to be acquired and a means to circumvent the requirements for new applicants set out in Chapter 8 of the Exchange Listing Rules…”. This is a principle based test.
         
        10.   The Exchange Guidance Letter (HKEX-GL78-14) on reverse takeovers (RTOs) explains that Rule 14.06(6) is an anti-avoidance provision designed to prevent circumvention of the new listing requirements. Paragraph 7 of the guidance letter states that:-
         
            “If a transaction falls outside the bright line tests, the Exchange will apply the principle based test to assess whether the acquisition constitutes an attempt to achieve a listing of the assets to be acquired and a means to circumvent the requirements for new listing. The transaction would be treated as a RTO under the principle based test if the Exchange considers it is an ‘extreme’ case taking into account the following criteria:
         
          the size of transaction relative to the size of the issuer;
         
          the quality of the business to be acquired—whether it can meet the trading record requirements for listings, or whether it is unsuitable for listing (e.g. an early stage exploration company);
         
          the nature and scale of the issuer's business before the acquisition (e.g. whether it is a listed shell);
         
          any fundamental change in the issuer's principal business (e.g. the existing business would be discontinued or very immaterial to the enlarged group's operations after the acquisition);
         
          other events and transactions (historical, proposed or intended) which, together with the acquisition, form a series of arrangements to circumvent the RTO Rules (e.g. a disposal of the issuer's original business simultaneously with a very substantial acquisition); and
         
          any issue of Restricted Convertible Securities1 to the vendor which would provide it with de facto control of the issuer.”
         
            (Rule 14.06(6) (now Rule 14.06B) was amended on 1 October 2019. See Note 1 below.)
         

        ANALYSIS

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

        CONCLUSION

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

        Notes

        1.   The reverse takeover Rules were amended on 1 October 2019. Under the new Rule 14.06B (which incorporates former Rule 14.06(6) with certain modifications):
         
          A “reverse takeover” is defined as an acquisition or series of acquisitions by a listed issuer which, in the opinion of the Exchange, constitutes, or is part of a transaction and/or arrangement or series of transactions and/or arrangements which constitutes, an attempt to achieve a listing of the acquisition targets and a means to circumvent the requirements for new applicants as set out in Chapter 8 of the Listing Rules.
         
          Note 1 to Rule 14.06B sets out the factors that the Exchange will normally consider in assessing whether the acquisition or series of acquisitions is a reverse takeover, including:
        i)   the size of the acquisition or series of acquisitions relative to the size of the issuer;
        ii)   a fundamental change in the issuer’s principal business;
        iii)   the nature and scale of the issuer’s business before the acquisition or series of acquisitions;
        iv)   the quality of the acquisition targets;<
        v)   a change in control (as defined in the Takeovers Code) or de facto control of the listed issuer (other than at the level of the subsidiaries); and/or
        vi)   other transactions or arrangements which, together with the acquisition or series of acquisitions, form a series of transactions or arrangements to list the acquisition targets.
         
          Note 2 to Rule 14.06B contains two specific forms of reverse takeovers involving a change in control (as defined in the Takeovers Code) of the listed issuer (other than at the level of the subsidiaries) and an acquisition or a series of acquisitions of assets from the new controlling shareholder and/or its associates at the time of, or within 36 months from, the change in control.
         
        2.   The Rule amendments would not change the analysis and conclusion in this case.
         

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

      • LD94-2016

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        HKEX LISTING DECISION
        HKEX-LD94-2016 (published in March 2016) (updated in October 2019 (amendments to the reverse takeover Rules))

        Party Company A – a Main Board issuer

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

        FACTS

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

        APPLICABLE LISTING RULES

        6.   Rule 8.04 requires that both the issuer and its business "must, in the opinion of the Exchange, be suitable for listing".
         
        7.   Rule 14.06(6) defines a "reverse takeover" as "an acquisition or a series of acquisitions of assets by an issuer which, in the opinion of the Exchange, constitutes, or is part of a transaction or arrangement or series of transactions or arrangements which constitute, an attempt to achieve a listing of the assets to be acquired and a means to circumvent the requirements for new applicants set out in Chapter 8 of the Exchange Listing Rules…". This is a principle based test.
         
