New listing rule amendments to become effective on 1 October 2019 seek to enhance Hong Kong’s reverse takeover rules and continuing listing criteria.

Hong Kong’s listing rules require listed issuers to maintain sufficient operations and to have assets of sufficient value to warrant their continued listing. Hong Kong Exchanges and Clearing Ltd (HKEX) has been cracking down on the misuse of shell companies – where companies divest much of their business but maintain their listing only motivated by the value of their listed status – by tightening the application of Hong Kong’s reverse takeover rules and continuing listing criteria.

On 26 July, The Stock Exchange of Hong Kong Ltd (the Exchange), a wholly owned subsidiary of HKEX, published conclusions on its consultation paper regarding backdoor listing, continuing listing criteria and other listing rule amendments. The consultation was part of a series of measures undertaken by the Exchange to strengthen and enhance the long-term health, quality and sustainability of the Hong Kong market.

‘These changes will enhance both the reverse takeover (RTO) rules and the continuing listing criteria, helping to address evolving market practices in backdoor listing and improve the regulation of shell activities,’ said David Graham, HKEX’s Head of Listing. ‘The
rule changes are a positive step forward for the whole market and will not restrict legitimate business activities, business expansion or diversification of listed issuers.’

Respondents to the consultation were supportive of the initiatives to address backdoor listing and shell activities, though some commented on specific RTO proposals and their possible application to normal business activities of issuers. The Exchange has made some modifications to the proposals in order to reflect the market’s response. In addition, the Exchange has modified some of the proposed amendments to the continuing listing criteria to provide exemptions for banking companies, insurance companies and securities houses that are subject to supervision by other regulatory authorities.

Key listing rule changes

1. Amendments relating to backdoor listings

The definition of RTO transactions is to be amended.

  • RTO principle-based test. The amendments codify the six assessment factors under the principle-based test in Guidance Letter GL78-14 with modifications relating to changes in control/de facto control, and the series of transactions and/or arrangements. This includes acquisitions, disposals and/or change in control or de facto control that take place in reasonable proximity (normally within 36 months) or are otherwise related.
  • RTO bright-line tests. The amendments modify the bright-line tests to apply to very substantial acquisitions from an issuer’s controlling shareholder within 36 months from a change in control of the issuer. The disposal restriction, for example, modifies the bright-line tests to restrict disposals (or distributions in specie) of all or a material part of the issuer’s business proposed at the time of or within 36 months after a change in control of the issuer. The Exchange may also apply the restriction to disposals (or distributions in specie) at the time of or within 36 months after a change in de facto control (as set out in the principle-based test) of the issuer.
  • Backdoor listing through large-scale issue of securities. The amendments codify Guidance Letter GL84-15 to disallow backdoor listing through large-scale issue of securities for cash, where there is, or will result in, a change in control or de facto control of the issuer, and the proceeds will be applied to acquire and/or develop new business that is expected to be substantially larger than the issuer’s existing principal business.

In addition to the amendments relating to the definition of an RTO transaction, the amendments tighten the compliance requirements for RTOs and extreme transactions.

  • Extreme transactions. The amendments codify the ‘extreme  VSAs’ (very substantial acquisitions) requirements in Guidance Letter GL78-14 and rename this category of transactions as ‘extreme transactions’. They also impose additional eligibility criteria on the issuer that may use this transaction category. The issuer must operate a principal business of substantial size, or the issuer must have been under the control or de facto control of the same person(s) for a long period (normally not less than 36 months) and the transaction will not result in a change in control or de facto control of the issuer.
  • Requirements for RTOs and extreme transactions. The amendments modify the listing rules to require the acquisition targets in an RTO or extreme transaction to meet the requirements of Rule 8.04 and Rule 8.05 (or Rule 8.05A or 8.05B), and the enlarged group to meet all the new listing requirements in Chapter 8 of the listing rules, except Rule 8.05. Where the RTO is proposed by a Rule 13.24 issuer, the acquisition targets must also meet the requirement of Rule 8.07.

