Guidance Note. on Connected Transactions. A Practical Guide to Good Governance

Transcription

1 Guidance Note on Connected Transactions A Practical Guide to Good Governance January 2016

2 The Hong Kong Institute of Chartered Secretaries (Incorporated in Hong Kong with limited liability by guarantee) The Hong Kong Institute of Chartered Secretaries (HKICS) is an independent professional body dedicated to the promotion of its members role in the formulation and effective implementation of good governance policies as well as the development of the profession of Chartered Secretary in Hong Kong and throughout ainland China. HKICS was first established in 1949 as an association of Hong Kong members of the Institute of Chartered Secretaries and Administrators (ICSA) of London. It became a branch of ICSA in 1990 before gaining local status in HKICS is a founder member of Corporate Secretaries International Association (CSIA) which was established in arch 2010 in Geneva, Switzerland to give a global voice to corporate secretaries and governance professionals. HKICS has over 5,800 members and 3,200 students.

3 Contents Page no Introduction 2. Types of CTs 3. Specified transactions with TPs: Financial assistance to commonly held entity. LR14A Specified transactions with TPs: Acquisition of target company & controller relationship. LR14A The main category: Transactions with CPs Non-PRC listed issuers (Appendix A) Step 1 Is the person within the red boxes? Step 2 No other deemed CP relationship Step 3 No associates and other deemed CP relationship Step 3. Box 1 Immediate family member Step 3. Box 2 Family members Step 3. Box 3 Relatives Step 3 ajority controlled company Step 3. Box 4 Associate of a company 6. The main category: Transactions with CPs PRC listed issuers (Appendix B) Step 1 Is the person within the red boxes? Steps 2 and 3 7. Transactions 8. Compliance requirements 9. Exemptions Exemption 1: De minimis exception. LR14A.76 Exemption 2: Transactions with connected persons at subsidiary level. LR14A.101 Exemption 3: Financial assistance exemption. LR 14A Exemption 4: Issues of new securities by issuer or subsidiaries. LR14A.92 Exemption 5: Dealing in securities on stock exchanges. LR14A.93 Exemption 6: Repurchases of securities by listed issuer or subsidiary. LR14A.94 Exemption 7: Directors services contracts and insurances. LR14A.95 and 96 Exemption 8: Buying and selling consumer goods or services.lr14a.97 Exemption 9: Sharing of administrative services. LR14A.98 Exemption 10: Transactions with associates of passive investors. LR14A Waivers 11. Conclusion Appendix A Appendix B Disclaimer and Copyright Guidance Note on Connected Transactions January

4 Background 1. Hong Kong has its fair share of concentrated ownership companies, including family and state-owned companies. The aim of the connected transaction (CT) rules is to prevent those involved in such concentrated ownership companies from benefiting from transactions between them and the listed issuers as part of shareholders protection, and otherwise for shareholders protection generally. 2. Hong Kong s connected transaction rules which are set out in Chapter 14A of the Listing Rules are amongst the most advanced globally, and precisely for this reason, the most complex. It follows that no other area of the Listing Rules attracts more vexed questions than that of the CT rules. 3. This Guidance Note is general in nature and is intended to provide an overview for members to acquire a working knowledge of the main provisions of the CT rules. It is not intended to be a substitute for the CT rules themselves. In addition to the CT rules, there may be other compliance requirements which members should seek to comply with. 4. We have used diagrams to make the subject of CT rules more comprehensible and as quick references to various topics thereunder. We have assumed that the reader has some knowledge of the Listing Rules and sought to keep explanations to a manageable level. 5. The materials herein are updated to January The ain Board Listing Rules are used as the basis for discussions. Please consult the equivalent GE rules for a GE Board listed issuer. 6. The original version of this Guidance Note is in English. In case of discrepancy, as and when the Chinese version is released, the English version will prevail. 7. Special gratitude is extended to the following persons from HKICS for their contributions and suggestions during the preparation of this Guidance Note (in surname alphabetical order): April Chan FCIS FCS, Chairman of Technical Consultation Panel (TCP) Jack Chow FCIS FCS, Chairman of Professional Development Committee (PDC) 2014/2015 Dr aurice Ngai FCIS FCS(PE), Immediate Past President Edith Shih FCIS FCS(PE), Past President Paul Stafford FCIS FCS, Vice-President and Chairman of PDC 2015/2016 Samantha Suen FCIS FCS(PE), Chief Executive Ivan Tam FCIS FCS, President Wendy Yung FCIS FCS, member of TCP PDC members 2014/2015 TCP members 2014/2015 2

5 8. Gratitude is also extended to The Stock Exchange of Hong Kong Limited (Exchange) for permission to reproduce the Listing Rule diagrams (LR diagrams). HKEx has also issued frequently asked questions (FAQs) and listing decisions relating to CTs (at com.hk) which serve as useful reference materials. Joint Authors: (in alphabetical order) Daniel Wan LLB (First Class Honours) Solicitor ohan Datwani FCIS FCS (PE) LLB LL PCLL BA (Iowa) (Distinction) CAS Solicitor and Accredited ediator Guidance Note on Connected Transactions January

