Jurisdiction - Hong Kong
Reports and Analysis
Hong Kong – Guiding Principles And Disclosures For Structured Contracts.

13 October, 2012


In August 2012, the Exchange further updated its listing decision in relation to structured contracts, setting out certain guiding principles and various prospectus disclosure requirements for issuers using a VIE structure. 
Guiding Principles
  1. Listing applicants should avoid repeated disclosures in various sections and instead use appropriate cross references. 
  2. Listing applicants should disclose all related risk factors under a heading such as “Risks relating to Corporate Structure.” 
  3. At a minimum, the risk factors in the prospectus should include the following:

• the PRC government may determine that the Structured Contracts do not comply with applicable regulations; 

• the structured contracts may not provide control as effective as direct ownership; 

• the domestic shareholders may have potential conflicts of interest with the applicant; and

• structured contracts may be subject to scrutiny of the PRC tax authorities and additional tax may be imposed.

Required Disclosures
An applicant using structured contracts for all or part of its business should disclose the following information concerning the structured contracts in 
its prospectus:
OPCO’s registered shareholders
A detailed discussion about the operating company’s registered shareholders and a confirmation that appropriate arrangements have been made to protect the applicant’s interests in the event of death, 
bankruptcy or divorce of the operating company’s registered shareholders to avoid any practical difficulties in enforcing the structured contracts.
Potential conflicts of interest
The extent to which the applicant has arrangements in place to address the potential conflicts of interest between the applicant and the operating company’s registered shareholders, particularly in cases where these shareholders are officers and directors of the applicant.
Directors’ belief
Bases for the directors’ belief that each of the agreements passing significant control and economic 
benefits from the operating company to the applicant is enforceable under the PRC and local law
Economic risks
The economic risks the applicant bears as the primary beneficiary of the operating company, in what way the applicant shares the losses of the operating company, the circumstances that could require the applicant to provide financial support to the operating company, or other events or circumstances that could expose the applicant to losses. 
Any interference or encumbrance 
from PRC governing bodies
A discussion on whether the applicant has, to date, encountered any interference or encumbrance from any PRC governing bodies in operating their business through the operating company under the structured contracts.
Option to acquire OPCO ownership
The limitations in exercising the option to acquire ownership in the operating company, including a separate risk factor explaining these limitations, and a clarification that ownership transfer may still be 
subject to substantial costs.
Material contracts
The structured contracts to be disclosed as material contracts in the “Statutory and General Information” section and also made available on the applicant’s website (or the applicant to justify and disclose the basis for not doing so). 
Corporate structure table
A corporate structure table in the “Summary” section for the purpose of illustrating the structured contracts and facilitating investors’ review and understanding of the arrangements.


For a copy of the listing decision LD43-3, please follow the link: http://www.hkex.com.hk/eng/rulesreg/listrules/listdec/Documents/LD43-3.pdf.



For further information, please contact:
Tony Grundy, Partner, Morrison Foerster
John Moore, Partner,  Morrison Foerster



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