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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
Listing decisions published before 1 January 2011 continue to bear the old references.
LD Series Number First
Listing Rules/ Topics Particulars LD138-2022 09/2022 Main Board Rules 8.04, 8A.04 and 19C.02 To provide guidance on why the Exchange considered certain proposed applicants have not demonstrated their suitability to list with a WVR structure LD137-2022 06/2022 Main Board Rule 7.27B The Exchange was satisfied that there were exceptional circumstances for Company A to undertake the proposed issuance of shares under Rule 7.27B LD136-2022 06/2022 Main Board Rule 14.06B The Exchange ruled the proposed acquisition to be a reverse takeover LD135-2022 05/2022
Main Board Rule 18A.01 Whether Product X (being one of Company A’s Core Products) which completed the Phase 1 clinical trials under the Therapeutic Goods Administration in Australia and subsequently obtained approval from both the European Medicines Agency and the National Medical Products Administration to commence the global pivotal Phase 2/3 clinical trial satisfies the relevant core product eligibility requirements under GL92-18 and Chapter 18A of the Main Board Rules LD134-2022 05/2022
Main Board Rule 8.04 Whether Company X is suitable for listing in light of (a) the prolonged deterioration of financial performance of its Core Businesses (as defined below); (b) the limited track record of its new services and temporary business improvement; and (c) the failure to prove its business improvement plans LD133-2022 05/2022 Main Board Rule 8.04 Whether Company X is suitable for listing in light of the material reliance on Dr. A LD132-2022 05/2022 Main Board Rules 3.08 and 3.09 Whether each of Mr. A and Mr. B is suitable to act as a director of an issuer in light of bribery incidents
HKEX LISTING DECISION
HKEX-LD138-2022 (September 2022)
Summary Parties Company A to Company E – each a proposed applicant seeking listing on the Main Board with a Weighted Voting Rights (WVR) structure
Issue To provide guidance on why the Exchange considered certain proposed applicants have not demonstrated their suitability to list with a WVR structure
Listing Rules Main Board Rules 8.04, 8A.04 and 19C.02
Related Publications HKEX-GL93-18 and HKEX-GL94-18 (the “Guidance Letters”)
Decision The Exchange determined that each of Company A to Company E has not demonstrated its suitability to list with a WVR structure
1. The Guidance Letters set out the factors that the Exchange takes into account when considering whether an applicant is suitable for listing with a WVR structure.
2. In making its assessment, the Exchange takes into account all relevant facts and circumstances. To enable the Exchange to make a prompt assessment, an applicant should include in its submission all relevant facts with a meaningful and balanced discussion of its core business, technologies and innovations, instead of making selective disclosures focusing only on favourable facts. Doing so will avoid the assessment being prolonged because of further information and/or clarification requests.
3. To illustrate how the Exchange may consider certain facts and circumstances when assessing an applicant’s suitability pursuant to the Guidance Letters, and with a view to improving the overall effectiveness and efficiency of the Exchange’s assessment, this listing decision sets out certain characteristics of applicants which are determined not to have demonstrated their suitability to list with a WVR structure.
CHARACTERISTICS OF APPLICANTS UNABLE TO DEMONSTRATE WVR SUITABILITY
4. Applicants which are unable to demonstrate WVR suitability generally failed to substantiate how they are able to differentiate themselves from existing market players, which is a key element of innovativeness. They generally possess one or more of the following characteristics:
(i) an inability to demonstrate that its success is attributable to the application, to its core business, of new technologies, innovations, and/or a new business model;
(ii) research and development not being a significant contributor of its expected value or constitute a major activity and expense;
(iii) the absence of an outsized market capitalisation relative to its tangible asset value; and
(iv) the absence of innovative technologies in its intellectual properties or a lack of relevance of such intellectual properties to its core business.
5. Appendix 1 sets out descriptions of relevant facts and circumstances of certain applicants which are determined not to have demonstrated their suitability to list with a WVR structure. A number of these applicants have proceeded to list on the Exchange without a WVR structure.
Applicant Background and Reasons Company A Company A is a retailer based in China which sells lifestyle products (such as stationery and gifts, personal care products, home décor and electronics).
Company A operates its physical retail network under a franchise and distributorship model. Under the franchise model, the franchisees would purchase Company A’s products and on-sell them to consumers at the retail store. Company A mainly assists the franchisees in customizing merchandise mix and monitoring store operations. Under the distributorship model, Company A sells the products to the distributors without any involvement in store and merchandise mix management.
Company A failed to demonstrate that its franchise and distributorship model was a new and innovative business model given that many businesses in China adopt similar approach for expansion.Company A also failed to demonstrate that research and development (“R&D”) is a significant contributor of its expected value and constitutes a major activity and expense and that it had implemented new technologies considering: (i) its R&D expenses represented a very insignificant portion of its total operating expenses during the proposed track record period; and (ii) the management systems and tools used (which include its supply chain management system, digitalised consumer engagement and marketing tools and the application of AI in store management) are al well-established in the retail sector and commonly used among large-scale retailers.
