Jurisdiction - Hong Kong
Reports and Analysis
Hong Kong – New Listing Decisions.
28 July, 2013

Waivers for Company Secretaries of PRC Issuers 


In April, the Exchange updated its listing decision LD35-1, which provided for waivers permitting company secretaries of PRC issuers to remain in office, for a period of three years, upon their listing in Hong Kong despite not having the relevant professional qualifications or experience, if assisted by a suitably qualified person. The update highlighted a number of subsequent cases where the Exchange had accepted an initial period, if assisted a suitably qualified person, of one year from the date of listing. 


The Exchange set out the factors it normally takes into consideration when determining whether to grant a waiver for a one-year or a three-year period:

(i) the individual’s experience in handling company secretarial matters (e.g., through acting as the secretary of the issuer’s board of directors while the issuer is listed on an overseas exchange), relevant professional qualifications and/or academic background – see further below;
(ii) whether the issuer has established measures and systems to facilitate the individual’s discharge of his duties as company secretary; and
(iii)the issuer’s regulatory compliance and/or weaknesses in internal controls during the track record period, and the sponsor’s confirmation under Listing Rule 3A.15(5) that the issuer has established procedures, systems and controls which are adequate and sufficient.


Regarding item (i) above, in considering these particular cases, the Exchange took into consideration the fact that the relevant company secretaries variously: 

(i) had been involved in company secretarial matters for more than one year; 
(ii) had more than ten years of work experience in the finance field or corporate management; 
(iii) had academic qualifications in accounting, law, business management and/or economics; and/or 
(iv) had professional qualifications in law. 

For a copy of the updated Listing Decision LD35-1, please follow this link: 


Waivers in Reverse Takeover Cases 


In April, the Exchange published three listing decisions in relation to whether the Exchange should waive Listing Rule 14.06 so that a company’s proposed acquisition would be classified as a very substantial acquisition instead of a reverse takeover. These listing decisions are summarized below. 


Waiver Granted for an Acquisition Related to a Company’s Principal Business 

Company A, engaged in the development and sale of electronic gaming systems, proposed to acquire a number of patents in an overseas market from Mr. X, its executive director and substantial shareholder. As the acquisition was a very substantial acquisition and Mr. X would become a controlling shareholder as a result of the acquisition, the acquisition would be a reverse takeover under Listing Rule 14.06(6)(a). 


The Exchange granted a waiver to Company A and classified the acquisition as a “very substantial and connected transaction” as the patents to be acquired were related to Company A’s existing principal business, and would enable the business to expand in an overseas market. Circumvention of the new listing requirements was not a material concern in this case. 

For a copy of Listing Decision LD59-2013, please follow the link: 


Waiver Denied for a Suspended Shell to Achieve Listing of New Business 

Company A was a long suspended company under delisting procedures. It proposed to acquire the target company (the “Target”) from a vendor. The Target’s principal business was similar to that of Company A before its trading suspension. As the acquisition was a very substantial acquisition and the vendor would become a controlling shareholder of Company A, the acquisition would be a reverse takeover under Listing Rule 14.06(6)(a). Company A requested a waiver from Listing Rule 14.06(6)(a) because it believed that the Target would be able to meet the trading requirements for new listing applicants under Listing Rule 8.05. 


The Exchange refused to grant the waiver for the following reasons: 

(i) Listing Rule 14.06(6) seeks to prevent circumvention of the new listing requirements. Its introductory paragraph defines “reverse takeover” as an acquisition or a series of acquisitions which represent an attempt to list the assets to be acquired and circumvent the new listing requirements; (ii) Company A had ceased operation and was a listed shell. The acquisition was an attempt by the vendor, the new controlling shareholder of Company A, to achieve a listing of its business (i.e., the Target) by injecting it into Company A. 

The Exchange concluded that the acquisition was a reverse takeover and Company A must submit a new listing application for its proposal. 

For a copy of Listing Decision LD58-2013, please follow the link: 

Waiver Denied for Acquisition of Unlistable Larger Target

Company A proposed to acquire 50% of the issued share capital (the “Target Shares”) of a target (the “Target”). Upon completion, Company A would account for these shares as “an interest in an associated company” or “an investment” in its financial statements. The Target was in a different principal business from Company A and was also significantly larger. 


The Exchange concluded that the acquisition should be classified as a reverse takeover for the following reasons: 


(i) this would be a very substantial acquisition, and would be significant to Company A in terms of size. Upon completion, Company A’s existing businesses and assets would be relatively immaterial to the enlarged group, 
hence the acquisition was a means to achieve the listing of the Target Shares;
(ii) neither the assets to be acquired nor the enlarged group would be able to meet the listing requirements under Listing Rule 8.05. 

