V. CONTINUING OBLIGATIONS OF LISTED COMPANIES
Companies listed on the Exchange have a number of obligations under the Listing Rules and the Securities and Futures Ordinance (the “SFO”). The Listing Rule obligations for Main Board and GEM issuers are virtually the same, the principal difference being in relation to the publication of quarterly financial reports and the deadlines for publication of financial statements.
1. Disclosure of Inside Information
Listed companies have a statutory obligation to disclose price sensitive (or inside) information under Part XIVA of the SFO. Breach of this obligation is a civil offence for which listed companies and their directors may be liable to a fine of up to HK$8 million.
The information which listed companies are required to announce under the statutory disclosure obligation is the same information which, if possessed by a listed company’s directors and other insiders, prohibits them from dealing in the company’s securities under the insider dealing offences in Parts XIII and XIV SFO.
- 1.1 What is Inside Information?
“Inside information” is defined as:
“specific information that:
- is about:
- the corporation;
- a shareholder or officer of the corporation; or
- the listed securities of the corporation or their derivatives; and
- is not generally known to the persons who are accustomed or would be likely to deal in the listed securities of the corporation but would if generally known to them be likely to materially affect the price of the listed securities.
Key elements of the definition
The three key elements of the definition are that:
- the information must be specific;
- the information must not be generally known to that segment of the market which deals or which would likely deal in the corporation’s securities; and
- the information would, if generally known be likely to have a material effect on the price of the corporation’s securities.
The SFC has published Guidelines on Disclosure of Inside Information (the “SFC Guidelines”) which provide guidance as to how these terms have been interpreted by the Market Misconduct Tribunal in the past.
The board of directors must give careful consideration to significant or unexpected events to determine whether it constitutes “inside information” which must be announced.
In assessing whether inside information is likely to materially affect the price of the issuer’s securities, the test to be applied is: whether the inside information would influence persons who are accustomed to or would be likely to deal in the issuer’s shares, in deciding whether or not to buy or sell such shares.
The SFC Guidelines set out examples of inside information including:
- Changes in performance, or the expectation of the performance, of the business or its financial condition;
- Changes in financial condition, e.g. cashflow crisis, credit crunch;
- Changes in directors and (if applicable) supervisors and their service contracts;
- Changes in auditors or any other information related to the auditors’ activity;
- Changes in the share capital, e.g. new share placing, bonus issue, right issue, share split, share consolidation and capital reduction;
- Takeovers and mergers;
- Purchase or disposal of equity interests or other major assets or business operations;
- Legal disputes and proceedings;
- Changes in expected earnings or losses;
- Insolvency of relevant debtors;
- Reduction of real properties’ values; and
- Orders received from customers, their cancellation or important changes.
- is about:
- 1.2 Timing of disclosure
A company must announce inside information as soon as reasonably practicable after any inside information has come to its knowledge. Inside information has come to the company’s knowledge if the inside information has, or ought reasonably to have, come to the knowledge of an officer (that is a director, manager or secretary) of the corporation in the course of performing functions as an officer of the company.
Listed companies must therefore have effective systems and procedures in place to ensure that any material information which comes to the knowledge of any of their officers is promptly identified and escalated to the board to determine whether it needs to be disclosed.
The company must ensure that the information is kept strictly confidential until it is publicly disclosed. If the company believes that confidentiality cannot be maintained or that there may have been a breach of confidentiality, it should immediately disclose the information to the public. A company can also issue a “holding announcement” to give it time to clarify the details and likely impact of an event before issuing a full announcement.
Inside information must be disclosed to the public by means of an announcement published on the websites of the Exchange and the listed company.
- 1.3 The Safe Harbours
There are four situations where listed companies are not required to disclose inside information. These are where:
- disclosure would breach an order by a Hong Kong court or any provisions of other Hong Kong statutes;
- the information relates to an incomplete proposal or negotiation (e.g. a contract is being negotiated but has not been finalised);
- if the information is a trade secret; or
- if the information concerns the provision of liquidity support from the Government’s Exchange Fund or a Central Bank (or institution performing such functions, inside or outside HK).
