III. QUALIFICATIONS FOR GEM LISTING
Chapter 11 of the GEM Listing Rules sets out the basic requirements that must be met before any initial listing of equity securities on the GEM. Chapter 25 contains additional requirements, modifications and exceptions to those requirements which apply to PRC incorporated companies.
The PRC issuer must be duly incorporated in the PRC as a joint stock limited company.
(b) Suitability for Listing
Both the issuer and its business must, in the opinion of the Exchange, be suitable for listing (Rule 11.06). The Exchange may, in its discretion, refuse a listing of a PRC issuer’s securities if it believes that it is not in the interest of the Hong Kong public to list them (Rule 25.07(1)). Factors considered by the Exchange in determining suitability are set out in the Exchange’s Guidance Letters HKEx-GL 68-13 and 68-13A.
(c) Cash Flow Requirement
A GEM listing applicant must have a positive cashflow from operating activities in the ordinary and usual course of business of at least HK$20 million in total for the 2 financial years immediately preceding the issue of the listing document.
(d) Statement of Business Objectives (Rule 14.19)
A new applicant must include in its listing document a statement of business objectives setting out the following information:
- general information as to (a) the overall business objectives of the new applicant; and (b) the market potential for the new applicant’s business pursuits over the period comprising the remainder of the current financial year of the applicant and the 2 financial years thereafter;
- a detailed description of the new applicant’s objectives for each of the products, services or activities (and any other objectives) analysed over the period comprising the remainder of the current financial year of the applicant and the 2 financial years thereafter;
- a detailed explanation as to how the applicant proposes to achieve the stated business objectives.
GEM issuers are required to report on the achievement of the business objectives stated in their listing documents in the annual and half year reports published in the first 2 full financial years after listing.
(e) Operating History and Management
A GEM listing applicant must have:
- management continuity for at least two completed financial years; and
- ownership continuity and control for at least 1 completed financial year,
immediately before the issue of the listing document. In both cases, continuity must continue until the date of listing.
The Exchange may accept a trading record period of less than 2 financial years and waive or vary the ownership and management requirements for:
- newly formed project companies; (for example a coy formed for the purpose of major infrastructure project)
- mineral companies where the directors and senior management have > 5 years’ relevant experience; and
- in exceptional circumstances under which the Exchange considers it desirable to accept a shorter period.
Where the Exchange accepts a shorter period, the applicant must nevertheless meet the cash flow requirement of HK$20 million for that shorter trading record period.
(f) Market Capitalisation
The required expected market capitalisation of a new listing application at the time of listing is HK$100 million.
(g) Public Float
There must be an open market in the securities for which listing is sought. The minimum public float requirement is in line with the Main Board requirement, that is 25% or, in the Exchange’s discretion, between 15% and 25% for companies with a market capitalisation of more than HK$10 billion. Shares held by the public must however have a market capitalisation of at least HK$30 million at the time of listing (Rule 11.23(2)(a)). If the issuer has more than one class of shares, the total shares in public hands (on all regulated market(s) including the Exchange) at the time of listing must be at least 25% of the issuer’s total issued share capital and the shares for which listing is sought must be at least 15% of the total issued share capital with an expected market capitalisation of HK$30 million at the time of listing.
(h) Minimum Number of shareholders
The equity securities in the hands of the public should, as at the time of listing, be held among at least 100 persons (including those whose equity securities are held through CCASS) (Rule 11.23(2)(b)).
In addition, not more than 50% of the securities in public hands at the time of listing can be beneficially owned by the three largest public shareholders.
(i) Accountants’ Report
A new applicant must have an accountants’ report covering at least the 2 financial years immediately preceding the issue of the listing document. The Exchange also encourages an issuer with a longer operating history of more than two years to voluntarily disclose three years’ financial results in the accountants’ report. The latest financial period reported on by the reporting accountants must not have ended more than 6 months before the date of the listing document (Rule 11.11).
(j) Directors and Supervisors
The board of directors of an issuer is collectively responsible for the management and operations of the issuer (Rule 5.01). Every director and supervisor must satisfy the Exchange that he has the character, experience and integrity and is able to demonstrate a standard of competence commensurate with his position as a director or supervisor of the issuer (Rules 5.02 and 25.13(2)).
