The Firm Lawyers What We Do Resources Contact Us March 2004 No.11   AMENDMENTS TO THE MAIN BOARD LISTING RULES (THE 'RULES') EFFECTIVE MARCH 31, 2004 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. The new definition excludes the following: Revenue Transactions in the Ordinary and Usual Course of Business of the Listed Issuer (Rule 14.04(1)(g)). 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: the grant of an indemnity or a guarantee or the provision of financial assistance by a listed issuer except (i) where the issuer is a 'banking company' (as defined under Rule 14A.10(1) – see paragraph 1.1(a) above) or (ii) where the issuer grants the indemnity or guarantee or provides financial assistance to a subsidiary. However where the subsidiary is a ‘connected person', the connected transaction provisions apply; acquisitions or disposals of assets, including deemed disposals under Rule 14.29; writing, accepting, transferring, exercising or terminating an option to acquire or dispose of assets or to subscribe for securities; entering or terminating finance leases the financial effect of which have an impact on the balance sheet and/or profit and loss account of the listed issuer; entering into or terminating operating leases which, by virtue of their size, nature or number have a significant impact on the operations of the issuer. The Exchange will normally consider an operating lease or leases to have a significant impact if, by virtue of its/their total monetary value or the number of leases involved, it/they represent(s) a 200% or more increase in the scale of the listed issuer's existing operations conducted through such leases; and entering into any arrangement or agreement involving the formation of a joint venture entity in any form (eg. a company or partnership) or any other form of joint arrangement. 2. Classification of Notifiable Transactions 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) The provisions relating to reverse takeovers in the GEM Rules which deal with back-door listings have been amended and incorporated into the Rules. The Exchange will treat a listed issuer proposing a reverse take-over as if it were a new listing applicant. The enlarged group or the assets to be acquired must be able to meet the financial qualifications for listing under Rule 8.05 and all other basic conditions for listing set out in Chapter 8. A listed issuer proposing a reverse takeover is required to comply with all procedures and requirements for a new listing, including the issue of a listing document. The listed issuer must state in the announcement on the reverse takeover when it expects the listing document to be issued. The definition of 'reverse takeover' refers to an acquisition or series of acquisitions which, in the opinion of the Exchange, constitute an attempt to list the assets to be acquired which circumvents the requirements for new listing applicants under Chapter 8. A 'reverse takeover' includes: 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). Where there is a change in control of the listed issuer and the existing controlling shareholder(s) will dispose of its/their shares to the incoming controlling shareholder(s) or its/their associates or to an independent 3rd party, the existing controlling shareholder(s) and its/their associates cannot vote in favour of a resolution approving the acquisition of assets from the incoming controlling shareholder or his associates at the time of the change in control (Rule 14.55). This prohibition on the outgoing controlling shareholder and his associates voting in favour of an injection of assets does not apply where the decrease in the outgoing shareholder's shareholding results solely from a dilution through the new issue of shares to the incoming controlling shareholder rather than a disposal of shares by the outgoing shareholder. 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) The total assets test is a stand-alone test which replaces the net assets test. 'Total assets' means the fixed assets (including intangible assets) plus current and non-current assets (Rule 14.04). Intangible assets include goodwill (whether positive or negative). The new consideration test is calculated by comparing the consideration for the transaction with the total market capitalization of the listed issuer (ie. the average closing price of the issuer's securities as stated in the Exchange's daily quotations sheets for the 5 business days immediately preceding the date of the transaction) (Rule 14.07(4)). The revenue test measures the level of activity of the target against that of the listed issuer. 'Revenue' means revenue arising from the principal activities of a company and does not include those items of revenue and gains that arise incidentally (Rule 14.14). 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   Use the figures shown in the latest published annual report If the listed issuer publishes an interim report after the issue of the annual report, use the figures shown in the interim report Adjustment for the value of a transaction if adequate information has been published and the transaction is completed Other adjustments Total assets (R14.16, 14.18 and 14.19) Yes Yes Yes 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) Yes No No 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) Yes No No 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). The grant, acquisition, transfer or exercise of an option by a listed issuer will be treated as a transaction and classified by reference to the percentage ratios. Termination of an option will also be treated as a transaction classified by reference to the percentage ratios, unless the termination is in accordance with the terms of the original agreement and does not involve payment of any amounts by way of penalty, damages or other compensation. 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.   Notification to Exchange Publication of an announcement in the newspapers Circular to shareholders Shareholders' approval Accountants' report Share transaction Yes Yes No No: 1 No Discloseable transaction Yes Yes Yes No No Major transaction Yes Yes Yes Yes: 2 Yes: 3 Very substantial disposal Yes Yes Yes Yes: 2 Yes: 5 Very substantial acquisition Yes Yes Yes Yes: 2 Yes: 4 Reverse takeover Yes Yes Yes Yes: 2, 6 Yes: 4 Notes: No shareholder approval is necessary if the consideration shares are issued under a general mandate. However, if the shares are not issued under a general mandate, the listed issuer is required, pursuant to Rule 13.36(2)(b) or Rule 19A.38, to obtain shareholders' approval in general meeting prior to the issue of the consideration shares. Any shareholder and his associates must abstain from voting if such shareholder has a material interest in the transaction. For acquisitions of businesses and/or companies only. The accountants' report is for the 3 preceding financial years on the business, company or companies being acquired. An accountants' report for the 3 preceding financial years on any business, company or companies being acquired is required. 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 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. 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 the written shareholders' approval has been obtained from a shareholder or closely allied group of shareholders who (together) hold more than 50% in nominal value of the shares giving the right to vote at the general meeting approving the transaction. 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 nature of the relationship including any past or present business association between 2 or more of them; the length of time each has been a shareholder; whether they would together be regarded as 'acting in concert' for the purposes of the Takeovers Code; and their past voting pattern on shareholders' resolutions other than routine resolutions at an AGM. 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; confirmation that to the best of the directors' knowledge, information and belief, having made all reasonable enquiries, the counterparty and its ultimate beneficial owner are third parties independent of the listed issuer and its connected persons; details of any guarantee or security given; the reasons for entering into the transaction and statement that the directors believe that the terms of the transaction are fair and reasonable and in the interests of the shareholders as a whole; if the transaction is a major transaction being approved by written shareholders' approval, the name and number of securities held by each of the shareholders giving such approval and the relationship between such shareholders; and if the transaction involves the disposal of an interest in a subsidiary by the listed issuer, a statement as to whether the subsidiary will still be a subsidiary of the listed issuer after the transaction. 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)).       This memorandum is intended only to highlight some of the principal amendments to the Main Board Listing Rules. 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