Companies can only rely on the safe harbours in paragraphs 2, 3 and 4 above if they have taken reasonable precautions to preserve the confidentiality of the inside information and the inside information has not been leaked.
If confidentiality is lost or the information is leaked, the company must announce the inside information as soon as practicable.
- 1.4 Liability of Officers
A listed company’s officers are required to take all reasonable measures to ensure that proper safeguards exist to prevent the company’s breach of the disclosure requirement. If a listed company breaches the disclosure obligation, an officer of the company will also have breached the obligation if either:
- the breach resulted from the officer’s intentional, reckless or negligent conduct; or
- the officer has not taken all reasonable measures to ensure that proper safeguards exist to prevent the breach).
In relation to officers’ obligation to take all reasonable measures to ensure the existence of proper safeguards, the SFC Guidelines focus on the responsibility of officers, including non-executive directors, to ensure that appropriate systems and procedures are put in place and reviewed periodically to enable the company to comply with the disclosure requirement. Officers with an executive role will also have a duty to oversee the proper implementation and functioning of the procedures and to ensure the detection and remedy of material deficiencies in a timely manner.
Possible penalties which can be imposed include:
- a fine of up to HK$8 million on the company, a director or chief executive (but not officers) of the company; and
- disqualification of the director or officer from being a director or otherwise involved in the management of a corporation for up to five years.
2. Obligation to Respond to Exchange Enquiry
Under Main Board Rule 13.10 (GEM Rule 17.11) the Exchange may make an enquiry concerning unusual movements in the price or trading volume of an issuer’s listed securities, the possible development of a false market in its securities, or any other matters. An issuer is required to respond promptly to the Exchange’s enquiries in one of the following two ways:
- provide to the Exchange and, if requested by the Exchange, announce any information relevant to the subject matter(s) of the enquiries available to it, so as to inform the market or to clarify the situation; or
- if appropriate, and if requested by the Exchange, issue a standard announcement confirming that, the directors, having made such enquiry with respect to the issuer as may be reasonable in the circumstances, are not aware of any information that is or may be relevant to the subject matter(s) of the enquiries, or of any inside information which needs to be disclosed under the SFO.
The latter response should be made in a standard form that is set out in Note 1 to Main Board Rule 13.10.
The Listing Rules require listed companies to publish announcements in a wide range of situations. Announcements must be published on the websites of the Exchange and the listed company. Matters which must be announced include (among others):
Inside information must be announced and kept strictly confidential until a formal announcement is made.
Notifiable transactions – any notifiable transaction within Chapter 14 of the Main Board Rules (chapter 19 of the GEM Rules).
Connected transactions – any connected transaction (unless an exemption is available) within Chapter 14A of the Main Board Rules (Chapter 20 of the GEM Rules).
Board meeting for approval of results – an issuer must publish an announcement at least 7 clear business days before the date fixed for any board meeting at which the profits or losses for any period are to be approved for publication (Main Board Rule 13.43/GEM Rule 17.48).
Annual, half-year and quarterly results – must be published by way of announcement.
Change in auditor or financial year end – any change in a listed issuer’s auditors or financial year end, the reason(s) for the change and any other matters that need to be brought to the attention of holders of the company’s securities must be announced.
Memorandum and Articles of Association – any proposed alteration of the memorandum or articles of association of the listed issuer
Change in directors and supervisors – any change of directors, supervisors or the chief executive, including, in the case of the resignation or removal of a director, a supervisor or the chief executive, the reasons given by or to him for his resignation or removal.
Notice of general meetings – notice of an issuer’s annual general meeting and other general meetings must be announced.
Issues of securities – an issue of securities (including convertible securities or warrants, options or similar rights) will almost always require an announcement.
Public float – the company must inform the Exchange immediately if it becomes aware that the number of listed securities required to be held by the public has fallen below the prescribed minimum percentage (i.e. 25% unless a lower percentage of between 15% and 25% was approved by the Exchange on listing for a company having an expected market capitalisation at the time of listing of more than HK$10 billion).
