AMENDMENTS TO THE MAIN BOARD LISTING RULES(THE 'RULES') EFFECTIVE MARCH 31, 2004
1. TRADING RECORD PERIOD AND MANAGEMENT AND OWNERSHIP CONTINUITYINTRODUCTION
The purpose of this memorandum is to summarise the amendments to the Main Board Listing Rules (the 'Rules') due to come into effect (subject to certain transitional arrangements summarized at Section II S below) on March 31, 2004. The amendments are extremely comprehensive, representing the most substantial review of the Rules since the 1980s. The amendments fall into 2 principal categories: first, amendments relating to the initial listing criteria and continuing obligations and secondly, amendments relating to corporate governance issues.
I. INITIAL LISTING CRITERIA AND CONTINUING OBLIGATIONS
A. INITIAL LISTING CRITERIA
Generally, a listing applicant is required to have a 3 financial year trading track period as is required under the current Rules. Amendments to the Rules codify the Exchange's interpretation of the existing rule that applicants must have management continuity for the 3 financial year trading track period and ownership continuity and control for at least the most recent audited financial year.
2. ALTERNATIVE FINANCIAL STANDARDS TO PROFIT REQUIREMENT
- Profit Test
The existing profit requirement (ie. a minimum of HK$20 million for the most recent year and a minimum of HK$30 million in aggregate for the 2 preceding years) has been maintained as one of the quantative tests for assessing the track record financial performance of a listing applicant. The Rules have however been amended to introduce 2 alternative tests: the market capitalization/revenue test and the market capitalization/revenue/cash flow test.
- Market Capitalization/Revenue Test (Rule 8.05(3))
- a market capitalization of at least HK$4 billion at the time of listing;
- revenue of at least HK$500 million for the most recent audited financial year;
- at least 1,000 shareholders at the time of listing;
- a trading record of not less than 3 financial years;
- management continuity for at least the 3 preceding financial years; and
- ownership continuity and control for at least the most recent audited financial year.
- as to management continuity for the most recent audited financial year; and
- that its directors and management have sufficient and satisfactory experience of at least 3 years in the applicant's line of business and industry.
It should be noted that where an applicant is seeking a waiver of the 3 financial year track record requirement, the Exchange has indicated that it will still expect to receive an accountants' report on the applicant's results for the preceding 3 financial years as required under Rule 4.04. The Exchange may however agree to accept an accountants' report on a shorter period, for example for the period since incorporation if less than 3 years.
- Calculation of Revenue (Rule 8.05(4))
For the purposes of calculating revenue under both the Market Capitalization/Revenue Test and the Market Capitalization/Revenue/Cash Flow Test, only revenue arising from the applicant's principal activities and not items of revenue or gains that arise incidentally will be recognized. Revenue from 'book transactions' such as banner barter transactions, writing back of accounting provisions and similar activities resulting from mere book entries are disregarded.
- Market Capitalization/Revenue/Cash Flow Test (Rule 8.05(2))
Requirements are:
- a market capitalization of at least HK$2 billion at the time of listing;
- revenue* of at least HK$500 million for the most recent audited financial year;
- positive cash flow from operating activities of the new applicant or its group, that are to be listed of at least HK$100 million in aggregate for the 3 preceding financial years;
- a trading record of not less than 3 financial years;
- management continuity for at least the 3 preceding financial years; and
- ownership continuity and control for at least the most recent audited financial year.
* Revenue is calculated as described under paragraph 2.2.3 above.
3. MARKET CAPITALIZATION
- Increase of Minimum Expected Market Capitalization at Time of Listing (Rule 8.09(2))
The initial minimum expected market capitalization of a new applicant has been increased to HK$200 million (from HK$100 million), which in fact reflects the current market norm.
Applicants listing under the market capitalization/revenue test or market capitalization/revenue/cash flow test must meet the applicable market capitalization standards of HK$4 billion and HK$2 billion, respectively.
- Determination of Market Capitalization
The expected market capitalization at the time of listing is to be calculated on the basis of all issued share capital of the issuer including:
- the class of securities to be listed; and
The expected issue price of the securities to be listed is to be used in determining the market value of other classes of securities that are unlisted or listed on other markets (Rule 8.09A). Accordingly, in the case of an H share issuer which also has A shares, the market capitalization of the applicant will be calculated by reference to both the H shares and A shares, the expected issue price of the H shares being used to determine the market value of the A shares.
4. PUBLIC FLOAT
- The Rules require:
- Exchange's Discretion to Accept Lower Public Float (Rule 8.08(1)(d))
The Rules have been amended so that:
This public float waiver is available only upon initial listing. It cannot be applied for post-listing if an issuer subsequently satisfies the HK$10 billion requirement.
The revised lower percentage of public float which the Exchange has a discretion to accept does not affect issuers that have been granted a waiver before March 31, 2004.
- Other amendments are:
- The guideline of at least 3 holders for each HK$1 million of the issue has been deleted.
5. INCREASE IN THE MINIMUM NUMBER OF SHAREHOLDERS AT THE TIME OF LISTING
The minimum number of shareholders of an issuer at the time of listing has been increased to 300 (from 100) (except where the issuer chooses to satisfy the Market Capitalization/Revenue test which requires a minimum of 1,000 shareholders at the time of listing) (Rule 8.08(2)).
6. MINING COMPANIESThe Rules are amended to clarify that the initial listing eligibility criteria set out in Chapter 8 apply equally to listing applicants that are mineral companies. Listing applicants wishing to apply for a waiver of the 3 financial year trading record requirement and/or the financial standards requirements of Rule 8.05 must demonstrate, to the satisfaction of the Exchange, that its directors and management have sufficient and satisfactory experience of at least 3 years in mining and/or exploration activities (Rule 18.03).
7. INFRASTRUCTURE COMPANIES
The requirements of the Announcement regarding Infrastructure Project Companies, with appropriate amendments, have been incorporated into the Rules (8.05B(2)).
8. WORKING CAPITAL SUFFICIENCY (Rule 8.21A)
- it has obtained written confirmation from the listing applicant as to the sufficiency of the working capital available to the group for at least 12 months from the date of the listing document; and
- it is satisfied that this confirmation has been given after due and careful enquiry by the applicant and that the persons or institutions providing finance have stated in writing that the financing facilities exist.
9. EFFECTIVE DATE
The new eligibility criteria will be effective on March 31, 2004. Applicants submitting their listing application after this date, and applicants that have submitted their application before this date but remain unlisted 3 months afterwards, must comply with these criteria.
B. CONTINUING OBLIGATIONS (New Chapter 13)
The amended Rules make the continuing obligations requirements currently set out in the Listing Agreements and in existing Practice Note 19 part of the Rules themselves. Issuers' continuing obligations are now set out in the new Chapter 13 and also in Chapters 19 and 19A (where appropriate).1. TIMELINESS OF ACCOUNTS (Rule 13.50)The trading of securities of issuers who fail to publish their financial results on the due date will be immediately suspended. Trading will only be resumed on publication of the requisite financial statements. There will be a transitional period up to December 31, 2004 for existing issuers to comply with this new obligation.
2. PUBLIC FLOAT
- Amendments provide that:
- the percentage fixed at the time of listing (between 15% and 25%) will apply to the issuer throughout its listing; and
- suspension of trading will normally be required where its public float falls below 10%.
- Statement of Sufficiency of Public Float
The Rules are also amended to require confirmation of the sufficiency of the public float in an issuer's annual reports, based on information publicly available to it and within the directors' knowledge as at the latest practicable date before issue of the annual report (Rule 13.35).
- Temporary Waiver (Rule 13.33)
The Exchange may grant a temporary waiver of the minimum public float requirement where an issuer is the subject of a general offer under the Takeovers Code (including a privatization offer). The waiver will be for a reasonable period (normally 3 months) after the close of the general offer to enable the issuer or controlling shareholders (on a failed privatization offer) to restore the minimum public float. This must be restored upon expiration of the waiver.
- Exchange's Discretion not to Suspend Trading (Rule 13.32(4))
The Exchange retains its discretion not to suspend trading if satisfied that there remains an open market in the securities and either:
3. SPREAD OF SHAREHOLDERS
- publish an announcement to that effect and reminding the public to exercise caution when dealing in its securities; and
- conduct an investigation under Section 329 Securities and Futures Ordinance and publish the results of the investigation.
4. OTHER CONTINUING OBLIGATIONS
New and amended continuing obligations have also been introduced as part of the amendments relating to corporate governance in respect of the following (which are discussed in Part II below):
- Voting by Poll (see paragraph H.1)
- General Mandate Provisions (see paragraphs D.1 and 2)
- Disclosure of Advances to Entities/Financial Assistance to Affiliated Companies (see paragraphs C.1 and 2)
- New Announcement Requirements (see paragraph P.1)
- Directors' Service Contracts (see paragraph O.1)
- Notice of Meetings and Circulars (see paragraph P.2)
C. DISCLOSURE REQUIREMENTS AT THE TIME OF INITIAL LISTING
1. PROTECTION OF SHAREHOLDERS' RIGHTS
- Over-allotment Option and Price Stabilizing Activities (Appendix 1A, paragraph 15(3))
The Exchange has codified its existing practice of requiring disclosure in the initial listing document of any over-allotment option to be granted and any proposed stabilizing activities. The information to be disclosed includes the following:
- the reasons for entering into the price stabilizing activities;
- whether there are any other terms, such as the duration, of the option; and
- the purpose for which the option has been granted.
2. CORPORATE REPORTING AND DISCLOSURE OF INFORMATION
There is a new requirement that in giving details of any controlling shareholder, the applicant must include a description of the matters it has relied upon in making the statement that it is satisfied that it is capable of carrying on its business independently of the controlling shareholder (including its associates) after listing.