Company B Company B operates an automotive-related business in China.
In recent years, to complement its offline business, Company B introduced an online platform (e.g. a website) as an ancillary service to enable users to search for and compare products online. Despite the introduction of the online platform, the majority of Company B’s sales transactions were generated from its offline network. Company B failed to demonstrate why the ancillary online platform was a new technology or innovation given that complementing the brick-and-mortar business with an online channel is common in China.Company B’s financial performance was on a decreasing trend, as demonstrated by a significant decrease in both revenue and gross profit margin by nearly half in the last two years of the proposed track record period. Company B failed to demonstrate that it has a track record of high business growth and that its high growth trajectory is expected to continue.
Company C Company C is a vocational education and training service provider in China which offers examination preparation courses through online and offline channels.
Company C failed to demonstrate that its success is attributable to the implementation of innovative technologies and business model for the following reasons: (i) the majority of revenue shifted from online education to offline education, which is very similar to conventional classroom-based education given that it did not involve the use of new technologies, innovations or a new business model; and (ii) the technologies adopted in its business are commonly used by the education sector in China and most of them were less advanced than those of its peers. Hence, Company C could not differentiate itself from existing market players.
Company C’s R&D expenses as a percentage of total operating expenses was lower than that of its peers and decreased by nearly two-thirds during the proposed track record period. As such, Company C could not establish that R&D is a significant contributor of its expected value and constitutes a major activity and expense.While Company C’s revenue increased over the proposed track record period, a significant majority of the revenue was generated from offline tutoring, and its gross profit decreased. It failed to demonstrate that it has a track record of high business growth and that its high growth trajectory is expected to continue.
Company D Company D is an electric vehicle (“EV”) manufacturer in China and it recorded decent growth in sales of EVs during the proposed track record period.
Whilst the EV industry is widely considered to be an emerging sector at this stage, the question of whether a company is eligible for listing with a WVR structure remains subject to it being able to satisfy the requirements under the Guidance Letters based on individual facts and circumstances. For Company D, it failed to demonstrate that it has a new business model or technologies that could differentiate itself from other existing players (which have exhibited a higher growth trend with newer car models) or that it would be able to sustain growth with updated car models:
(i) Company D mainly sells its vehicles through car dealers (which is substantially the same business model adopted by traditional vehicle manufacturers) and only adopted the direct-sales model recently. Both business models are not new in the industry and Company D did not differentiate itself from other existing market players. (ii) Company D could not establish that R&D is a significant contributor of its expected value: in particular, its R&D expenses was on a decreasing trend and, as a percentage of total operating expenses, it decreased by nearly half during the proposed track record period and was lower than its peers; the new technologies and innovations to be adopted in future vehicle models were co-developed with third parties; and Company D has yet to record any revenue from the sales of new vehicle models. Company E Company E initially engaged in the provision of third-party payment services and general trading. Mr. E is Company E’s founder and the proposed WVR holder. Since the first year of the proposed track record period, Company E acquired a number of businesses involved in the provision of cloud-based e-commerce solution services using data analytics and AI technologies to merchants, which subsequently became Company E’s core business (the “Core Business”).
In light of the following facts: (i) the growth of Company E was mainly attributed to the acquisition of the Core Business and (ii) the Core Business was not established by or primarily developed under the management of Mr. E, Company E failed to demonstrate that Mr. E has been materially responsible for the growth of Company E and/or the Core Business, which is one of the key requirements for qualifying as a WVR holder under Guidance Letter HKEX-GL93-18.
HKEX LISTING DECISION
HKEX-LD137-2022 (published in June 2022)
Party Company A – a Main Board issuer
Issue Whether Company A could proceed with its proposed issuance of shares that was highly dilutive
Listing Rules Main Board Rule 7.27B
Decision The Exchange was satisfied that there were exceptional circumstances for Company A to undertake the proposed issuance of shares under Rule 7.27BFACTS 1. Company A and its subsidiaries (the Group) were principally engaged in the provision of energy saving products and related services. Mr. X was the founder of the Group and had been the single largest shareholder and executive director of Company A since listing.
2. Company A was in financial difficulties. It proposed to repay part of its overdue indebtedness by issuing new shares to Mr. X to raise funds, and to certain creditors to settle the amounts owed to them (together, the Proposed Issue). The theoretical dilution of the Proposed Issue was over 25%.
3. The Proposed Issue was subject to independent shareholders’ approval. Upon completion of the issue, Mr. X’s shareholding in Company A would increase from 10% to over 50%. 1Company A would continue to operate its existing business under the same management.
4. Company A submitted that the high shareholder’s value dilution was exceptional and justified in the circumstances:
(a) The Group did not have sufficient funds to repay overdue indebtedness as its business performance and financial position deteriorated in the past two years due to the change in market conditions and the outbreak of COVID-19. The Group had received statutory demands for repayment from some of the creditors. Its auditor had issued a disclaimer of opinion on its financial statements due to the going concern issue.