6 1 Introduction 1.1 Prior to becoming a director of a listed issuer 1, an incumbent director would have signed an undertaking to comply, and to ensure the director s listed issuer comply with the Listing Rules (LR). This undertaking extends to compliance with connected transaction 2 (CT) rules under LR Chapter 14A. 1.2 There are 105 CT rules under LR Chapter 14A. They are to protect shareholders as a whole. Where CT rules apply they could lead to additional announcements, circulars, annual reports disclosures and shareholders approvals requirements for transactions 3 which could be both capital and revenue nature transactions. Additionally, for continuing connected transactions 4 (CCTs), they may require annual reviews by INEDs and auditors. These compliance requirements could be burdensome and therefore exemptions are available where the risk of abuse by connected persons 5 (CPs) is low: Rationale for CT Rules Listing Rules (LR) Chapter 14A sets out 105 CT rules provisions. Why do we need CT rules? LR14A.04 acknowledges that these may be burdensome, and there will be exemptions and waivers where risk of abuse by connected persons is low LR.14A.01 explains CT rules are to protect shareholders as a whole where listed issuer s group enters into a CT. LR14A.02 makes it clear that they could include capital and revenue transactions LR.14A.03 elaborates that there may need to be announcements, circulars, annual reports disclosures and shareholders approvals. Continuing connected transactions (CCTs) further requires annual reviews by INEDs and auditors 1.3 Nevertheless, CT rules are complicated. For example, LR14A.06 set outs some 39 definitions relating to CT rules and some of them cross refer back to other LR provisions. In the context of the complicated nature of CT rules, we hope to make the topic more comprehensible and manageable. 1 LR14A.06(21) 2 LR14A.06(11) and 23 to 30 3 LR14A.06(38) and 24 4 LR14.06(12) and 31 5 LR14.06(7) and 7 to 11 4

7 2 Types of CTs 2.1 The main category of CTs are (1) transactions between a listed issuer s group 6, meaning the listed issuer and its subsidiaries or any of them, and a CP. In addition, there are (2) transactions with third parties caught under CT rules because of benefits to CPs from interests in entities involved in transactions. Finally, CTs could be (3) one off or CCTs 7. Types of CTs ain Category: Transactions with connected persons (CPs) Transactions with third parties (TP) where CPs benefits from interests in entities involved These can be one off or continuing connected transactions (CCT) 2.2 Before turning to the main category of the regulation of transactions between listed issuer s group and CPs, we mention the TP transactions caught under CT rules. 6 LR14A.06(22) 7 Please see LR14A.23 generally Guidance Note on Connected Transactions January

8 3 Specified transactions with TPs: Financial assistance to commonly held entity. LR14A Where the listed issuer s group provides or receives financial assistance 8, that is, granting credit, lending money, or providing an indemnity against obligations under a loan, or guaranteeing or providing security for a loan, to or from a commonly held entity 9 (CHE), the CT rules may apply. 3.2 A CHE has amongst its shareholders (1) CPs at the issuer level, who individually or together exercise or control 10% or more of the voting rights, and (2) a member of the listed issuer s group, and hence the commonly held nature of the CHE. 3.3 For such purpose, interests indirectly held 10 through the listed issuer s group are excluded. The relationship is shown in the LR diagram 17: The Commonly Held Entity (CHE) LR diagram 17 Scenario 1 Scenario 2 X X The listed issuer X is a connected person at the issuer level Both the listed issuer s group and X are shareholders of Company A, and X holds 10% (or more) of shareholding in Company A. The listed issuer Any shareholding Company A Subsidiary of the listed issuer Any shareholding Company A Company A is a commonly held entity. Financial assistance provided by the listed issuer s group to, or received by the listed issuer s group from, Company A is a connected transaction. Note: If X held 30% or more of Company A, Company A will be an associate of X and regarded as a CP to attract the operations of CT rules. The effect of LR14A.26 is to lower this threshold to 10% or more to attract the operations of the CT rules because Company A is commonly held by a CP at the issuer level and the listed issuer s group. It does not extend to situations where X is a CP at the subsidiary level. 3.4 Please remember to consider CT rules implications when you have transactions involving financial assistance along with relevant exemptions, if any. 8 LR14A.06(17) and 24(4) 9 LR14A.06(6) and LR14A.06(19) 6

9 4 Specified transactions with TPs: Acquisition of target company & controller relationship. LR14A In acquisition type situations, where a person who is a non-cp is a substantial shareholder holding 10% or more of the target company being acquired, the CT rules may apply. This applies where the person who is a non-cp is, or will be proposed to be a controller 11 of the listed issuer, or an associate 12 of a controller. This is shown in LR diagram 18: Acquisition and the Controller Relationship LR diagram 18 Before the acquisition X After the acquisition X X is a controller or proposed controller of the listed issuer. X is a substantial shareholder of the Target Company. The listed issuer Subsidiaries of the listed issuer Third party The listed issuer Subsidiaries of the listed issuer Third party The acquisition of an interest in the Target Company by the listed issuer s group from the third party is a connected transaction. 5% 20% 15% 10% Target Company Target Company Note: If X held 30% or more of the Target Company, then the Target Company will be an associate of X and regarded as a CP to attract the operations of CT rules. The effect of LR14A.28 is to lower this threshold to 10% or more to attract the operation of the CT rules because of the common ownership of the Target Company with the listed issuer s group. It does not extend to situations where X is, or will be proposed controller, at the subsidiary level. 11 LR14A.06(13) and 28(1) 12 LR14A.06(2) and 12 to 15 Guidance Note on Connected Transactions January

