Jurisdiction - Hong Kong
Reports and Analysis
Hong Kong – New Listing Decisions.

16 May, 2013

 

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

 

Chapter 18 Mineral Company listing applicants 

 

In February and March 2013, the Exchange published three listing decisions in relation to whether (i) a company had “the right to participate actively in exploring for and/or extracting natural resources” (required under Rule 18.03(1)), based on demonstrating adequate rights under production sharing contracts; (ii) Canadian standard NI 51-101 is an acceptable reporting standard under Rule 18.32; and (iii) an applicant’s senior management had sufficient relevant experience under 
Rule 18.04. We summarise these decisions below.

 

Adequacy of rights under production sharing contracts


Company A entered into a production sharing contract (“PSC”) for each of the three oilfields where it acted as the sole operator and a foreign contractor with state-owned Company B. These oilfields had entered into commercial production and the PSCs would not expire for more than 23 years. 

 

The Exchange was satisfied that Company A had adequate rights which gave it sufficient influence in decisions over the exploration for and/or extraction of crude oil from the oilfields under Rule 18.03(1)(b), after taking account of the following factors:

 

(i) decisions of the joint management committee (“JMC”) had to be made unanimously, and Company A’s representatives with half of the JMC’s voting rights could vote down any resolution that Company B proposed which were not in Company A’s interests; 

(ii) Company B’s right to take over the oilfield operations would not affect Company A’s rights under Rule 18.03(1)(b) as: 


•     the PSCs for the oilfields would not expire for over 23 years, which was expected to be sufficiently long to extract most of the economic interests of the oilfields; 
•     Company B did not have the legal right to take over two oilfields’ operations because Company A had not recovered all of its development costs, and in the other oilfield Company A had not reached the limits set in the overall development plans; 
•     all the PSCs that Company B entered into with other parties had the same standard takeover clause, and Company B had never exercised the right to take over the operations of any of these oilfields; and 
•     Company B had confirmed that it would not exercise its rights to take over the three oilfield operations. 

 

Please follow this link for a copy of the listing decision, LD50-2013:


http://www.hkex.com.hk/eng/rulesreg/listrules/listdec/Documents/ld50-2013.pdf 

Canadian Standard NI 51-101 (“Standards of Disclosure for Oil and Gas Activities”)


Rule 18.32 requires mineral companies to disclose information on petroleum resources and reserves under either the Petroleum Resources Management System or other codes acceptable to the Exchange if it is satisfied that they give a comparable standard of disclosure and sufficient assessment of the underlying assets. 

 

In this respect, the Exchange approved the Canadian standard under NI 51-101 as an acceptable reporting standard for the listing applicant (“Company C”) under Rule 18.32 after taking into account, among others, the following: 

 

(i) the regime of NI 51-101 was comparable to the requirements of Chapter 18 of the Listing Rules; 

(ii) the prospectus would include Company C’s latest 
published reserves and resources information; and

(iii)Company C’s shares had been listed on a foreign stock exchange. 


Please follow this link for a copy of the listing decision, LD51-2013:


http://www.hkex.com.hk/eng/rulesreg/listrules/listdec/Documents/ld51-2013.pdf 


Sufficient experience of a Chapter 18 listing applicant’s management 


In March 2013, the Exchange published a listing decision on whether the directors and senior management of a Main Board listing applicant, Company A, had “sufficient experience relevant to exploration and/or extraction activity” under Rule 18.04. 

 

Facts


Company A was engaged in the exploration and mining of zinc and lead in South Africa. As Company A was not able to satisfy the profit test under Rule 8.05, it had to establish to the Exchange’s satisfaction that its directors and senior managers, taken together, had sufficient experience in order to apply for a Rule 8.05 waiver under Rule 18.04.


The Exchange’s assessment and conclusion


The Exchange considered that compliance with Rule 18.04 was a question of fact. In making the assessment, the Exchange would take various factors into consideration, including:

 

 

  • the directors and senior managers’ practical responsibilities and experience in exploration and/or extraction activity that was relevant to the applicant’s mining activity. They could be experienced in other commodities or minerals which had mining processes that did not differ materially from that of the applicant, if their skills were transferable to the applicant’s mining activity;
  • the directors and senior managers’ academic and professional qualifications, significant mining-related achievements or awards, and significant contribution to the mining industry and/or any mineral companies; and
  • whether the majority of the applicant’s core management team involved in its daily operations had sufficient practical experience in the exploration and/or extraction activity, rather than general management and marketing experience that was ancillary to that activity.


