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Backdoor listing



Hong Kong – a leading international market


Source: Data from World Federation of Exchanges (as at end of 31 December 2014). Figures for the London Stock Exchange Group include those of Borsa Italiana.

  • By market capitalisation, Hong Kong is the world’s 7th largest and Asia’s 3rd largest (after Japan & Shanghai) exchange
  • In terms of IPO funds raised, Hong Kong ranked 3rd worldwide in 2014 (after NYSE and LSE Group) and in world’s top 5 for 13 consecutive years

Why List in Hong Kong?

  • 1 International Financial Centre in Asia
  • Access to Mainland Chinese investors currently through Qualified Domestic Institutional Investor programme
  • Shanghai-Hong Kong Stock Connect launched in November 2014 allows Mainland Chinese investors to invest directly in HK listed stocks for the 1st time. Programme helps broaden investor base and add liquidity to HK market adding momentum to the market


Source: World Federation of Exchange (WFE) website

World Top Five in IPO Funds Raised

  • Ranked top 5 globally for 13th year in a row since 2002
  • Active secondary market

(HK$ billion)


Source: Hong Kong Exchanges and Clearing Limited

Ten Largest IPO on the HKEx

Company name Industry IPO funds raised (HK$bn)
1 AIA Group Ltd. Financials 159.08
2 Industrial and Commercial Bank of China Ltd. – H Shares Financials 124.95
3 Agricultural Bank of China Ltd. – H Shares Financials 93.52
4 Bank of China Ltd. – H Shares Financials 86.74
5 Glencore plc Resources 77.75
6 China Construction Bank Corporation – H Shares Financials 71.58
7 China Unicom Ltd. Telecommunications 43.61
8 China CITIC Bank Corporation Ltd. – H Shares Financials 32.92
9 China Mobile Ltd. Telecommunications 32.67
10 China Minsheng Banking Corp., Ltd. – H Shares Financials 31.23

Source: Hong Kong Exchanges and Clearing Limited

Ten Largest Hong Kong IPOs in 2014

Company name Industry IPO funds raised (HK$bn)
1 Dalian Wanda Commercial Properties Co., Ltd. – H Shares Properties & construction 28.80
2 CGN Power Co., Ltd. – H Shares Utilities 28.21
3 HK Electric Investments and HK Electric Investments Ltd. -SS Utilities 24.13
4 WH Group Ltd. Consumer goods 18.31
5 BAIC Motor Corporation Ltd. – H Shares Consumer goods 11.03
6 Shengjing Bank Co., Ltd. – H Shares Financials 10.40
7 China CNR Corporation Ltd. – H Shares Industrials 10.03
8 Harbin Bank Co., Ltd. – H Shares Financials 8.77
9 Luye Pharma Group Ltd. Healthcare 6.81
10 Tianhe Chemicals Group Ltd. Materials 5.80

Source: Hong Kong Exchanges and Clearing Limited

Gateway to Mainland China

Unit Total Mainland Enterprise % of Total
As at 31 December 2014
No. of listed companies Number 1,752 876 50%
Market capitalisation HK$bn 25,072 15,078 60%
As of 31 December 2014
Total equity funds raised HK$bn 935.8 693.9 74%
– IPO funds raised HK$bn 227.7 195.1 86%
– Post IPO funds raised HK$bn 708.1 498.8 71%
Average daily equity turnover HK$bn 51.2 36.2 71%

Source: Hong Kong Exchanges and Clearing Limited

Strong Market Liquidity

(HK$ m)


Source: Hong Kong Exchanges and Clearing Limited

Selected International Listings


Source: Hong Kong Exchanges and Clearing Limited

Hong Kong’s Markets

  • Main Board – caters for established companies able to meet its profit or other financial requirements.
  • Growth Enterprise Markets (“GEM”) – a second board for smaller growth companies. Has lower admission criteria and provides a stepping stone to Main Board listing.

Backdoor listing vs. IPO

  • A backdoor listing is generally considered as a “reverse takeover” (RTO) which is broadly defined to include an acquisition (or series of acquisitions) of assets by a listed issuer which, in the opinion of the Exchange, attempts to achieve a listing of the acquired assets while circumventing the Listing Rules’ requirements for a new listing applicant.
  • Historically, RTOs have been used as an alternative means of achieving a stock exchange listing.
  • The fact that no significant regulatory review was required (and there was no prospectus requirement) meant that the timeframe for completion of an RTO was considerably shorter than that for an Hong Kong IPO
  • Costs can also be saved due to the lack of an underwriter. It will be much easier for the company acquiring the listed company to raise capital, as investors will have a clearly defined exit strategy through the public market.
  • Some of the drawbacks to RTOs are that their speed and eventual value are sometimes overestimated, and they are sometimes completed without enough regard for the uninvolved shareholders.