10 4.2 LR14A.28 defines a controller as a director, chief executive or controlling shareholder 13 of the listed issuer. Any interests indirectly held through the listed issuer s group are excluded. This is shown in LR diagram 19: Exclusion for Indirectly Held Interests LR diagram 19 30% X X is a controller of the listed issuer. X only has an indirect interest in the Target Company through the listed issuer s group. The listed issuer/ its subsidiary The acquisition of an interest in the Target Company by the listed issuer s group from any third party (who is not a connected person) is not a connected transaction. Target Company 13 LR1.01 defines controlling shareholder as any person (including a holder of depositary receipts) who is or group of persons (including any holder of depositary receipts) who are together entitled to exercise or control the exercise of 30% (or such other amount as may from time to time be specified in the Takeovers Code as being the level for triggering a mandatory general offer) or more of the voting power at general meetings of the issuer or who is or are in a position to control the composition of a majority of the board of directors of the issuer; or in the case of a PRC issuer, the meaning ascribed to that phrase by rule 19A.14 8

11 5 The main category: Transactions with CPs Non-PRC listed issuers (Appendix A) 5.1 The main category of CTs are transactions between a listed issuer s group with CPs. LR diagram 1, under LR14A.07, sets out the persons who are to be regarded as connected persons in respect of the listed issuer s group: The CP Relationship LR diagram 1 Connected person Director, chief executive, substantial shareholder Director in the last 12 months Supervisor (PRC issuer only) Connected subsidiary Deemed connected person Associate Note: If you juxtapose within LR diagram 1 that (1) a substantial shareholder, holding 10% or more of a member of the listed issuer s group, could be a person or a company, and (2) a subsidiary could be wholly or partially owned, and where partially owned, could have other substantial shareholders at the subsidiary level as CPs, the above diagram would probably be an over-simplification of the relationships. This is especially as the relationships extend to (3) associates, and (4) the supervisor, as defined under LR19A.04, of a PRC listed issuer. Additionally, there is a (5) special exception for an insignificant subsidiary to brings persons, who would otherwise be CPs, out of the connected person relationship, and (6) the addition of connected subsidiaries as connected persons. 5.2 It is with an understanding of these relationships referred under the note to section 5.1 that we have created the two charts relating to CPs of non-prc listed issuer and PRC listed issuer under Appendix A and Appendix B respectively. We will go through Appendix A for non-prc listed issuers and highlight the additions under Appendix B for PRC listed issuers. Guidance Note on Connected Transactions January

12 5.3 Even after you have been through the steps below and determined that there is unlikely to be any CP relationship in respect of a transaction, please still try to seek for confirmations from the relevant third parties that the CT rules under Chapter 14A do not apply to them in relation to the proposed transaction as an additional safeguard, where possible. Please however remember that in the Exchange has the right to deem any persons as connected persons in relation to a transaction for the CT rules to apply. The ultimate discretion and interpretations under the Listing Rules are with the Exchange. Step 1 Is the person within the red boxes? 5.4 If you have to determine whether a person is a CP, please start by considering whether the person is within any of the red boxes of the ain Box of the chart in Appendix A. If so, the person is a CP. This takes into account the relationships referred to under the note to section 5.1 above and the discussions under the further notes below; and all such CPs are called First Wave Connected Persons The ain Box First Wave Connected Persons LR14A.07(1)&(2) ain Box Corporate shareholder Corporate shareholder Dir /ex Dir CE Non- PRC Listed Issuer Any connected person at the issuer level 100% Dir /ex Dir CE Dir /ex Dir CE Dir /ex Dir CE Dir /ex Dir 100% CE Dir /ex Dir CE Insignificant subsidiary Connected subsidiaries Note: subsidiaries could be partially owned (with or without its own ); wholly owned (which will not have any other ); connected (which must have CP at issuer level as ); and insignificant subsidiary (which can be at any subsidiary level). The diagram is illustrative to bring out these themes Dir = Director CE = Chief Executive = Substantial Shareholder 10

13 Further notes: The CP Relationship LR diagram 1 Connected person Director, chief executive, substantial shareholder Director in the last 12 months Supervisor (PRC issuer only) Connected subsidiary Deemed connected person Associate (1) If you read LR14A.07, you will see that there are 5 types of CPs as set out under the LR diagram 1 above. We will call the first two types on the left hand boxes corresponding to LR14A.07(1) and (2) the first wave connected persons. That is, for the non-prc listed issuers and its subsidiaries, any director, chief executive, substantial shareholder, and ex-director within the last 12 months. These are everyone within the red boxes in the chart. As long as you can slot a person into one of the red boxes, the person is a CP. For PRC listed issuers, the supervisor will be included, under the third box corresponding to LR14A.07(3) as first wave connected persons. Please refer to Appendix B. (2) You could also ascertain from the chart who are connected persons at the issuer level 14. These include the issuer s directors, chief executive, substantial shareholders and ex-directors within the last 12 months of the issuer and their respective associates. (3) By the same token, you could ascertain from the chart who are connected person at the subsidiary level 15. These include the directors, chief executive, substantial shareholders and ex-directors within the last 12 months of the issuer s subsidiaries, which could be wholly or partially owned by the issuer, and their respective associates. (4) Where a person is connected at an insignificant subsidiary 16 level, the person is not to be regarded as a CP. That is, a subsidiary with whose total assets, profits and revenue compared to that of the listed issuer s group are less than: (1) 10% for each of the latest 3 financial years; or (2) 5% for the latest financial year. If the person is connected with two or more subsidiaries, the Exchange will aggregate them 14 LR14A.06(8) 15 LR14A.06(9) 16 LR14A.06(20) and 09 Guidance Note on Connected Transactions January

