Entire Section

  • 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    Please visit Archive to view listing decisions which have been superseded or are no longer applicable.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    (Withdrawn in March 2019)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    (Withdrawn in September 2016)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    (Withdrawn in March 2019)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Whether the Exchange would waive the assured entitlement requirement for Company A's proposal to spin-off Company B (Withdrawn; Superseded by LD104-2017 in January 2017)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
    (01/2022)
    Main Board Rules 8.05(1), 14.06B and 14.54 Whether Company A's proposed acquisition of an interest in the Target was a reverse takeover

    (Updated in January 2022)
    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

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

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

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

      (the "Applicants")
      Issue

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

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

      APPLICABLE RULES, REGULATIONS AND PRINCIPLES

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

      ANALYSIS

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

      Company A

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

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

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

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

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

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

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

      Company B

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

      Company C

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

      Company D

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

      Company E

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

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

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

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

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

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

      Company F

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

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

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

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

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

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

      Company G

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

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

      Company H

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

      Company I

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

      Company J

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

      Company K

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

      Company L

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

      Company M

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

      Company N

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

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

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

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

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

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

      Company O

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

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

      Company P

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

      THE DECISION

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

      ****


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

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

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

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

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

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

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

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

    • LD71-2013

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

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

      FACTS

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

      APPLICABLE LISTING RULES

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

      ANALYSIS

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

      CONCLUSION

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

    • LD70-2013

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

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

      FACTS

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

      APPLICABLE LISTING RULES

      6. Rule 7.21(1) states that:

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

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

      ANALYSIS

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

      CONCLUSION

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

    • LD69-2013

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

      Parties Company A — a Main Board issuer

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

      FACTS

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

      APPLICABLE LISTING RULE

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

      ANALYSIS

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

      CONCLUSION

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

    • LD68-2013

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      HKEx LISTING DECISION
      HKEx-LD68-2013 (published in May 2013) (updated in October 2019 (Rule amendments))

      Summary
      Parties Company A — a Main Board listed issuer

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

      FACTS

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

      APPLICABLE LISTING RULES

      8.   Rule 14.58 provides that:
       
      "The announcement for a share transaction, discloseable transaction... must contain at least the following information:    
       
      (1)   ...
       
      (2)   a description of the principal business activities carried on by the listed issuer and a general description of the principal business activities of the counterparty, if the counterparty is a company or entity; ..."
       
      9.   Rule 14.60 provides that:
       
      "In addition to the information set out in rule 14.58, the announcement for a discloseable transaction... must contain at least brief details of the following:    
       
      (1)   the general nature of the transaction ...
       
      (2)   brief details of the asset(s) being acquired or disposed of, including the name of any company or business or the actual assets or properties where relevant ..."
       

      ANALYSIS

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

      CONCLUSION

      13.   The Exchange granted the waiver to Company A.
       
      Note:   With effect from 1 October 2019, Rule 14.58(2) also requires the announcement of a notifiable transaction to disclose the identity of the counterparty.
       

    • LD66-2013

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

      Summary
      Party Company A — a Main Board listed issuer

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

      FACTS

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

      APPLICABLE LISTING RULES

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

      ANALYSIS

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

      CONCLUSION

      7. The Exchange granted the waiver to Company A.

    • LD65-2013

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

      Party Company A — a Main Board issuer

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

      FACTS

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

      APPLICABLE LISTING RULES

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

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

      ANALYSIS

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

      CONCLUSION

      11. The Exchange granted the waiver to Company A.

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

    • LD63-2013

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

      Summary
      Parties Company A — a Main Board listed issuer

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

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

      FACTS

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

      APPLICABLE LISTING RULE

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

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

      ANALYSIS

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

      CONCLUSION

      8. The Exchange granted the waiver to Company A.

    • LD62-2013

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

      Parties Company A — a Main Board issuer

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

      FACTS

      Background

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

      Proposed amendment to the Acquisition agreement

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

      APPLICABLE LISTING RULES

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

      ANALYSIS

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

      CONCLUSION

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

    • LD61-2013

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      HKEx LISTING DECISION
      HKEx-LD61-2013 (Published in April 2013) (Updated in July 2014, October 2019 (Rule amendments))

      Summary
      Parties Company A — a Main Board listed issuer

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

      FACTS

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

      APPLICABLE LISTING RULES

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

      ANALYSIS

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

      CONCLUSION

      17.   The Exchange accepted Company A's proposal to use the Alternative Revenue in place of the Published Revenue when calculating the revenue ratio.
       
      Note:   On 1 October 2019, Rules 14.20 and 14A.80 were amended to clarify that if any calculation of the percentage ratio produces an anomalous results or is inappropriate to the sphere of activities of the issuer, the Exchange (or the issuer) may apply an alternative size test that it considers appropriate to assess the materiality of a transaction under Chapters 14 and 14A.

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

       

    • LD60-2013

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      HKEx LISTING DECISION
      HKEx-LD60-2013 (Published in April 2013) (Updated in July 2014, October 2019 (Rule amendments))

      Summary
      Parties Company A — a Main Board listed issuer

      The Target — a subsidiary of Company A

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

      FACTS

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

      APPLICABLE LISTING RULES

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

      ANALYSIS

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

      CONCLUSION

      12.   The Exchange accepted Company A's proposal to disregard the revenue ratio and to use the alternative size test for classifying the Procurement Transactions.
       
      Note:   On 1 October 2019, Rules 14.20 and 14A.80 were amended to clarify that if any calculation of the percentage ratio produces an anomalous results or is inappropriate to the sphere of activities of the issuer, the Exchange (or the issuer) may apply an alternative size test that it considers appropriate to assess the materiality of a transaction under Chapters 14 and 14A.

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

       

    • LD59-2013

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      HKEx LISTING DECISION
      HKEx-LD59-2013 (published in April 2013) (updated in October 2019 (amendments to the reverse takeover Rules))

      Summary
      Parties Company A — a Main Board listed issuer

      Mr. X — Company A's executive director and substantial shareholder
       
      Issue Whether the Exchange would waive 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
       
      Listing Rules Note 2(a) to Main Board Rule 14.06B
       
      Decision The Exchange granted the waiver to Company A
       

      FACTS

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

      APPLICABLE LISTING RULES

      8.   Rule 14.06(6) defines a "reverse takeover" as:
       
          "an acquisition or a series of acquisitions of assets by an issuer which, in the opinion of the Exchange, constitutes, or is part of a transaction or arrangement or series of transactions or arrangements which constitute, an attempt to achieve a listing of the assets to be acquired and a means to circumvent the requirements for new applicants set out in Chapter 8 of the Exchange Listing Rules. A "reverse takeover" normally refers to:
       
      (a)   an acquisition or a series of acquisitions (aggregated under rules 14.22 and 14.23) of assets constituting a very substantial acquisition where there is or which will result in a change in control (as defined in the Takeovers Code) of the listed issuer (other than at the level of its subsidiaries); or
       
      (b)   acquisition(s) of assets from a person or a group of persons or any of his/their associates pursuant to an agreement, arrangement or understanding entered into by the listed issuer within 24 months of such person or group of persons gaining control (as defined in the Takeovers Code) of the listed issuer (other than at the level of its subsidiaries), where such gaining of control had not been regarded as a reverse takeover, which individually or together constitute(s) a very substantial acquisition. ... ..."
       
          (Rule 14.06(6) (now Rule 14.06B) was amended on 1 October 2019. See Note 1 below.)
       

      ANALYSIS

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

      CONCLUSION

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

      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.
       
        Note 2 to Rule 14.06B states that:

      “Without limiting the generality of rule 14.06B, the following transactions are normally reverse takeovers (the bright line tests):
       
      (a) an acquisition or a series of acquisitions (aggregated under rules 14.22 and 14.23) of assets constituting a very substantial acquisition where there is or which will result in a change in control (as defined in the Takeovers Code) of the listed issuer (other than at the level of its subsidiaries); or
       
      (b) acquisition(s) of assets from a person or a group of persons or any of his/their associates pursuant to an agreement, arrangement or understanding entered into by the listed issuer within 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. … …”
       
      2.   The Rule amendments would not change the analysis and conclusion in this case.
       

    • LD58-2013

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      HKEx LISTING DECISION
      HKEx-LD58-2013 (published in April 2013) (updated in October 2019 (amendments to the reverse takeover Rules))

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

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

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

      FACTS

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

      APPLICABLE LISTING RULES

      6.   Rule 14.06(6) defines a "reverse takeover" as:
       
          "an acquisition or a series of acquisitions of assets by an issuer which, in the opinion of the Exchange, constitutes, or is part of a transaction or arrangement or series of transactions or arrangements which constitute, an attempt to achieve a listing of the assets to be acquired and a means to circumvent the requirements for new applicants set out in Chapter 8 of the Exchange Listing Rules. A "reverse takeover" normally refers to:
       
      (a)   an acquisition or a series of acquisitions (aggregated under rules 14.22 and 14.23) of assets constituting a very substantial acquisition where there is or which will result in a change in control (as defined in the Takeovers Code) of the listed issuer (other than at the level of its subsidiaries); or
       
      (b)   acquisition(s) of assets from a person or a group of persons or any of his/their associates pursuant to an agreement, arrangement or understanding entered into by the listed issuer within 24 months of such person or group of persons gaining control (as defined in the Takeovers Code) of the listed issuer (other than at the level of its subsidiaries), where such gaining of control had not been regarded as a reverse takeover, which individually or together constitute(s) a very substantial acquisition. ... ..."
       
          (Rule 14.06(6) (now Rule 14.06B) was amended on 1 October 2019. See Note 1 below.)
       

      ANALYSIS

      7.   Rule 14.06(6) seeks to prevent circumvention of the new listing requirements. Its introductory paragraph defines "reverse takeover" as an acquisition or a series of acquisitions which represents, in the Exchange's opinion, an attempt to list the assets to be acquired and circumvent the new listing requirements.
       
      8.   In addition, paragraphs (a) and (b) of Rule 14.06(6) refer to two specific forms of reverse takeovers which involve a change in control of the issuer and injection of significant assets into it. They are bright line tests to determine a change in control based on the Takeovers Code and to assess an asset injection based on size tests.
       
      9.   In this case, the Exchange refused to waive Rule 14.06(6)(a) because:-
       
      a.   The acquisition was a very substantial acquisition which would result in a change in control of Company A. It fell within the bright line tests of Rule 14.06(6)(a).
       
      b.   Company A had ceased operations and was a listed shell. The acquisition was an attempt by the Vendor, the new controlling shareholder of Company A, to achieve a listing of its business (i.e. the Target) by injecting it into Company A.
       
      c.   This case was different from the circumstances in Listing Decision LD95-1 quoted by Company A where there was no asset injection by the investor who also obtained control of the listed issuer concerned.
       

      CONCLUSION

      10.   The acquisition was a reverse takeover under Rule 14.06(6)(a). Company A must submit a new listing application for its resumption proposal.
       