The Exchange considered that (i) the experience of some directors and senior management of Company A in the polymetallic base metal mining industry was generally relevant, and could be transferred, to the area of lead and zinc ore mining, and (ii) five out of the nine core management members possessed sufficient experience relevant to Company A’s exploration and/or extraction activity. Accordingly, the Exchange determined that Company A’s directors and senior management, taken together, had sufficient relevant experience and were able to meet the requirements under Rule 18.04. 

 

Please follow this link for a copy of the listing decision, LD53-2013:


http://www.hkex.com.hk/eng/rulesreg/listrules/listdec/Documents/ld53-2013.pdf 


Listing by way of introduction and related waivers


In March 2013, the Exchange published a listing decision in relation to whether (i) a company’s listing by way of introduction would be acceptable; and (ii) the requested waivers would be granted. 


Facts


Company A, a PRC company whose A shares and B shares had been listed on a PRC stock exchange, proposed to convert all its B shares into H shares and sought a listing of the H shares on the Main Board of the Exchange by way of introduction. Its B shareholders could choose to become H shareholders or sell their B shares before the proposed listing to an independent third party (the “Cash Offer”).

 

Company A also applied for waivers from strict compliance with certain requirements under the Rules. 


Factors for accepting listing by way of introduction In determining whether Company B’s listing by way of introduction was acceptable, the Exchange considered the following: 


(i) the A and B shares of Company A had been listed on a PRC stock exchange for more than ten years;

(ii) all the H shares (representing about 50% of Company A’s total issued shares) would be registered on the Hong Kong share register, and apart from certain H shares which were subject to voluntary lock-up by the existing substantial shareholders, all the H shares would be available for trading on the Exchange;

(iii)to ensure adequate liquidity in the trading of H shares upon listing, Company A proposed to procure at least 300 public B shareholders to deposit the converted H shares in broker accounts opened in Hong Kong, and those converted H shares would have a minimum market capitalization of HK$1 billion (the “Proposed Arrangement”); 

(iv) the Cash Offer would be completed in the PRC before listing, and its objective was to protect B shareholders’ interests if they did not intend to convert their B shares into H shares. Accordingly, the Cash Offer was not considered as a situation involving “marketing” or a “pre-existing intention to dispose of securities” under Rule 7.15; and

(v) Company A would disclose in its listing document, and appropriate announcements, the Proposed Arrangement (including a risk factor on its potentially limited effectiveness) and information on the share price and trading volume of its A and B shares.

 

Factors for granting waivers


In determining whether to grant Company A the requested waivers (set out below), the Exchange considered, amongst others, the following factors: 

 

Waivers Requested Exchange’s Analysis

Minimum public float requirements


to allow a minimum H share public float 
of only 10% with a market capitalization 
of about HK$3 billion; and the aggregate 
shareholding of the three largest public 
shareholders to be up to 65% of the total H 
share public float (Rules 8.08(1)(b) and/or 
8.08(3))

•     The Proposed Arrangement (see (iii) above) indicated there would be 
sufficient liquidity in the H shares; 
•     The market capitalization of the relevant H shares public float would be well 
above the minimum public float market capitalization of HK$50 million 
under Rules 8.08(1)(b) and 8.09(1);
•     Company A had undertaken to increase the H share public float to 15% 
as required under Rule 8.08(1)(b) within one year from listing, subject to 
approval by the China Securities Regulatory Commission; and
•     Company A was a listed company with a market capitalization of about 
HK$30 billion.

Financial statement requirements 


to allow the accountants’ report to be 
replaced by Company A’s published financial 
statements for the latest three financial 
years, and the disclosure of unaudited 
interim financial information for the current 
year (Rules 4.01 and 8.06, and paragraph 
38 of Appendix 1A to the Rules)

•     The listing would not involve any new investors, all existing shareholders 
had already been provided with the necessary financial information, and 
the same financial information would be provided to Hong Kong investors. 
Company A and its sponsor considered that information to be an adequate 
and sufficient reflection of Company A’s performance and financial position 
during the track record period;
•     Company A would disclose in its listing document a directors’ confirmation 
that all material information had been included in the listing document 
and the information contained was accurate and complete in all material 
respects and not misleading or deceptive; and
•     Company A’s auditors and reporting accountants would provide it and 
its sponsor with a comfort letter with respect to the interim financial 
information based on certain agreed procedures performed under certain 
acceptable standards, and the interim financial information was for the 
interim period ended two months before Company A’s listing document

Residency of independent nonexecutive director (“INED”) 


to waive the requirement to have an INED 
ordinarily resident in Hong Kong until the 
next annual general meeting (“AGM”) (Rule 
19A.18(1))

