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Responsibilities of directors of companies listed on the Main Board of the Stock Exchange of Hong Kong Limited

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Responsibilities of directors of companies listed on the Main Board of the Stock Exchange of Hong Kong Limited

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XVI. CONNECTED TRANSACTIONS

The following is a summary of the rules governing connected transactions.

1. Introduction

The rules on connected transactions are set out in Chapter 14A of the Main Board Listing Rules. Their objectives are:

  1. to ensure that a listed issuer takes into account the interests of shareholders as a whole when it or one of its subsidiaries enters into connected transactions;
  2. 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.

Factors which the Exchange takes into account in determining whether connected transactions should be aggregated are whether they:

  1. are entered into by the listed issuer with the same party or parties connected/associated with one another;
  2. involve the acquisition or disposal of securities or an interest in one particular company or group of companies;
  3. involve the acquisition or disposal of parts of one asset; or
  4. together lead to substantial involvement by the listed issuer in a business activity not previously part of its principal business activities (Main Board Rule 14A.82).

The Exchange may consider aggregating continuing connected transactions with a single connected person (Main Board Rule 14A.83).

A connected transaction can also be a notifiable transaction. If so, the listed issuer must comply with both Chapters 14 and 14A of the Main Board Listing Rules.

2. Definitions

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 group’s business:

Transaction

  1. the acquisition or disposal of assets including a deemed disposal under Main Board Rule 14.29;
  2. any transaction involving an option to acquire or dispose of assets or to subscribe for securities;
  3. entering into or terminating finance or operating leases;
  4. granting an indemnity or a guarantee or providing financial assistance;
  5. entering into a joint venture in any form;
  6. issuing new securities of the issuer or its subsidiaries;
  7. provision or receipt of services;
  8. sharing of services;
  9. providing or acquiring raw materials, intermediate products and finished goods; and
  10. a qualified property acquisition (Main Board Rule 14A.24).

Connected Person

“Connected persons” are defined to include:

  1. a director, 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;

    Persons connected with the listed issuer’s “insignificant subsidiaries” are not connected persons. An “insignificant subsidiary” is a subsidiary of the issuer whose total assets, profits and revenues are less than:

    1. 10% under the percentage ratios for each of the three preceding financial years; or
    2. 5% under the percentage ratios for the latest financial year (Main Board Rule 14A.66).
  2. 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
  3. a connected subsidiary

    a “connected subsidiary” is:

    1. 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. This excludes an indirect interest in the subsidiary which is held by the connected person(s) through the listed issuer; or
    2. a subsidiary of such a non-wholly owned subsidiary.

Note: A wholly-owned subsidiary of a listed issuer is not a connected person.

Responsibilities-of-directors-of-companies-listed-on-the-Main-Board-of-the-HKEx-Connected-person

Company A and Company C are connected persons of the listed company as Company A is a non-wholly owned subsidiary in which a connected person at the issuer level (Director B) holds 10% of the shares. Company C as its subsidiary is also connected.

Associates of an individual

The associates of a connected person who is an individual include:

  1. 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”)(Main Board Rule 14A.12(1)(a));
  2. 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”).

    The trustees of an employee share scheme or occupational pension scheme are not “associates” of a connected person if:

    1. the scheme is established for a wide scope of participants; and
    2. the connected persons’ interests in the scheme are together less than 30% (Main Board Rule 14A.12(1)(b));
  3. 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 (Main Board Rule 14A/12(1)(c)).

A company is not an associate of an individual if the interests of the connected person and his associates in the entity (other than those held through the issuer) are together less than 10% (Main Board Rule 14A.14).

In the diagrams below, neither Company A nor Company B is an associate of X because X’s direct interest is less than 10%

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  1. a person cohabiting with him as a spouse, or his child, step-child, parent, step-parent, sibling or step-sibling (each a “family member”)(Main Board Rule 14A.12(2)(a));
  2. 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 (Main Board Rule 14A.12(2)(b));
  3. 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 (Main Board Rule 14A.21); and
  4. 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 (Main Board Rule 14A.22 and Main Board Rule 14A.21(1)(b)).

Associates of a company

The associates of a connected person which is a company include:

  1. its subsidiary or holding company, or fellow subsidiary of such a holding company (together, the “group companies”)(Main Board Rule 14A.13(1));
  2. the trustees of any trust of which the company is a beneficiary or, to the company’s knowledge, discretionary object (the “trustees”)(Main Board Rule 14A.13(2));
  3. a company in which the company, the group companies and/or the trustees (individually or together), can:
    1. exercise or control the exercise of 30% or more of the voting power at general meetings; or
    2. control the composition of a majority of the board of directors; and
  4. a subsidiary of a company in (c).

