Hong Kong Stock Exchange Publishes Phase 2 Consultation Paper on Competitiveness Review of Listing Framework

Notifiable Transactions

Percentage ratios — Profits ratio

Listed issuers measure the impact of transactions using five percentage ratios: (i) assets ratio; (ii) revenue ratio; (iii) profits ratio; (iv) consideration ratio; and (v) equity capital ratio

Transaction is classified where one or more of the percentage ratios exceed the applicable threshold

Remove the profits ratio, such that listed issuers would measure the impact of a transaction using the other four percentage ratios (i.e., assets ratio, revenue ratio, consideration ratio, and equity capital ratio)

Percentage ratios — Consideration ratio

The consideration ratio is derived by the consideration divided by the total market capitalisation of the listed issuer.

Modify the consideration ratio to allow listed issuers to compare the consideration for the transaction with the higher of:

(a) their market capitalisation (i.e., the existing requirement); or

(b) their net asset value, which means the equity attributable to the owners of the issuers as shown in their accounts or latest published interim report (whichever is more recent) (the NAV ratio).

Transaction classifications and materiality thresholds

Disclosable transaction (where applicable size tests are ≥5% but ˂25%) requires an announcement

A major transaction is classified where any percentage ratio is 25% or more but less than 100% for an acquisition or 75% for a disposal. Major transactions are subject to announcement, circular, and shareholders’ approval requirements.

VSD (Very Significant Disposal) (where applicable size tests are 75% or more) and VSA (Very Significant Acquisition) (where applicable size tests are 100% or more) require announcement, circular, and shareholders’ approval.

• Transactions in which any percentage ratio is 25% or more but less than 50% will be classified as disclosable transactions, subject to enhanced announcement disclosure requirements.
• For disclosable transactions in which any percentage ratio is 25% or more but less than 50% that involve specific types of assets (properties, mineral assets, or infrastructure projects), the listed issuers must also disclose the expert report(s) and the relevant expert statements.
• Increase the materiality threshold for major transactions from 25% to 50%.
• Important exception: The increased materiality threshold for classifying a major transaction  will NOT apply to transactions involving (i) provision of financial assistance and/or (ii) securities or other investment activities (which includes acquisitions or disposals of (a) securities; or (b) wealth management products, digital assets, and other investment products, that are held or to be held for investment or treasury management purpose) — for these, the major transaction classification remains at 25%. Similarly, the increased materiality threshold for classifying a disclosable transaction will not apply to these transactions as well, the disclosable transaction classification remains at ≥ 5% but ˂25% for transactions involving provisions of financial assistance and/or securities or other investment activities
• The VSD and VSA classifications will be removed. Transactions that are currently classified as VSAs or VSDs will be classified as major transactions.

Transactions in the ordinary and usual course of business

Notifiable transaction requirements applicable to transactions of a capital nature and in the ordinary and usual course of business of a listed issuer.

Provide an exemption for acquisition or leasing assets in the ordinary and usual course of business that constitutes a major transaction, from the circular and shareholder approval requirements, subject to:

(a) The assets are to be acquired or leased by the listed issuer to maintain or expand its existing principal business, which has been reported as a continuing principal business activity in the issuer’s published financial statements for the two full consecutive financial years immediately preceding the transaction; and

(b) the board of directors of the listed issuer has confirmed that the transaction is entered into in the issuer’s ordinary and usual course of business, conducted on normal commercial terms, and the terms are fair and reasonable as well as in the interests of the issuer and its shareholders as a whole.

Transactions falling within this proposed exemption would still be subject to an announcement requirement, pursuant to which the listed issuer is required to disclose:

• Details of the transaction according to the disclosure requirements for notifiable transaction announcements;
• Board of director confirmation that (i) the transaction is entered into by the listed issuer in its ordinary and usual course of business and on normal commercial terms; and (ii) the terms of the transaction are fair and reasonable and in the interests of the issuer and its shareholders as a whole;
• Information to demonstrate that the conditions of the proposed exemption were met; and
• Where applicable, the expert report required acquisition or leasing of specific types of assets (being properties, mineral assets or infrastructure projects) and the relevant expert statements.

