HKEx LISTING DECISION Cite as HKEx-LD48-4 (December 2005) (Updated in September 2010 and December 2012) Summary

Transcription

1 HKEx LISTING DECISION Cite as HKEx-LD48-4 (December 2005) (Updated in September 2010 and December 2012) Summary Name of Party Subject Company A a Main Board listing applicant Whether, and under what circumstances, the Exchange should allow a new listing applicant to dispense with the filing of placee lists with respect to its IPO shares sold in public offers outside Hong Kong? Listing Rules Listing Rule 9.16(6)(b)[Now Rule 9.11(35)(b)] and Paragraph 11 of Appendix 6 of the Listing Rules Decision The Exchange determined to grant the waiver requested on the basis that the following conditions (as set out in paragraph 8) were satisfied: a. the shares would be sold in a public offer governed by rules and regulations of the relevant jurisdiction to ensure independence of the investors; b. the applicant and sponsor(s) made a demonstrable effort to comply with the placee list requirement in good faith and full compliance would not be practicable; c. the sponsor(s), underwriters or placing brokers would confirm in writing that the investors obtaining the shares sold in the public offers are independent of the sponsors/underwriters/brokers, the applicant s connected persons or their associates or any existing shareholders of the applicant, including nominee(s) of the foregoing; and d. each placing broker would be required to submit to the Exchange a list setting out details of all institutional placees and the number of shares taken up by each of them as required under Rule 9.11(35)(b) and paragraph 11 of Appendix 6 to the Rules (condition added in December see paragraph 10). 1

2 SUMMARY OF FACTS 1. The international offering of Company A included a public offering without listing in Japan (hereinafter referred to as POWL ). The sponsor applied with respect to the IPO shares sold under POWL for a waiver from strict compliance with Listing Rule 9.16(6)(b) [Now Rule 9.11(35)(b)] and Paragraph 11 of Appendix 6 of the Listing Rules requiring submission to the Exchange a list from each of the placing brokers setting out details of and the amounts taken up by each placee. 2. The sponsor submitted its waiver application on the following grounds: a. Japanese regulations in general prohibit agents from disclosing clients details (including but not limited to the name, address, age of clients and details of assets) to third parties; b. information given by placees under standard market practice in Japan are insufficient for completing the information required under Listing Rule 9.16(6)(b) [Now Rule 9.11(35)(b)]; c. the POWL was expected to involve over 10,000 investors. Further, all information relating to placees would need to be translated into English. It would be unduly burdensome and near impossible to submit to the Exchange before commencement of dealings the required information relating to POWL placees; and d. the Japanese agents would confirm in writing the independence of each placee from any director of the Company or their respective associates or any existing shareholder or nominee of the Company. THE ISSUE RAISED FOR CONSIDERATION 3. Whether, and under what circumstances, the Exchange should allow a new listing applicant to dispense with the filing of placee lists in connection with IPO shares sold in public offers outside Hong Kong? APPLICABLE LISTING RULES OR PRINCIPLES 4. Listing Rule 9.16(6)(b) [Now Rule 9.11(35)(b)] requires that in the case of a placing of securities by a new applicant, the following document should be provided to the Exchange: a list from each placing broker setting out the names, addresses and identity card or passport numbers (where individuals) and the 2

3 names, addresses and business registration numbers (where companies) of all its placees, the names and addresses of the beneficial owners (in the case of nominee companies) and the amounts taken up by each of its placees. 5. Paragraph 11 of Appendix 6 of the Listing Rules also provides that: Dealings in the securities cannot commence until the Exchange has been supplied with and approved a listing setting the names, addresses and identity card or passport numbers (where individuals) and the names, addresses and business registration numbers (where companies) of all placees, the names and addresses of the beneficial owners (in the case of nominee companies) and the amounts taken up by each placee (see rule 9.16(6)) [Now Rule 9.11(35)(b)]. The Exchange reserves the right to require submission of such further information... on the placees as it may consider necessary for the purpose of establishing their independence, including without limitation details of beneficial ownership. THE ANALYSIS 6. The rationale behind the rules governing placing of shares is to ensure that shares are placed to independent and genuine investors, rather than connected persons of the issuers or related parties of the underwriters/ brokers. 7. Previously, the Exchange had not required the submission of placee lists in respect of public offer of shares sold under POWL in Japan and US, if it was reasonably satisfied that the investors were independent to the extent required under applicable foreign regulations. 8. As such, the Exchange resolved that the present application for waiver should be considered favourably if the following were satisfied: a. the shares would be sold in a public offer governed by rules and regulations of the relevant jurisdiction to ensure independence of the investors; b. the applicant and sponsor(s) made a demonstrable effort to comply with the placee list requirement in good faith and full compliance would not be practicable; c. the sponsor(s), underwriters or placing brokers would confirm in writing that the investors obtaining the shares sold in the public offers are independent of the sponsors/underwriters/brokers, the applicant s 3

