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1. What is a Reverse Takeover?

A reverse takeover is defined broadly as an acquisition (or series of acquisitions) of assets by a listed issuer which, in the opinion of the Hong Kong Stock Exchange (the HKEx), is, or is part of a transaction or series of transactions which is an attempt to list the acquired assets while circumventing the Listing Rules’ requirements for a new listing applicant.[1]This is a principle-based test.  A listed issuer which conducts a reverse takeover will be treated as if it were a new listing applicant.  The assets to be acquired must meet HKEx’s requirements as to suitability for listing and the financial and track record requirements for new listings, while the enlarged group must meet all listing requirements other than the financial tests.  The listed issuer will have to produce a listing document, appoint a sponsor to conduct due diligence on the assets to be acquired, and obtain shareholders’ approval. 

Where the listed issuer can demonstrate that it is not attempting to circumvent the requirements for new listings, the HKEx may regard the acquisition(s) as an extreme transaction if: (a) the issuer has been under the control (or de facto control) of the same person or group of persons for 36 months and the transaction will not result in a change of control of the issuer; or (b) the issuer’s principal business is substantial (having annual revenue or total assets of HK$1 billion) and will continue after the transaction(s) in question.  Where an acquisition is treated as an “extreme transaction”, the acquired assets and enlarged group must still meet the same requirements as for a reverse takeover (described above), but the listed issuer is not regarded as a new listing applicant.  Instead, it must appoint a financial adviser to conduct due diligence on the assets to be acquired and prepare a circular to shareholders to be sent to shareholders with the notice of the general meeting at which the transaction will be approved .


[1] Rule 14.06B of the Main Board Listing Rules and Rule 19.06B of the GEM Listing Rules.

2. Is there a specific definition of Reverse Takeover?

No.  The HKEx Listing Rules set out bright line tests for two specific types of reverse takeovers which are transactions involving a change in control (i.e. 30%) of a listed issuer and a very substantial acquisition (i.e. acquisition(s) where any percentage ratio is 100% or more) from the incoming controlling shareholder at the time of the change in control or within the following 36 months.[2]A very substantial acquisition which falls within the bright line tests constitutes a reverse takeover and will require the listed issuer to follow the procedures for a new listing applicant on HKEx.


[2] Note 2 to Rules 14.06B and 19.06B of the Main Board and GEM Listing Rules, respectively.

3. What other circumstances can give rise to a reverse takeover?

The situations set out in the bright line tests are not exhaustive, and if a transaction falls outside the bright line tests (e.g. where there is no change of control), the HKEx will apply the principle-based test to assess whether the acquisition alone, or with other transactions or arrangements, attempts to list the assets to be acquired (and assets already acquired in a series of transactions) and circumvent the requirements for new listings.  Other transactions or arrangements include a change of control or de facto control and acquisitions and disposals of assets.  Hence, a listed issuer’s disposal of its existing business and acquisition of a totally new business may constitute a reverse takeover even if there is no change in control.[3]


[3] See HKEx’s Listing Decision 75-1 of October 2009.

4. What are the consequences of a Very Substantial Acquisition within the bright line tests?

A very substantial acquisition within the bright line tests of Note 2 to Main Board Listing Rule 14.06B or GEM Listing Rule 19.06B will be treated as a reverse takeover, and the HKEx will treat the listed issuer proposing it as if it were a new listing applicant.  This requires that:

  1. the acquired assets must be suitable for listing (under Main Board Listing Rule 8.04 or GEM Listing Rule 11.06) and able to meet the financial tests and track record requirements of Main Board Listing Rule 8.05 (or 8.05A or 8.05B) or GEM Listing Rule 11.12A or 11.14;

  2. the enlarged group must meet all the listing requirements of Main Board Chapter 8 other than Rule 8.05 or GEM Chapter 11 other than Rule 11.12A;

  3. c.the listed issuer must issue a listing document containing virtually all the information required for a new listing applicant and the information required for a VSA.  It must  send the listing document to its shareholders with a notice convening a shareholders’ general meeting to approve the reverse takeover;

  4. an initial listing fee is payable; and

  5. the listed issuer must appoint a sponsor to conduct due diligence.