      Notes

      1   The reverse takeover Rules have been 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.
       
        Note 2 to Rule 14.06B states that:

      “Without limiting the generality of rule 14.06B, the following transactions are normally reverse takeovers (the bright line tests):
       
      (a) an acquisition or a series of acquisitions (aggregated under rules 14.22 and 14.23) of assets constituting a very substantial acquisition where there is or which will result in a change in control (as defined in the Takeovers Code) of the listed issuer (other than at the level of its subsidiaries); or
       
      (b) acquisition(s) of assets from a person or a group of persons or any of his/their associates pursuant to an agreement, arrangement or understanding entered into by the listed issuer within 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. … …”
       
      2   The Rule amendments would not change the analysis and conclusion in this case.
       

    • LD57-2013

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      HKEx LISTING DECISION
      HKEx-LD57-2013 (Published in April 2013) (Updated in October 2019 (amendments to the reverse takeover Rules) and January 2022 (amendments to the minimum profit requirement Rules))

      Parties Company A — a Main Board issuer

      Target — a company which Company A proposed to acquire
       
      Issue Whether Company A's proposed acquisition of an interest in the Target was a reverse takeover
       
      Listing Rules Main Board Rule 8.05(1), 14.06B and 14.54
       
      Decision The acquisition was a reverse takeover
       

      FACTS

      1.      Company A proposed to acquire some shares in the Target (the Target Shares) representing 50% of the Target's issued share capital. Upon completion, the Target Shares would be accounted for as an interest in an associated company or an investment in Company A's financial statements.
       
      2.   Company A would pay for the acquisition in cash and by issuing consideration shares and convertible bonds to the vendor. The consideration shares and the conversion shares would in aggregate represent over 1.8 times Company A's existing issued share capital. However, the terms of the convertible bonds did not allow any conversion which would trigger a mandatory general offer under the Takeovers Code.
       
      3.   The Target's principal business was principally engaged in the manufacturing and trading of sanitary ware products, which was different from Company A's principal businesses. Company A submitted that the Target could meet the profit requirement for new listing applicants under Rule 8.05(1).
       
      4.   The acquisition would be a very substantial acquisition based on the size tests. With an asset ratio of about 40 times and a revenue ratio of about 11 times, the Target was significantly larger than Company A.
       
      5.   There was an issue whether the acquisition would be treated as a reverse takeover under Rule 14.06(6).
       

      APPLICABLE LISTING RULES

      6.   Rule 8.05(1) states that:
       
          "To meet the profit test, a new applicant must have an adequate trading record under substantially the same management and ownership. This means that the issuer, or its group (excluding any associated companies and other entities whose results are recorded in the issuer's financial statements using the equity method of accounting), as the case may be, must satisfy each of the following:
       
      (a)      A trading record of not less than three financial years (see rule 4.04) during which the profit attributable to shareholders must, in respect of the most recent year, be not less than HK$20,000,000 and in respect of the two preceding years, be in aggregate not less than HK$30,000,000. ..."
       
      (Rule 8.05(1)(a) was amended on 1 January 2022. See Note 2 below.)
       
      7.   Rule 14.06(6) defines a "reverse takeover" as:
       
          "an acquisition or a series of acquisitions of assets by an issuer which, in the opinion of the Exchange, constitutes, or is part of a transaction or arrangement or series of transactions or arrangements which constitute, an attempt to achieve a listing of the assets to be acquired and a means to circumvent the requirements for new applicants set out in Chapter 8 of the Exchange Listing Rules. A "reverse takeover" normally refers to:
       
      (a)      an acquisition or a series of acquisitions (aggregated under rules 14.22 and 14.23) of assets constituting a very substantial acquisition where there is or which will result in a change in control (as defined in the Takeovers Code) of the listed issuer (other than at the level of its subsidiaries); or
       
      (b)   acquisition(s) of assets from a person or a group of persons or any of his/their associates pursuant to an agreement, arrangement or understanding entered into by the listed issuer within 24 months of such person or group of persons gaining control (as defined in the Takeovers Code) of the listed issuer (other than at the level of its subsidiaries), where such gaining of control had not been regarded as a reverse takeover, which individually or together constitute(s) a very substantial acquisition. ... ..."
       
      8.   Rule 14.54 states that:
       
          "The Exchange will treat a listed issuer proposing a reverse takeover as if it were a new listing applicant. The enlarged group or the assets to be acquired must be able to meet the requirements of Rule 8.05 and the enlarged group must be able to meet all the other basic conditions set out in Chapter 8 of the Exchange Listing Rules. ..."
       

      (Rule 14.06(6) (now Rule 14.06B) and Rule 14.54 were amended on 1 October 2019. See Note 1 below.)
       

      ANALYSIS

      9.   Rule 14.06(6) seeks to prevent circumvention of the new listing requirements. Its introductory paragraph defines "reverse takeover" as an acquisition or a series of acquisitions which represents, in the Exchange's opinion, an attempt to list the assets to be acquired and circumvent the new listing requirements. Rules 14.06(6)(a) and (b) provide bright line tests which apply two specific forms of reverse takeovers. They are not meant to be exhaustive. Therefore, transactions which are in substance backdoor listings but fall outside sub-rules (a) and (b) could still be treated as reverse takeovers. This, in practice, has been applied only to extreme cases (see the Listing Committee Annual Report 2009).
       
      10.   Here Rules 14.06(6)(a) and (b) did not apply because (i) the acquisition would not trigger the change in control test under sub-rule (a); and (ii) the vendor did not gain control of Company A within 24 months before the acquisition would be completed.
       
      11.   When determining whether the acquisition should be classified as a reverse takeover under Rule 14.06(6), the Exchange noted that:
         
            The acquisition would be a very substantial acquisition and, in terms of size, would be significant to Company A. Upon completion, Company A's existing businesses and assets would be relatively immaterial to the enlarged group. The acquisition was a means to achieve the listing of the Target Shares.
       
        Neither the assets to be acquired nor the enlarged group would be able to meet Rule 8.05:
       
      -      It was Company A's view that the Target could meet Rule 8.05(1). However, as Company A would account for the Target Shares as an interest in an associated company or an investment, the Exchange considered that the Target's trading record should be excluded for the purpose of Rule 8.05(1).
       
      -   Company A had recorded losses in recent years. The enlarged group (excluding the Target Shares) could not meet Rule 8.05.
       

      CONCLUSION

      12.   The Exchange considered that the acquisition was a transaction intended to list the Target Shares and circumvent the new listing requirements. It was an extreme case and should be classified as a reverse takeover under Rule 14.06(6).
       

      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.
       
      2.   The financial requirement under Rule 8.05(1)(a) has been amended with effect from 1 January 2022. Under the revised Rule 8.05(1)(a), a new applicant must have an adequate trading record of not less than three financial years during which the profit attributable to shareholders must, in respect of the most recent year, be not less than HK$35 million and, in respect of the two preceding years, be in aggregate not less than HK$45 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.
       
      3.   The Rule amendments would not change the analysis and conclusion in this case, but an assessment of whether the enlarged group could meet Rule 8.05 would not be required.
       

    • LD56-2013

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      HKEx LISTING DECISION
      HKEx-LD56-2013 (Published in March 2013) (Updated in April 2015)

      Parties Company A — a Main Board issuer

      Company B — an investor who agreed to subscribe for new shares and convertible notes to be issued by Company A
      Issue Whether the Exchange would give listing approval for new shares to be issued upon conversion of the convertible notes that could result in Company A's public float falling below the minimum 25% requirement under the Rules
      Listing Rules Main Board Rules 8.08(1)(a), 13.32
      Decision The Exchange gave the approval after Company A took satisfactory measures to ensure compliance with the public float requirement

      FACTS

      1. Company A proposed to issue certain new shares (the Subscription Shares) and convertible notes to Company B under a subscription agreement. The convertible notes would be convertible into new shares of Company A (the Conversion Shares) after the issue date according to the terms of the notes.
      2. The proposed issue was conditional on approval of Company A's shareholders and the Exchange giving listing approval for the Subscription Shares and the Conversion Shares.
      3. Upon completion of the subscription agreement, Company B would become a substantial shareholder of Company A, and the public float of Company A's shares would still meet the 25% requirement. However, based on the shareholding structure of Company A at that time, the public float would fall below 25% if Company B exercised its rights to convert some or all of the convertible notes.
      4. Company A proposed to undertake to the Exchange that it would take appropriate measures to ensure the compliance with the public float requirement at all times. For example, it would consider placing new shares to independent third parties to maintain a 25% public float as a result of any conversion of the convertible notes, or redeeming some of the convertible notes.
      5. Alternatively, Company A proposed to limit the maximum number of Conversion Shares that it might issue to Company B to be 25% of Company A's issued share capital at the time of completion of the subscription agreement.

      APPLICABLE LISTING RULES

      6. Rule 8.08(1)(a) provides that

      "at least 25% of the issuer's total number of issued shares must at all times be held by the public."
      7. Rule 13.32(1) states that

      "Issuers shall maintain the minimum percentage of listed securities as prescribed by rule 8.08 at all times in public hands..."

      ANALYSIS

      8. The public float requirement seeks to ensure an open market in the securities for which listing is sought. The Exchange would not give listing approval for an issue of new shares which would cause or facilitate a breach of the requirement.
      9. In this case, the issue of the convertible notes to Company B could possibly result in the public float of Company A's shares falling below the minimum 25% requirement. The Exchange did not consider that Company A's undertaking to use reasonable endeavours to meet the requirement would adequately address its concern. Without any concrete arrangements to ensure a minimum 25% public float for Company A upon conversion of the convertible notes, the Exchange was not prepared to give listing approval until the issue was addressed.
      10. The Exchange also did not consider the alternative proposal acceptable as it only took into account the shareholding structure of Company A at the time of the completion of the subscription agreement and not the conversion of the notes. It would be possible for Company A to issue Conversion Shares resulting in a breach of minimum public float requirement, as a result of changes to Company A's share capital (e.g. share repurchase) after the completion of the subscription agreement.
      11. To address the Exchange's concern, Company A and Company B agreed to revise the terms of the convertible notes so that a conversion of the notes could not take place if it would result in Company A failing to meet the minimum public float requirement under the Rules.

      CONCLUSION

      12. The Exchange accepted that the action taken by Company A in paragraph 11 above addressed the issue of possible insufficient public float upon completion of the subscription agreement.

    • LD55-2013

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      HKEx LISTING DECISION
      HKEx-LD55-2013

      Parties Company A — a Main Board issuer

      Company B — another Main Board issuer independent from Company A
      Issue Whether Company A was required to classify its subscription for convertible notes issued by Company B as if the notes were fully converted at the time of entering into the subscription agreement
      Listing Rules Main Board Rule 14.04(1)
      Decision The subscription of the notes would be classified as a transaction for Company A based on the percentage ratio calculations for providing financial assistance to Company B. It would not be classified as if the notes were fully converted given that the conversion of the notes was at Company A's discretion.

      FACTS

      1. Company A proposed to subscribe for certain convertible notes to be issued by Company B (the Subscription). Under the terms of the notes, Company A had the right to convert the notes into new shares of Company B any time during the conversion period. Any outstanding amount would be redeemed by Company B at the maturity date of the bonds.
      2. The Subscription was a transaction for Company A under Chapter 14 as it involved provision of financial assistance to Company B. There was an issue whether Company A would also need to classify the Subscription as if the notes were fully converted.
      3. Company A submitted that it had the sole discretion on the conversion of the notes, and it had yet to decide whether and when to exercise its conversion rights. If it proposed to convert the notes, it would comply with the notifiable transaction requirements for acquiring an interest in Company B.