For a copy of Listing Decision LD57-2013, please follow the link: 

Alternative Revenue Ratio Accepted for Classifying Certain Continuing connected Transactions

In a decision published in April, the Exchange accepted an alternative revenue ratio proposed by Company A for classifying certain continuing connected transactions with Company B. 

Company A had completed the acquisition of a target company (the “Target”) and accounted for it as a subsidiary. As Company B was the substantial shareholder of certain subsidiaries of the Target, it became a connected person of Company A. After the acquisition, the Target and its subsidiaries (the “Target Group”) would continue to conduct certain transactions with Company B. 


Company A considered that the revenue ratio was anomalous as its group had been substantially enlarged as a result of the acquisition but the revenue ratio was calculated using the revenue shown in its latest published audited consolidated accounts and did not take into account the Target’s results. 

Company A proposed an alternative revenue ratio using the enlarged group’s revenue shown in the pro forma consolidated income statement published in the acquisition circular. 


In accepting the alternative proposal, the Exchange noted that: 


  • as the transactions were conducted by the Target Group in the ordinary and usual course of business and constituted continuing connected transactions for Company A as a result of the acquisition, it would be reasonable to take into account the Target Group’s results when assessing the materiality of the transactions;
  • the pro forma financial information of the enlarged group was prepared in respect of the most recently completed financial year and published in the acquisition circular in accordance with the Listing Rules. 


For a copy of Listing Decision LD60-2013, please follow this link: 




Alternative Revenue Ratio Accepted Including Revenue of JCEs


In April, the Exchange published a decision on accepting an alternative revenue ratio for a jointly controlled entity (JCE) structure which was accounted for using the equity method of 

A listed company manufactured and sold automobiles in the Mainland through various JCEs. In the last completed financial year, the company had changed its accounting policy and accounted for the JCEs using the equity method 
of accounting instead of the proportionate consolidation method. As a result, the revenue shown in the company’s latest published consolidated accounts (“Published Revenue”) no longer included its share of the JCEs’ revenue.


The company felt that using he Published Revenue as the denominator or calculating the revenue ratio would produce anomalous results and would not properly reflect the materiality of a transaction to the company


The company proposed to adopt an alternative revenue ratio for classifying its transactions where the denominator would be the sum of the Published Revenue and its share of the JCEs’ revenue, with adjustments to eliminate the revenue arising from transactions between the JCEs and the company (or its 
subsidiaries). This would assimilate the group’s revenue as if the JCEs were still accounted for using the proportionate consolidation method. 

In accepting the alternative revenue ratio, the Exchange noted that: 


  • the substantial decrease in revenue shown in the company’s consolidated accounts was due to the change in accounting policy, and there was no change in its principal business or operating model; and 
  • when assessing the materiality of a transaction using the revenue ratio, it would be reasonable to take into account the group’s share of the JCEs’ revenue.


For a copy of Listing Decision LD61-2013, please follow this link: 

Placing Postponement is a Material Change to Acquisition

In April, the Exchange considered whether postponement of a placing is a material change to the underlying acquisition that is being funded, and should be made conditional on shareholders’ approval in a general meeting. 

Under the listed company’s acquisition agreement, completion of the acquisition was conditional on the completion of the placing. The pro forma financial information on the enlarged group reflected the impact of the acquisition and the placing. However, the company proposed to postpone the placing until after completion of the acquisition in light of deteriorating market conditions. 

The Exchange considered the proposed postponement to be a material change to the terms of the acquisition agreement because: 


  • the financing arrangements were material information for the shareholders in deciding how to vote on the acquisition – the shareholders had already been informed that the acquisition was conditional on the completion of the placing, and the cash consideration and a substantial part of the working capital required for the target’s new business would be funded by the placing. The circular lso disclosed how the acquisition, together with the placing, would affect the financial position of the listed company; and 
  • the proposed postponement would remove the condition in the acquisition agreement so that the company could complete the acquisition without the placing, i.e., changing the financing arrangement previously presented in the circular. Shareholders should have the right to reconsider whether it was in the interests of the company and its shareholders as a whole to complete the acquisition before raising sufficient funds to finance it. 


For a copy of Listing Decision LD62-2013, please follow this link: 

Waiving the Annual Review and Reporting Requirements for CCT

In April, the Exchange considered whether to waive the annual review and reporting requirements for a continuing connected transaction between Companies A and B. 

The listed Company A proposed to enter into a three-year supply of goods contract with Company B. Company B was an associate of X, an independent non-executive director of Company A. 

