1 Hong Kong Exchanges and Clearing Limited Enhancing Corporate Governance and Market Quality

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Hong Kong Exchanges and Clearing Limited

Enhancing Corporate Governance and Market Quality

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Corporate Governance - Notifiable Transactions

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General • New Main Board Chapters on notifiable transactions (Chapter

14) and connected transactions (Chapter 14A)– Structure and format based on existing Chapters 19 and 20

of GEM Rules• New section on “Options” in Chapters 14 and 14A• New section on “Financial Assistance” in Chapter 14A

– Based on:• Consultation Conclusions• Policy directions of Listing Committee• Codification of existing practices and interpretations• Further enhancement of transparency

• Existing Practice Note 13 of Main Board Rules repealed – Merged into new Chapters 14 (Notifiable Transactions) and 13

(Continuing Obligations)

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Major Rule amendments

• Definition of “transactions”• Classification of transactions• Reverse takeovers • Size test computation• Notification, publication and shareholders’ approval

requirements• Contents of announcements• Contents of circulars

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Definition of “transactions” R14.04(1)

• See Chart 1: Definition of “transactions”

• Definition of “transactions” excludes:

- Issue of securities by issuers for cash only*- In line with current Main Board practices

- GEM Rules are amended in line with Main Board Rules

• See Chart 2: Classification of transactions

* Under the new Rules, these transactions fall under the definition of “transactions” for the purpose of connected transactions.

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Definition of “transactions” under R14.04

A transaction

Is the transaction of a revenue nature in the ordinary and usual course of business of the listed issuer? *

Granting of financial assistance? An operating lease?

With a significant

impact on the listed issuer?

Does not fall under the definition of “transaction” under R14.04 Falls under the definition of “transaction” under R14.04

Does not fall under the definition of “transaction” under R14.04

Yes

Yes

Yes

Yes

No

No

No

No

No

Rule 14.04(1)(d)

Rule 14.04(1)(g)Rule 14.04(1)(e)

Yes

Intra-group financial assistance?

A transaction that is not of a revenue nature in the ordinary and usual course of business ofthe listed issuer and does not involve granting of financial assistance, includes:(Non-exhaustive list)• Acquisition or disposal of assets (R14.04(1)(a))• Writing, accepting, transferring, exercising or terminating an option to acquire or dispose of assets or to subscribe for securities (R14.04(1)(b))• Entering into or terminating finance leases (R14.04(1)(d))• Formation of a JV (R14.04(1)(f))

Rule 14.04(1)( g)

* Granting of financial assistance by a banking company in its ordinary and usual course of business will not be treated as a transaction for the purpose of notifiable transactions.

Chart 1This chart does not form part of the Listing Rules

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Classification of “transactions” (R14.06(1) to (5), 14.08)

Pre-existing thresholds Revised thresholds

Share transactions Less than 15% Less than 5%

Discloseable transactions

15% or more, but less than 50% 5% or more, but less than 25%

Major transactions 50% or more 25% or more,

but less than 100% for acquisitions and less than 75% for disposals

VSAs Main Board: 100% or more

GEM: - 200% or more; or

- 100% or more and the target business is

different from the current principal

activities of issuer; or

- 100% or more and there is an intention

to make a major change in the principal

activities of issuer.

100% or more

VSDs Not applicable 75% or more

This chart does not form part of the Listing Rules Chart 2

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Reverse takeovers (1)

Treated as a deemed new listing (R14.54)• Comply with new listing requirements under

Chapter 8

Revised definition (R14.06(6)):• Acquisitions involving a change in control and

triggering VSA threshold• Acquisitions within 24 months after a change in

control which individually or together trigger VSA threshold

Modified basis of computing the classification that applies during the 24 month period

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Reverse takeovers (2)R14.55 • Outgoing controlling shareholder cannot vote for

acquisition of assets from incoming shareholder if: - there is a change in control; and

- outgoing controlling shareholder disposes of his shares to any person

R14.92 & 14.93 • Restriction on disposal of existing business (at the

time of change in control) within 24 months after change in control:

- Treated as a new listing if disposal within the restriction period- Do not apply if assets acquired after change in control can meet R8.05

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Classification

• See Chart 3: Classification of notifiable transactions

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Classification of notifiable transactions

A transaction under R14.04

Financial assistance

• Disposal of assets• Writing, accepting, transferring or exercising an option to dispose of assets• Termination of a finance lease or operating lease

• Acquisition of assets• Writing, accepting, transferring or exercising an option to acquire assets• Entering into a finance lease or operating lease• Formation of a JV

Reversetakeover

Go through the classification Rules

VSA

VSD

Major transaction

Discloseabletransaction

Share transaction

No

No

YesYes

Rule 14.06(6)(a)

Rule 14.06(6)(b)

Yes

Rule 14.06(6)

Rule 14.08

Rule 14.06(5)

Rule 14.06(4)

Rule 14.06(3)

Rule 14.06(2)

Rule 14.06(1)

YesNo

All the percentage ratios are less than 5%?

Any of the percentage ratios is 5% or more but all the percentage ratios are less than 25%?

Any of the percentage ratios is 25% or more but all the percentage ratios are less than 100% (for acquisition) or 75% (for disposal) ?

A disposal transaction and any of the percentage ratios is 75% or more?

Yes

Yes

Yes

Not subject to notifiabletransaction provisions unless it is a share transaction

No

No

No

No

An acquisition transaction and any of the percentage ratios is 100% or more?YesNo

Involve issue of shares as consideration?

What is the nature of the transaction?

Involve a change in control and trigger VSA threshold ?

(a) Acquisitions of assets from the incoming controlling shareholder or its

associates within 24 months of such controlling shareholder gaining controlof the listed issuer; (b) such change in

control was not treated as a reverse takeover; and(c) trigger VSA threshold ?

Circumvent the new listing requirements?

Yes

Yes


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Size test computation

Five size tests (R14.07)

• Total assets test - replaces the existing net assets test

• Consideration to market capitalisation test- replaces the existing consideration to net assets test

• Revenue test - as a new stand-alone test

• Profits test (No change)

• Equity capital test (No change)

Aggregation of transactions (R14.22, 14.23)

• if transactions are all completed within 12 months

• if transactions are related

Factors for aggregating transactions are set out in Rule 14.23

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Total assets test (1)

R14.07(1), 14.09 to 14.12, 14.16, 14.18 and 14.19

Assets test = Total assets (the subject of the transaction) Total assets of the listed issuer

Total assets = current assets + non-current assets + fixed assets + intangible assets* (R14.04(12))

* Includes goodwill (whether positive or negative)

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Total assets test (2)

Subject matterNature of the transaction

Acquisition Disposal

Equity capital

(Rules 14.09, 14.16, 14.27)

Higher of:

(a) Book value (*) (R14.27(1)(a)); and

(b) Book value (*) adjusted for the latest published valuation(**) if the valuation is published after the issue of the accounts (R14.27(1)(b)).

(*) Where the equity capital being acquired or disposed of is listed on the Exchange, the listed issuer should adjust the book value for the latest published information e.g. dividend declared and completed transactions (R14.16(1))

(**) Normally applies to valuation of properties, vessels and aircraft (R14.16(2)/ R14.27(1)(b)).

Not equity capital Applicable only if book value of assets ascertainable

Book value of the assets

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Consideration test (1)

• R14.07(4), 14.15• Consideration test = Fair value of the consideration Total market capitalisation of listed issuer

• Determination of fair value of the consideration (R14.15(1))

• Calculation of total market capitalisation (R14.07(4))

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Consideration test (2)

• Where the transaction involves establishment of a joint venture aggregate total capital commitment and any guarantee or indemnity provided (R14.15(2))

• Where the issuer discharges or assumes any actual or contingent liabilities of the vendor add the total liabilities assumed or discharged to the consideration (R14.15(3))

• Where the issuer pays or receives consideration in the future Consideration = maximum total consideration payable or receivable under the agreement (R14.15(4))

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Revenue test

R14.07(3), 14.14 and 14.17

• Revenue = Revenue generated by the target Total revenue of the listed issuer

• “Revenue” means: – revenue arising from the principal activities of a

company – excludes revenue and gains that arise incidentally

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Figures used in total assets, profits and revenue calculationsUse the figures shown in the latest published annual report

If the listed issuer publishes an interim report after the issue of the annual report, use the figures shown in the interim report

Adjustment for the value of a transaction if adequate information has been published and the transaction is completed

Other adjustments

Total assets(R14.16, 14.18 and 14.19)

Yes Yes Yes • Issuer must adjust for the proposed or declared

dividend (which has not been recorded in the

accounts) and latest published valuation after the

publication of the latest published annual report

or interim report.

• The Exchange may require inclusion of

contingent assets.

Profits

(R14.17)

Yes No No May exclude the profits or revenue from the operation that have been discontinued during the previous financial year if the listed issuer has separately disclosed the profits and revenue from the discontinued operations in its accounts in accordance with HKFRS and IFRS.

