January to March 2012

Transcription

1 January to March 2012 This quarterly update (January to March 2012) highlights recent developments in Hong Kong capital markets practices: Interim guidance on pre-ipo investments: HKEx reproduced its press release published on 13 October 2010 in relation to the Interim Guidance on Pre-IPO Investments as a guidance letter on 16 January For more details, please see "Interim guidance on pre-ipo investments" below. Guidance on acquisitions of subsidiaries and businesses: HKEx published a guidance letter on 28 March 2012 for the purpose of providing guidelines and clarifications on the accounting and disclosure requirements under the Listing Rules in relation to the acquisitions or agreed/proposed acquisitions of subsidiaries or businesses by new listing applicants during or after the trading record period. For more details, please see "Guidance on acquisitions of subsidiaries and businesses" below. Guidance on typhoon and rainstorm warning arrangements: HKEx published a guidance letter on 5 March 2012 to set out the arrangements in relation to dealings with SEHK if a typhoon signal no. 8 or above is hoisted and/or black rainstorm warning is issued on the day of certain occasions in relation to a listing. For more details, please see "Guidance on typhoon and rainstorm warning arrangements" below. Guidance on issuance of debt securities to professional investors: SEHK published a letter on 30 March 2012 to provide guidelines and clarifications about the new professional debt securities listing regime under Chapter 37 of the Listing Rules which became effective on 11 November For more details, please refer to "Guidance on issuance of debt securities to professional investors" below. Capital Markets Quarterly Update January - March 2012 Issue 1

2 Guidance on drafting the "Summary and Highlights" section: HKEx published a guidance letter on 12 January 2012 to provide guidelines on drafting the "Summary and Highlights" section in listing documents. The major purpose is to simplify and improve the content of the section to make it easier for investors to decide whether they might be interested in the offer and wish to read the remaining part of the listing document. For more details, please see "Guidance on drafting the "Summary and Highlights" section" below. Guidance on disclosure of intellectual property rights: HKEx published a guidance letter on 9 February 2012 to encourage listing applicants to focus on discussing material intellectual property rights and making more meaningful disclosure on such rights to investors instead of disclosing them in tabular form in the listing documents. For more details, please see "Guidance on disclosure of intellectual property rights" below. Guidance on business model relying on forfeited income: HKEx published a guidance letter on 3 January 2012 to provide guidelines on making relevant disclosures to SEHK and in the listing documents for a business model relying heavily on forfeited income from prepaid services and products. For more details, please see "Guidance on business model relying on forfeited income" below. Guidance for listing applicants engaging in restaurant business: HKEx published a guidance letter on 16 January 2012 to provide guidelines on disclosure of matters in listing documents for listing applicants engaging in restaurant business. For more details, please see "Guidance for listing applicants engaging in restaurant business" below. The State of Delaware USA is an acceptable jurisdiction for listing: HKEx published a listing decision on 10 February 2012 to confirm that, subject to certain conditions, the State of Delaware is an acceptable jurisdiction of an issuer's incorporation for listing on SEHK. For more details, please see "The State of Delaware USA is an acceptable jurisdiction for listing" below. Alberta Canada is an acceptable jurisdiction for listing: HKEx published a listing decision on 27 February 2012 to confirm that, subject to certain conditions, Alberta Canada is an acceptable jurisdiction of an issuer's incorporation for listing on SEHK. For more details, please see "Alberta Canada is an acceptable jurisdiction for listing" below. Incorporation in Maryland USA acceptable on its own facts: HKEx published a listing decision on 12 March 2012 stating that the listing applicant's incorporation in Maryland USA did not prevent its secondary listing on SEHK based on its own facts and circumstances. A Maryland-incorporated listing applicant would be considered on a case-by-case basis in view of its own merit. For more details, please see "Incorporation in Maryland USA acceptable on its own facts" below. Capital Markets Quarterly Update January - March 2012 Issue 2

3 In this Update, the following terms have the following meanings: "CO" "GEM" "HK" "HK$" "HKEx" "IPOs" "JPS" "Listing Rules" "PRC" "SEC" "SEHK" "SFC" "SFO" "Takeovers Code" "USA" Companies Ordinance (Cap 32 of the Laws of Hong Kong) Growth Enterprise Market operated by SEHK Hong Kong Special Administrative Region of the PRC Hong Kong Dollars Hong Kong Exchanges and Clearing Limited (also referring to its subsidiaries, including SEHK, as appropriate) Initial public offerings Joint Policy Statement Regarding the Listing of Overseas Companies issued on 7 March 2007 Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (Main Board Listing Rules) or Rules Governing the Listing of Securities on the Growth Enterprise Market of The Stock Exchange of Hong Kong Limited (GEM Listing Rules) or both, as the case may be People's Republic of China U.S. Securities and Exchange Commission of the USA The Stock Exchange of Hong Kong Limited Securities and Futures Commission Securities and Futures Ordinance (Cap 571 of the Laws of Hong Kong) Code on Takeovers and Mergers United States of America Capital Markets Quarterly Update January - March 2012 Issue 3

4 Interim Guidance on Pre-IPO Investments QUICK READ HKEx made a press release on 13 October 2010 ("Press Release") in relation to the Interim Guidance on Pre-IPO Investments ("Interim Guidance"). Please refer to our legal update entitled "Hong Kong Stock Exchange Issues Guidance on Pre-IPO Investments" published on 14 October The Press Release was reproduced as a HKEx guidance letter "HKEx-GL29-12" on 16 January INTERIM GUIDANCE ON PRE-IPO INVESTMENTS Under the Interim Guidance, SEHK will generally require, except in very exceptional circumstances, that pre-ipo investments must be completed either: at least 28 clear days before the date of the first submission of the first listing application form; or 180 clear days before the first day of trading of the listing applicant s securities. Pre-IPO investments are considered completed when the funds are irrevocably settled and received by the listing applicant. Clear days exclude the day of the pre-ipo investment completion, the day of the submission of the listing application form and the first day of trading of securities. The Listing Committee will consider special situations on a case-by-case basis where it is justifiable to allow pre-ipo investments to be made on terms more favourable than those offered to investors at the IPO (e.g. where the listing applicant is in severe financial distress). Potential listing applicants are encouraged to consult the Listing Division before submission of listing applications if they have any questions. You may download copies of the guidance letter via the link below: Capital Markets Quarterly Update January - March 2012 Issue 4