      APPLICABLE LISTING RULES

      4. Rule 14.04(1) provides that:
      "any reference to a "transaction" by a listed issuer:
      (a) includes the acquisition or disposal of assets, ...;
      (b) includes any transaction involving a listed issuer writing, accepting, transferring, exercising or terminating (in the manner described in rule 14.73) an option (as defined in rule 14.72) to acquire or dispose of assets or to subscribe for securities;
      (c) ...;
      (d) ...;
      (e) includes granting an indemnity or a guarantee or providing financial assistance by a listed issuer, ...
      ..."
      5. Rule 14.12 states that:
      "Where the transaction involves granting an indemnity or guarantee or providing financial assistance by a listed issuer, the asset ratio will be modified such that the total value of the indemnity, guarantee or financial assistance plus in each case any monetary advantage accruing to the entity benefiting from the transaction shall form the numerator of the assets ratio. The "monetary advantage" includes the difference between the actual value of consideration paid by the entity benefiting from the transaction and the fair value of consideration that would be paid by the entity if the indemnity, guarantee or financial assistance were provided by entities other than the listed issuer."
      6. Rule 14.26 states that:
      "In an acquisition or disposal of equity capital, the numerators for the purposes of the (a) assets ratio, (b) profits ratio and (c) revenue ratio are to be calculated by reference to the value of the total assets, the profits attributable to such capital and the revenue attributable to such capital respectively."
      7. Rule 14.74 states that:
      "The following apply to an option involving a listed issuer, the exercise of which is not at the listed issuer's discretion:-
      (1) on the grant of the option, the transaction will be classified as if the option had been exercised. For the purpose of the percentage ratios, the consideration includes the premium and the exercise price of the option; and
      (2) on the exercise or transfer of such option, such exercise or transfer must be announced by the listed issuer by means of an announcement published in accordance with rule 2.07C as soon as reasonably practicable if the grant of the option has previously been announced pursuant to the requirements of this Chapter."
      8. Rule 14.75 states that:
      The following apply to an option involving a listed issuer, the exercise of which is at the listed issuer's discretion:-
      (1) on the acquisition by, or grant of the option to, the listed issuer, only the premium will be taken into consideration for the purpose of classification of notifiable transactions. Where the premium represents 10% or more of the sum of the premium and the exercise price, the value of the underlying assets, the profits and revenue attributable to such assets, and the sum of the premium and the exercise price will be used for the purpose of the percentage ratios; and
      (2) on the exercise of such option by the listed issuer, the exercise price, the value of the underlying assets and the profits and revenue attributable to such assets, will be used for the purpose of the percentage ratios. Where an option is exercised in stages, the Exchange may at any stage as the Exchange may consider appropriate require the listed issuer to aggregate each partial exercise of the option and treat them as if they were one transaction (see rules 14.22 and 14.23).

      ANALYSIS

      9. The Subscription would be a transaction for Company A that involved provision of financial assistance to Company B and accepting an option to convert the notes into Company B's shares. The Exchange agreed that when Company A entered into the subscription agreement:
      •   it should classify the Subscription by calculating the percentage ratios for the provision of financial assistance to Company B; and
      •   it was not necessary to classify the Subscription as if the notes were fully converted given that the conversion was at Company A's discretion. If Company A subsequently proposed to exercise the conversion rights, it would be required to classify the conversion as a transaction at that time taking into account the conversion price and Company B' total assets, revenue and profits. This was in line with the approach applicable to transactions involving options under Chapter 14.

      CONCLUSION

      10. The Subscription would be classified as a transaction of Company A based on the percentage ratio calculations for providing financial assistance to Company B.

    • LD54-2013

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      HKEX LISTING DECISION
      HKEX-LD54-2013 (Published in March 2013) (Updated in April 2015 and July 2018)

      Parties Company A — a Main Board issuer
      Issue Whether the Exchange would approve the proposed changes to the terms of convertible bonds issued by Company A under a general mandate
      Listing Rules Main Board Rules 13.36, 28.05
      Decision Company A was required to comply with Rule 13.36 for the proposals

      FACTS

      Background

      1. Two years ago, Company A issued certain convertible bonds to an independent third party (the investor) under a general mandate (the original general mandate). Assuming full conversion of the bonds at the initial conversion price, the conversion shares would represent 10% of the then issued shares of Company A.
      2. The original general mandate allowed Company A to issue new shares of not more than 20 per cent. of its issued shares until the conclusion of the next annual general meeting. Except for the issue of the convertible bonds, Company A had not used the mandate to issue any other securities.

      Proposals

      3. In light of the change in market conditions after the issue of the convertible bonds, Company A and the investor proposed to revise the terms of the bonds:
      (a) The parties proposed to reduce the initial conversion price of the bonds. Based on the revised conversion price, the maximum number of conversion shares would not exceed the number of new shares issuable under the original general mandate.
      (b) Alternatively, the parties would extend the conversion period and the maturity date of the bonds for one year. There would not be any change to the conversion price of the bonds and therefore the number of conversion shares issuable by Company A.
      4. Company A submitted that the original general mandate would be sufficient to cover the conversion shares issuable under the revised terms of the bonds. It sought the Exchange's approval for the proposed changes to the terms of the bond.

      APPLICABLE LISTING RULES

      5. Rule 13.36 states that:
      (1)
      (a) Except in the circumstances mentioned in rule 13.36(2), the directors of the issuer ... shall obtain the consent of shareholders in general meeting prior to allotting, issuing or granting:
      (i) shares;
      (ii) securities convertible into shares; or
      (iii) options, warrants or similar rights to subscribe for any shares or such convertible securities.

      Note: Importance is attached to the principle that a shareholder should be able to protect his proportion of the total equity by having the opportunity to subscribe for any new issue of equity securities. Accordingly, unless shareholders otherwise permit, all issues of equity securities by the issuer must be offered to the existing shareholders (and, where appropriate, to holders of other equity securities of the issuer entitled to be offered them) pro rata to their existing holdings, and only to the extent that the securities offered are not taken up by such persons may they be allotted or issued to other persons or otherwise than pro rata to their existing holdings. This principle may be waived by the shareholders themselves on a general basis, but only within the limits of rules 13.36(2) and (3).
      (b) ...
      (2) No such consent as is referred to in rule 13.36(1)(a) shall be required:
      (a) ...
      (b) if, but only to the extent that, the existing shareholders of the issuer have by ordinary resolution in general meeting given a general mandate to the directors of the issuer, either unconditionally or subject to such terms and conditions as may be specified in the resolution, to allot or issue such securities or to grant any offers, agreements or options which would or might require securities to be issued, allotted or disposed of, whether during the continuance of such mandate or thereafter, subject to a restriction that the aggregate number of securities allotted or agreed to be allotted must not exceed the aggregate of (i) 20% of the number of issued shares of the issuer as at the date of the resolution granting the general mandate (or in the case of a scheme of arrangement involving an introduction in the circumstances set out in rule 7.14(3), 20% of the number of issued shares of an overseas issuer following the implementation of such scheme) and (ii) the number of such securities repurchased by the issuer itself since the granting of the general mandate (up to a maximum number equivalent to 10% of the number of issued shares of the issuer as at the date of the resolution granting the repurchase mandate), provided that the existing shareholders of the issuer have by a separate ordinary resolution in general meeting given a general mandate to the directors of the issuer to add such repurchased securities to the 20% general mandate.

      ...
      ...
      6. Rule 28.05 states that:
      Any alterations in the terms of convertible debt securities after issue must be approved by the Exchange, except where the alterations take effect automatically under the existing terms of such convertible debt securities.

      ANALYSIS

      7. The Exchange considered that each of the proposals described in paragraph 3 would constitute a material change to the terms of the convertible bonds. They should be regarded as new arrangements for Company A to issue convertible securities to the investor. It could not use the original general mandate for the new arrangements.
      8. Accordingly, Company A was required to comply with Rule 13.36 for the proposals. It should obtain a specific mandate for issuing the conversion shares under the revised terms of the bonds unless it had an existing general mandate that was valid and sufficient to cover these conversion shares. If Company A failed to do so, the Exchange would not approve the proposed changes to the terms of the bonds.

      CONCLUSION

      9. Company A was required to comply with Rule 13.36 for the proposals.

      SUBSEQUENT DEVELOPMENT (Updated in July 2018)

      10. Under Rule 13.36(6) (which became effective on 3 July 2018), an issuer may not issue securities convertible into new shares of the issuer for cash consideration pursuant to a general mandate under Rule 13.36(2)(b), unless the initial conversion price is not lower than the benchmarked price (as defined in Rule 13.36(5)) of the shares at the time of the placing.
      11. In this case, the convertible bonds were issued to the investor for cash consideration two years ago and Company A was required to comply with Rule 13.36 for the proposals described in paragraph 3. Under the amended Rules, Company A should obtain a specific mandate for issuing the conversion shares under the revised terms of the bonds unless (i) it had an existing general mandate that was valid and sufficient to cover these conversion shares; and (ii) the conversion price of the bonds as revised was not lower than the benchmarked price of the shares at the time of the proposal.

    • LD52-2013

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      HKEx LISTING DECISION
      HKEx-LD52-2013 (published in March 2013)

      Summary
      Party Company A — a company listed on a PRC stock exchange which proposed to convert its entire B Shares into H Shares and sought a listing of the H Shares on the Main Board of the Exchange by way of introduction
      Issue
      (i) Whether Company A's listing by way of introduction would be acceptable
      (ii) Whether Company A's requested waivers would be granted
      Listing Rules Rules 2.04, 4.01(1), 7.14, 7.15, 8.06, 8.08(1)(b), 8.08(3), 19A.18(1) and paragraph 37 of Appendix 1A
      Decision The Exchange considered that:
      (i) Company A's listing by way of introduction was acceptable; and
      (ii) the waivers were granted to Company A based on its particular facts and circumstances and should not be treated as precedents for other companies seeking to convert their B shares into H shares. Waiver applications of future cases will be considered on a case-by-case basis.

      FACTS

      1. Company A was incorporated in the PRC and both its A shares ("A Shares") and its B shares ("B Shares") had been listed on a PRC stock exchange for more than ten years.
      2. Company A proposed to convert its entire B Shares into H shares ("H Shares") and sought a listing of the H Shares on the Main Board of the Exchange by way of introduction (the "Proposed Introduction"). Its B Shareholders could choose to become H Shareholders or sell their B Shares before the Proposed Introduction to an independent third party (the "Third Party") to be arranged by Company A (the "Cash Offer").
      3. Company A considered that the Proposed Introduction was an appropriate method of listing. It would undertake the Proposed Arrangement detailed in paragraph 14(iii) to ensure that a sufficient number of public shareholders deposited their H Shares with Hong Kong brokers for trading upon the Proposed Introduction.
      4. Company A was able to comply with the profit test requirement under Rule 8.05(1). It applied for waivers from strict compliance with certain requirements under the Rules, including the following:
      (i) Minimum public float requirements1 (in the event of non-compliance with those requirements after the Cash Offer):
      (a) Rule 8.08(1)(b) to allow a minimum H Share public float of 10% with a market capitalisation of about HK$3 billion; and
      (b) Rule 8.08(3) so that the aggregate shareholding of the three largest public shareholders would not exceed 65% of the total H Share public float upon the Proposed Introduction;
      (ii) Financial statements requirements:
      (a) Rule 4.01(1) and paragraph 37 of Appendix 1A to the Rules so that the accountants' report would be replaced by Company A's published financial statements for the latest three financial years (the "Historical Financial Information"); and
      (b) Rule 8.06 to disclose interim financial information for the current financial year which had not been audited or reviewed by the reporting accountants ("Interim Financial Information"); and
      (iii) Residency of independent non-executive director ("INED"):
      (a) Rule 19A.18(1) so that Company A was not required to have an INED ordinarily resident in Hong Kong until its next annual general meeting ("AGM").

