Entire Section

  • 2005

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    Please visit Archive to view listing decisions which have been superseded or are no longer applicable.

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

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

    LD Series Number First
    Release
    Date (Last
    Update
    Date)
    (mm/yyyy)
    Listing Rules/ Topics Particulars
    LD48-4 12/2005 (09/2010) (12/2012) Rule 9.11(35)(b), Paragraph 11 of Appendix 6 Whether, and under what circumstances, the Exchange should allow a new listing applicant to dispense with the filing of placee lists with respect to its IPO shares sold in public offers outside Hong Kong (Revised Listing Decision)
    LD48-3 12/2005 Rule 8.05(1)(c) Whether the requirements for ownership continuity and control under Listing Rule 8.05(1)(c) were satisfied where the controlling shareholder disposed of his shareholdings to a discretionary trust benefiting members of the shareholder's family (other than himself) after the track record period
    LD48-2 12/2005 Rule 8.05(1)(a) Whether compensation income arising from the one-time early termination of a contract could be counted towards satisfaction of the profit requirements under Listing Rule 8.05(1)(a)

    (Withdrawn in April 2019)
    LD48-1 12/2005 Rule 8.04, Paragraph 27A of Appendix 1A Whether existing financial assistance granted by the controlling shareholder in the form of counter-guarantees under foreign currency denominated equipment lease agreements in favour of Company A should be permitted to continue after listing

    (Withdrawn in September 2009; See LD69-1)
    LD47-5 07/2005 (10/2019) Rules 8.08(2), 8.08(3) Whether the requirements for public float and free float under Listing Rules 8.08(2) and 8.08(3) could be satisfied based on an estimate of the number of shareholders and shareholder groupings at the time of listing
    LD47-4 07/2005 Rules 10.07, 10.08 Whether the issue of shares in Company A upon conversion of convertible notes issued by Company A prior to listing on the Exchange should be regarded as a deemed disposal of interest prohibited under Listing Rules 10.07 and 10.08, where such conversion would occur upon or shortly after listing and at a price identical to the IPO price
    LD47-3 07/2005 (09/2009) Rules 4.04(1), 8.05(1)(a) Whether the requirements of Listing Rules 8.05(1) and 4.04(1) could be satisfied where the Group's three financial year trading record period comprised a prior-incorporation period under Company A's predecessor and a post-incorporation period under Company A directly

    (Withdrawn in April 2019)
    LD47-2 07/2005 Rules 4.28, 4.29, 8.05(2)(e) Whether the minimum revenue requirement under Listing Rule 8.05(2)(e) could be satisfied by reference to the latest unaudited pro forma combined financial information of the Group which was reorganised from separate groups of entities under respective shareholders during the track record period

    (Withdrawn in April 2019)
    LD47-1 07/2005 Rules 8.05(2) (b), 8.05(2)(c) Whether the requirements for ownership and management continuity could be satisfied absent a single legal structure amongst separate groups of entities in the track record period that made up Company A at the time of listing
    LD46-4 07/2005 Rules 8.06, 9.03(3) Whether the Exchange should accept a new Main Board listing application for vetting where the application was filed prior to 15 August 2005, contained financial accounts in audited form for the years ended 31 December 2002, 2003 and 2004, and the sponsor sought guidance from the Exchange in advance

    (Withdrawn in July 2009; Superseded by GL6-09)
    LD46-3 07/2005 Rule 8.02 Whether the requirement that a listing applicant must be legally established under Listing Rule 8.02 could be satisfied where the Group utilised a number of cross-shareholdings among its subsidiaries in order to comply with the laws of the place in which these subsidiaries were incorporated and operated their business

    (Withdrawn in February 2020)
    LD46-2 07/2005 Rule 8.04, Paragraph 27A of Appendix 1A Whether Company A's reliance on its Parent for the editorial content of certain publication materials upon which Company A relied for its advertising business rendered Company A not suitable for listing

    (Withdrawn in March 2019)
    LD46-1 07/2005 Rule 8.04, Paragraph 27A of Appendix 1A Whether Company A's reliance on the Parent Group for certain sales and procurement functions upon the deemed listing rendered Company A unsuitable for listing

    (Withdrawn in March 2019)
    LD45-3 Q1/2005 (06/2013) GEM Rules 7.03(1), 11.10 Whether Company A would be granted a waiver from the strict requirements of GEM Listing Rules 7.03(1) and 11.10 to the effect that the accountants' report that was included in its prospectus would not be required to include the financial information up to its latest financial year end? (Withdrawn in June 2013; Superseded by GL25-11)
    LD45-2 Q1/2005 Rule 8.05(1)(a) Whether (a) deferred tax credits arising out of netting off the tax effect from bad debt provisions; and (b) tax refunds arising out of capitalization of retained profits and statutory surplus reserves, in the financial statements of Company A could be counted towards satisfaction of the profit requirement of Listing Rule 8.05(1)(a)

    (Withdrawn in April 2019)
    LD45-1 Q1/2005 Rule 8.05(1) (b), Paragraph 2 of Practice Note 3 Whether the requirement for management continuity under Listing Rule 8.05(1)(b) and Paragraph 2 of Practice Note 3 could be satisfied when only one director had remained on the board of directors throughout the three financial year track record period up to the time of listing
    LD44-4 Q1/2005 Rule 8.05(1)(c) Whether the requirement for ownership continuity and control for at least the most recent audited financial year under Listing Rule 8.05(1)(c) could be satisfied by aggregating the shareholding interests and control of a group of individual shareholders
    LD44-3 Q1/2005 Rule 4.11 Whether the results of Subsidiary A could be consolidated into the financial statements of the Group where the registered capital of Subsidiary A had not yet been fully paid and such consolidation would result in technical non-compliance with the laws of Subsidiary A's place of incorporation

    (Withdrawn in April 2019)
    LD44-2 Q1/2005 Rules 10.03, 10.04, Paragraphs 5 and 13 of Appendix 6 Whether Shareholder X could purchase shares pursuant to an anti-dilution provision where it was also a connected client of one of the distributors of the shares in the initial public offering of Company A
    LD44-1 Q1/2005 Rules 8.08, 8.21C, 10.07(1)(a) Whether, in a case where an asset injection transaction caused Company A to be deemed a new listing applicant, the minimum public float requirement under Listing Rule 8.08 could be satisfied by the placing of existing and/or new Shares of Company A prior to the completion of the asset injection transaction
    LD43-4 Q1/2005 Rule 9.03(3) Whether the Exchange should accept a new Main Board listing application for vetting where the application was filed prior to 15 February 2005, contained financial accounts in audited form for the years ended 31 December 2001, 2002 and 2003 and six months ended 30 June 2003 and 2004, and the sponsor sought guidance from the Exchange in advance

    (Withdrawn in July 2009)
    LD43-3 Q1/2005 (04/2018) Rules 1.01, 8.04 Whether, in view of the fact that, in the conduct of its business in the PRC, Company A was a party to a number of contract-based structures ("Contractual Arrangements" or "Structured Contracts") between or among Company A, the PRC Subsidiaries, the OPCOs and the Registered Owners, Company A was unsuitable for listing due to legal questions associated with the Contractual Arrangements? (Revised Listing Decision)
    LD43-2 Q1/2005 (06/2015) Rules 11.16, 11.17 Whether the inclusion of unaudited financial information of the Acquired Group in the listing document of Company A should be allowed

    (Withdrawn in April 2019)
    LD43-1 Q1/2005 Rules 8.08(1)(a) and (d), Note (2)(b) to Rule 8.08 Whether in a case where Parentco had a pubic float approaching 50% of its equity capital, it was appropriate to relax the minimum public float requirement of 25% at the time of listing of Company A in the manner contemplated by Rule 8.08

    • LD48-4

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      HKEx LISTING DECISION
      Cite as HKEx-LD48-4 (December 2005) (Updated in September 2010 and December 2012)

        Summary
      Name of Party Company A — a Main Board listing applicant
      Subject Whether, and under what circumstances, the Exchange should allow a new listing applicant to dispense with the filing of placee lists with respect to its IPO shares sold in public offers outside Hong Kong?
      Listing Rules Listing Rule 9.16(6)(b)[Now Rule 9.11(35)(b)] and Paragraph 11 of Appendix 6 of the Listing Rules
      Decision The Exchange determined to grant the waiver requested on the basis that the following conditions (as set out in paragraph 8) were satisfied:
      a. the shares would be sold in a public offer governed by rules and regulations of the relevant jurisdiction to ensure independence of the investors;
      b. the applicant and sponsor(s) made a demonstrable effort to comply with the placee list requirement in good faith and full compliance would not be practicable;
      c. the sponsor(s), underwriters or placing brokers would confirm in writing that the investors obtaining the shares sold in the public offers are independent of the sponsors/underwriters/brokers, the applicant's connected persons or their associates or any existing shareholders of the applicant, including nominee(s) of the foregoing; and
      d. each placing broker would be required to submit to the Exchange a list setting out details of all institutional placees and the number of shares taken up by each of them as required under Rule 9.11(35)(b) and paragraph 11 of Appendix 6 to the Rules (condition added in December 2012- see paragraph 10).

      SUMMARY OF FACTS

      1. The international offering of Company A included a public offering without listing in Japan (hereinafter referred to as 'POWL'). The sponsor applied with respect to the IPO shares sold under POWL for a waiver from strict compliance with Listing Rule 9.16(6)(b) [Now Rule 9.11(35)(b)] and Paragraph 11 of Appendix 6 of the Listing Rules requiring submission to the Exchange a list from each of the placing brokers setting out details of and the amounts taken up by each placee.
      2. The sponsor submitted its waiver application on the following grounds:
      a. Japanese regulations in general prohibit agents from disclosing clients' details (including but not limited to the name, address, age of clients and details of assets) to third parties;
      b. information given by placees under standard market practice in Japan are insufficient for completing the information required under Listing Rule 9.16(6)(b) [Now Rule 9.11(35)(b)];
      c. the POWL was expected to involve over 10,000 investors. Further, all information relating to placees would need to be translated into English. It would be unduly burdensome and near impossible to submit to the Exchange before commencement of dealings the required information relating to POWL placees; and
      d. the Japanese agents would confirm in writing the independence of each placee from any director of the Company or their respective associates or any existing shareholder or nominee of the Company.

      THE ISSUE RAISED FOR CONSIDERATION

      3. Whether, and under what circumstances, the Exchange should allow a new listing applicant to dispense with the filing of placee lists in connection with IPO shares sold in public offers outside Hong Kong?

      APPLICABLE LISTING RULES OR PRINCIPLES

      4. Listing Rule 9.16(6)(b) [Now Rule 9.11(35)(b)] requires that in the case of a placing of securities by a new applicant, the following document should be provided to the Exchange:
      a list from each placing broker setting out the names, addresses and identity card or passport numbers (where individuals) and the names, addresses and business registration numbers (where companies) of all its placees, the names and addresses of the beneficial owners (in the case of nominee companies) and the amounts taken up by each of its placees.
      5. Paragraph 11 of Appendix 6 of the Listing Rules also provides that:
      dealings in the securities cannot commence until the Exchange has been supplied with and approved a listing setting the names, addresses and identity card or passport numbers (where individuals) and the names, addresses and business registration numbers (where companies) of all placees, the names and addresses of the beneficial owners (in the case of nominee companies) and the amounts taken up by each placee (see Rule 9.16(6)) [Now Rule 9.11(35)(b)]. The Exchange reserves the right to require submission of such further information ... on the placees as it may consider necessary for the purpose of establishing their independence, including without limitation details of beneficial ownership.

