Jurisdiction - Hong Kong
Hong Kong – New Listing Decisions.

19 Juy, 2012


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


Waiver from the Accountants’ Report Requirement for an Acquisition Circular

Company A proposed to acquire all of the shares in a target company (Target Company), and the acquisition would constitute a major transaction. As such, Rule 14.67(6)(a)(i) would require the inclusion of an accountants’ report on the Target Company in Company A’s circular for the acquisition. 

The Exchange agreed to waive the accountants’ report requirement in consideration of the following factors:


  1. the Target Company was listed on the Toronto Stock Exchange and had published financial information, including audited accounts, to the market on a regular basis;

  2. the Target Company’s accounts were audited/reviewed by auditors; and

  3. alternative disclosures would be made by Company A, including: 

    • a reconciliation of the Target Company’s financial nformation for the differences between its accounting policies under Canadian GAAP and Company A’s ccounting policies under HKFRS, with an explanation of the differences and a reconciliation review by the auditors under Hong Kong Standard on Assurance Engagements 3000; and

    • additional disclosures in the circular to bridge the gap between the Target Company’s accounts and the requirements under the Listing Rules.

For a copy of the Listing Decision LD28-2012, please follow the link:
Definition of Reverse Takeover
Company A, listed on the Exchange, proposed to acquire a fellow subsidiary (Target) from Company B, its controlling shareholder, as part of a reorganization within Company B’s group. 
The Exchange ruled that the proposed acquisition was a reverse takeover for Company A under Rule 14.06(6)(b) because: 
  1. it was a very substantial acquisition for Company A; and 
  2. the Target was to be acquired from Company B within 24 months after it gained control of Company A. 
The transaction, together with the change in control of Company A, was a means to list the Target’s business. 
For a copy of the Listing Decision LD29-2012, please follow the link: http://www.hkex.com.hk/eng/rulesreg/listrules/listdec/Documents/ld29-2012.pdf.
Reliance on Parent Company 
In April 2012, the Exchange issued a listing decision on whether a listing applicant’s operational and financial reliance on its parent company rendered it not suitable for listing. The Exchange focused on the 
following facts in the decision:
1.  operational reliance
• The group’s sales to its parent company did not show a decreasing trend.
• Expected sales to the parent company would remain significant after listing.
• Sales volume to independent customers was comparatively insignificant.
• The group’s product was experiencing a rapidly declining average selling price.
2.  Financial reliance
• Advance payments from the parent company were significantly larger than advances from independent customers. As such, the Exchange considered that, in substance, the advance payments were financial assistance.
• The parent company’s financial performance had been adversely 
impacted by the market downturn, and the group’s future financial performance would be adversely affected if its parent company continued to perform poorly.
On this basis, the Exchange considered that:
(i)  The listing applicant had been very reliant on sales to its parent company during the track record period. Although this reliance was expected to decline, it would still be significant after listing; 
(ii) The group had received substantial advances from its parent company for sales of its product; 
(iii) The parent company’s financial results had been adversely impacted by the continued downturn in the industry in which it operated; and 
(iv) The group therefore was financially and operationally dependent on its parent company, a company that had been adversely impacted in recent financial periods. Consequently, the sustainability of the group’s business was significantly dependent on a company whose sustainability was currently very uncertain. 
The Exchange determined that the listing applicant had not yet demonstrated its operational and financial independence from its parent company and that its significant reliance on its parent company also raised the issue of the sustainability of its business and suitability for listing under Rule 8.04. 
For a copy of the Listing Decision LD30-2012, please follow the link: http://www.hkex.com.hk/eng/rulesreg/listrules/listdec/Documents/ld30-2012.pdf.
Disclosure of Allegations and Rule 18.04 Waiver
In May 2012, the Exchange published a listing decision on:
  1.  whether a waiver of Rule 8.05(1) under Rule 18.04 should be granted to Company A in view of the lack of a clear path to commercial production; and  
  2. whether adequate disclosure had been made regarding allegations of illegal sale and price manipulation of an unrelated company on an overseas exchange, such allegations having been made against certain persons whose surnames were identical to those of Company A’s previous management members. 
Issue 1