4 connected persons or their associates or any existing shareholders of the applicant, including nominee(s) of the foregoing; and d. each placing broker would be required to submit to the Exchange a list setting out details of all institutional placees and the number of shares taken up by each of them as required under Rule 9.11(35)(b) and paragraph 11 of Appendix 6 to the Rules (condition added in December see paragraph 10). 9. The above conditions are not binding on the Exchange for future cases. They are neither meant to be exhaustive nor jurisdiction specific. Future waiver applications will be considered on a case-by-case basis and the Exchange reserves its right to require submission of such further information on the placees as it may consider necessary. DECISION IN A SUBSEQUENT CASE (Added in December 2012) 10. In a subsequent case where the applicant requested for the same waiver, it then came to the Exchange s attention that the relevant Japanese regulations prohibiting members of the Japanese Securities Dealers Association from disclosing customers information to any third party only applied to individual customers but not institutional customers. Therefore, in addition to the conditions as set out in paragraph 8(a) to (c) above, the waiver was granted to this applicant provided that each placing broker would be required to submit to the Exchange a list setting out details of all institutional placees and the number of shares taken up by each of them as required under Rule 9.11(35)(b) and paragraph 11 of Appendix 6 to the Rules. THE DECISION 11. Based on the above analysis and the facts of two cases, the Exchange considered that the conditions set out in paragraphs 8 and 10 respectively were satisfied and on this basis granted the waiver requested. 4

5 HKEx LISTING DECISION Cite as HKEx-LD48-3 (December 2005) Summary Name of Party Company A - a Main Board listing applicant and its subsidiaries (the Group ) Subject Whether the requirements for ownership continuity and control under Listing Rule 8.05(1)(c) were satisfied where the controlling shareholder disposed of his shareholdings to a discretionary trust benefiting members of the shareholder s family (other than himself) after the track record period? Listing Rule Listing Rule 8.05(1)(c) Decision The Exchange determined that Company A satisfied the requirements for ownership continuity under Listing Rule 8.05(1)(c). SUMMARY OF FACTS 1. As part of its listing application, it was disclosed that after the end of the three financial year track record period, the controlling shareholder of Company A, Mr. X, contributed his shareholdings to Holdco X which in turn was held by a professional trust company, Trust Corporation, in its capacity as trustee for a discretionary trust benefiting members of Mr. X s family (other than Mr. X himself). 1

6 2. The Group shareholding structure upon listing is illustrated as follows: Trust Corporation Holdco X (investment holding) Others Others Approx. 80% 18% 2% Holdco Y (investment holding) The Public 75.0% 25.0% Company A 3. The sponsor of Company A submitted that the discretionary family trust was established for Mr. X s estate planning purposes, and did not constitute a replacement of Mr. X s interest in Company A. In particular, the sponsor highlighted that: Mr. X was in actual control of the trust a. the eligible beneficiaries of the family trust, that is Mr. X wife and children, were associates of Mr. X according to the Listing Rules; b. Mr. X as the appointor of the trust had the power to remove the Trust Company and to appoint new trustee(s) in its place even though Mr. X had no power to interfere with the Trust Company s exercise of powers under the trust including (1) the power to administer and distribute the assets and the income thereof for the benefits of the eligible beneficiaries under the trust; (2) appoint additional eligible beneficiaries to the trust. However, any exercise of such powers must be accompanied by a prior notice to Mr. X; c. Mr. X and his wife were the directors of Holdco X. Mr. X was the sole director of Holdco Y, the immediate holding company of Company A. 2

7 The articles of association of both Holdco X and Holdco Y stipulated that business and affairs of the respective companies must be managed by their director(s). Under the present structure, the exercise of the voting powers at the shareholders meeting of Holdco Y would be in the hands of Mr. X, instead of in the hands of the Trust Company. The Trust Company s voting powers as shareholder would, in practice, be limited to and stopped at the level of Holdco X; No packaging of business d. the transfer of Mr. X s shareholding interest to Holdco X whose shares were being held by the Trust Company was for estate planning purposes and not for the purpose of packaging the business of Company A to meet the profit requirements of the Listing Rules; and No circumvention of any disclosure requirements e. under the Securities and Futures Ordinance, anyone who establishes a discretionary trust (i.e. the founder) is deemed to be interested in the shares of an issuer in which the trust has, and such a founder is required to report and disclose such interest, regardless of whether he himself is a beneficial under the trust or not. The shareholding structure involving the setting up of the Trust Company was not intended to circumvent any disclosure requirements. THE ISSUE RAISED FOR CONSIDERATION 4. Whether the requirements for ownership continuity and control under Listing Rule 8.05(1)(c) were satisfied where the controlling shareholder disposed of his shareholdings to set up a discretionary trust benefiting members of the shareholder s family (other than himself) after the track record period? APPLICABLE LISTING RULE OR PRINCIPLES 5. Listing Rule 8.05(1)(c) provides that to meet the profit test, a new applicant must, amongst other criteria, have ownership continuity and control for at least the most recent audited financial year. THE ANALYSIS 6. The Consultation Paper on Proposed Amendments to the Listing Rules relating to Initial Listing Criteria and Continuing Listing Obligations published by the Exchange in July 2002 (the Consultation Paper ) acknowledged that other 3