Since profits and revenue figures are standalone figures for a specific financial period, no adjustment should be made for valuation and/or information on latest published transactions.

Revenue

(R14.17)

Yes No No

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Exceptions to classification rules

R14.20• If any of the size tests produces anomalous results

→ provide appropriate alternative tests (if any) to the Exchange

– e.g. number of employees, production capacity and any industry-specific ratios

→ alternative profits test which compares

profitability

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Notification, publication and shareholders’ approval requirements

• See Chart 4: Summary of notification, publication and shareholders’ approval requirements

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Summary of notification, publication and shareholders’ approval requirements (1)

Notification to the Exchange

Short suspension of dealings

Publication of an announcement

Circular to shareholders

Shareholders’ approval

Accountants’ report and /or financial information on the subject matter of the transaction (Chapter 4)

Treated as a new listing applicant

Share transaction

Yes Yes Yes No No No No

Discloseable transaction

Yes No, unless it is price-sensitive

Yes Yes No No No

Major transaction

Yes Yes Yes Yes Yes Yes No

VSD Yes Yes Yes Yes Yes Yes No

VSA Yes Yes Yes Yes Yes Yes No

Reverse takeover

Yes Yes Yes Yes Yes Yes Yes

This chart does not form part of the Listing Rules Chart 4

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Shareholders’ approval requirements (1)

General voting requirements (R14.46, 14.49, 14.55)

• All shareholders can vote unless:

– have a material interest in the transaction (Existing requirements)

– are associates of a shareholder with a material interest (Codification of existing practices)

• Voting by way of poll if a shareholder needs to abstain from voting (R13.39)

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Shareholders’ approval requirements (2)

Definition of “material interest” (R2.15, 2.16)• Applicable throughout the Listing Rules

• No financial or monetary benchmark

• Determined on a case-by-case basis

• Key factors (non-exhaustive) to consider:– The shareholder is a party to the transaction

– Receives economic or other benefits not available to other shareholders

Disclosure of control over the voting rights of shareholders that

are required to abstain from voting (R2.17)

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Written shareholders’ approval

• Acceptable for major transactions* (R14.44) if:– no shareholder is required to abstain from voting; and – written approval is obtained from a shareholder or a closely

allied group of shareholders holding more than 50% interest entitled to vote.

• Definition of “closely allied group of shareholders” (R14.45)

• Not acceptable for:– VSDs and VSAs (R14.49)– Reverse takeovers (R14.55)

* In any event, a written shareholders’ approval will not be acceptable if the reporting accountants give a qualified opinion in the accountants’ report on the acquisition of business or companies (R14.86).

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Other announcement requirements

• Announcements required (R14.36) on:– termination of transactions – material variation of terms – material delay in the completion of the agreement

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Contents of announcements

• Confirmation of independence of the counterparty and its ultimate beneficial owner from the issuer and connected persons (R14.58(3))

• Book value and valuation (if any) of the target asset (R14.58(6))

• Name of the shareholders giving written shareholders’ approval approving major transactions, number of securities held by each such shareholder and the relationship between the shareholders (R14.60(5))

• Profit forecast (R14.62) :– Principal assumptions – Letter from auditors or reporting accountants– Report from financial advisers

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Contents of circulars (1)

• Competing interests of each director and his associates (R14.64(8))

• Statement of working capital sufficiency (R14.66(4))– For both major acquisitions and disposals, VSAs, VSDs and

reverse takeovers

• Management discussion and analysis:– on the target (major acquisitions) (R14.66(5))– on the remaining group (VSDs) (R14.68(3))– on the enlarged group (VSAs) (R14.69(7))

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• Prepare a business valuation report or traffic study report where the subject matter of a major transaction, VSA, VSD or reverse takeover is an interest in an infrastructure project or an infrastructure or project company (R14.71)

– All fundamental underlying assumptions

– Sensitivity analysis

– If the business valuation is based on a profits forecast,

• report by auditors or reporting accountants

• report by financial advisers

• For reverse takeovers, listed issuers must comply with the prospectus disclosure requirements.

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Application of new Rules

Scenarios Application of Rules

• Agreement entered into before 31 March 2004

• Announcement and circular to be published on or after 31 March 2004

• Further material amendments to material terms of the agreement on or after 31 March 2004

• Classify transactions under new Rules

• Disclosure requirements for announcement and circular under new Rules apply



• No further material amendments to material terms of the agreement on or after 31 March 2004

• Classify transactions under existing Rules

• Disclosure requirements for announcement and circular under existing Rules apply

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Corporate Governance - Connected Transactions

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General

New Main Board Chapter 14A on connected transactions • New section on “Options”• New section on “Financial assistance”• New definitions e.g. “controller”, “transactions”,

“listed issuer”

A “connected transaction” can also be a notifiable transaction – Main Board Chapter 14/ GEM Chapter 19 applies

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Major Rule amendments

• Definition of “connected persons” • Definition of “associates” • Definition of “connected transactions”• Classification of connected transactions• De minimis thresholds• Continuing connected transactions

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Definition of “connected persons”

• See Chart 5: Category 1 of “connected persons”

• See Charts 6 to 8: Categories 2A & B of “connected persons” – non wholly owned subsidiaries

• See Chart 9: Deemed associates

• See Chart 10: “Associates” of a connected person

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Definition of “connected person” (1)

Rule 14A.11(1)Directors, chief executive and substantial shareholders*of the listed issuers and anyof its subsidiaries**

“Connected persons” include:

Rule 14A.11(2)Directors within thepreceding 12 months

Rule 14A.11(3)Promoter and supervisor of a PRC issuer

Rule 14A.11(4)Associates

Rule 1.01

Category 1

* For GEM issuers, a “connected person” also includes management shareholders.

** Under pre-existing GEM Rules, directors, chief executive or substantial shareholders of the issuer’s subsidiaries are not treated as connected persons. The GEM Rules have now been amended along the same lines as the Main Board Rules.

Chart 5 This chart does not form part of the Listing Rules

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Category 2A: Non wholly owned subsidiaries• Any non wholly owned subsidiary of the listed issuer in which the connected person(s) (at the listed issuer’s level) hold(s) 10% or more interest (R14A.11(5))

• Any subsidiary of such non wholly owned subsidiary (R14A.11(6))

Listed Co.Director B of

Listed Co.

Company A (a non wholly owned subsidiary of Listed Co.) and its subsidiaries (wholly owned or non wholly owned)

>50% or have “control” under HKFRS or IFRS

10% or more interest

Company A and its subsidiaries are connected persons of Listed Co. because Director B is a connected person at the listed issuer level and he holds 10% or more interest in Company A.


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Company D(a non wholly owned subsidiary

of Listed Co.)

Listed Co.


10% or more but less than 30% and does not control boardcomposition

Director C is a connected person of Listed Co. at the subsidiary level.

There is no connected person at the issuer level holding 10% or more interest in Company D. In addition, Company D is not an associate of Director C under R1.01. Company D is therefore not aconnected person of Listed Co under Chapter 14A, but any transactions between Director C and Listed Co. will be treated as connected transactions.

Non wholly owned subsidiary - not a connected person under R14A.11(5)

Director C of Company D


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Director F is a connected person of Listed Co. at the subsidiary level.

Although there is no connected person at the issuer level holding 10% or more interest in Company E, Company E is a connected person of Listed Co under Chapter 14A as it is an associate of Director F under R1.01.

Listed Co.

Company E(a non wholly owned subsidiary

of Listed Co.)

Director F ofCompany E


30% or more interest

Chart 8

Category 2B: Non wholly owned subsidiary as a connected person under R1.01

This chart does not form part of the Listing Rules

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Other parties (R14A.11(4)(a))Any person or entity with whom theconnected person has entered, or proposes to enter, into any agreement,arrangement, understanding or undertaking, whether formal or informal and whether express or implied with respect to the transaction which is such that, in theopinion of the Exchange, that personor entity should be considered a connected person

Close family (R14A.11(4)(b))Persons cohabitingas a spouse, parents,brothers, sisters and children

Where the connected person is an individual

Where the substantial shareholder is a company

Other close family (R14A.11(4)(c))whose association with the connectedperson is such that, in the opinionof the Exchange, the proposed transaction should be subject to the requirement of Chapter 14A

Category 3“Deemed associates”


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M

Great-grandfather Great-grandmother

Great-aunt Great-uncle Grand-father Grand-mother

Aunt MotherUncle

Cousin Cousin Sister-in-lawBrother-in-law

Brother (and step-brother)Sister (and step-sister)

Connectedperson

Mother-in-law Father-in-law

Spouse Brother-in-law/Sister-in-law

father

M

Nephew Niece

M

Daughter(and

Step-daughter)

Son (andStep-son)Son-in-law Daughter-in-law

Grandson Granddaughter

Great-grandson Great-granddaughter

M

Great-grandparents

Grandparents

Parents

Children

Grand-children

Great-grandchildren

M = is married to

“Associates” of a connected person (R14A.11(4)(c))Close family

“Deemed associates” where their association with the connectedperson is such that, in the Exchange’s opinion, the transaction should be subject to the connected transaction provisions