5 Guidance on Acquisitions of Subsidiaries and Businesses QUICK READ HKEx published a guidance letter "HKEx-GL32-12" on 28 March 2012 to provide guidelines on and clarify the accounting and disclosure requirements under Main Board Listing Rules 4.04(2) and 4.04(4) (GEM Listing Rules 7.03(2) and 7.03(4)) and Main Board Listing Rule 4.05A (GEM Listing Rule 7.04A) (collectively "Relevant Rules") in relation to the acquisitions or agreed/proposed acquisitions of subsidiaries or businesses by new listing applicants during or after the trading record period. RELEVANT RULES Main Board Listing Rules 4.04(2) and 4.04(4) (GEM Listing Rules 7.03(2) and 7.03(4)) require a new listing applicant to include in the accountants report the results and balance sheet of any subsidiary or business acquired, agreed/proposed to be acquired since the date to which its latest audited accounts have been made up in respect of each of the three financial years (two financial years for GEM listing applicants): immediately preceding the issue of the listing document; since the incorporation of such subsidiary or the commencement of such business if this occurred less than three years (two years for GEM listing applicants) prior to such issue; or a shorter period which is acceptable to SEHK. Main Board Listing Rule 4.05A (GEM Listing Rule 7.04A) requires that, where a new listing applicant acquired any material subsidiary or business during the trading record period and that acquisition, if made by a listed issuer would have been classified at the date of application as a major transaction or a very substantial acquisition, then it must disclose pre-acquisition financial information on that material subsidiary or business from the commencement of the trading record period to the date of acquisition. (If the material subsidiary or business commenced its business after the commencement of the trading record period, then it must disclose from the date of the commencing of its business to the date of acquisition.) Pre-acquisition financial information on the material subsidiary or business must normally be: drawn up in conformity with the accounting policies adopted by the new listing applicant; and disclosed in the form of a note to the accountants report or in a separate accountants report. GUIDANCE This guidance letter provides guidelines following the acquisition of subsidiaries or businesses by listing applicants during or after the trading record period in relation to the following areas: Capital Markets Quarterly Update January - March 2012 Issue 5

6 Scope Size test Accounting requirements Main Board Listing Rules 4.04(2) and 4.04(4) (GEM Listing Rules 7.03(2) and 7.03(4)) Apply to acquisitions (including any acquisition agreements entered into and intention to acquire) of any subsidiaries or businesses (including any equity interest in another company) after the trading record period (including the stub period) No size test - the rules do not have a materiality threshold. This means that irrespective of the size of the subsidiary or business acquired, agreed to be acquired or proposed to be acquired after the trading record period, the listing applicant must include in the listing document the financial information of the relevant subsidiary or business for the trading record period unless a waiver is granted In conformity with the accounting policies adopted by the listing applicant Main Board Listing Rule 4.05A (GEM Listing Rule 7.04A) Apply to acquisitions of material subsidiaries or businesses (including any equity interest in another company) during the trading record period (including the stub period) By comparing the total assets, profits or revenue of the subsidiary or business being acquired for the most recent financial year of the trading record period to those of the listing applicant for the same financial year The rule is applicable if it is classified at the date of application as a major transaction or a very substantial acquisition (i.e. 25% of more) In conformity with the accounting policies adopted by the listing applicant Disclosure requirements Waivers considered Financial information during the trading record period (including the stub period) In a note to accounts or separate accountants' report Full financial statements preferred but at least include income statement and balance sheet (including information required by Main Board Listing Rule 4.05/GEM Listing Rule 7.04) Waivers will be considered on a case-by-case basis (see Listing Decision HKEx-LD78-1. Basis of the waiver including immateriality, unavailability of financial information due to genuine reasons and alternative disclosures in the listing document) Pre-acquisition financial information (from commencement of the trading record period to the date of acquisition) In a note to accounts or separate accountants' report Full financial statements (including information required by Main Board Listing Rules 4.04 and 4.05/GEM Listing Rules 7.03 and 7.04) SEHK may consider granting waivers on a case-by-case basis, but so far SEHK has only granted waivers in limited exceptional cases based on the special circumstances of each case You may download copies of the guidance letter via the link below: Capital Markets Quarterly Update January - March 2012 Issue 6