8 markets do not require a listing applicant to demonstrate that there is no change in their ownership at any time during the track record period. However, the situation in Hong Kong is unique, and the Exchange s intention is to prevent listing applicants from packaging their businesses so as to meet the profit record requirement. 7. When considering the issue of packaging in the context of the present case, the Exchange took into consideration the following factors: a. in substance, Mr. X retained the control of the family trust and Company A; b. the beneficiaries of the family trust were the family members of Mr. X who were connected persons under the Listing Rules; and c. the purpose of the family trust arrangement was understandably for estate duty purpose. 8. In light of the above, the Exchange determined that there was no packaging of business in the present case. THE DECISION 9. Based on the facts and circumstances of the case and the Exchange s analysis of the Listing Rules, the Exchange determined that Company A satisfied the requirements for ownership continuity under Listing Rule 8.05(1)(c). 4

9 HKEx LISTING DECISION Cite as HKEx-LD48-2 (December 2005) Summary Name of Party Subject Listing Rule Decision Company A - a Main Board listing applicant and its subsidiaries (the Group ) Whether compensation income arising from the one-time early termination of a contract could be counted towards satisfaction of the profit requirements under Listing Rule 8.05(1)(a)? Listing Rule 8.05(1)(a) The Exchange determined that the relevant income was related to activities within the ordinary and usual course of Company A s business, and therefore could be counted towards satisfaction of the profit requirements of Listing Rule 8.05(1)(a). SUMMARY OF FACTS 1. Company A was principally engaged in the provision of logistic services including warehousing ( Logistic Services ) for its customers. 2. The track record profit results of Company A included income arising from the one-time early termination of a contract entered into between the Group and an independent customer of the Group in the first financial year of the track record period. If the early termination fee had not been included, Company A could not have recorded a profit of not less than HK$30 million for the first two financial years of the track record period for the purpose of Listing Rule 8.05(1)(a). 3. The contract with the independent customer was for the provision of purpose-built warehousing services for the customer under a fixed term lease arrangement with a guaranteed minimum lease. The purpose-built warehouse was not for the exclusive use of the customer. Due to a change in business plan, the customer terminated the contract in the first financial year of the track record period and paid compensation to the Group. After the early termination, the customer continued to use the facility on a shorter term basis until the middle of the second financial year of the track record period. 4. The Exchange reviewed whether the compensation income should be permitted to be counted as profits for the purpose of Listing Rule 8.05(1)(a). 1

10 5. The sponsor considered that the compensation income fell within the ordinary and usual course of business of the Group for the following reasons: a. the compensation fee was calculated on the basis of the minimum guarantee fees over the remaining term of the contract. The minimum guarantee fees were intended to protect the Group s investment in the contract; b. because of the dynamic business environment of the Group s business, early termination of contracts was not uncommon. It was demonstrated to the Exchange that during the track record period the Group had also received compensation for early termination of contracts by customers although no purpose-built facilities were involved in such cases; and c. the reporting accountants of Company A confirmed that the compensation income was not considered to be an extraordinary item, and was regarded as part the ordinary course of business of the Group. Accordingly, the reporting accountants treated the compensation income as operating profit in the relevant audited financial statements in accordance with the Statements of Standard Accounting Practice issued by Hong Kong Institute of Certified Public Accountants. THE ISSUE RAISED FOR CONSIDERATION 4. Whether compensation income arising from the one-time early termination of a contract could be counted towards satisfaction of the profit requirements under Listing Rule 8.05(1)(a)? APPLICABLE LISTING RULES OR PRINCIPLE 5. Listing Rule 8.05(1)(a) states that: to meet the profit test, a new applicant must have an adequate trading record of not less than three financial years during which the profit attributable to shareholders must, in respect of the most recent year, be not less than HK$20,000,000 and, in respect of the two preceding years, be in aggregate not less than HK$30,000,000. The profit mentioned above should exclude any income or loss of the issuer, or its group, generated by activities outside the ordinary and usual course of its business. 6. Listing Rule 4.11 states that the financial history of results and the balance sheet included in the accountants report must normally be drawn up in conformity with 2

11 Hong Kong Financial Reporting Standards or International Financial Reporting Standards. THE ANALYSIS 7. In determining whether an item of income can be counted towards satisfaction of the profit requirement of Listing Rule 8.05(1)(a), the Exchange must be satisfied that, based on the facts and circumstances of a particular case, the income arises from the ordinary and usual course of business. 8. On the basis of the facts and circumstances of Company A s case, including the fact that both the sponsor and the reporting accountants considered that the compensation income was generated from activities within the ordinary and usual course of Company A s business, the Exchange allowed the income associated with the one-time early termination of a contract to be counted as profit for the purpose of Listing Rule 8.05(1)(a). THE DECISION 9. Based on the material facts and circumstances of Company A s case, the Exchange determined that the relevant income was related to activities within the ordinary and usual course of Company A s business, and therefore could be counted towards satisfaction of the profit requirements of Listing Rule 8.05(1)(a). 3