Where a reverse takeover involves a series of transactions, and the acquired assets cannot meet the management continuity and/or the ownership continuity and control requirements of Main Board Listing Rule 8.05(1)(b) and (c) (GEM Listing Rule 11.12A(2) and (3)), due to a change in their ownership and management solely as a result of their acquisition by the listed company, the HKEx may grant a waiver of these requirements.  In considering whether to grant a waiver, the HKEx will consider whether the listed company has the expertise and experience in the relevant business/industry of the acquired assets to ensure their effective management and operation.

5. What factors does HKEx take into account in assessing whether a transaction(s) constitutes a reverse takeover?

What factors does HKEx take into account in assessing whether a transaction(s) constitutes a reverse takeover?

In assessing whether a transaction or series of transactions constitutes an attempt to list the acquired assets and circumvent the new listing requirements, the HKEx considers the six factors set out in Note 1 to Main Board Listing Rule 14.06B (GEM Listing Rule 19.06B).   These are:

  1. the size of the acquisition(s) relative to the size of the listed issuer;

  2. a fundamental change in the listed issuer’s principal business;

  3. the nature and scale of the listed issuer’s  business before the acquisition(s) (e.g. whether the listed issuer is a shell);

  4. the quality of the assets acquired/to be acquired;

  5. a change in control or de facto control of the listed issuer (other than at the level of its subsidiaries); and

  6. other transactions or arrangements which, together with the asset acquisition or acquisitions, form a series of transactions or arrangements to list the acquired assets. 

The HKEx has said that in assessing shell activities, it will pay particular attention to assessment criteria (e) – change in control or de facto control and (b) a fundamental change in the listed issuer’s principal business.[4]  In determining whether there has been a change in control or de facto control, the HKEx takes into account: (i) any change in the listed issuer’s controlling shareholder; or (ii) any change in its single largest shareholder who is able to exercise effective control of the listed issuer, as indicated by factors such as a substantial change to its board of directors and/or senior management.


[4] HKEx.  “Consultation Conclusions Backdoor Listing, Continuing Listing Criteria and other Rule Amendments”.  July 2019.

6. What are extreme transactions?

An “extreme transaction” is an acquisition or series of acquisitions of assets by a listed issuer which, individually or together with other transactions (which may include a disposal) or arrangements achieve a listing of the acquired assets, where the listed issuer can demonstrate that this does not constitute an attempt to circumvent the requirements for a new listing.

To qualify as an “extreme transaction” the following three conditions must also be met:

  1. either:

    1. the listed company has been under the control or de facto control of a person or group of persons for a long period (normally at least 36 months), and the transaction would not result in a change in control or de facto control of the listed company (other than at the level of its subsidiaries); or

    2. the listed company has been operating a principal business of a substantial size, which will continue after the transaction.  HKEx Guidance Letter GL-104 provides guidance on what constitutes a business “of a substantial size”, which includes a listed company with annual revenue or total asset value of HK$1 billion according to its latest published financial statements.  The HKEx will also take into account the listed company’s financial position, the nature and operating model of its business and its future business plans;

  2. the acquired assets must:

    1. be suitable for listing under Main Board Listing Rule 8.04 (GEM Listing Rule 11.06); and

    2. meet the financial and track record requirements of Main Board Listing Rule 8.05, 8.05A or 8.05B (GEM Listing Rule 11.12A or 11.14); and

  3. the enlarged group must meet all the new listing requirements of Chapter 8 of the Main Board Listing Rules (except Listing Rule 8.05) or Chapter 11 of the GEM Listing Rules (except GEM Listing Rule 11.12A).

7. What are the requirements for extreme transactions?

A listed issuer proposing an extreme transaction is required to:

  1. comply with the requirements for very substantial acquisitions set out in Main Board Listing Rules 14.48 to 14.53 (GEM Listing Rules 19.48 to 19.53). The circular to shareholders must contain the information required under Main Board Listing Rule 14.69 (GEM Listing Rule 19.69); and

  2. appoint a financial adviser to perform due diligence on the assets subject to the acquisition (and any assets and businesses subject to a series of transactions and/or arrangements, if any). The financial adviser must submit to the HKEx a declaration in relation to the due diligence conducted before the bulk-printing of the circular for the transaction.  Under Listing Rule 13.87B, the financial adviser must be licensed or registered to perform sponsor work.

