Jurisdiction - Hong Kong
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Hong Kong – HKEx Launches Consultation On Reform Of Connected Transaction Rules.
16 July, 2013
Legal News & Analysis – Asia Pacific – Hong Kong – Capital Markets

On 26 April 2013, The Stock Exchange of Hong Kong Limited (the “Stock Exchange”) launched a two month public consultation on proposals to amend the connected transaction requirements under the Main Board Listing Rules and the Growth Enterprise Market Listing Rules (collectively the “Listing Rules”). Two consultation papers were published, with one dealing specifically with proposals to align the meanings of “connected person” and “associate” in different chapters of the Listing Rules.

Some of the Stock Exchange’s proposals are highlighted below:

Use of plain language

The Stock Exchange proposes to simplify the language of the connected transaction rules by replacing the current Chapter 14A of the Main Board Listing Rules and Chapter 20 of the Growth Enterprise Market Listing Rules with the plain language “Guide on Connected Transaction Rules” issued in April 2012.


Relaxation of the rules

While the Stock Exchange considers that the current connected transaction regime, last amended in June 2010, is appropriate and does not merit a fundamental redesign, it is prepared to relax a number of the requirements. We welcome the Stock Exchange’s initiatives to simplify the rules and introduce further exemptions where the risk of abuse by connected persons is limited. In particular, we believe that the proposed exemptions for connected persons at the subsidiary level, as discussed below, would help to reduce compliance burden on listed issuers.

Exemptions for transactions entered into with connected persons at the subsidiary level.


Under the Listing Rules, “connected persons” include both connected persons at the issuer level and connected persons at the subsidiary level. Unless an exemption applies, a transaction between the listed group and a connected person is subject to reporting, announcement and independent shareholders’ approval requirements. Taking into account that connected persons at the subsidiary level are less likely to be able to influence the decisions of the issuer, the Stock Exchange proposes the following exemptions, which may be adopted together or separately: 

  • exempt transactions with persons connected only at the subsidiary level from the independent shareholders’ approval requirement; and/or
  • full exemption for all transactions with persons connected only at the subsidiary level, other than transactions between a subsidiary (or any subsidiary below it) and the person connected with that subsidiary.


Excluding certain transactions involving buying or selling interests in target companies from or to third parties where the risk of abuse by “controller” is limited.


At present, connected transactions include acquisition or disposal of interests in a target company where each of the issuer and its “controller” is, or will be, a shareholder of the target company. “Controller” is defined to mean a director, chief executive or controlling shareholder (30% or more) of the issuer or any of its subsidiaries. The Stock Exchange considers that the current scope of the rules is too wide and proposes the following changes: 

  • limit the application of the rules to acquisition of interests by the listed group in a target company in which a controller is, or will be, a substantial shareholder (10% or above); and
  • exclude transactions involving target companies partly owned by controllers at the subsidiary level.

Expanding the “insignificant subsidiary” exemption.


The Stock Exchange proposes to expand the exemption for transactions entered into between the listed group and persons connected only because of their relationship with the issuer’s insignificant subsidiaries and remove these persons from the definition of “connected person”. 

Removing the 1% cap for the exemption on provision of consumer goods and services.


Currently, an issuer providing or receiving consumer goods or services to or from a connected person may rely on a full exemption provided that a number of conditions are satisfied. One of the qualifying conditions to the exemption is that the transaction value must be less than 1% of the listed group’s total revenue or total purchases. If the 1% cap is removed as proposed by the Stock Exchange, the exemption will apply irrespective of the transaction size so long as the other qualifying conditions are satisfied, e.g. the transaction must be on normal commercial terms, the goods or services have to be for private use or consumption and must be consumed in the same state as when they were acquired.

Exemptions for indemnity or insurance against directors’ liabilities.


It is also proposed that exemptions be introduced allowing issuers to grant indemnities to directors and to purchase insurance for directors against liabilities that may be incurred in the course of performing their duties, provided that such indemnity or insurance does not contravene any law of the issuer’s place of incorporation.


Relaxation of requirements applicable to continuing connected transactions.


Connected transactions may be one-off transactions or continuing transactions. Under the current rules, an issuer is required to enter into a written agreement, and to disclose the annual caps on a continuing connected transaction in terms of monetary value. The Stock Exchange proposes that the requirement for a written framework agreement may be waived if it is impracticable or unduly burdensome and the issuer has obtained a mandate for the transaction from its shareholders. In relation to a continuing connected transaction of a revenue nature, the issuer will be allowed to disclose the annual caps in monetary terms or as a percentage of the issuer’s annual revenue or other financial items in its published audited accounts. 


Proposals to align and enhance the meaning of “connected person” in the Listing Rules

Currently, Chapter 14A of the Main Board Listing Rules and Chapter 20 of the Growth Enterprise Market Listing Rules extend the general definitions of “connected person” and “associate” to a wide scope of persons for the purposes of the connected transaction rules. The Stock Exchange proposes that such extended meanings of “connected person” and “associate” should apply not only to the connected transactions but also transactions and corporate actions under other parts of the Listing Rules where there is a need to protect public shareholders from possible conflicts of interests, e.g. notifiable transactions, voting at general meetings and board meetings, share option schemes and repurchase of securities.In addition, the Stock Exchange proposes to clarify in the rules that it may deem as an issuer’s connected person: 


  • a shadow director or a de facto controlling shareholder of the issuer; and 
  • any person who is accustomed to acting according to a connected person’s irections.

Other consultation issues

The Stock Exchange proposes to retain the following connected transaction rules subject to market comments: 


Thresholds for de minimis exemptions.


The de minimis exemptions provide both percentage and monetary limits to exempt small transactions. The Stock Exchange proposes to retain the current monetary limits of HK$1 million for fully exempt connected transactions and HK$10 million for connected transactions exempt from the independent shareholders’ approval requirement, and invites comments on whether such limits should be retained or increased.

Connected persons at the issuer level.


Currently, connected persons at the issuer level include an issuer’s directors, substantial shareholders and their respective associates. The Stock Exchange notes that in some other jurisdictions, directors of an issuer’s controlling shareholder or holding company would also be taken as connected parties, and market comments are sought on whether similar extension of the meaning of “connected person” should be made in Hong Kong. 

Financial assistance to or from “commonly held entity”.


At present, the provision or receipt of financial assistance to or from a connected person or a “commonly held entity” are both classified as a connected transaction. A “commonly held entity” is a company whose shareholders include (i) a member of the listed group, and (ii) any connected person at the issuer level who can control the exercise of 10% or more of the voting power of the company. Given financial assistance is generally a high risk area, the Stock Exchange proposes to retain the rules on financial assistance involving commonly held entities subject to market comments.


The consultation closed on 26 June 2013. The consultation papers are available at:




For further information, please contact:

Matthew Bersani, Partner, Shearman & Sterling

[email protected] 

Shearman & Sterling Capital Markets Practice Profile in Hong Kong


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