        8.   The Exchange Guidance Letter (HKEX-GL78-14) on reverse takeovers (RTOs) explains that Rule 14.06(6) is an anti-avoidance provision designed to prevent circumvention of the new listing requirements. Paragraph 7 of the guidance letter states that:-
         
            "If a transaction falls outside the bright line tests, the Exchange will apply the principle based test to assess whether the acquisition constitutes an attempt to achieve a listing of the assets to be acquired and a means to circumvent the requirements for new listing. The transaction would be treated as a RTO under the principle based test if the Exchange considers it is an 'extreme' case taking into account the following criteria:
         
          the size of transaction relative to the size of the issuer;
         
          the quality of the business to be acquired—whether it can meet the trading record requirements for listings, or whether it is unsuitable for listing (e.g. an early stage exploration company);
         
          the nature and scale of the issuer's business before the acquisition (e.g. whether it is a listed shell);
         
          any fundamental change in the issuer's principal business (e.g. the existing business would be discontinued or very immaterial to the enlarged group's operations after the acquisition);
         
          other events and transactions (historical, proposed or intended) which, together with the acquisition, form a series of arrangements to circumvent the RTO Rules (e.g. a disposal of the issuer's original business simultaneously with a very substantial acquisition); and
         
          any issue of Restricted Convertible Securities1 to the vendor which would provide it with de facto control of the issuer."
         
            (Rule 14.06(6) (now Rule 14.06B) was amended on 1 October 2019. See Note 1 below.)
         

        ANALYSIS

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

        CONCLUSION

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

        Notes

        1.   The reverse takeover Rules were amended on 1 October 2019. Under the new Rule 14.06B (which incorporates former Rule 14.06(6) with certain modifications):
         
          A “reverse takeover” is defined as an acquisition or series of acquisitions by a listed issuer which, in the opinion of the Exchange, constitutes, or is part of a transaction and/or arrangement or series of transactions and/or arrangements which constitutes, an attempt to achieve a listing of the acquisition targets and a means to circumvent the requirements for new applicants as set out in Chapter 8 of the Listing Rules.
         
          Note 1 to Rule 14.06B sets out the factors that the Exchange will normally consider in assessing whether the acquisition or series of acquisitions is a reverse takeover, including:
          i)   the size of the acquisition or series of acquisitions relative to the size of the issuer;
          ii)   a fundamental change in the issuer’s principal business;
          iii)   the nature and scale of the issuer’s business before the acquisition or series of acquisitions;
          iv)   the quality of the acquisition targets;
          v)   a change in control (as defined in the Takeovers Code) or de facto control of the listed issuer (other than at the level of the subsidiaries); and/or
          vi)   other transactions or arrangements which, together with the acquisition or series of acquisitions, form a series of transactions or arrangements to list the acquisition targets.
         
          Note 2 to Rule 14.06B contains two specific forms of reverse takeovers involving a change in control (as defined in the Takeovers Code) of the listed issuer (other than at the level of the subsidiaries) and an acquisition or a series of acquisitions of assets from the new controlling shareholder and/or its associates at the time of, or within 36 months from, the change in control.
         
        2.   The Rule amendments would not change the analysis and conclusion in this case.
         

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

      • LD93-2016

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

        Party Company A – a Main Board issuer

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

        FACTS

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

        APPLICABLE LISTING RULES

        8. Paragraph 3(c) of Practice Note 15 states that:-
        “The Listing Committee must be satisfied that, after the listing of Newco, the Parent would retain a sufficient level of operations and sufficient assets to support its separate listing status. In particular, it would not be acceptable to the Listing Committee that one business (Newco's) supported two listing statuses (the Parent's and Newco's). In other words, the Parent itself would be required to retain, in addition to its interest in Newco, sufficient assets and operations of its own, excluding its interest in Newco, to satisfy independently the requirements of Chapter 8 of the Exchange Listing Rules.”
        9. Rule 8.05(1)(a) provides that a new applicant must have:
        “a trading record of not less than three financial years (see rule 4.04) during which the profit attributable to shareholders must, in respect of the most recent year, be not less than HK$20 million and, in respect of the two preceding years, be in aggregate not less than HK$30 million. The profit mentioned above should exclude any income or loss of the issuer, or its group, generated by activities outside the ordinary and usual course of its business”.
        10. Under Listing Decision LD66-1, for the purpose of the profit test under Rule 8.05(1)(a), the Exchange allows a new listing applicant to include unrealized fair value gains on investment properties as profits where the applicant is a property developer/investor, and the fair value gains are derived from the ordinary and usual course of business.
        11. In this connection, Guidance Letter GL68-13 sets out further guidance in situation where an applicant relied on unrealized fair value gains on investment properties to satisfy the profit test. The letter states that:-
        “The Exchange is of the view that even if an applicant is able to satisfy the profit test under Main Board Rule 8.05(1)(a) by relying on the unrealized fair value gains of its investment properties, if the applicant is loss making after such gains are excluded and it did not have a substantive business during its track record period, the applicant would have to demonstrate that it has a sustainable business before the Exchange considers it suitable for listing.