Share Repurchases – any purchase, sale, drawing or redemption by the company or its group members of its listed securities (whether on the Exchange or not).
4. Disclosure of Financial Information
- 4.1 Qualifications of auditors
The annual accounts must be audited by practising accountants of good standing. Such auditors must be independent of the PRC issuer as required under the Companies Ordinance and in accordance with the statements on independence issued by the International Federation of Accountants. If the PRC issuer’s primary listing is or is to be on the Exchange, the auditors must be
- qualified under the Professional Accountants Ordinance; or
- a firm of practising acceptable to the Exchange which has an international name and reputation and is a member of a recognised body of accountants; or
- a firm of practising accountants acceptable to the Exchange which is a joint venture approved by the China Securities Regulatory Commission (“CSRC”) to act as an auditor of a listed company in the PRC and at least one of the principal joint venture partners is qualified under 1) or acceptable under 2); or
- a firm of practising accountants approved by the China Ministry of Finance and CSRC as being suitable to act as an auditor or a reporting accountant for a PRC company listed in Hong Kong (Main Board Rule 19A.31).
- 4.2 Audit standards
The accounts of a PRC issuer must be audited to a standard comparable to that required in Hong Kong or under International Standards on Auditing or China Auditing Standards. Also, the auditors’ report must be annexed to all copies of the annual accounts required to be sent by the PRC issuer and indicate whether the accounts give a true and fair view. If the PRC issuer is not required to draw up its accounts so as to give a true and fair view, the PRC issuer can draw them up to an equivalent standard only if allowed by the Exchange. Reference must be made to the Exchange.
- 4.3 Annual Reports and Accounts
Listed companies must send a copy of their annual report and accounts and, if it prepares group accounts, its group accounts, together with a copy of the auditors’ report to every shareholder and every holder of its listed securities not less than 21 days before the date of its annual general meeting (“AGM”) and no later than 4 months after the end of the financial year (in the case of Main Board listed companies) or 3 months after the financial year end (in the case of GEM listed companies).The annual accounts, directors’ report and auditors’ report must be laid before the AGM and must be prepared in both English and Chinese.
In the case of overseas shareholders, it is sufficient for the listed issuer to mail the English language version of the relevant documents provided that such documents contain a prominent statement in English and Chinese that a Chinese language version is available from the company on request.
- 4.4 Half-year Reports and Accounts
Main Board listed companies must send half-year reports to the company’s shareholders and holders of their listed securities within 3 months of the end of the first 6 months of each financial year.Companies listed on GEM are required to publish half-year reports within 45 days of the end of the first 6 months of each financial year and must send the report to shareholders and holders of their listed securities as soon as practicable after publication.
The financial statements included in the half-year report will generally be unaudited. If this is the case, this fact must be stated. If the financial statements are audited, the auditors’ report and any qualifications must be included in the half-year report.
Half-year reports must be reviewed by the listed issuer’s audit committee.
- 4.5 Quarterly Reporting
For Main Board listed companies, quarterly reporting is a Recommended Best Practice only under the Corporate Governance Code, not a mandatory obligation under the Main Board Rules. If a Main Board listed issuer decides to publish quarterly financial results, it should do so within 45 days of the end of each quarter. Once a Main Board listed company decides to publish quarterly results, an announcement is required disclosing the reasons for any decision not to publish results for any particular quarter.Companies listed on GEM are required to publish quarterly reports within 45 days of the end of the relevant quarter.
- 4.6 Preliminary Announcements of Results
A company listed on the Main Board must publish a preliminary announcement of its annual and half-year results on the websites of the Exchange and the listed company as soon as possible and, in any event, not later than 30 minutes before the earlier of the commencement of the morning trading session or any pre-opening session on the business day after their approval by the board.Preliminary year-end results must be published no later than 3 months after the financial year end and preliminary half-year results must be published no later than 2 months after the half-year end.
A company listed on GEM must publish a preliminary announcement of its annual, half-year and quarterly results as soon as possible and, in any event, not later than 30 minutes before the earlier of the commencement of the morning trading session or any pre-opening session on the business day after their approval by the board.