- Information about the Applicant's Management (Appendix 1A, paragraph 41)
There is a new requirement that the biographical details given of the applicant's directors and senior management should include details of relevant management expertise and experience.
Issuers listing under the market capitalization/revenue test and seeking a waiver of the 3 financial year trading period and mineral and infrastructure companies seeking any waiver under Rule 8.05B, must include details of the management experience and expertise of its directors and senior management for at least 3 years in the line of business and industry of the applicant.
The Exchange's existing practice has been codified to require that where a profit forecast or estimate is prepared, it must be prepared on a basis consistent with the applicant's normal accounting policies.
II. CHANGES TO THE RULES RELATING TO CORPORATE GOVERNANCE ISSUES
A. NOTIFIABLE TRANSACTIONS (EXCEPT CONNECTED TRANSACTIONS)
The amended Rules contain separate chapters on Notifiable Transactions (Chapter 14) and Connected Transactions (Chapter 14A), bringing the format of the Rules in line with that of the GEM Rules. Where a connected transaction is also a notifiable transaction, Chapter 14 applies. There is a new definition of 'listed issuer' for the purposes of Chapters 14 and 14A which is any company or other legal person whose securities are listed on the Main Board and, unless the context requires otherwise, includes its subsidiaries. The term 'listed issuer' as used in this memorandum with reference to notifiable and connected transactions has the same definition.1. Definition of 'transaction' for the purposes of Notifiable Transactions (Rule 14.04)A new non-exhaustive definition of 'transaction' has been incorporated into the Rules based largely on the Exchange's current practice.
2. Classification of Notifiable Transactions
- The new definition excludes the following:
Revenue transactions in the ordinary and usual course of business of the listed issuer are excluded from the definition of transaction unless expressly provided for under Rule 14.04(1)(a)-(f) (eg. in relation to operating leases having a significant impact on the listed issuer).
The term 'ordinary and usual course of business' has been defined in Rule 14.04(8) as the existing principal activities of the listed issuer or an activity wholly necessary for its principal activities. Financial assistance will only be regarded as being in the ordinary and usual course of business if it is provided by a banking company (defined under Rule 14A.10(1) as a bank, restricted licence bank or deposit taking company as defined in the Banking Ordinance or a bank constituted under appropriate overseas legislation or authority).
Other points to note regarding revenue transactions are that:
- even if a revenue transaction is in the ordinary and usual course of business of the listed issuer and therefore exempted from the requirements of Chapter 14, it may nevertheless be discloseable under the general obligation to keep the market informed of all price-sensitive information (under Rule 13.09);
- transactions involving the acquisition and disposal of properties will not generally be regarded as being of a revenue nature unless such transactions are carried out as one of the principal activities and in the usual and ordinary course of business of the issuer; and
- the following is a non-exhaustive list of factors to be taken into account in determining whether a transaction is of a revenue nature:
- whether previous or recurring transactions of the same nature were treated as notifiable transactions;
- the accounting treatment of previous transactions of the same nature;
- whether the accounting treatment is in accordance with generally acceptable accounting standards; and
- whether the transaction is a revenue or capital transaction for tax purposes.
- Issue of New Securities
The new definition does not include the issue of new securities for cash. These transactions will however fall under the new definition of 'transaction' applicable to connected transactions.
- Transactions included in the non-exhaustive list contained in the new definition of 'transaction' are:
Under the amended Rules, there are 6 classifications of notifiable transactions:
- Share Transaction
- Discloseable Transaction
- Major Transaction
- Very Substantial Acquisition
- Very Substantial Disposal (new)
- Reverse Takeover (new).
3. Very Substantial Acquisitions ('VSAs')
Under the amended Rules, issuers must comply with the VSA provisions irrespective of whether the assets acquired are listed or not.
The Rules have been amended in line with the GEM Rules so that written shareholders' approval in lieu of a physical EGM is not acceptable for VSAs (Rule 14.49).
4. Very Substantial Disposals ('VSDs')
VSDs are included as a new notifiable transaction where the tests produce a ratio of 75% or more. VSDs will require shareholders' approval. Shareholders and their associates are required to abstain from voting only if the shareholder has a material interest in the transaction. Written shareholders' approval is not acceptable (Rule 14.49).
5. Reverse Takeovers (Rules 14.54 - 14.57)
- an acquisition or series of acquisitions of assets (aggregated as required under Rules 14.22 and 14.23) constituting a very substantial acquisition where there is or which will result in a change in control (as defined in the Takeovers Code (currently a holding or aggregate holdings of 30% or more of the voting rights of a company)) of the listed issuer: or
- an acquisition or series of acquisitions of assets from the incoming controlling shareholder(s) or his/their associates within 24 months after the change in control that had not been regarded as a reverse takeover, which individually or together reach the threshold for a VSA (Rule 14.06(6)).
In determining whether the acquisition(s) constitute(s) a VSA, the lower of:
- the latest published figures of the asset value, revenue and profits as shown in the listed issuer's accounts and the market value of the listed issuer at the time of the change in control; and
- the latest published figures of the asset value, revenue and profits as shown in the listed issuer's accounts and the market value of the listed issuer at the time of the acquisition(s),
is to be used as the denominator of the percentage ratios.
- Shareholders' Approval of Reverse Takeovers
A shareholder and its associates are required to abstain from voting at a shareholders' meeting approving a reverse takeover if the shareholder has a material interest in the transaction. Written shareholders' approval is not acceptable for reverse takeovers (Rule 14.55).
- Restriction on Disposal (Rule 14.92)
The Rules have been amended to allow a listed issuer to dispose of its existing business within 24 months of a change in control (as defined in the Takeovers Code), if the assets acquired from the incoming controlling shareholder(s) or its/their associates and any other assets acquired by the listed issuer (whether from the incoming shareholder or independent third parties) after the change in control, can meet the trading record requirement of Rule 8.05.
If the requirements of Rule 14.92 cannot be met, a disposal by a listed issuer of its existing business within 24 months of a change of control will result in the issuer being treated as a new listing applicant.
6. New Tests
The following size tests have been adopted for the classification of notifiable transactions:
Total assets test Profits test (no change) Revenue test Consideration test Equity capital test (no change)
7. Revised Thresholds for Classifying Transactions
The Rules have been amended to adjust the threshold levels for categorizing notifiable transactions under all size tests. The revised thresholds are set out in the table below.
Revised thresholds (based on new size tests) Share transaction less than 5% Discloseable transaction 5% or more but less than 25% Major transaction 25% or more, but less than 100% for acquisitions and less than 75% for disposals Very Substantial Acquisition 100% or more Very Substantial Disposal 75% or more Figures used in total assets, profits and revenue calculations
Total assets (R14.16, 14.18 and 14.19) Issuer must adjust for the proposed or declared dividend (which has not been recorded in the accounts) and latest published valuation after the publication of the latest published annual report or interim report.
The Exchange may require inclusion of contingent assets.
Profits (R14.17) May exclude the profits or revenue from the operation that have been discontinued during the previous financial year if the listed issuer has separately disclosed the profits and revenue from the discontinued operations in its accounts in accordance with HKFRS and IFRS.
Since profits and revenue figures are standalone figures for a specific financial period, no adjustment should be made for valuation and/or information on latest published transactions.
Revenue (R14.17)
8. Valuation of Properties, Vessels and Aircraft (Rule 14.12)
Where the issuer is to assume repayment obligations for outstanding mortgages or loans, the outstanding amounts are required to be aggregated to the consideration for the numerator of the assets test. This requirement has also been extended to shipping and aircraft companies.
9. Valuation of Assets (Rules 14.61 and 14.62)
The Rules are amended so that any valuation of assets (other than land and buildings) or businesses acquired by a listed issuer based on discounted cash flows or projections of profits, earnings or cash flows will be regarded as a profit forecast subject to the same requirements for profit forecasts under the Rules. These include disclosure of details of the principal assumptions of the valuations and obtaining a report from the issuer's auditors or reporting accountants. Any financial adviser mentioned in the circular to shareholders is also required to report on the forecast.
10. Options
The Rules have been amended to include a new section on options (other than share options) in Chapter 14 along the lines of the amended GEM Rules in relation to the grant, acquisition, transfer or exercise of an option by an issuer (Rules 14.72 to 14.77).
- Options not Exercisable at the Listed Issuer's Discretion
Where the exercise of the option is not at the discretion of the listed issuer, on the grant of the option, the transaction will be classified as if the option had been exercised. The issuer should then meet the requirements for notifiable transactions up-front. For the purposes of the percentage ratios, the consideration includes the premium and exercise price of the option.
The exercise or transfer of such options must be announced as soon as reasonably practicable if the grant of the option has previously been announced.
- Options Exercisable at the Listed Issuer's Discretion
Where the exercise of an option is at the listed issuer's discretion, the acquisition and exercise of the option are treated as 2 transactions, each subject to the percentage ratios.
On the acquisition by, or grant of the option to, the listed issuer, only the premium is used for the purposes of the percentage ratios. Where the premium represents 10% (currently 15% under the GEM Rules) or more of the sum of the premium and exercise price, the value of the underlying assets, the profits and revenue attributable to such assets, and the sum of the premium and exercise price will be used for calculating the percentage ratios.
When the option is exercised, the exercise price, the value of the underlying assets and the profits and revenue attributable to such assets, will be used for calculating the percentage ratios.
- Shareholders' Approval
A listed issuer may seek any necessary shareholders' approval for the exercise of an option (in addition to any necessary shareholders' approval for entering into the option) at the time of entering into the option. Such approval will satisfy any requirement for shareholders' approval on exercise provided that the actual monetary value of the consideration payable on exercise of the option and all other relevant information are known and disclosed to shareholders at the time approval is obtained and there has been no change in the material facts at the time of exercise.
