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17 December 2019

China Candy Holdings Limited – Listing Review Committee
 
On 12 December 2019, the Listing Review Committee heard an application by China Candy Holdings Limited (the Company) for a review of the decision of the GEM Listing Committee, set out in a letter dated 16 August 2019, cancelling the Company’s listing on GEM.
 
Having carefully considered all the facts and evidence, and all the submissions (written and oral) presented by the Company and the Listing Department, the Listing Review Committee decided that the Company’s listing should be cancelled under GEM Rule 9.14A.
 
We set out below the Listing Review Committee’s reasons for its decision. Please note that this necessarily represents only a summary of the Listing Review Committee’s analysis, and does not purport to set out exhaustively the facts or address all of the arguments presented.
 
1. The Company is engaged in the manufacture and sale of candies.
 
2. The Company’s shares have been listed on GEM since November 2015, although trading has been suspended since 12 December 2017.
 
3. The trading suspension arose at the Company’s request pending the release of inside information. On 14 December 2017, the Company announced that it was under a regulatory enquiry, and had been required to provide certain financial information relating to bank accounts, balances and ledgers of the Company and/or its subsidiaries. The Company said further that the Board had serious concern about the authenticity of this financial information, and had formed an independent committee (comprising its independent non-executive directors) to investigate.
 
4. Certain conditions were imposed on the Company that had to be met to the satisfaction of the Listing Department before the Company could resume trading. These included requirements that the Company should:
 
  (a) publish all outstanding financial results and address any audit qualifications;
 
  (b) disclose the findings of the investigation and take any remedial action to address the findings;
 
  (c) inform the market of all material information;
 
  (d) demonstrate that there is no reasonable regulatory concern about management integrity, and/or any persons with substantial influence over the Company’s management and operations which will pose a risk to investors and damage market confidence;
 
  (e) demonstrate that the directors of the Company meet a standard of competence commensurate with their position as directors of a listed issuer to fulfil duties of skill, care and diligence as required under GEM Rule 5.01 and 5.02; and
 
  (f)    demonstrate that the Company has in place adequate internal controls and procedures to comply with the GEM Listing Rules.
 
5. Mazars Corporate Recovery & Forensic Investigation Services Limited (Mazars) was commissioned by the independent committee to conduct an investigation, which covered 1 June 2015 to 31 December 2017. Amongst other things, Mazars found evidence of withdrawal of Company funds to a number of personal accounts belonging to key personnel or staff of the Company (including the CEO), inconsistencies relating to assertions made regarding these withdrawals, a lack of supporting evidence for some of the purported transactions, possible fictitious accounting records, transactions which were not booked in the accounts, and unverifiable bank documents.
 
6. In July 2019, the Company sought additional time for trading resumption to 31 December 2019. Amongst other things, the Company submitted that its auditor was auditing the Company’s 2017 and 2018 annual results, and the interim results to 30 June 2019, and that it expected to be able to address any concerns or qualifications that may be raised. All outstanding financial statements were expected to be published by early October 2019. The Company said that the remaining unverified payments by or to the CEO were substantially less than the amount of debt owed to the CEO, and that the CEO had agreed to set off any sum she owed to the Company against the debt owed by the Company to her, so the Company would not have incurred any financial loss. The Company considered it unnecessary to undertake any further investigation. The Company would procure the removal of the CEO and another individual who were both suspected of involvement in irregularities. The Company had appointed Grant Thornton to conduct a review of internal control procedures, and the review would be completed by the end of August. On 31 July 2019, the Company applied for a resumption of trading.
 
Applicable Listing Rules and guidance
 
7. The rules applicable to cancellation of listing were amended in 2018 and the current rules came into effect on 1 August 2018 (the Effective Date).
 
8. GEM Rule 9.01 provided that: “Listing is always granted subject to the condition that, where the Exchange considers it necessary for the protection of investors or the maintenance of an orderly market, it may, at any time, halt, suspend or direct the resumption of dealings in an securities or cancel the listing of any securities in such circumstances and subject to such conditions as it thinks fit”. GEM Rule 9.04 further provides that the Exchange may direct a trading halt or suspend dealings in any circumstances.
 
9. GEM Rule 9.14 provides that: “Pursuant to rule 9.01, the Exchange may cancel the listing of an issuer at any time and may do so in any circumstance including (but not limited to) … in circumstances where the securities of an issuer have been continuously suspended for a prolonged period without the issuer taking adequate action to obtain a restoration of the listing.”
 
10. GEM Rule 9.14A(1) provides that “Without prejudice to its power under rule 9.14, the Exchange may cancel the listing of any securities that have been suspended from trading for a continuous period of 12 months.”
 
11. Various transitional provisions are set out in GEM Rule 9.14A(2). In the case of the Company, the relevant transitional rule is GEM Rule 9.14A(2)(a), which applies to issuers which are not subject to a decision to commence the procedures to cancel a listing and a notice period for delisting immediately before the Effective Date, and when that issuer’s securities have been suspended from dealings as at the Effective Date. Under that rule, the 12 month period referred to in GEM Rule 9.14A(1) commences from the Effective Date.
 
12. The practical effect of the above rules is that the Company’s listing could be cancelled if it had not resumed trading by 31 July 2019.
 
13. Guidance Letter HKEX-GL95-18 (GL95-18) provides further guidance on long suspension and delisting. As noted in GL95-18, the objective of the amended delisting rules is to keep the necessary trading suspension to the minimum, by facilitating timely delisting of issuers that no longer meet the continuing listing criteria. This, in turn, provides certainty to the market on the delisting process. The delisting rules are also aimed at incentivising suspended issuers to act promptly towards resumption and deterring issuers from committing material breaches of the rules.
 