(b) The Proposed Issue formed part of the rescue plan of the Group. With part of the indebtedness to be repaid by the Group using the proceeds from the Proposed Issue, its creditors had conditionally agreed with the principal terms of a scheme of arrangement to settle the remaining indebtedness. Company A was also in discussion with a financing company for a loan facility to support its business operations, subject to the completion of the Proposed Issue.
(c) Company A had explored other fundraising means but these attempts failed due to its deteriorated financial position. The rescue plan would substantially improve its financial position and provide sufficient working capital to the Group for at least the next 12 months.
APPLICABLE LISTING RULES
5. Rule 7.27B states that:
“A listed issuer may not undertake a rights issue, open offer or specific mandate placing that would result in a theoretical dilution effect of 25% or more…unless the issuer can satisfy the Exchange that there are exceptional circumstances (for examples, the issuer is in financial difficulties and the proposed issue forms part of the rescue proposal)…”
6. Rule 7.27B became effective in July 2018. As explained in the Exchange’s Consultation Paper and Conclusions on Capital Raisings by Listed Issuers:
• The Rule was introduced to address concerns about abuses of highly dilutive capital raising transactions to the detriment of minority shareholders. Some highly dilutive issues lacked demonstrable commercial rationale and resulted in the introduction of new controlling or substantial shareholders. This raised questions on whether they were for the purpose of facilitating other activities, rather than to meet the issuers’ capital requirements. In many of these cases, there was no pressing funding need to justify such a high level of value dilution and the directors could not clearly explain how the high value dilution was in the interests of the shareholders.
• The Rule is not intended to restrict legitimate capital raisings. There is an exemption for issues in “exceptional circumstances” where the highly dilutive terms are justified by particular circumstances. This applies to an issuer who is in financial difficulties and the proposed issue forms part of its rescue proposal.
7. In this case, the Exchange was satisfied that there were exceptional circumstances for Company A to undertake the Proposed Issue. Based on Company A’s submission, the Group was in financial difficulties and had a pressing funding need. Company A had demonstrated that it had exhausted other fundraising means and the Proposed Issue was in the interests of Company A and its shareholders as a whole. The Proposed Issue formed part of the rescue plan of the Group to settle overdue indebtedness and support its business operations.
8. Company A had demonstrated that there were exceptional circumstances for it to undertake the Proposed Issue under Rule 7.27B.
1 Mr. X also applied for whitewash waiver pursuant to Note 1 on dispensation from Rule 26 of the Code on Takeovers and Mergers.
HKEx LISTING DECISION
HKEX-LD136-2022 (published in June 2022)
Parties Company A – a Main Board issuer
Target Company – a company which Company A proposed to acquire
Issue Whether Company A’s proposed acquisition which constituted a disclosable transaction was a reverse takeover
Listing Rules Main Board Rule 14.06B
Decision The Exchange ruled the proposed acquisition to be a reverse takeover
1. Company A was principally engaged in hotel hospitality business. Its assets comprised primarily a hotel property and a substantial amount of cash. The size of the operations was small and in the last five years, it recorded annual revenue of about HK$20 million to HK$40 million and incurred losses.
2. Company A proposed to acquire a majority interest in the Target Company (the Proposed Acquisition) from a third party vendor. Upon completion, the Target Company would become a subsidiary of Company A.
3. The Target Company was newly established to carry out a natural gas project involving the construction and operation of gas pipes and gas stations in the PRC. It had signed the relevant contracts but yet to commence operations. The Target Company expected to complete construction in one year and commence the sales of natural gas thereafter.
4. The Proposed Acquisition constituted a discloseable transaction based on the percentage ratios. The Target Company had not recorded any revenue and did not own any material assets. However, based on the financial forecast of the Target Company, it was expected to record substantial amounts of revenue and profits in the coming years. The projected annual revenue of the Target Company would be over 20 times of that of Company A’s hotel business.
APPLICABLE LISTING RULES
5. Rule 14.06B defines a "reverse takeover" as “an acquisition or a series of acquisitions of assets by a listed issuer which, in the opinion of the Exchange, constitutes, or is part of a transaction and/or arrangement or series of transactions and/or arrangements which constitute, an attempt to achieve a listing of the acquisition targets (as defined in rule 14.04(2A)) and a means to circumvent the requirements for new applicants set out in Chapter 8 of the Listing Rules.” This is a principle based test.
6. Note 1 to Rule 14.06B sets out the factors that the Exchange will normally consider in assessing whether the acquisition or series of acquisitions is a reverse takeover under the principle based test, 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.
7. In assessing the principle based test of Rule 14.06B, the Exchange will consider the six assessment factors and whether taken together, an acquisition would be considered an attempt to circumvent the new listing requirements and a means to achieve the listing of the acquisition targets.
