Disclosure Requirements For IPO Cases.

In January 2012, The Hong Kong Stock Exchanges and Clearing Limited (the “Stock Exchange”) published Guidance Letter HKEx-GL27-12 which provides guidance on the disclosure in the “Summary and Highlights” section in a listing document. The Guidance Letter has been updated from time to time and the recent update in January 2015 focused on disclosures relating to the recent development of the applicants and their listing expenses.

 

Recent Development

 

The purpose of the disclosure on the applicant’s recent development is to provide an update on the applicant’s operations and financial position since the latest audited financial period/ year. The Stock Exchange recommends the applicant to:

a) provide an update on its business and industry, and/or market or regulatory environment to no more than ten calendar days before the date of a listing document (i.e. latest practicable date);

b) disclose qualitative information or quantitative information with commentary relating to its financial performance and profitability (e.g. revenue, gross profit/ loss, gross profit/loss margin, and/or operating data such as average selling price and sales volume). Reference should also be made to Frequently Asked Questions Series 23 “Disclosure of a new applicant’s unaudited net profits/ losses after its track record period in a listing document” issued by the Stock Exchange in June 2013. The disclosure must enable investors to have a sense of materiality of the recent developments.

 

An applicant with material changes in its financial, operational and/or trading position after the trading record period should refer to Guidance Letter HKEx-GL41-12 for the additional disclosures;

c) disclose significant non-recurrent items in income statements.

 
Listing Expenses

 

The disclosure relating to listing expenses is to enable investors to assess the impact of listing expenses on an applicant’s financial performance. The Stock Exchange recommends disclosure on the total amount of listing expenses relating to the offer (including underwriting commission), and the accounting treatment (that is, a breakdown of the amount of listing expenses charged to the income statement or equity during the track record period and/or that will charged to the income statement or equity after the track record period) of such expenses.

 

Material Changes In Financial, Operational And/Or Trading Position After Trading Record Period

In August 2012, the Stock Exchange issued Guidance Letter HKEx-GL41-12 in relation to the disclosure of material changes in financial, operational and/or trading position after the trading record period. The rationale is that the inclusion of a profit forecast is not mandatory under the Rules Governing the Listing of Securities on the Stock Exchange (“Listing Rules”) and where an applicant decides not to include a profit forecast in its listing document, there should be sufficient information in the IPO listing document on any material changes after the trading record period and the applicant’s future prospects.

 

The Guidance Letter has been updated from time to time and the recent update in January 2015 provides guidance on the abovementioned point b) set out under “Recent Development”. Where an applicant discloses quantitative information relating to its financial performance after the track record period other than net profit/loss (for example, revenue, gross profit), this non-profit forecast financial information should be reviewed by the reporting accountants, and a statement must be included in the listing document that the non-profit forecast financial information has been reviewed by the reporting accountants.

 

The disclosure of the comparative financial information to the non-profit forecast financial information is not compulsory. If an applicant chooses to disclose such information in its listing document, this should at least be reviewed by the applicant’s sponsor.

 

The Stock Exchange further recommends that adverse changes should also be highlighted in the “Risk Factors” and “Financial Information” sections of the listing document. There may be mitigating factors to reduce the potential impact of financial or operational loss to the applicant. This does not negate the necessity to disclose the adverse changes.

 

Listing Decision In Relation To Applicability Of Twelve Months Lock-Up Period When One Ceased To Be A Controlling Shareholder

 

Listing Rule 10.07(1) was considered in the listing decision HKEx-LD85-2015. The issue was whether a company, which would cease to be a controlling shareholder (the “Shareholder”) of a listing applicant (“Company A”) after listing, should be subject to a 12-month lock-up of its shares after Company A’s listing under Listing Rule 10.07(1). 

The Shareholder, a corporation, was one of Company A’s controlling shareholders interested in more than 30% of Company A’s shares on the issue date of Company A’s listing document. The Shareholder was established by Company A’s founder who was also an executive director and actively involved in the management of Company A, although the Shareholder was owned by his son. 

An over-allotment option was granted to the global coordinator in Company A’s IPO. Upon full exercise of the over-allotment option after Company A’s listing, the Shareholder’s interest in Company A was diluted to less than 30% and it ceased to be a controlling shareholder of Company A as defined under the Listing Rules. The question was therefore whether the Shareholder would still be subject to the 12-month lock-up period.

Based on the analysis of the Stock Exchange, Listing Rule 10.07(1) is to require any person or group of persons, being a controlling shareholder or group of controlling shareholders shown by the listing document issued at the time of the issuer’s application for listing, to demonstrate its commitment to a new applicant and to protect investors by preventing a material change in the shareholding structure to the extent that a controlling shareholder no longer controls the applicant during the first year of the applicant’s listing.

Having considered the facts and circumstances of the Shareholder and the intention of Listing Rule 10.07(1), the Stock Exchange determined that the Shareholder, despite ceasing to be Company A’s controlling shareholder shortly after listing, was required to be subject to a 12-month lock-up of its shares after Company A’s listing under Listing Rule 10.07(1) (that is, maintaining at least the same number of shares as stated in Company A’s listing document for 12 months after Company A’s listing).