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

        ANALYSIS

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

        CONCLUSION

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

    • 2015

      Select By Rule or Topic: Download the consolidated index herehere

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

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

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

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

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

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

      (Withdrawn in July 2018)
      LD89-2015 05/2015 Main Board Rules 15.01 and 17.01 Whether Company A's proposed issue of warrants to certain members of senior management was subject to the requirements of Chapter 17
      LD88-2015 05/2015
      (10/2019)
      Main Board Rule 13.24 Whether Company A would have sufficient operations or assets under Rule 13.24 after a very substantial disposal
      LD87-2015 05/2015
      (08/2018)
      Main Board Rules 6.05 to 6.07 and Paragraph 4 of Practice Note 11 Whether the Exchange would direct the resumption of trading in Company A's shares under Rule 6.07
      LD86-2015 04/2015 GEM Rule 11.12A(1) Whether Company A's cash flow generated during a period of non-compliance should be counted towards the calculation of minimum cash flow under GEM Rule 11.12A(1)

      (Withdrawn in April 2019)
      LD85-2015 01/2015
      (11/2016)
      Main Board Rule 10.07(1) Whether Company B, which will cease to be a controlling shareholder of Company A shortly after listing, should be subject to a 12-month lock-up of its shares after Company A's listing under Listing Rule 10.07(1)

      • LD92-2015

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

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

        PURPOSE

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

        APPLICABLE LISTING RULES

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

        ****

        Appendix

        Rejection cases in 2013
        Company Rejection reasons
        Company A

        (a Main Board Applicant)

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

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

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

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

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

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

        (a Main Board Applicant)

        Company B was engaged in money lending business.

        The application was rejected due to the following observations:

        Non-compliances

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

        Reliance on controlling shareholders

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

        Directors' suitability

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

        (a Main Board Applicant)

        Company C was engaged in wholesaling and retailing of goods.

        Director's suitability

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

        Company D

        (a GEM Applicant)

        Company D was engaged in a regulated business.

        The application was rejected due to the following observations:

        Non-compliances

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

        Unsustainable business model

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

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

        (a GEM Applicant)

        Company E was a software solution provider.

        The application was rejected due to the following observations:

        Non-compliances

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

        Directors' suitability and inability to meet the management continuity requirement

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

        (a GEM Applicant)

        Company F was engaged in the trading of commodities.

        The application was rejected due to the following observations:

        Reliance on a major customer

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


        Rejection cases in 2014
        Company Rejection reasons
        Company G

        (a Main Board Applicant)

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

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

        Inability to meet the Main Board Rule 8.05

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

        (a Main Board Applicant)

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

        The application was rejected due to following observations:

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

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

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

        (a Main Board Applicant)

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

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

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

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

        Company J

        (a Main Board Applicant)

        Company J was engaged in money lending business.

        The application was rejected due to the following observations:

        Non compliance

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

        Directors' suitability

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

        Inability to meet the Main Board Rule 8.05(1)

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

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

        Company K

        (a GEM Applicant)

        Company K was engaged in property leasing business.

        Non-compliances

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

        Company L

        (a GEM Applicant)

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

        The application was rejected due to the following observations:

        Unsustainable business model

        There were concerns over Company L's business sustainability:

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

        (a GEM Applicant)

        Company M was engaged in a regulated business.

        Sponsor's non-independence

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

        Company N

        (a GEM Applicant)

        Company N was a manufacturer and seller of consumer products.