11. Dilution of Interest in Subsidiaries Resulting in Deemed Disposals (Rule 14.29)
The Rules have been amended so that the existing requirements relating to deemed disposal of interests in subsidiaries apply to allotments of share capital for any consideration, and not just 'cash consideration' as currently.
12. Notification, Publication and Shareholders' Approval Requirements
- The table below summarises the notification, publication and shareholders' approval requirements which will generally apply for each category of notifiable transaction.
Notes:
- An accountants' report on the listed issuer's group is required.
- Approval of the Exchange is necessary.
- Shareholders' Approval Requirements
Shareholders' approval is required for major transactions, VSAs, VSDs, reverse takeovers and share transactions where the consideration shares are not issued under a general mandate. The general requirement for all transactions subject to shareholders' approval is that a shareholder and his associates must abstain from voting on transactions in which the shareholder has a 'material interest' (Rule 2.05). Note also the specific requirements for reverse takeovers on an injection of assets at paragraph 5.4 above.
There is a new explanation of 'material interest' (Rule 2.16) which applies throughout the Rules. Factors to be taken into account in determining whether a shareholder has a material interest include:
- whether the shareholder or his associate is a party to the transaction or arrangement; and
The materiality of an interest must be determined according to the circumstances of the transaction, there being no benchmark for materiality of an interest which may not be quantifiable in financial or monetary terms.
In addition, a poll vote is mandatory where any shareholder is required to abstain from voting (Rule 13.39). The new requirements for poll votes are set out under paragraph H.1 below.
- Waiver of Requirement to hold General Meetings
In line with the Exchange's current practice, amendments provide that major transactions may be approved by written resolutions of shareholders in lieu of an EGM (Rule 14.44) if:
- no shareholder would be required to abstain from voting if an EGM were convened; and
Details of the shareholder or closely allied group of shareholders including the name(s) of the shareholder(s), the number of securities held by each such shareholder and the relationship between the closely allied group must be included in the announcement of the relevant transaction (Rule 14.60(5)).
Written shareholders' approval is not acceptable for VSAs, VSDs or Reverse Takeovers.
There is a new requirement that where the issuer discloses unpublished price sensitive information to a shareholder in confidence in seeking that shareholder's approval, the issuer must be satisfied that the shareholder is aware that he must not deal in the issuer's shares prior to the information being made available to the public.
'Closely allied group of shareholders'
The Rules are amended to elaborate on the meaning of 'closely allied group of shareholders' based on the existing definition in the GEM Rules. The Exchange will consider the following factors in determining whether shareholders constitute a closely allied group;
- the number of persons in the group;
- the length of time each has been a shareholder;
The onus is on the issuer to provide sufficient information to satisfy the Exchange that the shareholders are a 'closely allied group'.
13. Contents of Announcements (Rule 14.68)
Announcements of all notifiable transactions will require the inclusion of the following additional information:
- the book value and valuation (if any) of the assets the subject of the transaction;
- details of any guarantee or security given;
14. Other Announcement Requirements (Rule 14.36)
Listed issuers must make a further announcement as soon as is practicable in respect of a transaction previously announced on the occurrence of any of the following:
- the termination of the transaction;
- any material variation in its terms; and
- a material delay in completion of the agreement.
15. Contents of Circulars for Discloseable Transactions
New requirements as to the contents of circulars include, for discloseable transactions, information as to the competing interests of the listed issuer's directors and their associates (as would be required to be disclosed under Rule 8.10 if they were a controlling shareholder) (Rule 14.64(8)).
16. Disclosure of Financial Information in Circulars for Notifiable Transactions
- VSAs, Reverse Takeovers and Major Acquisitions
For a VSA, reverse takeover or major transaction involving the acquisition of a company or business, the listed issuer must prepare an accountants' report on the target company or business for the last 3 financial years (Rule 4.06). The accounts on which the report is based must relate to a period ending 6 months or less before the issue of the circular. A comparative table of audited financial statements taken from the listed issuer's annual reports for the last 3 financial years must also be included.
If the target asset of a major acquisition, VSA or reverse takeover is a revenue generating asset (other than a company or business) with an identifiable net income stream or assets valuation, the circular must include a profit and loss statement and valuation (if available) for the last 3 financial years on the identifiable net income stream and valuation of the assets (if available), which must be reviewed by the auditors or reporting accountants. The financial information on which the profit and loss statement is based must relate to a financial period ended 6 months or less before the issue of the circular (Rules 14.67(4)(b) and 14.69(4)(b)).
Financial information on a target contained in a shareholders circular on major acquisitions, VSAs and reverse takeovers must be prepared using accounting policies materially consistent with those of the listed issuer.
A management discussion and analysis must also be included in the circular:
- on the target for a major acquisition (Rule 14.66(5)); and
- on the enlarged group for a VSA (Rule 14.68(7)).
- VSDs
For VSDs involving the disposal of a company or business, the listed issuer must prepare an accountants' report on the existing group for the last 3 financial years with the business/company being disposed of shown separately as a discontinuing operation (Rule 4.06A). The accounts on which the report is based must relate to a financial period ending no more than 6 months before the issue of the circular.
If a revenue generating asset (other than a business or company) with an identifiable income stream or assets valuation is being disposed of, the circular must include a profit and loss statement and valuation (if available) for the last 3 financial years on the identifiable net income stream and valuation of the assets (if available), which must be reviewed by the auditors or reporting accountants. The financial information on which the profit and loss statement is based must relate to a financial period ended 6 months or less before the issue of the circular (Rule 14.68(2)).
The listed issuer must also include a management discussion and analysis (as required under paragraph 32 of Appendix 16) on the remaining group's performance in the circular for a VSD (Rule 14.68(3)).
- Pro Forma Financial Information for Circulars for Notifiable Transactions
The amended Rules include new requirements for the inclusion of pro-forma financial information where the subject of the transaction is a revenue generating asset (other than a business or company) with an identifiable income stream or assets valuation. The following is a summary of the new requirements for the inclusion of pro-forma financial information.
VSAs and Reverse Takeovers
For VSAs or reverse takeovers involving the acquisition of a company or business, the circular must include a pro forma income statement, balance sheet and cash flow statement on the enlarged group on the same accounting basis for the latest financial year (Rule 14.69(4)(a)(ii)).
If the target of a VSA or reverse takeover is a revenue-generating asset with an identifiable net income stream or valuation, the circular must include a pro-forma P&L statement and net assets statement on the enlarged group on the same accounting basis for the latest financial year (Rule 14.69(4)(b)(ii)).
Major Acquisitions
If the target of a major acquisition is a company or business, the circular must include a pro-forma net assets statement for the enlarged group on the same accounting basis for the latest financial year (Rule 14.67(4)(a)(ii)).
If the target is a revenue generating asset (other than a business or company) with an identifiable net income stream or assets valuation, the circular must include a pro forma net assets statement of the enlarged group on the same accounting basis for the latest financial year (Rule 14.67(4)(b)(ii)).
VSDs
For a VSD involving the disposal of a company or business, the circular must include a pro-forma income statement, balance sheet and cash flow statement for the remaining group on the same accounting basis for the latest financial year (Rule 14.68(2)(a)(ii)).
If a revenue generating asset with an identifiable income stream is being disposed of, the circular must include a pro-forma P&L statement and net assets statement on the remaining group for the latest financial year (Rule 14.68(2)(b)(ii)).
17. Despatch of Circulars
B. CONNECTED TRANSACTIONS
The new Chapter 14A has been formatted along the lines of Chapter 20 of the GEM Rules. New sections on 'options' and 'financial assistance' have been incorporated. Other changes to the connected transaction provisions are:1. Definition of Connected Person
- Amended definitions of 'connected persons' and 'associates';
- New definitions of 'controller', 'transactions' and 'listed issuer';
- Amended provisions relating to the classification of connected transactions;
- Revised de minimis thresholds; and
- A new category of continuing connected transactions.
- Transactions with Subsidiaries
Non Wholly-owned Subsidiaries
A non wholly-owned subsidiary will be treated as a 'connected person' only if any connected person(s) of the listed issuer (other than at the level of its subsidiaries) is/are, individually or together, a substantial shareholder (ie. entitled to exercise, or control the exercise of, 10% or more of the voting rights at general meetings of the company) in the non wholly-owned subsidiary (Rule 14A.11(5)). A subsidiary of such a non wholly-owned subsidiary will also be treated as a connected person.
A non wholly-owned subsidiary outside the above definition is not a connected person.
- Wholly-owned Subsidiaries
Wholly-owned subsidiaries are not within the definition of 'connected person' (Rule 14A.12).
2. Definition of 'Associate'
The main definition of associate in Rule 1.01 which applies throughout the Rules has been amended to include, in summary:
- beneficiaries of a trust who are corporate bodies.
The detailed provisions relating to trusts are that an associate includes:
- in relation to an individual:
* Note. 'Controlled' means controlled as to 30% or more of the voting rights at general meetings of the company or as to the composition of a majority of its board of directors.
** Note. The term 'family interests' of an individual means his spouse and the minor children or step-children (natural or adopted) of the individual or his spouse.
- in relation to a company:
- the trustees of any trust of which the company is a beneficiary or discretionary object;
3. Relatives of a Connected Person as Deemed Associates
The Rules have been aligned with the GEM Rules as to which relatives are deemed to be 'associates' of a connected person for the purposes of connected transactions.
In summary, the following are included within the definition:
- Close Relatives
These include any person co-habiting as a spouse, children, step-children, parents, step-parents, siblings and step-siblings.
- Other Close Relatives
These include in-laws, grandparents, grandchildren, uncles and aunts, cousins, nephews and nieces, whose association with the person is such that, in the opinion of the Exchange, the proposed transaction should be subject to the connected transaction requirements.