(k) Independent Non-executive Directors
Independent non-executive directors (“INEDs”) must make up at least one third of the issuer’s board of directors and there must be at least 3 INEDs. At least one INED must have appropriate professional qualifications or accounting or related financial management expertise (Rule 5.05). Each INED must confirm his independence in accordance with guidelines under Rule 5.09 to the Exchange at the time of submission of his declaration, undertaking and acknowledgement.
INEDs of PRC issuers are further required to demonstrate an acceptable standard of competence and adequate commercial or professional experience to ensure that the interests of the general body of shareholders will be adequately represented (Rule 25.13).
(l) Audit Committee and Remuneration Committee
Every issuer must establish an audit committee comprising non-executive directors only and a minimum of 3 members, at least one of whom is an INED with appropriate professional qualifications or accounting or related financial management expertise (Rule 5.28). The majority of the committee members must be INEDs of the issuer. The audit committee must be chaired by an INED. The duties of the audit committee must include at least the following matters:
- reviewing, in draft form, the issuer’s annual report and accounts, half-year report and quarterly reports and providing advice and comments thereon to the issuer’s board of directors; and
- reviewing and supervising the issuer’s financial reporting and internal control procedures.
Listed issuers must also establish a remuneration committee with specific written terms of reference which deal clearly with its authority and duties. A majority of the members of the remuneration committee should be independent non-executive directors and the committee must be chaired by an INED. The terms of reference of the remuneration committee should include, as a minimum, the duties as specified in paragraph B.1.3 of Appendix 15.
If an issuer fails to comply with the requirements in relation to audit and remuneration committees, it must inform the Exchange, publish an announcement giving reasons for such failure and must ensure that it complies with the requirements within three months.
A new applicant seeking a listing of equity securities on GEM must appoint one or more sponsors to assist with its listing application. At least one sponsor must be independent of the listing applicant. The listing application cannot be submitted less than 2 months after the appointment of the last sponsor to be appointed.
(n) Compliance Adviser
A PRC issuer is required to retain a compliance adviser for the period commencing on the date of listing and ending on the publication of its financial results for the second full financial year after listing (Rule 6A.19). A compliance adviser must be either a corporation licensed or authorised institution registered to advise on corporate finance matters under the Securities and Futures Ordinance. It must also be permitted to undertake sponsor work.
GEM issuers are required to consult with, and if necessary, seek advice from their compliance advisers in the same situations as MB issuers.
(o) Compliance Officer
A GEM issuer must appoint one of its executive directors as its compliance officer. The compliance officer’s responsibilities must include, as a minimum:-
- advising on and assisting the board of directors of the issuer in implementing procedures to ensure that the issuer complies with the GEM Listing Rules and other relevant laws and regulations applicable to the issuer; and
- responding promptly and efficiently to all enquiries directed at him by the Exchange.
(p) Mandatory Provisions for Articles of Association
The mandatory provisions which must be incorporated in a PRC issuer’s Articles of Association are set out at Appendix 3 and at Section 1 of Part C of Appendix 11 to the Listing Rules. The additional requirements for PRC issuers include:
- provisions which reflect the different nature of domestic shares and overseas listed foreign shares (including H shares) and the different rights of their respective holders (Rule 25.01(3)); and
- the appointment of a receiving agent in Hong Kong to receive from the issuer, and hold, pending payment, in trust for H shareholders, dividends declared and other moneys owing in respect of the H shares (Rule 25.38).
(q) Competing Businesses
A new applicant will not be rendered unsuitable for listing on the grounds that any director or shareholder has an interest in a business which competes or may compete with the new applicant’s business (Rule 11.03).
Full and accurate information of any business or interest of each director, controlling shareholder and, in relation only to the initial listing document, substantial shareholder and the respective associates of each that competes or may compete with the business of the group and any other conflicts of interest which any such person has or may have with the group must be disclosed in (i) each listing document and circular required under the GEM Listing Rules and (ii) in the annual report and accounts, half-year report and quarterly reports of the listed issuer (Rule 11.04).
A “controlling shareholder” of a PRC listing applicant is any shareholder or persons together entitled to exercise or control the exercise of 30% (or such other amount as may from time to time be specified in applicable PRC law as the level for triggering a mandatory general offer or for otherwise establishing legal or management control over a business enterprise) or more of the voting power at general meetings of the new applicant or who is in a position to control the composition of the majority of the applicant’s board of directors (Rule 25.10). According to Article 217 of the new Chinese Company Law, “controlling shareholder” means a shareholder whose shareholding accounts for 50% or more of the total share capital of the new applicant, or a shareholder whose shareholding is less than 50% but whose voting rights pursuant to such shareholding are sufficient to have a major impact on the resolutions of the shareholders’ meeting or shareholders’ assembly. For the purposes of the Listing Rule 11.04, the Exchange will not normally regard a PRC Governmental Body (as defined at Rule 25.04) as a controlling shareholder of a PRC issuer.