Grandson-in-law

M M

M

M

M

M


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Definition of “associate” (1) – See also Chart 11

Existing definition Extension of existing definition

In relation to an individual (R1.01(a))

1. His spouse

2. His family interests

3. Trustees, acting in their capacity as such trustees, of any trust of which he or any of his family interests is a beneficiary

4. A company in the equity capital of which he and/or his family interests taken together are directly or indirectly interested so as to 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, and any other company which is its subsidiary or holding company or a fellow subsidiary of any such holding company

5. A trustee-controlled company and its subsidiaries (together “trustee interests”)

6. A holding company of the trustee-controlled company and a subsidiary of any such holding company

7. A company in the equity capital of which he, his family interests, any of the trustees (see (2)) and/or trustee interests (see (5)) taken together are directly or indirectly interested so as to 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, and any other company which is its subsidiary or holding company or a fellow subsidiary of any such holding company

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“Associates” of an individual who is a connected person

Trustee (1.01(a)(iii))

Company A and its subsidiaries

(1.01(a)(v))

Company B(1.01(a)(v))

Company D(1.01(a)(v))

Other beneficiaries

Company C and its subsidiaries

(1.01(a)(v))

Company Eand its

subsidiaries(1.01(a)(iii))

30% or more or controls boardcomposition

> 50% or have control under HKFRSor IFRSActing in its

capacity as such trustee, holds30% or more or controls the boardcomposition

Associates under the pre-existing Rules

Individual

Family interest(1.01(a)(i) and (ii))

Note1: Individual or any of the Family interest is a beneficiary of the Trust or, in the case of a discretionary trust, is a discretionary object. For this purpose, interest of the Individual and his Family interest include all beneficial interest directly or indirectly held (e.g. a company beneficially controlled by the Individual, which is the beneficiary of a trust)

> 50% or have control under HKFRS or IFRS

“Individual” means directors, chief executive, substantial shareholders or (in the case of a GEM issuer) management shareholders of a listed issuer and its subsidiaries

Company F(1.01(a)(iv))

Company Gand its

subsidiaries(1.01(a)(iv))


Settlor and Protector

Together hold 30% or more interest

or control board composition

Company Hand its subsidiaries

(1.01(a)(v))

Extension of “Associates” under the new Rules

Company Jand its subsidiaries

(1.01(a)(v))

Company I(1.01(a)(v))


Chart 11

Note 1


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Definition of “associate” (2) – See also Chart 12Existing definition Extension of existing definition

In relation to a corporation (R1.01(b))

1. A subsidiary or holding company of the corporation, or a fellow subsidiary of any such holding company or any company in the equity capital of which the corporation and/or any such other companies taken together are directly or indirectly interested so as to 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

2. Trustees, acting in their capacity as such trustees, of any trust of which the corporation is a beneficiary

3. A trustee-controlled company and its subsidiaries (together “trustee interests”)

4. A holding company of the trustee-controlled company and a subsidiary of any such holding company

5. Any other company in the equity capital of which the corporation, such other companies referred to in (1), any of the trustees referred to in (2) and/or any trustee interests taken together are directly or indirectly interested so as to 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 and any other company which is its subsidiary or holding company or a fellow subsidiary of any such holding company

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“Associates” of a corporation which is a connected person

Trustee (1.01(b)(ii))

Company C(1.01(b)(i))

Other beneficiaries Company B

and its subsidiaries(1.01(b)(i))

Company Eand its

Subsidiaries(1.01(b)(ii))

> 50% or have control under HKFRSor IFRS

Acting in itscapacity as such trustee, holds30% or more or controls the boardcomposition

Associates under the pre-existing Rules

Corporation

Note 1: The Corporation is a beneficiary of the Trust or, in the case of a discretionary trust, is a discretionary object. For this purpose, interest of the Corporation include its subsidiaries (e.g. a subsidiary of the Corporation, which is the beneficiary of a trust)


Company F(1.01(b)(iii))

Company Gand its

Subsidiaries(1.01(b)(iii))


Settlor and Protector

Together hold 30% or more interest or

control board composition

Company Hand its subsidiaries

(1.01(b)(iv))

Extension of “Associates” under the new Rules

Company Jand its subsidiaries

(1.01(b)(iv))

Company I(1.01(b)(iv))



Company A and its subsidiaries

(1.01(b)(i))

Together hold 30% or more interest

or control board composition

Company D(1.01(b)(i))

“Corporation” means substantial shareholders or (in the case of a GEM issuer) management shareholders of a listed issuer and its subsidiaries

Chart 12

Note 1


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Connected transactions

• See Chart 13: Definition of “connected transaction”

• See Chart 14: Classification of connected transactions

• See Chart 15: De minimis thresholds

• See Chart 16: Classification of connected transactions not involving financial assistance

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Definition of “connected transaction” under R14A.13

A transaction under R14A.10(13) which is not a financial assistance

R14A.13(1)(a)R14A.13(5)R14A.13(6)

No

Is the counter-party a connected person?

Fall under any of the following categories?Any transaction between a listed issuer and a personwho is not a connected person and the transaction involves: (i) the listed issuer acquiring or disposing of an interest in a company where a substantial shareholder of that company is, or is proposed to be, a controller or is (or will become) an associate of the controller (R14A.13(1)(b)(i));(ii) the listed issuer acquiring an interest in a company (or an option to acquire such interest) of which a controller (or its associate) is, or will become, a shareholder where the interest being acquired is: (A) of a fixed income nature; or (B) on less favourable terms than those to controller; or (C) of a different class from those held by the controller (R14A.13(1)(b)(ii)); (iii) the controller subscribing on more favourable terms shares in a company in which the listed issuer is a shareholder (R14A.13(1)(b)(iii));(iv) the controller subscribing shares in a company in which the listed issuer is a shareholder but which are of a different class of shares (R14A.13(1)(b)(iv)).

Falls under the definition of “connected transaction”

Does not fall under the definition of “connected transaction”

NoYes

Yes

R14A.13(1)(b)


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Exemption for R14A.13(1)(b)

Before the acquisition of 60% interest in Company A

After the acquisition of 60% interest in Company A

Company A

Director of Company A

40%

Independent third party

60%

Company A

Director of Company A

40%

Listed Co.

60%

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Classification of connected transactions (R14A.16)

One-off connected transactions

Connected transaction provisions apply to:

Continuing connected transactions

• Transactions exempt from announcement, reporting and shareholders’ approval requirements (Fully exempt transactions)

• Transactions exempt from shareholders’ approval requirements

• Transactions subject to shareholders’ approval requirements- Establish an independent board committee (IBC) with INEDs only- Appoint an IFA to advise IBC and shareholders on the terms of the transaction


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De minimis thresholdsPre-existing (based on the net assets test and consideration test)

Revised (based on the new size tests except for profits test)*

Exemption from announcement, reporting and shareholders’approvalrequirements

(De minimis threshold 1)R14A.31(2), R14A.33

The consideration or value of the transaction is less than the higher of:

• HK$1 million; and

• 0.03% of the net tangible assets of the listed issuer.

• Each of the size tests (except for the profits test) is less than 0.1%**; or

• Each of the size tests (except for the profits test) is equal to or more than 0.1% but less than 2.5%** and the consideration*** is less than HK$1 million.

Exemption from shareholders’ approval requirement

(De minimis threshold 2)R14A.32, R14A.34

The consideration or value of the transaction is less than the higher of:

• HK$10 million; and

• 3% of the net tangible assets of the listed issuer.

• Each of the size tests (except for the profits test) is less than 2.5%**; or

• Each of the size tests (except for the profits test) is equal to or more than 2.5% but less than 25%** and the consideration*** is less than HK$10 million.

* All size tests (except for profits test) apply for classification of the transaction to the extent applicable. ** Determined on an annual basis for continuing connected transactions.*** Annual consideration for continuing connected transactions.


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Classification of connected transactions not involving financial assistance

A connected transaction that does not involve financial assistance

On normal commercial terms?

Below de minimis threshold 2?

Subject to disclosure, reporting &shareholders’ approval requirements

Yes

Yes

Yes

Yes No

No

No

R14A.31(2)

No

Fully exempt transaction under R14A.31(1), (3) to (8)?


