New HKEx Listing Rules Accelerating Delistings
A new framework for delisting came into effect on 1 August 2018 to address concerns regarding long suspensions of listed companies.
Changes to the Main Board Listing Rules
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Fixed period delisting criterion
A fixed period delisting criterion now applies which is aimed at delisting issuers that fail to resolve issues that led to their suspensions within a prescribed fixed period of continuous suspension. This amendment means that the Stock Exchange now has an express ground to cancel the listing of any securities which have been suspended from trading for a continuous period of 18 months due to the failure to resolve issues leading to the suspension. Depending on the cause of the suspension and the specific circumstances of the case, the Stock Exchange may also impose a different specific remedial period.
The new delisting Rules imply that the suspended issuer needs to remedy the cause of suspension before the end of the remedial period in order to not be delisted. The issuer needs to devise a resumption plan as soon as practicable, with a timeframe ensuring the timely remedy of relevant issues and re-compliance with the Rules. The timeframe needs to account for the time needed to implement the resumption plan and the time needed for the Exchange to complete its vetting process. The issuer may consult the Exchange at any point.
The prescribed fixed period may be extended only in exceptional circumstances.
The Exchange however plans to revisit the fixed period duration and will consider cutting it after monitoring the functioning of the amendments.
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Delisting process under Main Board Listing Rule 6.01
A company may be delisted under Listing Rule 6.01 where (i) the Exchange considers there are insufficient securities in the hands of the public (as required by Listing Rule 8.08(1)), or (ii) the Exchange considers that the issuer does not have a sufficient level of operations or sufficient assets to warrant the continued listing of the issuer’s securities (as required by Listing Rule 13.24); or (iii) the Exchange considers that the issuer or its business is no longer suitable for listing.
The amended Listing Rule 6.10 provides that there may be cases where a listing is cancelled without a suspension intervening where the Exchange considers that any circumstances set out in Rule 6.01 arise. For such delistings, the Exchange may either: (i) publish a delisting notice and give the issuer a period of time to remedy the relevant matters to avoid delisting: or (ii) delist an issuer immediately, but only under exceptional circumstances where the issues are fundamental to the general principles for listing and are beyond remedy.
Prior to delisting, the Exchange may specify a remedial period. All delisting decisions are subject to the review procedures of Chapter 2B of the Main Board Listing Rules.
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Practice Note 17 removal
Practice Note 17 regarding delisting of companies which do not have sufficiency of operations or have tangible assets of sufficient value or intangible assets which has sufficient potential value has been removed. The Exchange is therefore able to delist issuers that do not have sufficient operations or assets under either the fixed period criterion or the new delisting process of Rule 6.01.
A note has been added to Rule 13.24, which sets out the characteristics of issuers that are unable to comply with Rule 13.24, that were previously provided in paragraph 2.2 of Practice Note 17. Amendments to Rule 13.24 were proposed in the Exchange’s Consultation Paper on Backdoor Listing, Continuing Listing Criteria and other Rule Amendments published on 29 June 2018.
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Material breach of the Main Board Listing Rules as reason for suspension or delisting
The Exchange has removed Rule 6.01(1), which provided that a material breach of the Main Board Listing Rules is a specific ground for suspension or cancellation of a listing. Rule 2B.07(5) has been amended to clarify that decisions concerning cancellation of listing under Rule 6.01 are to be made and reviewed under the procedures for non-disciplinary matters set out in Chapter 2B, notwithstanding that the reasons for the cancellation include or amount to a breach of the Main Board Listing Rules by the listed issuer.
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Quarterly updates by suspended issuers
A requirement for suspended issuers to announce quarterly updates regarding developments and progress on satisfying resumption conditions has been added. A suspended issuer remains obliged to disclose inside information under the SFO and the Listing Rules.
Trading suspensions and related matters
Main Board Rule 14.37(1) (GEM Rule 19.37 (1)) which imposed a bright line trading halt requirement where an issuer failed to announce an agreement about a share or a major or (above) transaction has been removed.
Further, Main Board Rule 14.37(2) (GEM Rule 19.37(2)) which provided that an issuer who signed an agreement in respect of a notifiable transaction (which it reasonably believes would require disclosure pursuant to Part XIVA of the SFO) must immediately apply for a trading halt or suspension pending announcement of the agreement, has also been removed.
Resumption of trading at the direction of the Exchange
To expedite review procedures, the Exchange has delegated the authority of directing resumption of trading to the Listing Department, and now requires any review application to be submitted by the issuer within 5 business days (modified from the initially proposed 2 days) of a decision to direct resumption. An issuer will continue to have two levels of review.
Guidance letter on Long Suspension and Delisting
The Exchange also published a corresponding Guidance Letter HKEX-GL95-18 on Guidance on long suspension and delisting (Guidance Letter), which lays out the operation of the amended delisting Rules, suspended issuers’ general obligations, and the Exchange’s regulatory actions during the resumption process. The Guidance Letter supersedes the previous guidance for long suspended companies of Guidance Letter GL66-14.
The Guidance Letter stresses that the deadline of the remedial period is set for the resolution of the relevant issues and resumption of trading, and not for the submission of a resumption proposal as in the previous regime.
The Exchange also reminds issuers that the SFC has powers to request the Exchange to suspend trading in an issuer’s securities under Rule 8 of the Securities and Futures (Stock Market Listing) Rules (Rule 8 suspension), regardless of whether the trading has been suspended under the Rules.
The Guidance Letter sets out information on the circumstances in which the Exchange may impose a specific remedial period that is shorter than the prescribed remedial period. Only the Listing Committee can extend the remedial period and only in exceptional circumstances, such as where the Exchange has approved an A1 application and the issuer needs additional time for implementation.
The Guidance Letter further outlines the process for resumption of trading, details three specific suspension cases, and gives corresponding detailed guidance on the resumption process. The situations detailed are:
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failure to maintain sufficient operations or assets under Rule 13.24;
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failure to publish financial results or inside information due to material irregularities; and
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insufficient public float.