      THE ANALYSIS

      6. The rationale behind the rules governing placing of shares is to ensure that shares are placed to independent and genuine investors, rather than connected persons of the issuers or related parties of the underwriters/ brokers.
      7. Previously, the Exchange had not required the submission of placee lists in respect of public offer of shares sold under POWL in Japan and US, if it was reasonably satisfied that the investors were independent to the extent required under applicable foreign regulations.
      8. As such, the Exchange resolved that the present application for waiver should be considered favourably if the following were satisfied:
      a. the shares would be sold in a public offer governed by rules and regulations of the relevant jurisdiction to ensure independence of the investors;
      b. the applicant and sponsor(s) made a demonstrable effort to comply with the placee list requirement in good faith and full compliance would not be practicable;
      c. the sponsor(s), underwriters or placing brokers would confirm in writing that the investors obtaining the shares sold in the public offers are independent of the sponsors/underwriters/brokers, the applicant's connected persons or their associates or any existing shareholders of the applicant, including nominee(s) of the foregoing; and
      d. each placing broker would be required to submit to the Exchange a list setting out details of all institutional placees and the number of shares taken up by each of them as required under Rule 9.11(35)(b) and paragraph 11 of Appendix 6 to the Rules (condition added in December 2012- see paragraph 10).
      9. The above conditions are not binding on the Exchange for future cases. They are neither meant to be exhaustive nor jurisdiction specific. Future waiver applications will be considered on a case-by-case basis and the Exchange reserves its right to require submission of such further information on the placees as it may consider necessary.

      DECISION IN A SUBSEQUENT CASE (Added in December 2012)

      10. In a subsequent case where the applicant requested for the same waiver, it then came to the Exchange's attention that the relevant Japanese regulations prohibiting members of the Japanese Securities Dealers' Association from disclosing customers' information to any third party only applied to individual customers but not institutional customers. Therefore, in addition to the conditions as set out in paragraph 8(a) to (c) above, the waiver was granted to this applicant provided that each placing broker would be required to submit to the Exchange a list setting out details of all institutional placees and the number of shares taken up by each of them as required under Rule 9.11(35)(b) and paragraph 11 of Appendix 6 to the Rules.

      THE DECISION

      11. Based on the above analysis and the facts of two cases, the Exchange considered that the conditions set out in paragraphs 8 and 10 respectively were satisfied and on this basis granted the waiver requested.

    • LD48-3

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      HKEx LISTING DECISION
      Cite as HKEx-LD48-3 (December 2005)

      Summary
      Name of Party Company A — a Main Board listing applicant and its subsidiaries (the 'Group')
      Subject Whether the requirements for ownership continuity and control under Listing Rule 8.05(1)(c) were satisfied where the controlling shareholder disposed of his shareholdings to a discretionary trust benefiting members of the shareholder's family (other than himself) after the track record period?
      Listing Rule Listing Rule 8.05(1)(c)
      Decision The Exchange determined that Company A satisfied the requirements for ownership continuity under Listing Rule 8.05(1)(c).

      SUMMARY OF FACTS

      1. As part of its listing application, it was disclosed that after the end of the three financial year track record period, the controlling shareholder of Company A, Mr. X, contributed his shareholdings to Holdco X which in turn was held by a professional trust company, Trust Corporation, in its capacity as trustee for a discretionary trust benefiting members of Mr. X's family (other than Mr. X himself).
      2. The Group' shareholding structure upon listing is illustrated as follows:

      3. The sponsor of Company A submitted that the discretionary family trust was established for Mr. X's estate planning purposes, and did not constitute a replacement of Mr. X's interest in Company A. In particular, the sponsor highlighted that:

      Mr. X was in actual control of the trust
      a. the eligible beneficiaries of the family trust, that is Mr. X wife and children, were associates of Mr. X according to the Listing Rules;
      b. Mr. X as the appointor of the trust had the power to remove the Trust Company and to appoint new trustee(s) in its place even though Mr. X had no power to interfere with the Trust Company's exercise of powers under the trust including (1) the power to administer and distribute the assets and the income thereof for the benefits of the eligible beneficiaries under the trust; (2) appoint additional eligible beneficiaries to the trust. However, any exercise of such powers must be accompanied by a prior notice to Mr. X;
      c. Mr. X and his wife were the directors of Holdco X. Mr. X was the sole director of Holdco Y, the immediate holding company of Company A. The articles of association of both Holdco X and Holdco Y stipulated that business and affairs of the respective companies must be managed by their director(s). Under the present structure, the exercise of the voting powers at the shareholders' meeting of Holdco Y would be in the hands of Mr. X, instead of in the hands of the Trust Company. The Trust Company's voting powers as shareholder would, in practice, be limited to and stopped at the level of Holdco X;
      No packaging of business
      d. the transfer of Mr. X's shareholding interest to Holdco X whose shares were being held by the Trust Company was for estate planning purposes and not for the purpose of 'packaging' the business of Company A to meet the profit requirements of the Listing Rules; and
      No circumvention of any disclosure requirements
      e. under the Securities and Futures Ordinance, anyone who establishes a discretionary trust (i.e. the founder) is deemed to be interested in the shares of an issuer in which the trust has, and such a founder is required to report and disclose such interest, regardless of whether he himself is a beneficial under the trust or not. The shareholding structure involving the setting up of the Trust Company was not intended to circumvent any disclosure requirements.

      THE ISSUE RAISED FOR CONSIDERATION

      4. Whether the requirements for ownership continuity and control under Listing Rule 8.05(1)(c) were satisfied where the controlling shareholder disposed of his shareholdings to set up a discretionary trust benefiting members of the shareholder's family (other than himself) after the track record period?

      APPLICABLE LISTING RULE OR PRINCIPLES

      5. Listing Rule 8.05(1)(c) provides that to meet the profit test, a new applicant must, amongst other criteria, have 'ownership continuity and control for at least the most recent audited financial year.'

      THE ANALYSIS

      6. The Consultation Paper on Proposed Amendments to the Listing Rules relating to Initial Listing Criteria and Continuing Listing Obligations published by the Exchange in July 2002 (the 'Consultation Paper') acknowledged that other markets do not require a listing applicant to demonstrate that there is no change in their ownership at any time during the track record period. However, the situation in Hong Kong is unique, and the Exchange's intention is to prevent listing applicants from 'packaging' their businesses so as to meet the profit record requirement.
      7. When considering the issue of packaging in the context of the present case, the Exchange took into consideration the following factors:
      a. in substance, Mr. X retained the control of the family trust and Company A;
      b. the beneficiaries of the family trust were the family members of Mr. X who were connected persons under the Listing Rules; and
      c. the purpose of the family trust arrangement was understandably for estate duty purpose.
      8. In light of the above, the Exchange determined that there was no 'packaging' of business in the present case.

      THE DECISION

      9. Based on the facts and circumstances of the case and the Exchange's analysis of the Listing Rules, the Exchange determined that Company A satisfied the requirements for ownership continuity under Listing Rule 8.05(1)(c).

    • LD47-5

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      HKEx LISTING DECISION
      Cite as HKEx-LD47-5 (July 2005) (updated in October 2019 (for cross-references to amended Rules))

      Summary
      Name of Party Company A – a Main Board listed issuer and a deemed new listing applicant under Rule 14.54(1) and its subsidiaries (‘Group’)
       
      Subject Whether the requirements for public float and free float under Listing Rules 8.08(2) and 8.08(3) could be satisfied based on an estimate of the number of shareholders and shareholder groupings at the time of listing?
       
      Listing Rules Listing Rules 8.08(2) and 8.08 (3)
       
      Decision In the case of a reverse takeover and deemed new listing of a listed company's shares, for purposes of considering an approval in principle for listing, the Exchange determined that an estimate of the number of shareholders provided by the sponsor was acceptable to demonstrate compliance with Listing Rule 8.08, provided that the sponsor and Company A would demonstrate actual compliance with Listing Rules 8.08(2) and 8.08(3) to the satisfaction of the Exchange at the time of listing.
       

      SUMMARY OF FACTS

      1.   Company A entered into an agreement with its controlling shareholder (‘Parentco’) for the acquisition of certain companies held by Parentco. The acquisition constituted a very substantial acquisition and connected transaction. Parentco first obtained control of Company A less than 24 months prior to the date of the acquisition agreement. As such, the acquisition was treated as a reverse takeover under Listing Rule 14.06B and a deemed new listing of Company A’s shares. The transaction required the approval of independent shareholders of Company A in a special general meeting. A circular in the form of a listing document was required under the Listing Rules.
       
      2.   Company A would neither issue new shares as consideration for the acquisition nor contemplate any issue of new shares before completion of the acquisition.
       
      3.   For the purposes of demonstrating that Company A would be able to satisfy the requirements under Listing Rules 8.08(2) and (3) at the time of listing (that is, upon completion of the acquisition), the sponsor submitted as follows:
       
      Compliance with Listing Rule 8.08(2)
       
      a.   according to the list of shareholders as at the latest practicable date prior to the listing hearing provided by the share registrar (the 'Share Registrar Report') and the shareholding report provided by the Central Clearing and Settlement System operated by the Hong Kong Securities Clearing Company Limited (the 'CCASS Report'), Company A had at the material time an aggregate of more than 200 registered shareholders;
       
      b.   of the shareholders listed in the CCASS Report, more than 100 were banks and brokerage houses (the 'Financial Institutions') likely to be holding shares in Company A on behalf of their respective clients;
       
      c.   based on the assumptions made by the directors that each of the Financial Institutions would on average hold shares in Company A on behalf of not less than 2 beneficial owners who were not shareholders under the Share Registrar Report, Company A would be estimated to have not less than 350 shareholders. The sponsor confirmed that the above assumptions made by the directors of Company A in arriving at the total number of shareholders were reasonable;
       
      Compliance with Listing Rule 8.08(3)
       
      d.   according to the Share Registrar Report and the CCASS Report, the largest three registered shareholders of the Company were not connected persons of Company A;
       
      e.   apart from the interest held by Parentco (holding over 70% as at latest practicable date) and certain directors of the Group, Company A had not received any notice of movement of shareholding interest which was required to be disclosed under Part XV of the Securities and Futures Ordinance; and
       
      f.   based on the total number of shares held by the public shortly prior to the listing hearing, the maximum percentage of public shares held by the top three shareholders of Company A would be approximately 40%.
       

      THE ISSUE RAISED FOR CONSIDERATION

      4.   Whether the requirements for public float and free float under Listing Rules 8.08(2) and 8.08(3) could be satisfied based on an estimate of the number of shareholders and shareholder groupings at the time of listing?
       

      APPLICABLE LISTING RULES OR PRINCIPLES

      5.   Listing Rule 8.08(2) requires that:
       
          ‘at the time of listing there must be an adequate spread of holders of the securities to be listed. The number will depend on the size and nature of the issue, but in all cases there must be a minimum of 300 shareholders.’
       
      6.   Listing 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.’
       

      THE ANALYSIS

      7.   The Exchange considers that compliance with Listing Rules 8.08(2) and 8.08(3) are questions of fact and must be demonstrated by facts, not assumptions.
       