      APPLICABLE RULES AND PRINCIPLES

      Listing by way of introduction

      5. Rule 7.14 states that introductions will normally be appropriate where, among others, the securities for which listing is sought are al listed on another stock exchange.
      6. Rule 7.15 states that an introduction will only be permitted in exceptional circumstances if there has been a marketing of the securities in Hong Kong within the six months prior to the proposed introduction where such marketing was made conditional on listing being granted for those securities. Furthermore, there may be other factors, such as a pre-existing intention to dispose of securities, a likelihood of significant public demand for the securities or an intended change of the issuer's circumstances, which would render an introduction unacceptable to the Exchange.
      7. In addition, the Exchange announced in December 2009 that it would only consider an application for listing by way of introduction if the new applicant and its sponsor could satisfy the Exchange that there would be adequate precautionary measures in place on and from the first day of listing on the Exchange to ensure that the new applicant's shares would be traded on an orderly, informed and fair basis.

      Waivers

      8. Rule 2.04 states that the Exchange may waive, modify or not require compliance with the Rules in individual cases (to suit the circumstances of a particular case), as a variety of circumstances may exist which require it to make decisions in particular cases.
      9. Rule 8.08(1)(b) states that where an issuer has one class of securities or more apart from the class of securities for which listing is sought, the total securities of the issuer held by the public (on all regulated market(s) including the Exchange) at the time of listing must be at least 25% of the issuer's total issued share capital. However, the class of securities for which listing is sought must not be less than 15% of the issuer's total issued share capital, having an expected market capitalisation at the time of listing of not less than HK$50,000,000.
      10. Rule 8.08(3) requires that not more than 50% of the securities in public hands at the time of listing can be beneficially owned by the three largest public shareholders.
      11. Rule 4.01(1) and paragraph 37 of Appendix 1A to the Rules require accountants' reports to be included in a listing document issued by a new applicant.
      12. Rule 8.06 states that in the case of a new applicant, the latest financial period reported on by the reporting accountants must not have ended more than six months before the date of the listing document.
      13. Rule 19A.18(1) states that at least one of the INEDs must be ordinarily resident in Hong Kong for a PRC issuer.

      ANALYSIS

      Listing by way of introduction

      14. The Exchange considered Company A's listing by way of the Proposed Introduction acceptable after taking into account:
      (i) both its A Shares and its B Shares had been listed on the PRC stock exchange for more than ten years;
      (ii) all the H Shares (representing about 50% of Company A's total issued shares) would be registered on the Hong Kong share register, and apart from the H Shares held by the existing substantial shareholders (representing about 30% of Company A's total issued shares) which were subject to voluntary lock-up, all the H Shares would be available for trading on the Exchange;
      (iii) to ensure adequate liquidity in the trading of H Shares upon the Proposed Introduction, Company A proposed to procure at least 300 public B Shareholders to deposit the converted H Shares in broker accounts opened in Hong Kong, and those converted H Shares would have a minimum market capitalisation of HK$1 billion and be to trade on the Exchange upon the Proposed Introduction (the "Proposed Arrangement"). These H Shares would be well above the latest 30-day accumulated trading volume of the B Shares on the PRC stock exchange and the required minimum market capitalisation of shares held by the public of HK$50 million under Rule 8.09(1);
      (iv) the Cash Offer was not considered marketing activities of Company A's shares in Hong Kong before listing given that it would be completed in the PRC before the Proposed Introduction. In addition, the Cash Offer was to protect the B Shareholders' interests if they did not intend to convert their B Shares into H Shares, and therefore it should not be deemed as a situation involving "marketing" or "pre-existing intention to dispose of securities" under Rule 7.15; and
      (v) Company A would disclose:
      (a) in its listing document the Proposed Arrangement and a risk factor that its effectiveness might be subject to limitations, and the historical share price and trading volume of the B Shares by month for the last five years; and
      (b) by way of announcements on the websites of both the Exchange and the PRC stock exchange, the closing prices of the A Shares and B Shares on each of the three trading dates immediately before the Proposed Introduction.

      Waivers

      15. The Exchange agreed to grant the requested waivers to Company A having considered, among others, that:

      Minimum public float requirements
      (i) the Proposed Arrangement as set out in paragraph 14(iii) indicated that there would be sufficient liquidity in the H Shares;
      (ii) if the requested 10% H Share public float waiver was granted, the market capitalisation of the 10% H Share public float would be about HK$3 billion. If the requested waiver to allow the aggregate shareholding of the three largest public shareholders not exceeding 65% of the total H Share public float was granted, the market capitalisation of H Share public float excluding the three largest public H Shareholders would be about HK$2 billion. The market capitalisation of the relevant H Share public float under both circumstances would be well above the minimum public float market capitalisation of HK$50 million under Rules 8.08(1)(b) and 8.09(1);
      (iii) Company A had a B Share public float of about 20%, more than 60% of them were held by investors outside the PRC;
      (iv) Company A had undertaken to increase the H Share public float to 15% as required under Rule 8.08(1)(b) within one year from the Proposed Introduction, subject to the China Securities Regulatory Commission's approval; and
      (v) Company A is a listed company with a market capitalisation of about HK$30 billion;

      Financial statements requirements
      (vi) the Proposed Introduction would not involve any new investors and all the existing shareholders had al been provided with the Historical Financial Information 2 . The same financial information would be provided to Hong Kong investors as to Company A's existing shareholders. If an accountants' report were to be prepared for Company A, no adjustment to the Historical Financial Information was expected;
      (vii) Company A and its sponsor considered that the Historical Financial Information would provide adequate and sufficient information on its performance and financial position during the track record period to its existing shareholders and Hong Kong investors. In addition, Company A would disclose in its listing document a directors' confirmation that all material information had been included in the listing document and the information contained was accurate and complete in all material respects and not misleading or deceptive; and
      (viii) Company A's auditors and reporting accountants would provide it and its sponsor with a comfort letter with respect to the Interim Financial Information based on certain agreed upon procedures performed under China Standards on Related Services 41013 and the Interim Financial Information was for the interim period ended two months before Company A's listing document;

      Residency of INED
      (ix) Company A required more than three months to appoint an additional INED ordinarily resident in Hong Kong. The term of the current board would expire in the forthcoming AGM to be held within five months after the Proposed Introduction and Company A undertook to appoint an INED ordinarily resident in Hong Kong at the AGM; and
      (x) Company A proposed to appoint professional parties which are familiar with business, legal and regulatory issues in Hong Kong such as a Hong Kong legal adviser so long as Company A was listed on the Exchange.
      16. Company A subsequently withdrew the public float waiver applications as soon as it became aware that it had sufficient public float under Rules 8.08(1)(b) and 8.08(3) after the Cash Offer.
      17. These waivers were granted based on the particular facts and circumstances of Company A. All waivers granted to Company A will not be treated as precedents for other companies seeking to convert their B shares into H shares.

      CONCLUSION

      18. The Exchange considered that:
      (i) Company A's listing by way of introduction was acceptable; and
      (ii) the waivers were granted to Company A based on its particular facts and circumstances and should not be treated as precedents for other companies seeking to convert their B shares into H shares. Waiver applications of future cases will be considered on a case-by-case basis.

      ****


      1 Company A had a B Share public float of about 20% of its total issued Shares. For the avoidance of doubt, Company A only needed one of these two waivers after completion of the Cash Offer:

      (i) if the Third Party acquired 10% or more of the total issued Shares, it would not be regarded as a public shareholder. Company A would have a H Share public float of about 10% and would require a minimum public float (Rule 8.08(1)(b)) waiver; or
      (ii) if the Third Party acquired 9.99% or less of the total issued Shares, it would be regarded as a public shareholder. Company A would maintain a H Share public float of about 20% but it would require a waiver for the aggregate shareholding of the three largest public H Shareholders (Rule 8.08(3)).

      2The Historical Financial Information had been prepared under China Accounting Standards for Business Enterprises (acceptable accounting standards for PRC issuers under Rule 4.11) and audited by an approved PRC auditor under Rule 19A.08.

      3China Standards on Related Services 4101 is a comparable standard to that required by the Hong Kong Institute of Certified Public Accountants and the International Federation of Accountants.

    • LD48-2013

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      HKEX LISTING DECISION
      HKEX-LD48-2013 (January 2013) (Updated in May 2016)

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

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

      Company G, Company H, Company I, Company J and Company K
      — GEM listing applicants
      Issue To provide guidance on why the Exchange returned certain listing applications
      Listing Rules Main Board Rule 9.03(3) and GEM Rules 12.09 and 12.14
      Decision The Exchange returned the applications

      APPLICABLE RULES, REGULATIONS AND PRINCIPLES

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

      ANALYSIS

      4. The following set out the reasons why the Exchange considered the applications were not in an advanced form and returned certain listing applications during the period from January 2012 to November 2012.

      Company A

      5. Company A provided certain maintenance works. There were several deficiencies in disclosure:
      (i) Business model

      It was unclear whether Company A acted as a main contractor or a sub-contractor in its completed projects during the track record period and in future projects. For the service segment, there was no information on whether Company A obtained service projects through bidding or negotiation; and how it carried out its services (e.g. whether special approval from the government and traffic arrangement were required). For the equipment segment, there was no detail on whether Company A participated in tender bidding.
      (ii) Financial position

      The discussion of Company A's trade and bills receivables was too general. There was no meaningful explanation on (i) why Company A accumulated significant amounts of trade and bills receivables given that it required advanced deposits from new customers and did not generally grant credit to new customers; (ii) circumstances giving rise to the increasing amount of impairment of trade receivables during the track record period; and (iii) underlying reasons for delays in settlement from certain customers. There was no meaningful explanation for Company A's delay in settlement of certain payments for raw materials and subcontracting costs and the significant increase in trade payables aged over 1 year.
      (iii) Future plans and business strategies

      There was insufficient justification for the 100% increase in production capacity and the expansion plan given that Company A's current geographic coverage in the relevant country appears extensive.
      (iv) Others

      The "Summary" section of the prospectus lacked sufficient information to provide investors with a concise overview of Company A's operation model and highlights of significant matters. Company A did not use HKEX-GL27-121 as guidance. (Updated in May 2016)

      Company B

      6. Company B submitted its listing application in August 2012. The audited financial information included in the prospectus covered each of the three financial years ended 31 December 2011 and therefore the Company did not comply with the requirement of Rule 8.06 which states that the latest financial period reported on by the reporting accountants must not have ended more than six months before the listing document. The sponsor also had not provided the confirmation under paragraph 4.6 of Guidance Letter HKEX-GL6-092 for the Exchange to accept early filing. (Updated in May 2016)
      7. The PRC legal opinion revealed that Company B's controlling shareholder and executive director was implicated in two bribery convictions which might have implications for his suitability as a director. These concerns were not brought to the Exchange's attention in the documents submitted together with the listing application form (e.g. under paragraph 27 of Checklist I.B. — confirmation that there are no other material issues which could detrimentally affect the suitability of listing). There was also no submission from the sponsor on why it considered the individual as suitable to be a director under the Listing Rules.

