LD122-2019
HKEX LISTING DECISION
HKEX-LD122-2019 (published in July 2019) (updated in October 2019 (amendments to the reverse takeover Rules))
Parties | Company A – a Main Board issuer Mr. X – the former controlling shareholder of Company A Mr. Y – the existing controlling shareholder of Company A |
Issue | Whether the Exchange would impose additional requirements under Rule 2.04 on Company A’s proposed termination of a lease agreement relating to its original entertainment business |
Listing Rules | Main Board Rules 2.04, 14.06B and 14.54 |
Decision | The Exchange informed Company A that should it proceed with the proposal, the Exchange would treat it as if it were a new listing applicant under Rule 2.04 |
FACTS
Background
1. | At the time of its initial listing, Company A was principally engaged in the business of operating entertainment venues at separate locations under different brand names (the Original Business). Mr. X was the founder, the chairman and an executive director of Company A. |
2. | Shortly after the 12 month lock-up period, Mr. X disposed of his 70% equity interest in Company A to Mr. Y, which triggered a general offer for all the remaining shares in Company A under the Takeovers Code. |
3. | Upon close of the offer, all the directors of Company A at the time of its initial listing resigned. The new directors (including Mr. Y) appointed to the board of Company A did not have experience in the Original Business. A few months later, Company A closed down two of its entertainment venues that were loss-making. |
The Acquisition
4. | About two years after the offer, Company A acquired from Mr. Y a target company (the Acquisition) engaged in property management business (the New Business). The Acquisition was a major and connected transaction. Property management would become one of the principal activities of Company A upon completion of the Acquisition. |
5. | Company A stated that the Acquisition would enable it to diversify its income stream and it had no intention to dispose of or terminate the Original Business. |
The Proposal
6. | A few months after the completion of the Acquisition, Company A proposed to terminate the lease agreement for one of its two remaining entertainment venues (the Proposal). That entertainment venue contributed a material part of Company A’s revenue from the Original Business but it was operated at a loss in the latest financial year. |
7. | Company A submitted that a new tenant had leased a venue in the same building to operate an entertainment business in competition with that of Company A. The Proposal was initiated by the landlord who offered Company A a rent-free period before the termination date in exchange for an early termination. |
APPLICABLE LISTING RULES AND GUIDANCE MATERIALS
8. | Rule 2.04 states that -
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9. | 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. |
10. | Rule 14.54 states that -
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11. | The Exchange Guidance Letter (GL68-13A) provides guidance on the suitability for listing of new applicants to help prevent shell creation through IPO. The Guidance Letter states that:
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12. | The Exchange Guidance Letter (GL96-18) on a listed issuer’s suitability for continued listing cited examples of circumstances where the Exchange may raise concerns about the suitability for continued listing of a listed issuer or its business:
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ANALYSIS
13. | The Exchange considered that the Proposal, together with the Acquisition, would be an attempt to circumvent the new listing requirements having regard to the following:
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14. | Company A submitted that the Proposal was initiated by the landlord and was carried out for commercial reasons. However, the Exchange did not consider this sufficient to address the concerns. |
CONCLUSION
15. | The Exchange considered it appropriate, and informed Company A of its intention, to exercise its right to impose additional conditions on the Proposal under Rule 2.04, by treating Company A as if it were a new listing applicant and requiring it to comply with the requirements for a RTO. |
Notes
1. | The reverse takeover Rules were amended on 1 October 2019.
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2. | The Rule amendments would not change the analysis and conclusion in this case. |