      8.   In the present case, the Exchange noted that the estimated number of shareholders and shareholder groupings provided by Company A at the time of listing was based on objective interpretation of available data. However, the Exchange required Company A and its sponsor to demonstrate that Company A had put in place procedures and checks by which actual compliance of Listing Rules 8.08(2) and 8.08(3) could be demonstrated at the time of listing.
       
      9.   In this regard, Company A further submitted that in the event that the number of registered shareholders of Company A as shown in the list of shareholders at the date of completion of the acquisition provided by the Share Registrar Report and/or CCASS was less than 300, Company A would send out a letter to each of the brokerage firms listed on the CCASS Report, requesting them to provide the following information to Company A:
       
        the number of Shares held by them; and
       
        the full list of clients on whose behalf they hold the Shares.
       
      10.   The sponsor considered that, based on the replies to be received from the brokerage firms, Company A would be able to produce a sufficiently detailed list of shareholders for the purposes of demonstrating compliance with the requirements of Listing Rules 8.08(2) and 8.08(3).
       

      THE DECISION

      11.   In the case of a reverse takeover and deemed new listing of listed companies shares, for purposes of considering an approval in principle for listing, the Exchange determined that an estimate of the number of shareholders provided by the sponsor was acceptable to demonstrate compliance with Listing Rule 8.08, provided that the sponsor and Company A would demonstrate actual compliance with Listing Rules 8.08(2) and 8.08(3) to the satisfaction of the Exchange at the time of listing.
       

    • LD47-4

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      HKEx LISTING DECISION
      Cite as HKEx-LD47-4 (July 2005)

      Summary
      Name of Party Company A — a Main Board listing applicant and its subsidiaries (the "Group")
      Subject Whether the issue of shares in Company A upon conversion of convertible notes issued by Company A prior to listing on the Exchange should be regarded as a deemed disposal of interest prohibited under Listing Rules 10.07 and 10.08, where such conversion would occur upon or shortly after listing and at a price identical to the IPO price?
      Listing Rules Listing Rules 10.07 and 10.08
      Decision The Exchange determined that the issue of Company A's shares upon or shortly after listing upon conversion of the convertible notes should be allowed and the shares so issued would not be subject to lock-up.

      SUMMARY OF FACTS

      1. More than six months prior to the hearing of Company A's listing application, Company A issued a certain amount of convertible notes ('Convertible Notes') to pre-IPO investors ('Pre-IPO Investors'). The terms of the Convertible Notes provided that unless otherwise redeemed by Company A, all the outstanding principal amount and accrued interest would automatically be converted into shares of Company A ('Shares') at the IPO share offer price on the third business day after delivery of a written notice by Company A to the Pre-IPO Investors confirming that the Exchange had approved the listing of the Shares. In other words, the conversion would take place upon or shortly after the listing of the Shares.
      2. Based on the representations of the sponsor and Company A, the Exchange noted the following relevant material facts:
      a. a substantial portion of the proceeds from the issuance of the Convertible Notes had been used in the acquisition of a company by the Group;
      b. the Pre-IPO Investors decided to invest in Company A because of the investment return of the Convertible Notes and the business potential of the Group;
      c. the directors of Company A considered that the issue of the Convertible Notes was a strategic step to enhance the Group's relationship with the Pre-IPO Investors; and
      d. all the Pre-IPO Investors (and their respective directors and shareholders) were independent of and not connected with Company A within the meaning of the Listing Rules.

      THE ISSUE RAISED FOR CONSIDERATION

      3. Whether the issue of shares in Company A upon conversion of convertible notes issued by Company A prior to listing on the Exchange should be regarded as a deemed disposal of interest prohibited under Listing Rules 10.07 and 10.08, where such conversion would occur upon or shortly after listing and at a price identical to the IPO price?

      APPLICABLE LISTING RULES OR PRINCIPLES

      4. Listing Rule 10.07 (1)(a) states that:
      '[A] person or group of persons shown by the listing document issued at the time of the issuer's application for listing to be controlling shareholders of the issuer shall not and shall procure that the relevant registered holder(s) shall not:-
      (a) in the period commencing on the date by reference to which disclosure of the shareholding of the controlling shareholders is made in the listing document and ending on the date which is 6 months from the date on which dealings in the securities of a new applicant commence on the Exchange, dispose of, nor enter into any agreement to dispose of or otherwise create any options, rights, interests or encumbrances in respect of, any of those securities of the issuer in respect of which he is or they are shown by that listing document to be the beneficial owner(s); or'
      5. Listing Rule 10.08 states that:
      '[N]o further shares of securities convertible into equity securities of a listed issue (whether or not of a class al listed) may be issued or form the subject of any agreement to such an issue within 6 months from the date on which securities of the listed issuer first commence dealing on the Exchange (whether or not such issue of shares or securities will be completed within 6 months from the commencement of dealing), except for:
      (4) the issue of shares or securities pursuant to an agreement entered into before the commencement of dealing, the material terms of which have been disclosed in the listing document issued in connection with the initial public offering; and'

      THE ANALYSIS

      6. The Exchange ordinarily interprets Listing Rule 10.07(1)(a) to apply to a deemed disposal situation where there is a dilution of the controlling shareholders' interest as a result of the issue of new shares during the first six months of the listing of an issuer's shares. However, the Exchange ordinarily considers that an issue of new shares pursuant to an agreement entered into before the commencement of dealing is allowed under Listing Rule 10.08 provided that the material terms of the agreement have been disclosed in the prospectus.
      7. On the question of whether the issue of Shares upon conversion of the Convertible Notes should be disallowed in the present case and whether there should be a lock up of the Shares so issued, the Exchange considered the following:
      a. the material terms of the Convertible Notes including the reasons for the issue and the use of the proceeds were prominently disclosed in the prospectus in accordance with the Exchange's expectations under Listing Rule 10.08;
      b. the Convertible Notes were issued more than six months before the date of the hearing of Company A's listing application; and
      c. the Pre-IPO Investors were independent third parties and there was no evidence to suggest that the Pre-IPO Investors had any connection with the controlling shareholders such that they would constitute a group of controlling shareholders for the purpose of Listing Rule 10.07.
      8. Based on the facts and circumstances of the case, the Exchange did not consider the proposed conversion to be barred by Listing Rule 10.07 although it would result in a deemed disposal of controlling shareholders' interest in Company A. Furthermore, as the material terms had been disclosed in the prospectus as expected by the Exchange, no lock up of the Shares after conversion was required.

      THE DECISION

      9. Based on the above analysis and having regard to the material facts of the case, the Exchange determined that the issue of Shares upon or shortly after listing upon conversion of the Convertible Notes in favour of the Pre-IPO Investors should be allowed and the Shares so issued would not be subject to lock-up.

    • LD47-1

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      HKEx LISTING DECISION
      Cite as HKEx-LD47-1 (July 2005)

      Summary
      Names of Parties Company A — a Main Board listing applicant and its subsidiaries (the "Group")

      Subsidiary X — a wholly owned subsidiary of Company A which owned the majority of the assets of the Group and which prior to reorganisation into the Group was previously owned by Shareholder XX

      Subsidiary Y — a wholly owned subsidiary of Company A which provided management services to the Group and which prior to reorganisation into the Group was previously owned by Shareholder YY

      Subsidiary Z — a wholly owned subsidiary of Company which owned the remaining assets of the Group and which prior to reorganisation into the Group was previously owned by the amalgamation of Shareholder YY and Shareholder ZZ
      Subject Whether the requirements for ownership and management continuity could be satisfied absent a single legal structure amongst separate groups of entities in the track record period that made up Company A at the time of listing?
      Listing Rules Listing Rules 8.05(2) (b) and 8.05(2)(c)
      Decision The Exchange determined that there was a high degree of integration and interconnections amongst the entities which together formed the Group. Consequently, the Exchange determined that these entities could be viewed together as a group throughout the track record period for the purpose of assessing management and ownership continuity under Listing Rules 8.05(2)(b) and 8.05(2) (c).

      SUMMARY OF FACTS

      1. Company A applied for listing on the Main Board pursuant to Listing Rule 8.05(2).
      2. The Group was reorganised for the purpose of listing from three groups of subsidiaries through Subsidiary X, Subsidiary Y and Subsidiary Z (collectively referred to as the 'Subsidiaries'). Before the reorganisation during the track record period, these Subsidiaries had been separate entities held by their respective shareholders, Shareholder XX, Shareholder YY, and the amalgamation of Shareholder YY and Shareholder ZZ.
      3. Subsidiary X (held by Shareholder XX) owned the majority of the revenue generating assets of the Group. Subsidiary Y (held by Shareholder YY) principally engaged in the provision of management services for the Group. Subsidiary Z (held by the amalgamation of Shareholder YY and Shareholder ZZ) owned the remaining revenue generating assets of the Group.
      4. The sponsor sought to regard the Subsidiaries as a group for the purpose of demonstrating management and ownership requirements under Listing Rule 8.05(2)(b) and (c). Given the lack of a single legal structure amongst Subsidiaries, the Exchange was required to review whether Subsidiary X, Subsidiary Y and Subsidiary Z could be viewed together as a group under a common set of management and a common group of controlling shareholders throughout the track record period.
      5. In the course of the Exchange's review, the Exchange noted the following submissions by the sponsor:
      a. The Subsidiaries came together as an integrated enterprise for a number of years prior to the track record period on the basis that Shareholder YY would contribute its operating and management expertise, and Shareholder XX would contribute the required funding for the business to acquire revenue generating assets. Since establishment of this business mode, Shareholder XX and Shareholder YY sought opportunities to expand their operations by increasing the number of revenue generating assets through additional capital contributions provided by Shareholder XX and Shareholder YY and Shareholder ZZ.
      b. The operation and management of the assets of the Group were wholly delegated to Subsidiary Y through long term on-going management contracts (the "Management Contracts"). As a result, Shareholder YY was in charge of the day to day management of the business, including Subsidiary X and Subsidiary Z, through the operation of the Management Contracts.
      c. Shareholder XX was an integral part of the decision making process of the business and was involved in the strategic decision making of the Group's business as a whole. Shareholder XX had exerted substantial influence over the management of the business since its inception through various provisions under the Management Contracts which conferred additional rights to Shareholder XX:-
      (i) Major Actions — Under the Management Contracts, certain major transactions such as sale of any companies or assets held under Subsidiary X, entering into or modifying any agreement for the borrowing or lending of funds by Subsidiary X required the prior approval of Shareholder XX. In addition, Shareholder YY agreed that it would not, without the consent of Shareholder XX, invest independently in any business which might compete with the business of the Group.
      (ii) Regular meetings — Shareholder XX and Shareholder YY held regular meetings to discuss the affairs of the Group. All policy decisions were the result of interactions between Shareholder XX and Shareholder YY, and required the approval of Subsidiary X.
      (iii) Regular reporting — Under the Management Contracts, Shareholder YY was required to provide Shareholder XX with regular information on the progress of, or developments in the business and to produce quarterly progress reports. Shareholder YY was also responsible for identifying potential new business opportunities and for presenting these to Shareholder XX for discussion and consideration.
      d. Other contractual arrangements between Shareholder XX and Shareholder YY also supported the view that Subsidiary X and Subsidiary Y and Subsidiary Z should be regarded as a unified group:-
      (i) Packaged as one business for sale — Shareholder XX and Shareholder YY entered into a drag-along agreement which required that if Shareholder XX decided to sell Subsidiary X to a third party, then Shareholder YY would sell certain companies held under Subsidiary Y to such party as well. This mechanism would enable Shareholder XX and Shareholder YY to sell intact all or a significant part of their business even though Shareholder XX and Shareholder YY were separate legal entities.
      (ii) Success fees — there were agreements for Shareholder XX to pay certain success fees to Shareholder YY as incentives and rewards for its performance as manager and supervisors of the assets owned by Subsidiary X, and to align the mutual interests of Shareholder XX and Shareholder YY.
      e. Subsidiary Z was tied to Subsidiary Y through the Management Contracts and by virtue of ownership structure. In particular, Shareholder YY and its shareholders together owned interests in the respective members of Subsidiary Z. Furthermore, Shareholder YY controlled the board composition of and operated Subsidiary Z through holding all the voting rights (in the form of class A shares) in all members (save for one) of Subsidiary Z. The role of Shareholder ZZ in the business was limited solely to funding part of the acquisition costs of new assets.