Disputes involving holders of H shares and arising from a PRC issuer’s articles of association, or from any rights or obligations conferred or imposed by the PRC Company Law and any other relevant laws and regulations concerning the affairs of the PRC issuer, are to be settled by arbitration in either Hong Kong or the PRC at the election of the claimant.
(s) Service Agent
The PRC issuer must appoint, and maintain throughout the period its securities are listed on the GEM the appointment of, a person authorised to accept service of process and notices on its behalf in Hong Kong.
(t) Receiving Agent
A PRC issuer must appoint one or more receiving agents in Hong Kong and pay to such agents dividends declared and other monies owing in respect of its H shares in trust for the holders of such shares.
(u) Register of Shareholders
Provision must be made for a register of holders to be maintained in Hong Kong, or such other place as the Exchange may agree, and for transfers to be registered locally (Rule 25.07).
(v) Authorised Representatives
Every issuer must ensure that, at all times, it has 2 authorised representatives (Rule 5.24). The authorised representatives must be 2 individuals from amongst the issuer’s executive directors and company secretary (unless the Exchange, in exceptional circumstances, agrees otherwise). The responsibilities of an authorised representative are as follows (Rule 5.25):
- supplying the Exchange with details in writing of how he can be contacted including home, office and mobile phone telephone numbers and, where available, facsimile numbers and electronic mail addresses;
- for so long as the issuer continues to have a Sponsor or Compliance Adviser, assisting the Sponsor or Compliance Adviser in their roles under the Listing Rules and, in particular the Sponsor’s role as the principal channel of communication with the Exchange concerning the affairs of the issuer.
(w) Company Secretary
The secretary of the issuer must be a person who has the requisite knowledge and experience to discharge the functions of the secretary of the issuer and who possesses the qualifications prescribed under the GEM Listing Rules (Rule 5.14).
APPLICATION PROCEDURES FOR GEM LISTING
GEM Listing Division
The power to approve new listings has been delegated from the Listing Committee to the Listing Division. GEM applicants have a right of appeal to the Listing Committee against the Listing Division’s initial decision on an IPO.
Application for listing on the GEM is to be made to the Listing Division. All documents have to be submitted to the Listing Division which reviews all applications.
The process is similar to that for the Main Board and requires submission with the listing application of an advanced draft of the listing document, the Application Proof. The information contained in the Application Proof must be substantially complete except for matters which can only be finalised at a later date.
IV. RESTRICTIONS FOLLOWING LISTING
Restriction on Controlling Shareholders’ Disposal of Shares
The Listing Rules impose restrictions on the disposal of shares by controlling shareholders following a company’s new listing. Essentially, any person who is a controlling shareholder at the time of listing must not:
- dispose of, nor enter into any agreement to dispose of, or create any options, rights, interests or encumbrances in respect of his shares in the listed issuer in the 6 months after the commencement of dealing in the issuer’s securities on the Exchange; or
- in the 6 months following the expiry of the period in (i) above, dispose of, nor enter into any agreement to dispose of, or create any options, rights, interests or encumbrances in respect of his shares in the listed issuer that would result in such person ceasing to be a controlling shareholder of the company.
Restriction on New Issues of Shares
A listed issuer cannot issue (or agree to issue) any shares or securities convertible into shares of the issuer in the 6 months following listing except for:
- the issue of shares under a share option scheme under Chapter 17 of the Main Board Rules or Chapter 23 of the GEM Rules;
- the exercise of conversion rights attaching to warrants issued as part of the IPO;
- any capitalisation issue, capital reduction or consolidation or sub-division of shares;
- the issue of shares or securities pursuant to an agreement entered into before the listing and disclosed in the issuer’s listing document;
- the issue of shares or securities to be traded on the Main Board by a listed issuer that has successfully transferred its listing from GEM to the Main Board;
- for GEM issuers, the issue:
- for the purpose of an acquisition of assets which would complement the listed issuer’s business and the acquisition does not constitute a major (or above) transaction; and
- does not result in a controlling shareholder ceasing to be a controlling shareholder after the issue.