18 July, 2018
On 29 June 2018, The Stock Exchange of Hong Kong Limited (Exchange) published a consultation paper on backdoor listing, continuing listing criteria and other rule amendments, seeking market views on its proposed changes to the Listing Rules to address concerns over backdoor listings and “shell” activities.
The key proposals are summarised below.
A. Proposals relating to backdoor listing
The proposals are to codify the Exchange’s current practices set out in various guidance letters published in recent years, and to impose additional requirements to address specific issues concerning backdoor listing.
1. Modifying the definition of “reverse takeover” (RTO)
(a) Principle based test
(b) Bright line tests
(c) Disposal restriction
(d) Backdoor listings through large scale issue of securities
2. Codifying the “extreme very substantial acquisition” requirements with modifications
3. Tightening the compliance requirements for RTOs and “extreme transactions”
B. Proposals relating to continuing listing criteria
The proposed amendments to the continuing listing criteria aim to address specific concerns about some issuers that attempt to maintain the listing status by holding significant assets or investments, rather than operating businesses that have substance and are viable and sustainable in the longer term.
1. Sufficiency of operations
2. Cash companies
3. Transitional arrangements
The Exchange proposes to provide a 12-month transitional period from the effective date of the rule amendments for the proposals set out in sections B1 and B2 above to allow issuers to bring themselves into compliance with the new rules.
Guidance on listed issuer’s suitability for continued listing
On 29 June 2018, the Exchange has also issued a new Guidance Letter GL96-18 on listed issuer’s suitability for continued listing (effective on 29 June 2018), citing the following examples of circumstances where the Exchange may question a listed issuer’s suitability for continued listing:
- having “shell” characteristics;
- prolonged suspension of trading;
- suitability issues concerning directors or persons with substantial influence;
- material breach of the Listing Rules;
- inability to disclose material information;
- non-compliance with laws and regulations;
- significant trade or economic sanction risks;
- business structure or arrangements that cannot adequately safeguard issuer’s assets;
- engaging in gambling business without satisfying the requirements set out in Guidance Letter GL71-14;
- excessive reliance on key customer/supplier or controlling/substantial shareholder;
- published financial statements based on fraudulent accounts with significant overstatement of profits, or false documents;
- material internal control failures; and
- failure to provide information to the Exchange.
C. Other proposed rule amendments
1. Securities transactions
2. Significant distribution in specie of unlisted assets
3. Other matters relating to notifiable or connected transactions
Consultation period will end on 31 August 2018.
For further information, please contact:
Alexander Que, Partner, Deacons