      Company C

      8. Company C was engaged in the production of a certain metal. There were several deficiencies in disclosure:
      (i) Company C did not use HKEX-GL27-121 as guidance for disclosure in the "Summary" section of the prospectus; and (Updated in May 2016)
      (ii) although the price of the relevant metal fluctuated heavily during the track record period, there was no sensitivity analysis on how the movement in the price impacted Company C's profits during the track record period, and the basis to support its profit forecast.
      9. An article revealed that a company with a similar name to Company C's operating subsidiary was accused of emitting hazardous gas and discharging waste water into a drinking water protection area and causing lead-related pollution. No information on the allegation was provided in the listing application.

      Company D

      10. Company D was a mining company operating in a country subject to sanctions from the United Nations and the European Union. It was a mineral company under Chapter 18 of the Listing Rules and sought a waiver from the minimum profits requirement.
      11. In response to pre-IPO enquiries raised by the sponsors on behalf of Company D, the Exchange requested the sponsors and Company D to critically assess the issues of (i) suitability for listing and (ii) competition with controlling shareholder before submitting a listing application.
      12. Company D subsequently submitted the listing application. In relation to sanctions, there was a directors' confirmation which was brief and did not state the basis of the directors' view. There was also no view provided by the sponsors.
      13. On competition, the disclosure did not fully comply with the requirement under Rule 8.10(1)(a), including reasons for the exclusion of the excluded business, size of such business and how such business may compete with Company D's business, etc.
      14. Other disclosure deficiencies:
      (i) Company D did not have any customers and had not entered into any legally-binding sales or off-take agreements. There was lack of details on how new customers were to be procured.
      (ii) The "Industry Overview" section did not provide any outlook or forecast information on the industry in certain countries in which Company D operated.
      (iii) Based on the biographies of the directors and senior management, it appeared that they lacked experience in operating mining businesses in overseas countries. The prospectus did not give sufficient information for readers to appraise the future outlook of Company D, and that Company D's business was sustainable.
      (iv) The prospectus did not provide any information on Company D's future business model after commencing commercial production. In addition, certain aspects of Company D's operation were unclear, including: (i) details of the outstanding permits, approvals and licenses for commercial production and (ii) which activities would be carried out by Company D or contractors, and where the functions are outsourced, details of these functions and experience of the contractors.

      Company E

      15. Company E was a property development company.
      16. The Exchange had previously accepted its listing application for vetting. The Exchange issued a letter to the sponsor stating its intention to reject the listing application on the ground that Company E had not demonstrated its working capital sufficiency and its ability to meet its profit forecast. The Exchange issued a letter to the sponsor upon the lapse of the application stating that unless the sponsor had resolved to the Exchange's satisfaction the issues stated in the letter and provided updated accounts, the Exchange would not accept Company E's renewed listing application.
      17. Company E re-submitted a new listing application. The Exchange considered that the sponsor had not provided sufficient information to fully address the concerns raised in its previous letter. In particular, Company E had not provided an updated profit forecast and working capital forecast memorandum and the audited accounts had not been updated.

      Company F

      18. Company F engaged in the property businesses.
      19. Company F's accountants' report covered the three financial years ended 31 December 2011 and the six months ended 30 June 2012. Whilst Company F reported net profits attributable to shareholders for financial years 2009 to 2011, it incurred a net loss for the six months ended 30 June 2012.
      20. Company F applied for a waiver from the requirement of Rule 4.04(1) such that it would not be required to update its accountants' report to cover the year ended 31 December 2012. If the waiver was not granted, it was doubtful whether Company F could meet the minimum profits requirement for the latest financial year (i.e. 2012) given the net loss incurred in the first half of 2012.
      21. The Exchange considered it not appropriate to recommend the requested waiver.
      22. There were also several deficiencies in disclosure:
      (i) Summary section

      The disclosure did not follow the guidance in the Guidance Letter HKEX-GL27-121. Missing information included: (Updated in May 2016)
      •   a detailed discussion of Company F's fair value gains of the investment properties and realized gain on disposal of an investment property holding subsidiary, their contribution to the profit of Company F and relevant sensitivity analysis;
      •   breakdown of Company F's revenue contribution and key operating data during the track record period, with commentary on material fluctuations;
      •   historical non-compliances;
      •   identities, background and relationships with major customers and suppliers; and
      •   an update on the recent development of Company F's operations and financial performance in accordance with Guidance Letter HKEX-GL41-12.
      (ii) Business model and future plans
      •   details of the properties held by the Company F;
      •   in respect of the land/properties acquired by Company F, details of the tendering process and the decision making process and the measures/ policies to monitor the Company F's leasing business, occupancy rates, rental yield and liquidity and financial positions;
      •   how Company F's development plan would affect Company F's business risk profile and highlight the associated risks and impact in the "Summary" and "Risk Factors" sections; and
      •   how Company F's strategy of developing residential projects aligned with its policy, the commercial rationale for this strategy and how Company F planned to achieve the relevant strategy.
      (iii) Non-compliance incidents

      The disclosure on non-compliance incidents was unclear and insufficient. The rectification measures and internal controls were not specific and could not be aligned to the non-compliances. There was also limited disclosure on the maximum penalties and liabilities.
      (iv) Regulatory overview

      The prospectus lacked disclosure on the relevant rules and regulations applicable to Company F's business and operations.
      (v) Disclosure of the financial position

      Company F had net current liabilities and negative operating cash flow. The prospectus should have provided more meaningful discussion on Company F's tight liquidity position and how the Group would improve its liquidity position and finance its purchase of land/ properties.

      Company G

      23. There were several deficiencies in disclosure:
      (i) Description of business model

      The disclosure on Company G's principle businesses was unclear and delineation between different segments was vague. It was not clear when and how Company G derived and recognized revenue for each business segment. It was unclear whether the agent customers served as the Group's distributors or end-customers.

      There was inadequate disclosure on how Company G priced its products and/or services and no disclosure on the renewal status of Company G's operating license.
      (ii) Summary section

      The disclosure did not follow the guidelines in the Guidance Letter HKEX-GL27-121. (Updated in May 2016)
      (iii) Potential Tax Liabilities

      Company G's subsidiary might be exposed to additional tax liabilities due to non-compliance with the relevant laws and regulations and might also be subject to penalty. However, the disclosure on details of the non-compliances was unclear and convoluted. The prospectus also lacked information on the root causes of the non-compliances. The sponsor also did not provide its view on these non-compliances and how they might impact on Company G and whether its directors have the character and competency to run a listed company.
      24. There was no sponsor's view on Company G's executive director and non-executive director who served in another company which a number of articles had criticized on human rights abuses, ignoring indigenous people's human rights, perpetrating political corruption and neglecting the environment in relation to its forestry logging activities.

      Company H

      25. Company H did not submit, together with the listing application form, the anticipated final draft of the sponsor's letter on working capital sufficiency as required under GEM Rule 12.22(13).

      Company I

      26. Company I was a distributor of certain products. There were several deficiencies in disclosure:
      (i) Summary section

      The "Summary" section of the prospectus lacked sufficient information to provide investors with a concise overview of Company I's operation model and highlights of significant matters. Company I did not use HKEX-GL27-121 as guidance. Examples of material information missing included description of the usage of Company I's main products, the classification of distributors, how Company I determined the pricing of its products with its suppliers and distributors, the price control under the relevant PRC laws and regulations and legal proceedings against Company I. (Updated in May 2016)
      (ii) Competition with the Controlling Shareholder

      The prospectus did not provide details to demonstrate (i) how the distribution businesses of Company I and its controlling shareholder could be delineated, and (ii) that there were adequate and effective corporate governance measures to manage conflicts of interest and competition between them.
      (iii) Distributorship

      There was insufficient disclosure on the relationship between the different types of distributor customers and measures to address the potential conflict of interests. The degree of Company I's control over its distributors with respect to compliance with the national pricing policy, sales and avoidance of cannibalisation and the competition between different types of distributors were unclear.

      The prospectus should have also included information to address the issue of independence of distributors according to Guidance Letter HKEX-GL36-12. The prospectus should have provided an explanation on what value-added services Company I provided to its distributor customers to sustain its level of gross profit margin which was particularly high when compared to its peers.
      (iv) Industry and Regulatory Overview

      The prospectus lacked information about the regulations on price control. There was no detailed analysis of the extent to which Company I was affected by the controlled price changes during the track record period, the measures taken to mitigate the adverse impact of price reductions, and an update on relevant laws and regulations applicable to Company I and their impact.
      (v) Future plans and business objectives

      There was insufficient information on Company I's plan to expand its distribution network by obtaining new exclusive distribution rights for new products. There was also insufficient information on why Company I needed to enhance the development of products through alliance or partnership, given that Company I was only engaged in distribution, but not research and development.

      Company J

      27. Company J did not highlight matters which might have significant adverse impact on its operation and financial position in the foreseeable future in the "Summary" and other relevant sections as required under Guidance Letter HKEX-GL27-121. For example, there was no discussion regarding the potential significant decrease in revenue resulting from the recent reorganization and massive layoff plan of one of Company J's top five customers, and the anticipated substantial decline in net profit. (Updated in May 2016)
      28. There was insufficient disclosure of the key terms of agreements with major customers.
      29. Certain information requested in the Exchange's pre-IPO guidance letter had not been adequately disclosed.

      Company K

      30. There were several deficiencies in disclosure:
      (i) There was no disclosure on the reason for the absence of title certificates for Company K's production facilities, the estimated impact on Company K in case of forced eviction, the legality of the lease agreement in respect of collectively-owned land, and analysis on the adequacy and sufficiency of contingency measures.
      (ii) The risks associated with Company K's business in international-sanctioned countries had not been adequately highlighted.
      (iii) There was inadequate disclosure on Company K's arrangements with subcontractors.
      (iv) There was limited information on Company K's business rationale to raise significant bank borrowings to acquire numerous properties from the controlling shareholders shortly before submitting the listing application.
      (v) The commentary on the year-on-year fluctuation on financial statement items and financial ratios was framed in very general terms.
      31. Company K submitted the listing application shortly after the latest audited financial period end date. Given such a limited period of time, there were concerns on whether adequate and sufficient audit work and due diligence had been performed by the reporting accountants and the sponsor on the financial information.

      THE DECISION

      32. The Exchange returned the applications.
      33. Subsequently, all but 2 applicants re-filed listing applications 3 to 119 days after the Exchange returned their previous applications. As they had disclosed and/ or provided the missing information/ documents, the Exchange accepted the re-filed applications.