12 HKEx LISTING DECISION Cite as HKEx-LD47-5 (July 2005) Name of Party Subject Summary Company A a Main Board listed issuer and a deemed new listing applicant under Rule 8.21C and its subsidiaries ( Group ) Whether the requirements for public float and free float under Listing Rules 8.08(2) and 8.08(3) could be satisfied based on an estimate of the number of shareholders and shareholder groupings at the time of listing? Listing Rules Listing Rules 8.08(2) and 8.08 (3) Decision In the case of a reverse takeover and deemed new listing of a listed company s shares, for purposes of considering an approval in principle for listing, the Exchange determined that an estimate of the number of shareholders provided by the sponsor was acceptable to demonstrate compliance with Listing Rule 8.08, provided that the sponsor and Company A would demonstrate actual compliance with Listing Rules 8.08(2) and 8.08(3) to the satisfaction of the Exchange at the time of listing. SUMMARY OF FACTS 1. Company A entered into an agreement with its controlling shareholder ( Parentco ) for the acquisition of certain companies held by Parentco. The acquisition constituted a very substantial acquisition and connected transaction. Parentco first obtained control of Company A less than 24 months prior to the date of the acquisition agreement. As such, the acquisition was treated as a reverse takeover under Listing Rule 14.06(6)(b) and a deemed new listing of Company A s shares. The transaction required the approval of independent shareholders of Company A in a special general meeting. A circular in the form of a listing document was required under the Listing Rules. 2. Company A would neither issue new shares as consideration for the acquisition nor contemplate any issue of new shares before completion of the acquisition. 3. For the purposes of demonstrating that Company A would be able to satisfy the requirements under Listing Rules 8.08(2) and (3) at the time of listing (that is, upon completion of the acquisition), the sponsor submitted as follows: 1

13 Compliance with Listing Rule 8.08(2) a. according to the list of shareholders as at the latest practicable date prior to the listing hearing provided by the share registrar (the Share Registrar Report ) and the shareholding report provided by the Central Clearing and Settlement System operated by the Hong Kong Securities Clearing Company Limited (the CCASS Report ), Company A had at the material time an aggregate of more than 200 registered shareholders; b. of the shareholders listed in the CCASS Report, more than 100 were banks and brokerage houses (the Financial Institutions ) likely to be holding shares in Company A on behalf of their respective clients; c. based on the assumptions made by the directors that each of the Financial Institutions would on average hold shares in Company A on behalf of not less than 2 beneficial owners who were not shareholders under the Share Registrar Report, Company A would be estimated to have not less than 350 shareholders. The sponsor confirmed that the above assumptions made by the directors of Company A in arriving at the total number of shareholders were reasonable; Compliance with Listing Rule 8.08(3) d. according to the Share Registrar Report and the CCASS Report, the largest three registered shareholders of the Company were not connected persons of Company A; e. apart from the interest held by Parentco (holding over 70% as at latest practicable date) and certain directors of the Group, Company A had not received any notice of movement of shareholding interest which was required to be disclosed under Part XV of the Securities and Futures Ordinance; and f. based on the total number of shares held by the public shortly prior to the listing hearing, the maximum percentage of public shares held by the top three shareholders of Company A would be approximately 40%. THE ISSUE RAISED FOR CONSIDERATION 4. Whether the requirements for public float and free float under Listing Rules 8.08(2) and 8.08(3) could be satisfied based on an estimate of the number of shareholders and shareholder groupings at the time of listing? 2

14 APPLICABLE LISTING RULES OR PRINCIPLES 5. Listing Rule 8.08(2) requires that: at the time of listing there must be an adequate spread of holders of the securities to be listed. The number will depend on the size and nature of the issue, but in all cases there must be a minimum of 300 shareholders. 6. Listing Rule 8.08(3) requires that: not more than 50% of the securities in public hands at the time of listing can be beneficially owned by the three largest public shareholders. THE ANALYSIS 7. The Exchange considers that compliance with Listing Rules 8.08(2) and 8.08(3) are questions of fact and must be demonstrated by facts, not assumptions. 8. In the present case, the Exchange noted that the estimated number of shareholders and shareholder groupings provided by Company A at the time of listing was based on objective interpretation of available data. However, the Exchange required Company A and its sponsor to demonstrate that Company A had put in place procedures and checks by which actual compliance of Listing Rules 8.08(2) and 8.08 (3) could be demonstrated at the time of listing. 9. In this regard, Company A further submitted that in the event that the number of registered shareholders of Company A as shown in the list of shareholders at the date of completion of the acquisition provided by the Share Registrar Report and/or CCASS was less than 300, Company A would send out a letter to each of the brokerage firms listed on the CCASS Report, requesting them to provide the following information to Company A: the number of Shares held by them; and the full list of clients on whose behalf they hold the Shares. 10. The sponsor considered that, based on the replies to be received from the brokerage firms, Company A would be able to produce a sufficiently detailed list of shareholders for the purposes of demonstrating compliance with the requirements of Listing Rules 8.08(2) and 8.08 (3). 3

15 THE DECISION 11. In the case of a reverse takeover and deemed new listing of listed companies shares, for purposes of considering an approval in principle for listing, the Exchange determined that an estimate of the number of shareholders provided by the sponsor was acceptable to demonstrate compliance with Listing Rule 8.08, provided that the sponsor and Company A would demonstrate actual compliance with Listing Rules 8.08(2) and 8.08(3) to the satisfaction of the Exchange at the time of listing. 4