Announcement requirements relating to notifiable transactions

Announcement requirements for notifiable transactions require disclosure of basic information including identity of parties, assets, consideration, and financial effects

Enhance announcement disclosure requirements for all notifiable transactions by requiring the announcement to include the following additional information:

(a) Material terms and conditions (e.g., material undertakings, indemnities, or representations and warranties);

(b) Adequate explanation of the basis of consideration, including details of valuation (if any);

(c) Key financial information of the target for the two financial years immediately preceding the transaction (revenue, assets, and liabilities, cash flow from operating activities, together with key sector-specific financial metrics and adequate explanation);

(d) Explanation of the transaction’s impact on the listed issuer (qualitative and quantitative analysis of any material effect on P&L, assets/liabilities, liquidity and financial resources, and financial and trading prospects);

(e) Information about the listed issuer’s interests in a target company post-transaction where a transaction involves acquisition or disposal of an interest in a company that will become or cease to be a subsidiary of the issuer;

(f) Information about where securities are issued, transferred out or treasury or listed as part of a transaction;

(g) A director’s responsibility statement confirming accuracy and completeness of the information in the announcement; and 

(h) Further announcements on: (i) extension of long stop date; (ii) change in payment schedule; (iii) where consideration is not fixed, the amount when determined; and (iv) completion of a notifiable transaction.

With regard to additional financial information of the target, the issuer must also disclose:

• Audited financial information of the target, where available
• Where the issuer does not possess the target’s audited financial information (including where audited figures are not available for the two, or any of the two, financial years immediately preceding the transaction), the board of directors must explain (a) why such audited information is unavailable and (b) the basis on which the directors consider it reasonable to enter into the transaction based on the unaudited information and the reliability of such information
• The source of the target’s financial information (e.g., unaudited management accounts)
• The basis on which such information has been prepared (including applicable accounting standards and any adjustments or assumptions applied)

Circular requirements relating to major transactions

Major transactions, VSAs, and VSDs are subject to detailed circular disclosure requirements, including financial statements, accountants’ reports, indebtedness statements, MD&A, and material contracts

Align and enhance the circular disclosure requirements applicable to major transactions, VSAs, and VSDs, including to:

• For disposals: streamline the financial information requirements by (a) removing auditors or reporting accountants’ review requirement in the case of disposals; (b) refining the scope of disclosure for disposals by requiring financial information of the disposal target (and removing the option to disclose the  financial information of the issuer group with the disposal target shown separately) and requiring the target’s profit and loss statement, balance sheet, and cash flow statement (instead of the full set of financial statements);
• Remove MD&A requirement on issuer group and other acquisitions;
• Introduce new requirement for risk factors relating to the transaction and any new risks to the issuer group as a result of the transaction;
• Remove indebtedness statement requirement for issuer group;
• Remove disclosure of material contracts entered into by the issuer within two years before the circular;
• Allow directors and chief executive’s general information to be incorporated by reference;
• Codify existing waiver for acquisitions of revenue-generating assets; and
• Codify requirement for independent valuation reports where consideration is primarily based on valuation.

Exemption for securities transactions of a revenue nature conducted by securities houses

Acquisitions or disposals of securities carried out by a securities house that is mainly engaged in regulated activities under the Securities and Futures Ordinance (SFO) in its ordinary and usual course of business are fully exempt from the notifiable transaction requirements

Modify the revenue exemption to cover securities transactions carried out by a PRC securities house that is regulated under the PRC Securities Law and mainly engaged in businesses that are equivalent to regulated activities under the SFO, provided proprietary securities trading and/or investment activities do not constitute a significant part of the business.

Connected Transactions

Definition of “connected subsidiary”

Where any connected person(s) at the issuer level can exercise or control the exercise of ≥10% of the voting power in such subsidiary

Modify the definition of “connected subsidiary” by increasing the threshold for a connected person’s shareholding in a subsidiary from 10% to 30% or more of the voting power. Accordingly, a non-wholly owned subsidiary of the listed issuer where any connected person(s) at the issuer level, individually or together, can exercise or control the exercise of 30% or more of the voting power at such subsidiary’s general meeting will be considered as a connected subsidiary subject to the connected transaction requirements

Application of notifiable transaction proposals to connected transactions

The Listing Rules provide de minimis exemptions for connected transactions that fall below specific materiality threshold. The methods of calculating percentage ratios for notifiable transactions generally also apply to connected transactions, except that profit ratio is not applicable.