        The application was rejected due to the following observations:

        Inability to meet the GEM Rule 11.12A

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

        Unsustainable business model

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

        Directors' suitability under GEM Rule 5.02

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

        (a GEM Applicant)

        Company O was engaged in property sub-leasing business.

        The application was rejected due to the following observations:

        Concerns on the business model

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

        Excess competition with controlling shareholder

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

        (a GEM Applicant)

        Company P was a hotel developer and owner.

        The application was rejected due to the following observations:

        Unsustainable business model

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

        Deteriorating financial performance

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

      • LD91-2015

        View Current PDFView Current PDF

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

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

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

        Purpose

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

        APPLICABLE RULES, REGULATIONS AND PRINCIPLES

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

        ****

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

      • LD89-2015

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

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

        FACTS

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

        APPLICABLE LISTING RULES

        5. Rule 15.01 states that:

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

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

        ANALYSIS

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

        CONCLUSION

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

      • LD88-2015

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        HKEX LISTING DECISION
        HKEX-LD88-2015 (published in May 2015) (Updated in August 2018, October 2019 (Rule amendments))

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

        FACTS

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

        APPLICABLE LISTING RULES

        7.   Rule 13.24 states that:

        "An issuer shall carry out, directly or indirectly, a sufficient level of operations or have tangible assets of sufficient value and/or intangible assets for which a sufficient potential value can be demonstrated to the Exchange to warrant the continued listing of the issuer's securities."
         
        8.   Rule 6.01 states that
         
        "Listing is always granted subject to the condition that where the Exchange considers it necessary for the protection of the investor or the maintenance of an orderly market, it may at any time direct a trading halt or suspend dealings in any securities or cancel the listing of any securities in such circumstances and subject to such conditions as it thinks fit, whether requested by the issuer or not. The Exchange may also do so where:—  
         
        . . .  
         
        (3)   the Exchange considers that the issuer does not have a sufficient level of operations or sufficient assets to warrant the continued listing of the issuer's securities (see rule 13.24)…"
         
        (Rule 6.01(3) and 13.24 were amended on 1 October 2019.  See Note 1 below.)  
         
        9.   Rule 6.04 states that:

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

        ANALYSIS

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

        CONCLUSION

        15.   The Exchange considered that Company A would not comply with Rule 13.24 should it proceed with the Disposal.
         
            Notes:
         
        1.     The amended Rule 6.01 states that:

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



        (3) the Exchange considers that the issuer does not carry on a business as required under rule 13.24; or

        …”

        The amended Rule 13.24 states that:
         
        “(1)   An issuer shall carry out, directly or indirectly, a business with a sufficient level of operations and assets of sufficient value to support its operations to warrant the continued listing of the issuer’s securities.
         
        Note:   Rule 13.24(1) is a qualitative test. The Exchange may consider an issuer to have failed to comply with the rule in situations where, for example, the Exchange considers that the issuer does not have a business that has substance and/or that is viable and sustainable.

        The Exchange will make an assessment based on specific facts and circumstances of individual issuers.  For example, when assessing whether a money lending business of a particular issuer is a business of substance, the Exchange may consider, among other factors, the business model, operating scale and history, source of funding, size and diversity of customer base and loan portfolio and internal control systems of the money lending business of that particular issuer, taking into account the norms and standards of the relevant industry. 

        Where the Exchange raises concerns with an issuer about its compliance with the rule, the onus is on the issuer to provide information to address the Exchange’s concerns and demonstrate to the satisfaction of the Exchange its compliance with the rule.
         
        (2)   …”
         
        2.   Rule 13.24(1) makes it clear that an issuer must carry out a business with a sufficient level of operations to warrant its continued listing. The issuer must also have sufficient assets to support its operations.

        In this case, the Exchange’s analysis and conclusion would remain unchanged, but an assessment of “sufficiency of assets to justify a listing” would not be required.  