16 HKEx LISTING DECISION Cite as HKEx-LD47-4 (July 2005) Name of Party Subject Summary Company A - a Main Board listing applicant and its subsidiaries (the Group ) Whether the issue of shares in Company A upon conversion of convertible notes issued by Company A prior to listing on the Exchange should be regarded as a deemed disposal of interest prohibited under Listing Rules and 10.08, where such conversion would occur upon or shortly after listing and at a price identical to the IPO price? Listing Rules Listing Rules and Decision The Exchange determined that the issue of Company A s shares upon or shortly after listing upon conversion of the convertible notes should be allowed and the shares so issued would not be subject to lock-up. SUMMARY OF FACTS 1. More than six months prior to the hearing of Company A s listing application, Company A issued a certain amount of convertible notes ( Convertible Notes ) to pre-ipo investors ( Pre-IPO Investors ). The terms of the Convertible Notes provided that unless otherwise redeemed by Company A, all the outstanding principal amount and accrued interest would automatically be converted into shares of Company A ( Shares ) at the IPO share offer price on the third business day after delivery of a written notice by Company A to the Pre-IPO Investors confirming that the Exchange had approved the listing of the Shares. In other words, the conversion would take place upon or shortly after the listing of the Shares. 2. Based on the representations of the sponsor and Company A, the Exchange noted the following relevant material facts: a. a substantial portion of the proceeds from the issuance of the Convertible Notes had been used in the acquisition of a company by the Group; b. the Pre-IPO Investors decided to invest in Company A because of the investment return of the Convertible Notes and the business potential of the Group; 1

17 c. the directors of Company A considered that the issue of the Convertible Notes was a strategic step to enhance the Group s relationship with the Pre-IPO Investors; and d. all the Pre-IPO Investors (and their respective directors and shareholders) were independent of and not connected with Company A within the meaning of the Listing Rules. THE ISSUE RAISED FOR CONSIDERATION 3. Whether the issue of shares in Company A upon conversion of convertible notes issued by Company A prior to listing on the Exchange should be regarded as a deemed disposal of interest prohibited under Listing Rules and 10.08, where such conversion would occur upon or shortly after listing and at a price identical to the IPO price? APPLICABLE LISTING RULES OR PRINCIPLES 4. Listing Rule (1)(a) states that: [A] person or group of persons shown by the listing document issued at the time of the issuer s application for listing to be controlling shareholders of the issuer shall not and shall procure that the relevant registered holder(s) shall not:- (a) in the period commencing on the date by reference to which disclosure of the shareholding of the controlling shareholders is made in the listing document and ending on the date which is 6 months from the date on which dealings in the securities of a new applicant commence on the Exchange, dispose of, nor enter into any agreement to dispose of or otherwise create any options, rights, interests or encumbrances in respect of, any of those securities of the issuer in respect of which he is or they are shown by that listing document to be the beneficial owner(s); or 5. Listing Rule states that: [N]o further shares of securities convertible into equity securities of a listed issue (whether or not of a class already listed) may be issued or form the subject of any agreement to such an issue within 6 months from the date on which securities of the listed issuer first commence dealing on the Exchange (whether or not such issue of shares or securities will be completed within 6 months from the commencement of dealing), except for: 2

18 (4) the issue of shares or securities pursuant to an agreement entered into before the commencement of dealing, the materials terms of which have been disclosed in the listing document issued in connection with the initial public offering. THE ANALYSIS 6. The Exchange ordinarily interprets Listing Rule 10.07(1)(a) to apply to a deemed disposal situation where there is a dilution of the controlling shareholders interest as a result of the issue of new shares during the first six months of the listing of an issuer s shares. However, the Exchange ordinarily considers that an issue of new shares pursuant to an agreement entered into before the commencement of dealing is allowed under Listing Rule provided that the material terms of the agreement have been disclosed in the prospectus. 7. On the question of whether the issue of Shares upon conversion of the Convertible Notes should be disallowed in the present case and whether there should be a lock up of the Shares so issued, the Exchange considered the following: a. the material terms of the Convertible Notes including the reasons for the issue and the use of the proceeds were prominently disclosed in the prospectus in accordance with the Exchange s expectations under Listing Rule 10.08; b. the Convertible Notes were issued more than six months before the date of the hearing of Company A s listing application; and c. the Pre-IPO Investors were independent third parties and there was no evidence to suggest that the Pre-IPO Investors had any connection with the controlling shareholders such that they would constitute a group of controlling shareholders for the purpose of Listing Rule Based on the facts and circumstances of the case, the Exchange did not consider the proposed conversion to be barred by Listing Rule although it would result in a deemed disposal of controlling shareholders interest in Company A. Furthermore, as the material terms had been disclosed in the prospectus as expected by the Exchange, no lock up of the Shares after conversion was required. THE DECISION 9. Based on the above analysis and having regard to the material facts of the case, the Exchange determined that the issue of Shares upon or shortly after listing 3