8. Can a listed issuer’s disposal of assets constitute a reverse takeover?

The HKEx may rule that a reverse takeover exists where it considers that other transactions or arrangements, together with one or more asset acquisitions, form a series of transactions or arrangements attempting to list the acquired assets and circumvent the requirements for a new listing.  The other “transactions” or “arrangements” may include changes in control, de facto control, acquisitions and/or disposals and the HKEx may regard these and an asset acquisition or series of acquisitions as a series amounting to a reverse takeover if they take place in reasonable proximity to eachother (normally within a period of 36 months) or are otherwise related.   

If the HKEx considers the acquisition(s) and other transactions or arrangements to constitute a series, it will treat the entire series as one transaction.  Since the other transactions can be acquisitions or disposals, it is possible for a disposal by a listed issuer to trigger a reverse takeover with respect to a previously completed acquisition.  Hence, a reverse takeover may occur where a listed issuer disposes of its existing business following an acquisition of a new business.

9. When will HKEx aggregate a series of transactions or arrangements?

HKEx’s guidance letter on reverse takeovers, HKEx-GL 104-10 provides that it will normally apply the “series of transactions and/or arrangements” factor together with other assessment factors, for example the relative size of the transaction to the listed issuer, and whether the series of transactions would lead to a fundamental change in the principal business of the listed issuer.

The guidance letter also notes that:

  1. This criterion should not unduly restrict listed issuers’ business expansion or diversification that occur over a reasonable period where publicly disclosed information will inform shareholders and the public about their business operations and developments.

  2. HKEx will not normally consider a transaction or arrangement outside the three-year period to be part of the series, except where the transactions are clearly related or there are specific concerns regarding circumvention of the reverse takeover rules.  The following examples are given:

    1. a transaction proposed just outside the three-year period which was likely under contemplation within it;

    2. where a listed  issuer terminates a proposed acquisition of a target business (or reduces the size of an acquisition) after the HKEx rules it to be a reverse takeover, the HKEx may treat any further acquisitions of the target business outside the three-year period as part of a series; and

    3. where a listed issuer acquires a new business with an option to acquire another target business and the option is exercised more than three years after the original acquisition, the HKEx may consider the acquisitions as a series.

  3. HKEx will normally aggregate acquisitions that are related, such as:

    1. acquisitions that are in a similar line of business;

    2. acquisitions of interests in the same company or group of companies; and

    3. acquisitions of businesses from the same or a related party.

Size Tests

In assessing whether the size of acquisitions in a series is substantial, the HKEx will normally compare:

  1. the aggregate financial figures/ consideration of the acquired assets at their respective acquisition times to:

  2. the size of the listed issuer being the lower of its latest published financial figures (i.e. revenue, profits and assets) or market capitalisation: (i) before the first transaction in the series; and (ii) at the time of the last transaction in the series (Guidance Letter HKEx-GL104-19 at paragraph 32).

The above is however guidance only and the HKEx will consider anomalous results case-by-case.

10. What are the Hong Kong Takeovers Code implications of a Reverse Takeover?

An offer to acquire 30% or more of the voting rights of a Hong Kong listed company will trigger the obligation under Rule 26 of the Takeovers Code to make a general offer to all shareholders of the target company on the same terms in the absence of a waiver from the SFC Executive.  Rule 25 further prohibits an offeror and its associates from offering favourable conditions to one or more shareholders which are not available to all the other shareholders. 

Summary of RTO Assessment Process and Requirements

The-10-most-important-things-to-know-about-Reverse-Takeovers-of-Hong-Kong-listed-companies-Summary-of-RTO-assessment-process-and-requirements

 

Reverse takeovers of Hong Kong listed companies

Acquisitions of assets by a HKEx listed issuer

HKEx-GL78-14

Bright line tests in Hong Kong Listing Rules

an RTO of mineral or petroleum assets

Very substantial acquisitions (VSA)

Hong Kong listing requirements

Hong Kong Listing Committee

Hong Kong Takeovers Code