14 together, and it is 100% of the total assets, profits and revenue that will be used for the purposes of calculations unless this produces an anomalous result whereby the Exchange may consider alternative tests provided by the listed issuer. (5) A subsidiary is not a connected person in general. For the avoidance of doubt, LR14A.18 states that a subsidiary is not a CP where (1) it is a directly or indirectly wholly-owned (100%) subsidiary (2) where its substantial shareholder is a subsidiary of the listed issuer and/or (3) where the connection is with an associate of a connected person at the subsidiary level. These are set out in LR diagrams 12 to 14: The Subsidiary Relationship LR diagram 12 The listed issuer Subsidiary A is not a connected person. 100% Subsidiary A LR diagram 13 The listed issuer Subsidiary A Subsidiary A is a substantial shareholder of another subsidiary of the listed issuer. However, this relationship will not make Subsidiary A a connected person of the listed issuer. Subsidiary of the listed issuer LR diagram 14 The listed issuer Subsidiary A Subsidiary of the listed issuer X 30% X is a substantial shareholder of a subsidiary of the listed issuer. X holds 30% (or more) shareholding in Subsidiary A. Subsidiary A is an associate of X. However, this relationship will not make Subsidiary A a connected person of the listed issuer because X is only a connected person at the subsidiary level. 12

15 (6) There is a special case in which a subsidiary has a substantial shareholder who is a connected person at the issuer s level. This subsidiary is called a connected subsidiary 17 and in itself regarded as a connected person. Please note that any subsidiary of a connected subsidiary is also a connected subsidiary. These will be the light blue shaded boxes in the chart. Even then, there is an exemption for transactions between connected subsidiaries where the only CP relationship arises based on the same connected person at the issuer level. Please see LR diagrams 10 and 11 for further details as to the narrow scope of the exemption: The Connected Subsidiaries Relationship LR diagram 10 X The listed issuer Subsidiary D Subsidiary A Subsidiary B Subsidiary C LR diagram 11 Scenario 1 Scenario 2 X is a connected person at the issuer level, and he or it has a 10% (or more) shareholding in Subsidiary A. Subsidiary A is a connected subsidiary. (See rule 14A.16(1)) Subsidiaries B and C are subsidiaries of Subsidiary A. Subsidiaries B and C are also connected subsidiaries. (See rule 14A.16(2)) Transactions between the listed issuer or Subsidiary D with Subsidiary A/B/C are connected transactions. Transactions between any of Subsidiaries A, B and C are not connected transactions if Subsidiaries B and C are connected solely because of their relationship with Subsidiary A. (See rule 14A.17) X X Y X and Y are connected persons at the issuer level. The listed issuer Subsidiary D The listed issuer Subsidiary D Subsidiaries D and E are connected subsidiaries. Subsidiary E is a subsidiary of Subsidiary D. However, the exemption in rule 14A.17 does not apply to transactions between them because Subsidiary E is a connected subsidiary not only because of its relationship with Subsidiary D but also its relationship with X or Y. Subsidiary E Subsidiary E 17 LR14A.06(10) and 16 Guidance Note on Connected Transactions January