19 upon conversion of the Convertible Notes in favour of the Pre-IPO Investors should be allowed and the Shares so issued would not be subject to lock-up. 4

20 HKEx LISTING DECISION Cite as HKEx-LD47-3 (July 2005) (Updated for accounting and auditing standards reference in September 2009) Summary Name of Party Company A a Main Board listing applicant and its subsidiaries (the Group ) Subject Whether the requirements of Listing Rules 8.05(1) and 4.04(1) could be satisfied where the Group s three financial year trading record period comprised a prior-incorporation period under Company A s predecessor and a post-incorporation period under Company A directly? Listing Rules Listing Rules 8.05(1)(a) and 4.04(1) Decision The Exchange determined that: the business that formed the subject matter of listing in the present case had been in existence for more than three financial years, and it had been separately demonstrated to the Exchange that the requirements of Listing Rules 4.04 and 8.05 had been satisfied; the trading record period of Company A which comprised one period under Company A s predecessor and a second period under Company A directly was not, in itself, objectionable to listing; the presentation of the track record results of Company A in two accountants reports in its prospectus was an acceptable way to present financial information of the Group. SUMMARY OF FACTS 1. Company A was incorporated in the first year of the three financial year track record period (comprising Year 1, Year 2 and Year 3 ). Therefore, Company A itself had a trading record of less than three years. Prior to its establishment, Company A s business that formed the subject matter of listing ( Business ) was carried out by its parent company ( Parent ). Upon establishment, the Parent transferred the Business to Company A. The transfer involved a change in the minority shareholders interests. 1

21 2. It was noted that the Business had been operated under substantially the same management and ownership since the beginning of the track record period. The Exchange also noted that the Group could meet the minimum profit requirement under Listing Rule 8.05(1) even without taking into account the results from the Predecessor Period. 3. The Group s accounts had been prepared in accordance with accounting principles generally accepted in Hong Kong ( HK GAAP ). According to applicable accounting standards, the track record period of Company A was presented in two sets of accountants reports covering the results of the Business for the prior-incorporation period (the Predecessor Period ), and the results of Company A since the date of incorporation (the Post Incorporation Period ). 4. According to the reporting accountants of Company A, the relevant accounting principles (that is SSAP27 1 ) precluded Company A from including the results of the Business for the Predecessor Period into its financial statement for the reason that there had been a change in the minority interests during the transfer of the Business from the Predecessor to Company A. Consequently, two accountants reports were required to present the results of the Business for the track record period. 5. With regard to the preparation of the financial information in relation to the Business during the Predecessor Period and the Post Incorporation Period, the reporting accountants confirmed that:- a. the financial information in relation to the Predecessor Period had been extracted from the financial statements of the Predecessor. In particular, the assets, liabilities, results of operation and the cashflow could be easily identified from the underlying ledgers; the balance sheet items of the Business substantially did not require allocations; and most of the results from the operation of the Business could be directly captured; and b. the basis of preparation of the two accountants reports for the Predecessor Period and the Post Incorporation Period had no significant difference. THE ISSUE RAISED FOR CONSIDERATION 6. Whether the requirements of Listing Rules 8.05(1) and 4.04(1) could be satisfied where the Group s three financial year trading record period comprised a priorincorporation period under Company A s predecessor and a post-incorporation period under Company A? 2

22 APPLICABLE LISTING RULES OR PRINCIPLES 7. Listing Rule 4.04 (1) provides, in the case of a new applicant, the accountants report must include: the results of the issuer or, if the issuer is a holding company, the consolidated results of the issuer and its subsidiaries in respect of each of the three financial years immediately preceding the issue of the listing document. 8. Listing Rule 8.05(1) provides that: [T]o meet the profit test, a new applicant must have an adequate trading record under substantially the same management and ownership This means that the issuer, or its group. must satisfy each of the following: (a) a trading record of not less than three financial year (see rule 4.04) during which the profit attributable to shareholders must, in respect of the most recent period, be not less than HK$20,000,000 and, in respect of the most recent year, be not less than HK$30,000,000 ; (b) (c) management continuity for at least the three preceding financial years; and ownership continuity and control for at least the most recent audited financial year. 9. Listing Rule 4.08(3) requires accountants report to prepared in accordance with the Auditing Guideline Prospectuses and the reporting accountant (AG 3.340) issued by the Hong Kong Institute of Certified Public Accountants. 10. Listing Rule 4.11 requires the financial history of results and the balance sheet included in the accountants report must normally be drawn up in conformity with Hong Kong Financial Reporting Standards or International Financial Reporting Standards. 11. Paragraph 1(f) of Appendix to AG specifically states that: where, for example, companies under common control but legally unconnected are formed into a legal group prior to issue or floatation, the accountant s report should be prepared on a combined basis and should explain the basis of preparation in the introductory paragraphs of the report. 3

