LD95-5
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HKEx LISTING DECISION
HKEx-LD95-5 (July 2010) (updated in October 2019 (amendments to the reverse takeover Rules))
Parties | Company A — a Main Board issuer Mr X — Company A's controlling shareholder and owner of a 70% interest in the Target The Target — a company in which Company A acquired a 30% interest from Mr X two years ago |
Issue | Whether Company A's proposed acquisition of a further interest in the Target from Mr X was a reverse takeover under Note 2(b) to Rule 14.06B |
Listing Rules | Note 2(b) to Main Board Rule 14.06B |
Decision | Company A's proposed acquisition was a reverse takeover under Note 2(b) to Rule 14.06B |
FACTS
Background |
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1. | Mr X subscribed for Company A’s new shares, and became its controlling shareholder. The Securities and Futures Commission granted him a whitewash waiver from the requirement to make a general offer to acquire all Company A’s shares not already owned by him. |
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Proposed Acquisition |
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2. | Six months later, Company A proposed to acquire a further interest in the Target from Mr X (the Acquisition). This would be a connected and very substantial acquisition. The consideration would be in cash and convertible preference shares. The terms of the convertible preference shares did not allow any conversion which would trigger a mandatory general offer under the Takeovers Code (the Conversion Restriction). |
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3. | To fund the cash consideration for the Acquisition, Company A would place new shares to independent third parties. The Acquisition and the placing would be conditional upon each other. |
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4. | After completion of the placing and the Acquisition, Mr X’s interest in Company A would drop below 30% and he would cease to be Company A’s controlling shareholder but remain its single largest shareholder. |
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5. | Company A sought the Exchange’s confirmation whether the Acquisition would be a reverse takeover under Rule 14.06(6)(b). Company A considered that it was not because:
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APPLICABLE LISTING RULES
6. | 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
7. | 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. |
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8. | Sub-rule (b) applies if (i) an issuer’s acquisition(s) of assets constitute(s) a very substantial acquisition; and (ii) the assets were acquired from the incoming controlling shareholder within 24 months after his gaining control of the issuer (as defined under the Takeovers Code). |
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9. | The Exchange considered that the Acquisition would be a reverse takeover under Rule 14.06(6)(b) because it:
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10. | Company A submitted that for Rule 14.06(6)(b) to apply, Mr X had to remain in control of Company A after the Acquisition. The Exchange disagreed. Rule 14.06(6)(b) is a bright line test and both conditions specified in the Rule were met. The fact that Mr X would cease to be Company A’s controlling shareholder on completion was irrelevant. |
CONCLUSION
11. | Rule 14.06(6)(b) would apply to the proposed Acquisition. |
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. |