GEM listed companies must publish preliminary year-end results no later than 3 months after the financial year end and must publish preliminary half-year and quarterly results no later than 45 days after the end of the relevant period.
The Exchange may suspend dealings in a listed company’s shares or cancel the listing if a listed company fails to publish its financial information on time.
5. Notifiable Transactions
Chapter 14 of the Main Board Listing Rules (Chapter 19 of the GEM Rules) sets out detailed requirements in respect of certain transactions, principally acquisitions and disposals, entered into by a listed issuer and its subsidiaries.
The requirements include obligations to notify the Exchange of the transaction, disclose the transaction to the public by publication of an announcement and to obtain prior shareholders’ approval depending on the size of the transaction.
- 5.1 Definition of Transaction
A “transaction” includes (among others):
- an acquisition or disposal of assets;
- the grant, acceptance, transfer, exercise or termination of an option to acquire or dispose of assets or to subscribe for securities;
- entering into or terminating finance leases where the financial effects of such leases 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 listed issuer;
- granting an indemnity or a guarantee or providing financial assistance, except to the listed issuer’s own subsidiaries; and
- entering into a joint venture entity in any form.
To the extent not expressly provided in (a) to (f) above, the definition of “transaction” excludes any transaction of a revenue nature in the ordinary and usual course of business of the listed issuer.
- 5.2 Classification of Notifiable Transactions
The requirements for a notifiable transaction depend upon which of the 6 categories of notifiable transaction it falls into. Classification is made on the basis of the percentage ratios as set out in the table below.
Transaction Type Assets ratio Consideration ratio Profits ratio Revenue ratio Equity capital ratio Share transaction less than 5% less than 5% less than 5% less than 5% less than 5% Discloseable transaction 5% or more but less than 25% 5% or more but less than 25% 5% or more but less than 25% 5% or more but less than 25% 5% or more but less than 25% Major transaction – disposal 25% or more, but less than 75% 25% or more, but less than 75% 25% or more, but less than 75% 25% or more, but less than 75% Not Applicable Major transaction – acquisition 25% or more, but less than 100% 25% or more, but less than 100% 25% or more, but less than 100% 25% or more, but less than 100% 25% or more, but less than 100% Very Substantial Disposal 75% or more 75% or more 75% or more 75% or more Not applicable Very Substantial Acquisition 100% or more 100% or more 100% or more 100% or more 100% or more
The categories of notifiable transactions are:
- A share transaction is an acquisition of assets (excluding cash) by a listed issuer or one of its subsidiaries where the consideration includes securities for which listing will be sought and where all percentage ratios are less than 5%;
- A discloseable transaction is a transaction or a series of transactions by a listed issuer or one of its subsidiaries where any percentage ratio is 5% or more, but less than 25%;
- A major transaction is a transaction or a series of transactions by a listed issuer or one of its subsidiaries where any percentage ratio is 25% or more, but less than 100% for an acquisition or 75% for a disposal;
- A very substantial disposal is a disposal or a series of disposals of assets by a listed issuer or one of its subsidiaries where any percentage ratio is 75% or more;
- A very substantial acquisition is an acquisition or a series of acquisitions of assets by a listed issuer or one of its subsidiaries where any percentage ratio is 100% or more; and
- A reverse takeover is an acquisition or a series of acquisitions of assets 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 .
A “reverse takeover” includes:
- an acquisition/series of acquisitions of assets constituting a very substantial acquisition where there is or which will result in a change in control (i.e. 30% or more of the voting rights) of the listed issuer; or
- an acquisition/series of acquisitions of assets from the incoming controlling shareholder(s) or his/their associates within 24 months after the change in control of the listed issuer that had not been regarded as a reverse takeover, which individually or together reach the threshold for a very substantial acquisition.