      • LD87-2015

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

        Parties Company A — a Main Board issuer

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

        FACTS

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

        APPLICABLE LISTING RULES

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

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

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

        ANALYSIS

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

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

        CONCLUSION

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

      • LD85-2015

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

        Summary
        Name of Party Company A — Main Board listing applicant

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

        SUMMARY OF FACTS

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

        THE ISSUE RAISED FOR CONSIDERATION

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

        APPLICABLE LISTING RULES

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

        THE ANALYSIS

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

        THE DECISION

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

    • 2014

      Select By Rule or Topic: Download the consolidated index herehere

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

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

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

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

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

      LD Series Number First Release Date (Last Update Date)
      (mm/yyyy)
      Listing Rules/ Topics Particulars
      LD84-2014 02/2014
      (05/2016)
      Main Board Rule 9.03(3) and GEM Rules 12.09 and 12.14 To provide guidance on why the Exchange returned certain listing applications
      LD83-2014 01/2014 Main Board Rules 8.08(2) and 8.08(3) For Company A's proposed rights issue of shares with bonus warrants, whether the Exchange would waive the requirements on the minimum number and spread of warrantholders at the time of listing of the warrants
      LD82-2014 01/2014
      (04/2015)
      Main Board Rules 8.08, 10.06(3) and 13.32
      (i) Whether to allow Company A to proceed with a share repurchase offer which might result in a lack of open market in its shares
      (ii) Whether to give consent to Company A for issuing new shares within 30 days after completion of the offer under Rule 10.06(3) to meet the public float requirement
      LD81-2014 01/2014 Main Board Rules 9.20(1) and Paragraph 30 of Appendix 1B Whether the Exchange would waive the requirements relating to the inclusion of a statement of sufficient working capital in Company A's listing document for a rights issue

      (Withdrawn in October 2020)
      LD80-2014 01/2014 Main Board Rules 14.15(2) and 14.22 Whether Company A's proposed guarantee for a bank loan to be granted to the Joint Venture should be aggregated with its initial capital contribution to the Joint Venture
      LD79-2014 01/2014
      (07/2014)
      Main Board Rules 14A.25, 14A.36, 14A.76 Whether the amendments to the non-competition undertaking given by the Holding Company to Company A would require independent shareholders' approval
      LD78-2014 01/2014
      (07/2014)
      Main Board Rules 14A.19, 14A.26, 14A.27 Whether the guarantee provided by Company A for a loan facility granted to the Borrower was subject to the connected transaction requirements
      LD77-2014 01/2014 Main Board Rules 2.13(2) and 11.07 Whether Company A's level of internal controls on its hedging activities was appropriate for a listed company

      (Withdrawn in July 2018)

      • LD84-2014

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

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

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

        APPLICABLE RULES, REGULATIONS AND PRINCIPLES

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

        ANALYSIS

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

        Company A

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

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

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

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

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

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

        Company B*

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

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

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

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

        Company C

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

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

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

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

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

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

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

        Company D*

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

        Company E

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

        Company F

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

        Company G*

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

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

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

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

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

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

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

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

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

        Company H*

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

        Company I*

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

        Company J

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

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

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

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

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

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

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

        Company K

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

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

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

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

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

        Company L

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

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

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

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

        Company M

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

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

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

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

        Company N

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

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

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

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

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

        Company O*

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

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

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

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

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

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

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

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

        Company P

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

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

        Company Q*

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

        THE DECISION

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

        ****


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

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

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

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

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

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

        * GEM listing applicant

      • LD83-2014

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

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

        FACTS

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

        APPLICABLE LISTING RULES

        6. Rule 8.08 states that

        "There must be an open market in the securities for which listing is sought. This will normally mean that:
        (1)
        (a) at least 25% of the issuer's total issued share capital must at all times be held by the public;
        ...
        (2) for a class of securities new to listing, at the time of listing there must be an adequate spread of holders of the securities to be listed, except where: (a) they are options, warrants or similar rights to subscribe for or purchase shares; (b) they are offered to existing holders of a listed issuer's shares by way of bonus issue; and (c) in the 5 years before the date of the announcement of the proposed bonus issue, there are no circumstances to indicate that the issuer's shares may be concentrated in the hands of a few shareholders. The number will depend on the size and nature of the issue, but in all cases there must be at least 300 shareholders; and
        (3) not more than 50% of the securities in public hands at the time of listing can be beneficially owned by the three largest public shareholders, save where: (a) the securities to be listed are options, warrants or similar rights to subscribe or purchase shares; (b) such securities are offered to existing holders of a listed issuer's shares by way of bonus issue; and (c) in the 5 years preceding the date of the announcement on the proposed bonus issue, there are no circumstances to indicate that the shares of the issuer may be concentrated in the hands of a few shareholders."

