Beruflich Dokumente
Kultur Dokumente
Abu Dhabi Herbert Smith LLP Suite 302, 3rd Floor Al Bateen Towers C2 Building Al Bateen PO Box 106178 Abu Dhabi UAE T: +971 2 412 1700 F: +971 2 412 1701 Amsterdam Stibbe Stibbetoren Strawinskylaan 2001 PO Box 75640 1070 AP Amsterdam T: +31 20 546 06 06 F: +31 20 546 01 23 Bangkok Herbert Smith (Thailand) Ltd 1403 Abdulrahim Place 990 Rama IV Road Bangkok 10500 T: +66 2657 3888 F: +66 2636 0657 Beijing Herbert Smith LLP 28th Floor Office Tower Beijing Yintai Centre 2 Jianguomenwai Avenue Chaoyang District Beijing PRC 100022 T: +86 10 6535 5000 F: +86 10 6535 5055 Berlin Gleiss Lutz Friedrichstrasse 71 10117 Berlin T: +49 30 800 979-0 F: +49 30 800 979-979 Brussels Herbert Smith LLP Central Plaza Rue de Loxum 25 1000 Brussels T: +32 2 511 7450 F: +32 2 511 7772 Gleiss Lutz Central Plaza Rue de Loxum 25 1000 Brussels T: +32 2 551 1020 F: +32 2 551 1039 Stibbe Central Plaza Rue de Loxum 25 1000 Brussels T: +32 2 533 5211 F: +32 2 533 5212
Budapest Bn, S. Szab & Partners Gleiss Lutz associated firm Jzsef ndor tr 5-6 1051 Budapest T: +36 1 266-3522 F: +36 1 266-3523 Dubai Herbert Smith LLP Dubai International Financial Centre Gate Village 7, Level 4 PO Box 506631 Dubai UAE T: +971 4 428 6300 F: +971 4 365 3171 Stibbe Dubai International Financial Centre Gate Village 7, Level 4 PO Box 506631 Dubai UAE T: +971 4 428 6300 F: +971 4 365 3171 Dsseldorf Gleiss Lutz Bleichstrasse 8-10 40211 Dsseldorf T +49 211 54061-0 F +49 211 54061-111 Frankfurt Gleiss Lutz Mendelssohnstrasse 87 60325 Frankfurt/Main T: +49 69 95514-0 F: +49 69 95514-198 Hong Kong Herbert Smith 23rd Floor, Gloucester Tower 15 Queens Road Central Hong Kong T: +852 2845 6639 F: +852 2845 9099 Jakarta Hiswara Bunjamin and Tandjung Herbert Smith LLP associated firm 23rd Floor, Gedung BRI II Jl. Jend. Sudirman Kav. 44-46 Jakarta, 10210 T: +62 21 574 4010 F: +62 21 574 4670 London Herbert Smith LLP Exchange House Primrose Street London EC2A 2HS T: +44 20 7374 8000 F: +44 20 7374 0888
London (continued) Stibbe Exchange House Primrose Street London EC2A 2ST T: +44 20 7466 6300 F: +44 20 7466 6311 Luxembourg Stibble Luxembourg, Avocats 20, rue Eugne Ruppert L-2453 Luxembourg T: +352 26 6181 F: +352 26 6182 Madrid Herbert Smith Spain LLP Paseo de la Castellana 66 28046 Madrid T: +34 91 423 4000 F: +34 91 423 4001 Moscow Herbert Smith CIS LLP 10 Ulitsa Nikolskaya Moscow 109012 T: +7 495 363 6500 F: +7 495 363 6501 Munich Gleiss Lutz Karl-Scharnagl-Ring 6 80539 Munich T: +49 89 21667-0 F: +49 89 21667-111 New York Stibbe 489 Fifth Avenue, 32nd floor New York, NY 10017 T: +1 212 972 4000 F: +1 212 972 4929 Paris Herbert Smith LLP 66, Avenue Marceau 75008 Paris T: +33 1 53 57 70 70 F: +33 1 53 57 70 80 Prague Kubnek & Nedelka v.o.s. Gleiss Lutz associated firm nm. Republiky 1a 110 00 Prague 1 T: +420 225 996-500 F: +420 225 996-555 Saudi Arabia Al-Ghazzawi Professional Association Herbert Smith LLP associated firm Jeddah Commercial Centre, 3rd Floor, Al Maady Street Corniche Al Hamra P.O. Box 7346 Jeddah 21462 T: +966 2 6531576 F: +966 2 6532612