16 (7) A PRC Governmental Body 18 is not normally treated as a CP 19. (8) A depository of the listing of a depository receipt will not be regarded as associate of the holder of the depository receipt or or controlling shareholder of the listed issuer 20. (9) The Exchange has power to deem any person as a CP 21. Step 2 No other deemed CP relationship 5.5 If the person is not a CP under Step 1, please go on to consider if the person has with any first wave CP (that is the red person in the ain Box) (1) any agreement, arrangement, understanding or undertaking, whether formal or informal and whether express of implied, to potentially be deemed a CP by the Exchange under LR14A.20. These are the yellow persons under the chart to the first wave connected persons. Step 3 No associates and other deemed CP relationship 5.6 If a person has no CP relationship identified from Steps 1 and 2, you will still need to go through the rest of the chart to see if the person is an associate or deemed connected person and thereby regarded as a CP (which again is expanded from the LR diagram 1 on pages 9 and 11 based on the LRs indicated). We will go through each of the boxes in turn. Please note that persons within the red boxes are known as first wave connected persons. The Associate and Deemed CP Relationships Overview CONNECTED PERSONS (NON-PRC LISTED IUER) Associates of Individual: Immediate Family embers Associates of Individual: Family embers Relatives LR14A.12(1) LR14A.12(2)(a) LR14A.21(1)(a) Reproduce with suitable acknow BOX 1 /Dir/exDir/CE Beneficiary Spouse BOX 2 other/ Father/ Step- Step-mother Father BOX 3 Grandfather Grandmother Grandfather Grandmother Trustee(s) Child/Step-child (natural or adopted) under 18 Individually or together (directly or indirectly) exercise or control the exercise of 30% or more of the voting power at general meetings or control the composition of a majority of the board of directors LR14A.12(1)(c) 30% 30% - controlled company Subsidiaries Brother/ Person(s) Step-brother/ cohabiting Sister/ as a spouse Step-sister First wave connected person [1] = Already covered by Box 1 [1] [1] / Spouse Dir/ exdir/ CE Son/Step-son/ Daughter/ Step-daughter aged 18 or above Spouse of Uncle/Aunt Cousin Uncle/ Aunt [2] Father in law Brotherin-law/ Sister-inlaw other/ Stepmother Father/ Stepfather Uncle/ Aunt [1] = Already covered by Box 1 [2] = Already covered by Box 2 [2] Cousin Spouse of Uncle/Aunt [2] [2] [1] [1] Brother/ Person(s) /Dir/ Spouse Sister-in-law/ Step-brother/ cohabiting exdir/ce Brother-in-law Sister/ as a spouse Step-sister [2] First wave Son/Step-son/ connected person Nephew/ Daughter/ Niece Step-daughter aged 18 or above Grandson/ Granddaughter other in law Daughterin-law/ Son-in-law First Wave Connected Persons LR14A.07(1)&(2) ain Box Corporate shareholder Any Dir /ex Dir CE connected Corporate person at shareholder the issuer level Non- PRC Listed Issuer 100% Dir /ex Dir CE Dir /ex Dir CE Dir /ex Dir CE 100% Dir /ex Dir CE Dir /ex Dir CE Insignificant Connected subsidiary subsidiaries Note: subsidiaries could be partially owned (with or without its own ); wholly owned (which will not have any other ); connected (which must have CP at issuer level as ); and insignificant subsidiary (which can be at any subsidiary level). The diagram is illustrative to bring out these themes first wave connected persons: LR14A.07 associates of the first wave connected persons such associates are connected persons: LR14A.07(4) deemed connected persons: having agreement, arrangement, understanding or undertaking (whether formal or informal and whether express or implied) with (1) Dir, CE or of the listed issuer or any of its subsidiaries; and (2) ex- Dir of the listed issuer or any of its subsidiaries in the last 12 months: LR14A.20 deemed connected persons: LR14A.21 connected subsidiary and any subsidiary of such connected subsidiary: LR14A.16 CE chief executive, which is defined as a person who either alone or together with one or more other persons is or will be responsible under the immediate authority of the board of directors for the conduct of the business of a listed issuer. For example, CEO: LR1.01 Dir / director / former directors within the last ex Dir 12 months substantial shareholder, in relation to a company means a person (including a holder of depositary receipts) who is entitled to exercise, or control the exercise of, 10% or more of the voting power at any general meeting of the company marriage Any connected person at the issuer level (1) Dir, CE, of the listed Issuer; (2) ex-dir of the listed issuer in the last 12 months; and (3) an associate of any of the above: LR14A.06(8) Insignificant subsidiary subsidiary whose total assets, profits and revenue compared to that of the listed issuer s group are less than: (1) 10% for each of the latest 3 financial years; or (2) 5% for the latest financial year: LR14A.09 Individually or together (directly or indirectly) exercise or control the exercise of more than 50% of the voting power at general meetings or control the composition of a majority of the board of directors LR14A.12(2)(b) ajority-controlled LR14A.21(1)(b) company Subsidiaries Associates of company LR14A.13 BOX 4 Holding Trustee(s) Companies beneficiary Corporate Fellows shareholder Subsidiaries Fellows Individually or together (directly or indirectly) exercise or control the exercise of 30% or more of the voting power at general meetings or control the composition of a majority of the board of directors LR14A.13(3) 30% 30% - controlled company Subsidiaries 18 LR14A.06(31) and 19A LR14A LR14A LR14A.19 14

17 (1) Step 3. Box 1 Immediate family member 22 The CP relationship extends to a first wave CP s (that is, the red persons under the ain Box) immediate family members as shown in the grey boxes. As could be seen from the diagram, these include trustee, spouse, child, step-child, natural or adopted, under 18, any 30%-controlled company 23 and its subsidiaries. For detailed definitions as to trustees 24 and 30%-controlled company, please refer to LR14A.12: Associates of Individual: Immediate Family embers LR14A.12(1) BOX 1 /Dir/exDir/CE Spouse Beneficiary Trustee(s) Child/Step-child (natural or adopted) under 18 Individually or together (directly or indirectly) exercise or control the exercise of 30% or more of the voting power at general meetings or control the composition of a majority of the board of directors LR14A.12(1)(c) 30% 30% - controlled company Subsidiaries 22 LR14A.12(1)(a) 23 LR14A.06(1) 24 LR14A.06(39) and 12(1)(b) or 13(2) Guidance Note on Connected Transactions January

18 (2) Step 3. Box 2 Family members 25 In addition to immediate family members already covered under Box 2 [1], the other family members under Box 2 within the grey boxes are also regarded as associates of the first wave connected person (that is, the red persons under the ain Box) and therefore CPs themselves. You will see these include a person cohabiting as a spouse, etc. The grey boxes are self-explanatory: Associates of Individual: Family embers LR14A.12(2)(a) BOX 2 other/ Step-mother Father/ Step- Father [1] Brother/ Step-brother/ Sister/ Step-sister Person(s) cohabiting as a spouse = Already covered by Box 1 First wave connected person [1] / Dir/ exdir/ CE [1] Spouse Son/Step-son/ Daughter/ Step-daughter aged 18 or above 25 LR14A.06 (16) and 12(2)(a) 16

19 (3) Step 3. Box 3 Relatives 26 In addition to immediate family members and family members already covered under Box 3 [1] and [2], the other relatives under Box 3 within the green boxes are deemed CPs. The green boxes are self-explanatory: Relatives LR14A.21(1)(a) BOX 3 Grandfather Grandmother Grandfather Grandmother Spouse of Uncle/Aunt Uncle/ Aunt [2] other/ Stepmother [2] Father/ Stepfather Uncle/ Aunt Spouse of Uncle/Aunt other in law Father in law Cousin Cousin Sister-in-law/ Brother-in-law Nephew/ Niece [2] [2] Brother/ Step-brother/ Sister/ Step-sister Person(s) cohabiting as a spouse First wave Son/Step-son/ connected person Daughter/ Step-daughter aged 18 or above [1] = Already covered by Box 1 [2] = Already covered by Box 2 [1] [1] /Dir/ Spouse exdir/ce [2] Grandson/ Granddaughter Daughterin-law/ Son-in-law Brotherin-law/ Sister-inlaw 26 LR14A.06(37) and 21(1)(a) Guidance Note on Connected Transactions January

