Entire Section

  • 2017

    Select By Rule or Topic: Download the consolidated index herehere

    Please visit Archive to view marked-up versions and versions that have been superseded or withdrawn.

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

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

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

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

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

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

    • LD117-2017

      View Current PDFView Current PDF

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

      Parties Company A — a Main Board issuer

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

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

      FACTS

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

      APPLICABLE LISTING RULES

      6. Rule 8.04 states that:

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

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

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

      ANALYSIS

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

      CONCLUSION

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

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

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

    • LD116-2017

      View Current PDFView Current PDF

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

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

      FACTS

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

      APPLICABLE LISTING RULES AND GUIDANCE MATERIALS

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

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

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

      ANALYSIS

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

      CONCLUSION

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

      Notes:

      1.   The amended Rule 6.01 states that:

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

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

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

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

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

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

    • LD115-2017

      View Current PDFView Current PDF

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

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

      FACTS

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

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

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

      APPLICABLE LISTING RULES AND GUIDANCE MATERIALS

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

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

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

      ANALYSIS

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

      CONCLUSION

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

      Notes:

      1.   The amended Rule 6.01 states that:

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

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

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

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

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

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

    • LD114-2017

      View Current PDFView Current PDF

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

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

      FACTS

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

      APPLICABLE LISTING RULES AND GUIDANCE

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

      . . .

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

      ANALYSIS

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

      CONCLUSION

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

    • LD113-2017

      View Current PDFView Current PDF

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

      Parties Company A — a Main Board issuer

      Company B — the former controlling shareholder of Company A

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

      FACTS

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

      APPLICABLE LISTING RULES AND GUIDANCE MATERIALS

      7.   Rule 2.04 states that -

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

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

      ANALYSIS

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

      CONCLUSION

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

      Notes

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

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

    • LD112-2017

      View Current PDFView Current PDF

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

      Parties Company A — a Main Board issuer

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

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

      FACTS

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

      APPLICABLE LISTING RULES AND GUIDANCE MATERIALS

      7.   Rule 13.24 states that-

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

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

      ANALYSIS

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

      CONCLUSION

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

      Notes:

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

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

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

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

    • LD111-2017

      View Current PDFView Current PDF

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

      Parties Company A — a Main Board issuer

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

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

      FACTS

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

      APPLICABLE LISTING RULES

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

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

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

      ANALYSIS

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

      DECISION

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

    • LD110-2017

      View Current PDFView Current PDF

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

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

      FACTS1

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

      APPLICABLE LISTING RULES

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



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

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

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

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

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

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

      …"

      ANALYSIS

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

      CONCLUSION

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

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

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

    • LD109-2017

      View Current PDFView Current PDF

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

      Parties Company A — a Main Board issuer

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

      FACTS1

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

      APPLICABLE LISTING RULES

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

      ANALYSIS

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

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

      CONCLUSION

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

      Notes

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

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

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

       

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

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

       

    • LD108-2017

      View Current PDFView Current PDF

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

      Parties Company A — a Main Board issuer

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

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

      FACTS1

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

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

      APPLICABLE LISTING RULES

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

      ANALYSIS

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

      CONCLUSION

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

      Notes

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

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

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

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

    • LD107-2017

      View Current PDFView Current PDF

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

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

      PURPOSE

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

      APPLICABLE LISTING RULES

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

      ****

      Appendix

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

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

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

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

      Company C
      (a GEM Applicant)

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

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

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

      Company D
      (a GEM Applicant)

      Company D was a software solution provider in Hong Kong.

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

      Company E
      (a Main Board Applicant)

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

      Company F and
      Company G
      (Main Board Applicants)

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

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

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

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

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

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

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

      Company K
      (a GEM Applicant)

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

      Company J was a printing company in the PRC.

      Company K was a licensed software developer in Hong Kong.

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

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

      Company L was a utility provider in the PRC.

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

      Company M
      (a GEM Applicant)

      Company M was a restaurant operator in the PRC.

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

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

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

      Unsustainable business model

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

    • LD106-2017

      View Current PDFView Current PDF

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

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

      PURPOSE

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

      APPLICABLE RULES, REGULATIONS AND PRINCIPLES

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

      ****

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

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

      The application was returned because:

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

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

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

      Company C
      (a GEM Applicant)

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

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

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

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

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

      Company D
      (a GEM Applicant)

      Company D was a toy manufacturer in the PRC.

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

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

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

      Company E
      and
      Company F
      (GEM Applicants)

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

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

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

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

      Company G

      (a Main Board Applicant)

      Company G was a bead wire manufacturer in the PRC.

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

    • LD105-2017

      View Current PDFView Current PDF

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

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

      FACTS

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

      APPLICABLE LISTING RULES, LISTING DECISIONS AND GUIDANCES

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

      ANALYSIS

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

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

      CONCLUSION

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

      Notes:

      1.   The amended GEM Rule 9.04 states that:

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

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

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

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

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

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

    • LD104-2017

      View Current PDFView Current PDF

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

      Parties Company A — a Main Board issuer

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

      FACTS

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

      APPLICABLE LISTING RULES

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

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

      ANALYSIS

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

      CONCLUSION

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

      GENERAL WAIVER FOR THE ASSURED ENTITLEMENT REQUIREMENT

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