      THE ISSUE RAISED FOR CONSIDERATION

      6. Whether the requirements for ownership and management continuity could be satisfied absent a single legal structure amongst separate groups of entities in the track record period that made up Company A at the time of listing?

      APPLICABLE LISTING RULES OR PRINCIPLES

      7. Listing Rule 8.05(2) states that:
      '[T]o meet the market capitalisation/revenue/cash flow test, a new applicant must satisfy each of the following:-
      (a) a trading record of not less than three financial years;
      (b) management continuity for at least the three preceding financial years;
      (c) ownership continuity and control for at least the most recent audited financial year;
      (d) a market capitalisation of at least HK$2,000,000,000 at the time of listing;
      (e) revenue of at least HK$500,000,000 for the most recent audited financial year; and
      (f) positive cash flow from operating activities carried out by the new applicant, or its group, that are to be listed of at least HK$100,000,000 in aggregate for the three preceding financial years'.

      THE ANALYSIS

      8. The Consultation Paper on Proposed Amendments to the Listing Rules relating to Initial Listing Criteria and Continuing Listing Obligations published by the Exchange in July 2002 (the 'Consultation Paper') acknowledged that other markets do not require a listing applicant to demonstrate there is no change in their ownership at any time during the track record period. However, the situation in Hong Kong is unique, and the Exchange's intention is to prevent listing applicants from 'packaging' their businesses so as to meet the profit record requirement.
      9. When considering the issue of packaging in the context of the present case, the Exchange took into consideration the following factors:
      a. there was a high degree of integration and cooperation between Shareholder XX and Shareholder YY as evidenced by the Management Contracts and other contractual arrangements;
      b. there was, through different groups, management continuity throughout the three financial years track record period;
      c. Shareholder XX had demonstrated continuous ownership of Company A throughout the last financial year of the track record period and Shareholder XX was and would be the largest group of shareholders before and after the reorganisation;
      d. Shareholder YY had, through participation on boards of directors and the Management Contracts, in fact managed the Subsidiaries comprising Company A throughout the track record period and would after the reorganisation have majority representation in the executive board of Company A; and
      e. the structure of the Group before the reorganisation took account of the separation of the management of assets from the funding and ownership of the assets.
      10. Based on the above analysis, the Exchange accepted the sponsor's submissions that the present structure was driven by commercial considerations related to the efficient growth and development of the business that formed the subject matter of listing. The consolidation of the Subsidiaries was not found to be an amalgamation of different and unrelated businesses created purely for the purpose of or in connection with an application for listing. As such, the Exchange was of the view that the grouping of the Subsidiaries through reorganisation should not be viewed as 'packaging' for the purpose of satisfying the requirements of Listing Rules 8.05(2)(b) and 8.05(2)(c).

      THE DECISION

      11. Based on the facts and circumstances of the above case and the Exchange's analysis, the Exchange determined that there was a high degree of integration and interconnections amongst the entities which together formed the Group. Consequently, the Exchange determined that these entities could be viewed together as a group throughout the track record period for the purpose of assessing management and ownership continuity under Listing Rules 8.05(2)(b) and 8.05(2)(c).

    • LD45-1

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      HKEx LISTING DECISION
      Cite as HKEx-LD45-1 (First Quarter of 2005)

      Summary
      Name of Party Company A — a Main Board listed issuer and its subsidiaries (the "Group")
      Subject Whether the requirement for management continuity under Listing Rule 8.05(1)(b) and Paragraph 2 of Practice Note 3 could be satisfied when only one director had remained on the board of directors throughout the three financial year track record period up to the time of listing ?
      Listing Rules Listing Rule 8.05(1)(b); Paragraph 2 of Practice Note 3
      Decision The Exchange determined that the requirement for management continuity was satisfied when it was demonstrated that a group of individuals on the board of directors and in senior management of Company A and its operating subsidiaries, who constituted the core management group responsible for the track record results of Company A, had been in place for the required three-year period and up to the time of listing.

      SUMMARY OF FACTS

      1. In the first year of the three financial year track record period of Company A ('Year 1'), there was a major shareholding change in Company A's predecessor where Shareholder X replaced Shareholder Y as the majority shareholder.
      2. The change in share ownership had also caused major changes in the composition of the board of directors of Company A's predecessor. The board of directors constituted the top management of Company A's predecessor under its articles of association. Except for Mr. Q, no other director had remained on the board throughout the three financial year track record period up to the time of listing. Mr. Q was the only director holding office since the time of Company A's predecessor. Mr. Q had been responsible for the business, strategy and operational management of Company A and its predecessor throughout the relevant period.
      3. At the second tier of management, the level immediately below the board of directors, an identified group of senior officials who made up the Management Committee of Company A and its predecessor remained largely unchanged throughout the relevant period. The Management Committee had been responsible for the daily management of Company A and its predecessor, including carrying out the decisions of the board through Mr. Q, overseeing the production process, the sales and financial aspects of management of the business and other essential operations. All these activities resulted in the most substantial portion of the track record results of Company A and its predecessor.
      4. For the purpose of demonstrating management continuity under Listing Rule 8.05(1)(b) and Paragraph 2 of Practice Note 3, the sponsor of Company A submitted that throughout the track record period up to the time of listing, the management of Company A had been carried out through the core management group comprising Mr. Q, the only executive director, and the Management Committee.
      5. The sponsor of Company A further demonstrated to the satisfaction of the Exchange that the numbers of directors appointed by each shareholder (Shareholder X and Shareholder Y) were reflective of the respective shareholdings in Company A and its predecessor during the relevant periods. Apart from Mr. Q, all other directors of Company A were non-executive directors. The board of directors seldom convened meetings. In the event that board meetings were convened, they were for the purposes of satisfying the formal requirements of the articles of association, for example, receiving, discussing reports and endorsing business plans and budget and dividend distribution, etc. prepared or recommended by the core management group. Throughout the relevant track record period, none of the directors had sought to interfere with the management and operational decisions of the core management group through their influence in the board of directors or through other channels.

      THE ISSUE RAISED FOR CONSIDERATION

      6. Whether the requirement for management continuity under Listing Rule 8.05(1)(b) and Paragraph 2 of Practice Note 3 could be satisfied when only one director had remained on the board of directors throughout the three financial year track record period up to the time of listing?

      APPLICABLE LISTING RULES OR PRINCIPLE

      7. Listing Rule 8.05(1)(b) provides that in order 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 new applicant or its group must, among other criteria, satisfy 'management continuity for at least the three preceding financial years.'
      8. Paragraph 2 of Practice Note 3 of the Listing Rules gives further guidance on the interpretation of the requirement for substantially the same management as follow:

      'In all cases the trading record period of a new applicant must enable the Exchange and investors to make an informed assessment of the management's ability to manage the applicant's business and the likely performance of that business in the future. In order to make this assessment the applicant must be able to satisfy the Exchange that its main business or businesses, as at the time of listing, have normally been managed by substantially the same persons throughout the period of the qualifying trading record and that such persons are the management of the new applicant.'

      THE ANALYSIS

      9. The Exchange ordinarily considers management continuity under Listing Rule 8.05(1)(b) and Paragraph 2 of Practice Note 3 to be a question of fact.
      10. In the Consultation Paper on Proposed Amendments to the Listing Rules Relating to Initial Listing Criteria and Continuing Eligibility published in July 2002 (the 'Consultation Paper'), paragraph 31 clearly stated that the Exchange has interpreted the management continuity requirement to mean that applicants must demonstrate that there has been no change in the majority of the applicant's board of directors and senior management of its principal operating subsidiaries during the three financial year track record period. Paragraph 2 of Practice Note 3 requires that management continuity must continue up to the date of listing.
      11. Based on this interpretation of the Listing Rules, when examining whether Company A and its predecessor satisfied the management continuity requirement, the Exchange followed the practice of concentrating on a review of the substance of the management, particularly considering whether:
      a. an identifiable group of individuals most relevant and responsible for the track record results of a listing applicant remained in positions of responsibility with the enterprise under review throughout the relevant track record period; and
      b. such group of individuals would form the core management of the applicant at the time of listing and thereafter.
      12. When assessing the relevance of individual members of a management team to the track record results of Company A and its predecessor, the Exchange followed the practice of ordinarily attributing proportionately greater responsibility to officers with more senior positions than those with more junior positions. This practice is intended to reflect the formal responsibilities of senior officers in their corporate roles. In its determination process, the Exchange ordinarily considers special facts and circumstances of an individual case to enable appropriate adjustments to be made in its final conclusion.
      13. In the present case, the Exchange accepted submissions from the sponsor of Company A that the numbers of directors that were appointed by each shareholder were reflective of the respective shareholdings in Company A's predecessor. Based on the submitted facts, the Exchange accepted that, although under the relevant articles of association the board of directors was the organ with the highest authority, the management of the actual operation of Company A and its predecessor that contributed directly to the track record results had been entrusted to Mr. Q, the only executive director at the board level, and the Management Committee.
      14. Following the above analysis, the Exchange therefore determined that the requirement for management continuity was satisfied in the present case. This conclusion was arrived at notwithstanding that the core management of Company A and its predecessor most responsible for the results during the three financial year track record period and at the time of listing constituted a minority in numbers in their respective boards of directors.

      THE DECISION

      15. Based on the above facts and the circumstances of the case and the Exchange's analysis of the Listing Rules, the Exchange determined that the requirement for management continuity under Listing Rule 8.05(1)(b) and Paragraph 2 of Practice Note 3 was satisfied when it was demonstrated that management continuity within a group of individuals on the board of directors and in senior management of Company A and its operating subsidiaries (that is, Mr. Q and the Management Committee), who constituted the core management group responsible for the track record results of Company A, had been in place for the required three-year period and up to the time of listing.

    • LD44-4

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      HKEx LISTING DECISION
      Cite as HKEx-LD44-4 (First Quarter of 2005)

      Summary
      Name of Party Company A — a Main Board listing applicant
      Subject Whether the requirement for ownership continuity and control for at least the most recent audited financial year under Listing Rule 8.05(1)(c) could be satisfied by aggregating the shareholding interests and control of a group of individual shareholders?
      Listing Rule Listing Rule 8.05(1)(c)
      Decision The Exchange determined that special circumstances existed and that they justified aggregating the shareholding interests and control of a group of shareholders in the most recent audited financial year of Company A. Consequently, Company A had satisfied the ownership continuity and control requirement of Listing Rule 8.05(1)(c).

