LD95-2
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HKEx LISTING DECISION
HKEx-LD95-2 (July 2010) (updated in October 2019 (amendments to the reverse takeover Rules))
Parties | Company A — a Main Board issuer The Acquisition Target — a company to be acquired by Company A from the Vendor The Vendor — the vendor of the Acquisition Target The Disposal Target — a company wholly owned by Company A and to be sold to Mr X Mr X — Company A's former chairman and controlling shareholder |
Issue | Whether Company A's proposed acquisition constituted a reverse takeover under Rule 14.06B |
Listing Rules | Main Board Rule 14.06B |
Decision | The proposed acquisition constituted a reverse takeover under Rule 14.06B |
FACTS
Background
1 | Company A's principal business was designing, manufacturing and selling toys (the Original Business). |
2 | Company A made an open offer to raise funds for general working capital. Mr X did not take up any offer shares. As a result, his interest in Company A decreased from 40% to 8% on completion of the offer. He also retired as director and chairman at Company A's annual general meeting. |
3 | At about the same time, Company A commenced the business of property holding and research and development of electric bus batteries, which were minimal in scale and insignificant to Company A. |
Proposed acquisition and disposal
4 | Four months after the completion of the open offer, Company A proposed to:
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5 | The Acquisition Target, established less than a year earlier, had yet to generate any revenue. |
6 | Company A would pay for the Acquisition by issuing consideration shares and convertible bonds to the Vendor. The consideration shares and the shares convertible from the bonds would represent about 17% and 70% of Company A's enlarged share capital respectively. The terms of the convertible bonds would not allow any conversion which would trigger a mandatory general offer under the Takeovers Code (the Conversion Restriction). |
7 | Company A would use the disposal proceeds to (i) repay shareholder loans; and (ii) pay a special dividend to shareholders. |
8 | Company A considered that the Acquisition would enable it to change its business into a new area with high potential growth whereas the Disposal would realise its investment in a loss making business. |
9 | There was an issue of whether the Acquisition would constitute a reverse takeover under Rule 14.06(6). |
10 | Company A submitted that the Acquisition would not be a reverse takeover under the Rule because:
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APPLICABLE LISTING RULES
11 | Rule 14.06(6) defines a "reverse takeover" as:
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(Rule 14.06(6) (now Rule 14.06B) was amended on 1 October 2019. See Note 1 below.) |
ANALYSIS
12 | Rule 14.06(6) seeks to prevent circumvention of the new listing requirements. Its introductory paragraph defines "reverse takeover" as an acquisition or a series of acquisitions which represents, in the Exchange's opinion, an attempt to (i) list the assets to be acquired and (ii) circumvent the new listing requirements. Rules 14.06(6)(a) and (b) provide bright line tests which apply to two specific forms of reverse takeover. They are not meant to be exhaustive. Therefore, transactions which are in substance backdoor listings but fall outside sub-rules (a) and (b) could still be treated as reverse takeovers. This, in practice, has been applied only to extreme cases (see the Listing Committee Annual Report 2009). |
13 | Rules 14.06(6)(a) and (b) did not apply here because (i) the Acquisition would not trigger the change in control test under sub-rule (a); and (ii) the Vendor did not gain control of Company A within 24 months before the Acquisition would be completed. |
14 | In considering whether the Acquisition would be a reverse takeover defined under Rule 14.06(6) and an extreme case, the Exchange considered that:
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15 | Company A submitted that the Acquisition would not be a reverse takeover as it would not result in a change in control of Company A (as defined under the Takeovers Code). The Exchange considered this fact irrelevant. An acquisition is a reverse takeover under the introductory paragraph of Rule 14.06(6) if the Exchange is satisfied that it is an attempt to (i) list the assets to be acquired and (ii) circumvent the new listing requirements. This is irrespective of whether it would result in a change in control. In this case, the Exchange considered that (i) and (ii) were satisfied given the factors in paragraph 14. |
CONCLUSION
16 | The Acquisition constituted part of a series of transactions intended to circumvent the requirements for new applicants and was an extreme case. |
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):
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2 | The Rule amendments would not change the analysis and conclusion in this case. |