      ****


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

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

    • LD46-2013

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      HKEx LISTING DECISION
      HKEx-LD46-2013 (Published in January 2013) (Updated in April 2015)

      Parties Company A — a Main Board issuer

      Mr. X — an appointee of Company A's secretary
      Issue Whether Mr. X qualified to act as Company A's secretary
      Listing Rules Main Board Rule 3.28
      Decision Mr. X qualified to act as Company A's secretary under Rule 3.28

      FACTS

      1. Company A proposed to appoint Mr. X as its company secretary and chief financial officer.
      2. Mr. X did not have the academic or professional qualifications set out in Note 1 to Rule 3.28. That said, Company A considered that Mr. X, by virtue of his professional qualification and relevant experience, was capable of discharging the functions of its company secretary:
      a. Mr. X was a member of a reputable overseas professional body of accountants.
      b. Before joining Company A, Mr. X was the chief financial officer of another listed issuer. In addition to financial management and reporting matters, he also participated in the preparation of the company's regulatory announcements and circulars.
      c. He had regularly attended training courses relating to corporate governance, accounting and financial reporting, the Listing Rules and company law.

      APPLICABLE LISTING RULES

      3. Rule 3.28 states that:
      "The issuer must appoint as its company secretary an individual who, by virtue of his academic or professional qualifications or relevant experience, is, in the opinion of the Exchange, capable of discharging the functions of company secretary.

      Notes:
      1 The Exchange considers the following academic or professional qualifications to be acceptable:
      (a) a Member of The Hong Kong Institute of Chartered Secretaries;
      (b) a solicitor or barrister (as defined in the Legal Practitioners Ordinance);and
      (c) a certified public accountant (as defined in the Professional Accountants Ordinance).
      2 In assessing "relevant experience", the Exchange will consider the individual's:
      (a) length of employment with the issuer and other issuers and the roles he played;
      (b) familiarity with the Listing Rules and other relevant law and regulations including the Securities and Futures Ordinance, Companies Ordinance, Companies (Winding Up and Miscellaneous Provisions) Ordinance and the Takeovers Code;
      (c) relevant training taken and/or to be taken in addition to the minimum requirement under rule 3.29; and
      (d) professional qualifications in other jurisdictions."

      ANALYSIS

      4. In light of Mr. X's professional qualifications, his working experience and the relevant training taken by him, the Exchange accepted that Mr X was capable of discharging the functions of Company A's secretary.

      CONCLUSION

      5. Mr. X qualified to act as Company A's secretary under Rule 3.28.

    • LD45-2013

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      HKEx LISTING DECISION
      HKEx-LD45-2013 (Published in January 2013)

      Party Company A — a Main Board issuer

      The Target — a company listed on the Australian Stock Exchange
      Issue Whether the Exchange would grant a waiver such that Company A could defer the publication of the competent person's report (CPR), valuation report (VR) and other disclosures as required under Rules 18.09(2), (3) and (4)
      Listing Rules Main Board Rules 18.09(2), 18.09(3) and 18.09(4)
      Decision The Exchange agreed to grant the waiver

      FACTS

      1. The Target was an iron ore development company and its principal assets were some iron mines in Australia.
      2. Company A proposed to make a conditional offer to acquire all interests in the Target not al held by it (the Offer). The Offer price was determined with reference to the Target's share price. The Offer was conditional on Company A acquiring at least a 50.1% interest in the Target.
      3. The Offer was a major transaction for Company A. Company A submitted that it would defer complying with the financial and other disclosure requirements in accordance with Rule 14.67A as it could meet the conditions set out in the Rule:
      (i) the Offer was not invited by the Target's board. Company A did not have access to the Target's non-public information and records necessary for complying the disclosure requirements under the Rules;
      (ii) ASX is a regulated, regularly operating and open stock exchange recognized by the Exchange; and
      (iii) the Target would become a subsidiary of Company A.
      4. According to Rule 14.67A, Company A would publish an initial circular to seek shareholders' approval for the Offer. It would publish a supplemental circular to include the outstanding information within 45 days of the earlier of it being able to (i) gain access to the Target's books and records; and (ii) exercise control over the Target.
      5. As the Offer was a Relevant Notifiable Transaction under Chapter 18, Company A's initial circular for the Offer should also contain a CPR and a VR on the Target's natural resources and other disclosures required under Rules 18.09(2), (3) and (4). For the same reasons set out in paragraph 3, Company A would have practical difficulty in obtaining the Target's non-public information for making the disclosures in the initial circular.
      6. Company A therefore sought a waiver from Rules 18.09(2), (3) and (4) so that it could defer the disclosure of information to the supplemental circular for the Offer. It submitted that it would summarise and reproduce the public statements and reports on the Target's mineral assets and other material information published by the Target in the initial circular to enable shareholders to make an informed voting decision on the Offer.

      APPLICABLE LISTING RULES

      7. Rule 18.05(2) to (6) provides that "a Mineral Company must include in its listing document:-
      ...
      (2) a statement that no material changes have occurred since the effective date of the Competent Person's Report. Where there are material changes, these must be prominently disclosed;
      (3) the nature and extent of its prospecting, exploration, exploitation, land use and mining rights and a description of the properties to which those rights attach, ... . Details of material rights to be obtained must also be disclosed;
      (4) a statement of any legal claims or proceedings that may have an influence on its rights to explore or mine;
      (5) disclosure of specific risks and general risks. Companies should have regard to Guidance Note 7 on suggested risk analysis; and
      (6) if relevant and material to the Mineral Company's business operations, information on the following:-
      (a) project risks arising from environmental, social, and health and safety issues;
      (b) any non-governmental organisation impact on sustainability of mineral and/or exploration projects;
      (c) compliance with host country laws, regulations and permits, and payments made to host country governments in respect of tax, royalties and other significant payments on a country by country basis;
      (d) sufficient funding plans for remediation, rehabilitation and, closure and removal of facilities in a sustainable manner;
      (e) environmental liabilities of its projects or properties;
      (f) its historical experience of dealing with host country laws and practices, including management of differences between national and local practice;
      (g) its historical experience of dealing with concerns of local governments and communities on the sites of its mines, exploration properties, and relevant management arrangements; and
      (h) any claims that may exist over the land on which exploration or mining activity is being carried out, including any ancestral or native claims."
      8. Rule 18.09 requires that "A mineral company proposing to acquire or dispose of assets which are solely or mainly Mineral or Petroleum Assets as part of a Relevant Notifiable Transaction must:-
      (1) comply with Chapter 14 and Chapter 14A, if relevant;
      (2) produce a Competent Person's Report, which must form part of the relevant circular, on the Resources and/or Reserves being acquired or dispose of as part of the Relevant Notifiable Transaction;
      ...
      (3) in the case of a major (or above) acquisition, produce a Valuation Report, which must form part of the relevant circular, on the Mineral or Petroleum Assets being acquired as part of the Relevant Notifiable Transaction; and...
      (4) comply with the requirements of rules 18.05(2) to 18.05(6) in respect of the assets being acquired."
      9. Rule 18.10 states that "a listed issuer proposing to acquire assets which are solely or mainly Mineral or Petroleum Assets as part of a Relevant Notifiable Transaction must comply with rule 18.09".

      ANALYSIS

      10. Under the Listing Rules, an issuer must ensure that the information in its circular for a notifiable transaction is accurate and complete in all material respects and not misleading or deceptive. The circular must contain all information necessary to allow the issuer's shareholders to make a properly informed decision on how to vote on the transaction.
      11. Rule 14.67A addresses issuers' practical difficulties in disclosing non-public financial and other information of the target companies in hostile takeover situations. The Exchange considers that the same principle may also apply to the disclosure requirements under Chapter 18 based on the circumstances of each case.
      12. Here the Exchange agreed to grant the waiver because:
      •   The Offer could meet the conditions set out in Rule 14.67A.
      •   The Target was listed on an overseas stock exchange, and had been providing regular updates on its mineral assets. The disclosures were subject to supervision by regulatory authorities. Company A would include material public information of the Target in the initial circular to enable shareholders to make an informed voting decision.

      CONCLUSION

      13. Company A was granted a waiver to defer the CPR, the VR and other disclosures as required under Rules 18.09(2), (3) and (4) to the supplement circular.

    • LD44-2013

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      HKEx LISTING DECISION
      HKEx-LD44-2013 (published in January 2013) (updated in October 2019 (amendments to the reverse takeover Rules))

      Parties Company A — a Main Board issuer

      The Target — a company which Company A proposed to acquire from certain independent third parties
      Issue Whether the Target had the right to participate actively in the exploration for and/or extraction of natural resources
      Listing Rules Main Board Rules 14.06B and 18.03(1)
      Decision The Exchange accepted that the Target had the right to participate actively in the exploration of natural resources through an earn-in arrangement

       

      FACTS
       
         
      1.   Company A proposed to acquire the Target which participated in a gold mining project (the Project).
       
      2.   At the time of the acquisition, the Target did not have any interest in the Project, but it had entered into certain agreements (the Agreements) with the owner of the Project (the Owner) to "earn" an interest in it. Under the Agreements, the Target provided funding and technical expertise for the exploration activities of the Project. When the Target achieved the performance targets set out in the Agreements (including the completion of the scoping study, the pre-feasibility study and the feasibility study), the Owner would transfer 52% of its interest in the Project to the Target. Upon completion of the exploration works, the Target and the Owner would form a joint venture to develop the Project and share the profits of the mining activities.
       
      3.   The size of the acquisition was very significant to Company A. When assessing whether the acquisition would constitute a reverse takeover, one of the factors that the Exchange considered was whether the Target could meet the new listing requirements (see Guidance Letter HKEX-GL104-19 for guidance on the application of the reverse takeover Rules). There was an issue whether the Target could meet Rule 18.03(1) which requires a new applicant mineral company to have the right to participate actively in the exploration for and/or extraction of natural resources.
       
      4.   Company A submitted that earn-in arrangements were common for exploration activities in the mining industry. While the Target did not yet own an interest in the Project, it had actively participated in the Project and could exercise sufficient influence in the decisions over the exploration activities through the Agreements given that:
       
        The Agreements gave the Target the sole and exclusive rights to explore for minerals over the Project areas. All the required licenses, permits and approvals had been obtained for the Target to conduct the exploration activities.
       
        The Target was the manager of the Project and was responsible for executing the scoping study, the pre-feasibility study and the feasibility study. It also had the right to appoint other contractors and consultants to assist it in carrying out the activities.
       
        The Target and the Owner had set up a committee to oversee the exploration activities of the Project, including monitoring the progress of the scoping study, the pre-feasibility study and the feasibility study of the Project, assessing whether the studies met the required technical standards, and making recommendation as to whether the Project should proceed to the next stage. A majority of the committee members were appointed by the Target.
       
        The Owner did not have right to unilaterally terminate the Agreements unless the Target materially breached the Agreement terms.
       
      APPLICABLE LISTING RULES
       
         
      5.   Rule 18.03(1) requires that "A mineral company must establish to the Exchange's satisfaction that it has the right to participate actively in the exploration and/or extraction of natural resources, either:—
       
      (a)   through control over a majority (by value) of the assets in which it has invested together with adequate rights over the exploration for and/or extraction of natural resources; or
      Note: 'control over a majority' means an interest greater than 50%.
       
