Jurisdiction - Hong Kong
Reports and Analysis
Hong Kong – The Listing Regime.

29 September, 2014

 

 

In this Practice Note written by Mike Suen, partner at DLA Piper, we summarise the relevant legislation under the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap 32) (Winding Up Ordinance) and Securities and Futures Ordinance (Cap 571) (SFO), and introduce the non-statutory Listing Rules of the Stock Exchange of Hong Kong. The dual filing regime under the Securities and Futures (Stock Market Listing) Rules (Cap 571V) is also covered, as are the principles for preparing prospectuses.

 

Where securities are offered to the public in Hong Kong, any prospectus issued in connection with the offering must contain prescribed information and must be registered. 


The old Companies Ordinance (Cap 32) prospectus regime (the relevant provisions of which have been retained in the new Winding Up Ordinance has been under review for many years. In September 2006, the Securities and Futures Commission (the SFC) issued the Consultation Conclusions on the Consultation Paper on Possible Reforms to the Prospectus Regime in the Companies Ordinance, outlining the 12 proposals it will pursue. 


One of these concerned the transfer of the provisions in the erstwhile Companies Ordinance relating to the public offering of shares and debentures to the Securities and Futures Ordinance (Cap 571) (SFO) as a discrete part separate from the investment advertisement regime of SFO, Pt IV.


A comprehensive review of the erstwhile Companies Ordinance was launched in 2006. It is clear from the review that the Financial Services and Treasury Bureau (the FSTB) intends
for the provisions relating to prospectuses in what is now the Winding Up Ordinance to be dealt with in a separate review by the SFC. These provisions are likely to be moved to SFO. 


However, as of March 2014, the SFC has yet to issue a consultation paper in this respect. It is currently not clear what the reforms involve or when they will take effect.


Legislation


The primary pieces of legislation governing the offering of securities and other investment arrangements to the public in Hong Kong are the Winding Up Ordinance and SFO.


The Winding Up Ordinance contains provisions dealing with the public offering of shares in Hong Kong companies and the public offering in Hong Kong of shares in non-Hong Kong incorporated companies. These provisions are hereinafter referred to as the Winding Up Ordinance prospectus regime (Winding Up Ordinance, Pts II and XII).


SFO, Pt IV includes provisions concerning the issue of advertisements, invitations or documents containing invitations to the public regarding securities, regulated investment agreements and collective investment schemes. The general approach is to prohibit the issue of such advertisements unless the issue is authorised or exempted (SFO, s 103).


SFO, Pt IV also provides exemptions in the case of prospectuses for the offer of shares so as to avoid or limit duplication with the Winding Up Ordinance prospectus regime (SFO, s 103(3)).


In the case of collective investment schemes and certain other investment arrangements, SFC authorisation is conditional on the scheme or arrangement complying with the applicable SFC code, which sets out details of the regulatory framework applicable to that scheme or arrangement (eg the Code on Real Estate Investment Trusts and Code on Unit Trust and Mutual Funds).

 

Non-Statutory Listing Rules


The Stock Exchange of Hong Kong Limited (the SEHK), a subsidiary of The Hong Kong Exchanges and Clearing Limited (the HKEx), has a statutory obligation to ensure as far as reasonably practicable an orderly, informed and fair market for the trading of securities in Hong Kong (SFO, s 21).

 

To discharge this statutory obligation, the SEHK created the Rules Governing the Listing of Securities on the SEHK (the Listing Rules) prescribing the requirements for listing securities on the SEHK. The Listing Rules have been approved by the SFC pursuant to SFO, s 24 (SFO, s 23).


A large number of listed companies in Hong Kong are incorporated outside Hong Kong (eg Cayman Islands, Bermuda, PRC, etc) and are governed primarily by the laws of those jurisdictions. The Listing Rules rather than the Winding Up Ordinance have become the principal tool for regulating and monitoring overseas incorporated listed companies in Hong Kong.