23 12. Statements of Standard Accounting Practice 27 ( SSAP27 ) 1 of Hong Kong Financial Reporting Standards ( HKFRS ) sets out the principles for the accounting treatment of group reconstructions. In that paragraph 5 thereof requires: [A] group reconstruction should be accounted for by using merger accounting if: a. merger relief is taken advantage of ; b. the ultimate shareholders remain the same, and the rights of each such shareholder, relative to the others, are unchanged; and c. any minority interest in the net assets of the group is unaltered by the transfer. Acquisition accounting should be used for all group reconstructions that are not accounted for by using merger accounting. THE ANALYSIS 13. The Exchange ordinarily interprets Listing Rule 8.05 as an eligibility standard, while requirements of Chapter 4 of the Listing Rules related to the contents of accountants report (See, for example, Listing Decision HKEx-LD41-2). As such, Listing Rule 4.04(1) and Listing Rule 8.05(1) are separate requirements. 14. When assessing whether a listing applicant can meet the eligibility requirements under Listing Rule 8.05, the starting point of the Exchange s analysis is the historical ownership interest in the listing applicant and its subsidiaries during the last three financial years as presented in accordance with the requirements under Rule 4.04(1). 15. Further more, in assessing whether there is a sufficient trading record under Listing Rule 8.05, the Exchange interprets the rule to refer to the business that forms the subject matter of listing and not the legal entity that forms the listing applicant as such. 16. Based on the above analysis, considerations were given to the followings: In respect of compliance with Rule 4.04(1) a. the two accountants reports together presented the historical results of the Business that formed the substance of listing for three full financial years in compliance with the requirements of Listing Rule 4.04; 4

24 In respect of compliance with Rule 8.05(1) b. the Business that formed the substance of listing had been conducted for over three financial years originally as a division of the Parent and subsequently as a division of Company A since its incorporation in Year 1; c. the Business was carried on by the Group and the Predecessor under substantially the same management; d. there was no change in management and ownership control upon the incorporation of Company A and the transfer of the Business from the Predecessor to Company A in Year 1; and e. the minimum profit requirements could be met. 17. Given that it was demonstrated to the Exchange that the requirements under Listing Rule 8.05(1) could be met on the basis of the historical accounts that were presented, the Exchange determined that the presentation of the track record results of Company A in two accountants reports in its prospectus was an acceptable way to present financial information of the Group. THE DECISION 18. Based on the above analysis and having regard to the material facts, it was determined that: Note: a. the Business that formed the subject matter of listing had been in existence for more than three financial years; b. Listing Rules 4.04 and 8.05 had been separately demonstrated to the satisfaction of the Exchange; c. the trading record period of Company A which comprised a Predecessor Period and a Post Incorporation Period was not, in itself, objectionable to the listing of Company A; and d. the presentation of the track record results of Company A in two accountants reports in its prospectus was an acceptable way to present financial information of the Group. 1. SSAP 27 was superseded in Please also refer to Accounting Guideline 5 Merger Accounting for Common Control Combinations (issued in November 2005). (Added in September 2007) 5

25 HKEx LISTING DECISION Cited as HKEx-LD47-2 (July 2005) Summary Name of Party Subject Company A - a Main Board listing applicant and its subsidiaries (the Group ) Whether the minimum revenue requirement under Listing Rule 8.05(2)(e) could be satisfied by reference to the latest unaudited pro forma combined financial information of the Group which was reorganised from separate groups of entities under respective shareholders during the track record period? Listing Rules Listing Rules 8.05(2) (e); 4.28 and 4.29 Decision The Exchange determined that the minimum revenue requirement of Listing Rule 8.05(2)(e) was satisfied by reference to the latest unaudited pro forma financial statements of the Group. SUMMARY OF FACTS 1. Company A applied for listing on the Main Board pursuant to Listing Rule 8.05(2). 2. The Group was reorganised from three groups of subsidiaries held through Subsidiary X, Subsidiary Y and Subsidiary Z respectively for the purpose of listing. Before the reorganisation, these Subsidiaries had been separate entities held in majority by different groups of shareholders, Shareholder XX, Shareholder YY and Shareholder ZZ. 3. It was determined by the Exchange that, despite the lack of a single legal structure amongst these Subsidiaries throughout the track record period, these Subsidiaries were held under a common set of management, a common group of controlling shareholders. Consequently, the Exchange determined that these Subsidiaries could be viewed together as a group throughout the track record period. (See Listing Decision HKEx-LD47-1) 4. According to the Listing Rules and the applicable accounting standards the financial information of the Group would be presented in the prospectus in two principal sets of financial accounts: a. the separate historical audited financial statements of each member of Company A (i.e. Subsidiary X, Subsidiary Y and Subsidiary Z) in accordance with Listing Rule 4.04; and 1