The other category of persons deemed to be associates for the purposes of connected transactions, is any other person or entity with whom the connected person has entered or proposed to enter any agreement, arrangement, understanding or undertaking of whatever nature with respect to the transaction which is such that, in the opinion of the Exchange, that person or entity should be considered to be a connected person (Rule 14.A11(4)(a)).
4. New Definitions
5. Classification of Connected Transactions
- Total assets test
- Consideration test
- Revenue test
- Equity capital test
- those which are exempt from the reporting, announcement and independent shareholders' approval requirements (fully exempt transactions);
- those exempt from the independent shareholders' approval requirement; and
- transactions subject to the reporting, announcement and independent shareholders' approval requirements*.
* These transactions will also require:
- the establishment of an independent board committee with INEDs only; and
- the appointment of an independent financial adviser to advise the independent board committee and shareholders on the transaction (see paragraph I.4 below).
- The categories of transactions which are fully exempt are set out at Rule 14A.31.
- Revised de Minimis Exemption Thresholds (Rules 14A.31 and 14A.32)
The following table summarises the revised de minimis thresholds for exempting connected transactions (other than those involving financial assistance or the granting of options) from the reporting, announcement and/or independent shareholders' approval requirements. The connected transaction must be on normal commercial terms if either of these exemptions is to be relied upon.
De minimis threshold for exemption from reporting, announcement and independent shareholders' approval requirements
Each of the size tests (except profits) is less than 0.1%; or
Each size test (except profits) is equal to or more than 0.1% but less than 2.5% and the consideration is less than HK$1 million.
De minimis threshold for exemption from independent shareholders' approval requirement
Each size test (except profits) is less than 2.5%; or
Each size test (except profits) is equal to or more than 2.5% but less than 25% and the consideration is less than HK$10 million.
6. Shareholders' Approval Requirements
- any connected person with a material interest in the transaction;
- any person falling within Rule 14A.13(1)(b) (ie. those transactions which are connected transactions by virtue of a possible benefit being conferred on a director, chief executive or substantial shareholder of a listed issuer or their associates) that has a material interest in the transaction and its associates; and
- any shareholder with a material interest in the transaction and its associates.
In addition, any vote of shareholders on a connected transaction at a general meeting must be taken on a poll (irrespective of whether any person has a material interest in the transaction) (Rule 13.39(4)). The issuer must comply with the new requirements for poll votes (see further at paragraph H.1 below).
- Waiver of Requirement to hold General Meetings
Connected transactions may be approved by written resolutions of independent shareholders in lieu of an EGM (Rule 14A.43) if:
7. Continuing Connected Transactions
The Rules have been amended to include a new category of 'continuing connected transactions' along the same lines as the GEM provisions.
- Classification of Continuing Connected Transactions
Continuing Connected Transactions Exempt from the Reporting, Announcement and Independent Shareholders' Approval Requirements (Rule 14A.33)
The following continuing connected transactions are fully exempt:
- the provision of consumer goods or services as set out in Rule 14A.31(7);
- the sharing of administrative services as set out in Rule 14A.31(8); and
- continuing connected transactions on normal commercial terms where:
Continuing Connected Transactions Exempt from the Independent Shareholders' Approval Requirement
A continuing connected transaction will be subject only to the reporting and announcement requirements if it is on normal commercial terms where:
- each of the percentage ratios (except profits) is on an annual basis less than 2.5%; or
Non-Exempt Continuing Connected Transactions
- enter into a written agreement with the connected person. The agreement must be for a fixed period not exceeding 3 years (except in exceptional circumstances) and be on normal commercial terms;
- set a maximum aggregate annual value (cap), the basis of which must be disclosed;
- comply with the relevant reporting and announcement requirements; and
- obtain independent shareholders' approval of the transaction and cap unless the transaction is exempt from the requirement for independent shareholders' approval under Rule 14A.34.
A listed issuer will be required to re-comply with the reporting and announcement requirements and obtain independent shareholders' approval (unless exempt under Rule 14A.34) for a continuing connected transaction when the agreement is renewed or there is a material change to the terms of the agreement and when the cap set in respect of the transaction is exceeded (Rule 14A.36).
- Requirements for the annual review of continuing connected transactions by the issuer's INEDs are incorporated into the Rules.
- Continuing Transactions Become Continuing Connected Transactions
Where a listed issuer has entered into a continuing transaction which becomes a continuing connected transaction for whatever reason (eg. a party becomes a director of the issuer), the issuer must, immediately upon becoming aware of that fact, comply with all applicable reporting and disclosure requirements. Any variation or renewal of the agreement requires compliance with applicable reporting, disclosure and independent shareholders' approval requirements (Rule 14A.41). Note also the requirements where an existing listed issuer has previously been granted a waiver (see paragraph S.5 below).
8. Financial Assistance as a Connected Transaction
The amended Rules contain a new section on financial assistance.
- Provision of Financial Assistance by a Listed Issuer (Rule 14A.13(2))
The provisin of financial assistance by a listed issuer will only be regarded as a connected transaction if it is made:
- to a connected person; or
- Exemptions from the Reporting, Announcement and Independent Shareholders' Approval Requirements (Rule 14A.65)
- Financial Assistance provided by a Banking Company
As is the case for notifiable transactions, financial assistance is only regarded as being provided in the ordinary and usual course of business of a listed issuer if the listed issuer is a 'banking company' (ie. a bank, restricted licence bank or deposit taking company as defined under the Banking Ordinance or a bank constituted under appropriate overseas legislation (Rule 14A.10(1)). Further, references to financial assistance not provided in the ordinary and usual course of business mean financial assistance not provided by a banking company (Rule 14.04(8)). Accordingly the exemptions available where financial assistance is provided in the ordinary and usual course of business of the listed issuer are available only to banking companies.
Financial assistance provided by a listed issuer which is a banking company to a connected person or a Rule 14A.13(2)(a)(ii) company will be fully exempt if:
- it is on normal commercial terms (or better to the listed issuer) (Rule 14A.65(1)); or
- Financial Assistance provided by a Listed Issuer which is not a Banking Company
As discussed above, the exemptions available where financial assistance is not provided in the ordinary and usual course of business of a listed issuer are available to listed issuers which are not banking companies.
Where financial assistance is provided by a listed issuer other than a banking company for the benefit of a connected person, it will be fully exempt if it is on normal commercial terms (or better to the listed issuer) and it meets the requirements for de minimis threshold 1 (see paragraph 8.2.1(ii) above) (Rule 14A.65(2)).
Where the listed issuer provides financial assistance to a Rule 14A.13(2)(a)(ii) company (see paragraph 8.1 above), the financial assistance will be exempt from the reporting, announcement and independent shareholders' approval requirements for connected transactions if it is on normal commercial terms (or better to the listed issuer) and:
- it is provided in proportion to the listed issuer's equity interest in the company; and
Where the financial assistance provided by the listed issuer to any such company is not in proportion to the issuer's equity interest or any guarantee given is not on a several basis, the financial assistance will be exempt from the reporting, announcement and independent shareholders' approval requirements if it is on normal commercial terms and meets the requirements for de minimis threshold 1 (see paragraph 8.2.1(ii) above (Rule 14A.65(3)(b)(ii)).
Exemption from Independent Shareholders' Approval
Financial Assistance provided by a Listed Issuer which is a Banking Company
Financial assistance provided by a banking company in its ordinary and usual course of business will be subject only to the reporting and announcement requirements for connected transactions (and exempt from the independent shareholders' approval requirement) if:
- it is for the benefit of a connected person or a Rule 14A.13(2)(a)(ii) company;
- it is not on normal commercial terms (or better to the listed issuer); and
Financial Assistance provided by a Listed Issuer which is not a Banking Company
Financial assistance provided by a listed issuer who is not a banking company will be subject only to the reporting and announcement requirements if:
- it is on normal commercial terms (or better to the listed issuer); and
- it meets the requirements for de minimis threshold 2 (see paragraph iii above).
- Provision of Financial Assistance to a Listed Issuer
The provision of financial assistance to a listed issuer will be regarded as a connected transaction if it is provided by:
- a connected person; or
Exemption from Reporting, Announcement and Independent Shareholders' Approval Requirements Rule 14A.65(4)
Financial assistance provided to a listed issuer by a connected person or a company within paragraph 8.3(ii) above is exempt from the reporting, announcement and independent shareholders' approval requirements for connected transactions if:
- it is on normal commercial terms (or better to the listed issuer); and
- no security over the assets of the listed issuer is granted in respect of the financial assistance.
C. APPLICATION OF THE SIZE TESTS IN OTHER PARTS OF THE RULES
1. Disclosure of Advances to Entities (Rules 13.13 to 13.15)
The disclosure thresholds for advances to entities have been revised. There is a general disclosure obligation where:
- the percentage ratios for the amount of an increase in the amount of an advance to an entity since the previous disclosure is 3% or more (currently 8% of net assets).
Although all the size tests apply in theory, only the consideration and total assets test will be relevant in practice.
Advances to a subsidiary of a listed issuer are not regarded as advances to an entity.
2. Disclosure of Financial Assistance to Affiliated Companies (Rule 13.16)
The term 'affiliated company' means a company accounted for by an issuer using the equity method of accounting in accordance with Hong Kong Financial Reporting Standards ('HKFRS').
A general disclosure obligation arises where any of the percentage ratios of the financial assistance given to affiliated companies of an issuer, and guarantees given for facilities to such affiliated companies together in aggregate exceeds 8% (rather than 25% or more of the net assets of the listed issuer under the current Rules).
As for advances to entities, only the consideration and total assets test will apply in practice.