7 Guidance on Typhoon and Rainstorm Warning Arrangements QUICK READ HKEx published a guidance letter "HKEx-GL31-12" on 5 March 2012 to set out the arrangements in relation to dealings with SEHK if a typhoon signal no. 8 or above is hoisted and/or black rainstorm warning is issued ("Bad Weather Events") on the day of the following occasions in relation to a listing: Issue of an authorisation letter for the registration of a prospectus Opening or closing of application lists of the public offer Pre-vetting of an announcement about final offer price, indication of the levels of interest in the placing, the basis of allocation and the results of applications of the public offer shares ("Allocation Announcement") Issue of a listing approval letter Commencement of dealings in shares ISSUE OF AN AUTHORISATION LETTER FOR THE REGISTRATION OF A PROSPECTUS The arrangements when a Bad Weather Event occurs on the day before the publication of the prospectus ("P-1 Day") are as follows: Time Status Typhoon signal no. 8 or above Black rainstorm warning Before 9 a.m. Cancelled at or before 1 p.m. Before 9 a.m. Remains in effect at and after 1 p.m. The relevant documents will be reviewed and the authorisation letter will be issued after the SEHK IPO team in charge ("Team") return to work on P-1 Day The relevant documents will be reviewed by the Team on the business day after the Bad Weather Event is cancelled and the authorisation letter will be issued as soon as possible After 9 a.m. The authorisation letter will be issued before the Team leaves the office on P-1 Day The Team remains in office and no special arrangement is needed If the Bad Weather Event would result in a delay in the registration of the prospectus with the Companies Registry and: the offer period would be less than 3 days, the listing applicant should amend its listing timetable to ensure compliance with section 44(1) of the CO. It should also publish an announcement about the revised timetable on the business day after the Bad Weather Event. Issue of a supplemental prospectus is not required; and Capital Markets Quarterly Update January - March 2012 Issue 7

8 accordingly, the prospectus would be dated earlier than its publication. The listing applicant should prepare a letter stating that the prospectus would not be published, circulated or distributed on the date of the prospectus as a result of the delay caused by the Bad Weather Event. The listing applicant is not required to amend the date of the prospectus. OPENING OR CLOSING OF APPLICATION LISTS If a Bad Weather Event is in force at any time between 9:00 a.m. and 12:00 noon on the scheduled date of the opening of application lists ("A Day"), the lists will not be opened on that day. Instead, the application lists will be opened between 11:45 a.m. and 12:00 noon on the next business day ("A+1 Day") if no Bad Weather Event is in force between 9:00 a.m. and 12:00 noon. No announcement is required if the above arrangement is explained in the prospectus. If an announcement is to be made, no pre-vetting by SEHK is required. PRE-VETTING OF ALLOCATION ANNOUNCEMENT The Allocation Announcement is usually approved for publication by close of business 2 days before listing ("L-2 Day"). The Allocation Announcement is posted on SEHK s website between 4:15 p.m. to 11:00 p.m. on L-2 Day or between 6:00 a.m. to 8:30 a.m. on the day before listing ("L-1 Day"). If a Bad Weather Event occurs on L-2 Day, the arrangements are as follows: Time Status Typhoon signal no. 8 or above Black rainstorm warning Before 9 a.m. Cancelled at or before 1 p.m. Before 9 a.m. Remains in effect at and after 1 p.m. The pre-vetting of the Allocation Announcement would be done after the Team returns to work on L-2 Day The results of the allocation could be posted before 8.30 a.m. on L-1 Day on SEHK's website. The Allocation Announcement would be post-vetted on L-1 Day. A supplemental Allocation Announcement may be required if material information was omitted previously. Other actions may be required from the listing applicant to prevent a disorderly market on the listing date. Otherwise, the listing applicant may need to delay its listing timetable and publish an announcement accordingly on L-1 Day If the listing applicant is unable to post the allocation results before 8.30 a.m. on L-1 Day on SEHK's website, the listing applicant may need to amend its listing timetable and make an announcement accordingly on L-1 Day After 9 a.m. The pre-vetting will be done before the Team leaves the office on L-2 Day The Team remains in office and no special arrangement is required Capital Markets Quarterly Update January - March 2012 Issue 8

9 ISSUE OF LISTING APPROVAL LETTER If a Bad Weather Event occurs on L-1 Day, the arrangements are as follows: Time Status Typhoon signal no. 8 or above Black rainstorm warning Before 9 a.m. Before 9 a.m. Cancelled at or before 1 p.m. Remains in effect at and after 1 p.m. The approval letter will be issued by the end of L-1 Day The approval letter will be issued on L-2 Day if bad weather is anticipated, or before 9:15 a.m. on the day of listing ("L Day") if no Bad Weather Event is in force After 9 a.m. The approval letter will be issued before the Team leaves the office on L-1 Day The Team remains in office and no special arrangement is required DAY OF LISTING Dealings would commence at the time when trading resumes even if it is only for half a day. Please refer to SEHK's website for details of the timing of resumption of trading. No announcement is required to be issued by the listing applicant as the trading arrangement will be posted on SEHK's website. DISCLOSURE IN PROSPECTUS Listing applicants should ensure their listing documents disclose the emergency arrangements in case of Bad Weather Events which may disrupt their listing timetable. You may download copies of the guidance letter via the link below: Capital Markets Quarterly Update January - March 2012 Issue 9

10 Guidance on Issuance of Debt Securities to Professional Investors QUICK READ The new professional debt securities listing regime under Chapter 37 of the Listing Rules became effective on 11 November SEHK published a letter entitled "Update on issuance of debt securities to professional investors under Chapter 37 of the Main Board Listing Rules" on 30 March 2012 to provide guidelines and clarifications about the new regime. The new regime aims to simplify and streamline the application and approval procedures for professional debt securities listing which allow a shorter turnaround time. GUIDANCE Qualifications for professional debt listing Subject to certain exceptions, the three conditions which an issuer and its debt securities are required to satisfy for listing are: it has net assets of HK$100 million; it has audited accounts for the two years before the listing application; and the debt securities have a minimum denomination of HK$500,000 or equivalent amount in foreign currency. Simplified approval procedures Under Rule of the Listing Rules, SEHK will inform an issuer whether it and its debt securities are eligible for listing within five business days after receipt of the listing application. In practice, for normal applications, SEHK will usually issue the listing approval letter or eligibility letter: within one business day for issues involving a Hong Kong listed company; and within two business days for other issuers. Disclosure requirements Under Rule of the Listing Rules, a listing document must contain information which professional investors would customarily expect it to contain with simple disclosure requirements. The underlying rationale is to allow issuers to decide the contents of their documentation to professional investors who should be able to exercise their own judgement to determine whether the information provided in the listing documents are sufficient. Capital Markets Quarterly Update January - March 2012 Issue 10

