16 May, 2013
Side benefits for cornerstone investors
In February 2013, the Exchange published a guidance letter to remind applicants that it does not allow any direct or indirect benefits (by side letter or otherwise) to be given to cornerstone investors to participate in the placing tranche of an IPO, other than a guaranteed allocation of shares at the IPO price.
Placings to cornerstone investors are generally permitted based on the following principles:
| IPO price | The transaction must be at the IPO price |
| Lock-up |
The shares subscribed must be locked up, generally for at least six months following the listing date |
| Independence |
No representation on the board of the listing applicant is allowed, and the investor must be independent of the listing applicant, its connected persons and their respective associates |
| Disclosure |
Details of the placing arrangement, including the identity and background of the investors, must be disclosed in the prospectus |
| Public float |
The shares will form part of the public float under Rule 8.08 (provided the investor is a member of the public for the purpose of Rule 8.24) |
The Exchange considers it misleading to the public if any investors are being considered as cornerstone investors in an IPO and yet they receive direct or indirect benefits by side letter or otherwise, other than a guaranteed allocation of the shares. Where any such benefits are given, these investors should be reclassified as pre-IPO investors and comply with the Interim Guidance on Pre-IPO Investments (Guidance Letter GL29-12).
The Exchange is also of the view that non-disclosure of such side benefits given to cornerstone investors violates the principles under Rule 2.13 (relating to accuracy and presentation of information).
Examples of side benefits may include:
• waiver of brokerage commission
• put option to sell shares to a controlling shareholder (or
another person) after IPO
• sharing of underwriting commissions
• agreement to invest IPO proceeds in funds managed by
cornerstone investor
• agreement to allow allocation of shares in another IPO
• any other transaction or arrangement entered into on non-arm’s length terms in connection with the cornerstone investment.
This guidance does not prevent the making of arm’s length commercial arrangements between applicants and investors (e.g. where the investors are major customers and suppliers, or formation of joint ventures for business development with such investors), which are considered strategic dealings and/
or arrangements with strategic investors. Details of any such commercial arrangements should be fully disclosed in the prospectus.
Please follow this link for a copy of Guidance Letter, GL51-13:
http://www.hkex.com.hk/eng/rulesreg/listrules/listguid/Documents/gl51-13.pdf
Chapter 18 Mineral Company applicants: disclosure in
listing documents
In March 2013, the Exchange published a guidance letter to assist mineral companies by giving guidance for better preparation of listing documents under Chapter 18 (Chapter 18A of the GEM Rules):
(i) Disclosure
The Exchange suggests that the following disclosures be made in the listing document:
|
Summary section |
• overview of the Mineral or Petroleum Assets • salient terms of the mining and exploration licenses in tabular format • access to major transportation networks from the mines/oilfields • financial information of each major product • mining rights pledged to secure banking facilities (if any) • risks associated with capital expenditure projects |
|
Competent Person’s Report and related disclosure |
• data related to mining valuation • any differences in views between the Competent Person and the applicant on assumptions adopted • detailed analysis of any harmful elements identified in deposits at mines • scale diagrams of the location of the Mineral or Petroleum Assets • data related to reserves • net present value rates and bases • onsite investigation and verification work conducted, or reasons why none are needed • disclosure in the Risk Factors section of all material risks mentioned in the Competent Person’s Report |
|
Business section |
Project development
Workflow/Production
Outsourcing arrangements
Utilities
• measures to secure utility supplies
Regulatory, environmental and social matters
Financial information
|
(ii) Drafting
The Exchange requires applicants to:
• Avoid using the word “mine” to describe projects at an
early stage of development or exploration work, and giving
unrealistic indications of accuracy where estimates are
disclosed;
• explain qualitative descriptions; and
• ensure the consistency of terminology.
Please follow this link for a copy of the Guidance Letter, GL52-2013:
http://www.hkex.com.hk/eng/rulesreg/listrules/listguid/Documents/gl52-13.pdf
For further information, please contact:
Stephen Birkett, Morrison Foerster