      SUMMARY OF FACTS

      1. Prior to the most recent audited financial year of the track record period of Company A, Company A's share capital was divided into Class A and Class B shares, which entitled each class of shareholders to different rights. In particular and subject to performance targets being met, Class A Shares could be converted into Class B Shares.
      2. The Class A Shares were held by ten individuals ("Founding Individuals"), which accounted for no less than 51% of the voting rights in Company A but only approximately 10% of the beneficial interest in Company A. In contrast, although the Class B Shares held by other three financial investors ("Financial Investors") accounted for approximately 90% of the beneficial interest in Company A, the shares conferred upon them only 49% of the voting rights.
      3. Pursuant to a shareholders' agreement entered into between the Founding Individuals and the Financial Investors in the second year of the track record period, the Financial Investors were granted veto rights with regard to major corporate decisions concerning the operations of Company A. Certain major corporate decisions, amongst others, required the approval of two out of the three board members nominated by the Financial Investors. The prescribed major corporate decisions included any changes to the business scope, any amendments to/modifications/waivers of provisions in the charter documents, a sale or disposition of all or substantially all of the assets, a merger, any transactions involving large amounts, the approval of annual budget, and any commitments to large capital expenditure.
      4. The Founding Individuals included members of Company A's senior management and their business associates. However, the majority of the board members of Company A and its subsidiary were representatives appointed by the Founding Individuals.
      5. During the last audited financial year of the track record period, the existing shareholders increased their investment in Company A. As a result of the additional investment and the conversion of Class A Shares into Class B Shares, the Founding Individuals' voting rights merged with their equity rights and their aggregated shareholdings increased to more than 60%, while the Financial Investors' equity interests and voting rights were correspondingly reduced.
      6. In reviewing whether Company A could fulfil the ownership continuity and control requirement for at least the most recent audited financial year under Listing Rule 8.05(1)(c) by virtue of the shareholding interests of the Founding Individuals in Company A, the Exchanged considered the following reasons:-
      a. no individual member of the Founding Individuals or the Financial Investors held a controlling interest in Company A at any time during the track record period.
      b. the Founding Individuals neither had a shareholders' agreement nor any other form of documentation concerning their rights as shareholders; and
      c. without the Founding Individuals being viewed as a group of shareholders for the purposes of Listing Rule 8.05, the Financial Investors would change their collective status from being the single largest group of shareholders to the second largest group of shareholders during the most recent audited financial year.

      THE ISSUE RAISED FOR CONSIDERATION

      7. Whether the requirement for ownership continuity and control for at least the most recent audited financial year under Listing Rule 8.05(1)(c) could be satisfied by aggregating the shareholding interests and control of a group of individual shareholders?

      APPLICABLE LISTING RULE OR PRINCIPLE

      8. Listing Rule 8.05(1)(c) provides that in order to meet the profit test, a new applicant must have an adequate trading record under substantially the same management and ownership. This means that a new applicant or its group must, amongst other criteria, have 'ownership continuity and control for at least the most recent audited financial year'.

      THE ANALYSIS

      9. In reaching its conclusion in the present case, the Exchange interpreted control under Listing Rule 8.05(1)(c) to mean voting control as distinguished from beneficial interest.
      10. In determining whether any individual shareholders of Company A had been acting as part of a controlling group of shareholders, the Exchange took into account the following factual circumstances including:-
      a. the nature of their relationship including the way they had associated with each other in any past or present business dealings and whether there had been in existence any formal or informal arrangements amongst the individual shareholders;
      b. how the individual members jointly affected their "management and control" as a unit, for example:-
      •   the pattern in which the individual members had voted in the past on shareholders' resolutions involving key decisions other than routine resolutions at an annual general meeting. The frequent occurrence of unanimous resolutions amongst individual shareholders during the past years was considered to support the proposition that such shareholders should be viewed as a controlling group for the purposes of the Listing Rules;
      •   whether consensus building process was adopted to arrive at a voting or business decision by the individual shareholders;
      •   whether mutual trust and bonding as a group could be demonstrated amongst the individual shareholders in the consensus building process; and
      c. whether any group of shareholders could be regarded as "acting in concert" for the purposes of the Takeovers Code.
      11. Applying the above analysis, the Exchange determined that there was a reasonable basis to view the Founding Individuals as a controlling group of ten shareholders although the relationship amongst them were never formalized or documented (by way of shareholders' agreement or otherwise).
      12. The conclusion was reached based on the factual circumstances that:-
      a. the Founding Individuals had a long term business relationship of more than ten years and had jointly invested in the Group for more than four years;
      b. the Founding Individuals held regular meetings, reached consensus on key decisions, and had unanimous voting patterns which supported the premise that they had consolidated their "management and control" and acted as a unit; and
      c. no single largest shareholder or single largest group of shareholders among the Founding Individuals ever attempted to exercise his/their voting rights independently without the concurrence of the other Founding Individuals.
      13. In contrast and based on the same analysis, the Exchange determined that the Financial Investors never acted as a controlling group that could enable their interests to be aggregated. The Exchange arrived at such a conclusion based on the factual circumstances that:-
      a. each of the Financial Investors was an independent private equity investor;
      b. each of the Financial Investors was owned and managed by different entities without any cross ownership or management amongst the three entities. They did not have any joint investments other than their investment in Company A;
      c. there had been no understanding or arrangement (formal or otherwise) that the board representatives of the Financial Investors would vote in any coordinated manner;
      d. the Financial Investors were not considered by the Securities and Futures Commission as parties acting in concert in respect of Company A under the Takeovers Code; and
      e. as regards the veto rights of the Financial Investors under the shareholders' agreement, the Exchange found that the rights could be regarded as conferring on the Financial Investors some operational control over Company A. However, the Exchange determined that since day-to-day management was entrusted to the Founding Individuals, and the Financial Investors had never exercised their veto rights, the existence of the veto rights was insufficient to establish that the Financial Investors had ownership control of Company A during the last financial year of the track record period. Therefore, the Exchange determined that the presence of the veto rights did not affect the ownership continuity and control for the most recent financial year of the track record period.

      THE DECISION

      14. Based on the above facts and the circumstances of the case and the Exchange's analysis of the Listing Rules, the Exchange determined that the Founding Individuals constituted the controlling group of shareholders for at least the most recent audited financial year. Consequently, Company A had satisfied the ownership continuity and control requirement of Listing Rule 8.05(1)(c).

    • LD44-2

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      HKEx LISTING DECISION
      Cite as HKEx-LD44-2 (First Quarter of 2005)

      Summary
      Name of Parties Company A — a Main Board listed issuer and its subsidiaries (the "Group")

      Shareholder X — an existing shareholder of Company A
      Subject Whether Shareholder X could purchase shares pursuant to an anti-dilution provision where it was also a connected client of one of the distributors of the shares in the initial public offering of Company A?
      Listing Rules Listing Rules 10.03, 10.04; Paragraphs 5 and 13 of Appendix 6 of the Listing Rules
      Decision The Exchange determined that, subject to full disclosure of the details of the proposed placing to Shareholder X in the prospectus and in the announcement of the allotment results,
      a. a waiver of Listing Rule 10.04 would be granted to permit the proposed placing of Shares to Shareholder X at the IPO price; and
      b. the Exchange's written consent would be given in respect of the proposed placing of Shares to Shareholder X.

      SUMMARY OF FACTS

      1. Company A applied for a waiver of Listing Rule 10.04 and for the Exchange's written consent under paragraph 5 of Appendix 6 to enable an existing shareholder of Company A ("Shareholder X") to subscribe for a certain number of shares of Company A ("Shares") upon their listing on the Exchange. The proposed placing of Shares to Shareholder X would be conducted on the same terms as those offered to other investors under the initial share offer of Company A, including subscription at the IPO price.
      2. Shareholder X was an insurance company whose normal course of business included investing in Hong Kong listed shares. Shareholder X and one of the distributors involved in the placing of Shares were both members of a same group of companies.
      3. The existing version of Company A's articles of association contained an anti-dilution provision which conferred upon all shareholders the right to purchase or subscribe for such number of additional securities to be issued by Company A in order to maintain their respective proportionate shareholdings. The existing shareholders of Company A, other than Shareholder X, had waived their right under the anti-dilution provision. A new set of articles of association without any anti-dilution provision would be adopted upon the listing of Company A.
      4. Company A proposed to include in its prospectus a statement that Shareholder X had served a notice pursuant to the anti-dilution provision on Company A that it intended to subscribe for a number of shares in the IPO sufficient to enable it to maintain its proportionate shareholdings in Company A.

      THE ISSUE RAISED FOR CONSIDERATION

      5. Whether Shareholder X could purchase shares pursuant to an anti-dilution provision where it was also a connected client of one of the distributors of the shares in the initial public offering of Company A?

      APPLICABLE LISTING RULES OR PRINCIPLE

      6. Listing Rule 10.04 provides that:

      'A person who is an existing shareholder of the issuer may only subscribe for or purchase any securities for which listing is sought which are being marketed by or on behalf of a new applicant either in his or its own name or through nominees if the conditions in rules 10.03(1) and (2) are fulfilled.'
      7. Appendix 6 of the Listing Rules sets out the placing guidelines for new listing applicants.
      8. Paragraph 5(1) of Appendix 6 states that no allocations will be permitted to "connected clients" of the lead broker or of any distributors without the prior written consent of the Exchange.
      9. Paragraph 13 of Appendix 6 sets out the various categories of persons that may be defined as a "connected client" of an Exchange Participant. This includes but not limited to, in the case of the Exchange Participant being a company, any client of the Exchange Participant which is a member of the same group of companies as such Exchange Participant.

      THE ANALYSIS

      10. The principal regulatory rationale for Listing Rule 10.04 and the Placing Guidelines set out in Appendix 6 of the Listing Rules is to ensure that shares are placed to independent and genuine investors, rather than to existing shareholders of the new listing applicants or related parties of the lead brokerages.
      11. In considering the issues in the present case, the Exchange took into account the following:-
      a. the placing of Shares to Shareholder X was in accordance with the existing provisions of the articles of association of Company A;
      b. the proposed placing of Shares would be at the IPO price; and
      c. Shareholder X had agreed to a lock-up period in respect of the Shares allotted to it under the IPO of Company A for a period longer than that required under Listing Rule 10.07.
      12. Consequently, the Exchange determined that it would grant a waiver of Listing Rule 10.04 and give the required written consent under paragraph 5 of Appendix 6 of the Main Board Listing Rules subject to the conditions that there would be full disclosure of the details of the proposed placing to Shareholder X in the prospectus and in the announcement of the allotment results.

      THE DECISION

      13. Based on the above facts and the circumstances of the case and the Exchange's analysis of the Listing Rules, the Exchange determined that, subject to full disclosure of the details of the proposed placing to Shareholder X in the prospectus and in the announcement of the allotment results,
      a. a waiver of Listing Rule 10.04 would be granted to permit a proposed placing of Shares to Shareholder X at the IPO price; and
      b. the Exchange's written consent would be given in respect of the proposed placing of Shares to Shareholder X.

    • LD44-1

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      HKEx LISTING DECISION
      Cite as HKEx-LD44-1 (First Quarter of 2005)

      Summary
      Name of Party Company A — a Main Board listed issuer and a deemed new listing applicant under Listing Rule 8.21C
      Subject Whether, in a case where an asset injection transaction caused Company A to be deemed a new listing applicant, the minimum public float requirement under Listing Rule 8.08 could be satisfied by the placing of existing and/or new Shares of Company A prior to the completion of the asset injection transaction?
      Listing Rules Listing Rules 8.08; 8.21C; 10.07(1)(a)
      Decision The Exchange determined that the proposed placings were acceptable. The Exchange also granted a waiver to Listing Rule 10.07 so that Parentco, a controlling shareholder, would be able to place down its Shares within the prescribed restricted period.