11 Waivers to allow selling to high net worth investors SEHK will grant waivers to the definition of professional investors such that professional debt securities can be marketed to high net worth investors. Such waiver is granted on the assumption that retail investors would be exceedingly unlikely to trade these securities. Listing fees The one-off listing fees payable upon application for listing of professional debt issues are capped at a range of HK$7,000 to HK$90,000, depending on issue size and tenor. No annual fee is required. You may download copies of the letter via the link below: Capital Markets Quarterly Update January - March 2012 Issue 11

12 Guidance on Drafting the "Summary and Highlights" Section QUICK READ HKEx published a guidance letter "HKEx-GL27-12" on 12 January 2012 to provide guidelines on drafting the "Summary and Highlights" section in listing documents. The major purposes of the guidelines are to ensure that the section: is comprehensible and readable; is concise, easy to read and in plain language; and is made easier for investors to decide whether they might be interested in the offer and wish to read the remaining part of the listing document. GUIDANCE There are two parts to the guidance letter: general guidance on how to draft the "Summary and Highlights" section in a way that is concise, easy to read and in plain language ("General Guidance"); and a checklist of information that might be included in the "Summary and Highlights" section with guidance on what to disclose and how to disclose it ("Checklist of Information"). GENERAL GUIDANCE The General Guidance covers the following areas: General plain language principles - such as using short sentences and using definite and direct everyday language. Principles for dealing with technical points - such as using simple defined terms and avoiding reliance on glossaries and defined terms unless they are helpful. Information which the "Summary and Highlights" section should exclude - such as excluding detailed description of the listing applicant s competitive strengths and business strategies (instead a list with short explanations should be included) and multiple pages of detailed financial statements. (Instead, disclosure should be limited mainly to the headline financial statements and key financial ratios.) Using tables to make the "Summary and Highlights" section easier to read - such as using tables to present details of use of proceeds and expansion plans and capital expenditures. Overall length of the "Summary and Highlights" section - excluding irrelevant information. The length should generally be no more than 10 pages long, although its actual length will Capital Markets Quarterly Update January - March 2012 Issue 12

13 depend on the nature and complexity of the listing applicant, its business and the offering. CHECKLIST OF INFORMATION The Checklist of Information covers the following key areas with recommendations as to what information SEHK typically expects to see included in the "Summary and Highlights" section. However it is not a prescriptive checklist of information which must be included. Only information that is relevant and necessary for a particular listing applicant should be included. The listing applicant should ensure that the content is in line with the key messages contained in the listing document and the road show presentation. Key area: Business model Major Recommendations: describing principal business activities currently engaging in; describing major development milestones and mergers and acquisitions since establishment if they are material; describing any material change in the business focus during the track record period; explaining the direction of the listing applicant with the expected result; describing the major customers and distributors, suppliers and contract manufacturers; describing the sales/distribution channels; describing the market share/ranking data; the summary should not generally include a separate industry section, although it may refer to industry trends; and listing the competitive strengths and business strategies without cutting and pasting such information from the business section. Key area: Shareholder information Major Recommendations: including details of the major shareholders and investors at the pre-ipo stage, shortly before or, at the same time as, listing; explaining the competition and key business relationships with controlling shareholders, if any; and explaining the dilution effect resulting from the full exercise of all outstanding pre-ipo share options and/or other derivatives, if material. Capital Markets Quarterly Update January - March 2012 Issue 13

14 Key area: Key operational and financial data Major Recommendations: the financial and operational data contained in the section should be a quick overview only and generally should not be more than two pages; and any discussion and analysis should be made on a high level basis and kept short. Key area: Future plans and prospects Major Recommendations: future plans and use of proceeds should be in bullet or table form; and disclosure of dividend policy such as expected dividend payout ratio and significant distributions or matters that should be drawn to investors attention. Key area: Offer related information and profit forecast Major Recommendations: key offering statistics should be in table form; where a full-year profit forecast is included in the listing document, forecast P/E ratio should be included for investors' information; and making cross-references to the bases and assumptions in appendices/other sections of the listing document instead of copying them out in the section. Key area: Other information Major Recommendations: Highlighting other significant matters or issues affecting the listing applicant or the offering such as including the following information: deteriorating/highly fluctuating financial results after the track record period, significant non-recurring items in income statements, adverse changes in business trends, market positions or regulatory environment; material non-compliance and litigation incidents and other material events; a short summary of the very material risk factors or making cross-references to the "Risk Factors" section do not list all risk factors; key non-standard ongoing waivers granted; and Capital Markets Quarterly Update January - March 2012 Issue 14

15 other material company/industry-specific information, if any (e.g. for introduction cases liquidity measures, information on share price/trading volume; for property companies list of projects; for companies whose businesses may be significantly affected by commodity prices/fair value changes - sensitivity analysis and key initiatives to manage these risk exposures; for novel overseas jurisdictions - highlights on laws and regulations). You may download copies of the guidance letter via the link below: Capital Markets Quarterly Update January - March 2012 Issue 15