Subject to disclosure & reporting requirements

Fully exempt

R14A.32


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Fully exempt connected transactions (1)

• Intra-group transactions (R14A.31(1))

– unless the non wholly owned subsidiary is a connected person

• Pro-rata issue of securities (R14A.31(3)(a))

• Issue of securities under share option schemes (R14A.31(3)(b))

• Underwriting or sub-underwriting rights issue or open offers (R14A.31(3)(c))

• Top-up placing (R14A.31(3)(d))

– up to the number of securities placed by the connected person

• Certain Stock Exchange dealings (R14A.31(4))

• Purchase of own securities (R14A.31(5))

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Fully exempt connected transactions (2)

• Directors’ service contracts (R14A.31(6))

• Consumer goods or consumer services (R14A.31(7))

• Sharing of administrative services (R14A.31(8))

- Repealed current exemption (existing Main Board Rule 14.24(2)) for transactions between 2 or more issuers or their subsidiaries that involve sharing of services provided by one or more of such companies on normal commercial terms and in the ordinary and usual course of business of both companies → will need to comply with continuing connected transaction requirements

52

Financial assistance

• See Chart 17: Classification

• See Chart 18: Financial assistance to an issuer

• See Chart 19: Financial assistance by an issuer

• See Chart 20: Financial assistance by an issuer which is a banking company

• See Chart 21: Financial assistance by an issuer which is not a banking company

53

Financial assistance - classification

A connected transaction involving financial assistance

Financial assistance by an issuer to:(a) a connected person (R14A.13(2)(a)(i)); or(b) a company in which the issuer and connected person(s) (at the issuer level but not at the subsidiary level) are shareholders and the connected person(s), individually or together, hold(s) 10% or more interest (R14A.13(2)(a)(ii)).

Go to Charts 19 to 21

Financial assistance to an issuer by:(a) a connected person (R14A.13(2)(b)(i)); or(b) a company in which the issuer and connected person(s) (at the issuer level but not at the subsidiary level) are shareholders and the connected person(s), individually or together, hold(s) 10% or more interest (R14A.13(2)(b)(ii)).

Go to Chart 18


54

Financial assistance to an issuer

Meet both of the following 2 conditions:(a) on normal commercial terms (or better to the listed issuer); and(b) no security over the listed issuer’s asset?

Subject to disclosure, reporting & shareholders’ approval under R14A.63

Financial assistance to an issuer by:(a) a connected person (R14A.13(2)(b)(i)); or(b) a company in which the issuer and connected person(s) (at the issuer level but not at the subsidiary level) are shareholders and the connected person(s), individually or together, hold(s) 10% or more interest (R14A.13(2)(b)(ii)).

Fully exempt under R14A.65(4)

Yes No


55

Financial assistance by an issuer (1)

Financial assistance provided by the issuer in its ordinary and usual course of business?

The issuer is not a banking company.

Go to Chart 21

Financial assistance by an issuer to:(a) a connected person (R14A.13(2)(a)(i)); or(b) a company in which the issuer and connected person(s) (at the issuer level but not at the subsidiary level) are shareholders and the connected person(s), individually or together, hold(s) 10% or more interest (R14A.13(2)(a)(ii)).

The issuer is a banking company.*

Go to Chart 20

Yes No

* A “banking company” means a bank, a restricted licence bank or a deposit taking company as defined in the Banking Ordinance or a bank constituted under appropriate overseas legislation or authority.


56


On normal commercial terms?


Subject to disclosure, reporting &shareholders’ approval requirements

Yes

Yes

No

No



Fully exempt

Financial assistance by an issuer, which is a banking company, to:(a) a connected person (R14A.13(2)(a)(i)); or(b) a company in which the issuer and connected person(s) (at the issuer level but not at the subsidiary level) are shareholders and the connected person(s), individually or together, hold(s) 10% or more interest (R14A.13(2)(a)(ii)).

Yes NoR14A.65(1)

R14A.65(2)(a)R14A.65(3)(a)

R14A.66(1)


57


On normal commercial terms or better to the issuer ?


Subject to disclosure, reporting &shareholders’ approval

Yes

Yes

No

No



Fully exempt

Financial assistance by an issuer, which is not a banking company, to:(a) a connected person (R14A.13(2)(a)(i)); or(b) a company in which the issuer and connected person(s) (at the issuer level but not at the subsidiary level) are shareholders and the connected person(s), individually or together, hold(s) 10% or more interest (R14A.13(2)(a)(ii)).

Yes

No

Financial assistance to a connected person?

Financial assistance is provided in proportion to the issuer’s equity interest in the R14A.13(2)(a)(ii) company and any guarantee given by issuer is on a several basis?

NoYes

Yes

No

R14A.65(2)(b)

R14A.65(3)(b)(i) R14A.65(3)(b)(ii)

R14A.66(2)


58

Written shareholders’ approval

• Acceptable (R14A.43) if:– no shareholder is required to abstain from voting if a

general meeting is convened; and – written approval is obtained from a shareholder or a

closely allied group of shareholders holding more than 50% interests entitled to vote.

59

Continuing connected transactions (1)• Codifies Main Board existing practices and

interpretations – along the same lines as GEM Rules

• Exempt continuing connected transactions (R14A.33 and 14A.34)

• For any non-exempt transactions, – Enter into a written agreement

• Must be for a fixed period which must not exceed 3 years (except for special cases) (R14A.35(1))

– A maximum annual monetary cap, the basis of which must be disclosed (R14A.35(2))

– Annual review by INEDs (R14A.37)– Annual auditors’ confirmation (R14A.38)

60

Continuing connected transactions (2)

• Revised GEM Rules: – In line with new Main Board Rules – Major amendments:

• No longer subject to annual shareholders’ approval at AGM

• Introduces de minimis threshold for exempting continuing connected transactions from shareholders’ approval (i.e. disclosure and reporting only)

61

Contents of announcements

• INEDs’ views on transactions exempt from shareholders’ approval (R14A.56(1))

• For acquisition of assets, the original purchase cost to the connected person (R14A.56(5))

• For disposal of assets held by an issuer for 12 months or less, the original acquisition cost of the asset to the issuer (R14A.56(6))

• Name of the shareholders giving written shareholders’ approval approving connected transactions, number of securities held by each such shareholder and the relationship between the shareholders (R14A.56(7))

62


• Annual cap and basis of calculation for continuing connected transactions (R14A.59(9))

• Competing interests of each director and his associates (R14A.59(11))

• For acquisition of assets, the original purchase cost to the connected person (R14A.59(14))

• For disposal of assets held by an issuer for 12 months or less, the original acquisition of the asset to the issuer (R14A.59(15))

63


• Prepare a business valuation report or traffic study report where the subject matter of the transaction is an interest in an infrastructure project or an infrastructure or project company (R14A.59(17))– All fundamental underlying assumptions– Sensitivity analysis – If the business valuation is based on a profits forecast,

• report by auditors or reporting accountants • report by financial advisers

64

Implementation

For existing waivers with a fixed period:• Waiver will continue to apply until the earlier of:

– the expiry of the waiver– failure to comply with waiver conditions or renewal or

material changes to terms of the agreement

For existing waivers with an indefinite period:– Appropriate steps to be taken to comply with the new

Rules as soon as practicable

65

Application of new Rules

Scenarios Application of Rules



• Further material amendments to material terms of the agreement on or after 31 March 2004

• Classify transactions under new Rules

• Disclosure requirements for announcement and circular under new Rules apply



• No further material amendments to material terms of the agreement on or after 31 March 2004

• Classify transactions under existing Rules

• Disclosure requirements for announcement and circular under existing Rules apply

66

Accounting issues

67

Major areas

• Accountants’ reports• Pro-forma financial information• Financial reporting

68

Accountants’ reports (1)

When required• New listing (R4.01(1))

• Offer of securities to public for subscription or purchase as required by s38(1) or s342(1) of the Companies Ordinance (R4.01(2))

• Major acquisitions (R4.01(3))– On the target company or business

69


When required• VSAs (R4.01(3))

– on the target company or business*

• Reverse takeovers (R4.01(3)) – new requirement for Main Board

– on the target company or business*

* The existing GEM Rules require an accountants’ report on the enlarged group. This will be amended along the same line as the Main Board Rules.

70


When required

• VSDs (R4.01(4) and 4.06A) – new requirement

– on the existing group

– separate disclosure of financial information of the company or business disposed of

71

Pro-forma financial information for notifiable transactions

Subject matter

Major

Acquisition VSD

VSA and

reverse takeover

Revenue generating assets which have an identifiable net income stream or valuation

Pro forma net assets statement of the enlarged group for the latest financial year (R14.67(4)(b)(ii))

Pro forma net assets statement and profit and loss statement of the remaining group for the latest financial year

(R14.68(2)(b)(ii))

Pro forma net assets statement and profit and loss statement of the enlarged group for the latest financial year

(R14.69(4)(b)(ii))

Businesses or companies

Pro forma net assets statement of the enlarged group for the latest financial year

(R14.67(4)(a)(ii))

Pro forma income statement, balance sheet and cash flow statement of the remaining group for the latest financial year

(R14.68(2)(a)(ii))

Pro forma income statement, balance sheet and cash flow statement of the enlarged group for the latest financial year

(R14.69(4)(a)(ii))

R4.25 to 4.27

72

Pro-forma financial information for new listing

(R4.28)

• Acquisition or proposed acquisition of any businesses or companies since the date to which the latest audited accounts have been made up; and

• Such businesses or companies acquired constitute a “major subsidiary” (i.e. 5% or more under any of the size tests)

– Aggregation of all acquisitions or proposed acquisitions.