The Exchange concluded that the waiver of Rule 8.05(1) should not be granted, as Company A had not demonstrated to the Exchange’s satisfaction that it had a clear path to commercial production based on:
  • the Company’s limited trial production; 
  • the lack of a detailed mine plan with a detailed production schedule; 
  • the lack of a geotechnical study and use of preliminary grade study; and 
  • vague framework agreements which appeared to be little more than undertakings to negotiate on the amounts and quantities to be purchased, the price and other terms.
Accordingly, Company A would not be able to satisfy the eligibility requirements under Rule 8.05(1).
Issue 2
There was an anonymous letter alleging that members of Company A’s management with a certain surname were involved in a legal action filed by an overseas regulator relating to the illegal sale and price manipulation of an unrelated company listed on an overseas exchange. 
Mr. X, the former controlling shareholder of Company A who had the same surname as the persons in the complaint, later sold his entire equity interest in Company A to Company B and Company C, who then became Company A’s new controlling shareholders. Mr. X and Mr. X’s cousin with the same surname also resigned as directors of Company A. Based on the total investment cost paid by Company B and Company C to Mr. X, the investment cost represented a discount of over 70% to the proposed offer price. 
The Exchange considered that the disclosures relating to the allegations were unclear and limited and questioned Mr. X’s willingness to sell his interest in Company A for a large discount and whether Mr. X and his cousin were associated with Company B and Company C. 
The Exchange directed that certain disclosures be made, including:
  • a statement by the directors that Mr. X and his cousin retained no economic or other interests in Company A and that the current controlling shareholders and Company A were independent of Mr. X and his cousin, and a discussion of their due diligence regarding the acquisition of Company A; 
  • the steps taken by the sponsors to satisfy themselves that Mr. X and 
  • his cousin retained no economic or other interest in Company A and that the current controlling shareholders, Company A and their respective associates were independent of Mr. X and his cousin and their respective associates; and 
  • the steps taken by the current controlling shareholders to satisfy 
  • themselves that there were no other issues arising from the allegations that should be addressed. 
Subsequent developments
Company A progressed to commercial production and resubmitted a new listing application with enhanced disclosures addressing all of the Exchange’s concerns regarding the change in controlling shareholders. Company A also began preparing a mining plan with a detailed production schedule and updated its independent technical report. 
Based on the revised disclosures, the Exchange agreed to grant a waiver of    Rule 8.05(1) under Rule 18.04 to Company A, and the listing was permitted to proceed. 
For a copy of the Listing Decision LD31-2012, please follow the link: http://www.hkex.com.hk/eng/rulesreg/listrules/listdec/Documents/ld31-2012.pdf.
Competent Person’s Report for Mining Interests to be Acquired/Developed 
In June 2012, the Exchange published a listing decision in relation to whether a listing applicant must prepare a competent person’s report (CPR) for mining interests it intended to acquire or develop. The listing applicant had the following assets (see chart below):
Description  Nature of Interests
Mine W Mining right
Mine X Exploration right
Mine Y
A conditional agreement to purchase the majority equity interests in 
an entity which held the exploration right for Mine Y
Mine Z
An option to purchase the majority equity interests in an entity which 
held the mining right for Mine Z
The Exchange was satisfied that:
  • the preparation of a CPR for mines X, Y and Z was not practicable before listing (see listing decision for the reasons) and the prospectus would not include any estimated resource or reserve information of mines X, Y and Z; and 
  • the listing applicant did not rely on the contribution of mines X, Y and Z to justify obtaining a listing. 
As a result, the Exchange allowed the listing applicant to omit from the listing document a full CPR for each of mines X, Y and Z, on condition that it must: 
  • disclose in the prospectus material information regarding mines X, Y and Z and the proposed terms and likely benefit of acquisitions, for investors’ assessment of their potential; 
  • undertake to issue a CPR for each of these mines when the necessary information is available; and 
  • undertake to report in the annual reports on the status of these mines’ and management’s intentions regarding them. 
For a copy of the Listing Decision LD32-2012, please follow the link: http://www.hkex.com.hk/eng/rulesreg/listrules/listdec/Documents/ld32-2012.pdf.



For further information, please contact:
Venantius Tan, Partner, Morrison & Foerster


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