      (b)   through adequate rights (arising under arrangements acceptable to the Exchange), which give it sufficient influence in decisions over the exploration for and/or extraction of the natural resources;"
       
      6.   Paragraph 9 under Part B of Consultation Conclusions on New Listing Rules for Mineral Companies published in May 2010 states that "The natural resources industry is characterized by enforceable arrangements which may not give a company control of its assets but will give it a right to participate in the exploration for and/or extraction of Natural Resources. These agreements include joint ventures, production sharing contracts or specific government mandates, which are all legitimate ways of participating in the exploration for and/or extraction of Natural Resources. Companies adopting these arrangements will accordingly be eligible under Chapter 18 provided that their rights give them sufficient influence over the exploration for and/or extraction of Natural Resources."
       
      7.   FAQ Series 12, No. 3 states that "Companies may rely on exploration and extraction rights held by third parties if they participate in mineral and/or exploration activity under joint ventures, product sharing agreements or other valid arrangements if they can demonstrate the agreements give them sufficient influence over the exploration for and extraction of Resources and Reserves. Ordinarily we would expect that applicants have an interest of at least 30% in assets relevant to extraction of Reserves. However, we will consider other arrangements where companies have interests smaller than 30% but actively operate mining projects. Rights granted under specific government mandates will be recognized..."
       
         
      ANALYSIS
       
         
      8.   In this case, the Target did not have any interest in the Project at the time of the acquisition and could not meet Rule 18.03(1)(a).
       
      9.   Rule 18.03(1)(b) states that the Exchange may accept other arrangements which give a company adequate rights to actively operate mining projects. Here, the Target had entered into the Agreements which allowed it to explore for minerals in the Project areas using its own resources and to secure an interest in the Project by completing the exploration works. Company A had demonstrated that the Agreements gave the Target the rights to exercise significant influence in the decisions over the exploration activities of Project.
       
         
      CONCLUSION
       
         
      10.   The Exchange considered that the Target had the right to participate actively in the exploration of natural resources as required under Rule 18.03(1)(b).
       
         

       

    • LD43-2013

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      HKEx LISTING DECISION
      HKEx-LD43-2013 (published in January 2013) (updated in October 2019 (amendments to the reverse takeover Rules))

      Parties Company A — a Main Board issuer

      The Target — a company which Company A proposed to acquire from a third party
      Issue Whether the Target had a clear path to commercial production 
      Listing Rules Main Board Rules 14.06B, 18.04 and 18.07
      Decision The Target was able to demonstrate a clear path to commercial production

       

      FACTS
       
      1.   Company A proposed to acquire the Target. The Target had interests in certain mining companies in the PRC (the Mining Companies)which held the mining licenses of a number of coal mines(the Coal Mines) in a province (the Province) in the PRC.
       
      2.   There was a substantial amount of resources at the Coal Mines. However, the operations of the Coal Mines had been suspended for some years to undertake reconstruction and improvement works required by the government authorities. The Mining Companies had not yet completed the improvement works and had not obtained all the necessary permits and licenses for the Coal Mines to commence commercial production.
       
      3.   The size of the Acquisition was very significant to Company A. When assessing whether the acquisition would constitute a reverse takeover, one of the factors that the Exchange considered was whether the Target could meet the new listing requirements (see Guidance Letter HKEX-GL104-19 for guidance on the application of the reverse takeover Rules). There was an issue whether the Target could demonstrate a clear path to commercial production.
       
      4.   To address the issue, Company A submitted details of the reconstruction and improvement works of the Coal Mines and its plans for the mines to proceed to production with indicative dates and costs. It also submitted additional information to demonstrate that the Coal Mines would be able to resume operations as planned:
       
        The Target was one of the entities delegated by the government authorities to undertake the merger and reorganisation of coal mines in the Province. Under the government policies at the relevant time, coal mines which were not able to meet the required standard of safety and minimum production capacity were closed until the necessary reconstruction and improvement works had been undertaken. The Target acquired the Mining Companies to undertake the merger and reorganisation of the Coal Mines according to the policies.
       
        When Company A acquired the Target, most of the reconstruction and improvement works of the Coal Mines had been completed. Company A would also disclose all the outstanding permits and licenses necessary for commercial production of the Coal Mines and the status of the relevant applications. The PRC legal advisers confirmed that there was no impediment for the Target group to obtain the outstanding permits and licenses.
       
        The competent person was of the view that the schedule for the reconstruction and improvement works of the Coal Mines and the expected timetable for the commencement of commercial production were attainable.
       
      APPLICABLE LISTING RULES
       
      5.   Rule 18.03(1) states that “A Mineral Company must:—
       
      (1)   establish to the Exchange’s satisfaction that it has the right to participate actively in the exploration for and/or extraction of Natural Resources …”
       
      6.   Rule 18.04 states that “if a Mineral Company is unable to satisfy either the profit test in rule 8.05(1), … , it may still apply to be listed if it can establish to the Exchange’s satisfaction that its directors and senior managers, taken together, have sufficient experience relevant to the exploration and/or extraction activity that the Mineral Company is pursuing.”
       
      7.   HKEx Guidance Letter HKEx-GL22-10 and paragraph 6 under the Executive Summary of Consultation Conclusions on New Listing Rules for Mineral Companies published in May 2010 states that, “While we expect most applicants taking advantage of Rule 18.04 will still be at the development stage, those who are al in the production stage are not necessarily precluded. This is because Mineral Companies in production may have junior assets that are yet to be developed. Waivers from the financial standard requirements are only likely to be considered favourably where Mineral Companies demonstrate a clear path to commercial production”.
       
      8.   Rule 18.07 states that “if a Mineral Company has not yet begun production, it must disclose its plans to proceed to production with indicative dates and costs. These plans must be supported by at least a Scoping Study, substantiated by the opinion of a Competent Person. If exploration rights or rights to extract Resources and/or Reserves have not yet been obtained, relevant risks to obtaining these rights must be prominently disclosed.”.
       
      ANALYSIS
       
      9.   In this case, the Target did not meet the track record requirements for new listing as required under Rule 8.05.
       
      10.   As stated in the guidance materials published by the Exchange, waivers from the financial standard requirements are only likely to be considered favourably where mineral companies demonstrate a clear path to commercial production. In this case, there was concern whether the Target’s plan for commercial production could be achieved in light of the prolonged suspension of operations of the Coal Mines and that the Mining Companies had not obtained all the necessary permits and licenses for coal production.
       
      11.   However, the Exchange also considered the special circumstances of the case, and Company A’s submission to demonstrate that the Coal Mines would be able to commence commercial production within a reasonable period. The risks to obtaining regulatory approval for commercial production of the Coal Mines would be prominently disclosed.
       
      CONCLUSION
       
      12.   The Exchange considered that the Target had demonstrated a clear path to commercial production.
       

    • LD42-2013

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      HKEx LISTING DECISION
      HKEx-LD42-2013 (Published in January 2013)

      Party Company A — a Main Board issuer
      Issue Whether the Exchange would waive the requirement to produce a competent person's report (CPR) on the mineral resources to be disposed of by Company A
      Listing Rules Main Board Rule 18.09(2)
      Decision The Exchange did not grant the waiver

      FACTS

      1. Company A proposed to sell its interest in one of its mining projects (Mine Y) to a third party, which would be a very substantial disposal. The consideration was determined with reference to the value of the reserves and resources of the mine. The Rules required Company A to include a CPR on Mine Y in the circular for the disposal.

      Background

      2. Mine Y was acquired by Company A some years ago (before the current Chapter 18 came into effect). At that time, a technical report for Mine Y (the Technical Report) was included in the transaction circular. The report was prepared by an expert (the Expert) using the Chinese Standard. The Expert provided a comparison between the Chinese Standard and the JORC Code, and quoted the resources and reserves using categorization under the JORC Code. However, the resources and reserves were not reported as JORC Code compliant resources and reserves because certain information required for such conversion was not available to the Expert.
      3. After the completion of the acquisition, Company A updated Mine Y's resources and reserves in accordance with the Chinese Standard in its subsequent annual reports.

      Waiver application

      4. For the proposed disposal, Company A sought a waiver from producing a CPR on Mine Y in the circular. It was of the view that its shareholders would have sufficient information to assess the proposed disposal based on the Technical Report previously provided, and a "no material change statement" by Company A and the Expert to be included in the circular for the disposal. It would be unduly burdensome to engage a competent person to prepare a new CPR on Mine Y given the substantial time and costs required.

      APPLICABLE LISTING RULES

      5. Rule 2.13 provides that "... any announcement or corporate communication required pursuant to the Exchange Listing Rules must be prepared having regard to the following general principles:
      ...
      (2) the information contained in the document must be accurate and complete in all material respects and not be misleading or deceptive. ..."
      6. Chapter 18 defines that:
      "Mineral Company" ... a listed issuer that completes a Relevant Notifiable Transaction involving the acquisition of Mineral or Petroleum Assets.
      7. Rule 18.09 requires that "A mineral company proposing to acquire or dispose of assets which are solely or mainly Mineral or Petroleum Assets as part of a Relevant Notifiable Transaction must:
      ...
      (2) produce a Competent Person's Report, which must form part of the relevant circular, on the Resources and/or Reserves being acquired or dispose of as part of the Relevant Notifiable Transaction;

      Note: The Exchange may dispense with the requirement for a Competent Person's Report on disposals where shareholders have sufficient information on the assets being disposed of.

      ..."
      8. Rule 18.29 states that "A Mineral Company must disclose information on mineral Resources, Reserves and/or exploration results either:—
      (1) under:
      (a) the JORC Code;
      (b) NI 43-101; or
      (c) the SAMREC Code,
      ..."

      ANALYSIS

      9. In this case, the Exchange noted the Technical Report was issued some years ago and was out-dated. It was prepared under the Chinese standard which however is not a recognised reporting standard acceptable by the Exchange under the current Chapter 18. The Exchange did not agree that Company A's proposed disclosure would provide accurate and complete information on the resources of Mine Y for the shareholders to make an informed voting decision on the disposal.

      CONCLUSION

      10. The Exchange refused the waiver.

    • LD41-2013

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      HKEx LISTING DECISION
      HKEx-LD41-2013 (published in January 2013) (updated in October 2019 (amendments to the reverse takeover Rules))

      Parties Company A — a Main Board issuer

      The Target — a company which Company A proposed to acquire from an independent third party
      Issue Whether the Target had a portfolio of natural resources that was meaningful and of sufficient substance to justify a listing
      Listing Rules Main Board Rules 14.06B and 18.03(2)
      Decision The Target could not demonstrate that it had a portfolio of natural resources as required solely based on the resources and reserves identified under the Chinese Standard

       

      FACTS
       
      1.   Company A proposed to acquire the Target. The Target held mining rights of certain iron mines in the PRC (the Mines) and had not yet commenced production.
       
      2.   The size of the Acquisition was very significant to Company A. When assessing whether the acquisition would constitute a reverse takeover, one of the factors that the Exchange considered was whether the Target could meet the new listing requirements (see Guidance Letter HKEX-GL104-19 for guidance on the application of the reverse takeover Rules). There was an issue whether the Target could meet Rule 18.03(2) which requires a new applicant mineral company to have at least a portfolio of Indicated Resources, and the portfolio must be meaningful and of sufficient substance.
       
      3.   To address the issue, Company A provided the estimate of resources and reserves for the Mines identifiable under the Chinese standard. Company A would appoint a competent person to report on the resources and reserves under the JORC Code when preparing the circular for the acquisition at a later stage.
       