8. In this case, the Proposed Acquisition was a disclosable transaction only to Company A based on historical financial figures of the Target Company. However, in assessing the impact of the Proposed Acquisition on Company A under the principle based test, the Exchange took into account future profitability of the Target Company and the nature and scale of Company A’s existing business. The Exchange was concerned that the Proposed Acquisition would be an attempt to circumvent the new listing requirements having regard to the following:
• Size of the acquisition relative to the issuer - Company A’s existing business had a low level of operations. Based on the Target Company’s business plan and financial forecast, its natural gas business would be significantly larger than the existing business of Company A in terms of revenue and profits.
• Fundamental change in the issuer’s principal business - The Target Company’s natural gas business was different from, and unrelated to, Company A’s existing business. The Proposed Acquisition would lead to a fundamental change in Company A’s principal business given the significant size of the natural gas business.
• Quality of the acquisition target - The Target Company had not generated any revenue before the Proposed Acquisition. It did not have a track record and could not meet the new listing requirements.
9. The Exchange informed Company A of its intention to rule the Proposed Acquisition as a reverse takeover under Rule 14.06B. Company A terminated the Proposed Acquisition.
HKEX LISTING DECISION
HKEx-LD135-2022 (May 2022)
Summary Party Company A – a biotech Main Board listing applicant
Issue Whether Product X (being one of Company A’s Core Products) which completed the Phase 1 clinical trials under the Therapeutic Goods Administration (“TGA”) in Australia and subsequently obtained approval from both the European Medicines Agency (“EMA”) and the National Medical Products Administration (“NMPA”) to commence the global pivotal Phase 2/3 clinical trial satisfies the relevant core product eligibility requirements under GL92-18 and Chapter 18A of the Main Board Rules
Listing Rules Main Board Rule 18A.01
Related Publications Guidance Letter HKEX-GL92-18 (“GL92-18”)
FAQ No. 036-2018 of FAQs-Main Board Listing Rules-Chapter 18A
Decision The Exchange determined that Product X meets the eligibility requirements of Core Product under paragraph 3.3(b)(i) of GL92-18
1. Company A is a biotech listing applicant under Chapter 18A of the Main Board Rules (the “Proposed Listing”). It has identified Product X (a biologic product) as one of its Core Products for the purpose of the Proposed Listing.
2. Company A conducted the Phase 1 clinical trials on Product X in Australia (“Australian Trial”). Subsequently, Company A decided to conduct the global pivotal Phase 2/3 clinical trials on Product X in multi-centers, including the EU and China markets. Prior to the completion of the Australian Trial, Company A requested a rapid scientific advice (“RSA”) from the EMA and initiated the investigational new drug (“IND”) application with the NMPA.
3. Company A submitted the clinical trial designs for the Australian Trial and the global pivotal Phase 2/3 clinical trials on Product X and presented the clinical data from the Australian Trial to both the EMA and the NMPA. After reviewing the materials on the clinical data of the Australian Trial and protocol of the global pivotal Phase 2/3 clinical trials, both the EMA and the NMPA confirmed their acknowledgement and acceptance of the results of the Australian Trial and that they had no objection for Company A to progress to the pivotal global Phase 2/3 clinical trials on Product X.
4. Subsequently, Company A had obtained approval from both the EMA and the NMPA to commence the global pivotal Phase 2/3 clinical trials on Product X.
ISSUE RAISED FOR CONSIDERATION
5. Whether Product X, which completed the Australian Trial and subsequently obtained approval from both the EMA and the NMPA to commence the global pivotal Phase 2/3 clinical trials, satisfies the relevant Core Product eligibility requirements under GL92-18 and Chapter 18A of the Main Board Rules?
APPLICABLE RULES AND GUIDANCE
6. Under Main Board Rule 18A.01, each of the US Food and Drug Administration (“FDA”), the NMPA and the EMA are recognized as a Competent Authority. It further provides that the Exchange may, at its discretion, recognize another national or supranational authority as a Competent Authority in individual cases.
7. Paragraph 3.3(b)(i) of GL92-18 states that in the case of a Core Product that is a biologic product, the applicant must demonstrate that it has completed Phase I clinical trials (being clinical trials on human subjects categorized as Phase I clinical trials by the FDA) and the relevant Competent Authority has no objection for it to commence Phase II (or later) clinical trials.
8. FAQ No. 036-2018 further states that the Exchange may accept clinical trials of a Biotech Product that are conducted by authorities other than the Competent Authorities under Chapter 18A of the Main Board Rules. The assessment will be conducted on a case by case basis with reference to:
(i) whether such authority can be regarded or authorized as a comparable authority as to the Competent Authorities;
(ii) whether the approval process of that authority in relation to the Biotech Product in question is comparable to the process and expertise of a Competent Authority in terms of assessing the robustness of a Biotech Product; and
(iii) whether there are precedent cases and the basis of other Biotech Products seeking such comparable authority for guidance or reference.
9. The Exchange took into account all relevant facts and circumstances when assessing whether or not the Australian Trial (which is not a clinical trial regulated by a Competent Authority recognized under Chapter 18A of the Main Board Rules) satisfies the relevant Core Product eligibility requirements under GL92-18 and Chapter 18A of the Main Board Rules.