In granting the waiver, the Exchange took into account the following factors:

  • X was only an independent non-executive director (INED); 
  • the transaction met all of the conditions set out in Listing Rule 14A.42(1) for waivers involving INED interests; 
  • it was unlikely that X could exert undue influence over Company A to benefit from the transaction; and 
  • the size of the transaction was immaterial. 


For a copy of Listing Decision LD63-2013, please follow this link: 

Labuan is an Acceptable Jurisdiction


In April, the Exchange decided in a listing application that Labuan was an acceptable jurisdiction for an issuer’s incorporation, on the basis that: 
(i) a Labuan applicant must address any shareholder protection deficiency based on its individual circumstances, by amending its articles or, if not feasible, through other methods of shareholder protection acceptable to the Exchange; 
(ii) a Labuan applicant must provide in its prospectus specific disclosures in respect of each shareholder protection topic by reference to its articles and the laws of Labuan, and highlight the major differences from the Hong Kong 

requirements and the arrangements to address them (the envisaged issues and solutions are itemized in the Exchange’s listing decision);
(iii) a Labuan company must inform the Exchange if there are any subsequent major changes in Labuan laws and regulations that significantly worsen shareholder protection standards in Labuan compared to those in Hong Kong, 
and the Exchange would then consider imposing further conditions or reconsider accepting any future listing applications from Labuan companies;
(iv) there are no specific circumstances that make it inappropriate to accept Labuan as an issuer’s jurisdiction of incorporation;
(v) a Labuan applicant must demonstrate to the Exchange that there is a reasonable nexus between its operations and Labuan; 
(vi) customary confirmations are required from the sponsor and legal advisers; and
(vii)a Labuan company must comply with the Listing Rules upon listing (subject to any waivers). 

For a copy of Listing Decision LD64-2013, please follow this link: 

Mineral Company: Waiver of CPR and Valuation Report for Proposed Acquisition

In May, the Exchange granted a waiver of the requirement for a listed issuer to produce a competent person’s report (CPR) and a valuation report (VR) for its proposed acquisition of an overseas listed global oil and gas exploration and development company (the “Target”). 

The acquisition was a major transaction for the listed issuer, and the Target would become its wholly owned subsidiary. The following factors were relevant: 

(i) the Target was listed on a recognized overseas exchange, and its oil and gas reserves information was subject to supervision by regulatory authorities; 
(ii) its reserves information was prepared and reported on by technical experts with relevant qualifications and experience; 
(iii) the Canadian NI 51-101 standard was an acceptable reporting standard for the Target’s reserves estimates; and

(iv) the listed issuer would provide a ‘no material change’ statement for the latest reserves information in the acquisition circular. 

In waiving the requirement to produce a CPR, the Exchange agreed that it would be unduly burdensome. The proposed alternative disclosure would provide relevant and reliable information on the Target’s oil and gas reserves comparable to that required under Chapter 18 of the Rules. 

In waiving the requirement to produce a VR, the Exchange noted that the Target’s share price and market capitalization would represent its fair value, and the consideration for the acquisition was not based on a valuation of the Target’s assets. Hence, granting a waiver from the VR requirements would be unlikely to result in undue risks to the shareholders. 

For a copy of Listing Decision LD65-2013, please follow this link: 

Waiver of P&L Statement in Acquisition CircularIn May, the Exchange considered granting a waiver of the requirement for a listed company to include a three-year profit and loss statement in its circular regarding the acquisition of a property. 

The company proposed to acquire a commercial building in Hong Kong for investment purposes. The acquisition would be a major transaction for the company, and because the target property yielded rental income, the shareholder circular would be required to include a profit and loss statement for the property’s net income stream for the previous three years. However, the company was unable to compile such a statement because limited information was available from the vendor.


The Exchange granted the waiver as the company had no access to the information required for compiling the profit and loss statement, and the circular would include a valuation report as well as estimates or summaries of relevant income and expenses. The Exchange considered that the company had taken reasonable steps to provide alternative financial information to its shareholders for assessing the impact of the transaction, and the waiver would not result in an omission of material information from the circular. 


For a copy of Listing Decision LD66-2013, please follow this link: 



Waiver of Disclosure Requirements for Disclosable Transactions

In May, the Exchange published two listing decisions on whether to waive disclosure requirements for certain disclosable transactions on grounds of commercial sensitivity. 

Please see the table below for details of the two decisions.