16 Guidance on Disclosure of Intellectual Property Rights QUICK READ HKEx published a guidance letter "HKEx-GL30-12" on 9 February 2012 to encourage listing applicants to focus on discussing material intellectual property rights and making more meaningful disclosure on such rights to investors instead of disclosing them in tabular form in the listing documents. BACKGROUND Under the Listing Rules, a listing applicant is required to include in its listing document: details of any trade marks, patents or other intellectual or industrial property rights (together referred to as "IP Rights") which are material in view of the group s business; and a statement regarding the extent to which the group is dependent on factors, where such factors are of fundamental importance to the group s business or profitability. GUIDANCE A listing applicant should discuss those IP Rights which are material to its business as part of the description of its business instead of using a separate list. The listing applicant should focus on what IP Rights would be meaningful to disclose to investors to give more relevant prospectus disclosure. In determining what IP Rights are material for disclosure in its listing document, the following factors should be considered by the listing applicant: materiality should be analysed from the perspective of investors what would be relevant to their decision on whether to invest; materiality should be judged in the context of the listing applicant s business, profitability and prospects in its entirety; and materiality should also be judged in the context of the extent to which the listing applicant s business activities and operations, financial position and prospects are dependent on the IP Rights. A material IP Right is one the absence or defect of which, from a reasonable investor s perspective, would materially impact the business, profitability or prospects of the listing applicant and its subsidiaries, taken as a whole. You may download copies of the guidance letter via the link below: Capital Markets Quarterly Update January - March 2012 Issue 16

17 Guidance on Business Model Relying on Forfeited Income QUICK READ HKEx published a guidance letter "HKEx-GL26-12" on 3 January 2012 to provide guidelines on making relevant disclosures to SEHK and in the listing documents for a business model relying heavily on forfeited income from prepaid services and products. BACKGROUND This guidance letter is published particularly for listing applicants who are engaging in the business of providing personal care services to individual customers (e.g. slimming and beauty services). Their common business model is summarised below: a material portion of the listing applicant s revenue during the track record was derived from prepaid packages of services or products. This model would continue after listing; the validity period of these prepaid packages usually ranged from 3 months to a year or longer from the date of purchase. After then, it was at the listing applicant s discretion to extend; initially, prepayments received were recorded as deferred revenue in the balance sheet. After the services had been provided to customers, the prepayments were recognised as revenue. When a prepaid package expired, any remaining balance of the deferred revenue would be recognised as income (forfeited income); and the forfeited income constituted a significant part of the listing applicant s revenue for each year of the track record period, exceeding 30% of the yearly revenue in some cases. Should the forfeited income be excluded, the listing applicant would not be able to meet the minimum profit requirement for listing under Rule 8.05(1)(a) of the Listing Rules (basic conditions for listing - the profit test). GUIDELINES HKEx sets out the following guidelines for a business model with material forfeited income from prepayments: Whether it is an industry norm to include forfeited income - A listing applicant may regard income for services and/or products not rendered and/or utilised as revenue generated in the usual and ordinary course of business for the purpose of Rule 8.05 of the Listing Rules (basic conditions for listing) if it is an industry norm to include forfeited income in its business operation. Factors to be taken into consideration - The following factors will be taken into consideration which may warrant serious concern: o whether the listing applicant has a relatively short history of operating a business with forfeited income; Capital Markets Quarterly Update January - March 2012 Issue 17

18 o whether the listing applicant's reliance on forfeited income is substantially above the industry norm; and/or o whether there are many complaints or legal claims in relation to the operation. Accordingly, a heightened standard of review will be adopted. An exceptionally high level of forfeited income - An exceptionally high level of forfeited income in the listing applicant s income portfolio when compared to its industry peers could imply that it should not be considered as generated in the usual and ordinary course of business for the purpose of Rule 8.05(1)(a). Situation renders listing unsuitable - The listing applicant might not be considered suitable for listing, if, after taking into consideration the factual situation, SEHK concluded that: o continued reliance on forfeited income would potentially render the business not sustainable; o its business operation depends on unethical selling methods; or o it is sceptical whether the listing applicant is able to provide the contracted services/products. Specific disclosure - Where SEHK considers appropriate, it will require specific disclosure in the listing document and a detailed submission explaining why the sponsor and the directors consider that the listing applicant's business is suitable for listing and satisfies the basic conditions for listing under the Listing Rules. Material information to be included - The listing document should include the following information if it is material: o specified details on the prepaid packages giving rise to forfeited income; and o specified details on the quality control and complaints handling. Submission to SEHK - SEHK normally requires the following submission: o an analysis on the remaining balances of revenue and profit after exclusion of the forfeited income and related expenses from the track record period profits; o a comparative analysis with industry peers on various specified items and on other material aspects of the operation; and o a confirmation from the sponsor stating that: the listing applicant is able to provide the contracted services/products; and the internal control measures are adequate. Capital Markets Quarterly Update January - March 2012 Issue 18

19 You may download copies of the guidance letter via the link below: Capital Markets Quarterly Update January - March 2012 Issue 19

20 Guidance for Listing Applicants Engaging in Restaurant Business QUICK READ HKEx published a guidance letter "HKEx-GL28-12" on 16 January 2012 to provide guidelines on disclosure of matters in listing documents for listing applicants engaging in restaurant business. GUIDANCE Below is a summary of the issues which SEHK considers a listing applicant engaging in restaurant business should discuss and disclose in detail in its listing document to the extent they are material: Suppliers, sources and prices of raw materials details of the price fluctuations and market price trends of the listing applicant s major food ingredients; details of the cost monitoring and control measures of the major food ingredients; details of the sources, shelf life and quality management of the major food ingredients; details of the authorised suppliers used; and details of any food supply interruption and difficulties. Same stores sales and table/seat turnover rate details of the same store sales and table/seat turnover rate with commentary on any changes; details of the average spending per customer and average daily revenue for each restaurant with appropriate commentary on any changes; and the time period normally required for a restaurant to breakeven. Cash management details of the internal control system and procedures to prevent cash misappropriation/ embezzlement; and details of any material incidents of cash misappropriation/embezzlement. Trademarks details of the listing applicant's trademarks and whether they have been duly registered; and details of any possible damage and/or actual damage suffered resulting from the passing off behaviour of other restaurants. Capital Markets Quarterly Update January - March 2012 Issue 20

