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The Listing Rules’ requirements for reverse takeovers of Hong Kong listed companies

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The Listing Rules’ requirements for reverse takeovers of Hong Kong listed companies

8. Meeting the Criteria for a New Listing Applicant

The enlarged group or the assets to be acquired will need to meet the requirements for listing which in the case of a Main Board listing will require the applicant to satisfy the requirements of Main Board Rule 8.05 as to operating history and management and satisfy one of the three financial tests (profit test, market capitalization/revenue test or market capitalization/revenue/cash flow test) which are summarised in Annex A to this note. An applicant for listing on GEM will need to meet the positive cash flow requirement and requirements as to operating history and management of GEM Rule 11.12A.

The enlarged group must also meet all other basic listing conditions in Chapter 8 (Chapter 11 of GEM), as summarised in Annex A to this note.

8.1. Meeting the Initial Listing Criteria: Listing Decision 44-1

Listing Decision 44-1 related to satisfaction of the public float. The issue was whether in a case where an asset injection caused Company A to be deemed a new listing applicant, the minimum public float requirement under Main Board Rule 8.08 could be satisfied by the placing of existing and/or new shares of Company A prior to the completion of the asset injection.

The Exchange decided that the placing arrangements by the company and/or its parent to maintain the public float before completion of the assets injection were acceptable. It further granted a waiver of Main Board Rule 10.07 which prohibits a person shown by the listing document to be a controlling shareholder from disposing of its shares in the listed company for 6 months following listing. The waiver allowed the parent company, a controlling shareholder, to place down its shares during the restricted period.

8.2. Implications of an RTO of Mineral or Petroleum Assets

Chapter 18 of the Main Board Rules and Chapter 18A of the GEM Rules impose specific requirements to be met by new applicant mining and petroleum companies in addition to the basic requirements for listing contained in Chapters 8 and 11 of the Main Board Rules and GEM Rules, respectively.

Chapter 18 (GEM Chapter 18A) apply to a Mineral Company which is defined as “a new applicant whose Major Activity (whether directly or through its subsidiaries) is the exploration for and/or extraction of Natural Resources, or a listed issuer that completes a Relevant Notifiable Transaction involving the acquisition of Mineral or Petroleum Assets.

The term “Major Activity” is an activity of an issuer and/or its subsidiaries which represents 25% or more of the total assets, revenue or operating expenses of the issuer and its subsidiaries. When assessing whether or not this threshold has been reached, reference should be made to the issuer’s latest audited consolidated financial statements.

Listed issuers engaged in the resources sector when the new regime became effective were not automatically treated as Mineral Companies. However, they will become Mineral Companies once they complete a Major Transaction, Very Substantial Acquisition or Reverse Takeover involving the acquisition of Mineral or Petroleum Assets.

Thus a listed issuer which engages in a reverse takeover of a company involved in the resources sector will be treated as a Mineral Company. In addition to adhering to the basic conditions for listing, as set out in Chapter 8 of the Main Board Rules or Chapter 11 of the GEM Rules, if treated as a new applicant under the RTO Rules, the listed issuer must also satisfy the additional eligibility requirements for mineral and petroleum companies which are summarized in Annex B to this Note.


As mentioned above, where the Listing Committee determines that the RTO Rules do not apply to an extreme VSA, the issuer will be required to:

  • prepare a transaction circular under an enhanced disclosure and vetting approach;
  • appoint a financial adviser to conduct due diligence on the acquisition.

The transaction also needs to follow the requirements for VSAs under Chapter 14 (GEM Chapter 19) including the requirement for shareholders’ approval.

9.1. Announcement Requirement

The issuer must make an announcement to all shareholders regarding the VSA containing the information required by Main Board Rules 14.58 and 14.60 (GEM Rules 19.58 and 19.60). An announcement of a VSA is subject to pre-vetting by the Exchange under Rule 13.52(2)(a) (GEM Rule 17.53(2)(a)).

9.2. Transaction Circular Disclosure

Where the Listing Committee determines that the RTO Rules do not apply to an extreme VSA, the issuer should ensure that the transaction circular contains material information about the target and the future business prospects of the issuer. In doing so, it is required to apply the standard of disclosure for listing documents of new listing applicants.

In particular, issuers should disclose their intention to make significant changes in: (i) the enlarged group’s business and/or arrangements for potential acquisitions or disposals of assets; (ii) the issuer’s board composition; and (iii) the target’s management.

Issuers are required by Hong Kong Accounting Standards 36 – Impairment of Assets, to conduct an impairment assessment of the target for the purpose of preparing pro forma financial statements in the circular, adopting a valuation methodology that is consistent with the accounting standards and the issuer’s accounting policy. Issuers should make appropriate pro forma adjustments taking into account any impairment of assets, based on the valuation reports and in accordance with the accounting standards for impairment. Issuers’ auditors should provide reasonable assurance on the pro forma adjustments applying the Hong Kong Standard on Assurance Engagements 3420, “Assurance Engagements to Report on the Compilation of Pro Forma Financial Information Included in a Prospectus”.

Where there are material impairments, issuers should also disclose the following:

  • the results of such impairment assessment in the circular; and
  • information about the valuation including the methodology adopted and major assumptions.