      APPLICABLE LISTING RULES
       
      4.   Rule 18.03(2) states that "A Mineral Company must:
       
      ...
       
      (2)   establish to the Exchange's satisfaction that it has at least a portfolio of:-
       
        (a)   Indicated Resources; or
       
        (b)   Contingent Resources,
       
        identifiable under a Reporting Standard and substantiated in a Competent Person's Report. This portfolio must be meaningful and of sufficient substance to justify a listing;"
       
      5.   Rule 18.01(3) defines "Reporting Standard" as:
      a recognised standard acceptable to the Exchange, including:
       
      (1)   the JORC Code, NI 43-101, and the SAMREC Code, with regard to mineral Resources and Reserves;
       
      (2)   PRMS with regard to Petroleum Resources and Reserves; and
       
      (3)   CIMVAL, the SAMVAL Code, and the VALMIN Code, with regard to valuations."
       
      6.   Rule 18.29 states that "A Mineral Company must disclose information on mineral Recourses, Reserves and/or exploration results either:
       
      (1)   under:
      (a) the JORC Code;
      (b) NI 43-101; or
      (c) the SAMREC Code,
      as modified by this Chapter; or
       
      (2)   under other codes acceptable to the Exchange as communicated to the market from time to time, provided the Exchange is satisfied that they give a comparable standard of disclosure and sufficient assessment of the underlying assets.
       
      Note:   The Exchange may allow presentation of Reserves under other reporting standards provided reconciliation to a Reporting Standard is provided. A Reporting Standard applied to specific assets must be used consistently."
       
      7.   As to the issue on the acceptance of other reporting standards, paragraph 5.14 of Consultation Paper on New Listing Rules for Mineral Companies published in September 2009 states that: "We propose to recognise Russian and Chinese standards when they are more widely accepted. The current concerns over comparability of these standards with those internationally recognised and a lack of global recognition necessitate a transitional period where reconciliations to JORC-type codes will protect the interests of investors." As set out in paragraph 77 and 81 under Part B of the Consultation Conclusions published in May 2010 (the Consultation Conclusions), the Exchange decided to implement the proposal to request reconciliation to one of the Reporting Standards where information is presented in accordance with Russian or Chinese standards, until such time as they achieve widespread recognition or efforts at convergence between these standards and JORC-type codes are sufficiently advanced.
       
      8.   Paragraphs 83 under Part B of the Consultation Conclusion further states that "The crucial difference between Chinese or Russian standards and the JORC-type Codes is that the former standards are based on in-situ estimates, while the latter are focused on commercial extractability, taking account of mining dilution and losses. Listing applicants should be cautioned that owing to the difference between Chinese/Russian resource estimates and those estimated under JORC, a resource under Chinese/Russian standards may not be categorized as such under a JORC-type Code. A "Reserve" referred to by a Russian or Chinese estimate is only a Resource under the JORC Code as it does not include economic and technical factors."
       
      9.   Paragraph 4 under the Executive Summary of Consultation Conclusions elaborated our view on early stage exploration company: "Given the importance of retail investors in the Hong Kong IPO market and the significantly higher investment risks involved in investing in early stage or pure-play exploration companies, we consider it is not appropriate to list early stage exploration companies at this time."
       
      10.   Paragraph 224 under Part B of Consultation Conclusions further states that "Early stage exploration companies are considered speculative by nature. The requirement for Indicated or Contingent Resources together with a production plan should also ensure that the market is less susceptible to potential abuse."
       
      ANALYSIS
       
      11.   As stated in the Consultation Conclusion, the Exchange considers it inappropriate to list early exploration companies. To ensure the market is less susceptible to abuse, the Rules require new applicant mineral companies to have Indicated or Contingent resources together with a production plan.
       
      12.   In this case, when the Exchange determined the transaction classification at the announcement stage, Company A could only provide the estimate on resources and reserves under the Chinese standard. However, Chinese standards are not yet recognized as acceptable reporting standards for the purpose of the Chapter 18 requirements. As the basis for information presentation under Chinese standards and JORC-like codes are fundamentally different, resources and reserves presented under Chinese standards may not be recognized as such under JORC-like codes.
       
      CONCLUSION
       
      13.   The Target could not meet Rule 18.03(2) solely based on the estimate of resources and reserves under the Chinese standard.
       

       

       

       

    • LD40-2013

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      HKEx LISTING DECISION
      HKEx-LD40-2013 (published in January 2013)

      Parties Company A — a Main Board issuer

      The Target — a company which Company A proposed to acquire from a third party vendor
      Issue Whether the Exchange would waive the requirements to produce competent person's reports (CPR) and valuation reports on some of the mining interests held by the Target
      Listing Rules Main Board Rules 18.09(2) and (3)
      Decision The Exchange waived the requirements

      FACTS

      1. Company A proposed to acquire the Target.
      2. The Target was in the business of exploration and mining of minerals. Its primary asset was the interest in a mining project (Mine X) and it held the mining licence for the mine. The Target also held the exploration licences for two other mines (the Other Mines)
      3. Under the Rules, Company A was required to include CPRs and valuation reports covering all the mines held by the Target in its circular for the acquisition. It sought a waiver from producing the CPRs and valuation reports on the Other Mines for the following reasons:
      •   The Target had not undertaken any exploration or mining activities at the Other Mines. There was not much geological information or resources data for these mines. To prepare CPRs, the competent person would need to conduct substantial work and spend a long time to complete the process.
      •   Based on the due diligence work performed by Company A, resources in the Other Mines appeared to be mainly inferred resources. Their economic values were expected to be immaterial and no valuation on these resources would be allowed under the Rules.
      •   The reason for Company A to acquire the Target was to obtain a controlling interest in Mine X which had a substantial amount of reserves and resources. Company A had no intention to explore or exploit the Other Mines after completion of the acquisition. When determining the consideration for the acquisition, it did not take into account the value of the Other Mines. Based on the preliminary valuation, the value of Mine X represented over 90% of the consideration.
      4. In light of the above, Company A considered the Other Mines were insignificant to the portfolio of mineral resources to be acquired under the acquisition. It would be unduly burdensome to require Company A to produce CPRs and valuation reports on the Other Mines in the circular.

      APPLICABLE LISTING RULES

      5. Rule 2.13 provides that "... any announcement or corporate communication required pursuant to the Exchange Listing Rules must be prepared having regard to the following general principles:
      ... ...
      (2) the information contained in the document must be accurate and complete in all material respects and not be misleading or deceptive. ..."
      6. Rule 18.09 requires that "A mineral company proposing to acquire or dispose of assets which are solely or mainly Mineral or Petroleum Assets as part of a Relevant Notifiable Transaction must:
      ...
      (2) produce a Competent Person's Report, which must form part of the relevant circular, on the Resources and/or Reserves being acquired or dispose of as part of the Relevant Notifiable Transaction;

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

      ANALYSIS

      8. In this case, the Exchange was satisfied with Company A's explanation that the Other Mines were only a minor part of the Target's portfolio of mineral resources under the acquisition, and the waiver would not result in an omission of material information in the circular. The Exchange agreed that it would be unduly burdensome for Company A to produce the CPRs and valuation reports on the Other Mines.

      CONCLUSION

      9. The Exchange agreed to waive the requirements for producing CPRs and valuation reports on the Other Mines.

    • LD39-2013

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      HKEx LISTING DECISION
      HKEx-LD39-2013 (published in January 2013) (updated in October 2019 (amendments to the reverse takeover Rules))

      Parties Company A — a Main Board issuer

      The Vendor — an independent third party

      The Target — a company which Company A proposed to acquire from the Vendor
      Issue Whether the Target had a portfolio of natural resources that was meaningful and of sufficient substance to justify a listing
      Listing Rules Main Board Rules 14.06B and 18.03(2)
      Decision The Target did not have a portfolio of natural resources as required

       

      FACTS    
       
      1.   Company A proposed to acquire the Target that was engaged in the exploration, exploitation and processing of mineral resources in some offshore areas (the Areas). The acquisition was subject to disclosure and shareholder approval requirement under Chapter 14 of the Rules.
       
      2.   The consideration for the acquisition would include cash and consideration shares and convertible bonds to be issued by Company A. It was agreed that:
       
        Company A would pay 10% of the consideration to the Vendor upon completion of the acquisition on the basis that the Vendor produced a valuation report showing that the Areas had Indicated Resources of value not less than 10% of the consideration.
       
        Company A would deliver to an escrow agent the convertible bonds representing the remaining 90% of the consideration.  After completion of the acquisition, the Vendor could perform extra works in the Areas during a specified period, and the escrow agent would release an amount of convertible bonds to the Vendor according to the value of any additional Indicated Resources discovered.  After the specified period, Company A would cancel any convertible bonds that had not been released to the Vendor, and the consideration for the acquisition would be reduced accordingly.
       
      3.   The size of the acquisition was very significant to Company A. When assessing whether the acquisition would constitute a reverse takeover, one of the factors that the Exchange considered was whether the Target could meet the new listing requirements (see Guidance Letter HKEX-GL104-19 for guidance on the application of the reverse takeover Rules). There was an issue whether the Target could meet Rule 18.03(2) which requires a new applicant mineral company to have at least a portfolio of Indicated Resources, and the portfolio must be meaningful and of sufficient substance.
       
      4.   Company A submitted that it would only pay the consideration based on the value of the Indicated Resources identified under a reporting standard acceptable by the Rules. The portfolio of mineral resources to be acquired was meaningful and of sufficient substance.
       
      APPLICABLE LISTING RULES    
       
      5.   Rule 18.03(2) states that "A Mineral Company must:-  
       
      ...
       
         
      (2)   establish to the Exchange's satisfaction that it has at least a portfolio of:-
       
      (a)   Indicated Resources; or
       
      (b)   Contingent Resources,
       
      identifiable under a Reporting Standard and substantiated in a Competent Person's Report. This portfolio must be meaningful and of sufficient substance to justify a listing;"
       
         
      6.   Paragraph 4 under the Executive Summary section of Consultation Conclusions on New Listing Rules for Mineral Companies published in May 2010 (the Consultation Conclusion) elaborated our view on early stage exploration company: "Given the importance of retail investors in the Hong Kong IPO market and the significantly higher investment risks involved in investing in early stage or pure-play exploration companies, we consider it is not appropriate to list early stage exploration companies at this time."
       
      7.   Paragraph 224 under Part B of Consultation Conclusions further states that "Early stage exploration companies are considered speculative by nature. The requirement for Indicated or Contingent Resources together with a production plan should also ensure that the market is less susceptible to potential abuse."
       
      ANALYSIS    
       
      8.   As stated in the Consultation Conclusion, the Exchange considers it inappropriate to list early exploration companies. To ensure the market is less susceptible to abuse, the Rules require new applicant mineral companies to have Indicated or Contingent Resources together with a production plan.
       
      9.   When Company A acquired the Target, the parties could only prove the existence of Indicated Resources of value representing 10% of the consideration, and a substantial part of the Target's portfolio of minerals was not substantiated in the competent person's report. The Vendor was given a long period after completion of the acquisition to ascertain whether there were any additional Indicated Resources in the Areas. The circumstances of the case indicated that the Target was an early exploration company at the time of the acquisition.
       
      CONCLUSION    
       
      10.   The Target did not have a portfolio of natural resources required under Rule 18.03(2).