The SEHK, which is the administrator of the Listing Rules, does not have any statutory investigation power over any suspected breach of the Listing Rules. It may only resort to non-statutory sanctions such as public censures, public statements of criticism, private reprimands or private warnings.


The Listing Division of the SEHK is responsible for supervising the listing process and the issuers’ ongoing compliance obligations under the Listing Rules. The Listing Committee was set up by the SEHK to perform functions and exercise powers in relation to listing matters (including approving an applicant’s listing application) delegated by the Board of the HKEx.


The Listing Rules reflect current acceptable market standards and are intended to ensure that investors have and can maintain confidence in the market. The SEHK and the Listing Committee regularly review the Listing Rules, amendments to which must be approved by the SFC (SFO, s 24).


The lack of statutory teeth of the Listing Rules has been an issue of concern to the market and the general public over the last decade. The dual filing regime has rendered false or misleading disclosure, made knowingly or recklessly by listing applicants not only in final prospectuses but also in filings with the SEHK (which are filed at the same time with the SFC), an offence under SFO, s 384.


However, no statutory liability exists for listing applicants who breach listing requirements under the Listing Rules. Following the two-stage market consultations carried out by the FSTB in October 2003 and January 2005, it is clear that the FSTB is keen to provide statutory backing for the listing requirements. As a first step, with the enactment of the Securities and Futures (Amendment) Ordinance 2012 in May 2012, requirements under the Listing Rules relating to the disclosure of price sensitive information (now known as inside information) were transferred to SFO’s disclosure of inside information regime, which came into effect on 1 January 2013 (SFO, Pt XIVA).


In the meantime, the market awaits further consultation by the FSTB and/or the SFC regarding statutory backing for other listing requirements of the Listing Rules.


Dual Filing Regime


Dual filing was introduced on 1 April 2003 under the Securities and Futures (Stock Market Listing) Rules (Cap 571V). Dual filing requires a listing applicant to file copies of the application with the SFC after the same is submitted to the SEHK (SFO, s 384). 


To facilitate compliance and minimise any additional costs to a listing applicant, the applicant may authorise the SEHK to file the application material with the SFC on its behalf.
The SFC has the power to make comments and object to a listing application. It can also exercise its statutory power to take action against knowingly or recklessly false or misleading disclosures.


Principles For Preparing A Prospectus In Hong Kong


The following are the fundamental principles that one must bear in mind when preparing prospectuses in Hong Kong:

 

  • Overall Disclosure Standard (Winding Up Ordinance, Sch 3, para 3)
    • ‘Sufficient particulars and information to enable a reasonable person to form as a result thereof a valid and justifiable opinion of the shares or debentures and the financial condition and profitability of the company at the time of the issue of the prospectus, taking into account the nature of the shares or debentures being offered and the nature of the company, and the nature of the persons likely to consider acquiring them.’
  • Overriding Principle (Listing Rules, LR 11.07)
    • A prospectus must ‘contain such particulars and information which, according the particular nature of the issuer and the securities for which listing is sought, is necessary to enable an investor to make an informed assessment of the activities, assets, and liabilities, financial position, management and prospects of the issuer and of its profits and losses and of the right attaching to such securities.’
  • General Principles (Listing Rules, LR 2.03(2))
    • ‘The Listing Rules…are designed to ensure that investors have and can maintain confidence in the market and in particular that…the issue and marketing of securities is conducted in a fair and orderly manner and that potential investors are given sufficient information to enable them to make a properly informed assessment of an issuer and of the securities for which listing is sought.’
  • Presentation of Information (Listing Rules, LR 2.13(2))
    • ‘the information contained in the document must be accurate and complete in all material respects and not be misleading or deceptive.’

 

This article was supplied by Lexis Practical Guidance.

 

PG Logo_with white background-01

 

For more information on Lexis Practical Guidance, please click here.

Comments are closed.