73

Disclosure of pro-forma financial information (1)

R4.29(1) – general principle

R4.29(2) – for illustrative purpose

R4.29(3) – presentation and basis of preparation

74


Examples

Financial information covering the following periods

Year ended

31 March

Year ended

30 September

Year ended

31 December

Most recently completed financial period (R4.29(4)(b))

Year ended

31.3.03

Year ended 30.9.03

Year ended 31.12.03

Most recent interim period (R4.29(4)(c)) 6 months ended 30.9.03

N/A N/A

Current financial period (R4.29(4)(a)) May cover forecast for year ending 31.3.04 or stub period in accountants’ report

May cover forecast for year ending 30.9.04 or stub period in accountants’ report

May cover forecast for year ending 31.12.04 or stub period in accountants’ report

75


R4.29(5) – Source of unadjusted information

R4.29(6) – Adjustments

R4.29(7) – Report by auditors or reporting accountant

R4.29(8) – pro forma earnings per share information

76

Financial Reporting

Major amendments:• Abolition of two-phased publication approach for

results announcements• New disclosures in annual and half-year results

announcements • New disclosures in annual report and summary

financial report• New disclosures in interim reports and summary

interim reports• Recommended disclosures

77

Abolition of two phased publication arrangement

• Existing Rules: – Option 1: Publish a long-form results announcement;

– Option 2: Publish a short-form results announcement and post the long-form financial results on the Exchange’s website within 14 days

– Applicable to annual reporting by Main Board and GEM issuers and half-year reporting by Main Board issuers

• New Rules: – Two-phased approach abolished– Disclosure requirements for results announcements (Appendix

16-45, 46) brought into line with those for summary financial reports (Appendix 16-50) / summary interim reports (Appendix 16-51)

78

Results announcementsAppendix 16-45 & 46• Financial information in annual results announcements

(Appendix 16-45(1), 45A): – Not required to be audited – Be “agreed with auditors”– Should not be materially different from audited results

• Must publish an announcement to explain any material differences

• Business review in annual and half-year results announcements (Appendix 16-45(3), 46(3))– Provide fair review of business development of issuers for

investors to gain understanding of business trends– But MD & A requirements still apply to annual reports and

interim reports

79

Disclosures in annual reports (1)

• Confirmation of INED’s independence by issuers– If a newly appointed INED fails to meet any of the

independence guidelines (Appendix 16-12A)

– Annual confirmation of independence of each INED (Appendix 16-12B)

• Exempt directors’ service contract entered into on or before 31 January 2004 (Appendix 16-14A)

• Directors’ remuneration on a named basis and remuneration policy of issuers (Appendix 16- 24, 24A, 24B)

80

Disclosures in annual reports (2)

• Confirm compliance with:– Model Code for directors’ dealings (Appendix 16-34(2))

– Minimum number of INEDs (Appendix 16-34(3))

– Appointment of an INED with professional qualifications or accounting/ financial management expertise (Appendix 16-34(3))

– Establishment of an audit committee (Appendix 16-34(4))

– Connected transaction provisions (Appendix 16-8)

• Public float sufficiency statement (Appendix 14-34A)

81

Summary financial reports (annual)

Appendix 16-50• Confirm compliance with:

– Code of Best Practice in Appendix 14– Minimum number of INEDs– Appointment of an INED with professional

qualifications or accounting/ financial management expertise

– Establishment of an audit committee

82

Interim Reports

• Disclosure requirements (Appendix 16-44):– Confirm compliance with:

• Model Code for directors’ dealings

• Minimum number of INEDs*

• Appointment of an INED with professional qualifications or accounting/ financial management expertise*

• Establishment of an audit committee*

• Introduction of summary interim reports (R13.48, Appendix 16-51)

* also required to be disclosed in summary interim reports

83

Recommended disclosures for annual and interim reports

Appendix 16-52• Non-mandatory provisions on MD&A

– for transparency

• Examples:– Efficiency indicators for last 5 years

– Industry specific ratios for last 5 years

– Corporate strategies

– Corporate policies and performance on community, social and ethical issues

84

Transitional arrangements

• All new disclosure requirements for results announcement and financial reports effective for accounting periods commencing on or after 1 July 2004

• Abolition of two-phased arrangements effective for accounting periods commencing on or after 1 July 2004– Early adoption is encouraged

85

Corporate Governance –Other Provisions

86

Major Rule amendments• Directors and board practices • Model Code for directors’ dealings • Voting by controlling shareholders• Application of size tests in other parts of Listing Rules• Profits forecast• Articles of Association• Rights issues and open offers• Restrictions on share repurchase• Restriction on grant of share options• Issues of securities within 6 months of listing • Withdrawal of listing• Publication of supplemental information• Publication of HKEx’s website

87

Directors and board practices

• Appointment of INEDs

• Independence of INEDs

• Audit committee

• Qualified accountant

88

Appointment of INEDs

• A minimum of 3 INEDs* (R3.10(1))

• At least 1 INED with appropriate professional qualifications or accounting or related financial management expertise* (R3.10(2))

• Notify the Exchange and publish announcement if the issuer fails to comply with Rule 3.10* (R3.11)

* A transitional period of 6 months from 31 March 2004.

89

Independence of INEDs (1)

• Additional guidelines on independence of INEDs (R3.13)

• Guidelines only - a non-exhaustive list

90

Independence of INEDs (2)• Key factors to consider:

– Shareholding interest >1% (R3.13(1))

– A professional adviser, with a cooling-off period of 1 year (R3.13(3)) – including employees of the professional adviser who has been involved in the provision of services

– Material interest in any principal business activity or involved in any material business dealing with the listed issuer, its holding company, their subsidiaries or connected persons (R3.13(4))

– Connected with “connected person” of the listed issuer with a cooling-off period of 2 years (R3.13(6))

– An executive or director (excluding INEDs) of the listed issuer, its holding company, their subsidiaries or connected persons, with a cooling-off period of 2 years (R3.13(7))

– Financially dependent on the listed issuer, its holding company, their subsidiaries or connected persons (R3.13(8))

91

Independence of INEDs (3)

• If an INED fails to meet any of the independence guidelines disclose why he is considered independent in the announcement of his appointment and the next annual report (R3.13)

• Annual confirmation of independence of INEDs in the annual reports (R3.14)

• Existing INEDs must submit independence confirmation on or before 30 September 2004 (R3.15)

– If existing INEDs fail to meet the new independence guidelines, must be replaced by new ones.

92

Audit committee

• As a mandatory requirement* (R3.21):

– Comprise non-executive directors only

– A minimum of 3 members

– A majority of INEDs

– At least 1 INED with appropriate professional qualifications or accounting or related financial management expertise

– Chaired by an INED

• Notify the Exchange and publish announcement if the issuer fails to comply with Rule 3.21* (R3.23)

* A transitional period of 6 months from 31 March 2004

93

Qualified accountant (R3.24)

• Must be a member of senior management (preferably an executive director)

• Must be a qualified accountant

• Must be a member of HKSA or other recognised accounting bodies

• Responsible for overseeing:

– Financial reporting procedures

– Internal controls

– Compliance with Listing Rules relating to financial reporting and other accounting-related issues

94

Model Code for directors’ dealings

• Status of Model Code • Definition of “dealings” • Black-out period• Notification of directors’ dealings• Dealing under exceptional circumstances • Disclosure in annual and interim reports

95

Status of Model Code

• Mandatory requirements

• Breach of Listing Rules - if non-compliance with the required standards

• Issuers may adopt its own code on terms no less exacting than those in the Model Code

96

Definition of “dealings” (Paragraph 7(a))

• Subject matter (“Securities”):– any securities of the listed issuer, or

– any entity whose assets solely or substantially comprise securities of the listed issuer

• Transactions or an agreement (whether or not for consideration)

involving:– any acquisition, disposal or transfer of Securities

– offer to acquire, dispose of or transfer Securities

– creation of pledge, charge or any other security interest in Securities

– grant, acceptance, acquisition, disposal, transfer, exercise or discharge of any option (whether call, put or both) or other right or obligation, present or future, conditional or unconditional, to acquire, dispose of or transfer Securities, or any interest in Securities

• Exemptions set out in paragraph 7(d)

97

Black-out period* (Rule A.3)

Unless the circumstances are exceptional, 1 month immediately preceding the earlier of :• date of board meeting (as such date is first notified

to the Exchange) for approval of financial results;

and • deadline for publishing the results announcement

and ending on the date of the results announcement.

* At any time, directors must not deal in listed issuers’ securities if they are privy to any price-sensitive information.

98

Notification of directors’ dealings

Rule B.8 to B.9• Prior to dealings:

– Notify the Chairman or a designated director in writing

– Receive a written consent to deal

• Maintain a written record of directors’ dealings

99

Dealings under exceptional circumstances

Rule C.14

• Disposal of the issuer’s securities during the restriction period is only allowed under exceptional circumstances e.g. pressing financial commitment. * In any event, directors must not acquire the issuer’s securities during

the restriction period.