2. Amendments to continuing listing criteria for listed issuers

  • Rule 13.24 (sufficient operations). Rule 13.24 will be amended to require an issuer to carry out a business with a sufficient level of operations and to have assets of sufficient value to support its operations to warrant its continued listing (and not sufficient operations or assets set out in the current Rule 13.24). Proprietary securities trading and/or investment activities by an issuer’s group (other than a Chapter 21 company) are normally excluded when considering whether the issuer can meet Rule 13.24 (except for those carried out by a member of the issuer’s group that is a banking company, an insurance company, or a securities house that is mainly engaged in regulated activities under the Securities and Futures Ordinance).

  • Rules 14.82 and 14.83 (cash companies). The amendments will (i) extend the definition of ‘short-dated securities’ in Rule 14.82 to cover investments that are easily convertible into cash and rename it as ‘short-term investments’; and (ii) confine the exemption under Rule 14.83 to cash and short-term investments held by members of an issuer’s group that are banking companies, insurance companies or securities houses.

  • Transitional arrangement. A transitional period of 12 months from the effective date (1 October 2019) will apply to listed issuers that do not comply with the new Rule 13.24 or 14.82 strictly as a result of the listing rule amendments. The transitional arrangement will minimise the impact of the listing rule amendments on those issuers by allowing them a 12-month period to comply with the listing rules as amended. For the avoidance of doubt, the transitional arrangement will not apply to issuers that do not comply with the current requirements under Rule 13.24 or 14.82, or become non-compliant with the new Rule 13.24 or 14.82 after the effective date.

The Exchange will also adopt other proposed listing rule amendments relating to issuers’ securities trading and/or investments, significant distributions in specie, notifiable transactions and connected transactions as set out in the consultation paper with minor modifications.

Summary of major modifications to the RTO rules

Following the consultation, major modifications made to the RTO proposals include those described below.

  • Revising the indicative factors under the ‘change in control or de facto control’ factor of the principle-based test of the RTO rules to the following: a change in (i) controlling shareholder of the issuer; or (ii) the single largest substantial shareholder who is able to exercise effective control.

  • Removing references to greenfield operations, equity fundraisings and termination of business from the ‘series of transactions and/or arrangements’ factor of the principle-based test of the RTO rules to address concerns about possible application of the RTO rules to issuers’ transactions in the normal course of business.
  • Removing the proposal to apply additional requirements where the issuer aborted transactions that are considered part of a
    series of transactions and there is a ‘pre-ordained’ strategy to circumvent the new listing requirements, to address concerns about regulatory uncertainty.

  • Removing the proposed RTO compliance requirement for the enlarged group to meet Rule 8.05 applicable to Rule 13.24 issuers, to address concerns that smaller issuers would be particularly restricted.
  • Revising the proposed additional requirements on issuers that may use the extreme transaction category, to address concerns about unfair treatment of mid- or small-sized issuers.

Online resources

To assist issuers with compliance, the Exchange has published three new guidance letters on the application of the listing rules as amended.

  • guidance on application of the reverse takeover rules (HKEX-GL104-19)
  • guidance on large-scale issues of securities (HKEX-GL105-19), and
  • guidance on sufficiency of operations (HKEX-GL106-19).

The Exchange has also published a frequently asked question on the notifiable transaction requirements relating to securities transactions (FAQ Number 057-2019).

Source: Hong Kong Exchanges and Clearing Ltd

The Consultation Conclusions, respondents’ submissions, amendments to the Main Board Listing Rules and amendments
to the GEM Listing Rules are available on the HKEX website:


ACRU 2019 insights

Hong Kong’s reverse takeover rules and the continuing listing criteria were addressed in the 20th Annual Corporate and Regulatory Update (ACRU) of The Hong Kong Institute of Chartered Secretaries, held on 5 June 2019 at the Hong Kong Convention and Exhibition Centre. Patrick Yu, Senior Vice-President, Listed Issuer Regulation, Listing Department, Hong Kong Exchanges and Clearing Ltd (HKEX), focused his ACRU presentation on the misuse of shell companies. He pointed out that HKEX applies a qualitative not a quantative test when assessing sufficiency of operations and assets. HKEX does not apply a prescribed threshold on ‘sufficiency’, but looks for evidence as to whether the issuer’s business is viable and sustainable, and whether the business has substance. He warned that HKEX will suspend trading where issuers are deemed to have breached the sufficiency test, for example, where there is a very low level of operating activities and revenue, which is not the result of a temporary downturn in the market, or where assets do not generate sufficient revenue and profits.

A full review of the Institute’s 20th ACRU is available in the July 2019 edition of this journal.