        ANALYSIS

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

        CONCLUSION

        10. The Exchange granted the waiver to Company A.

      • LD82-2014

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

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

        FACTS

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

        APPLICABLE LISTING RULES

        7. Rule 8.08 states that:

        "There must be an open market in the securities for which listing is sought. This will normally mean that:-
        (1)
        (a) at least 25% of the issuer's total number of issued shares must at all times be held by the public;
        ...
        (2) for a class of securities new to listing, at the time of listing there must be an adequate spread of holders of the securities to be listed, ... . The number will depend on the size and nature of the issue, but in all cases there must be at least 300 shareholders; and
        (3) not more than 50% of the securities in public hands at the time of listing can be beneficially owned by the three largest public shareholders, ... ."
        8. Rule 13.32 states that:
        "(1) Issuers shall maintain the minimum percentage of listed securities as prescribed by rule 8.08 at all times in public hands. ...
        (2) Once the issuer becomes aware that the number of listed securities in the hands of the public has fallen below the relevant prescribed minimum percentage the issuer shall take steps to ensure compliance at the earliest possible moment...
        (3) If the percentage falls below the minimum, the Exchange reserves the right to require suspension of trading in an issuer's securities until appropriate steps have been taken to restore the minimum percentage of securities in public hands. In this connection, the Exchange will normally require suspension of trading in an issuer's securities where the percentage of its public float falls below 15% (or 10% in the case of an issuer that has been granted a lower percentage of public float under rule 8.08(1)(d) at the time of listing).
        (4) Where the percentage has fallen below the minimum, the Exchange may refrain from suspension if the Exchange is satisfied that there remains an open market in the securities...

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

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

        ANALYSIS

        Public Float Requirements

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

        Possible Placing after the share repurchase offer

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

        CONCLUSION

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

      • LD81-2014

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

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

        FACTS

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

        APPLICABLE LISTING RULES

        4. Rule 7.22 states that:

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

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

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

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

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

        ANALYSIS

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

        CONCLUSION

        12. The Exchange granted the waiver to Company A.

      • LD80-2014

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

        Parties Company A — a Main Board issuer

        Company B — a joint venture partner

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

        FACTS

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

        The proposed transaction

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

        APPLICABLE LISTING RULES

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

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

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

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

        ANALYSIS

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

        CONCLUSION

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

      • LD79-2014

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

        Parties Company A — a Main Board listed issuer

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

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

        FACTS

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

        APPLICABLE LISTING RULE

        6. Rule 14A.01 states that:

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

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

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

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

        ANALYSIS

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

        CONCLUSION

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

      • LD78-2014

        View Current PDFView Current PDF

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

        Parties Company A — a Main Board issuer

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

        The Borrower — a non-wholly subsidiary of Company B

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

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

        FACTS

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

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

        APPLICABLE LISTING RULES

        5. Rule 14A.19 states that:

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

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

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

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

        ANALYSIS

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

        CONCLUSION

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

    • 2013

      Select By Rule or Topic: Download the consolidated index herehere

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

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

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

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

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

      LD Series Number First Release Date (Last Update Date) (mm/yyyy Listing Rules/Topics Particulars
      LD76-2013 12/2013 Main Board Rules 2.13(2) and 8.04 Whether the Applicants were suitable for listing under Rule 8.04 given that they had conducted businesses in certain countries which were subject to trade or economic sanctions imposed by overseas governments before and during the Track Record Period, and if so, how the issue could be addressed

      (Withdrawn in March 2019)
      LD75-2013 07/2013
      (02/2018)
      Main Board Rule 9.03(3) and GEM Rules 12.09 and 12.14 To provide guidance on why the Exchange returned certain listing applications
      LD74-2013 06/2013 Main Board Rules 18.04 and 18.07 Whether Company A has satisfactorily demonstrated that its principal mineral asset has a clear path to commercial production under Rule 18.07