• Must notify the Exchange in writing – Explain why the issuer considered the circumstances are

exceptional

• Must publish an announcement – State that the chairman or designated director is satisfied

that the circumstances were exceptional

100

Disclosure in annual and interim reports

Rule D.15• whether the issuer has adopted a code of conduct regarding

securities transactions by directors on terms no less exacting than the Model Code

• having made specific enquiry of all directors:– whether its directors have complied with the Model Code

and its own code– whether there has been any non-compliance with the Model

Code and its own code

• details of any non-compliance with the Model Code and an explanation of the remedial steps taken by the listed issuer to address such non-compliance

101

Voting by controlling shareholders (1)

• Controlling shareholders* and their associates must abstain from voting even if they have no material interest for:– Second and subsequent refreshment of general mandate

during the year (new requirement) (R13.36)– Withdrawal of primary listing (existing requirement)

(R6.12)– Rights issues or open offers that increase issued share

capital or market capitalisation by more than 50% (existing requirement) (R7.19 and 7.24)

– Fundamental change in principal business activities shortly after listing (existing requirement) (R14.90)

* The Exchange reserves the right to require shareholders who are former controlling shareholders at the time of making the decision to enter into the transaction and their associates to abstain from voting at general meeting.

102

Voting by controlling shareholders (2)

• Such controlling shareholders and their associates will be allowed to vote against the resolution → intention to vote against must be disclosed in listing documents or circulars.

• Where there are no controlling shareholders, directors (other than INEDs)*, chief executive * and their associates must abstain from voting.

• Procedures adopted to record that any parties that must abstain or intend to vote against have done so at general meeting.

* The Exchange reserves the right to require shareholders who are former directors (excluding INEDs) and chief executive at the time of making the decision to enter into the transaction and their associates, to abstain from voting at general meeting.

103

Application of size tests in other parts of Listing Rules (1)Existing percentage ratio using net assets as the basis of comparison

Existing percentage ratio using profits as the basis of comparison

Revised -

Percentage ratio using the same size tests as those used to classify notifiable transactions

PN15-3(e)(1)

Shareholders’ approval for spin off requirements (Main Board only) where the transaction represents:

50% of net tangible assets of the listed issuer

50% of profits of the listed issuer

25%

R13.25(2)

Definition of “major subsidiary” – a subsidiary represents:


15% of pre- tax trading profits of the listed issuer

5% Equity capital test is not applicable.

R18.07(2)

Despatch of a circular by a listed issuer proposing to explore for natural resources where the proposed transaction represents:

33% of net assets of the listed issuer

33% of pre-tax trading results of the listed issuer

10%

R13.13

General disclosure obligation that will arise from advance to an entity that represents:


N/A 8% Profits test, revenue test and equity capital test are not applicable.

R13.14

General disclosure obligation that will arise from increasing advance to an entity by an amount representing:


N/A 3% Profits test, revenue test and equity capital test are not applicable

104

Application of size tests in other parts of Listing Rules (2)

Existing percentage ratio using net assets as the basis of comparison


Revised -Percentage ratio using the same size tests as those used to classify notifiable transactions

R13.16

General disclosure obligation that will arise from advance to an affiliated company that represents:



App16-15 Note 2

Definition of “contract of significance”



App16-23

Disclosure of information relating to properties held for development and/or sale or for investment purpose that represent:


15% of pre-tax operating profits of the listed issuer


App16-36

Definition of “financial conglomerate” – financial business of a listed issuer represents:


15% net profit attributable to shareholders of the listed issuer


105

Application of size tests in other parts of Listing Rules (3)

Existing percentage ratio using net assets as the basis of comparison


Revised –

Percentage ratio using the same size tests as those used to classify notifiable transactions

R13.25(1)(d) and (e) Notifying the Exchange upon possession of or sale by any mortgagee of a portion of the listed issuer’s assets, or the making of any final judgement, declaration or order by any court or tribunal of competent jurisdiction which may adversely affect the listed issuer’s enjoyment of any portion of its

assets that represent:


N/A 5% Equity capital test is not applicable.

106

Profit forecasts (1)

Revised definition (R11.17): • Any forecast of profits or losses • Any statement explicitly or implicitly quantifying

future profits or losses • Any estimate of profits or losses for a financial period

expired but for which the results have not yet been published

• Any assets (except land and buildings) or business valuation based on discounted cash flows or projections of profits, earnings or cash flows

107

Profit forecasts (2)

Disclosure requirements (R11.17): • Clear and unambiguous statement required

• Presented in an explicit manner

• Principal assumptions disclosed

• Basis of preparation must be consistent with the accounting policies adopted by issuers

Report of financial advisers or sponsors (R11.17):• Review of accounting policies and calculations of the forecast

• They are satisfied that the forecast has been made by directors after due and careful enquiry

108

Articles of Association

• Nomination of directors • Voting at board meetings • Voting at general meetings• Transitional period

109

Nomination of directors

Example for AGM Issuer can at any time from Day 1 to Day 14 allow shareholders a period of at least 7 days to lodge a notice for appointment of directors

(Appendix 3- 4(4))

Despatch of Notice of

Meeting of AGM

End of Notice Period for Nomination of Directors

Date of AGM

Day 0 Day 14

At least 7 days (Appendix 3- 4(5))

The Rules do not prevent an issuer accepting a notice for nomination of directors earlier than Day 1.

Day 21Day 1

Appendix 3-4(4): That the minimum length of the period for shareholders to lodge their notice to nominate a directors shall be at least 7 days. Appendix 3-4(5): That the period for lodgment of the notices will commence no earlier than the day after the

despatch of the notice of the meeting and end no later than 7 days prior to the date of such meeting.

R13.70: Must publish an announcement or issue a supplementary circular upon receipt of a notice from a shareholder to nominate a director at the general meeting where such notice is received by the issuer after publication of the notice of meeting. The issuer shall include particulars of the proposed director in the announcement or supplementary circular. Note: The issuer must assess whether or not it is necessary to adjourn the meeting of the election to give shareholders at least 14 days to consider the relevant information disclosed in the announcement or supplementary circular.

110

Voting at board meetings

• Existing Appendix 3-4(1):– Directors shall not vote for transactions in which they have

a material interest

• New Appendix 3-4(1): – Directors shall not vote for transactions in which they or

their associates have a material interest

111

Voting at general meetings

• New Appendix 3-14:– Where any shareholder is required to abstain from voting

or restricted to vote only for or only against, issuers must not count the votes cast by or on behalf of such shareholder in contravention of such requirement or restriction.

112

Transitional period

• Must amend the articles of association at the earliest opportunity and in any event, no later than the conclusion of the next AGM– Where notice of next AGM has been despatched before 31

March 2004 and the next AGM will be convened on or after 31 March 2004, the articles of association must be amended at the earliest opportunity after 31 March 2004.

113

Rights issues and open offers (1)

R7.19(6), 7.24(5)• If issued share capital or market capitalisation increases by

more than 50%:– controlling shareholders must abstain from voting in favour– details of proposed rights issue or open offer must be

disclosed e.g. proposed use of proceeds, description of funds raised in previous 12 months, use of proceeds and intended use of funds not yet utilised

• Aggregation over previous 12 months:

– with other rights issues, open offers, bonus securities, warrants or other convertible securities granted as part of rights issues or open offers

114

Rights issues and open offers (2)

Rights Issueannounced

Dealings in Rights Shares Commence

Issues of Convertible Securities (assuming

full conversion)

Announcement of Latest Proposed Right

Issue

Month 0 Aggregation Month 12

Aggregation rule

115

Restrictions on share repurchase (1)

Price (R10.06(2)(a)): • Cannot repurchase shares if the price is higher by 5%

or more than average closing market price for the 5 preceding trading days

Number of shares: • Existing 25% limit* under Main Board Rules repealed

* Under current Main Board Rules, issuers are not allowed to repurchase in any calendar month more than 25% of total number of shares that were traded in the preceding calendar month.

116

Restrictions on share repurchase (2)

Restriction period (R10.06(2)(e)):• In line with the black-out period for directors’ dealings• Unless the circumstances are exceptional, 1 month

immediately preceding the earlier of:– date of board meeting for approval of financial

results – reporting deadline under the Listing Rules

and ending on the date of results announcement

117

Restriction on grant of share options

Restriction Period (R17.05):• In line with the black-out period for directors’ dealings• Unless the circumstances are exceptional, 1 month

immediately preceding the earlier of:– date of board meeting for approval of financial

results – reporting deadline under the Listing Rules

and ending on the date of results announcement

118

Issues of securities within 6 months of listing No issues of securities within 6 months of listing (R10.08), except

for **:• issue of shares pursuant to a share option scheme• exercise of conversion rights attaching to warrants issued as part

of IPO• any capitalisation issue, capital reduction or consolidation or sub-

division or shares*; and• issue of shares or securities pursuant to an agreement entered into

before listing and the material terms have been disclosed in the listing document.