- 5.3 Percentage Ratios
The percentage ratios normally referred to as the “five tests” are the figures expressed as percentages resulting from each of the following calculations:
- Assets ratio —the total assets which are the subject of the transaction divided by the total assets of the listed issuer;
- Profits ratio — the profits attributable to the assets which are the subject of the transaction divided by the profits of the listed issuer;
- Revenue ratio — the revenue attributable to the assets which are the subject of the transaction divided by the revenue of the listed issuer;
- Consideration ratio — the consideration divided by the total market capitalisation of the listed issuer. The total market capitalisation is the average closing price of the listed issuer’s securities as stated in the Exchange’s daily quotations sheets for the five business days immediately preceding the date of the transaction; and
- Equity capital ratio — the nominal value of the listed issuer’s equity capital issued as consideration divided by the nominal value of the listed issuer’s issued equity capital immediately before the transaction. The value of the listed issuer’s debt capital (if any), including any preference shares, is not included in the calculation of the equity capital ratio.
Aggregation of Transactions
Pursuant to Rule 14.22, the Exchange may require listed issuers to aggregate a series of transactions and treat them as if they were one transaction if they are all completed within a 12 month period or are otherwise related.
- 5.4 Consequences of entering into a notifiable transaction
The actions required to be taken by the issuer depend on the category of notifiable transaction within which the transaction falls. The requirements under applicable to each category are as follows:
Notification to Exchange Short suspension of dealings Publication of an Announcement Circular to shareholders Shareholder approval Accountants’ report Share Transaction Yes Yes Yes No No1 No Discloseable transaction Yes No, unless there is inside information Yes No No No Major transaction Yes Yes Yes Yes Yes2 Yes3 Very substantial disposal Yes Yes Yes Yes Yes2 No5 Very substantial acquisition Yes Yes Yes Yes Yes2 Yes4 Reverse takeover Yes Yes Yes Yes Yes2, 6 Yes4
- 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 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.
- An accountants’ report on the business, company or companies being acquired is required.
- An accountants’ report on any business, company or companies being acquired is required.
- A listed issuer may at its option include an accountants’ report.
- Approval of the Exchange is necessary.
Notification and Announcement Requirements
As soon as possible after the terms of a notifiable transaction have been finalised, the listed issuer must:
- inform the Exchange; and
- publish an announcement on the websites of the Exchange and the listed issuer.
Circular to Shareholders
The circular for major transactions to be approved in general meeting, very substantial acquisitions and very substantial disposals, must be sent to shareholders on or before the deadline for giving notice of the general meeting under the PRC Company Law. The deadline for giving notice under PRC Company Law is 20 days in the case of a general meeting and 15 days for a special general meeting.
Shareholders’ Approval Requirements
Major Transactions, Very Substantial Disposals, Very Substantial Acquisitions and Reverse Takeovers must be made conditional on approval by shareholders in general meeting.
Any shareholder that has a material interest in the transaction must abstain from voting.
Requirements for Reverse Takeovers
The Exchange will treat a listed issuer proposing a reverse takeover as a new listing applicant. The enlarged group or the assets to be acquired must be able to meet the financial tests for listing and the enlarged group must be able to meet all other listing criteria.
The listed issuer must comply with the procedures and requirements for new listing applicants and must appoint a sponsor, issue a listing document and pay the initial listing fee. A PRC issuer must send the listing document to shareholders on or before the deadline for giving notice of the general meeting under the PRC Company Law.
6. Connected Transactions
The Listing Rules contain detailed rules on transactions between the listed issuer’s group and its connected parties. Their objectives are:
- to ensure that a listed issuer takes into account the interests of shareholders as a whole when it enters into connected transactions;
- to provide safeguards against the directors, chief executive and substantial shareholders (or their associates) taking advantage of their positions. This is achieved by the general requirement of independent shareholders’ approval for connected transactions.
Generally, a connected transaction is any transaction between a listed issuer or any of its subsidiaries and a connected person.
For classification purposes, the Exchange may aggregate a series of transactions that are completed over a 12-month period or are otherwise related.
- 6.1 Definition of Transaction
The term “transaction” for the purposes of the connected transaction requirements includes the following, regardless of whether any such transaction is of a revenue nature and entered into in the ordinary and usual course of the listed issuer’s business:
- the acquisition or disposal of assets;
- any transaction involving an option to acquire or dispose of assets or to subscribe for securities;
- entering into or terminating finance or operating leases;
- granting an indemnity or a guarantee or providing financial assistance;
- entering into a joint venture;
- issuing new securities;
- provision or receipt of services;
- sharing of services;
- providing or acquiring raw materials, intermediate products and finished goods; and
- a qualified property acquisition .