Background to Hong Kong’s position on RTOs

  • The listing rules of the Stock Exchange of Hong Kong Ltd. (Exchange) provide for stringent regulation of RTOs.
  • Major amendments to the Exchange’s listing rules (Listing Rules) took effect on 31 March, 2004 which introduced specific reverse takeover rules (RTO Rules) to the Main Board Rules for the first time (previously RTO Rules were contained in the Listing Rules for the Exchange’s Growth Enterprise Market (GEM)) and aligned the existing GEM RTO Rules with the new Main Board RTO provisions.
  • The 2004 RTO Rules were aimed at putting a stop to “back door listings” to which the Exchange had long objected: its argument being that they were being used to circumvent the Listing Rules.
  • Essentially, it was possible to inject assets into a listed company in return for a change of control while avoiding the onerous listing criteria of Chapter 8 required to be met by a listing applicant seeking to list on the Exchange’s Main Board.

The RTO rules

  • The 2004 RTO Rules, in essence, require :
    • an acquisition (or series of acquisitions) of assets which constitute both an attempt to achieve a listing of the relevant assets and a means of circumventing the Listing Rules’ requirements for new listing applicants, to be treated as a new listing;
    • the assets to be acquired or the enlarged group to be able to meet the minimum criteria for listing;
    • the preparation of a listing document containing both the information required in a new applicant’s listing document and the information required for a very substantial acquisition under Main Board Rule 14.69 (GEM Rule 19.69); and
    • compliance with the announcement and shareholders’ approval requirements applicable to a “very substantial acquisition” (VSA).

RTO as Work-Out Tool

  • Backdoor listings provided a well-trodden route for bank creditor driven restructurings of distressed HKEx-listed companies. The point has been made that the March 2004 Rule changes (whose primary aim was the improvement of HKEx listed companies’ corporate governance standards) stemmed from the Exchange’s view at the time, that the corporate governance standards of certain Hong Kong listed companies were below par and that these companies adversely affected the overall quality of the market.
  • However, that overriding concern failed to acknowledge any distinction between a rescue and non-rescue situation. For creditors of a distressed HKEx-listed company, the listing status was often the “asset” that was most capable of being realised.
  • Previously, it had been possible for bank creditors to achieve a disposal of a “HKEx listed shell” through the entry of a White Knight and so achieve some level of recoveries from their bad debt positions. This was often supplemented by a well-timed exit from an equity position held by the banks following the restructuring.
  • This route was often preferable to the alternative of a liquidation from which the returns likely to be generated from the company’s underlying assets were less certain.

The Listing Rule definition

  • The definition of Reverse Takeovers introduced in Main Board Rule 14.06(6) and GEM Rule 19.06(6) (which remains the current definition) is:
    • An acquisition or a series of acquisitions by a listed issuer which, in the opinion of the Exchange, constitutes, or is part of a transaction or arrangement or series of transactions or arrangements which constitute:
      • an attempt to achieve a listing of the assets to be acquired; and
      • a means to circumvent the requirements for new applicants set out in Chapter 8 of the Listing Rules. (our emphasis added)
  • According to those paragraphs, a “reverse takeover” normally refers to:
    • an acquisition or a series of acquisitions of assets (aggregated under Rules 14.22 and 14.23) by a listed issuer which constitute a VSA where there is, or which will result in, a change of control (as defined in the Takeovers Code (i.e. 30%)) of the listed issuer (other than at the level of its subsidiaries); or
    • an acquisition or a series of acquisitions of assets (aggregated under Rules 14.22 and 14.23) by a listed issuer which constitute a VSA from a person or group (or their associates) under any agreement or arrangement entered into by the listed issuer within 24 months of that person or group gaining control of the listed issuer (where the original transaction did not constitute an RTO). In determining whether one or more transactions constitute a VSA, the denominator in the percentage ratio calculation is measured at the time of the change of control or the acquisition(s), whichever produces the lower figure.
  • The 2004 Listing rule amendments extended the period during which a series of transactions must be aggregated from twelve to twenty-four months.
  • As a result, acquisitions in the twenty-four months after a change in control, which individually or together cross the threshold of a VSA, will constitute an RTO and be treated as a new listing.
  • The difficulty that this rule poses in the context of a restructuring is that the net worth of companies following a restructuring is generally not that large. Hence almost any acquisition of a reasonable size is likely to trigger the RTO rules retrospectively.
  • The first hurdle faced by a listed issuer following a restructuring is the requirement in Main Board Rule 13.24/GEM Rule 19.24 for listed companies to carry out sufficient operations or have assets of a sufficient value to justify their continued listing which effectively renders cash companies unsuitable for continued listing. Since no further additions to the business can be made for twenty-four months (unless the assets acquired or the enlarged group are able to satisfy the listing criteria for new listings), it will be necessary to ensure that the business is sustainable for the twenty-four month period.
  • The definition of RTO in the Listing Rules gives the Exchange a very wide discretion to determine that a transaction is designed to circumvent the listing requirements and should be treated as an RTO.
  • In the Listing Committee Annual Report 2007, the Listing Committee confirmed that while paragraphs (a) and (b) of Rule 14.06(6) refer to two specific forms of reverse takeovers, these are not meant to be exhaustive.
  • Transactions which are in substance backdoor listings, but do not fall strictly within paragraphs (a) and (b) of the Rule, may still be considered reverse takeovers subject to the Listing Rules.