10. In this case, given both the EMA and the NMPA (both being Competent Authorities under Chapter 18A of the Main Board Rules) have (i) reviewed and taken into account the clinical trial design and data of the Australian Trial in granting their approval for Company A to commence the global pivotal Phase 2/3 clinical trials on Product X and (ii) confirmed their acknowledgement and acceptance of the results of the Australian Trial and that they had no objection for Company A to progress to the pivotal global Phase 2/3 clinical trials on Product X based on the clinical results of the Australian Trial, the Exchange considered that the Australian Trial meets the requirement under paragraph 3.3(b)(i) of GL92-18.
11. Based on the specific facts and circumstances, the Exchange accepted that Product X meets the eligibility requirements of a Core Product under paragraph 3.3(b)(i) of GL92-18.
12. Such conclusion is specifically related to Product X and should not be construed as (i) a clinical trial conducted in Australia being generally accepted as a trial regulated by a Competent Authority; and/or (ii) the TGA being generally accepted as a Competent Authority under Chapter 18A of the Main Board Rules.
HKEX LISTING DECISION
HKEx-LD134-2022 (May 2022)
Summary Parties Company X – a Main Board listing applicant
Issue Whether Company X is suitable for listing in light of (a) the prolonged deterioration of financial performance of its Core Businesses (as defined below); (b) the limited track record of its new services and temporary business improvement; and (c) the failure to prove its business improvement plans
Listing Rule Main Board Rule 8.04
Decision The Exchange decided that Company X was not suitable for listing and rejected its listing application
1. Company X owned and operated five hospitals focusing on providing basic healthcare services to residents in local communities in China. Company X had submitted its listing application (the “Original Listing Application”) with the corresponding track record period (the “Original Track Record Period”). In response to the Exchange’s concerns, Company X subsequently updated its listing application (the “Renewed Listing Application”) and the corresponding track record period with an additional 12 months of financial information (the “Renewed Track Record Period”).
Original Listing Application
2. During the Original Track Record Period, Company X generated most of its revenue from its (a) outpatient clinic services (e.g. clinical treatments or day surgery); and (b) inpatient hospital services (together, the “Core Businesses”), representing almost 80% of its revenue. The remaining revenue was mainly generated from its sales of pharmaceuticals. Its general physical examination services had only contributed minimal revenue during the Original Track Record Period.
3. During the Original Track Record Period, the business and financial performance of the Core Businesses had been deteriorating significantly mainly for the following reasons:
(a) Breach of Regulations relating to Inpatient Hospital Services – two of Company X’s hospitals were found to be in breach of certain regulations imposed by the local hospital authorities (the “Breaches”) for admitting some inpatients and mandating unnecessary inpatient services and treatments which involved higher fees. To prevent future Breaches (which may revoke Company X’s hospitals as designated medical institutions for social reimbursement purposes), Company X had tightened its inpatient admission standards for all its hospitals. Since then, Company X recorded a significant drop in the utilization rate of beds in operation, the number of inpatient visits and relevant revenue from inpatient hospital services;
(b) Relocation of Hospitals – in view of the land title issues/defects at the original hospital site, Company X had to scale down its operation at one of its hospitals (which contributed over 25% of its revenue), and planned to relocate to a new site, which was more distant from the original site and with only half of the total gross floor area and total number of beds (the “Relocation”). The operation of such hospital (the “Relocated Hospital”) had been scaling down since the stub period of the Original Track Record Period. In addition, the remaining four hospitals were also located on leased properties with land title issues/defects or expiring term. The operations of these four remaining hospitals may also be exposed to potential material adverse impact arising from relocation; and
(c) COVID-19 Outbreak – the performance of the Core Businesses was further adversely affected since the outbreak of COVID-19 pandemic (the “Outbreak”) as people were reluctant to visit hospitals amid the Outbreak.
4. In light of the above, the revenue and profitability of the Core Businesses had experienced serious decline over the Original Track Record Period. The Exchange therefore had concerns on Company X’s business sustainability.
Renewed Listing Application
5. Company X submitted the Renewed Listing Application covering the Renewed Track Record Period. In an attempt to address the Exchange’s concerns, Company X submitted that its business had improved as a result of an increase in revenue from general physical examination services and the COVID-19 nucleic acid tests, each of which contributed around 10% (together around 20%) of Company X’s revenue in the last year and the stub period of the Renewed Track Record Period.
6. However, the business and financial performance of the Core Businesses continued to deteriorate. In particular, the Relocation for the Relocated Hospital lasted for almost half a year and since its resumption, it only managed to achieve around one-third of its level of revenue prior to the scale-down of the operation. In addition, two of Company X’s hospitals (which contributed more than 40% of Company X’s total revenue) were located on properties with leases that had expired or would soon expire. Company X had not provided any concrete renewal plans and the operations of these two hospitals were subject to imminent relocation risks.