•     The term of the then current board would expire at the forthcoming AGM to 
be held within five months after listing;
•     Company A undertook to appoint an INED ordinarily resident in Hong 
Kong at that AGM; and 
•     Company A proposed to appoint professional parties familiar with business, 
legal and regulatory issues in Hong Kong so long as Company A was listed 
on the Exchange

 

The Exchange determined that Company A’s listing by way of introduction was acceptable, and the waivers were granted to Company A based on its particular facts and circumstances (and not as a universal precedent for other B share companies). Please follow this link for a copy of the listing decision, LD52-2013:


http://www.hkex.com.hk/eng/rulesreg/listrules/listdec/Documents/ld52-2013.pdf

 

Convertible Bonds


The Exchange published three listing decisions in relation to convertible bonds, which we outline below.


Changes to the terms of convertible bonds issued under a general mandate


Company A issued certain convertible bonds to an independent third party under a general mandate. The general mandate allowed Company A to issue new shares representing not more than 20% of its existing issued shares until the next annual general meeting. Assuming full conversion of the bonds at the initial conversion price, the conversion shares would represent 10% of the then issued shares of Company A. 

 

Company A then proposed to revise the terms of the bond to (i) reduce the initial conversion price but cap the number of conversion shares at the number of new shares issuable under the original general mandate, or (ii) extend the conversion period and the maturity date of the bonds for one year without changing the conversion price or the maximum number of conversion shares. 


The Exchange considered that each of the proposals would constitute a material change to the terms of the convertible bonds. The proposed revisions would be regarded as new arrangements for Company A to issue convertible securities and the original general mandate could not be used. As a result, Company A was required to comply with Rule 13.36. Please follow this link for a copy of the listing decision, LD54-2013: 


http://www.hkex.com.hk/eng/rulesreg/listrules/listdec/Documents/ld54-2013.pdf 


Preserving 25% public float on conversion of convertible notes


Company A, a Main Board issuer, proposed to issue certain new shares and convertible notes to Company B under a subscription agreement. Upon completion of the subscription agreement, Company B would become a substantial shareholder of Company A, and the public float of Company A’s shares would still meet the 25% requirement. However, based on the shareholding structure of Company A at that time, the public float would fall below 25% if Company B exercised its right to convert some or all of the convertible notes. 


Company A proposed to undertake to the Exchange that it would take appropriate measures to ensure compliance with the public float requirement at all times. Alternatively, Company A proposed to limit the maximum number of shares it might issue to Company B under the notes so as to maintain a 25% public float based on Company A’s issued share capital at the time of completion of the subscription agreement.

 

Without any concrete arrangements to ensure a minimum 25% public float, the Exchange did not consider that Company A’s undertaking to use reasonable endeavours to meet the requirement would adequately address its concern. The Exchange also did not consider the alternative proposal acceptable as it only took into account the shareholding structure of Company A at the time of the completion of the subscription agreement and not the conversion of the notes. 


To address the Exchange’s concern, Company A agreed to revise the terms of the notes so that a conversion of the notes could not take place if it would result in Company A failing to meet the minimum public float requirement. 


Please follow this link for a copy of the listing decision, LD56-2013:


http://www.hkex.com.hk/eng/rulesreg/listrules/listdec/Documents/ld56-2013.pdf


Classification of subscription for convertible notes 

 

Company A proposed to subscribe for certain convertible notes to be issued by Company B (the “Subscription”). Company A and Company B were both Main Board issuers and independent of each other. Under the terms of the notes, Company A had the right to convert the notes into new shares of Company B at any time during the conversion period. The Subscription was a transaction for Company A under Chapter 14 as it involved providing financial assistance to Company B. The question was whether the transaction would be classified as if the notes were fully converted when the subscription agreement was signed.


The Exchange determined that, since the conversion of the notes was at Company A’s discretion, Company A would classify the transaction on the basis of the percentage ratio calculations for providing financial assistance to Company B. If Company A subsequently proposed to exercise the conversion rights, Company A would need to classify the conversion as a transaction at that time taking into account the conversion price and Company B’s total assets, revenue and profits. This was in line with the treatment of option transactions under Chapter 14 of the Listing Rules. 


Please follow this link for a copy of the listing decision, LD55-2013:


http://www.hkex.com.hk/eng/rulesreg/listrules/listdec/Documents/ld55-2013.pdf

 

 

For further information, please contact:

 

John Moore, Partner, Morrison Foerster
johnmoore@mofo.com
 

Stephen Birkett, Morrison Foerster

sbirkett@mofo.com

 

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