XV. NOTIFIABLE TRANSACTIONS
Chapter 14 of the Listing Rules sets out detailed requirements in respect of certain transactions, principally acquisitions and disposals by a listed issuer, of which the Stock Exchange of Hong Kong (the “Exchange”) must be notified. The term “listed issuer”, as used in Chapter 14 and in this memorandum, refers to both the listed issuer itself and its subsidiaries and accordingly, transactions entered into by subsidiaries of the listed issuer may constitute notifiable transactions under Hong Kong Listing Rules. A transaction may be both a notifiable transaction and a connected transaction under Hong Kong Listing Rules, in which case the listed issuer must comply with the provisions of Chapter 14 and Chapter 14A.
To determine whether a transaction is notifiable, it is first necessary to determine whether it falls within the definition of “transaction” under Chapter 14.
1. Definition of Transaction
For the purposes of Chapter 14 any reference to a “transaction” by a listed issuer, includes:
- the acquisition or disposal of assets, including deemed disposals as referred to in Main Board Rule 14.29;
- any transaction involving a listed issuer writing, accepting, transferring, exercising or terminating 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. The Exchange will normally consider an operating lease or a transaction involving multiple operating leases to have a “significant impact” if such lease(s), by virtue of its/their total monetary value or the number of leases involved, represent(s) a 200% or more increase in the scale of the listed issuer’s existing operations conducted through lease arrangements of such kind;
- granting an indemnity or a guarantee or providing financial assistance, except to the listed issuer’s own subsidiaries, or unless the listed issuer is a banking company or a securities house (however, if such a transaction constitutes a connected transaction, the issuer must comply with the provisions of Chapter 14A); and
- entering into any arrangement or agreement involving the formation of a joint venture entity in any form, such as a partnership or a company, or any other form of joint arrangement.
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.
Issues of New Securities for Cash
The definition of “transaction” excludes the issue of new securities for cash only. These transactions are however within the definition of “transaction” which applies for the purposes of “connected transactions” under Main Board Rule 14A.24(6).
Transaction of a “Revenue Nature”
Pursuant to Note 4 of Main Board Rule 14.04(1)(g), in considering whether or not a transaction is of a revenue nature, a listed issuer should take into account the following factors:
- whether previous transactions or recurring transactions that were of the same nature were treated as notifiable transactions;
- the historical accounting treatment of its previous transactions that were 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.
The above list is non-exhaustive and the Exchange may take other factors into account.
It should be noted that any transaction involving the acquisition and disposal of properties will generally not be considered to be of a revenue nature unless such transactions are carried out as one of the principal activities and in the ordinary and usual course of business of the listed issuer (Note 2 to Main Board Rule 14.04(1)).
Transaction in the “Ordinary and Usual Course of Business”
The term “ordinary and usual course of business” is defined as the existing principal activities of the listed issuer or an activity wholly necessary for its principal activities. Further, financial assistance is only regarded as being in the ordinary and usual course of business if it is provided by: (i) a banking company; or (ii) by a securities house on normal commercial terms for the purposes set out in Main Board Rule 14.04(1)(e)(iii) (Main Board Rule 14.04(8)).
A banking company is defined under Main Board Rule 14A.88 as a bank, restricted licence bank or deposit taking company as defined in the Banking Ordinance (CAP 155) or a bank constituted under appropriate overseas legislation or authority. A securities house is defined under Main Board Rule 14.04(10E) as a corporation which is licensed or registered under the Securities and Futures Ordinance (CAP 571) for Type 1 (dealing in securities) or Type 8 (securities margin financing) regulated activity.
2. Classification of Notifiable Transactions under Hong Kong Listing Rules
The requirements for a notifiable transaction depend upon which of the 6 categories of notifiable transaction set out in Main Board Rule 14.06 it falls into. Classification is made on the basis of the percentage ratios set out in Main Board Rule 14.07 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 set out in Main Board Rule 14.06 are:
- A share transaction is an acquisition of assets (excluding cash) by a listed issuer 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 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 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 (including deemed disposals under Main Board Rule 14.29) by a listed issuer 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 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 set out in Chapter 8 of the Listing Rules.
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.
In determining whether the acquisition(s) constitute(s) a very substantial acquisition, 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.
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 number of shares to be issued by the listed issuer as consideration divided by the total number of the listed issuer’s issued shares immediately before the transaction. The numerator includes shares that may be issued upon conversion or exercise of any convertible securities or subscription rights to be issued or granted by the listed issuer as consideration. The listed issuer’s debt capital (if any), including any preference shares, is not included in the calculation of the equity capital ratio.
Exceptions to the Classification Rules
If any size test produces an anomalous result or is inappropriate to the issuer’s sphere of activity, the Exchange may disregard the calculation and substitute other relevant size indicators or industry specific tests (Main Board Rule 14.20).
Transactions involving an Acquisition and Disposal
Where a transaction involves both an acquisition and a disposal, the Exchange will apply the percentage ratios to both the acquisition and the disposal. The transaction will be classified based on the larger of the acquisition or disposal, and subject to the requirements applicable to that classification. Where a circular is required, each of the acquisition and disposal will be subject to the content requirements applicable to their respective transaction classification (Main Board Rule 14.24).
4. Aggregation of Transactions
Pursuant to Main Board 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.
Factors which the Exchange will take into account in determining whether transactions will be aggregated include whether the transactions:
- are entered into by the listed issuer with the same party or with parties connected or otherwise associated with one another;
- involve the acquisition or disposal of securities or an interest in one particular company or group of companies;
- involve the acquisition or disposal of parts of one asset; or
- together lead to substantial involvement by the listed issuer in a business activity which did not previously form part of the listed issuer’s principal business activities.
Aggregation is not automatic only because one factor is triggered. The Exchange will also consider whether the aggregation would result in a higher transaction classification.
With regards to the aggregation of transactions, the Exchange should be consulted at an early stage:
- in cases of doubt;
- if any of the factors above apply to any transaction entered into by the listed issuer in the preceding 12-month period; or
- if any transaction entered into by the listed issuer involve acquisitions of assets from a person or group of persons or any of his/their associates within 24 months of such person or group of persons gaining control of the listed issuer (other than at the subsidiary level).
The Exchange may aggregate transactions regardless of whether it was consulted by the listed issuer.
5. 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 Main Board Rule 14.33 generally 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|
|Discloseable transaction||Yes||No, unless there is PSI||Yes||No||No||No|
|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, pursuant to Main Board Rule 13.36(2)(b), 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 (see also Main Board Rules 4.06 and 14.67(6)).
- An accountants’ report on any business, company or companies being acquired is required (see also Main Board Rules 4.06 and 14.69(4)).
- A listed issuer may at its option include an accountants’ report (see Note 1 to Main Board Rule 14.68(2)(a)(i)).
- Approval of the Exchange is necessary.
6. 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 in accordance with Main Board Rule 2.07C (Main Board Rule 14.34).
7. Short suspension of dealings
Where a listed issuer has signed an agreement in respect of a share transaction, major transaction, very substantial disposal, very substantial acquisition or reverse takeover and the required announcement has not been published on a business day, the listed issuer must request a short suspension of dealings in its securities pending the publication of the announcement in accordance with Main Board Rule 2.07C. A listed issuer that has signed an agreement in respect of any notifiable transaction that is expected to be price sensitive must immediately request a short suspension of dealings pending publication of an announcement (Main Board Rule 14.37). Where a listed issuer has finalised the major terms of a notifiable transaction that is expected to be price sensitive, it must ensure the confidentiality of the relevant information until an announcement is published.