Apply the following notifiable transaction proposals to connected transactions:

(a) modify the consideration ratio to allow comparison with the higher of market capitalisation or NAV;

(b) enhance announcement and circular requirements to align with the notifiable transaction approach; and

(c) allow incorporation by reference of directors/chief executive information into circulars.

PRC issuer connected transaction requirement

For PRC issuers, an associate of a connected person includes any joint venture partner of a cooperative or contractual joint venture in which the connected person holds 30% or more in the capital or assets contributions, or the contractual share of its profits or other income.

Remove this requirement that is applicable to PRC issuers only

Annual caps for continuing connected transactions

Annual caps for continuing connected transactions must be expressed in monetary terms with reference to previous transactions and figures in the published information of the listed issuer’s group.

Allow annual caps for continuing connected transactions to be expressed as a percentage of a listed issuer’s revenue and other financial items in its audited accounts (instead of fixed monetary amounts), provided that the transactions are of a revenue nature in the issuer’s ordinary and usual course of business.

Spinoffs

Scope of applicability of Practice Note 15 (PN15)

PN15 applies to all listed issuers conducting spinoffs, including where the spinoff is effected by a listed subsidiary — in which case, both the listed subsidiary and its listed holding company are subject to PN15.

Refine the scope such that PN15 does not apply to the listed holding company of a subsidiary proposing a spinoff, where both the holding company and the subsidiary are listed on the Stock Exchange.

Regulatory process for spinoffs

All spinoff proposals must have prior approval from the Stock Exchange in order to proceed.

To introduce a self-assessment route without the Stock Exchange’s prior approval for eligible listed issuers that:

(a) The listed issuer effecting the spinoff (ParentCo) has conducted a self-assessment confirming compliance with all applicable principles and requirements under PN15;

(b) The ParentCo has a market capitalisation of at least HK$10 billion calculated by multiplying (1) the number of shares of the ParentCo in issue (excluding treasury shares) as at the trading day before the date of the new listing application of the entity to be spun-off by the listed issuer (SpinCo) by (2) the volume weighted average price of the relevant class of shares of the ParentCo listed on the Stock Exchange over the 125 trading days immediately preceding the date of the new listing application of the SpinCo;

(c) The ParentCo’s principal business(es) has a revenue of at least HK$1 billion for the financial year as shown in its latest published audited accounts; and

(d) The revenue and total assets attributable to the business(es) of the remaining group account for more than 50% of the issuer group.

The self-assessment route is available only to Main Board issuers (not GEM). Any spinoff proposal by a GEM issuer would remain subject to the Stock Exchange’s prior approval under the existing regime.

Announcement requirements relating to spinoffs

ParentCo must announce its spinoff listing application; currently no specific requirements on announcement content.

Specify disclosure requirements for spinoff announcements, including:

(a) Identity and principal business activities of SpinCo and the remaining group;

(b) Revenue and net profits attributable to SpinCo for two consecutive financial years immediately preceding the proposed spinoff;

(c) Details of the spinoff structure and listing venue;

(d) ParentCo’s expected shareholding before and after completion;

(e) Total funds expected to be raised and use of proceeds;

(f) Reasons for and benefits expected from the spinoff, with board confirmation on fairness and reasonableness; and

(g) Statement on Stock Exchange’s approval or self-assessment under PN15, together with board confirmation that the spinoff complies with all the applicable principles and requirements under PN15.

Material developments or changes to previously announced spinoff proposals must also be announced.

Assured entitlement

ParentCos must provide existing shareholders with an assured entitlement to shares in SpinCo, either by way of distribution in species or preferential offering; this may be waived by a minority shareholders’ resolution.

Remove this requirement regardless of listing venue and whether the ParentCo is primary or secondary listed.

Moratorium period for spinoffs after listing

A spinoff proposal would not normally be considered within three years of the initial listing.

To shorten from three years to one year after the initial listing of the ParentCo during which a spinoff listing application should not be filed.

Provide an exemption from the moratorium period for:

• Secondary listed issuers listed under Listing Rules Chapter 19C; and
• Dual-primary listed issuers, provided that they have been listed on a PRC stock exchange or a Recognised Stock Exchange for at least two consecutive financial years immediately before their listing in Hong Kong.

Shareholders’ approval threshold alignment

Under PN15, shareholder approval required for spinoffs with any percentage ratio of 25% or more.

Consequential amendment to align the PN15 shareholder approval threshold from 25% to 50%, consistent with the increased major transaction threshold.