3. Application of the Percentage Ratios to other parts of the Rules
The table below sets out the application of the percentage ratios used to classify notifiable transactions to other parts of the Rules:
PN15-3(e)(1)
Shareholders' approval for spin off requirements where the transaction represents:R13.25(2)
Definition of "major subsidiary" - a subsidiary represents:Equity capital test is not applicable. R18.07(2)
Despatch of a circular by a listed issuer proposing to explore for natural resources where the proposed transaction represents:App16-15 Note 2
Definition of "contract of significance"Consideration and total assets tests only are applicable. App16-23
Disclosure of information relating to properties held for development and/or sale or for investment purpose that represent:Equity capital test is not applicable. App16-36
Definition of "financial conglomerate" - financial business of a listed issuer represents:Equity capital test is not applicable. R13.25(1)(d) and (e)
Notifying the Exchange upon possession of or sale by any mortgagee of a portion of the listed issuer's assets, or the making of any final judgement, declaration or order by any court or tribunal of competent jurisdiction which may adversely affect the listed issuer's enjoyment of any portion of its assets that represent:Equity capital test is not applicable.
D. DILUTION OF SHAREHOLDERS' INTERESTS
1. Refreshment of General Mandate (Rule 13.36)
The existing upper limit on the number of shares which may be issued under a general mandate (ie. 20% of the existing issued share capital) is retained. The Exchange has however indicated that it may consider lowering the upper limit after further market consultation.The amended Rules allow companies to refresh their general mandate once a year subject to shareholders' approval. This will normally be done at the company's AGM. Subsequent refreshments require independent shareholders' approval subject to an exemption for a top-up of the unused portion of a previous general mandate after a pre-emptive issue of shares to existing shareholders (Rule 13.36(4)). Such top-ups only require shareholders' approval. The relevant circular to shareholders must also contain information relating to the issuer's history of refreshments of its mandate since the last AGM; the amount of proceeds raised from the utilization of the mandate; the use of such proceeds; the intended use of any unutilized amount and how the issuer has dealt with such amount.
2. New Price Restriction on the Issue of Shares under the General Mandate (Rule 13.36(5))
Issuers may not issue shares under a general mandate if the placing price or subscription price under the top-up arrangements represent a discount of 20% or more to the bench-marked price of the securities, unless the issuer can satisfy the Exchange that it is in severe financial difficulties or that there are other exceptional circumstances. The bench-marked price is the higher of:
- the closing price on the date of the relevant placing agreement or other agreement involving the proposed issue of securities under the general mandate; and
- the average closing price in the 5 trading days immediately prior to the earlier of:
- the date of announcement of the placing or the proposed transaction or arrangement involving the proposed issue of securities under the general mandate;
- the date of the placing agreement or other relevant agreement; and
- the date on which the placing or subscription price is fixed.
The issuer is further required to provide the Exchange with detailed information on the allottees to be issued with securities under the general mandate.
There is also a new requirement (Rule 13.29) that where securities are issued under the general mandate at a discount of 20% or more to the benchmarked price, the issuer must publish a separate announcement (ie. in addition to the announcement of the issue under the general mandate) in the newspapers on the business day following the day on which the agreement involving the proposed issue is signed. That announcement must disclose, among other things:
- where there are less than 10 allottees, the name of each allottee (or beneficial owner, if applicable) and a confirmation of its independence from the issuer; and
- where there are more than 10 allottees, the name of each allottee (or beneficial owner, if applicable) subscribing 5% or more of the securities issued and a generic description of all other allottees, and a confirmation of their independence from the issuer. In calculating the 5%, the securities subscribed by each allottee, its holding company and their subsidiaries must be aggregated.
3. Placing and Top-Up Subscription (Rule 14A.31(3)(d))
Where there is a placing and top-up by a connected person to an independent third party, the exemption from the reporting, announcement and independent shareholders' approval requirements will only apply if the number of new shares subscribed by the connected person does not exceed the number of shares placed by him to the independent third party. This prevents the connected person from maintaining his percentage interest before and after the placing while other shareholders suffer a dilution of their interest, as is currently allowed.
The Rules are also amended to follow the GEM Rules so that the exemption applies only where the new shares are issued within 14 days of the connected person signing an agreement to reduce his shareholding.
4. Offers of Securities Permitted to Exclude Overseas Shareholders
The Rules are amended:
- to allow issuers to exclude overseas shareholders in an offer of securities provided that the directors of the issuer, having made enquiry as required under (b) below, consider such exclusion to be necessary or expedient on account either of the legal restrictions under the laws of the relevant place or the requirements of the relevant regulatory authorities or stock exchange;
- to require the issuer to make enquiry regarding the relevant legal restrictions and regulatory or stock exchange requirements;
- to require the issuer to include an explanation for the exclusion of overseas shareholders in the relevant circular or document; and
- to require issuers to ensure that the circular or offer document is delivered to any excluded overseas shareholders, subject to compliance with local laws, regulations and requirements.
5. Rights Issues and Open Offers
The Rules retain the existing requirement for independent shareholders' approval (ie. shareholders other than controlling shareholders and their associates or, where there are no controlling shareholders, directors (except INEDs) and the chief executive of the issuer and their associates) for any rights issue or open offer which would increase either the issued share capital or the market capitalization of the issuer by more than 50%.
The Rules are amended to clarify how the 50% threshold is determined. The latest rights issue or open offer is aggregated with:
- any other rights issues or open offers announced by the issuer (a) within the 12 month period immediately preceding the announcement of the proposed rights issue or offer or (b) prior to such 12 month period where dealing in the shares issued under the rights issue or open offer started within such 12 month period; and
- any bonus securities, warrants or other convertible securities (assuming full conversion) granted to shareholders as part of such rights issues or open offers.
(Rules 7.19(6) and 7.24(5))
The Rules relating to open offers are also amended to follow the Rules relating to rights issues in providing for issuers to make arrangements to dispose of securities not validly applied for by shareholders in excess of their assured allotments, provided those arrangements make such securities available for subscription by all shareholders and allocate them on a fair basis (Rule 7.26A(1)). The offer of such securities must be fully disclosed in the open offer announcement, listing document and any circular.
Amendments to the Rules clarify that an issue of new securities to a connected person under an open offer which is underwritten or sub-underwritten by the connected person will be exempt from the reporting, announcement and independent shareholders' approval requirements for connected transactions provided that the offer makes arrangements as required by Rule 7.26A(1) or shareholders' approval has been obtained (Rule 14A.31(3)(c)).
In line with the corresponding rights issue Rules, where an open offer which is wholly or partly underwritten or sub-underwritten by a director, chief executive or substantial shareholder of the issuer (or an associate of any of them) fails to make arrangements or makes arrangements other than those described in Rule 7.26A(1), then the absence of such arrangements or making of such other arrangements requires shareholders' approval. Shareholders with a material interest in any such other proposed arrangements must abstain from voting (Rule7.26A(2)).
E. SHARE REPURCHASES
1. 25% Monthly Share Repurchase RestrictionThe 25% monthly share repurchase restriction has been removed.2. New Restriction on Price of Repurchases
Repurchases on the Exchange are not allowed at more than 5% of the average closing market price for the previous 5 days on which the shares are traded on the Exchange (Rule 10.06(2)(a)).
3. Dealing Restriction Period
The Rules have been amended (Rule 10.06(2)) to take into account issuers' delay in publication of their results announcements. The period during which issuers are prohibited from repurchasing their shares is the period of one month immediately preceding the earlier of:
- the date of the board meeting (as such date is first notified to the Exchange in accordance with the Rules) for the approval of the issuer's results for any year, half-year, quarterly or any other interim period (whether or not required under the Rules); and
- the deadline for the issuer to publish an announcement of its results for any year or half-year under the Rules, or quarterly or any other interim period (whether or not required under the Rules),
and ending on the date of the results announcement.
F. WITHDRAWAL OF LISTING
1. Withdrawal of Primary Listing on the Exchange (Rule 6.12)
The Rules are amended so as to be consistent with proposed changes to the Takeovers Code. Any withdrawal of primary listing on the Exchange will be subject to:
- the approval of at least 75% of the votes of independent shareholders (ie. shareholders other than controlling shareholders and their associates (or, if there are no controlling shareholders, the issuer's directors (excluding INEDs) and the chief executive and their respective associates) who must abstain from voting in favour). In determining the percentage, the listed securities held by directors, the chief executive and any controlling shareholders or their associates that vote against the resolution are included;
- the number of votes cast against the resolution must not be more than 10% of the votes attaching to shares held by independent shareholders. In determining the percentage, the listed securities held by directors, the chief executive and any controlling shareholders that vote against the resolution are included; and
- shareholders other than directors (except INEDs), the chief executive and controlling shareholders being offered a reasonable cash alternative or other reasonable alternative.
2. Withdrawal of Secondary Listing on the Exchange (Rule 6.16)
New provisions allow issuers with secondary listing status on the Main Board of the Exchange to withdraw their listing if:
- they have complied with all relevant laws, regulations and listing rules of the jurisdiction of their primary listing and all laws and regulations of their jurisdiction of incorporation; and
- they have given shareholders at least 3 months' prior notice by way of an announcement in the newspapers.
G. DISPOSAL OF CONTROLLING SHAREHOLDERS' INTERESTS
1. Commencement of Lock-up Period (Rule 10.07(1))
The lock-up periods for the disposal of interests by controlling shareholders of issuers will commence on the date by reference to which disclosure of the shareholding of the controlling shareholders is made in the listing document. There will be no amendment to the expiry date of the lock-up periods.
Any offer for sale disclosed in a listing document is not subject to the above restriction.
2. Agreement for Disposal of Shares
The Rules (Rule 10.07(1)) are amended in line with the comparable GEM Rules to expressly prohibit controlling shareholders from entering into any agreement to dispose of their shares or creating any options, rights, interests or encumbrances in respect of their shares during the restriction periods under the Rules for (i) the disposal of any shares by controlling shareholders; and (ii) the disposal of any shares by controlling shareholders which would result in their ceasing to be controlling shareholders. This requirement will apply to all initial listing applications in process on or after March 31, 2004, including those new listing applicants whose applications have been approved but not listed.