Listing Rules requirements for an RTO

  • Treatment as new listing on the HKEx
    • Where a listed issuer proposing a reverse takeover is treated as a new listing applicant, the enlarged group or the assets to be acquired must be able to meet the financial tests in Main Board Rule 8.05 or GEM Rule 11.12A and the enlarged group must be able to meet all other listing criteria of Main Board Chapter 8 or GEM Chapter 11 of the Listing Rules (Main Board Rule 14.54/GEM Rule 19.54).
    • The listed issuer must comply with the procedures and requirements for new listing applicants set out in Chapter 9 of the Main Board Rules (Chapter 12 of the GEM Rules) and must issue a listing document and pay the initial listing fee. A reverse takeover listing document is required to include virtually all the information required by Part A of Appendix 1 to the Listing Rules in addition to the information required for a very substantial acquisition under Main Board Rules 14.63 and 14.69 (GEM 19.63 to 19.69).
  • Announcement requirement
    • The applicant must, following a short suspension in dealings of its securities, make an announcement to all shareholders regarding the RTO in accordance with Main Board Rule 2.07C/ GEM Rule 16.17.
    • The announcement must contain all pertinent information about the transaction, including the matters listed in Main Board Rules 14.58 and 14.60 (GEM Rules 19.58 and 19.60).
    • However, these are just the basic requirements, and any other pertinent information must be included as well.
    • The Exchange decides on a case-by-case basis what constitutes sufficient information.
  • Requirement for shareholders’ approval
    • An RTO must be made conditional on being approved by shareholders in general meeting and the listing document must be sent to shareholders at the same time as, or before, the listed issuer gives notice of the general meeting to approve the transaction.
    • The announcement of the reverse takeover must state the expected date of despatch of the listing document and, if this is more than 15 business days after the publication of the announcement, reasons for this must be given.
    • The listing document must include an Accountants’ Report for the 3 preceding financial years on the business, company or companies to be acquired (Main Board Rule 14.69(4) and GEM Rule 19.69(4)).
    • At a general meeting to approve an RTO, any shareholder and his associates are barred from voting if the shareholder has a “material interest” in the transaction.
    • In relation to an RTO, the Listing Rules further require that where there is a change in control of the listed issuer and the existing controlling shareholder(s) will dispose of shares to any person, the existing controlling shareholder(s) cannot vote in favour of the acquisition of assets from the incoming controlling shareholder or his associates at the time of the change in control.
    • This prohibition does not however 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.

Other regulatory issues

  • It is also important to bear in mind Rule 25 of the Hong Kong Takeovers Code on Special Deals with Favourable Conditions which prohibits an offeror and its associates from entering into a deal to buy a company’s shares which involves favourable conditions being offered to one or more shareholders which are not available to all the other shareholders.
  • In addition, if there is a whitewash application for a waiver from the obligation to make a general offer to all shareholders by the incoming shareholder, all connected shareholders are likely to be barred from voting on it, as one of the conditions for the grant of a waiver of the mandatory offer obligation is that the transaction is approved at a shareholders’ meeting by an “independent vote” – i.e. by shareholders “who are not involved in or interested in, the transaction”. (Note 1 to Rule 26)

Meeting the criteria for a new listing applicant

  • The enlarged group or the assets to be acquired will need to meet the requirements for listing which in the case of a Main Board listing will require the applicant to satisfy the requirements of Main Board Rule 8.05 as to operating history and management and satisfy one of the three financial tests (profit test, market capitalization/revenue test or market capitalization/revenue/cash flow test).
  • An applicant for listing on GEM will need to meet the positive cash flow requirement and requirements as to operating history and management of GEM Rule 11.12A.
  • The enlarged group must also meet all other basic listing conditions in Chapter 8 (Chapter 11 of GEM).

Asset injections satisfying the listing requirements

  • One of the remaining paths for rescuing a distressed listed company remains the injection of assets which meet the Listing Rules’ requirements for listing. This is acceptable to the Exchange as the issuer is subject to the full requirements of the Listing Rules.
  • Transactions in the twenty-four months after the restructuring may be subject to the Notifiable Transactions requirements, but will not need to be aggregated with the original RTO transaction as the RTO (and new listing) has already occurred.
  • The downside for bank creditors leading a restructuring is that the pool of investors with assets meeting the listing requirements, and who are willing to invest in this type of restructuring, is likely to be small. As the investor is bringing his own assets, the likelihood is that he’ll be in a strong position to negotiate down the price for the listed company.
  • Creditor banks who take an equity position in the restructuring should benefit in the long term given the injection of new assets. In the short-term, however, commentators have remarked that the immediate cash payout is likely to be substantially less than on a cash subscription type restructuring.

Backdoor listing in Hong Kong

Hong Kong reverse takeover (RTO)

Very substantial acquisitions (VSA)

Hong Kong Takeovers Code on Special Deals with Favourable Conditions

Hong Kong IPO

New listings on HKEx

Hong Kong Listing Rules

HKEx listed companies’ corporate governance standard

Distressed HKEx-listed companies

HKEx listed shell

White knight