26 b. the unaudited pro forma combined financial information of Subsidiary X, Subsidiary Y and Subsidiary Z in accordance with Listing Rules 4.28 and The unaudited pro forma combined financial information of these Subsidiaries was reported on by the reporting accountants and produced as if the reorganisation had taken place at the beginning of the last financial year of the track record period, adjusting for the effect of the reorganisation (including, among others, the capitalisation of shareholders loan and cash payment to respective shareholders as part of the reorganisation), and eliminating the intra-group balances. 6. Based on such unaudited combined pro forma information, the Group recorded a revenue of not less than HK$500 million from operating activities for the latest financial year of the track record period. 7. Based on the historical audited accounts of Company A (i.e. comprising Subsidiary X, Subsidiary Y and Subsidiary Z), none of the Subsidiaries individually had the revenue for the latest financial year of the track record period of not less than HK$500 million. THE ISSUE RAISED FOR CONSIDERATION 8. Whether the minimum revenue requirement under Listing Rule 8.05(2)(e) could be satisfied by reference to the latest unaudited pro forma combined financial information of the Group which was reorganised from separate groups of entities under respective shareholders during the track record period? APPLICABLE LISTING RULES OR PRINCIPLES 9. Listing Rule 8.05(2) states that: [T]o meet the market capitalisation/revenue/cash flow test, a new applicant must satisfy each of the following:- (a) (b) (c) (d) (e) a trading record of not less than three financial years; management continuity for at least the three preceding financial years; ownership continuity and control for at least the most recent audited financial year; a market capitalisation of at least HK$2,000,000,000 at the time of listing; revenue of at least HK$500,000,000 for the most recent audited financial year; and 2

27 (f) positive cash flow from operating activities carried out by the new applicant, or its group, that are to be listed of at least HK$100,000,000 in aggregate for the three preceding financial years. 10. Listing Rules 4.28 requires that: [I]n the case of a new applicant (rule 4.01(1)) which has acquired or proposed to acquire any businesses or companies, which would at the date of application or such later date of acquisition before listing of the applicant be classified as a major subsidiary, since the date to which the latest audited accounts of the issuer have been made up, it must include in its listing document the pro forma financial information required under rule 4.29 in respect of the enlarged group (i.e. the new applicant, its subsidiaries and any businesses or companies acquired or proposed to be acquired since the date to which the latest audited accounts of the issuer have been made up). 11. Listing Rule 4.29 states that: [W]here an issuer includes pro forma financial information in any document (whether or not such disclosure of pro forma financial information is required under the Exchange Listing Rules), that information must comply with rules 4.29(1) to (6) and a report in the terms of rule 4.29 (7) must be included in the relevant document. 12. Listing Rule 4.29(7) states that: [T]he pro forma financial information must be reported on in the document by the auditors or reporting accountants who must report that, in their opinion: (a) (b) (c) the pro forma financial information has been properly compiled on the basis stated; such basis is consistent with the accounting policies of the issuer; and the adjustments are appropriate for the purposes of the pro forma financial information as disclosed pursuant to rule 4.29(1). THE ANALYSIS 13. The Consultation Paper on Proposed Amendments to the Listing Rules relating to Initial Listing Criteria and Continuing Listing Obligations published by the Exchange in July 2002 (the Consultation Paper ) and the subsequent Consultation Conclusions published by the Exchange in January 2004 ( Consultation Conclusions ) indicated that the new Listing Rule 8.05(2) was intended to cater for potential listing applicants that have generated substantial revenue and demonstrated a high degree of achievement in their industries. 3

28 14. The Consultation Paper considered the use of market capitalisation together with revenue and positive cash flow from operating activities as an indicator of the financial performance of a listing applicant. Revenue indicated whether the listing applicant s business activities were steady so as to generate a constant flow of income, and only revenue that generated actual cash inflow was considered. Positive cash flow from operating activities indicated whether the listing applicant was a going concern and had sufficient working capital for its operations during the track record period. Subsequent to the Consultation Conclusion, alternative tests to the profit record requirement were introduced. These alternative tests, namely the Market Capitalisation/Revenue Test and Market Capitalisation/Revenue/Cash Flow Test, require a minimum revenue requirement of at least HK$500 million for the new applicant's most recent audited financial year. 15. Given the background to the introduction of minimum revenue test in the Listing Rules, the Exchange considered that the minimum revenue test was intended to be an objective standard based on the latest available financial information relating to a listing applicant. The policy underlying the Listing Rules also intends that such revenue information appear in the IPO prospectus so that it is publicly available to investors for review. 16. When analysing the issue in consideration, the Exchange considered the following factors: a. the plain meaning of Listing Rule 8.05(2)(e) indicated that the historical financial statements should be used to determine the relevant revenue figure for purposes of Listing Rule 8.05(2)(e); b. Listing Rule 8.05(2)(e) suggested that revenue derived from the new applicant s business as a whole should be considered; and c. Company A was required by the Listing Rules to include in its prospectus a report prepared by the reporting accountants regarding the pro forma accounts of the combined Group for the latest financial year of the track record period. Such pro forma revenue figures opined on by the reporting accountants were separately supported by audited financial statements relating to each of the subsidiaries. Consequently, such pro forma figures could provide an objective indication of the Group s business activities in the last financial year of the track record period and there was sufficient information to enable investors to arrive at an informed judgment of Company A. 17. Based on the above and with regard to the analysis that the combined group comprising Subsidiary X, Subsidiary Y, Subsidiary Z was the subject of the analysis of management and ownership continuity under Listing Rules 8.05(2)(b) and 8.05(2)(c), the Exchange determined that the minimum revenue requirement of Listing Rule 8.05(2)(e) could be satisfied by reference to the unaudited pro forma combined financial information of the Group. 4