      SUMMARY OF FACTS

      1. Company A entered into an agreement with its controlling shareholder ("Parentco") for the acquisition of certain target companies held by Parentco ("asset injection transaction"). As the asset injection transaction constituted a very substantial acquisition involving a change in control of Company A, it was treated as a reverse takeover transaction under the Listing Rules. Consequently, the asset injection transaction was deemed a new listing of Company A's Shares pursuant to Listing Rule 8.21C. It follows that the asset injection transaction required the issue to shareholders of Company A a circular in the form of a listing document and the transaction required the approval of independent shareholders of Company A in a special general meeting.
      2. In order to maintain the minimum public float requirement upon completion of the asset injection transaction, Company A and Parentco proposed the following three options :-
      Option 1- Parentco placing existing Shares;
      Option 2- Company A placing new Shares;
      Option 3- A combination of placing existing and new Shares by Parentco and Company A.

      THE ISSUE RAISED FOR CONSIDERATION

      3. Whether, in a case where an asset injection transaction caused Company A to be deemed a new listing applicant, the minimum public float requirement under Listing Rule 8.08 could be satisfied by the placing of existing and/or new Shares of Company A prior to the completion of the asset injection transaction?

      APPLICABLE LISTING RULES OR PRINCIPLE

      4. Listing Rule 7.11 provides that:

      'The Exchange may be prepared to allow preliminary arrangements and placings to be made to dispose of securities before the start of dealings where necessary to comply with the requirement in rule 8.08(1) that a minimum prescribed percentage of any class of listed securities must at all times be held by the public.'
      5. Listing Rule 8.08(1) provides that

      'There must be an open market in the securities for which listing is sought. This will normally mean that
      (1)
      (a) at least 25% of the issuer's total issued share capital must at all time be held by the public...'
      6. Listing Rule 8.21C provides that:-

      'Without prejudice to the generality of other applicable provisions of the Exchange Listing Rules, a listed issuer that is treated as if it were a new applicant must meet all the basis conditions set out in this Chapter 8, unless otherwise waived by the Exchange. In particular, where there are assets to be injected into or acquired by the listed issuer, the assets to be injected or acquired or the enlarged group must meet the requirements under rule 8.05, and the enlarged group must meet all the other basic conditions set out in this Chapter 8. In cases of doubt, issuers and advisers should consult the Exchange at an early stage.'
      7. Listing Rule 10.07(1)(a) provides that a person or group of persons shown by the listing document issued at the time of the issuer's application for listing to be controlling shareholders of the issuer shall not dispose of shares in the issuer 'in the period commencing on the date by reference to which disclosure of the shareholding of the controlling shareholders is made in the listing document and ending on the date which is 6 months form the date on which dealings in the securities of a new applicant commence on the Exchange'.

      THE ANALYSIS

      Public Float Requirement under Listing Rule 8.08

      8. The Exchange stated in paragraph 118 of the Consultation Conclusions on Proposed Amendments to the Listing Rules relating to Initial Listing and Continuing Listing Eligibility issued in January 2004 ("Consultation Conclusions") that with regard to the treatment of new listing applications arising from reverse takeover transactions, and in particular, with regard to asset injections, the same set of initial listing eligibility criteria should be consistently and fairly applied in order to ensure a level playing field for all listing applicants seeking a listing on the Exchange.
      9. The Exchange concluded in paragraph 123 of the Consultation Conclusions that the Main Board Listing Rules should be amended such that in a case of "reverse takeover" transaction including asset injection in a rescue situation, the enlarged group (or where appropriate, the NewCo, or assets to be injected) would be required to comply with the initial listing eligibility criteria. This would mean that the enlarged group of the existing issuer, or the NewCo, must meet the public float requirements and the spread of shareholders requirements under Listing Rule 8.08.
      10. Pursuant to the Consultation Conclusions, Listing Rule 8.21C was adopted and took effect on 31 March 2004.
      11. In light of its recent statements in the Consultation Conclusions, the Exchange ordinarily will not entertain a proposal to waive the requirements of Rule 8.08 to allow time for the restoration of public float after the completion of a deemed new listing transaction. Accordingly, the Exchange required strict compliance with Listing Rule 8.08 in this case. The Exchange would regard the date of completion of the asset injection transaction as the date of the deemed new listing of the shares of Company A. Consequently, Company A was required to demonstrate to the Exchange that the requirements under Listing Rule 8.08 would be satisfied on or before the completion of the asset injection transaction.

      Consequential waiver of Listing Rule 10.07

      12. In the event of placings under proposed Option 1 and Option 3 mentioned in paragraph 2 above, Listing Rule 10.07(1) would operate to prohibit Parentco from disposing of Company A's Shares within the prescribed restricted period. Therefore, the Exchange was asked to consider a waiver of Listing Rule 10.07(1) to afford Company A greater flexibility when acting to comply with Listing Rule 8.08.
      13. Listing Rule 7.11 provides that the Exchange may be prepared to allow preliminary arrangements and placings to be made to dispose of shares of an issuer before the start of dealings where necessary to comply with the requirements of Listing Rule 8.08(1). The Exchange noted that the proposed placing arrangements were consistent with the spirit of Listing Rule 7.11. However, the Exchange also noted that one of the purposes of Listing Rule 10.07 is intended to ensure that controlling shareholders are committed to an issuer during its initial stage of listing, as a means to ensure the protection of investors.
      14. In the present case, the Exchange noted that the proposed placings formed part of the asset injection transaction. This conferred sufficient protection on the shareholders of Company A as the asset injection transaction would be subject to approval by independent shareholders. The proposed placing arrangements would also be disclosed in Company A's circular to the shareholders prior to the special general meeting. In view of the above safeguards, the Exchange concluded that it was appropriate to grant a waiver of Listing Rule 10.07 for the purpose of facilitating the placings by Parentco under the above proposed Option 1 or Option 3.

      THE DECISION

      15. Based on the above facts and circumstances and the Exchange's analysis of the Listing Rules, the Exchange determined that:-
      a. the proposed placing arrangements by the Company and/or Parentco to maintain the minimum public float under Listing Rule 8.08 before completion of the Asset Injection were arrangements acceptable to the Exchange;
      b. the Exchange would grant a waiver of Listing Rule 10.07 so that Parentco, a controlling shareholder, would be able to place down its Shares as contemplated under the proposed placing arrangements within the restricted period.

    • LD43-3

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      HKEX LISTING DECISION
      HKEX-LD43-3 (First Quarter of 2005, updated in November 2011, August, November and December 2012, November 2013, April 2014, August 2015, February and April 2018)

      Summary
      Name of Parties Company A — a Main Board listing applicant

      Group — Company A together with its subsidiaries

      PRC Subsidiaries — subsidiaries of Company A with substantially all operations in the PRC

      OPCOs — companies owned by the Registered Owners and controlled by Company A through the Contractual Arrangements

      Registered Owners — shareholders of the OPCOs
      Subject Whether, in view of the fact that, in the conduct of its business in the PRC, Company A was a party to a number of contract-based structures ("Contractual Arrangements" or "Structured Contracts") between or among Company A, the PRC Subsidiaries, the OPCOs and the Registered Owners, Company A was unsuitable for listing due to legal questions associated with the Contractual Arrangements?
      Listing Rules Rules 1.01 and 8.04
      Decision The Exchange determined that the Contractual Arrangements would not render Company A unsuitable for listing.

      SUMMARY OF FACTS

      1. Company A was incorporated outside Hong Kong. The Group operated a business in the PRC, and PRC regulations applicable to its industry sector limited foreign investment.
      2. Therefore, the Group did not possess the licences required to operate its business in the PRC. However, the Group adopted Contractual Arrangements designed to give the various rights listed in paragraph 4. The Contractual Arrangements were binding on Company A, the PRC Subsidiaries, the OPCOs and the Registered Owners.
      3. A brief diagram illustrating the Contractual Arrangements is set out below:-



      Note 1: The Registered Owners were PRC nationals and controlling shareholders of Company A

      Note 2: The OPCO was incorporated in the PRC
      4. The Sponsor submitted that the Contractual Arrangements were designed specifically to confer upon the Group:-
      a. the right to enjoy all the economic benefit of the OPCOs, to exercise management control over the operations of the OPCOs, and to prevent leakages of assets and values to shareholders of the OPCOs;
      b. the right to all intellectual properties through assignments from the OPCOs;
      c. the right to consolidate the financial results of the OPCOs as if they were wholly-owned subsidiaries of the Group under prevailing accounting principles;
      d. the right to acquire, if and when permitted by PRC law, the equity interests in and/or assets of the OPCOs for a nominal price or a pre-paid amount; and
      e. a first priority security interest in the OPCO shares owned by the Registered Owners, as security for the proper performance of the Contractual Arrangements.
      5. The Sponsor confirmed that Company A had satisfied all conditions for listing under the Listing Rules (save for waivers sought) and no alteration of the confirmation was necessary by reason of the existence of the Contractual Arrangements. The Sponsor intended to disclose full details of the Contractual Arrangements in the listing document.
      6. The PRC legal adviser of Company A issued an opinion that the Contractual Arrangements complied with PRC laws, rules and regulations, including those applicable to the business of Company A, the PRC Subsidiaries and the OPCOs, and complied with the articles of association of the PRC Subsidiaries.
      7. The reporting accountants of Company A confirmed that it had the right to consolidate the financial results of the OPCOs as if they were wholly-owned subsidiaries of the Group under prevailing accounting principles.

      THE ISSUE RAISED FOR CONSIDERATION

      8. Whether, in view of the fact that, in the conduct of its business in the PRC, Company A was a party to the Contractual Arrangements between or among Company A, the PRC Subsidiaries, the OPCOs and the Registered Owners, Company A was unsuitable for listing due to legal questions associated with the Contractual Arrangements?

      APPLICABLE LISTING RULES OR PRINCIPLE

      9. Rule 1.01 states that 'subsidiary' includes 'any entity which is accounted for and consolidated in the audited consolidated accounts of another entity as a subsidiary pursuant to applicable Hong Kong Financial Reporting Standards or International Financial Reporting Standards'.
      10. Rule 8.04 provides that in the opinion of the Exchange both the issuer and its business must be suitable for listing.