The Rules retain the current exceptions to the restrictions on disposal of interests by controlling shareholders of issuers including, in particular, a pledge or charge to an authorized institution as security for a bona fide commercial loan.
3. Deemed Disposal of Controlling Shareholders' Interests
The Rules are amended to codify the Exchange's practice of preventing a deemed disposal by controlling shareholders. Under Rule 10.08, issuers are prohibited, for 6 months after their shares commence dealing on the Exchange, from issuing shares or securities convertible into equity securities or agreeing to such an issue (whether or not the issue of shares or securities would be completed within the 6 month period). There are exceptions for:
- the issue of shares, the listing of which has been approved by the Exchange, pursuant to a share option scheme;
- the exercise of conversion rights of warrants issued as part of the initial public offering;
- any capitalization issue, capital reduction or consolidation or sub-division of shares; and
- the issue of shares or securities pursuant to an agreement entered into before the commencement of dealing, the material terms of which have been disclosed in the listing document issued in connection with the initial public offering.
H. VOTING BY SHAREHOLDERS
1. Poll Vote Mandatory (Rule 13.39(4))
- Voting by poll (rather than by show of hands) is required for:
- connected transactions;
- all resolutions requiring independent shareholders' approval;
- granting of options to a substantial shareholder, an INED or any of their associates; and
- transactions in which a shareholder has a 'material interest'* and is therefore required to abstain from voting under Rule 2.15.
As discussed at paragraph A.12.2 above there is a new explanation of 'material interest' (Rule 16). Factors to be taken into account in determining whether a shareholder has a material interest include:
- whether the shareholder or his associate is a party to the transaction or arrangement;
- whether the transaction or arrangement confers upon the shareholder or his associate a benefit (whether economic or otherwise) not available to the issuer's other shareholders.
- There is a new requirement (Rule 13.39(5)) for the issuer to publish the results of a poll in the newspaper on the business day following the meeting. The issuer must also appoint its auditors, share registrar or external accountants qualified to serve as accountants as scrutineer for the vote-taking and must state the scrutineer's identity in the announcement.
- There is also a new requirement for issuers to disclose the procedure of demanding a poll by shareholders pursuant to their constitutional documents in circulars to shareholders, when voting by poll is not a mandatory requirement under the Rules or the issuer's constitutional documents.
2. Voting by Controlling Shareholders
- The following circumstances in which controlling shareholders are required to abstain from voting (irrespective of whether they have a material interest) are retained:
- rights issues and open offers when either the issued share capital or market capitalization of the issuer will increase by more than 50% (see paragraph D.5 above);
- withdrawal of a primary listing on the Exchange (subject to the revised voting thresholds) (see paragraph F.1 above); and
- on a fundamental change in the principal business activities of the listed issuer within 12 months of commencement of dealings in its securities on the Exchange (Rule 14.90).
Amendments to the Rules now also require controlling shareholders to abstain from voting on the second and subsequent refreshments of the general mandate during the year (see paragraph D.1 above).
- Amendments to the Rules provide that in the circumstances set out at 2.1 above, controlling shareholders and their respective associates are only required to abstain from voting in favour of the relevant resolution ie. they are now permitted to vote against the relevant resolution. Their intention to do so must be stated in the relevant listing document or circular to shareholders (Rule 13.40).
- The Rules are also amended so that in the circumstances requiring independent shareholders' approval, where there are no controlling shareholders, the issuer's chief executive and directors (excluding INEDs) and their respective associates must abstain from voting in favour.
- In circumstances requiring independent shareholders' approval, the Exchange also reserves the right to require the following parties to abstain from voting in favour of the relevant resolution at the general meeting:
- parties who were controlling shareholders of the issuer at the time the decision for the transaction or arrangement was made or approved by the board (and who are still shareholders, but no longer controlling shareholders, at the time of the general meeting), and their associates; and
- where there were no controlling shareholders, directors (other than INEDs) and the chief executive of the issuer at the time the decision for the transaction or arrangement was made or approved by the board, and their associates.
- Issuers are required to have procedures in place to record that any parties that must abstain or have stated their intention to vote against the relevant resolution in the listing document, circular or announcement have done so at the general meeting.
I. DIRECTORS AND BOARD PRACTICES
INDEPENDENT NON EXECUTIVE DIRECTORS
1. Further Guidance regarding Independence (Rule 3.13)
- The Rules have been amended to provide further guidelines for the determination of the independence of INEDs. Although none of the specified factors would necessarily be conclusive as to the independence of a director, the Exchange is more likely to question independence if the director:
- holds more than 1% of the total issued share capital of the listed issuer. Where a listed issuer wishes to appoint an INED holding more than 1%, it will have to satisfy the Exchange, prior to the appointment, that the candidate is independent. A candidate holding an interest of 5% or more will not normally be considered independent. In calculating the 1% limit, the total number of shares held legally or beneficially by the candidate must be taken into account together with shares which may be issued to him or his nominee on the exercise of any outstanding share options, convertible securities or any other rights to call for the issue of shares;
- has received an interest in any securities of the listed issuer as a gift, of by means of other financial assistance, from a connected person or the listed issuer. However, subject to the requirement to satisfy the Exchange of the independence of a candidate holding between 1% and 5%, he may still be considered independent if he receives shares or interests in securities from the listed issuer or its subsidiaries (but not from a connected person) as part of his director's fee or pursuant to a share option scheme established in accordance with the Rules;
- is a director, partner or principal of a professional adviser which currently provides or has within one year immediately prior to the date of his proposed appointment provided services, or is an employee of such professional adviser who is or has been involved in providing such services during the same period, to:
- the listed issuer, its holding company or any of their respective subsidiaries or connected persons; or
- any person who was a controlling shareholder or, if there was no controlling shareholder, any person who was the chief executive or a director (other than an INED) of the listed issuer within one year immediately preceding the date of the proposed appointment, or any of their associates;
- has a material interest in any principal business activity of, or is involved in any material business dealings with the listed issuer, its holding company or their respective subsidiaries or with any connected persons of the listed issuer;
- is on the board specifically to protect the interests of an entity whose interests are not the same as those of the shareholders as a whole;
- is or was connected with a director, the chief executive or a substantial shareholder (ie. the holder of 10% or more of the voting rights in general meetings) of the listed issuer within the 2 years immediately prior to the date of his proposed appointment. Guidance is given as to persons who will be regarded as 'connected';
- is, or was at any time during the 2 years preceding the date of his proposed appointment, an executive* or director (other than an INED) of the listed issuer, its holding company or any of their respective subsidiaries or of any connected persons of the listed issuer; and
- is financially dependent on the listed issuer, its holding company or any of their respective subsidiaries or connected persons of the listed issuer.
* Note. An executive includes any person who has a management function in the company and its company secretary.
- Other amendments to the Rules relating to INEDs require:
- an INED to provide the Exchange with a written confirmation (i) of the above factors concerning his independence and (ii) that there are no other factors affecting his independence. That confirmation must be submitted with his declaration and undertaking. Existing INEDs have until September 30, 2004 to submit their confirmation of independence with reference to the new guidelines;
- INEDs to inform the Exchange of any change of circumstances which may affect their independence;
- each INED to provide annual confirmation of his independence to the listed issuer;
- the listed issuer to confirm in its annual report whether it has received such confirmation and whether it considers the INED to be independent; and
- that where a proposed INED fails to meet any of the independence guidelines, the listed issuer must satisfy the Exchange that the person is independent prior to the proposed appointment. The reasons why the person is considered to be independent must also be disclosed in the announcement of the appointment and in the next annual report. Where there is any doubt, the Exchange should be consulted at an early stage.
2. Qualification of INEDs*
The Rules are amended to require listed issuers to appoint at least one INED who has appropriate professional qualifications or accounting or related financial management expertise (Rule 3.10(2)).
3. Minimum Number of INEDs*
The amended Rules require a listed issuer to appoint a minimum of 3 INEDs. The Rules have further been amended to require a listed issuer to inform the Exchange and publish an announcement immediately if the number of its INEDs falls below the minimum number required by the Rules or if it has failed to meet the requirement for one qualified INED (see paragraph 2 above). The Rules allow a period of 3 months for the appointment of a sufficient number of INEDs to meet the minimum requirement or to appoint an INED who is appropriately qualified after failure to meet the relevant requirement.
The draft of the revised Code of Best Practice (to be renamed the Code on Corporate Governance Practices) includes as a recommended best practice that a listed issuer should appoint INEDs representing at least one third of the board.
* Existing listed issuers have until September 30, 2004 to meet these requirements.
4. Independent Board Committees (Rule 13.39(6))
- The Rules have been amended so that for connected transactions and transactions requiring independent shareholders' approval (see paragraph H.2.1 above) or spin-off proposals requiring shareholders' approval under Practice Note 15 (paragraph 3(e)), issuers are required to:
- establish an independent board committee (consisting only of INEDs) to advise shareholders on the transaction or arrangement and on how to vote, taking into account the recommendations of the independent financial adviser (see (ii) below); and
- appoint an independent financial adviser acceptable to the Exchange to recommend to the independent board committee and the shareholders as to whether the terms of the relevant transaction or arrangement are fair and reasonable and whether the transaction or arrangement is in the interests of the issuer and its shareholders as a whole and to advise shareholders on how to vote.
- The Rules clarify that the independent board committee may not consist of INEDs who have a material interest in the transaction or arrangement. The independent board committee may consist of one INED only if all other INEDs have a material interest in the transaction or arrangement. If all the INEDs have such a material interest, no board committee can be formed in which case the independent financial adviser shall make its recommendations to the shareholders only.