* Existing GEM requirement

** Under GEM Rule 17.29(5), an issue of share or securities convertible into equity securities of the listed issuer is allowed within 6 months of listing if:

(a) it is for the purpose of an acquisition (which is not a major transaction, VSA or reverse takeover) of assets which would complement the listed issuer’s focused line of business;

(b) it does not result in a controlling shareholder of the listed issuer ceasing to be a controlling shareholder and must not result in a change in control;

(c) the listed issuer complies with the shareholders’ approval, disclosure and shareholding requirements.

119

Withdrawal of primary listing (1)

R6.12

• Require controlling shareholders to abstain from voting in favour

• New approval thresholds:

– Approval by at least 75% of votes of holders of securities voting at meeting*

– The number of votes cast against resolution is not more than 10% of the votes of holders that are allowed to vote *

* Including controlling shareholders voting against the resolution

120

Withdrawal of primary listing (2)

R6.15

• Exemption from shareholders’ approval if:

– exercise of right to compulsory acquisition after a general offer

– privatisation by way of scheme of arrangement that is subject to Takeovers Code

• Publish notice of proposed delisting to shareholders

• Disclosure of the intention to delist in the circular

121

Withdrawal of secondary listing

R6.16• Must comply with all rules and regulations of the

jurisdiction of primary listing and incorporation• Notice period of 3 months to shareholders by way of

announcement

122

Publication of supplemental information

(R13.73)

Where there are any additional material information:

• must publish an announcement or supplementary circular

• must adjourn the general meeting to give shareholders at least 14 days to consider the new information

123

Publication on HKEx’s website (R2.07C)Types of documents Deadline for submission to HKEx

Issuers

R2.07C(1)(a)

Announcements or notice required under Listing Rules

No later than 9 pm on the business day last preceding the day of publication in the newspapers

R2.07C(1)(b)(i)

Other corporate communications to be sent to shareholders

No later than 9 pm on the business day last preceding the day on which it is sent

R2.07C(1)(b)(ii)

Prospectus to be registered under the Companies Ordinance* and application forms

No later than 9 am on the day of registration of the prospectus

New applicants

R2.07C(1) (c)

Prospectus to be registered under the Companies Ordinance* and application forms

No later than 9 am on the day of registration of the prospectus

R2.07C(1)(c)

Prospectus not required to be registered under the Companies Ordinance and application forms

No later than 9 pm on the business day last preceding the date of issue

* The issuer must provide a written confirmation of the registration accompanied by a copy of the letter from the Companies Registry confirming the registration, as soon as the issuer has received the letter.

124

Implementation

• New Rules effective on 31 March 2004

• Transitional arrangements on certain Rule amendments – Refer to HKEx news release on 30 January 2004

• Rule changes are published on HKEx’s website

125

Code on Corporate Governance Practices & Corporate Governance Report

126

• Consultation Conclusions published in January 2003

– Set out the framework and certain key provisions of the Draft Code and Corporate Governance Report

• Latest regulatory practices and developments and experience in Hong Kong and other jurisdictions

• Corporate governance working group established in May 2003

Background

127

• Published on 30 January 2004

• To allow the market to comment on:

– timing of proposed implementation of the Code

– detailed wording of the draft Code

Exposure Paper

128

• New Code effective for accounting periods commencing:

– 1 January 2005 for all the Code provisions and related disclosure obligations (except for those on “internal control”)

– 1 July 2005 for the Code provisions on “internal control” and related disclosure obligations

• Early adoption encouraged

Implementation

129

• Non–mandatory

• Two tiers of board practices

– 1st tier: Code provisions – comply or explain approach

• Non-compliance does not constitute a breach of the Listing Rules

– 2nd tier: Recommended Best Practices – listed issuers encouraged to disclose their non-compliance

Structure of Draft Code

130

• Section A: Directors • Section B: Directors’ remuneration

• Section C: Accountability and Audit

• Section D: Delegation by the Board

• Section E: Communication with Shareholders

Code Provisions (1)

131

• Regular board meetings – at least 4 times a year at approximately quarterly intervals

• Conflicted matters should be dealt with by holding board meetings with INEDs present

• Separation of the roles of Chairman and CEO

• Comprehensive and formal induction upon appointment as a director

Code Provisions (2)

132

• Establishment of a remuneration committee with a majority of INEDs

• Annual review of effectiveness of internal control

• Duties of an audit committee

Code Provisions (3)

133

Major Recommended Best Practices

• INEDs comprising at least one-third of the board

• Establishment of a nomination committee with a majority of INEDs

• Quarterly reporting for Main Board issuers

• Continuous training for directors

• Disclosure of senior management’s emoluments on a named basis

134

Corporate Governance Report

• Three levels of disclosure requirements

– 1st level: Mandatory disclosure requirements

– 2nd level: Code provision disclosure – need to explain non-disclosure

– 3rd level: Recommended disclosure

135

• Whether the Code provisions and the issuers’ own code are met

• Details of non-compliance with the Code provisions

• Details in relation to the board of directors

– e.g. board composition, number of board meetings and attendance record of directors at board meetings

• Details of audit committee, remuneration committee and nomination committee

– e.g. role and functions, composition, number of meetings and summary of work done during the year

Major Mandatory Disclosure Requirements

136

Disclosure requirements in the Code where non-disclosure requires explanation in the Corporate Governance Report

• Directors’ acknowledgement of their responsibility for preparing accounts and auditors’ statement about their reporting responsibility

• Report on material uncertainties relating to the issuer’s ability to continue as a going concern

• Explanation of the different views of the audit committee and the board on selection, appointment, resignation and dismissal of the external auditors

Code Provision Disclosure

137

• Share interests of senior management

• Shareholders’ rights

– to convene an EGM, direct enquiries to the board, put forward proposals at shareholders’ meetings

• Investor relations

– e.g. significant changes in articles of association, details of shareholdings, indication of important shareholders’ dates in the coming year

• Report on internal controls

• Division of responsibility between the board and management

Recommended Disclosure

138

• Comments on or before 31 March 2004

• Target for publication of Code – end 1st half 2004

Proposed Timetable

139

Amendments to the Listing Rules Amendments to the Listing Rules Relating to Relating to

Initial Listing CriteriaInitial Listing Criteria

140

Initial listing eligibility criteria

Chapter 8

141


Current requirements:

• Trading record period

• Profit requirement

• Management and ownership continuity

New requirements:

• *Trading record period – maintain (R8.05(1)(a), (2)(a), (3)(a))

• Codified existing interpretation of :– *management continuity for at least the 3 preceding

financial years

(R8.05(1)(b), (2)(b), (3)(b))

– ownership continuity and control for the most recent audited financial year

(R8.05(1)(c), (2)(c), (3)(c))

* can be waived in the case of applications

under market capitalisation / revenue test

Track Record (R8.05)

142

Financial Standards

• Profit test (R8.05(1))

• Market capitalisation / revenue test (R8.05(3))

• Market capitalisation / revenue / cash flow test (R8.05(2))


143

Market Capitalisation / revenue test

• Market capitalisation : at least HK$4 billion (R8.05(3)(d))

• Revenue : at least HK$500millionfor the most recent audited financial year(R8.05(3)(e))

• No. of shareholders : 1,000 (R8.05(3)(f))

“Revenue”

Only revenue arising from the principal activities of the listing applicants and not items of revenue & gains that arise incidentally (R8.05(4))


144


Market Capitalisation / revenue test

• Waiver of 3-financial-year trading record requirement

(R8.05A)

• Pre-requisites :

– management experience

– management and ownership continuity

145

Market capitalisation / revenue / cash flow test

• Market capitalisation : at least HK$2billion (R8.05(2)(d))

• Revenue : at least HK$500millionfor the most recent audited

financial year (R8.05(2)(e))

• Positive Cash Flow : at least 100million in aggregate for the 3 preceding financial years(R8.05(2)(f))

“Revenue”

Only revenue arising from the principal activities of the listing applicants and not items of revenue & gains that arise incidentally (R8.05(4))


146

Market Capitalisation

• Current requirement

– at least HK$100million

• New Rule (R8.09(2))

– increased to at least HK$200 million

• Definition of “Market Capitalisation” (R8.09(2))

– Expected issue price of securities as basis (R8.09A)


147

Initial listing eligibility criteriaPublic float

• Current requirement:

– 25% (if market capitalisation does not exceed HK$4 billion)– floor: 10% (discretionary, if market capitalisation exceeds HK$4

billion)

• New Rule: (R8.08(1))

– 25% by reference to aggregate market capitalisation of all securities of applicant (at least 15% having a market capitalisation of HK$50 million if more than 1 class of securities)

– floor: 15% (discretionary, if market capitalistaion exceeds HK$10 billion)

148


Number of shareholders

• increased to 300 (R8.08(2))

• 1,000 for issuers applying to list under the market capitalisation / revenue test (R8.05(3)(f))