- 6.2 Connected Persons
“Connected persons” are defined to include:
- a director, supervisor, chief executive or substantial shareholder (holding 10% or more of the voting rights) of the listed issuer or any of its subsidiaries, or an associate of any such persons;
- a person who was a director of the listed issuer or any of its subsidiaries in the past 12 months, or an associate of such a person; or
- a non-wholly owned subsidiary of the listed issuer where any connected person(s) at the issuer level are entitled to exercise, or control the exercise of, 10% or more of the voting power at general meetings of the non-wholly owned subsidiary or a subsidiary of such a non-wholly owned subsidiary.
Note: A wholly-owned subsidiary of a listed issuer is not a connected person.
The associates of an individual include:
- his spouse, his (or his spouse’s) child or step-child (natural or adopted) under the age of 18 years (each an “immediate family member”);
- the trustees, acting in their capacity as trustee of any trust of which the individual or his immediate family member is a beneficiary or, in the case of a discretionary trust, is (to his knowledge) a discretionary object (the “trustees”).
- a company in which the individual, his immediate family members and/or the trustees (individually or together) control the exercise of 30% or more of the voting power or control the composition of a majority of the board of directors, and any subsidiary of such company.
- a person cohabiting with him as a spouse, or his child, step-child, parent, step-parent, sibling or step-sibling (each a “family member”);
- a company in which the family members (individually or together), or the family members together with the individual, his immediate family members and/or the trustees control the exercise of 50% or more of the voting power or control the composition of a majority of the board of directors, and any of its subsidiaries;
- a parent-in-law, brother-in-law, sister-in-law, son-in-law, daughter-in-law, grandparent, grandchild, uncle, aunt, nephew, niece or cousin of the connected person (each a “relative”) whose association with the connected person is such that, in the opinion of the Exchange, the proposed transaction should be subject to the connected transaction requirements; and
- a company in which the relatives (individually or together) or the relatives together with the connected person, the trustees, his immediate family members and/or family members control the exercise of 50% or more of the voting power or control the composition of a majority of the board of directors, and any of its subsidiaries, whose association with the connected person is such that, in the opinion of the Exchange, the proposed transaction should be subject to the connected transaction requirements.
Associates of a company
The associates of a connected person which is a company include:
- its subsidiary or holding company, or fellow subsidiary of such a holding company (together, the “group companies”));
- the trustees of any trust of which the company is a beneficiary or, to the company’s knowledge, discretionary object (the “trustees”));
- a company in which the company, the group companies and/or the trustees (individually or together), can:
- exercise or control the exercise of 30% or more of the voting power at general meetings; or
- control the composition of a majority of the board of directors; and
- a subsidiary of a company in (c).
The Exchange will not normally treat a PRC Governmental Body as a connected person of a PRC issuer
Deemed Connected Persons
The Exchange has the power to deem a person or entity as an issuer’s connected person where:
- the person or entity has entered, or proposes to enter, into:
- a transaction with the group; and
- an agreement, arrangement, understanding or undertaking (whether formal or informal and whether express or implied) with respect to the transaction with a director, chief executive, supervisor or substantial shareholder of the issuer or any of its subsidiaries or a person who was such a director within the previous 12 months; and
- the person or entity should, in the Exchange’s opinion, be considered as a connected person .
- 6.3 Connected Transactions where there is no transaction with a connected person
A group acquiring an interest in a company (the “target company”) from a person who is not a connected person is a connected transaction if the target company’s substantial shareholder:
- is (or is proposed to be) a controller (i.e. a director, chief executive or controlling shareholder of the listed issuer); or
- is, or will, as a result of the transaction, become, an associate of a controller or proposed controller of the listed issuer.
Acquiring the target company’s assets is also a connected transaction if the assets account for 90% or more of the target company’s net assets or total assets.