21 Expansion details of the number and movement of restaurants with reasons for termination or replacement of restaurants; details of site selection criteria for new restaurants and measures to prevent competition with the existing restaurant(s); details of the future expansion plans; details of the competitive landscape including the existing status of competition; details of the growth strategy to sustain growth (i.e. organic growth, through franchise arrangement or acquisition); for franchise arrangements: o details of the salient terms of the franchise agreements and any breach of the franchise agreements; o the significance of the franchising operation to the listing applicant; and o details of the measures to ensure that the franchised restaurant(s) operate(s) according to the specified standards. Pricing policy the factors determining the pricing policy of a restaurant; and whether similar prices are charged across different restaurants of the listing applicant and if not, the factors for determining the charging of different prices. Food safety and quality control details of the quality control measures to ensure food safety; details of the senior management and staff responsible for food safety and quality control; details of the inspections carried out on suppliers by the listing applicant and/or other inspection and testing agencies; and details of any investigation regarding the hygiene of food/restaurant(s) conducted by any government authorities. Complaints details of the complaints received and their merits; Capital Markets Quarterly Update January - March 2012 Issue 21

22 details of the procedures and measures to record and handle customers complaints; and details of any detrimental incident (e.g. food poisoning) that occurred. You may download copies of the guidance letter via the link below: Capital Markets Quarterly Update January - March 2012 Issue 22

23 The State of Delaware USA is an Acceptable Jurisdiction for Listing QUICK READ HKEx published a listing decision "HKEx-LD " on 10 February 2012 to confirm that, subject to certain conditions, the State of Delaware USA ("Delaware") is an acceptable jurisdiction of an issuer's incorporation for listing on SEHK. BACKGROUND There is only one type of for-profit corporation under Delaware law. The constitutive documents of a Delaware corporation are its certificate of incorporation, or charter, and its by-laws ("Constitutive Documents"). The certificate of incorporation may grant power to the board to amend or repeal the by-laws. The certificate of incorporation and/or by-laws may also contain provisions requiring shareholders approval for any amendments to the by-laws. A corporation must comply with the registration and reporting requirements of SEC if it is a public company in the USA. SEC is a full signatory to the IOSCO Multilateral Memorandum of Understanding Concerning Consultation and Cooperation and the Exchange of Information and has also entered into a Memorandum of Understanding Concerning Cooperation and the Exchange of Information in the Administration and Enforcement of Securities Laws with SFC. JPS FRAMEWORK The Listing Rules set out a general regime for overseas listing applicants to list on SEHK. SEHK may reject a listing application if it is not satisfied that the overseas listing applicant is incorporated in a jurisdiction which offers at least equivalent standards of shareholder protection in Hong Kong. Having said that, SEHK may still approve a listing application if the overseas listing applicant makes amendments to its constitutive documents to provide the necessary protection as requested by SEHK. The JPS formalises this process by setting out a list of shareholder protection areas which SEHK takes into consideration. COMPARISON After comparing the CO with the relevant Delaware laws and regulations based on the JPS framework, SEHK is aware of the following differences in shareholder protection: areas where Delaware laws and regulations are considered comparable with or even stricter than the CO; and areas where the differences in shareholder protection standards under Delaware laws and regulations are considered acceptable even though some differences remained, or where SEHK considers that a Delaware corporation must take action to reconcile the differences. Capital Markets Quarterly Update January - March 2012 Issue 23

24 A DELAWARE LISTING APPLICANT SHOULD ADDRESS THESE AREAS Below is a summary of the actions which SEHK expects a Delaware corporation/listing application to take for the purpose of reconciling the shareholder protection differences identified by SEHK: The following actions are expected to be taken if they are not unduly burdensome to the corporation: a corporation's Constitutive Documents should provide for a voting threshold of at least a two-thirds majority of shareholders present in the general meeting ("GM"); only a corporation's shareholders should be empowered to amend its Constitutive Documents (i.e. both the charter and by-laws) but not the board; a corporation's Constitutive Documents should provide for a court petition right as under the CO; and a corporation's Constitutive Documents should provide for a court confirmation for reduction of share capital. Actions must be taken to demonstrate that a corporation's Constitutive Documents provide for the following shareholder protection aspects comparable to that under the CO: appointment, removal and remuneration of auditors must be approved by shareholders; holding of a GM each year as its annual GM, and no more than 15 months may elapse between two annual GMs; members holding not less than 5% of the paid up capital may require the company to convene an extraordinary general meeting and may request the company to circulate a resolution proposed by the requisitionists; the notice period for a meeting approving a special resolution must be at least 21 days and for any other shareholders' meeting at least 14 days; appointment of a director is required to be voted on individually. Unanimous approval of members is required to pass a resolution permitting appointment of two or more directors by a single resolution; if a corporation is not subject to the Sarbanes-Oxley-Act (which provides a shareholder protection comparable to the CO), it must demonstrate that its Constitutive Documents provide that, subject to certain exceptions, it will not make loans, including quasi loans and credit transactions, to its directors and their associates; any payment to a director or a past director as a compensation for loss of office or retirement from office requires shareholders' approval; any alternation of share capital must be approved by a majority vote in GM; and Capital Markets Quarterly Update January - March 2012 Issue 24

25 any reduction of share capital must be approved by a three-quarter majority vote in GM. SEHK DECISION Subject to certain conditions, SEHK decided that Delaware is an acceptable jurisdiction for an issuer s incorporation for listing on SEHK. SEHK would require a Delaware listing applicant to submit the following confirmations upon filing its listing application: a sponsor's confirmation that it has considered and reviewed all material shareholder protection areas in its due diligence review under the Listing Rules, and that it is independently satisfied that the shareholder protection afforded by the USA and Delaware laws to the corporation s shareholders is at least equivalent or broadly commensurate to that in Hong Kong; and a legal opinion and sponsor's confirmation that the corporation's Constitutive Documents do not contain provisions which will prevent it from complying with the Listing Rules, the SFO Disclosure of Interests and, if they apply, the Takeovers Codes. You may download copies of the listing decision via the link below: Capital Markets Quarterly Update January - March 2012 Issue 25

