Consultation conclusions on backdoor listing, continuing listing criteria and other rule amendments

On 29 June 2018, the Stock Exchange of Hong Kong Limited (“SEHK”) published the consultation paper on whether to amend the provisions of the Rules Governing the Listing of Securities on the Stock Exchange of Hong Kong Limited (“Listing Rules”) in relation to backdoor listing and continuing listing criteria. 

The consultation conclusions were published on 26 July 2019. The relevant amendments to the Listing Rules will take effect on 1 October 2019.

The key changes introduced by the revised Listing Rules include the following:

I. Backdoor Listing

(a) Definition of a Reverse Takeover Transaction

Principle based test: codify the six assessment factors under the principle based test as set out in Guidance Letter GL78-14 (with modifications made to the last two factors).

Bright line tests: retain and modify the bright line tests under the current Rule 14.06(6) and the current Rules 14.92 and 14.93 – (i) such that the relevant tests would apply to very substantial acquisitions from an issuer’s controlling shareholder that take place within 36 months after a change in control of the issuer; and (ii) restrict an issuer from proposing a disposal or distribution in specie of all or a material part of its existing business at the time of or within 36 months after a change in control of the issuer. The SEHK may also apply the restrictions 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: 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 a business that is expected to be substantially larger than the issuer’s existing principal business.

The SEHK will also adopt other proposed amendments to the Listing Rules 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.

The SEHK also published (i) three new guidance letters to provide guidance on the application of the amended provisions of the Listing Rules: 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), and (ii) a frequently asked question on the notifiable transaction requirements relating to securities transactions (FAQ Number 057-2019).

The consultation conclusions, respondents’ submissions, amendments to the Main Board Listing Rules and amendments to the GEM Listing Rules are available on the website of Hong Kong Exchanges and Clearing Limited (https://www.hkex.com.hk/).