7. According to Company X’s forecast, it expected that the revenue from the Core Businesses would further decrease by around 10% notwithstanding COVID-19 had subsided in China, and that the revenue from the Relocated Hospital would still decrease by half as compared to that prior to the scale-down of the operation. In contrast, Company X forecasted that the general physical examination services and the COVID-19 nucleic acid tests would further expand and contribute, in aggregate, nearly 30% of the total forecast revenue in the upcoming financial year. However, Company X did not provide any basis in support of such growth estimate (e.g. no legally binding agreements substantiating the anticipated significant increase in general physical examination services).
8. In addition, Company X planned to use a substantial portion of the IPO proceeds for (a) upgrading equipment and hospital facilities aiming at providing more advanced diagnosis services, which it believed could increase the number of relatively more complex surgeries that generally had a higher gross profit margin; and (b) merger and acquisition of smaller hospitals located in areas where healthcare resources were scarce and demand for comprehensive and quality healthcare services was unmet, but no memorandum of understanding or agreement had been reached.
ISSUE RAISED FOR CONSIDERATION
9. Whether Company X is suitable for listing in light of (a) the prolonged deterioration of financial performance of its Core Businesses; (b) the limited track record of its new services and temporary business improvement; and (c) the failure to prove its business improvement plans.
APPLICABLE RULES AND PRINCIPLES
10. Main Board Rule 8.04 states that both the issuer and its business must, in the opinion of the Exchange, be suitable for listing.
11. In assessing Company X’s suitability for listing, the Exchange considered all the facts and circumstances of the case and had taken the following factors into consideration:
Prolonged Deterioration in Financial Performance of Core Businesses
12. The business and financial performance of Company X’s Core Businesses had been deteriorating significantly throughout the Original Track Record Period and the Renewed Track Record Period due to various adverse circumstances including the Breaches and the Relocation.
13. Having considered the fact that the Relocated Hospital had sustained a material business decline as a result of the Relocation, the imminent risk of possible relocation faced by Company X’s two other major hospitals (which contributed a significant portion of Company X’s revenue) and its lack of concrete plans in renewing the leases or securing other appropriate hospital sites have aggravated the concern that this would materially adversely affect Company X’s operation, and in turn its business sustainability.
14. Company X had no specific strategies or plans in improving the Core Businesses. Based on its own forecast, Company X did not anticipate a significant rebound in the Core Businesses during the forecast period recovering to the revenue and profitability level prior to (a) the tightening of the standards of inpatient admission of all hospitals as a result of the Breaches; and (b) the Relocation. The Sponsor had also failed to provide any information to substantiate the sustainability of such businesses.
Limited Track Record of New Services and Temporary Business Improvement
15. Company X claimed that its business had improved in the last year of the Renewed Track Record Period and would continue to improve significantly as a result of the increase in revenue and profit attributable from the provision of general physical examination services and COVID-19 nucleic acid tests. However, provision of the general physical examination services had not been part of Company X’s Core Businesses and was only incidental to other core services generating insignificant revenue historically. Company X generated around 10% of revenue from general physical examination services in the last year of the Renewed Track Record Period and there was also no concrete basis to support the projected three-fold increase in revenue to be generated during the forecast period. For COVID-19 nucleic acid tests, as the demand for such test varies over the developments of the Outbreak, the revenue generated from these tests was temporary and may not be sustainable in the longer term.
Failure to Prove Business Improvement Plans
16. Company X failed to demonstrate how its expansion plan and proposed use of proceeds could improve its business and financial performance. The Exchange has taken the following into account:
(a) there was lack of sufficient patient demand to justify the upgrade of equipment and facilities for advanced diagnosis services given its deteriorating historical financial performance of its inpatient hospital services and outpatient clinic services, low bed utilization rate and number of patient visits and there had been no sign of recovery. The commercial rationale for such upgrade was also unclear given that Company X’s hospitals generally provided less complex treatments and focused on patients in local communities who preferred more affordable healthcare services; and
(b) Company X had not clearly identified the criteria for and the availability of the targets for merger and acquisition. No memorandum of understanding or agreement had been reached. It remained questionable whether Company X could materialize its expansion plan.
17. In view of the foregoing considerations, the Exchange was of the view that the sponsor and Company X had not satisfactorily addressed the Exchange’s concerns on Company X’s business sustainability and its proposed use of proceeds.
18. Based on the specific facts and circumstances, the Exchange decided that Company X was not suitable for listing and rejected its listing application.
HKEX LISTING DECISION
HKEx-LD133-2022 (May 2022)
Summary Parties Company X – a Main Board listing applicant
Dr. A and his wife – Company X’s executive directors and controlling shareholders
Issue Whether Company X is suitable for listing in light of the material reliance on Dr. A
Listing Rule Main Board Rule 8.04
Related Publication Guidance Letter HKEX-GL68-13 (“GL68-13”)
Decision The Exchange decided that Company X was not suitable for listing and rejected its listing application
1. Dr. A and his wife founded and operated a medical specialist practice by operating two specialist clinics, where they were the respective sole resident medical specialists, through the establishment of Company X. Throughout Company X’s operating history, Dr. A and his wife generated substantially all (i.e. over 90%) of Company X’s revenue. Particularly, Dr. A contributed around 70% to 80% of Company X’s total revenue during the track record period.