26 Alberta Canada is an Acceptable Jurisdiction for Listing QUICK READ HKEx published an updated listing decision "HKEx-LD " on 27 February 2012 to confirm that, subject to certain conditions, Alberta Canada ("Alberta") is an acceptable jurisdiction of an issuer's incorporation for listing on SEHK. BACKGROUND SEHK was asked to consider whether Alberta is an acceptable jurisdiction for listing in relation to: Company X (listed on the Toronto Stock Exchange and a reporting issuer) who proposed to secondary list on SEHK; and Company Y (a non-reporting issuer and not listed on any exchange) who proposed to primary list on SEHK. Both Company X and Company Y were incorporated under the Business Corporations Act (Alberta) ("ABCA") and had sufficient nexus with Alberta as their headquarters and major assets were in Alberta. Also, the Alberta Securities Commission is a full signatory to the IOSCO Multilateral Memorandum of Understanding Concerning Consultation and Cooperation and the Exchange of Information. JPS FRAMEWORK The Listing Rules set out a general regime for overseas listing applicants to list on SEHK. SEHK may reject a listing application if it is not satisfied that the overseas listing applicant is incorporated in a jurisdiction which offers at least equivalent standards of shareholder protection in Hong Kong. Having said that, SEHK may still approve a listing application if the overseas listing applicant makes amendments to its constitutive documents to provide the necessary protection as requested by SEHK. The JPS formalises this process by setting out a list of shareholder protection areas which SEHK takes into consideration. ACTIONS TAKEN TO ADDRESS THE SHAREHOLDER PROTECTION DIFFERENCES After comparing the CO requirements with the ABCA requirements based on the JPS framework, SEHK identified various shareholder protection differences between the two legal regimes. The following actions were taken by Company X and Company Y to address the shareholder protection differences between the CO and ABCA and which are acceptable to SEHK: Amendment of constitutive documents - Both Company X and Company Y would pass a resolution to amend their articles or by-laws to provide that any amendment to the articles or by-laws requires a vote of not less than a two-thirds majority of shareholders who voted at a general meeting. Capital Markets Quarterly Update January - March 2012 Issue 26

27 Conversion to an unlimited liability company - Under Alberta law, upon conversion of a limited company to an unlimited liability company through at least a two-thirds majority vote of shareholders who voted at a meeting, shareholders are liable for the debts and liabilities which arose before or after the conversion. Both Company X and Company Y gave an undertaking that it would not convert to an unlimited liability company. Share register open to inspection - Company Y would amend its articles or by-laws to provide that its share register would be open to inspection by shareholders and closure of the register must not be more than 30 days. Also, notice would be given to shareholders of such closure. No action is required by Company X. Appointment of director - Company X provided an undertaking to arrange its directors to be voted on individually. Company Y would amend its articles or by-laws to achieve such requirement. Loan to director - Company X provided an undertaking that it would only make loans to directors under the situations permitted under the CO. Company Y would amend its articles or by-laws to achieve such requirement. Compensation to director - Company X provided an undertaking that it would only make payment to a director or past director as compensation for loss of office or retirement from office in accordance with the CO requirements. Company Y would amend its articles or by-laws to achieve such requirement. Apart from the shareholder protection differences which are resolved by the actions taken by Company X and Company Y as explained above, SEHK noted that some differences remained but they are considered acceptable and no actions are required by the companies. SEHK DECISION Subject to certain conditions, SEHK decided that Alberta is an acceptable jurisdiction for an issuer s incorporation for listing on SEHK. SEHK would require an Alberta listing applicant to submit the following confirmations upon filing its listing application: a sponsor's confirmation that it has considered and reviewed all material shareholder protection areas in its due diligence review under the Listing Rules, and that it is independently satisfied that the shareholder protection offered in Alberta is at least equivalent or broadly commensurate to that in Hong Kong; and a legal opinion and sponsor's confirmation that the corporation's constitutive documents do not contain provisions which will prevent it from complying with the Listing Rules, the SFO Disclosure of Interests and, if they apply, the Takeovers Code. You may download copies of the listing decision via the link below: Capital Markets Quarterly Update January - March 2012 Issue 27

28 Incorporation in Maryland USA Acceptable on Its Own Facts QUICK READ HKEx published a listing decision "HKEx-LD " on 12 March 2012 stating that the listing applicant's incorporation in the State of Maryland USA ("Maryland") did not prevent its secondary listing on SEHK based on its own facts and circumstances. BACKGROUND The listing applicant (Company A) was incorporated in Maryland as a USA domestic company. Its shares had been listed on the New York Stock Exchange ("NYSE") for over 10 years before it applied for a secondary listing on SEHK. Company A had been incorporated in Maryland since its shares were listed on NYSE and was considered to have sufficient nexus with Maryland. SEC was the securities regulator of Company A in the USA. The SEC is a full signatory to the IOSCO Multilateral Memorandum of Understanding Concerning Consultation and Cooperation and the Exchange of Information and has also entered into a Memorandum of Understanding Concerning Cooperation and the Exchange of Information in the Administration and Enforcement of Securities Laws with SFC. JPS FRAMEWORK The Listing Rules set out a general regime for overseas listing applicants to list on SEHK. SEHK may reject a listing application if it is not satisfied that the overseas listing applicant is incorporated in a jurisdiction which offers at least equivalent standards of shareholder protection in Hong Kong. Having said that, SEHK may still approve a listing application if the overseas listing applicant makes amendments to its constitutive documents to provide the necessary protection as requested by SEHK. The JPS formalises this process by setting out a list of shareholder protection areas which SEHK takes into consideration. The HKEx guidance letter "HKEx-GL12-09" sets out the streamlined procedures for listing overseas companies ("Streamlined Procedures"). Under these procedures, a listing applicant can benchmark the shareholder protection standards in its home jurisdiction to any one of the recognised or accepted jurisdictions, instead of benchmarking to Hong Kong as long as it ensures that its shareholder protection standards are not lower than indicated in the relevant listing decisions. COMPARISON After comparing the CO requirements and the requirements under Maryland law (in particular, the Maryland General Corporation Law) in relation to the areas of shareholder protection specified under the JPS framework, SEHK was satisfied that: for certain items, Maryland law was comparable with or even stricter than Hong Kong law; Capital Markets Quarterly Update January - March 2012 Issue 28