      (Withdrawn in September 2016)
      LD73-2013 05/2013 Main Board Rules 2.03, 2.04, 2.06 and 8.04 Whether Company A's non-compliances, uncertainties over the principal retail stores and deteriorating financial performance subsequent to the Track Record Period would render it unsuitable for listing

      (Withdrawn in March 2019)
      LD72-2013 05/2013 Paragraph 3(f) of Practice Note 15 to the Main Board Rules Whether the Exchange would waive the assured entitlement requirement for Company A's proposal to spin-off Company B (Withdrawn; Superseded by LD104-2017 in January 2017)
      LD71-2013 05/2013
      (07/2018)
      Main Board Rules 7.19A and 7.27A Whether Company A's proposed rights issue required independent shareholder approval
      LD70-2013 05/2013
      (07/2018)
      Main Board Rules 7.21(1)(a) and 7.21(3)(a) Whether Company A's arrangements to dispose of the excess rights shares would comply with Rules 7.21(1)(a) and 7.21(3)(a)
      LD69-2013 05/2013 Main Board Rule 14.38A Whether the Exchange would waive the circular requirement for a major transaction of Company A
      LD68-2013 05/2013
      (10/2019)
      Main Board Rules 14.58(2), 14.60(1), 14.60(2) Whether the Exchange would waive certain specific disclosure requirements for the announcement of a discloseable transaction
      LD67-2013 05/2013 Main Board Rules 13.13, 13.15, 14.58 Whether the Exchange would waive the requirements for disclosing certain information relating to a loan provided by Company A to the Borrower

      (Withdrawn in December 2019)
      LD66-2013 05/2013 Main Board Rule 14.67(6) (b)(i) Whether the Exchange would waive the requirement for Company A's circular to include a 3-year profit and loss statement for the property to be acquired from the Vendor
      LD65-2013 05/2013 Main Board Rules 18.09(2), 18.09(3) Whether the Exchange would waive the requirements for Company A to produce a competent person's report (CPR) and a valuation report (VR) for its proposed acquisition of the Target
      LD64-2013 04/2013 Rules 19.05 and 19.30 and GEM Rule 24.05 Whether the Exchange would consider Labuan an acceptable jurisdiction under Chapter 19 of the Main Board Rules and Chapter 24 of the GEM Rules

      (Withdrawn, superseded by Labuan Country Guide in December 2013)
      LD63-2013 04/2013 (07/2014) Main Board Rule 14A.103 Whether the Exchange would waive the annual review and reporting requirements for a continuing connected transaction between Company A and Company B
      LD62-2013 04/2013 Main Board Rules 14.36, 14.49 Whether the Proposed Amendment was a material change to the terms of the Acquisition agreement
      LD61-2013 04/2013
      (10/2019)
      Main Board Rule 14.20, 14A.80 Whether the Exchange would accept Company A's proposed alternative revenue ratio for classifying transactions under Chapters 14 and 14A
      LD60-2013 04/2013
      (10/2019)
      Main Board Rule 14A.80 Whether the Exchange would accept Company A's proposed alternative revenue ratio for classifying certain continuing connected transactions with Company B
      LD59-2013 04/2013
      (10/2019)
      Note 2(a) to Main Board Rule 14.06B Whether the Exchange would waive Note 2(a) to Rule 14.06B so that Company A's proposed acquisition of certain assets from Mr. X would be classified as a very substantial acquisition rather than a reverse takeover
      LD58-2013 04/2013
      (10/2019)
      Main Board Rule 14.06B Whether the Exchange would waive 14.06B so that Company A's proposed acquisition of the Target would not be classified as a reverse takeover
      LD57-2013 04/2013
      (10/2019)
      Main Board Rule 14.06B Whether Company A's proposed acquisition of an interest in the Target was a reverse takeover
      LD56-2013 03/2013
      (04/2015)
      Main Board Rules 8.08(1)(a), 13.32 Whether the Exchange would give listing approval for new shares to be issued upon conversion of the convertible notes that could result in Company A's public float falling below the minimum 25% requirement under the Rules
      LD55-2013 03/2013 Main Board Rule 14.04(1) Whether Company A was required to classify its subscription for convertible notes issued by Company B as if the notes were fully converted at the time of entering into the subscription agreement
      LD54-2013 03/2013
      (07/2018)
      Main Board Rules 13.36, 28.05 Whether the Exchange would approve the proposed changes to the terms of convertible bonds issued by Company A under a general mandate
      LD53-2013 03/2013 Main Board Rule 18.04 Whether Company A's directors and senior management, taken together, had "sufficient experience relevant to exploration and/ or extraction activity"?
       