20 (4) Step 3 ajority controlled company 27 As seen in the bottom of Box 1, if any immediate family member of first wave CPs (that is, the red persons under the ain Box) has a 30%-controlled company then the company is deemed an associate. Another case is where all persons in Boxes 1, 2 and/or 3 together control a majority-controlled company, then that company and its subsidiaries are CPs: Individually or together (directly or indirectly) exercise or control the exercise of more than 50% of the voting power at general meetings or control the composition of a majority of the board of directors LR14A.12(2)(b) LR14A.21(1)(b) ajority-controlled company Subsidiaries 27 LR14A.06(23) means a company held by a person who can exercise or control the exercise of more than 50% of the voting power at general meetings, or control the composition of a majority of the board of directors 18

21 (5) Step 3. Box 4 Associate of a company 28 Where the first wave connected person is a company, by necessity as it is not a natural person, it cannot be a director, chief executive or former director, and it must be a substantial shareholder. This is because under LR only natural persons could be directors of listed issuers. LR14A.13 extends the concept of a CP to its associates shown in the grey boxes, namely trustees, holding company, fellows, subsidiaries and 30%-controlled entities and their subsidiaries: BOX 4 Associates of company LR14A.13 Trustee(s) Holding Companies beneficiary Corporate shareholder Subsidiaries Fellows Fellows Individually or together (directly or indirectly) exercise or control the exercise of 30% or more of the voting power at general meetings or control the composition of a majority of the board of directors LR14A.13(3) 30% 30% - controlled company Subsidiaries 28 LR14A.06 and 13 Guidance Note on Connected Transactions January

22 6 The main category: Transactions with CPs PRC listed issuers (Appendix B) Step 1 Is the person within the red boxes? 6.1 Please refer to the analysis under Section 5 for non-prc listed issuers. The only difference for PRC listed issuers is that a supervisor of a PRC listed issuer and any of its subsidiaries is to be considered and regarded within the first wave CP. The ain Box First Wave Connected Persons LR14A.07(1)&(2)&(3) ain Box Corporate shareholder Corporate shareholder SP Dir /exdir CE PRC Listed Issuer ex-dir 100% SP Dir /exdir CE SP Dir /exdir CE SP Dir /exdir CE 100% SP Dir /exdir CE SP Dir /exdir CE Insignificant subsidiary Connected subsidiaries Note: subsidiaries could be partially owned (with or without its own ); wholly owned (which will not have any other ); connected (which must have CP at issuer level as ); and insignificant subsidiary (which can be at any subsidiary level). The diagram is illustrative to bring out these themes 20

23 Steps 2 and The similar thought process under Section 5 as with non-prc listed issuers apply. That is, you should go through the boxes in Appendix B. You will notice that there is the additional need to consider the cooperative or contractual joint venture relationships to identify if a joint venture partner would be regarded as an associate of a first wave connected person. If it would, the joint venture partner is also a CP. Individually or together (directly or indirectly) hold 30% or more of the joint venture s capital or assets contributions or the share of its profits or income LR14A.15 X (the joint venture partner) X (the joint venture partner) Individually or together (directly or indirectly) hold 30% or more of the joint venture s capital or assets contributions or the share of its profits or income Cooperative or contractual joint venture LR14A.15 Cooperative or contractual joint venture Guidance Note on Connected Transactions January

24 7 Transactions 7.1 We have referred to the main category of CTs as transactions between the listed issuer s group and CPs. Thus, in addition to defining who is a CP, there is also the need to consider what amounts to a transaction. 7.2 As to what constitutes a transaction is relatively straightforward. As set out under LR14A.24, transactions could be of both capital and revenue nature, and whether in the listed issuer group s ordinary course of business or not and extends to: Types of Transactions Acquisition, disposal, deemed disposals (LR14A.06 and LR14.29) Granting, accepting, exercising, transferring, or terminating an option (except on non-discretionary puts) over assets or securities subscription, or not exercising a call Entering, terminating finance or operating leases or sub-leases Granting an indemnity or providing or receiving financial assistance Agreement, arrangement to set up joint venture or joint venture arrangement 7.3 We will not discuss the details of what amount to transactions, except to point out that the more complicated area relates to options 29, which you will in all likelihood, be taking in professional advice. The Exchange is considering option pricing as part of investor protection. 29 LR14A.61 22

25 8 Compliance requirements 8.1 In accordance with LA14A.32 to 60, there are many additional compliance requirements relating to CTs. Subject to exemptions, there may need to be written agreement, announcement, independent shareholders approval with independent board committee recommendations, usually based on independent financial adviser s advice, issue of circulars and disclosures in annual reports. The exemptions are set out under section 9, and they relate to certain threshold amounts as well as procedural safeguards for full or partial exemptions set out therein for exemption from the onerous CT rules which would otherwise be applicable. The Compliance Requirements Overview Written Agreement announcement ISA and IBC (with IFA) input Issue circular Disclosure in Annual Report Note: Under LR14A.81, the Exchange will aggregate a series of connected transactions and treat them as one transaction if they were all entered into or completed within a 12-month period or otherwise related; and 24 months if the connected transactions are a series of acquisitions of assets being aggregated which may constitute a reverse takeover. 8.2 For CCTs, additionally, there are additional needs for the agreement to set out the basis for calculation of the CCTs; not to exceed three years; and with preapproved annual caps 30. There will be need for re-compliance with these CCT rules requirements where the cap is exceeded or there is material change to the CCT. Also auditors need to provide annual confirmation to the board to be filed with the Exchange relating to compliance with the CCT rules. 8.3 Under LR14A.60, if a continuing transaction subsequently becomes a CCT, the listed issuer must comply with the annual review and disclosure requirements including the publishing an announcement and annual reporting, and upon renewal or variation, comply with all requirements. 30 LR14A.06(4) and 53 Guidance Note on Connected Transactions January

