Jurisdiction - Hong Kong
Hong Kong – Recent HKEX Consultations.

28 July, 2013

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


Exchange’s Consultations on Review of Connected Transaction Rules and Definitions


In April, the Exchange issued two consultation papers regarding connected transactions:


  • The main paper reviews the current model for regulating connected transactions by listed issuers, and proposes changes to simplify the Listing Rules and address anomalies.
  • The second paper reviews the different definitions of “connected person” and “associate” in Chapters 1 and 14A of the Listing Rules (GEM Chapters 1 and 20) and proposes to align the definitions in certain parts of the Rules with those used in Chapter 14A, while renaming the definitions in Chapter 1 to distinguish them from those in Chapter 14A.


The two papers are reviewed in turn below.


Exchange’s Consultation on Review of Connected Transaction Rules 

The new proposals in this consultation paper are in summary 
as follows:

Plain language simplification


  • simplify the language of the connected transaction rules by replacing Chapter 14A with the Exchange’s illustrated “Guide on Connected Transaction Rules” issued in April 2012.

Scope of connected persons


  • introduce further exemptions for persons connected only at the subsidiary level:

    • exempt all transactions between the issuer group and persons connected only at the subsidiary level, other than transactions between a subsidiary (or its own subsidiary) and the person connected with that subsidiary; and/or
    • exempt transactions with persons connected only at the subsidiary level from the shareholder approval requirements (but require disclosure, and approval by the disinterested directors);
  • clarify that the deeming provision will include a shadow director or de facto controlling shareholder of the issuer, and a person who is accustomed to acting in accordance with a connected person’s directions or instructions; and
  • exclude from the definition of “connected person” certain persons who are unlikely to control or exert significant influence over the issuer.


Scope of connected transactions


  • exclude from the connected transaction rules certain transactions involving the issuer group buying or selling interests in target companies from or to third parties where the risk of abuse by the controllers is limited. 

Continuing connected transactions (CCTs)


  • allow issuers to seek a mandate from their shareholders for CCTs over a period of time (up to three years) instead of a framework agreement, subject to conditions, if requiring such an agreement would be unduly onerous;
  • allow the annual cap to be expressed as a percentage of the issuer’s annual revenue or other financial items in its published accounts (as an alternative to the current requirement for a monetary cap) for CCTs of a revenue nature (other than financial assistance provided outside the ordinary and usual course of business); and
  • remove inconsistencies with Practice Note 740 (Auditor’s Letter on Continuing Connected Transactions under the Hong Kong Listing Rules) issued by the Hong Kong Institute of Certified Public Accountants.

Option and IBC requirements


  • revise the requirements for transfer, non-exercise or termination of options, including provisions to:

    • introduce alternative classification rules for the transfer or non-exercise of an option granted by a connected person (currently, it is a connected transaction, classified as if the option is exercised);
    • align the requirements for the termination of an option with those applicable to the transfer or nonexercise of the option; and
  • clarify the scope of requirements regarding the independent board committee’s opinion on connected transactions.



  • remove the 1% cap on transaction value, which is a condition of the exemption for provision or receipt of consumer goods or services;
  • codify an exemption for issuers’ provision to directors of indemnities or insurance against liabilities incurred in the course of performing their duties; and
  • amend the monetary caps for full exemption and exemption from shareholders’ approval.

For a copy of the consultation paper, please follow this link: 


Exchange’s Consultation on Aligning the Definitions of “Connected Person” and “Associate” in the Listing Rules 

The Exchange’s proposals in this consultation paper, published in April, are subject to adoption of the proposals in the accompanying paper (described above) to re-write Chapter 14A in simpler language.

 They are in summary to: 


  • widen the meanings of “connected person” and “associate”, from those currently in Chapter 1 to the extended meanings in Chapter 14A, for the purposes of various provisions that aim to protect independent/minority shareholders when issuers propose transactions or other corporate actions, or in other circumstances where there may be a conflict of interest (see further details below);
  • add self-contained definitions of “connected person” and “associate” in Chapter 14A; and
  • rename the existing narrower definitions of those terms, which are contained in Chapter 1, as “restricted connected person” and “close associate” to distinguish them from the definitions in Chapter 14A.


The provisions where the (widened) terms are proposed to be retained include provisions on transactions (such as reverse takeovers, backdoor listings and property acquisitions), issues or repurchases of securities, share options, voting at board or general meetings, disclosures in issuers’ documents, and selection of independent non-executive directors, independent financial advisers and sponsors.


For a copy of the consultation paper, please follow this link: 


SFC’s Consultation Paper on Amendments to Professional Investor Regime and Client Agreement Rules 


In May, the Securities and Futures Commission (SFC) published proposals to amend the professional investor (PI) regime and the client agreement requirements. The main focus of the proposals is to introduce additional protection for PIs who qualify as such based solely on having wealth above a monetary threshold, and to limit exemptions under the SFC’s Code of Conduct for licensed or registered persons (the “Code”) to cases where intermediaries are dealing with sufficiently sophisticated investors. The proposals would be implemented via amendments to the Code and do not include any change to the law. The public consultation period closes on August 14, 2013.

Professional Investor Regime

The Code provides exemptions from certain of its requirements for intermediaries when serving PIs. The exemptions relate to information about or for the client, client agreements and discretionary accounts, and include exemption from the duty to ensure the suitability of each recommendation or solicitation for the client is reasonable in all the circumstances (the “Suitability Requirement”). For PIs other than Institutional PIs (as referred to below), the exemptions only apply if the intermediary is reasonably satisfied that the PI meets stated knowledge and experience criteria.

However, the proposals would create three categories of PIs (individual, corporate, and institutional), and distinguish between them as follows:



  • Individual PIs – i.e., individuals who (alone or with their spouse or child on a joint account) have a portfolio of HK$8 million or more, and corporate investment vehicles wholly owned by them and their family trusts. The consultation paper’s main proposal is to disapply the Code’s exemptions where intermediaries are serving Individual PIs, irrespective of whether they satisfy any knowledge and expertise criteria. This would evidently increase intermediaries’ clearance procedures for dealings with Individual PIs.
  • Corporate PIs – i.e., any corporation or partnership with a portfolio of HK$8 million or more, or total assets of HK$40 million or more (including any trust corporation that has been entrusted with total assets of HK$40 million or more), but excluding corporate investment vehicles included above as Individual PIs. Intermediaries will still have access to the same Code exemptions when serving Corporate PIs, but the required assessment of the PI’s knowledge and experience will be changed from the current bright-line tests (such as trading not less than 40 transactions per annum and being active in the relevant market for at least 2 years). A principles-based assessment will apply instead, based on criteria including the Corporate PI’s structure and investment process/controls, and its decision makers’ relevant experience and training and awareness of the relevant risks. 
  • Institutional PIs – i.e., all PIs except those designated by subsidiary legislation made under the SFO, namely those who qualify as PIs only by having wealth above a specified level. Intermediaries serving Institutional PIs already benefit automatically from the Code exemptions mentioned above, and the SFC is not proposing any change to this. 


The SFC is proposing to require client agreements to incorporate the Suitability Requirement as a contractual term, not to contain terms which are inconsistent with the Code, and to set out accurately in clear terms the actual services to be provided to the client. The SFC notes that, while breaches of the Suitability Requirement can lead to disciplinary action being taken by the SFC against an intermediary, the aggrieved clients cannot currently obtain compensation.

For a copy of the consultation paper, please follow this link: 



For further information, please contact:


John Moore, Partner, Morrison Foerster

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