9.3. Responsibilities of the Financial Adviser

Attachment 1 to Exchange Guidance Letter HKEx-GL78-14 sets out the responsibilities of, and the scope of work to be performed by, the financial adviser appointed to conduct due diligence on an extreme VSA which is not a RTO. The issuer and its financial adviser are required to observe the following:

  • The financial adviser should be:
    • licensed or registered under the Securities and Futures Ordinance for Type 6 regulated activity;
    • permitted under its licence or certificate of registration to undertake sponsor work;
    • required to appoint a transaction team that comprises staff with appropriate levels of knowledge, skills and experience and include a Principal22 as the team’s supervisor; and
    • required to provide a declaration to the Exchange in respect of its due diligence on the transaction in the form set out in Attachment 2 to the guidance letter.
  • The extent of the financial adviser’s work and scope of due diligence should be referenced to Practice Note 21 to the Rules (Practice Note 2 to the GEM Rules). The financial adviser is expected to refer to the procedures sponsors would typically perform. Since the scope and extent of due diligence appropriate for any transaction may be different from the typical examples provided in the Practice Note, the financial adviser must exercise its judgment as to what investigations or steps are appropriate for a particular transaction and the extent of each step.
  • The issuer should note that the financial adviser’s due diligence work on the transaction would not relieve its directors of their responsibilities and obligations under the Listing Rules.
  • The issuer and its directors should assist the financial adviser to perform its duties:
    • the issuer should afford the financial adviser full access at all times to all persons, premises and documents relevant to its duties. In particular, the terms of engagement with experts retained to perform services related to the transaction should contain clauses entitling the financial adviser access to:
      1. any such expert;
      2. the expert’s reports, draft reports (both written and oral) and terms of engagement;
      3. information provided to or relied on by the expert;
      4. information provided by the expert to the Exchange or the Securities and Futures Commission (the Commission); and
      5. all other correspondence exchanged between the issuer or its agents and the expert, or amongst the expert, the issuer and the Exchange or Commission.
    • The issuer should keep the financial adviser informed of any material change to any of the above information previously given to or accessed by the financial adviser.
    • The issuer should provide to or procure for the financial adviser all necessary consents to the provision of the above information to the financial adviser.

The Financial Adviser’s Declaration

Attachment 2 to the guidance letter sets out the form of declaration which the financial adviser is required to give to the Exchange in respect of an extreme VSA. This is in similar form to the sponsor’s declaration given to the Exchange in respect of a new listing application (as set out in Appendix 19 to the Listing Rules and Form G of Appendix 7 to the GEM Rules). This requires declarations by the financial adviser to the following effect:

  • that having made reasonable due diligence inquiries, the financial adviser has reasonable grounds to believe and believes that:
    • the assets to be acquired meet the minimum profit requirements under Rule 8.05 (or the positive cash flow requirement under GEM Rule 11.12A) and the enlarged group meets all other conditions for listing;
    • the issuer’s circular contains sufficient information to enable a reasonable person to form a justifiable opinion of the transaction and the financial condition and profitability of the assets to be acquired;
    • the information in the non-expert sections of the circular is complete and accurate in all material respects and not misleading in any material respect;
    • there are no other material issues relating to the transaction which should be disclosed to the Exchange;
  • that in relation to each expert section of the circular, having made reasonable due diligence inquiries, it has reasonable grounds to believe and believes that:
    • material factual information relied on, but not verified by, the expert is complete and accurate in all material respects;
    • the material bases and assumptions on which the expert sections are based are fair, reasonable and complete;
    • the expert is appropriately qualified, experienced and sufficiently resourced to give the relevant opinion;
    • the expert’s scope of work is appropriate to the opinion required; and
    • the expert is independent from the issuer, its directors and controlling shareholders, the counterparty to the transaction and the assets to be acquired and the directors and controlling shareholders of the counterparty to the transaction; and
  • in relation to the information in the expert reports, the financial adviser, as a non-expert, after performing reasonable due diligence, has no reasonable grounds to believe that the information is untrue, misleading or contains any material omissions.


One of the remaining paths for rescuing a distressed listed company remains the injection of assets which meet the Listing Rules’ requirements for listing. This is acceptable to the Exchange as the issuer is subject to the full requirements of the Listing Rules and will follow the process for a new listing. Transactions in the twenty-four months after the restructuring may be subject to the Notifiable Transactions requirements, but will not need to be aggregated with the original RTO transaction as the RTO (and new listing) has already occurred.

The downside for bank creditors leading a restructuring is that the pool of investors with assets meeting the listing requirements, and who are willing to invest in this type of restructuring, is likely to be small. As the investor is bringing his own assets, the likelihood is that he’ll be in a strong position to negotiate down the price for the listed company. Creditor banks who take an equity position in the restructuring should benefit in the long term given the injection of new assets. In the short-term, however, commentators have remarked that the immediate cash payout is likely to be substantially less than on a cash subscription type restructuring.

11. Cash Subscriptions and Business Resuscitations: Main Board Rule 13.24/GEM 19.24

Cash injections and business resuscitations as a route to corporate rescues run into problems under MB Rule 13.24 (GEM 19.24).

These Rules provide that:

“An issuer shall carry out directly or indirectly, a sufficient level of operations or have tangible assets of sufficient value and/or intangible assets for which a sufficient potential value can be demonstrated to the Exchange to warrant the continued listing of the issuer’s securities.”

Where a listed issuer’s assets consist wholly or substantially of cash or short-dated securities (i.e. securities such as bonds, bills or notes which have less than a year to maturity), it will not be considered suitable for listing and trading in its securities will be suspended (Main Board Rule 14.82 and GEM Rule 19.92).

The difficulty in rescue situations is that in many cases the operations of the listed issuer have ceased to operate. The problems with a cash injection (which has never been classed as a Notifiable Transaction) stem from Rule 13.24. If the Rule 13.24 requirements are satisfied, there is then the issue of the 24-month period during which any injection of new assets into the listed company will be aggregated with the restructuring transaction and the aggregated transaction constituting a VSA. The issuer would then be treated as a new listing applicant. For the investor, the question will be whether the business can be sustained for 24 months without any injection of assets.

22 As defined in Paragraph 17 of the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission.


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