      THE ANALYSIS

      11. When considering Company A's suitability for listing under Rule 8.04, the Exchange reviewed whether the Group's business operations, including the use of the Contractual Arrangements, complied with all applicable laws and regulations.
      12. In the review, the Exchange continued its established practice of utilising a disclosure-based approach. Under this approach, the sponsor and the directors of Company A had to demonstrate, by a clear preponderance of the materials submitted for review, that it had complied in fact and in good faith with all relevant PRC laws and regulations. If Company A could meet this burden it would not be treated as unsuitable for listing on the Exchange by reason of the Contractual Arrangements.
      13. In this case, the Exchange adopted the following standard of review:-
      a. the Listing Rules and Listing Department policies would be strictly construed;
      b. the Contractual Arrangements should be narrowly tailored to achieve the listing applicant's business purposes and minimise the potential for conflict with relevant PRC laws and regulations. Wherever possible, the listing applicant would be required to demonstrate genuine efforts to comply with applicable laws and regulations. Evidence to the contrary would indicate a higher risk of the Contractual Arrangements being deemed in breach of relevant laws and regulations;
      c. a broad review of all relevant facts and circumstances concerning the listing applicant would be undertaken by the Exchange, including a review of its legal and compliance history (if any), its management systems and corporate governance practices, its records in protecting shareholder interests and its financial resources to ensure compliance with the applicable laws and regulations. If material uncertainties were identified in the areas of the listing applicant's business, a higher level of assurance with respect to the arrangements would be required; and
      d. subject to availability and practicability, appropriate regulatory assurance should be obtained from the relevant regulatory authorities. In the absence of such regulatory assurance, the listing applicant's legal adviser would be required to make a statement to the effect that in its legal opinion all possible actions or steps taken to enable it to reach its legal conclusions had been taken. In consultation with the listing applicant and the sponsor, other relevant forms of assurance could be considered.
      14. Based on the submissions of the Sponsor which were supported by professional opinions from the PRC legal advisers and the reporting accountants, Company A had demonstrated that it had satisfied the above requirements. Consequently, the Exchange determined that the Contractual Arrangements were legal and binding and that Company A had the ability to ensure the sound and proper operation of the Contractual Arrangements. Given that there would be full disclosure of the Contractual Arrangements in the listing document, the Exchange determined that Company A or its business would not be rendered unsuitable for listing by reason of the use of the Contractual Arrangements.

      THE DECISION

      15. The Exchange continued to adopt a disclosure-based approach in considering Company A's listing application. Based on the material facts and the PRC legal opinion as submitted, the Exchange determined that Company A had demonstrated the legality of the Contractual Arrangements and its ability to ensure the sound and proper operation of the Contractual Arrangements. Subject to appropriate disclosures in the listing document of the Contractual Arrangements and the risks associated therewith, the Exchange determined that Company A was suitable for listing.

      SUBSEQUENT DEVELOPMENT

      16. In a review in 2011, the Listing Committee confirmed the practice of allowing Contractual Arrangements (also commonly known as structured contracts or VIEs) on a case-by-case basis after full consideration of the reasons for adopting such arrangements and subject to the conditions in this listing decision (Added in November 2011).
      16A. All listing applicants without exception (including applicants transferring its listing from GEM to the Main Board) must narrowly tailor their Contractual Arrangements regardless of materiality of the business, in terms of revenue or profit or otherwise, to the listing applicant. This means that Contractual Arrangements may only be used to the extent necessary to address any limits on foreign ownership, except as provided in paragraphs 16B and 16C. The listing applicant must otherwise directly hold the maximum permitted interest in the OPCO. For the avoidance of doubt, even if the listing applicant is able to control OPCO through the direct equity interest held by it in OPCO (e.g. by holding a direct equity interest of more than 50%), the remaining equity interest that is not permitted to be directly held by it may still be held through Contractual Arrangements (Added in November 2013 and amended in April 2018).
      16B. If the OPCO, as a result of having foreign ownership, is required to obtain approval and fulfill additional eligibility standards ("Other Requirements"), the listing applicant must fulfill such Other Requirements. The listing applicant must seek and obtain such regulatory approval to directly hold the maximum interest in the OPCO prior to submitting its listing application, unless the approving regulatory authority confirms that it will not or cannot give approval even if the listing applicant fulfilled the Other Requirements:
      a. because no procedures or guidance for granting approval are available; or
      b. for policy reasons.
      (Paragraph 16B added in April 2014 and amended in April 2018)
      16C. If clear procedures or guidance from the approving regulatory authority is not available, the listing applicant can directly hold less than the maximum permitted interest in OPCO if it demonstrates to the satisfaction of the Exchange that it has, as advised by its legal advisers, reasonably assessed the requirements under all applicable rules, committed financial and other resources and implemented all the legal adviser's recommendations prior to submitting its listing application. A mere intent, undertaking or plan to implement such recommendations is not sufficient (Added in April 2018).
      17. If there are no limits on foreign ownership, the listing applicant must not use Contractual Arrangements to carry on its business (Added in November 2011 and amended in April 2018).
      18. In addition to the matters in paragraph 13, the Exchange requires any listing applicant using Contractual Arrangements and/or its sponsor to:
      a. provide reasons for the use of Contractual Arrangements in its business operation;
      b. terminate the Contractual Arrangements as soon as the law allows the business to be operated without them. The OPCO's registered shareholders must undertake that, subject to the relevant laws and regulations, they must return to the listing applicant any consideration they receive in the event that the listing applicant acquires the OPCO's shares when terminating the Contractual Arrangements. The undertaking must be disclosed in the listing document (Amended in November 2013);
      c. ensure that the Contractual Arrangements:
      (i) include a power of attorney by which the OPCO's shareholders grant to the listing applicant's directors and their successors (including a liquidator replacing the listing applicant's directors) the power to exercise all rights of the OPCO's shareholders, including the rights to vote in a shareholders' meeting, sign minutes, file documents with the relevant companies registry. OPCO's shareholders should ensure that the power of attorney does not give rise to any potential conflicts of interest. Where OPCO's shareholders are officers or directors of the listing applicant, the power of attorney should be granted in favour of the listing applicant and actions in relation to the Contractual Arrangements must be decided by officers or directors of the listing applicant who are not shareholders of OPCO;
      (ii) contain dispute resolution clauses that:
      •   provide for arbitration and that arbitrators may award remedies over the shares or land assets of OPCO, injunctive relief (e.g. for the conduct of business or to compel the transfer of assets) or order the winding up of OPCO;
      •   provide the courts of competent jurisdictions with the power to grant interim remedies in support of the arbitration pending formation of the arbitral tribunal or in appropriate cases. The courts of Hong Kong, the listing applicant's place of incorporation, the OPCO's place of incorporation, and the place where the listing applicant or the OPCO's principal assets are located should be specified as having jurisdiction for this purpose; and
      (iii) encompass dealing with the OPCO's assets, and not only the right to manage its business and the right to revenue. This is to ensure that the liquidator, acting on the Contractual Arrangements, can seize the OPCO's assets in a winding up situation for the benefit of the listing applicant's shareholders or creditors.

      (Paragraph 18 added in November 2011)
      18A. Where the relevant laws and regulations specifically disallow foreign investors from using any agreements or Contractual Arrangements to gain control of or operate a foreign restricted business (e.g. on-line game business in the PRC which is subject to GAPP's Notice 131), the legal adviser's opinion on the Contractual Arrangements must include a positive confirmation that the use of the Contractual Arrangements does not constitute a breach of those laws and regulations or that the Contractual Arrangements will not be deemed invalid or ineffective under those laws and regulations. The legal opinion must be supported by appropriate regulatory assurance, where possible, to demonstrate the legality of the Contractual Arrangements (Added in November 2013)
      19. A listing applicant using Contractual Arrangements for the entire or part of its business should disclose the following information concerning the Contractual Arrangements in its listing document:
      a. detailed discussion about the OPCO's registered shareholders and a confirmation that appropriate arrangements have been made to protect the listing applicant's interests in the event of death, bankruptcy or divorce of the OPCO's registered shareholders to avoid any practical difficulties in enforcing Contractual Arrangements.
      b. the extent to which the listing applicant has arrangements in place to address the potential conflicts of interest between the listing applicant and the OPCO's registered shareholders, particularly in cases where these shareholders are officers and directors of the listing applicant.
      c. bases why the directors believe that each of the agreements conferring significant control and economic benefits from the OPCO to the listing applicant is enforceable under the relevant laws and regulations.
      d. the economic risks the listing applicant bears as the primary beneficiary of the OPCO, in what way the applicant shares the losses of the OPCO, the circumstances that could require the listing applicant to provide financial support to the OPCO, or other events or circumstances that could expose the listing applicant to losses.
      e. a discussion on whether the listing applicant has, to date, encountered any interference or encumbrance from any governing bodies in operating their business through the OPCO under the Contractual Arrangements.
      f. the limitations in exercising the option to acquire ownership in the OPCO, include a separate risk factor explaining these limitations, and clarifying that ownership transfer may still subject to substantial costs.
      g. the Contractual Arrangements as material contracts in the "Statutory and General Information" section and make them available on the listing applicant's website (Amended in November 2012).
      h. corporate structure table in the "Summary" section for the purpose of illustrating the Contractual Arrangements and facilitating investors' review and understanding of the arrangements.
      i. details of any insurance purchased to cover the risks relating to Contractual Arrangements, or a prominent disclosure that those risks are not covered by any insurance (Added in December 2012).
      j. a separate disclosure of revenue from Structured Contract arrangements if the listing applicant generates revenue from other subsidiaries apart from the OPCO (Added in November 2013).
      k. if the OPCO's operations are in the PRC, a positive confirmation from the PRC legal advisers that the Contractual Arrangements would not be deemed as "concealing illegal intentions with a lawful form" and void under the PRC contract law. (Added in November 2013)

      (Paragraph 19 added in August 2012)
      20. The relevant disclosure on Contractual Arrangements in the listing document should follow the following guiding principles:
      a. Various sections — To avoid repeated disclosure in various sections, such as those relating to connected transactions arising from the Contractual Arrangements, the basis of consolidation of the OPCO, and the terms of the Contractual Arrangements, disclosure on Contractual Arrangements (other than risk factors) should be consolidated into one standalone section. Appropriate cross references should be sufficient.
      b. Risk Factors — Cluster all related risk factors under an appropriate heading, such as "Risks relating to Corporate Structure". In addition, the listing document should include at least the following Contractual Arrangements-related risk factors:
      (i) The government may determine that the Contractual Arrangements do not comply with applicable regulations;
      (ii) The Contractual Arrangements may not provide control as effective as direct ownership;
      (iii) The domestic shareholders may have potential conflicts of interest with the listing applicant; and
      (iv) Contractual Arrangements may be subject to scrutiny of the tax authorities and additional tax may be imposed.