- 6.4 Financial assistance
Financial assistance includes granting credit, lending money, providing security for, or guaranteeing a loan.Financial assistance provided by a listed issuer or its subsidiaries will constitute a connected transaction where it is provided to:
- a connected person; or
- a Commonly Held Entity.
“Commonly Held Entity” refers to a company whose shareholders include:
- a member of the listed issuer’s group; and
- a connected person(s) at the issuer level who, individually or together, can exercise or control the exercise of 10% or more of the voting power at the company’s general meeting.
Financial assistance provided to a listed issuer or its subsidiaries will constitute a connected transaction where it is provided by:
- a connected person; or
- a Commonly Held Entity.
- 6.5 Options involving Connected Persons
The grant, acceptance, transfer, exercise or non-exercise of an option by a listed issuer or its subsidiaries to or from a connected person is a connected transaction and is classified by reference to the percentage ratios (except the profits ratio).
Termination of an option by a listed issuer is a “transaction” unless termination is in accordance with the terms of the original agreement and there is no payment of any penalty, damages or other compensation.
- 6.6 Joint ventures involving Connected Persons
The entering into of any arrangement or agreement involving the formation of a joint venture entity in any form, such as a partnership or company or any other form of joint venture arrangement, by a listed issuer and a connected person constitutes a connected transaction (Rule 14A.10(13)(f)).
- 6.7 Continuing Connected Transactions
Continuing connected transactions are connected transactions that:
- involve the provision of goods, services or financial assistance;
- are carried out on a continuing or recurring basis; and
- are expected to extend over a period of time.
They are usually transactions in a group’s ordinary and usual course of business.
- 6.8 Classification of Connected and Continuing Connected Transactions
Connected and continuing connected transactions fall into three categories:
- Non-exempt transactions which must be: (a) reported in the listed issuer’s annual report; (b) announced on the websites of the Exchange and the listed issuer; and (c) made conditional on being approved by the issuer’s independent shareholders;
- Transactions exempt from the reporting, announcement and independent shareholders’ approval requirements (“wholly exempt” transactions); and
- Transactions exempt from the independent shareholders’ approval requirement only (but subject to the reporting and announcement requirements) (“partially exempt” transactions).
- 6.9 Connected Transaction Requirements
Written agreement requirement
The listed issuer must enter into a written agreement with all relevant parties in respect of the connected transaction.
Independent board committee and financial adviser requirements
Where a connected transaction must be approved by the issuer’s independent shareholders, an independent board committee must be established to advise shareholders as to:
- whether the terms of the connected transaction are fair and reasonable;
- whether the transaction is in the interests of the listed issuer and the shareholders as a whole;
- whether the connected transaction is on normal commercial terms and in the issuer’s ordinary and usual course of business; and
- how to vote, taking into consideration the views of the independent financial adviser.
An independent financial adviser must be appointed to make recommendations to the independent board committee as to the matters set out above.
Additional requirements apply to continuing connected transactions. These include requirements that:
- the agreement governing the transaction must be on normal commercial terms and must be for a fixed period, usually not exceeding 3 years. The reporting requirements must be followed for each subsequent financial year during which the listed issuer undertakes the continuing connected transaction.
- The listed issuer must set a maximum aggregate annual cap expressed in monetary terms.
- Continuing connected transactions must be reviewed annually by the company’s independent non-executive directors and its auditors.
- 6.10 Exemptions from Connected Transaction Requirements
There are a number of exemptions which are available. These include the following:
Transactions between a listed issuer and a non wholly-owned subsidiary or between its non wholly-owned subsidiaries are wholly exempt where:
- none of the subsidiaries concerned are connected persons; and
- no connected persons at the issuer level exercise or control the exercise of 10% or more of the voting power at any general meeting of any of the subsidiaries concerned (Rule 14A.18).
De minimis transactions
Transactions on normal commercial terms are wholly exempt where each or all of the percentage ratios except the profits ratio is/are:
- less than 0.1%;
- less than 1% and the transaction is a connected transaction only because it involves a connected person at the subsidiary level; or
- less than 5% and the total consideration is less than HK$3 million
This exemption does not apply to the issue of new securities by an issuer to a connected person.