2. In an attempt to address the reliance concern, Company X hired an additional medical specialist to join one of its clinics in the last year of the track record period (the “New Hire”). However, the revenue contributed by the New Hire was insignificant since his joining. Dr. A continued to contribute over 70% of Company X’s revenue and hence, reliance on Dr. A remained significant.
3. Company X had proposed plans to reduce reliance on Dr. A, such as recruiting eight new medical specialists and opening four new clinics within six months to three years after listing (the “Plans”).
ISSUE RAISED FOR CONSIDERATION
4. Whether Company X is suitable for listing in light of the material reliance on Dr. A.
APPLICABLE RULES AND PRINCIPLES
5. Main Board Rule 8.04 states that both the issuer and its business must, in the opinion of the Exchange, be suitable for listing.
6. GL68-13 states that material reliance on another party may threaten a new applicant’s business sustainability if it is likely that the relationship with such party may materially adversely change. Examples of material reliance include dependence on the controlling shareholder for critical functions, such as sales. A new applicant’s material reliance on another party can be addressed by way of disclosure only if, absent any red flag indicating otherwise, (a) the relationship with the other party is unlikely to materially adversely change or terminate; or (b) the new applicant is/ will be able to effectively mitigate its exposure to any material adverse changes to or termination of its relationship with the other party.
7. Given almost all of the revenue generated during the track record period was attributable to Dr. A and his wife (to a large extent, on Dr. A), the level of reliance was extreme. The Exchange is of the view that such significant reliance cannot be dealt with by way of disclosure because, notwithstanding Dr. A is the co-founder, executive director and controlling shareholder, any material changes in his relationship with Company X (e.g. Dr. A ceasing to hold controlling interest in Company X or departing from Company X) will have material adverse impact on Company X’s business and financial conditions, thereby raising concerns on Company X’s suitability for listing and sustainability based on the existing business model.
8. In addition, the Exchange also takes the view that Company X has failed to demonstrate that it has been and would be able to effectively mitigate its exposure to any material adverse changes to or termination of its relationship with Dr. A for the following reasons:
(a) Company X’s operations were essentially a medical practice operated by two doctors who are husband and wife. In such context, it is believed that a doctor’s experience, skills and expertise are unique and critical to the past and future success of the medical practice, and the personal reputation and trust with patients that were built up by Dr. A and his wife over the years may not be transferrable to other doctors or replicated in other clinics. The fact that Company X only generated minimal revenue from the New Hire (who is a medical doctor with over 10 years of experience) and failed to reduce revenue contribution from Dr. A might suggest that Company X is not able to readily reduce its extreme reliance on Dr. A and his wife.
(b) Company X proposed the Plans to reduce reliance on Dr. A. However, the Plans were preliminary and none of them would be materialised before listing. The Plans had never been executed during the track record period. Since the establishment and throughout the track record period, Company X has only operated two clinics and it took four to six years before Company X ran them successfully. The proposed expansion by way of opening additional clinics with new hires were never successfully implemented or proven by Company X. There remained questions as to whether Company X can identify qualified specialists fit for their practice, or its management has adequate experience in developing and operating a chain of clinics, or given Company X is limited to a distinct specialist area, whether there will be sufficient market demand to support its expansion plan (from two to six clinics) within the next three years. The feasibility of the Plans is called into question.
9. Based on the foregoing, the Exchange was of the view that Company X had not demonstrated that the material reliance on Dr. A could be effectively reduced, and that the reduction of support from Dr. A would not result in material adverse impact on Company X’s business. Accordingly, the Exchange considered that such reliance issue could not be dealt with by way of disclosure, and that the extreme reliance on Dr. A posed grave concerns on Company X’s business sustainability and suitability for listing under Main Board Rule 8.04 and decided to reject the listing application.
HKEX LISTING DECISION
HKEx-LD132-2022 (May 2022)
Summary Parties Company A – a Main Board listing applicant
Mr. A – a director and controlling shareholder of Company A
Company B – a potential Main Board listing applicant
Mr. B – a director and co-founder of Company B
Issue Whether each of Mr. A and Mr. B is suitable to act as a director of an issuer in light of bribery incidents
Listing Rules Main Board Rules 3.08 and 3.09
Related Publications Guidance Letters HKEX-GL68-13 (“GL68-13”) and HKEX-GL96-18 (“GL96-18”)
Listing Decision HKEX-LD92-2015
Decision The Exchange determined that (i) each of Mr. A and Mr. B was not suitable to act as a director of an issuer under the Rules; and (ii) given Mr. A’s substantial influence on Company A, Company A was not suitable for listing.FACTSCompany A and Mr. A 1. Mr. A was an executive director, the chairman and one of the founders and controlling shareholders of Company A.
2. According to the court judgement issued shortly before the filing of Company A’s listing application, Mr. X, a former PRC government official, was convicted of receiving a bribe around ten years ago from Mr. A in exchange for his assistance in Company A’s application for certain government funding.