      (Withdrawn in February 2020)
      LD52-2013 03/2013 Main Board Rules 2.04, 4.01(1), 7.14, 7.15, 8.06, 8.08 (1)(b), 8.08(3), 19A.18(1) and paragraph 37 of Appendix 1A
      (i) Whether Company A's listing by way of introduction would be acceptable
      (ii) Whether Company A's requested waivers would be granted
      LD51-2013 02/2013 Main Board Rule 18.32 Whether NI 51-101 is an acceptable reporting standard under Rule 18.32
       
      (Withdrawn in February 2020)
      LD50-2013 02/2013 Main Board Rule 18.03(1)(b) Whether Company A had adequate rights under the production sharing contracts which gave it sufficient influence in decisions over the exploration for and/or extraction of crude oil
       
      (Withdrawn in February 2020)
      LD49-2013 01/2013 Main Board Rules 18.33(2) and 18.33(6)
      (1) Whether disclosure of net present values attributable to Proved Reserves, Proved plus Probable Reserves, Proved plus Probable plus Possible Reserves and Contingent Resources both on a pre-tax and post-tax basis is acceptable under Main Board Rule 18.33(2)
      (2) Whether to grant a waiver of Main Board Rule 18.33(6) to allow Company A to disclose estimated values of Possible Reserves, Contingent Resources and Petroleum-Initially-In-Place
       
      (Withdrawn in February 2020)
      LD48-2013 01/2013
      (05/2016)
      Main Board Rule 9.03(3) and GEM Rules 12.09 and 12.14 To provide guidance on why the Exchange returned certain listing applications
      LD47-2013 01/2013
      (04/2015)
      Main Board Rule 3.28, HKEx-LD35-1 (July 2003) Whether Mr. X qualified to act as Company A's secretary after the waiver period

      (Withdrawn in October 2020; superseded by GL108-20)
      LD46-2013 01/2013
      (04/2015)
      Main Board Rule 3.28 Whether Mr. X qualified to act as Company A's secretary
      LD45-2013 01/2013 Main Board Rules 18.09(2), 18.09(3) and 18.09(4) Whether the Exchange would grant a waiver such that Company A could defer the publication of the competent person's report (CPR), valuation report (VR) and other disclosures as required under Rules 18.09(2), (3) and (4)
      LD44-2013 01/2013
      (10/2019)
      Main Board Rules 14.06B and 18.03(1) Whether the Target had the right to participate actively in the exploration for and/or extraction of natural resources
      LD43-2013 01/2013
      (10/2019)
      Main Board Rules 14.06B, 18.04 and 18.07 Whether the Target had a clear path to commercial production
      LD42-2013 01 /2013 Main Board Rule 18.09(2) Whether the Exchange would waive the requirement to produce a competent person's report (CPR) on the mineral resources to be disposed of by Company A
      LD41-2013 01/2013
      (10/2019)
      Main Board Rules 14.06B and 18.03(2) Whether the Target had a portfolio of natural resources that was meaningful and of sufficient substance to justify a listing
      LD40-2013 01/2013 Main Board Rules 18.09(2) and (3) Whether the Exchange would waive the requirements to produce competent person's reports (CPR) and valuation reports on some of the mining interests held by the Target
      LD39-2013 01 /2013
      (10/2019)
      Main Board Rules 14.06B and 18.03(2) Whether the Target had a portfolio of natural resources that was meaningful and of sufficient substance to justify a listing

      • LD75-2013

        View Current PDFView Current PDF

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

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

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

        (the "Applicants")
        Issue

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

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

        APPLICABLE RULES, REGULATIONS AND PRINCIPLES

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

        ANALYSIS

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

        Company A

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

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

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

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

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

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

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

        Company B

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

        Company C

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

        Company D

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

        Company E

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

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

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

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

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

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

        Company F

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

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

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

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

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

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

        Company G

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

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

        Company H

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

        Company I

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

        Company J

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

        Company K

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