Saudi Arabia (continued) Al-Ghazzawi Professional Association Herbert Smith LLP associated firm Arabian Business Center Prince Muhammad Street PO Box 381 Dammam 31411 T: +966 3 8331611 F: +966 3 8331981 Al-Ghazzawi Professional Association Herbert Smith LLP associated firm King Faisal Foundation North Tower, 4th Floor K. Fahd Road PO Box 9029 Riyadh 11413 T: +966 1 4632374 F: +966 1 4627566 Shanghai Herbert Smith LLP 38th Floor, Bund Center 222 Yan An Road East Shanghai 200002 T: +86 21 2322 2000 F: +86 21 2322 2322 Singapore Herbert Smith LLP 50 Raffles Place #24-01 Singapore Land Tower Singapore 048623 T: +65 6868 8000 F: +65 6868 8001 Stuttgart Gleiss Lutz Maybachstrasse 6 70469 Stuttgart T: +49 711 8997-0 F: +49 711 855096 Tokyo Herbert Smith 41st Floor, Midtown Tower 9-7-1 Akasaka, Minato-ku Tokyo 107-6241 T: +81 3 5412 5412 F: +81 3 5412 5413 Warsaw Pietrzak Siekierzynski Bogen Sp. k. Gleiss Lutz associated firm ul. Z`lota 59 00-120 Warsaw T: +48 22 22242-00 F: +48 22 22242-99 www.herbertsmith.com www.gleisslutz.com www.stibbe.com
Herbert Smith LLP, Gleiss Lutz and Stibbe are three independent firms which have a formal alliance.
Introduction
Going public is a key stage in the growth and development of a company. Obtaining a listing on the Hong Kong Stock Exchange enables a company to improve its standing in the business community and gives it greater access to equity and debt capital raising markets, while at the same time providing shareholders with an internationally recognised stock exchange on which they can freely trade their shares. The Herbert Smith Hong Kong IPO Guide is intended to provide an overview to capital raising in Hong Kong and in particular to the initial public offering (IPO) process for companies listing on the Main Board of the Exchange from the pre-IPO strategic investor stage through listing. There has been a significant growth in the market capitalisation of the Hong Kong market in recent years, spurred by the listing of Mainland enterprises. Red chip and H share companies now account for approximately 50% of the total market capitalisation of the Hong Kong market. The global nature of the investment community and capital markets has resulted in more and more companies considering dual listings on other international exchanges, like New York or London, or structuring their offerings as exempt offerings so their shares can be offered to US and other investors. This Guide is a summary only of the more significant legal and regulatory issues encountered in the IPO process as at August 2010 and as such should not be relied upon as legal advice. In particular, this Guide does not consider regulatory issues imposed by jurisdictions other than Hong Kong and the US. Herbert Smith accepts no responsibility for any errors or omissions this Guide may contain. Reference should be made to the Herbert Smith Compliance Guide for companies listed on the Hong Kong Stock Exchange for details of the continuing obligations applicable to companies following listing on the Exchange. This Guide may be updated from time to time. However, we are under no obligation to do so or to forward any revised Guide to any previous recipients. We trust you will find the Herbert Smith Hong Kong IPO Guide a useful reference tool and a helpful introduction to the IPO process in Hong Kong. If you have any questions please feel free to contact any of the people named on the following page.
