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Hong Kong – IPO: Disclosure In Listing Documents: Updated Guidance Letters Published.

23 March, 2015

 

Legal News & Analysis – Asia Pacific – Hong Kong – Capital Markets

 

The following guidance letters, which relate to disclosure of information in listing documents, were updated by the Hong Kong Stock Exchange during January and February 2015:

 

  • Guidance Letter GL27-12 – disclosure to summary & highlights section;
  • Guidance Letter GL41-12 – disclosure of material changes in financial, operation and/or trading position after the trading record period;
  • Guidance Letter GL62-13 – changes to the directors, supervisors and senior management section; and
  • Guidance Letter GL65-13 – information in property valuation report and market report.

 

Changes To Guidance On Summary & Highlights Section

 

Guidance Letter GL27-12, which was originally published in January 2012, was further updated on 23 January 2015.  The aim of this Guidance Letter is to ensure that the “summary & highlights” section of the listing document is comprehensive and readable, drafted in easy to read and plain language, and that it helps investors decide if they are interested in the offer and, if so, to read the rest of the document.  The attachment to the Guidance Letter provides general guidance and drafting principles together with a checklist of information that might be included in that section.

 

This latest update adds to the existing guidance for disclosing information on recent developments on an applicant’s operations and financial position since the latest audited financial period. Where an applicant discloses qualitative or quantitative information with commentary relating to its financial performance and profitability, the newly added guidance provides that the disclosure should enable investors to have a sense of materiality of the recent developments.  The updated guidance also makes clear that disclosure of comparative financial information to the non-profit forecast financial information is not compulsory but if this is disclosed, then it should be reviewed by the sponsor.

 

For disclosures relating to expenses, the updated guidance makes clear that when disclosing the total amount of listing expenses relating to the offer, the underwriting expenses should also be included.

 

A marked-up version of this Guidance Letter can be found here.

 

Changes To Guidance On Disclosure Of Material Changes In Financial, Operational And/Or Trading Position After The Trading Record Period

 

On the same day, updated Guidance Letter GL41-12, which provides guidance on the disclosure in an IPO prospectus of material changes in financial, operation and/or trading position after the trading record period, was published.  The guidance provided in this letter is expected to be followed, and failure to do so may mean that the listing document is considered not substantially complete under the Listing Rules.  This Guidance Letter was originally published on 22 August 2013.

 

The purpose of the information in a listing document is to enable investors to make a fully informed decision on a listing applicant and its securities. Given that it is not mandatory to include a profit forecast in the listing document, there should be sufficient information in the prospectus on any material changes after the trading record period and the applicant’s future prospects.

 

The guidance acknowledges that the term “material adverse change” is commonly used and that sponsors and listing applicants are best positioned to determine what information is material with regard to each applicant’s facts and circumstances. It also lists non-exhaustive examples of adverse changes to the financial, operational or trading position which will require disclosure, if material.  The updated guidance reflects the changes made to Guidance Letter GL27-12 above, in that the Hong Kong Stock Exchange expects qualitative or quantitative disclosure with commentary on how the adverse changes affect the financial, operational and tradition position after the trading record period in the “summary” section of the listing document. The disclosure must enable investors to have a sense of materiality of the adverse changes.

 

Where an applicant discloses quantitative information relating to its financial performance after the track record period other than net profit/loss (eg revenue, gross profit, etc), this non-profit forecast financial information should be reviewed by the reporting accountants, and a statement must be included to this effect. The updated guidance further adds that the disclosure of the comparative financial information to the non-profit forecast financial information is not compulsory, but if an applicant chooses to disclose such information then it should at least be reviewed by the sponsor.

 

The updated guidance also provides that adverse changes should also be highlighted in the “risk factors” and “financial information” sections of the listing document.  While 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.

 

A marked-up version of this Guidance Letter can be found here.

 

Changes To Guidance On Directors, Supervisors And Senior Management Section

 

Guidance Letter GL62-13, which was originally published on 23 July 2013, was further updated on 9 January 2015.

 

The letter provides guidance on the disclosure in the “directors, supervisors and senior management” section in listing documents, covering the extent of information to be disclosed, content of biographies and other relevant disclosures such as committees information, remuneration, incentive plans and deviations from any Code Provisions set out in Appendix 14 of the Listing Rules.

 

The amended guidance letter clarifies that there is no need to include references to directors who were not directors or senior management of the applicant or any of its subsidiaries during the track record period in the table of directors’ remuneration in the accountants’ report.

 

A marked-up version of this Guidance Letter can be found here.

 

Changes To Guidance Relating To Information In Property Valuation And Market Report

 

Guidance Letter GL65-13, which was originally published on 6 September 2013, was further updated on 16 January 2015.

 

The letter provides guidance on the disclosure in listing documents as to the bases and assumptions adopted by property valuers and independent market consultants in preparing property valuation reports and market reports.

 

In some IPOs, a substantial part of the listing proceeds will be used for property acquisitions and information in a property valuation report may be linked with the market report in determining the value of a property.  Therefore, the underlying assumptions and their bases and justifications are considered material to an investor.  It is important that this is clearly highlighted, particularly for businesses that rely heavily on cashflow based valuations, such as property investment businesses.

 

The updated guidance has extended the minimum disclosure requirements in a property valuation report.  Previously, the Hong Kong Stock Exchange expected a property valuation report to disclose, at a minimum, (i) for the valuation of property interests using the discounted cash flow method, the bases and justifications of the key assumptions, and (ii) for valuation of property interests using the comparison method, details of comparable properties and the bases why they are selected, how the valuation of an applicant’s properties differ from those of comparable properties and reasons for material differences. The updated guidance adds a new additional minimum disclosure requirement at paragraph 4.1(c) in the property valuation report requiring the inclusion of clear references to tenure and other specific factors, such as title defects and special requirements imposed on the properties by the land grant contracts, and the associated value implications, if material.  Such information should be checked against the relevant legal opinion to ensure consistent disclosure.

 

A marked-up version of this Guidance Letter can be found here.

 

Hogan Lovells

 

 

For further information, please contact:

 

Jamie Barr, Partner, Hogan Lovells

jamie.barr@hoganlovells.com

 

Tim Fletcher, Partner, Hogan Lovells

tim.fletcher@hoganlovells.com

 

Terence Lau, Partner, Hogan Lovells

terence.lau@hoganlovells.com

 

Mark Parsons, Partner, Hogan Lovells

mark.parsons@hoganlovells.com

 

Nelson Tang, Partner, Hogan Lovells

nelson.tang@hoganlovells.com

 

Thomas Tarala, Partner, Hogan Lovells

thomas.tarala@hoganlovells.com

 

Steven Tran, Partner, Hogan Lovells

steven.tran@hoganlovells.com

 

Hogan Lovells Capital Markets Practice Profile in Hong Kong

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