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LD2-2011

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HKEx LISTING DECISION
HKEx-LD2-2011

Parties Company A — a Main Board issuer

The Partner — an independent third party

Joint Venture — a joint venture to be formed by Company A and the Partner
Issue Whether the Partner's contractual right to acquire Company A's interest in the Joint Venture was an "option" under Chapter 14 and, if so, whether it would be classified as a major transaction
Listing Rules Rules 14.72(1), 14.76(1)
Decision The right was an "option" under Chapter 14. It would not be classified as a major transaction but its terms should be disclosed by an announcement.

FACTS

1. Company A proposed to enter into an agreement with the Partner to form the Joint Venture (the Agreement). Based on size test calculations, this would not be a notifiable transaction.
2. Under the Agreement, the Partner would have the right to acquire Company A's interest in the Joint Venture (the Right) in case of:
a. a change in control of Company A within a prescribed period after the Joint Venture was formed;
b. a deadlock on certain matters proposed but not passed at the board or shareholder meetings of the Joint Venture;
c. Company A becoming insolvent; or
d. Company A committing a material breach of the Agreement.
3. No premium was payable for the Right. In the case of a, b or c, the exercise price would be the fair market value of to be determined by an independent valuer jointly appointed by the parties. In the case of d, the exercise price would be determined based on the net asset value and other specific financial figures of the Joint Venture at that time.
4. Company A's directors considered that terms of the Agreement were fair and reasonable.
5. Company A sought the Exchange's view on the application of the notifiable transaction requirements to the Right. It submitted that the Right was a common commercial arrangement between joint venture partners to protect their rights and investments. It was not an "option" under Rule 14.72(1) because it was exercisable by the Partner only upon occurrence of events which might or might not happen.
6. If the Exchange disagreed, the Right would be classified as if it had been exercised under Rule 14.74(1). Company A proposed to calculate the size tests based on its estimation of the exercise price for the Right. On this basis, the Right would be below a major transaction.

APPLICABLE LISTING RULES

7. Rule 14.04(1)(b) states that any reference to a "transaction" by a listed issuer:
includes any transaction involving a listed issuer writing, accepting, transferring, exercising or terminating (in the manner described in rule 14.73) an option (as defined in rule 14.72) to acquire or dispose of assets or to subscribe for securities.
8. Rule 14.72(1) defines "option" to mean:
the right, but not the obligation, to buy or sell something; ...
9. Rule 14.73 states that:
the grant, acquisition, transfer or exercise of an option by a listed issuer will be treated as a transaction and classified by reference to the percentage ratios.
10. Rule 14.74(1) states that the following apply to an option involving an issuer, the exercise of which is not at the issuer's discretion:
on the grant of the option, the transaction will be classified as if the option had been exercised. For the purpose of the percentage ratios, the consideration includes the premium and the exercise price of the option;
11. Rule 14.76(1) states that:
For the purpose of rules 14.74(1) ..., where, on the grant of the option, the actual monetary value of each of the premium, the exercise price, the value of the underlying assets and the profits and revenue attributable to such assets has not been determined, the listed issuer must demonstrate to the satisfaction of the Exchange the highest possible monetary value, which value will then be used for the purpose of classification of notifiable transaction. Failure to do so will result in the transaction being classified as at least a major transaction. ...

ANALYSIS

Whether the Right was an "option" under Chapter 14

12. The Exchange considered that the Right was an "option" which is defined widely in Rule 14.72 to mean the right "to buy and sell something". It disagreed with Company A's view on the application of this rule.

Classification of the Right

13. As the exercise of the Right was not at Company A's sole discretion, the grant of the Right would be classified as if it had been exercised.
14. In determining the classification of the Right, the Exchange considered the size test calculations for the Right prepared by Company A and the following:
•   The formation of the Joint Venture was not a material transaction to Company A.
•   The Right was an exit arrangement that was common in joint ventures. It would be exercised only upon occurrence of certain triggering events which were extraordinary or beyond the parties' control. This could be distinguished from other circumstances where put options were granted.
•   The exercise price would be based on the Joint Venture's fair market value determined by an independent valuer agreeable to both parties, which would protect Company A's interests in the Joint Venture in the event of a buyout, deadlock or insolvency. In the event of a default, Company A considered it reasonable to use a different basis for determining the exercise price when it was in breach of a material term of the Agreement.
•   The Joint Venture was not yet established and the exercise price of the Right had not been determined at the time of the Agreement. Even if the grant of the Right was classified as a major transaction and Company A's shareholders were given an opportunity to vote on it, they would have little information to make an informed decision.
15. In light of the above, the Exchange decided that the grant of the Right would not be treated as a major transaction. Despite this, the Exchange considered that Company A should disclose the formation of the Joint Venture and the terms of the Right because they would bind Company A to a possible disposal in the future which might be material to Company A at that time.

CONCLUSION

16. The Right was an "option" under Chapter 14. It would not be classified as a major transaction but its terms should be disclosed by an announcement.