26 9 Exemptions 9.1 Under the CT rules, there are various exemptions. These could range from full exemptions to partial exemption from shareholders approval requirement only. In most cases, your main task will be to identify if the person is a CP along with applicable exemptions, if any, in relation to potential transactions with CT implications. Please remember the need to comply with other compliance requirements, including Chapter 14 on notifiable transactions. The Extent of Exemptions Fully exempt from shareholders approval, annual review by INEDs and auditors and all disclosure requirements Exempt from shareholders approval requirement only 9.2 Under the LR, there are 10 types of exemptions, there are listed below: Types of Exemptions 1 De minimis 2 Transactions with CPs at the subsidiary level 3 Financial assistance 4 Issues of new securities by issuer or subsidiaries 5 Dealings in securities on stock exchange 6 Repurchase of securities by issuer or subsidiaries 7 Directors service contracts and insurances 8 Buying or selling consumer goods or services 9 Sharing of administrative costs 10 Transactions with associates of passive investors 24

27 9.3 Under the various exemptions, you may need to consider the applicable tests. As a reminder these are based on: The Applicable Tests Assets ratio The total assets which are the subject of the transaction divided by the total assets of the listed issuer (LR14.09 to 14.12, 14.16, and 14.19) Revenue ratio The revenue attributable to the assets which are the subject of the transaction divided by the revenue of the listed issuer (LR14.14 and 14.17) Consideration ratio The consideration divided by the total market capitalisation of the listed issuer for the five business days immediately preceding the date of the transaction (LR14.15) Equity capital ratio The number of shares to be issued by the listed issuer as consideration divided by the total number of the listed issuer s issued shares immediately before the transaction Note: The issuer may propose alternative tests where the above tests are not applicable. The applicable percentage ratios 31 should be worked out with the finance team. Also, the profits ratio is not applicable to CTs/CCTs. 31 LR14A.06(30) and LR14.04(9) Guidance Note on Connected Transactions January

28 Exemption 1: De minimis exemption. LR14A There could be full or partial exemption depending on the size tests and threshold amounts involved with the CT. This exemption is commonly used in various instances by listed issuers. Please see diagram below: De minimis exemption (LR 14A.76) De minimis Fully exempt normal commercial terms or better: <0.1% OR <1% with CP at Sub Level OR <5% and <$3m LR14A.76(1) Partially exempt normal commercial terms or better <5% OR <25% and <$10m LR14A.76(2) Note: The partial exemption under Rule 14A.76(2) is in respect of circular, including independent financial advice and shareholders approval requirements. Note: For CCT, the listed issuer must use the cap as the numerator. If the agreement covers over one year, the transaction will be classified based on the largest cap during the term of the agreement. 9.5 You will see from the diagram that the extent of exemptions depends on the size of the transactions, with relaxation for CTs at the subsidiary level. Please refer to the applicable LR for further details where you have a relatively small CT as this exemption may be applicable. 26

29 Exemption 2: Transactions with connected persons at subsidiary level. LR14A Please remember that where a person is connected at an insignificant subsidiary level the person is not to be regarded as a CP. This operates as an exclusion of the person from being a CP. There will be no compliance requirements required under CT rules. An insignificant subsidiary under LR14A.09 refers to a subsidiary whose total assets, profits and revenue compared to that of the listed issuer s group are less than: (1) 10% for each of the latest 3 financial years; or (2) 5% for the latest financial year. 9.7 Additionally, there is a partial exemption (from the circular, independent financial advice and shareholders approval requirements) under the LR for a transaction with CPs at the subsidiary level where the transaction is (1) on normal commercial terms or better, and (2) independent non-executive directors (INEDs) have provided the confirmation as set forth in the diagram below: The Subsidiary Exemptions A CT between listed issuer s group and CP at the subsidiary level on normal commercial terms or better is exempt from the circular, independent financial advice and shareholders approval requirements if: listed issuer s board approved it, and INEDs confirmed the terms are fair and reasonable on normal commercial terms or better, and in the interests of the listed issuer and its shareholders as a whole Note: In the case of formation of a joint venture by a qualified issuer and a qualified connected person to make a qualified property acquisition, the qualified issuer must announce the transaction as soon as practicable after receiving notification of the success of the bid by the joint venture If any details of the acquisitions or the joint venture required to be disclosed are not available when the qualified issuer publishes the initial announcement, it must publish subsequent announcement(s) to disclose the details as soon as practicable after they have been agreed or finalized. 9.8 In case of formation of joint venture by qualified issuer 32 and a qualified connected person 33 to make a qualified property acquisition 34, an announcement will be required upon notification of the successful bid by the joint venture. Note: Under the Exchange s FAQ Series 28, FAQ No21B of 29th ay 2015 the Exchange clarifies that transactions or arrangements involving substantial shareholder of a subsidiary and hence CP at subsidiary level in relation to placing of shares to such CP is not exempt. Please see the FAQ for further analysis. 32 LR14A.06(34) and 14.04(10B) 33 LR14A.06(33) means a connected person of the qualified issuer solely because he or it is a substantial shareholder (or its associate) in one or more of the qualified issuer s non whollyowned subsidiaries formed to participate in property projects, each of which is single purpose and project specific. This person may or may not have representation on the board of the subsidiary or subsidiaries. 34 LR14A.06(35) and 14.04(10C) Guidance Note on Connected Transactions January