3. Mr. A was named as a witness in the court judgement, but was not prosecuted or convicted in the bribery case. However, the relevant court judgement stated that Mr. X’s conviction was premised on the fact that Mr. X received a bribe from Mr. A in exchange for assistance from Mr. X.
Company B and Mr. B
4. Mr. B was a director and a co-founder of Company B and intended to continue to serve as a director of Company B after its proposed listing. He was responsible for the overall management and strategic development of Company B’s business.
5. Mr. C, who was a former director of Company B, made gifts and payments to Mr. Y, a former PRC government official, in the hope of facilitating the regulatory approval process of Company B’s products. These incidents had taken place over a period of seven years, and with the most recent incident occurring around six years before Company B’s intended listing application.
6. According to the court judgement, Mr. Y was convicted of receiving bribes from Mr. C in exchange for his assistance for Company B’s application. Mr. B and Mr. C were named as witnesses but were not prosecuted or convicted in the bribery case. However, based on the relevant judgement, Mr. B was aware of Mr. C’s plan to give bribes to Mr. Y.
ISSUES RAISED FOR CONSIDERATION
7. Whether (i) each of Mr. A and Mr. B is suitable to act as a director of an issuer in light of the bribery incidents, and (ii) Mr. A’s substantial influence on Company A would affect the suitability of listing of Company A?
APPLICABLE RULES AND PRINCIPLES
8. Main Board Rule 3.08 states that, among other things, the Exchange expects the directors to fulfil fiduciary duties and duties of skill, care and diligence to a standard at least commensurate with the standard established by Hong Kong law.
9. Main Board Rule 3.09 provides that directors of a listed issuer must have the character, experience and integrity and be able to demonstrate a standard of competence commensurate with their positions as directors of a listed issuer.
10. Paragraph 17 of GL96-18 states that an individual may not be suitable to be a director if an incident involving him raises a serious doubt as to his character or integrity and his ability to fulfil his duty to act honestly, in good faith and for a proper purpose. One example is where such individual is involved in bribery. The assessment is on a case-by-case basis.
11. Paragraph 18 of GL96-18 further states that if a director is no longer suitable to act as a director, the retention of office by the director is prejudicial to the interests of minority shareholders. If he is also a person being highly likely to be able to exert control or substantial influence over the issuer’s operation and management, the concern about the company’s suitability for continued listing would exist irrespective of whether he ceases to be a director.
12. Paragraph 3.4 of GL68-13 also states that if a controlling shareholder is culpable for the bribery incidents, so long as such controlling shareholder has the ability to exert substantial influence over the new applicant, the new applicant will not be suitable for listing. The assessment of substantial influence will be determined on a case-by-case basis, taking into all relevant facts and circumstances.
13. The board of directors of an issuer is responsible for directing and supervising the issuer’s affairs and hence, can affect how the issuer conducts its business. In addition, the board of directors is entrusted with public funds. As such, it is imperative that the directors must be suitable in terms of character, experience, integrity and competence.
14. Bribery is serious in nature and would raise a concern as to a director’s character and integrity, and ability to fulfil a director’s duties to act honestly, in good faith and for a proper purpose.
15. The Exchange took into account all relevant facts and circumstances when assessing each of Mr. A’s and Mr. B’s suitability to act as a director of an issuer under the Rules (including their respective roles and nature of involvement in the bribery incidents).
16. In both cases, Company A and Company B argued that neither Mr. A nor Mr. B was prosecuted or convicted in the bribery cases. However, the relevant court judgements stated clearly that (i) Mr. A did give a bribe; and (ii) Mr. B was aware of his fellow director’s plan to give a bribe. Mr. A’s direct involvement in the bribery incident relating to Company A, and the fact that Mr. B (who was responsible for the overall management and strategic development of Company B’s business) did not express any disagreement or take any action against the bribery incident relating to Company B even after he became aware of it, had impugned their character and integrity. As such, the Exchange considered that the retention of office by Mr. A and Mr. B would be prejudicial to the interests of shareholders of Company A and Company B, respectively.
17. In addition, the sponsor of each of Company A and Company B had failed to demonstrate to the Exchange’s satisfaction that each of Mr. A and Mr. B was able to meet the character and integrity standards required under Main Board Rules 3.08 and 3.09 based on the submitted facts and circumstances.
18. In the case of Company A, Mr. A, as a controlling shareholder of Company A, is capable of continue exerting substantial influence over the operation and management of Company A even if he resigns as a director and from all management roles of Company A. After taking into account all relevant facts and circumstances (including Mr. A’s involvement in the bribery incident relating to Company A and his substantial influence on Company A as its controlling shareholder), the Exchange considered that Company A was not suitable for listing.
19. Based on the specific facts and circumstances, the Exchange determined that each of Mr. A and Mr. B was not suitable to act as a director of an issuer under Main Board Rules 3.08 and 3.09. The Exchange also considered that Company A was not suitable for listing because it would be subject to substantial influence by Mr. A.