Spread of shareholders (R8.08(3))

• top 3 public shareholders hold not more than 50% of public float

• “shareholders”- refers also to beneficial owners

149


Working capital sufficiency (R8.21A)

• Sufficient working capital for an applicant’s present requirements, that is for at least the next 12 months from the date of initial listing document

• Sponsors to give written confirmation

* An applicant whose business is entirely or substantially that of the provision of financial services, and its solvency & capital adequacy are subject to prudential supervision by a regulator acceptable to the Exchange excepted

150


• Mineral companies (R8.05B(1))

• Infrastructure companies (R8.05B(2))

151


Deemed new listing (R8.01, R8.21C)

• Asset to be injected/acquired or the enlarged group must meet :

– track record requirement inclusive of trading record period & management and ownership continuity requirements;

– profit or other financial standards requirement

• Enlarged group of the existing issuer, or NewCo, must meet :

– working capital sufficiency requirement;– market capitalisation requirement;– public float requirement;– spread of shareholders requirement

152

Disclosure requirements

at the time of initial listing

Part A of Appendix 1

153

Disclosure requirements at the time of initial listing

• Over-allotment option and price stabilising activities

App 1A, Para 15(3)

• Persons in control of the listing applicant \

App 1A, Para 27A

• Management experience / qualification

App 1A, Para 41

• Applicant group prospects

App 1A, Para 34(2)

154

Implementation

• Effective Date : 31 March 2004

• Some exceptions

155

Implementation

Exceptions for new initial listing eligibility criteria:

– Form A1 submitted before 31 March 2004, and listed within three months afterwards*, i.e.

Submit Form A1 Listing Applicable criteria

Before 31/3/2004 Before 31/3/2004 Existing

Before 31/3/2004 Before 1/7/2004 Existing*

Before 31/3/2004 On or after 1/7/2004 New

After 31/3/2004 - - New

156

Continuing listing obligations

157

Chapter 13 – Continuing Obligations (New)

• Existing Appendices 7A, B & I (Listing Agreements) become part of the Listing Rules

– New Chapter 13 introduced (existing Chapter 13 repealed)

– Merged into Chapters 19 and 19A

• Existing Practice Note 19 (General disclosure obligations) merged into new Chapter 13

158

Major areas of Rule amendments

• Voting by poll• General mandate provisions• Independent board committee and independent

financial advisers• Disclosure of advances to entities/financial assistance

to affiliated companies• New announcement requirements • Directors’ service contracts• Public float• Timeliness of accounts• Notice of meeting and circulars

159

Voting by poll (1)

• When required (R13.39(4))(*):

– Connected transactions

– Transactions that require controlling shareholders to abstain from voting in favour

– Where any interested shareholders are required to abstain from voting

– Granting of options to a substantial shareholder or INED or his associates

• Disclosure of procedures for shareholders to demand a poll in each circular (R13.55(3))

* Where an issue of shares or securities convertible into equity securities is allowed under

GEM Rule 17.29(5), the transaction must be subject to shareholders’ approval by way of poll.

160

Voting by poll (2)

• Publication of poll results after general meeting (R13.39(5))

• Appointment of a scrutineer for vote-taking (R13.39(5))– Disclosure of his identity in the poll result

announcement

161

General mandate

• Limit on general mandate (R13.36(2)) : – Existing limit of 20% of issued share capital retained

• Refreshment of general mandate (R13.36(2)&(4)):– Refreshment subject to shareholders’ approval once a year

(normally at AGM)– Independent shareholders’ approval for any subsequent

refreshments in a year

• Restriction on placing discounts of 20% or more to market price– unless issuers are in severe financial difficulties or the

circumstances are exceptional (R13.36(5))

162

Refreshment of General Mandate (R13.36(4)(e))Issued share capital (Number of Shares)

General Mandate (Number of Shares)

No of shares 1,000,000 (20%) 200,000

Unused Mandate (say)

Rights Issue –1 share for 2 existing shares- 50% increase*

Issued shares after Rights Issue

Unused portion of GM that can be topped up and subject to shareholders approval

Total shares available and unused under the GM

500,000

1,500,000

150,000

150,000 x 50%*

= 75,000 shares

150,000 + 75,000

= 225,000 shares

If the listed issuer wishes to have a general mandate so that the number of shares is equivalent to 20% of the issued share capital after the Rights Issue (being 300,000 shares), it must obtain independent shareholders approval for the remaining 75,000 shares (being 1,500,000 x 20% less 225,000 shares).

163

Independent Board Committee (1)

When required (R13.39(6), 13.68):• Connected transactions subject to independent

shareholders’ approval• Transactions where controlling shareholders are

required to abstain from voting in favour• Spin-off proposals subject to shareholders’ approval• Directors’ service contracts subject to shareholders’

approval

164

Independent Board Committee (2)

Composition (R13.39(6)(a)):

• INEDs (with no material interests) only – May consist of only 1 INED

– If all INEDs have a material interest in transaction, independent financial adviser shall make recommendation to shareholders directly

Role (R13.39(6)(a)):

• Advise shareholders:– Are the terms of the transactions fair and reasonable?

– Is the transaction in the interests of the issuer and shareholders as a whole?

– Based on the IFA’s recommendations, should shareholders vote in favour of the resolution?

165

Independent Financial Adviser• When required (R13.39(6)):

– Connected transactions subject to independent shareholders’ approval

– Transactions where controlling shareholders are required to abstain from voting in favour

– Spin-off proposals subject to shareholders’ approval

• IFA letters in circulars to shareholders (R13.39(7)):

– Separate letters to IBC and shareholders:

• Are the terms of the transactions fair and reasonable?

• Is the transaction in the interests of the issuer and shareholders as a whole?

• Should shareholders vote in favour of the resolution?

166

Disclosure of advances to entities

• Exclude advances to subsidiaries

• All size tests apply* (to the extent applicable**)

• Disclosure thresholds – For any advance made: lowered from 25% to 8%

(R13.13)

– For any increase since previous disclosure: lowered from 10% to 3% (R13.14)

• Must comply with the new Rules as soon as practicable

* Under current Rules, only the net assets test applies.

** In practice, only consideration test and total assets test would apply.

167

Disclosure of financial assistance to affiliated companies

• “Affiliated companies” = companies accounted for by issuers using equity method of accounting (R13.11(2)(a))

• All size tests apply* (to the extent applicable**)

• Disclosure threshold lowered from 25% to 8%

(R13.16)

• Must comply with the new Rules as soon as practicable

* Under current Rules, only the net assets test applies.

** In practice, only consideration test and total assets test would apply.

168

New announcement requirements

Publish an announcement on:• any proposed alteration of memorandum or articles of

association (R13.51(1))

• any appointment, resignation or re-designation of directors (R13.51(2))

• any change in the rights attaching to (1) any class of listed securities and (2) any shares into which any listed debt securities are convertible or exchangeable (R13.51(3))

• any change in auditors (R13.51(4))

• any change in financial year end (R13.51(4))

• any change in secretary or registered address (R13.51(5))

169

Public Float (1)• Maintain public float of 25% (unless a lower % is

accepted at the time of initial listing) – existing requirement

• Suspension if public float falls below 15% (R13.32(3)) – new requirement

• Temporary waiver may be granted in general offer situation for a “reasonable period” after close of offer (R13.33)– Normally for a period of 3 months

– Must restore minimum public float after expiration of waiver

– Not extended to share repurchase situation

170

Public Float (2)

• Where lower % of public float (between 15% and 25%) accepted at the time of listing with market capitalisation over HK$10 billion (R8.08(1)(d), 13.32)

– Such lower % is applicable throughout issuer’s listing on the Exchange

– Suspension if public float falls below 10% (R13.32(3))

• Lower % of public float will not be considered post listing

171

Public Float (3)

• Confirmation of public float sufficiency in annual reports (R13.35, App 16-34A)

– based on publicly available information

– within the knowledge of directors

172

Directors’ service contracts• Shareholders’ approval required if:

– duration that may exceed 3 years

– the service contract expressly require notice period of more than 1 year or compensation of more than 1 year’s emoluments for termination of contracts

→ (a) remuneration committee with a majority of INEDs or

(b) independent board committee : to advise shareholders (R13.68)

• Exempt service contracts entered into on or before 31 January 2004 (R13.69)

– Shareholders’ approval required if renewal or variation of material terms of contracts

173

Timeliness of account (R13.50)

• Immediate suspension - if failure to publish financial results on due date

• Transitional period up to 31 December 2004

174

Notice of meeting and circulars (R13.73 and 13.74)

• Must despatch circulars at the same time as or before giving notice of meeting

• Must publish notice of every meeting of shareholders and creditors by way of an announcement

• For election of directors at general meetings,

– Must disclose biographical details (see R13.51(2)) of the proposed directors in the circular to shareholders

Documents

1 Hong Kong Exchanges and Clearing Limited Enhancing Corporate Governance and Market Quality