30 9.9 For example, this exemption was used in a recent transaction as follows: An Illustrative Example Corporate structure prior to completion of the transactions Listco 100% A 99.9% 100% 3 Vendors to sell their interests in Target to Listco (the 3 blue arrows) It is discloseable transaction because % ratio >5% but <25% It is connect transaction because the 3 Vendors are connected persons. It is subject to reporting and announcement requirements but not shareholders approval, because (a) Listco Board has approved, and (b) all INEDs gave confirmations that the terms of the transaction are fair and reasonable, on normal commercial terms and in the interests of the Listco and its shareholders as a whole 0.1% B C D E F Others 50% 6% 10% 10% 10% 14% Target Regular subsidiary Corporate structure immediately after completion of the transactions Listco Others 86% 14% Target 28

31 Exemption 3: Financial assistance exemption. LR 14A These range from financial assistance provided by a banking company 35 (BC) to CP or CHE; financial assistance provided by the listed issuer s group to cover certain liabilities to directors directly or through indemnities; financial assistance provided by the listed issuer s group to CP or CHE; and financial assistance received by the listed issuer s group from CP or CHE. ost of these have to be on normal commercial terms or better 36 and in ordinary and usual course of business 37 (Ordinary Terms), and subject to certain size tests. Types of Exemptions for Financial Assistance By Banking Companies By BC to CP or CHE is fully exempt if on Ordinary Terms By BC to CP or CHE is fully exempt if NOT on Ordinary Terms but at <0.1% OR <1% with CP at sub level OR <5% and <$3m (inclusive of monetary advantage (LR14A.06(25))) By BC to CP or CHE is partially exempt from circular ISA/IFA requirements if NOT on Ordinary Terms but <5% OR <25% and <10m (inclusive of monetary advantage) Received and Provided by Listed Issuers Received by a listed issuer s group from a CP or CHE is fully exempt if on normal commercial terms and not secured by the assets of the listed issuer s group By listed issuer s group on normal commerical terms and in proportion to its equity interest directly held (LR14A.06(15)) in the CP or CHE, and in case of guarantee on several basis By listed issuer s group is fully exempt if as an indemnity for liabilities incurred in the course of the director performing his duties, and in permitted form in Hong Kong or place of incorporation 35 LR14A.06(3) and LR14A.06(26) 37 LR14A.06(28) Guidance Note on Connected Transactions January

32 Exemption 4: Issues of new securities by issuer or subsidiaries. LR14A LR 14A.92 provides exemption for the issue of new securities by listed issuers and its subsidiaries, and additionally for issues at the subsidiary level, the de minimis exemption 1 above applies. Types of Exemptions for New Securities Fully exempt, if pro rata as shareholder, or where the CP is an underwriter or sub-underwriter in a rights issue or open offer Fully exempt under top-up placings and subscriptions Fully exempt under a pre or post IPO share option schemes 30

33 Exemption 5: Dealing in securities on stock exchanges. LR14A There is an exemption for dealing in securities acquired under an acquisition covered under LRA14A.28 referred to in Section 4 above. The Requirements for Securities Dealing Exemption Dealing by listed issuer s group in securities of a target company (acquired under a LR14A.28 CT) is fully exempt if in the listed issuer s group s ordinary and usual course of business The target company s securities are listed on HKSE or other recognised exchanges The dealings are carried out on market, or off market with no consideration moving to or from a connected person There is no direct or indirect benefit to a CP who is a substantial shareholder of the target company Guidance Note on Connected Transactions January

34 Exemption 6: Repurchases of securities by listed issuer or subsidiary. LR14A There is an exemption for repurchases of securities under applicable rules. Please refer to LR14A.94 for further details: Types of Repurchases of Securities Exemption Repurchases of own securities by a listed issuer or its subsidiary from a connected person is fully exempt if it is made: (1) on HKSE or recognised stock exchange (LR14A.06), except where the CP knowingly sells the securities to the listed issuer s group; or (2) in a general offer made under the Code on Share Buy-backs. 32

35 Exemption 7: Directors service contracts and insurances. LR14A.95 and The entering of service contract by directors with the listed issuer or its subsidiary and purchase of insurances in permitted form under Hong Kong or place of incorporation are fully exempt from operations of the CT rules. Directors Related Exemptions LR14A.95, a director entering into a service contract with the listed issuer or its subsidiary is fully exempt LR 14A.96, purchase and maintenance of insurance for a director of the listed issuer or its subsidiaries against liabilities to third parties that may be incurred in the course of performing his duties are fully exempt if in permitted form in Hong Kong or place of incorporation Guidance Note on Connected Transactions January

36 Exemption 8: Buying and selling consumer goods or services. LR14A This is an exception to allow the CP to be in the position of any consumer in relation to the goods or services of the listed issuer s group. The Consumer Exemption LR14A.97, a listed issuer s group buying consumer goods or services as a customer from, or selling consumer goods or services to, a connected person on normal commercial terms or better in its ordinary and usual course of business is fully exempt subject to a host of conditions as set out therein The examples are, eals consumed by a director at a restaurant owned by the listed issuer s group, A director buying groceries for his own use at a retail store operated by the listed issuer s group, Utilities provided by the listed issuer s group to a director s apartment, or provided by a connected person to the listed issuer s group where the prices are published or publicly quoted and apply to other independent consumers 34