29 for certain items, Company A had addressed satisfactorily based on the legal and regulatory framework to which it was subject to and/or the undertakings provided to SEHK; and for the remaining items, SEHK identified shareholder protection differences under Maryland law and Hong Kong law where SEHK would usually expect the overseas listing applicant to amend its constitutive documents or provide alternative arrangements or undertakings to SEHK to reconcile the differences. However, Company A refused to take actions to deviate from the existing practices of its primary listing venue for the purpose of its secondary listing in Hong Kong ("Unreconciled Items"). UNRECONCILED ITEMS The Unreconciled Items are summarised as follows: Voting threshold for change of constitutive documents Under the CO, amendments to a company s constitutive documents must be approved by a three-quarter majority of the share capital present in the general meeting. Under the Streamlined Procedures, SEHK considers a voting threshold of two-thirds acceptable, although they are not strictly equivalent. Under Maryland law, the power to amend by-laws is vested in shareholders except to the extent that the by-laws vest such power in the board of directors. In the current case, Company A's by-laws provided the board with the exclusive power to adopt, alter or repeal any provision of the by-laws. Based on the submission made by Company A and the facts and circumstances of the case, SEHK did not require Company A, on a case specific basis, to change its by-laws to reconcile the difference. Shareholders request to convene an extraordinary general meeting and circulate a resolution Under the CO, shareholders holding not less than 5% of the paid up capital may require the company to convene an extraordinary general meeting and may ask the company to circulate a resolution proposed by the requisitionists. Maryland law does not have any equivalent provision which provides shareholders with a right to request the circulation of a proposed resolution. Company A s by-laws provided that shareholders holding not less than a majority of all of the votes entitled to be cast at a meeting could require it to call a special meeting. This threshold could be reduced (to as low as holders of 5% of paid up capital) by amending the by-laws. However, Company A indicated that it would not and did not consider it necessary to reduce the threshold because requiring the same percentage of shareholders as that required for a quorum (i.e. currently, holders of a majority of all of the votes entitled to be cast at a meeting) would Capital Markets Quarterly Update January - March 2012 Issue 29

30 ensure there would be sufficient interest in a special meeting to hold a meeting and approve a matter. This practice was in line with many Maryland companies listed in the USA. Based on the submission made by Company A and the facts and circumstances of the case, SEHK did not require Company A, on a case specific basis, to change its by-laws to reconcile the difference. Shareholder rights plan The JPS requires an overseas listing applicant to inform SEHK matters which may have a material and negative impact on the value and rights of the shares being offered. SEHK noted that Company A reserved the ability to adopt a future shareholder rights plan ("Rights Plan"), also known as a "poison pill", although no such plan was being implemented at the relevant time. Under a typical Right Plan, a corporation is allowed to issue rights to its shareholders that: may be exercised under specified circumstances to purchase shares or other securities of the corporation; and may become void if owned by a designated person or classes of persons under specified circumstances. This deters the unauthorised acquisition of a corporation s shares by virtue of the significant dilution suffered by any shareholder who acquires shares in excess of a specified ownership threshold (usually 10% to 20%) without prior approval of the board of directors. The board of directors generally retains the power to redeem the rights issued under the Rights Plan at a nominal price per right, thereby removing the Rights Plan and preserving the right of the corporation to negotiate a transaction with a potential purchaser on terms acceptable to the board of directors. Rights Plans are generally used by USA companies as a defensive measure to, among other things, maximise value for all shareholders by encouraging a potential purchaser to negotiate the terms of a potential takeover transaction with a corporation s board of directors. Based on the submission made by Company A, SEHK allowed Company A to retain the ability to adopt a Rights Plan in the future that is in compliance with the laws and regulations of its home jurisdiction and primary listing venue. SEHK DECISION Subject to certain conditions and based on its own facts and circumstances, SEHK decided that Company A s incorporation in Maryland did not prevent its secondary listing on SEHK. Maryland legal requirements do not provide comparability with all the JPS items. In general, a Maryland listing applicant is required to demonstrate its comparability with Hong Kong law by amending its constitutive documents, giving appropriate undertakings or proving the comparability based on its own facts and circumstances. Capital Markets Quarterly Update January - March 2012 Issue 30

31 Future Maryland-incorporated listing applicants would be considered on a case-by-case basis in view of their own facts and circumstances. They may approach SEHK for advice on how to satisfy the jurisdiction requirements. You may download copies of the listing decision via the link below: Capital Markets Quarterly Update January - March 2012 Issue 31

32 Contact Us JECKLE CHIU Partner, Mayer Brown JSM Ph: Fax: JASON T. ELDER Partner, Mayer Brown LLP Ph: Fax: MARK UHRYNUK Partner, Mayer Brown LLP Ph: Fax: PATRICK C. K. WONG Partner, Mayer Brown JSM Ph: Fax: Capital Markets Quarterly Update January - March 2012 Issue 32