- The circular to shareholders must contain:
- a separate letter from the independent board committee advising on the transaction or arrangement and on how to vote, taking into consideration the recommendations of the independent financial adviser (see (ii) below); and
- a separate letter from the independent financial adviser recommending to the independent board committee and shareholders (or, if applicable, to the shareholders only) as to whether the terms of the relevant transaction or arrangement are fair and reasonable and whether the relevant transaction or arrangement is in the interests of the issuer and its shareholders as a whole and advising them how to vote. This letter must set out the reasons for and the key assumptions made and factors taken into account in forming that opinion.
J. BOARD PRACTICES
1. Code on Corporate Governance Practices
A draft has been produced of the revised Code of Best Practice (which has been renamed the Code on Corporate Governance Practices (the 'Code')). It is intended that the Code will apply to both Main Board and GEM issuers.
The Exchange has invited comments on the draft Code and the related draft Corporate Governance Report which should be submitted to the Exchange no later than March 31, 2004. The Exchange proposes to publish the final Code in the first half of 2004. To allow issuers sufficient time to ensure compliance with the Code, it is proposed that the provisions of the Code will become effective for accounting periods commencing on or after January 1 2005.
The draft Code contains 2 tiers of recommended board practices. The first tier contains minimum standards of board practices with which the listed issuer is expected to comply. A listed issuer can adopt its own code on terms no less exacting than the Code provisions. Compliance with the minimum standard will not be a mandatory requirement. Instead, the Code has adopted the 'comply or explain' approach adopted in the UK Listing Rules. That is to say that issuers will be allowed to deviate from the minimum standard but will be required to disclose any deviation from the minimum standards in their corporate governance report in their annual report.
The proposed minimum standards include:
- Regular board meetings at least 4 times a year at approximately quarterly intervals;
- If a director has a conflict of interest in a matter to be considered by the board, the matter should be dealt with at a board meeting at which INEDs are present;
- Segregation of the roles of chairman and chief executive;
- Directors should be subject to retirement by rotation once every 3 years; and
- Comprehensive, formal induction for newly appointed directors.
The second tier of recommended board practices comprises the recommended best practices that listed issuers are encouraged to adopt. A listed issuer that has not adopted the recommended best practices is not required to disclose any deviation in its corporate governance report, but is encouraged to disclose any deviation in the same way as for deviation from the first tier provisions.
Major recommended best practices include:
- INEDs comprising at least one third of the board;
- Establishment of a nomination committee with a majority of INEDs;
- Quarterly reporting for Main Board issuers;
- Continuous training for directors; and
- Disclosure of senior managers' emoluments.
2. Report on Corporate Governance
The Exchange has produced draft rules relating to its proposed corporate governance report requirements and has invited comments to be received before March 31, 2004. Listed issuers will be required to include a Corporate Governance Report in their annual report and disclose information relating to their corporate governance practices in the report. The proposed Corporate Governance Report consists of 3 levels of disclosure requirements:
- the first level comprises mandatory disclosure requirements. A failure to comply with these mandatory requirements will be regarded as a breach of the Listing Rules;
- the second level summarises the Code provisions relating to disclosure of the issuer's corporate governance practices. These are not mandatory disclosure requirements. Listed issuers are however required to explain any non-disclosure in the Corporate Governance Report; and
- the third level consists of recommended disclosures that listed issuers are encouraged to include.
K. ESTABLISHMENT OF GOVERNANCE COMMITTEES
1. Audit Committee (Rule 3.21) and Qualified Accountant (Rule 3.24)
The Rules have been amended to follow the GEM Rules so that the establishment of an audit committee is a compulsory requirement. Existing listed issuers have until September 30, 2004 to comply.
The Rules require the committee to be made up of non-executive directors only, the majority of which must be INEDs of the listed issuer. The committee must have a minimum of 3 members, at least one of whom must be an INED with appropriate professional qualifications or accounting or related financial management expertise as required by Rule 3.10(2). The committee must be chaired by an INED.
There is a new requirement that if an issuer fails to establish an audit committee or at any time fails to meet the requirements as to its constitution under Rule 3.21, it must immediately inform the Exchange and publish an announcement containing the relevant details and reasons. Listed issuers are allowed a period of 3 months to fulfil the relevant requirements.
A list of the duties and responsibilities of audit committees has been included as minimum standards and recommended good practices in the draft Code (rather than in the Rules themselves) to provide further guidance to issuers.
The Rules also require issuers to disclose certain information relating to the audit committee in their annual reports.
The Rules have also been amended in line with the GEM Rules to include a requirement for listed issuers to employ a qualified accountant on a full-time basis. This must be met by March 31, 2004. The individual must:
- be a member of senior management (preferably an executive director); and
- be a fellow or associate member of the Hong Kong Society of Accountants or a similar body of accountants recognized by that Society.
The responsibilities of the qualified account must include overseeing the issuer and its subsidiaries with respect to its financial reporting procedures and internal controls and compliance with the Rules relating to financial reporting and accounting-related matters.
2. Remuneration Committee
The establishment of a remuneration committee comprising a majority of INEDs has been included as a minimum standard in the draft Code. The draft Code also includes the principal functions of the remuneration committee as minimum standards. These include establishing a formal and transparent procedure for developing policy on directors' remuneration, fixing the remuneration packages of executive directors and senior management and ensuring that no director is involved in determining his own remuneration.
3. Nomination Committee
The establishment of a nomination committee comprising a majority of INEDs has been included as a recommended best practice in the draft Code. The principal functions of the committee, which are also included as recommended best practices in the draft Code, include making recommendations to the board on directors' appointments and assessing the independence of INEDs.
L. DIRECTORS' DUTIES AND RESPONSIBILITIES
1. Duties and responsibilities of Non-Executive Directors (Paragraph A5 of the draft Code)
The draft Code includes the duties and responsibilities of non-executive directors as minimum standards and best practices.
2. Chairman and Chief Executive Officer
The draft Code (paragraph A2) requires as a minimum standard the segregation of the roles of chairman and chief executive. The Rules also require issuers to disclose whether these roles are segregated in their corporate governance report.
3. Internal Controls (Paragraph C2 of the draft Code)
The draft Code includes as a minimum standard a requirement that directors should review the effectiveness of the internal control system of the issuer and its subsidiaries at least annually and should report to shareholders that they have done so in the annual report. The review should cover all material controls, including financial, operational and compliance controls and risk management functions.
The draft Code further includes as recommended best practices:
- the specific areas to be covered by the annual review; and
- a requirement that issuers should disclose in the corporate governance report a statement as to how they have complied with the Code's provisions on internal control.
M. ARTICLES OF ASSOCIATION
1. Voting By Interested Directors
The Rules have been amended (paragraph 4(1) of Appendix 3 to the Rules) so that the required provision in the articles of association of an issuer whose equity securities are listed prohibiting a director from voting on any board resolution approving a contract or arrangement in which he has a material interest or from being counted in the quorum for the meeting, is extended to cover any board resolution approving a contract or arrangement in which either he or any of his associates (as defined in the Rules) has a material interest. The existing exceptions to the prohibition as set out in the Notes to Appendix 3 are retained.
The same prohibition has also been included in the Rules themselves (Rule 13.44).
2. Nomination of Directors (Appendix 3 paragraph 4(4)-(5))
The issuer's articles of association are required to provide that the minimum length of the period for shareholders to lodge notice of their nomination of a director is at least 7 days. Amendments are required to provide that such period should commence no earlier than the day after despatch of notice of the meeting appointed for such election and should end no later than 7 days prior to the date of the meeting.
Rule 13.70 further requires that a listed issuer publishes a newspaper announcement or issues a supplementary circular upon receipt of notice from a shareholder of its intention to nominate a director, if received after issue of notice of the relevant meeting.
3. Voting at General Meetings (Appendix 3 paragraph 14)
An issuer's articles of association are required to contain a new provision that where any shareholder is required under the Rules to abstain from voting on any particular resolution or restricted to voting only for or against any particular resolution, any votes cast by or on behalf of any such shareholder in contravention of such requirement or restriction will not be counted.
See paragraph S.2 below regarding requirements for existing listed issuers.
N. SECURITIES TRANSACTIONS BY DIRECTORS
1. Disclosure of Breaches
The Rules have been amended so that any breach of the minimum standard of conduct for securities transactions by directors set out in the Model Code for Securities Transactions by Directors of Listed Issuers (the 'Model Code') at Appendix 10 of the Rules will constitute a breach of the Rules. Listed issuers are entitled to adopt their own code in respect of securities transactions by directors on terms no less exacting than those set out in the Model Code. Where a listed issuer sets a higher standard in its own code, breach of such code will not be regarded as a breach of the Rules provided that the standard required by the Rules is met.
2. Definition of Dealing
A non-exhaustive definition of 'dealing' has been included at Rule 7(a). The transactions and arrangements included within the definition constitute dealings whether they are for consideration or not. The definition includes, among other things:
- the creation of any pledge, charge or other security interest in securities of a listed issuer; and
- dealing in the securities of an entity whose assets solely or substantially comprise securities of a listed issuer.
Dealings which are specifically excluded from the definition by Rule 7(d) include:
- an acquisition of qualification shares by a director where the final date for acquiring the shares under the issuer's constitutional documents falls within a period when the director is prohibited from dealing under the Model Code and the director cannot acquire the shares at another time;
- the taking up of entitlements under a rights issue, bonus issue, capitalization issue or other offer made by a listed issuer to holders of its securities. However, applying for excess rights in a rights issue or applying for shares in excess of an assured allotment in an open offer, constitutes a 'dealing'; and
- undertakings to accept, and the acceptance of, general offers.
3. 'Black-Out' period for Directors' Securities Transactions (Rule A.3)
Unless the circumstances are exceptional, directors are prohibited from dealing in a listed issuer's securities during the period commencing one month immediately preceding the earlier of:
- the date of the board meeting (as first notified to the Exchange) for approval of the listed issuer's results for any year, half-year, quarterly or other interim period; and
- the deadline for the listed issuer to publish an announcement of its results for any year or half-year under the Rules, or quarterly or any other interim period,
and ending on the date of the results announcement.