14. Paragraph 12 of GL95-18 emphasises that, under the rules, the Exchange would cancel the listing of a long suspended issuer upon the expiry of the remedial period (prescribed or specific) if the issuer has not remedied the issues causing the suspension and re-complied with the rules.
 
15. Paragraph 19 of GL95-18 notes that the remedial period may only be extended in exceptional circumstances.
 
GEM Listing Committee decision
 
16. In August 2019, the Listing Department made a recommendation of delisting to the GEM Listing Committee. The Listing Department noted that the Company had failed to fulfil satisfactorily the resumption conditions and had not resumed trading by the deadline of 31 July 2019. The Listing Department considered that the Company’s situation did not fall within the exceptional circumstances in which an extension of time may be given.
 
17. The matter was considered by the GEM Listing Committee on 15 August 2019. The GEM Listing Committee decided to cancel the Company’s listing under GEM Rule 9.14A as the Company had failed to resume trading in its securities by 31 July 2019.
 
Submissions to the Listing Review Committee
 
Submissions by the Company
 
18. In written submissions provided by the Company in September 2019, the Company acknowledged that it had not fulfilled all the resumption conditions by 31 July 2019, but considered that the Company’s situation fell within the scope of the exceptional circumstances under paragraph 19 of GL95-18 and accordingly an extension of time to 31 December 2019 for resumption of trading should be granted.
 
19. Amongst other things, the Company submitted that it had made positive progress towards fulfilling the resumption conditions, although some delays had occurred which were outside the Company’s control. The first draft reports of all outstanding financial results would be ready by 11 October 2019, and that when they became available, the Company would address any qualifications raised. The ongoing audit work and the proposed set off with the CEO would address the issues arising from the investigation. Changes had been made to the Company’s management in September, including the removal of the CEO, and the new management had the requisite competence. Grant Thornton’s report on internal controls would be completed “very soon”.
 
20. The Company also made submissions on how the relevant rules and guidance should be interpreted and applied, with a view to protecting interests of shareholders and investors. In short, the Company submitted that although prolonging the suspension in this case may adversely affect the market’s quality and reputation, cancellation would create lasting damage to shareholders and investors, and so an extension was the “lesser evil”.
 
21. On 5 December 2019, the Company submitted a letter requesting a postponement of the hearing to a date on or after 27 December 2019, as the auditing works had been delayed by a matter outside of the Company’s (or the auditor’s) control, and the auditor might need two more weeks to complete the outstanding financial reports.
 
22. In oral submissions at the hearing, the Company provided an update in respect of timing for the financial results and the Grant Thornton report, saying that both were expected to be ready by the end of December 2019.
 
Submissions by the Listing Department
 
23. The Listing Department submitted that the Company had not fulfilled any of the resumption conditions, either by 31 July 2019 or by the date of the hearing. There remained substantial uncertainty as to what the audited financial statements and the internal control report would say. The Listing Department remained concerned about the integrity of management and persons with substantial influence as, despite the CEO’s resignation, she remained highly likely to be able to exert control or substantial influence. The Listing Department submitted that the circumstances described in GL95-18 in which an extension could be granted did not exist in this case.
 
24. In relation to the interpretation and application of the relevant rules and guidance, the Listing Department submitted that the current rules were made after extensive market consultation and with the approval of the Securities and Futures Commission. The current rules are designed to introduce a robust framework for timely delisting, to provide certainty to the market, and to maintain the quality and reputation of the market.
 
Listing Review Committee’s views
 
25. The Listing Review Committee noted that the Company had not met the resumption conditions, either by 31 July 2019 or by the date of the hearing. Accordingly, the listing could be cancelled in accordance with the rules.
 
26. On the question of whether or not to grant the Company further time to address and fulfil the resumption conditions (whether by way of postponement of the hearing, or an extension of the remedial period), the Listing Review Committee decided that, in the circumstances, no further time should be given. Whilst the Company may have made some progress towards fulfilling the resumption conditions, the Listing Review Committee was not convinced that the Company was close to completing the fulfilment of those conditions. The Company had not provided persuasive or substantive evidence of progress (such as draft reports of preliminary findings) to support its submission that the audited financial information and the internal control review report would be ready by the end of December 2019. There was also significant uncertainty as to what both the financial information and the internal control review report, even if completed by the end of December, might say. In particular, there might be qualifications of the financial reports, or adverse findings and/or remediation recommendations in the internal control review report, which require further time and work before trading could resume.
 
27. The Listing Review Committee took into account the submissions of the parties in relation to the interpretation and application of the rules, and was sympathetic to individual shareholders and investors who may be impacted by the cancellation of listing, but considered that the intention of the rules and guidance was for a robust delisting framework, with limited scope for extensions of time for companies which had not resumed trading by the prescribed deadline, notwithstanding the impact this may have on shareholders and investors in the companies concerned, and that its decision in this case was consistent with that intention and appropriate in the circumstances.
 
Decision
 
28.    The Listing Review Committee therefore decided to uphold the Listing Committee’s decision that the Company’s listing should be cancelled under GEM Rule 9.14A.
 
Please note that decisions of the Listing Review Committee do not represent binding precedents, and do not constrain the discretion of or otherwise bind the Exchange or other committees (including without limitation the Listing Review Committee in respect of other matters).