For a copy of Listing Decisions LD67-2013 and LD68-2013, please follow the relevant links:




Listing Decision LD67-2013 LD68-2013
Business of Issuer Financing service provider which operated a pawn loan and money lending business Hotel investment and operation.
Transaction A secured entrusted loan to a borrower independent from 
the issuer (the “Loan Transaction”) on normal commercial terms.
Acquisitions of units in a Hong Kong building from various vendors.
Waived Information Identity of the borrower, the interest rate and the amount of interest and service fee receivable from the borrower under the Loan Transaction. Principal business activities of the corporate vendors, the name and address of the property, the units to be acquired, and the conditions recedent for 


Reasons for 
Granting Waiver

(i) disclosure of the required specific information would 
harm the competitive position of the issuer and risk causing it to lose the business of publicity-shy customers;
(ii) the Loan Transaction was only a disclosable transaction 
and not significant to the company; and
(iii) the Loan Transaction was collateralized, and the 
proposed alternative disclosure of non-specific information was meaningful and would allow investors 
to assess the creditworthiness of the borrower and the 
risks and exposure of the Loan Transaction.

Note: The Exchange noted that if the Loan Transaction 
constituted a major transaction, full disclosure and 
shareholders’ approval would be required. In addition, if the Loan Transaction was unsecured, the company would need to produce to the Exchange a satisfactory credit agency report on the borrower and disclose the borrower’s 
credit rating in the announcement.

(i) prompt disclosure of the required specific information would harm the interests of the company as regards to its continuing negotiations to acquire other units in the same building (but commercially sensitive 
information should not be shielded from publication if it was material to investors);
(ii) the acquisitions constituted a 
disclosable transaction only, and were not significant to the company; and
(iii) the proposed alternative disclosure of non-specific information would allow 
investors to understand the nature of the acquisitions and the waiver would not result in an omission of material information.



Waiver of Shareholder Circular for Transaction by Departing Subsidiary
In May, the Exchange considered whether to waive the shareholder circular requirement for a major transaction arising from an acquisition by a listed issuer’s subsidiary after the issuer (Company A) had announced its proposed disposal (the “Disposal”) of its interests in the subsidiary (Company B). 

The Disposal did not require shareholders’ approval and would be completed when the parties obtained the necessary regulatory approvals. Upon completion, Company B would cease to be a subsidiary of Company A. 

After the Disposal had been announced, Company B proposed to acquire a target company from independent third parties (the “Acquisition”), which would be a very substantial acquisition for Company B, and also a major transaction for Company A since Company B was still its subsidiary. Completion of the Disposal was expected to take place before Company B issued its circular and notice of general meeting for the approval of the Acquisition. In granting the waiver, the Exchange noted that:(i) it would be unduly burdensome to require Company A to issue a circular for the Acquisition if at the material time


Company B was no longer its subsidiary. Information about the Acquisition would be irrelevant to Company A and its shareholders; and 

(ii) Company A would not require a general meeting to approve of the Acquisition, as its parent company would provide a written approval under Listing Rule 14.44. Thus, a shareholder circular, if the Exchange required one, would only be for information purposes. 

For a copy of Listing Decision LD69-2013, please follow this link: 



Allocation of Excess Rights Shares

In May, the Exchange considered whether a listed issuer’s arrangements to dispose of excess rights shares would comply with Listing Rule 7.21(1), which requires fairness and disclosure. 

The issuer had announced a rights issue and disclosed that the allocation of the excess rights shares would be at its discretion and on a fair and equitable basis under the following principles: 


(i) preference would be given to applications to top-up holdings to a round number of board lots (“Top-up Applications”) where it appeared to the directors that the applications were not made with the intention of abusing 
that mechanism; and 
(ii) any remaining shares would be allocated to other applicants on a sliding scale based on the number of excess shares they applied for. 

The issuer noted unusual patterns of excess applications and believed that most of the applications were made to abuse the top-up mechanism, as those shareholders had split their shareholdings into odd lots enabling them to submit multiple Top-up Applications. 

The board decided to exercise its discretion to allocate the excess rights shares in full only to the non-abusive Top-up Applications. The remaining excess rights shares would then be allocated as set out in paragraph (ii) above. 


The Exchange decided these arrangements complied with Rule 7.21(1) as the issuer had fully disclosed the intended basis of allocation in its announcement and listing document. In addition, the Exchange noted the special circumstances of this case and was satisfied that the issuer had taken reasonable steps to allocate the excess shares on a fair basis that was 
consistent with the principles disclosed in the company’s documents above.

For a copy of Listing Decision LD70-2013, please follow this link:

Rights Issues: Trigger for Independent Shareholder Approval

In May, the Exchange considered how to determine whether a proposed rights issue would require independent shareholder approval. The Listing Rules stipulated that such approval would be required for rights issues that would increase the issuer’s market capitalization by more than 50%. 