In addition, directors are prohibited from dealing in a listed issuer's securities at any time if they are in possession of unpublished price-sensitive information relating to those securities or if they have not been given clearance to deal under Rule B8.
4. Dealings by Directors in Exceptional Circumstances (Rule C)
The Model Code has been amended so that directors are allowed to dispose of, but not acquire, securities of a listed issuer under exceptional circumstances (for example, to meet a pressing financial commitment) during the 'black-out' period.
Prior to disposing of the shares, the director must notify the Chairman or the director designated by the board for notification of dealings in writing (as required under Rule B.8) and receive a dated written acknowledgement. He must also satisfy the Chairman or designated director that the circumstances are exceptional.
The listed issuer is required to:
- notify the Exchange of the disposal in writing as soon as practicable, stating why it considered the circumstances to be exceptional; and
- publish an announcement in the newspapers immediately after the disposal stating that the Chairman or designated director is satisfied that the circumstances were exceptional.
5. Directors as Trustees or Beneficiaries
The Model Code has been amended so that:
- If a director is acting as sole trustee, the provisions of the Model Code will apply to all dealings of the trust as if he were acting on his own account (unless the director is a bare trustee and neither he nor any of his associates is a beneficiary of the trust, in which case the provisions of the Model Code do not apply) (Rule A4); and
- If a director is acting as a co-trustee and he has not participated in or influenced the decision to deal in the securities and neither he nor any of his associates is a beneficiary of the trust, dealings by the trust will not be regarded as his dealings (Rule A5).
6. Disclosure in Annual and Interim Reports (Rule D15)
- whether the listed issuer has adopted a code of conduct regarding transactions by directors on terms no less exacting than those contained in the Model Code;
- having made specific enquiry of all directors, whether its directors have complied with and whether there has been any non-compliance with the minimum standards set out in the Model Code and in its own code of conduct for securities transactions by directors; and
- if there has been any non-compliance with the required standard contained in the Model Code, details of the non-compliance and an explanation of the steps taken to remedy the situation.
O. DIRECTORS' CONTRACTS, REMUNERATION AND APPOINTMENTS
1. Directors' Service Contracts (Rule 13.68)
The Rules are amended to require the prior approval of shareholders (other than the relevant director and his associates) for a service contract that is to be granted to a director of the listed issuer or any of its subsidiaries which:
- may exceed a period of 3 years; or
- requires the issuer to give more than one year's notice or pay compensation of more than one year's remuneration, in order to terminate the contract.
The Rules are also amended to require the issuer's remuneration committee (if any and provided it has a majority of INEDs) or an independent board committee to advise shareholders (other than shareholders who are directors with a material interest in the service contracts and their associates) on any such contract and as to how to vote. See paragraph S.4 below for the requirements for contracts entered into before March 31, 2004.
2. Disclosure of Directors' Remuneration
The Rules have been amended to require listed issuers to disclose individual directors' and past directors' emoluments on a named basis in its financial statements (Appendix 16 paragraph 24).
P. DISCLOSURE OF INFORMATION
1. New Announcement Requirements
There is a new requirement for issuers to publish a formal announcement as soon as practicable (in addition to immediately notifying the Exchange) of:
- any proposed alteration of the issuer's memorandum or articles of association;
- any appointment, resignation or re-designation of its directors or supervisors including the reasons for any resignation and biographical details of newly appointed directors and supervisors;
- any change in the rights attaching to (1) any class of listed securities or (2) any shares into which any listed debt securities are convertible or exchangeable;
- any change in the auditors or financial year end; and
- any change in the secretary or registered address.
2. Despatch of Notice of General Meetings and Circulars (Rule 13.73)
- The Rules have been amended in line with the GEM Rules to require listed issuers to despatch circulars to shareholders at the same time as, or before, giving notice of the general meeting to approve the transaction referred to in the circular (Rule 13.73).
- Any material information coming to the directors' attention after the issue of the circular must be given to shareholders either in a supplementary circular or by way of an announcement in the newspaper not less than 14 days before the relevant general meeting. The meeting must be adjourned to comply with the 14-day requirement by the chairman or, if that is not allowed under the issuer's constitutional documents, by a resolution to that effect.
- Notice of all general meetings and meetings of creditors must be published by way of announcement.
Q. FINANCIAL REPORTING
The two-phased publication arrangements for annual and half-year results announcements are to be abolished with effect from the accounting period commencing on or after July 1, 2004. Under the amended Rules, the disclosure requirements for annual and half-year results announcements under Appendix 16 paragraphs 45 and 46 have been brought into line with those for summary financial reports.
The financial information in the preliminary announcement of annual results is required to 'have been agreed with the auditors' rather than actually audited. The Exchange does not expect there to be any material difference between the information contained in the preliminary announcement of results and that contained in the audited results. If, however, it becomes necessary to revise the information contained in the preliminary announcement of results in the light of developments arising between the date of the announcement and completion of the audit, the issuer must immediately notify the Exchange and inform the public by an announcement in the newspapers (Rule 45A.1).
The amended Rules also allow issuers to send out a summary interim report instead of an interim report (Rule 13.48). The required contents of summary interim reports are set out at Appendix 16, paragraph 51.
R. MEANING OF SUBSIDIARY
The definition of 'subsidiary' for all purposes under the Rules is expanded to include:
- any entity which is accounted for and consolidated in the audited consolidated accounts of an issuer as a subsidiary under the applicable Hong Kong Financial Reporting Standards ('HKFRS') or International Financial Reporting Standards ('IFRS'); and
- any entity which will, as a result of acquisition of its equity interest by the issuer, be accounted for and consolidated in the next audited consolidated accounts of the issuer under the applicable HKFRS or IFRS.
S. TRANSITIONAL ARRANGEMENTS FOR INTRODUCTION OF LISTING RULE CHANGES
1. INEDs and Audit Committee
Listed issuers have a transitional period of 6 months, expiring on September 30, 2004 to comply with the requirements that:
- INEDs appointed by listed issuers prior to March 31, 2004 submit to the Exchange a written confirmation of their independence with reference to the new guidelines on independence under Rule 3.13 (see paragraph I.1 above). If an INED fails to meet the new guidelines, a new INED must be appointed to replace him. No transitional period is available for INEDs appointed after March 31, 2004;
- listed issuers appoint at least one INED with appropriate professional qualifications or accounting or related financial management expertise (Rule 3.10(2));
- listed issuers appoint at least 3 INEDs (Rule 3.10(1));
- listed issuers establish an audit committee meeting the requirements of Rule 3.21 (see paragraph K above).
2. Amendments to Articles of Association
Listed issuers must amend their Articles of Association to comply with the amended provisions of Appendix 3 (see paragraph M above) at the earliest opportunity and, in any event, no later than the conclusion of their next AGM. Where an issuer has despatched notice of an AGM before March 31, 2004 and the meeting will be convened after that date, it must amend its articles at the earliest opportunity after the implementation of the new Rules.
3. Financial Reporting
The new disclosure requirements for annual and half-year results announcements, annual reports, summary financial reports, half-year reports and summary half-year reports will be effective for accounting periods commencing on or after July 1, 2004. The abolition of the two-phased publication arrangements will also be effective for accounting periods commencing on or after July 1, 2004. Early adoption of the new disclosure requirements is however encouraged by the Exchange. Where results announcements are published in accordance with the new disclosure requirements on or after March 31, 2004, they will not be required to comply with the existing two-phased publication arrangements.
4. Directors' Service Contracts (Rule 13.69)
The amended Rules require shareholders' approval for directors' service contracts which may exceed 3 years or require a listed issuer to give more than one year's notice or to pay more than one year's remuneration on termination (Rule 13.68). This new requirement applies only to:
- new service contracts entered into after March 31, 2004; and
- variations as to the duration or payment on termination or any other material terms of existing service contracts and renewal of such contracts.
Directors' service contracts entered into on or before January 31, 2004 are exempt from the new requirements. Issuers are however required to include the particulars of any exempt service contracts in their annual reports for the term of such contracts (Appendix 16 paragraph 14A).
5. New Size Tests and Percentage Ratios
Notifiable and Connected Transactions
The revised size tests and percentage ratios applicable to notifiable and connected transactions will apply to all such transactions which are entered into and announced on or after March 31, 2004.
However, with respect to the new category of continuing connected transactions, the position is as follows:
- Where a listed issuer has been granted a waiver for a fixed period, the waiver continues to apply until the earlier of:
- the expiry of the waiver; and
- the listed issuer failing to comply with any waiver condition(s), the agreement being renewed or there being a material change to the terms of the agreement.
- Where a waiver has been granted indefinitely, the listed issuer should ensure compliance with the new requirements as soon as practicable after March 31, 2004.
Advances to Entities and Affiliated Companies (Rules 13.13 to 13.16)
Listed issuers should also ensure compliance with the general disclosure requirements for advances to entities and financial assistance and guarantees to affiliated companies based on the revised percentage ratios as soon as possible after March 31, 2004 (see Section C above).
6. Placing and Top-up Subscriptions
The revised exemption from the reporting, announcement and independent shareholders' approval requirements on a placing and top-up by a connected person to an independent third party under Rule 14A.31(3)(d) will apply to placing and top-up arrangements entered into and announced by the listed issuer on or after March 31, 2004.
7. Lock-up Periods for Disposal of Controlling Shareholders' Interests
The new requirements of Rule 10.07 (see paragraph G.1 above) will apply to all initial listing applicants in process on or after March 31, 2004, including those new applicants whose applications have been approved but not listed.
This memorandum is intended only to highlight some of the principal amendments to the Main Board Listing Rules. Specific advice should be sought in relation to any particular situation.
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