Partially exempt connected transactions
Connected transactions are exempt from the independent shareholders’ approval requirement only (and are subject to the reporting and announcement requirements) where the connected transaction is on normal commercial terms or better to the listed issuer and each or all of the percentage ratios (except the profits ratio) is/are:
- less than 5%; or
- less than 25% and the total consideration is less than HK$10 million.
7. The Corporate Governance Code
The Corporate Governance Code (the “Code”) contains two levels of recommended practices. The first tier contains the “Code Provisions”. Listed companies must state in their half-year and annual reports whether they have complied with the Code Provisions (CP) and give reasons for any non-compliance.
The second level consists of recommended best practices which listed companies are encouraged to adopt. Listed companies are encouraged, but are not required, to include a statement as to compliance with the recommended best practices and considered reasons for any non-compliance in their financial reports.
The Code covers 5 principal areas: Directors; Remuneration of Directors and Senior Management; Accountability and Audit; Delegation by the Board and Communication with Shareholders.
8. The Model Code for Securities Transactions by Directors and Supervisors of Listed Companies (“Model Code”)
Listed Companies must adopt rules governing dealings by directors and supervisors in their listed securities on terms no less stringent than the terms set out in the Listing Rules.
The Model Code provides that a director or supervisor of a listed company must not deal in the securities of the company:
- at any time when he is in possession of unpublished inside information in relation to those securities, or if clearance to deal has not been given;
- on the publication date of the company’s financial results;
- during the period of 60 days preceding the publication date of the annual results or, if shorter, the period from the end of the relevant financial year up to the publication date of the results; and
- during the period of 30 days preceding the publication date of the quarterly results (if any) or half-year results or, if shorter, the period from the end of the relevant quarterly or half-year period up to the publication date of the results.
Further, a director or supervisor of a listed issuer must not deal in its securities if he is in possession of inside information in relation to those securities by virtue of his position as a director of another listed issuer. The restrictions on dealings also apply equally to dealings by directors’ and supervisors’ spouses and children under the age of 18 and to other dealings in which they are deemed to be interested for the purposes of Part XV of the SFO.
Duty of Notification
Listed companies must establish a procedure whereby a director or supervisor is required to give written notification to the chairman or a director designated by the board and receive a dated written acknowledgement before dealing in any securities of the listed company.
9. The Environmental, Social and Governance Reporting Guide
According to Main Board Rule 13.91 (GEM Rule 17.103), listed issuers are required to disclose the Environmental, Social and Governance (ESG) matters set out in the Environmental, Social and Governance Reporting Guide (Appendix 27 to the Main Board Rules/ Appendix 20 to the GEM Rules). These matters must be disclosed in the annual report of the relevant financial year or in a separate ESG report. There are two levels of ESG disclosures: “comply or explain” and “recommended disclosures”.
|“Comply or explain”||–||The listed issuer must comply with these disclosure provisions, but may deviate from these provisions if they can provide considered reasons for the deviation in its ESG report.|
|“Recommended disclosures”||–||The listed issuer is encouraged, but not required, to report on these matters.|
ESG reports must be published on an annual basis and regarding the same period as their annual reports.
Currently, key performance indicators in the “Environmental” subject area are only recommended disclosures. Beginning on 1 January 2017, those key performance indicators will be a “comply or explain” disclosure.
This note is provided for information purposes only and does not constitute legal advice. Specific advice should be sought in relation to any particular situation. This note has been prepared based on the laws and regulations in force at the date of this note which may be subsequently amended, modified, re-enacted, restated or replaced.
Listing PRC companies on HKEx
H share companies listing in Hong Kong
Red chip listing
China Securities Regulatory Commission (“CSRC”)
Listing Decision HKEx-LD43-3
Hong Kong Sponsor Due Diligence Guidelines
Circular 10 – the M&A Rules
Ministry of Commerce (“MOFCOM”)
restrictions on foreign investment under PRC law
wholly foreign-owned enterprise (“WFOE”)
HKEx’s connected transaction requirements