Update No. 127

Note to subscribers for the amendments to the rules governing the listing of securities (the “Listing Rules”)

Update No. 127

July 2019

Dear Sirs,

Amendments to the Main Board Listing Rules

We enclose reprinted pages of the Listing Rules and filing instructions. The reprinted pages incorporate amendments to implement the proposals of the “Consultation Conclusions on Backdoor Listing, Continuing Listing Criteria and Other Rule Amendments” published on 26 July 2019.

We have amended the Listing Rules to:

(i)   Amendments Relating to Backdoor Listings
•  Reverse takeover (“RTO”) – Principle based test: codify the six assessment factors under the principle based test in Guidance Letter GL78-14, with modifications made to the last two factors:
- transaction size
- target quality
- nature and scale of issuer’s business
- fundamental change in principal business
- change in control/de facto control
- series of transactions and/or arrangements (this includes acquisitions, disposals and/or change in control or de facto control that take place in reasonable proximity (normally within 36 months) or are otherwise related);
•  RTO – Bright line tests: modify the bright line tests to (i) apply to very substantial acquisitions from an issuer’s controlling shareholder within 36 months from a change in control of the issuer; and (ii) restrict disposals (or distributions in specie) of all or a material part of the issuer’s business proposed at the time of or within 36 months after a change in control of the issuer. The Exchange may also apply the restriction to disposals (or distributions in specie) at the time of or within 36 months after a change in de facto control (as set out in the principle based test) of the issuer;
•   Backdoor listing through large scale issue of securities: codify Guidance Letter GL84-15 to disallow backdoor listing through large scale issue of securities for cash, where there is, or will result in, a change in control or de facto control of the issuer, and the proceeds will be applied to acquire and/or develop new business that is expected to be substantially larger than the issuer’s existing principal business;
•   Extreme transactions: (i) codify the “extreme VSAs” requirements in Guidance Letter GL78-14 and rename this category of transactions as “extreme transactions”; and (ii) impose additional eligibility criteria on the issuer that may use this transaction category: (a) the issuer must operate a principal business of substantial size; or (b) the issuer must have been under the control or de facto control of the same person(s) for a long period (normally not less than 36 months) and the transaction will not result in a change in control or de facto control of the issuer;
•   Requirements for RTOs and extreme transactions: modify the Rules to require the acquisition targets in a RTO or extreme transaction to meet the requirements of Rule 8.04 and Rule 8.05 (or Rule 8.05A or 8.05B), and the enlarged group to meet all the new listing requirements in Chapter 8 of the Rules except Rule 8.05. Where the RTO is proposed by an issuer that does not meet Rule 13.24, the acquisition targets must also meet the requirement of Rule 8.07;
(ii)   Amendments to Continuing Listing Criteria for Listed Issuers
•   Rule 13.24 (sufficient operations): amend Rule 13.24 to require an issuer to carry out a business with a sufficient level of operations and to have assets of sufficient value to support its operations to warrant its continued listing (and not sufficient operations or assets set out in the current Rule). Proprietary securities trading and/or investment activities by an issuer’s group (other than a Chapter 21 company) are normally excluded when considering whether the issuer can meet Rule 13.24 (except for those carried out by a member of the issuer’s group that is a banking company, an insurance company, or a securities house that is mainly engaged in regulated activities under the Securities and Futures Ordinance); and
•   Rules 14.82 and 14.83 (cash companies): (i) extend the definition of “short-dated securities” in Rule 14.82 to cover investments that are easily convertible into cash and rename it as “short-term investments”; and (ii) confine the exemption under Rule 14.83 to cash and short-term investments held by members of an issuer’s group that are banking companies, insurance companies or securities houses.
A transitional period of 12 months from the effective date (i.e. 1 October 2019) will apply to listed issuers that do not comply with the new Rule 13.24 or 14.82 strictly as a result of the Rule amendments. The transitional arrangement will minimise the impact of the Rule amendments on those issuers by allowing them a 12-month period to comply with the Rules as amended. For the avoidance of doubt, the transitional arrangement will not apply to issuers that do not comply with the current requirements under Rule 13.24 or 14.82, or become non-compliant with the new Rule 13.24 or 14.82 after the effective date.  

There are also other Rule amendments relating to issuers’ securities trading and/or investments, significant distributions in specie, notifiable transactions and connected transactions.

Coming into effect

The amendments will come into effect on 1 October 2019.

Please click HERE to see the amendments to the Main Board Listing Rules.

Yours faithfully,
For and on behalf of
The Stock Exchange of Hong Kong Limited

David Graham
Head of Listing