Herbert Smith
Herbert Smith is a leading international legal practice with over 1,400 lawyers based in its offices in Asia, Europe and the Middle East. We are committed to providing high quality and innovative legal services to corporations, governments, financial institutions and all types of commercial organisations. The firm advises its clients on corporate, dispute resolution, banking and finance issues, and energy and projects and offers a full range of specialist services including investment funds, regulatory, construction, insurance, tax and IP/IT. Hong Kong office: 23rd Floor, Gloucester Tower 15 Queens Road Central Hong Kong Beijing office: 28th Floor Office Tower, Beijing Yintai Centre 2 Jianguomenwai Avenue, Chaoyang District Beijing 100022 Peoples Republic of China Shanghai office: 38th Floor, Bund Center 222 Yan An Road East Shanghai 200002 Peoples Republic of China
Contacts
Corporate partners Ashley Alder T Tom Chau T Matt Emsley T Gary Lock T Carolyn Sng T Tommy Tong T Andrew Tortoishell T +852 2101 4001 +86 10 6535 5136 +852 2101 4101 +852 2101 4228 +852 2101 4155 +852 2101 4151 +852 2101 4012 ashley.alder@herbertsmith.com tom.chau@herbertsmith.com matt.emsley@herbertsmith.com gary.lock@herbertsmith.com carolyn.sng@herbertsmith.com tommy.tong@herbertsmith.com andrew.tortoishell@herbertsmith.com john.moore@herbertsmith.com kevin.roy@herbertsmith.com nicky.cardno@herbertsmith.com tim.wright@herbertsmith.com
US securities partners John Moore T +852 2101 4106 Kevin Roy T +852 2101 4102 Practice support consultant Nicky Cardno T +852 2101 4137 Business development Asia Tim Wright T +852 2101 4665 Defined terms CSRC Exchange GEM INEDs LR or Listing Rules MOFCOM SEC SFC SFO Share Repurchase Code Takeovers Code
China Securities Regulatory Commission The Stock Exchange of Hong Kong Limited Growth Enterprise Market Independent Non-Executive Directors the Main Board Listing Rules Ministry of Commerce of the Peoples Republic of China United States Securities and Exchange Commission Securities and Futures Commission of Hong Kong Securities and Futures Ordinance (Cap. 571, Laws of Hong Kong) SFC Code on Share Repurchases SFC Code on Takeovers and Mergers
The information provided in this Guide is general and may not apply in a specific situation. Legal assistance should always be sought before taking any action based on the information provided. Herbert Smith 2010
Contents
Regulatory background
1. 2. 3. 4. Offers of securities is a prospectus required? Who can offer securities? Main Board and GEM key listing criteria Hong Kong Depositary Receipts 1 4 5 7
Pre-IPO preparation
5. 6. Group reorganisations Strategic investors and pre-IPO placings 8 12
IPO process
11. The team 12. Listing methods and criteria 13. Listing timetable and Exchange documents 14. Sponsors responsibilities 15. Prospectus content 16. Approval and registration of prospectus 30 33 36 43 51 55
International offerings
31. Exempt US offerings 32. Hong Kong and US dual listings 33. Hong Kong and Shanghai dual listings 102 105 115
Post-IPO matters
34. Post-IPO restrictions on shareholders and company 117
Legislation
Ordinances The primary legislation in Hong Kong governing the offering of securities and other investment arrangements to the public in Hong Kong is the Companies Ordinance and the Securities and Futures Ordinance. Companies Ordinance The Companies Ordinance requires that a prospectus issued in connection with an offering of shares to the public must comply with detailed content requirements and must be approved by the SFC and filed with the Registrar of Companies. The Companies Ordinance also contains guidelines as to certain exempt offers which do not require a prospectus (such as offers to not more than 50 people). Securities and Futures Ordinance Under Section 103 of the SFO, a person is prohibited from issuing any advertisement, invitation (including any oral invitation), offering memorandum, or document (together an offer document) which to his knowledge is or contains an invitation to the public to subscribe for securities or acquire an interest in a collective investment scheme (such as a unit trust or mutual fund), unless, among other things, the offer document: is a prospectus complying with the Companies Ordinance; or relates to an exempt offer under the Companies Ordinance; or is authorised by the SFC; or is issued to professional investors (discussed below).