      (Paragraph 20 added in August 2012 and amended in November 2013)

      DRAFT PRC FOREIGN INVESTMENT LAW

      Background
      21. This Listing Decision is in part based on the conclusion that the Structured Contracts comply with PRC laws, rules and regulations, and are legal and binding. This is evident in paragraphs 6, 13(d), 14 and 15 above.
      22. Following publication of the consultation draft (the "Draft FIL") of the new PRC Foreign Investment Law (the "FIL") by the Ministry of Commerce in January 2015, concerns over the legality and validity of Structured Contracts to hold interests in PRC businesses which are subject to foreign ownership restrictions were heightened. Applicants which use Structured Contracts to hold interests in PRC businesses are encouraged to contact the Exchange in advance to seek informal and confidential guidance on novel issues (Amended in April 2018).
      Measures to be adopted, if any
      23. Since there is uncertainty as to the implementation and the wording of the final FIL, a listing applicant with a VIE business in the PRC should seek PRC legal advice and decide what measures to adopt (if any) to mitigate against any potential risk.
      24. Whether or not the listing applicant decides to adopt any measures, it must disclose in the listing document the reasons for taking that approach.
      25. If the listing applicant decides to adopt certain measures, it must also include an appropriate risk factor in the listing document stating that such measures may not be effective since the FIL has not been finalized and requirements under the final FIL may be different from those set out in the Draft FIL.
      26. A listing applicant with a VIE business in the PRC should also include the following disclosure in the listing document (and highlighted in the "Summary" and "Risk Factors" sections):
      a. Description of the Draft FIL pursuant to our Guidance Letter HKEX-GL86-16 and its promulgation status.
      b. A risk factor (i) explaining that the Draft FIL is currently in draft form only, (ii) cross referring to the description of the Draft FIL; (iii) stating that if the listing applicant cannot comply with the final FIL, if and when it becomes effective, it may be required to dispose of its VIE business under the Structured Contracts; and (iv) if the listing applicant no longer has a sustainable business after such disposal, the Exchange may delist the listing applicant.
      c. A statement that the listing applicant will disclose, as soon as possible: (i) updates of changes to the Draft FIL that will materially and adversely affect the listing applicant as and when they occur; and (ii) a clear description and analysis of the final FIL as implemented, specific measures taken by the listing applicant to fully comply with the final FIL supported by a PRC legal opinion and any material impact of the final FIL on the listing applicant's operations and financial position.
      27. If the listing document indicates that the listing applicant will acquire or establish a VIE business after listing, then the Exchange will apply the above guidance to the listing applicant.
      On-going developments
      28. The Exchange recognises that the Draft FIL remains subject to change. The Exchange will continue to monitor developments with respect to the FIL and will update this document when appropriate.
      (Paragraphs 23 to 28 added in April 2018)

      1"Notice Regarding the Consistent Implementation of the "Stipulations on 'Three Provisions'" of the State Council and the Relevant Interpretations of the State Commission Office for Public Sector Reform and the Further Strengthening of the Administration of Pre-examination and Approval of Internet Games and the Examination and Approval of Imported Internet Games" (Xin Chu Lian [2009] No. 13) published jointly by PRC General Administration of Press and Publication, National Copyright Administration, and National Office of Combating Pornography and Illegal Publications on 28 September 2009 (as amended from time to time).

    • LD43-1

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      HKEx LISTING DECISION
      Cite as HKEx-LD43-1 (First Quarter of 2005)

      Summary
      Name of Parties Parentco — the holding company of Company A, a Main Board listed issuer

      Company A- a Main Board listing applicant being spun off by Parentco
      Subject Whether in a case where Parentco had a pubic float approaching 50% of its equity capital, it was appropriate to grant a permanent waiver to Company A in respect of the minimum public float requirement of 25%?
      Listing Rules Listing Rule 8.08(1)(a) and (d); and Note (2)(b) to Listing Rule 8.08
      Decision The Exchange determined that there were no justifiable grounds for exercising its discretion to grant permanent relief from the minimum public float requirements of 25% in favour of Company A. The Exchange, however, determined to grant temporary relief under Note (2)(b) to Listing Rule 8.08 on the undertaking of Company A and its controlling shareholder to restore the required 25% public float level within eighteen months of Company A's listing.


      SUMMARY OF FACTS

      1. The listing application of Company A followed a spin-off application initiated by its controlling shareholder, Parentco. Parentco had a public float approaching 50% of its equity capital. The spin-off constituted a major transaction for Parentco requiring prior approval by the shareholders of Parentco.
      2. Company A applied to the Exchange for a permanent waiver of the minimum public float requirement of 25% under Rule 8.08 and to allow Company A to maintain a minimum public float of 15% instead. The remaining 85% would be held by Parentco upon listing. The expected market capitalisation of Company A's shares upon listing was above the minimum market capitalisation set forth in Listing Rule 8.08 allowing the Exchange to exercise discretion to reduce the required minimum public float level.
      3. Company A explained that the net proceeds to be raised from the public offering (both in Hong Kong and overseas) would be sufficient for the present requirements of Company A. Company A believed that to raise capital in excess of its current requirement for the sake of complying with the minimum public float requirement might have an adverse impact on shareholder value and, therefore, was not in the best interest of Company A. Parentco also considered it to be inappropriate to take any action to reduce its shareholding in Company A to below 85% by declaring a dividend in specie of shares of Company A held by Parentco.
      4. It was submitted that given the absolute number of securities concerned and their widespread distribution, a lower percentage than that required under Listing Rule 8.08(1) would still enable the market to operate properly. In this regard, the sponsor submitted that:-
      a. the market capitalisation of Company A's shares would be in excess of HK$10 billion as required under 8.08(1)(d). Arguably, an inference could be made that a waiver should be granted to a company if its market capitalisation exceeded this level;
      b. given the size of the offering, the expected dollar value of the proposed 15% public float of Company A would facilitate a far more open market than a great majority of other Main Board listed companies with public floats of 25% or more. Furthermore, if the recent daily turnover ratio level of the predecessor company could be relied on as a guide, it would require more than 40 days for all the public float shares to be transacted once. In view of the above, a reasonably liquid market for the shares could be maintained;
      c. Company A intended to seek opportunities to expand. These would involve further issues of shares either to raise capital to fund expansion, or as consideration for future acquisitions which would thereby increase its public float to above 25% in the course of time;
      d. the allocation of Company A's shares would require compliance with Practice Note 18 and this would result in a sufficient portion of securities to be offered in Hong Kong; and
      e. the particular circumstances of the present share offering suggested that there would not be an undue concentration of shares in the public float. These circumstantial factors included preferential offers to existing shareholders of Parentco and employees of the Group and a worldwide distribution network that stimulated a strong yet dispersed shareholder subscription base.

      THE ISSUE RAISED FOR CONSIDERATION

      5. Whether in a case where Parentco had a pubic float approaching 50% of its equity capital, it was appropriate to grant a permanent waiver to Company A in respect of the minimum public float requirement of 25%?

      APPLICABLE LISTING RULES OR PRINCIPLE

      6. Listing Rule 8.08(1) (a) and (d) provide that:

      'There must be an open market in the securities for which listing is sought. This will normally mean that:-
      (1)
      (a) at least 25% of the issuer's total issued share capital must at all times be held by the public.
      (b) ...
      (c) ...
      (d) the Exchange may, at its discretion, accept a lower percentage of between 15% and 25% in the case of issuers with an expected market capitalisation at the time of listing of over HK$10,000,000,000, where it is satisfied that the number of securities concerned and the extent of their distribution would enable the market to operate properly with a lower percentage, and on condition that the issuer will make appropriate disclosure of the lower prescribed percentage of public float in the initial listing document and confirm sufficiency of public float in successive annual reports after listing...'
      7. Note (2)(b) to 8.08 provides that where the public float percentage has fallen below the minimum, the Exchange may refrain from suspension if the Exchange is satisfied that there remains an open market in the securities and if (not exhaustively):

      ' the issuer and the controlling shareholder(s) or single largest shareholder undertake to the Exchange to take appropriate steps to ensure restoration of the minimum percentage of securities to public hands with a specified period which is acceptable to the Exchange.'

      THE ANALYSIS

      8. The Consultation Paper On Proposed Amendments To The Listing Rules Relating To Initial Listing And Continuing Listing Eligibility And Cancellation Of Listing Procedures issued by the Exchange in July 2002 mentioned that 'the level of public float may have implications for minority shareholders' protection.... For good corporate governance and shareholders' protection, we consider that the floor with regard to the minimum percentage of public float that the Exchange....can grant should be raised'. In the Consultation Conclusion of the said Consultation Paper, the Exchange considered it appropriate to raise the threshold of the minimum percentage of public float that the Exchange may grant to not less than 15%. The Exchange proposed to codify the then practice to require a minimum market capitalisation of HK$10 billion. As a safeguard to protect the interests of minority shareholders, the Exchange proposed that there should be appropriate disclosure in the prospectus of the lower public float percentage and future annual reports. All these proposals have been adopted and incorporated in the current Listing Rule 8.08(1)(d).
      9. The Exchange considered that eligibility for a grant of waiver under Listing Rule 8.08(1)(d) did not imply that an issuer with a market capitalisation greater than HK$10 billion would be automatically granted a lower percentage public float. On the contrary, Listing Rule 8.08(1)(d) specifies that the Exchange will accept a lower percentage 'at its discretion'.
      10. When exercising a discretion to grant waivers under the Listing Rules, it is the established practice of the Exchange to give due consideration to all relevant facts and circumstances. In light of the plain meaning of the general provisions of Listing Rule 8.08 and the statements made in the Consultation Paper issued in July 2002, the Exchange determined that Listing Rule 8.08(1)(d) should be interpreted to require an applicant to demonstrate:-
      a. a reasonable basis for concluding that an open market for the securities in question can be maintained with the lower percentage public float; and
      b. that such market can be maintained for a reasonable period of time after the time of permitting such lower public float.
      11. In considering the present case, the Exchange was of the view that the measure of what constitutes an open market must be taken both in absolute terms, based on appropriate analysis of quantitative factors, and in relative terms, giving appropriate weight to qualitative factors specific to the applicant's history and the market sector in which it operates.
      12. While accepting that Parentco had operated as a responsible corporate enterprise listed on the Main Board, the Exchange noted the following factors weighing against accepting a lower public float:-
      a. in light of the nature of the spin-off in this case, the Exchange was of the view that Parentco as the controlling shareholder was in a position to ensure full compliance with the public float requirements and therefore should use its best endeavours to comply with the Listing Rules whenever possible. Indications to the contrary without good reasons should weigh against the exercise of discretion by the Exchange;
      b. the spin-off transaction would cause a substantial reduction of the currently existing public float and the transaction was fundamentally voluntary; and
      c. Company A had a relatively small market capitalisation as compared to the cases previously considered by the Exchange where a lower public float had been allowed.
      13. Based on the material facts and analysis above, the Exchange determined that Company A had not established a reasonable basis for concluding that an open market for the securities in question could be maintained with the lower percentage public float. In particular, the Exchange gave significant weight to the recent trading history and public float level of the predecessor company with operations substantially similar to that of Company A. Given the relatively high degree of change in the public float level as compared to recent levels experienced by Parentco as well as other factors weighing against the exercise of discretion under Listing Rule 8.08(1)(d), the Exchange was of the view that there were no justifiable grounds to grant permanent relief from the requirements of Listing Rule 8.08(1)(a) in this case.
      14. However, the Exchange considered it acceptable to allow Company A to proceed with the listing of its shares at the requested not less than 15% public float on the strength of the undertaking by Company A and the controlling shareholders to the Exchange that they would take appropriate steps to ensure restoration of the minimum percentage of securities to public hands within a specified period acceptable to the Exchange. Such temporary relief is specifically contemplated by Note (2)(b) to Listing Rule 8.08.
      15. In determining the appropriate length of time for the restoration of the required minimum public float level under Listing Rule 8.08, the Exchange took into account that, as required by Listing Rule 10.07, Parentco would not be allowed to dispose any shares in Company A in the first six months after being listed on the Main Board and that, under Listing Rule 10.08, Company A would not be allowed to issue new shares within the first six months of listing.

      THE DECISION

      16. Based on the facts and circumstances of the case and the Exchange's analysis of the Listing Rules, the Exchange considered it inappropriate to grant permanent relief from the requirements of Listing Rule 8.08(1)(a) to Company A in this case.
      17. However, the Exchange considered it appropriate to grant temporary relief to Company A upon its listing to allow the percentage of public float level to fall below the minimum as required by Listing Rule 8.08 on the undertaking of Company A and Parentco that they would take appropriate steps to ensure restoration of the minimum percentage of securities to public hands within eighteen months of Company A's listing.