Deemed Connected Persons

The Exchange has the power to deem a person or entity as an issuer’s connected person where:

  1. the person or entity has entered, or proposes to enter, into:
    1. a transaction with the group; and
    2. 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 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
  2. the person or entity should, in the Exchange’s opinion, be considered as a connected person (Main Board Rule 14A.21).

3. Connected Transactions where there is no transaction with a connected person

Acquisition of interest in a Company (Main Board Rule 14A.28)

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:

  1. is (or is proposed to be) a controller (i.e. a director, chief executive or controlling shareholder of the listed issuer); or
  2. 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.

The Exchange may aggregate the interests of the controller and his/its associates in the target company to determine if they are together the target company’s substantial shareholder. Main Board Rule 14A.28 does not apply to a listed issuer’s acquisition if the controller or his/its associates are together a substantial shareholder of the target only because of their indirect shareholdings in the target company held through the listed issuer’s group (Main Board Rule 14A.30).

4. Financial assistance

Financial assistance includes granting credit, lending money, providing security for, or guaranteeing a loan (Main Board Rule 14A.24(4)).

Financial assistance provided by a listed issuer or its subsidiaries will constitute a connected transaction where it is provided to:

  1. a connected person; or
  2. a Commonly Held Entity.

Financial assistance provided to a listed issuer or its subsidiaries will constitute a connected transaction where it is provided by:

  1. a connected person; or
  2. a Commonly Held Entity.

Financial assistance must comply with the Connected Transaction Rules if it involves:

  1. Financial Assistance for the Benefit of Connected Interests – i.e. the listed issuer or its subsidiaries providing an indemnity, guarantee or other financial assistance to and/or for the benefit of a connected person or a Commonly Held Entity; or
  2. Granting Security to Connected Interests – i.e. the listed issuer or its subsidiaries grant security over the group’s assets for financial assistance provided by a connected person or a Commonly Held Entity to the listed issuer or its subsidiaries.

The term “Commonly Held Entity” refers to a company whose shareholders include:

  1. a member of the listed issuer’s group; and
  2. 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 (Main Board Rule 14A.27).

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) (Main Board Rule 14A.24(2)(a)).

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.

Options granted by listed group to a connected person

If the listed issuer’s group grants an option to a connected person and exercise of the option is not at the group’s discretion:

  • on grant of the option to a connected person, the transaction is classified as if the option had been The percentage ratios are calculated based on the consideration for the transaction (which is taken to include the premium and the exercise price), the value of the underlying assets, and the revenue attributable to the assets (Main Board Rule 14A.79(1));
  • the issuer must announce:
    1. any exercise or transfer of the option by the option holder; and/or
    2. if the option is not exercised in full, the option holder notifying the listed issuer’s group that it will not exercise the option, or the expiry of the option, whichever is the earlier (Main Board Rule 14A.61).

Options acquired by listed group from a connected person

If the listed issuer’s group acquires or accepts an option granted by a connected person where the option is exerciseable at the discretion of the listed group:

  • on acquisition by (or grant of the option to) the group, only the premium is taken for the purpose of calculating the percentage ratios. However, if the premium represents 10% or more of the sum of the premium and the exercise price, the percentage ratios are calculated based on the premium, the exercise price, the value of the underlying assets, and the revenue attributable to such assets (Main Board Rule 14A.79(2));
  • on exercise of the option by the group, the exercise price, the value of the underlying assets and the revenue attributable to such assets are used for the purpose of calculating the percentage ratios;
  • if the listed group transfers the option to a third party, terminates the option or decides not to exercise the option:
    1. the transaction is classified as if the option was exercised. The exercise price, value of the underlying assets, the revenue attributable to such assets and (if applicable) the consideration for transferring the option, or the amount receivable or payable by the listed group for terminating the option are used for the purpose of the percentage ratios (Main Board Rule 14A.79(4)(a)); or
    2. the Exchange may allow the listed issuer to classify the transaction using the asset and consideration ratios based on the higher of:
      1. 1) for a put option held by the listed issuer’s group, the exercise price less the value of the assets subject to the option; or

        2) for a call option held by the listed issuer’s group, the value of the assets subject to the option less the exercise price; and

      2. the consideration or amount payable or receivable by the listed group.

      An issuer may adopt the alternative classification test under (ii) above if the value of the option assets is readily ascertainable and the issuer is able to provide:

      • a valuation of the option assets prepared by an independent expert using generally acceptable methodologies; and
      • a confirmation from the INEDs and an independent financial adviser that the transfer, termination or non-exercise of the option is fair and reasonable and in the interests of the listed issuer and its shareholders as a whole.

      If an issuer adopts the alternative method, it must announce the transfer, termination or non-exercise of the option with the views of the INEDs and independent financial adviser

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 (Main Board Rule 14A.24(5)).

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Posted on

2016-01-29