The Exchange determined that the assessment should be based on the issuer’s market capitalization at the time of the proposed rights issue, and that for this purpose it is generally acceptable to use the closing price on the date when the terms of the rights issue are finalized. 

For a copy of Listing Decision LD71-2013, please follow this link:

Waiver of Assured Entitlement Requirement in a PRC Spin-off

In May, the Exchange considered whether to waive the assured entitlement requirement for a proposal to spin off a subsidiary for listing on a PRC stock exchange. 

Company A proposed to spin off its subsidiary, Company B, for listing on a PRCstock exchange. Company B would offer new A shares in the Mainland and the deemed disposal of interests in Company B would be a discloseable transaction for Company A. 

There was a legal bar to Company A providing its shareholders with an assured entitlement to Company B’s A shares under the proposed spin-off, as foreign persons cannot invest in the A-share market in the PRC unless they are qualified foreign institutional investors. Company A therefore sought a waiver 
from the assured entitlement requirement, on the basis that, although the Listing Rules allowed minority shareholders to give a waiver by resolution, the PRC legal restriction could not be overcome even if they refused, so it would be burdensome to require Company A to seek a waiver from shareholders.

In granting the waiver application, the Exchange noted that: 


  • the proposed spin-off was not a material transaction for Company A and did not require shareholders’ approval under the Listing Rules; and
  • Company A could not provide its shareholders with an assured entitlement to Company B’s A shares due to legal restrictions in the PRC. 

For a copy of Listing Decision LD72-2013, please follow this link:



Suitability for Listing

In May, the Exchange considered whether a listing applicant’s non-compliance incidents, uncertainties over its principal retail stores, and its deteriorating financial performance would render it unsuitable for listing. 

The applicant was a retailer and had three principal retail stores (Stores A, B and C), all of which were leased properties. The three stores contributed around 80% of its revenue during the track record period. 

 The Exchange noted the following material issues in its listing application:


  • Store A required rectification of unauthorized building works, and surrender of several floors owing to heir use for purposes the occupation permit did not allow. The rectification required approval by the authorities and would involve delay, impaired performance and, if not approved, a move to another location;
  • The applicant’s financial performance deteriorated significantly subsequent to Year 3 of the track record period, and the revenue and net profit in Year 4 were expected to decrease by over 10% and over 30%, respectively, compared to Year 3;
  • Store C’s rental cost would increase by 10% to 20% upon a forthcoming lease renewal; and
  • The directors’ conduct was a factor for consideration. During over 30 years of leasing Store A, the directors had not taken sufficient steps to identify or rectify the breach of building regulations. Professionals were hired to perform inspections in Store A shortly before the listing application, and a full assessment was performed only after the listing application was filed. The applicant submitted the rectification proposal to the relevant authority only toward the end of Year 4, months after the Exchange had raised comments on the breach. 


The Exchange considered that the cumulative effect of the various uncertainties would affect the applicant’s future performance and could not be adequately addressed by disclosure in the prospectus. The applicant was considered not suitable for listing for the time being. 

For a copy of Listing Decision LD73-2013, please follow this link:

Exchange’s Reasons for Returning Listing Applications In July, the Exchange published a listing decision providing guidance on its reasons for determining that certain listing applications (some being for GEM) were not in “advanced form” and, accordingly, returning them. The decision lists over a dozen cases and their shortcomings in some detail, providing the market with insight on matters to pay particular attention to, but also a sense of the point at which the cumulative effect of an application’s defects has led the Exchange not to accept the application for vetting (though, of course, the treatment of each case is specific to its own overall facts). This is highly relevant in the context of the new sponsor regime coming into force on October 1, 2013, as the SFC has emphasized the need for an improvement in the quality of listing applications, and in particular for due diligence to be at an advanced stage. 

Space does not permit inclusion here of full details of all the case studies. However, the deficiencies noted by the Exchange were mainly in the following areas:


  • Business information, covering a wide range of aspects where the particular case called for further explanation
  • Business model, including where changes had occurred or the industry norm was not clear
  • Competition, including sustainability and excluded businesses
  • Control measures
  • Customers, suppliers and raw materials
  • Directors, including independence 
  • Documents not filed as required
  • Financial information, primarily where not included or adequately explained (including management discussion and analysis)
  • Future plans, including use of proceeds
  • Compliance with the exchange’s relevant guidance letters and listing decisions
  • Intellectual property
  • Litigation
  • Regulatory and legal non-compliance
  • Reorganization, including disposals made, and effects on future operations
  • Structured contracts
  • Summary section of the prospectus


For a copy of Listing Decision LD 75-2013, please follow this 



For further information, please contact:


John Moore, Partner, Morrison Foerster

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