Exempt offers
A prospectus is required where an offer of securities is made to the public. Very little guidance is given as to who constitutes the public. However, the Companies Ordinance specifically identifies offers which do not require a prospectus. If an offer does not fall within one of these exemptions, the more important of which are noted below, then generally it will be considered as being made to the public and will require a prospectus: offers to professional investors as defined in the SFO (see definition below); offers to not more than 50 people; offers with a maximum offering value of HK$5 million; offers with a minimum subscription value of HK$500,000; offers made in connection with a genuine invitation to enter into an underwriting agreement; offers made under a takeover or merger made in compliance with the Code on Takeover and Mergers; offers where there is no consideration involved (such as bonus issues) or as an alternative to a dividend or other distribution; offers to qualifying persons (including directors and employees) of the company or of any other member of the same group of companies; offers in connection with a collective investment scheme (mutual fund or unit trust) authorised under s104 of the SFO.
All of the above can be used in combination with each other (other than offers with a maximum offering of HK$5 million and offers with a minimum subscription of HK$500,000) so that it is possible to offer shares to an unlimited number of professional investors and up to 50 other investors. The offer document for certain of the exempt offers noted above must include a warning statement that the offer document has not been reviewed by any regulatory authority. Only offers to persons in Hong Kong need be considered. Thus an offer could be made to 50 persons in Hong Kong and additional persons outside Hong Kong provided the offer complies with the rules of the relevant overseas jurisdictions. For the purposes of the above exemptions professional investors include: (a) SFO licensed/registered firms and banks, or any person carrying on the business of the provision of investment services regulated under the law of any place outside Hong Kong; (b) Hong Kong and overseas regulated banks; (c) Insurers authorised under the Insurance Companies Ordinance, or any person carrying on insurance business and regulated under the law of any place outside Hong Kong; (d) authorised collective investment schemes under the SFO; (e) any individual, either alone or with his spouse or child, having a portfolio of securities and/or currency deposits of not less than HK$8 million;
(f)
any corporation or partnership having a portfolio of securities and/or currency deposits of not less than HK$8 million or total assets of not less than HK$40 million;
(g) any corporation the sole business of which is to hold investments and which is whollyowned by an individual who falls within (e) above; and (h) any trust corporation with total assets of not less than HK$40 million.
Unsolicited calls
A licensed intermediary cannot make unsolicited calls or send emails offering to sell securities except: if the call is made to a solicitor, professional accountant, licensed intermediary, authorised financial institution, money lender, professional investor, or an existing client; or if the call is a permissible communication (pursuant to the Securities and Futures (Unsolicited Calls Exclusion) Rules) being any communication other than one made in the course of a visit in person, or by a telephone conversation, or any other interactive dialogue in the course of which statements and responses to them are exchanged immediately.
The Exchange may accept a shorter trading record period or may modify or waive the profit or other financial standards for mineral companies, newly formed project companies and in exceptional circumstances. More details on the Main Board listing criteria are set out in Listing Methods and Criteria.
continuity of ownership and control for the last full financial year up until listing; and management continuity for the last two financial years.
The Exchange may accept a shorter trading record or modify or waive the ownership or management continuity requirements for newly formed project companies, mineral companies and in exceptional circumstances, in each case, subject to acceptable reasons.
Appointment of depositary
An HDR issuer will need to appoint a depositary acceptable to the Exchange. The depositary must be a suitably authorised and regulated financial institution which the Exchange considers has suitable experience in issuing and managing depositary receipts programmes in Hong Kong or overseas. The depositary will issue the depositary receipts as the agent for the issuer. The issuer will need to enter into a deposit agreement with the depositary which complies with the requirements set by the Exchange, including that the depositary hold the shares in the issuer on trust for the sole benefit of the HDR holders. Whilst the share register of the HDR issuer does not need to be maintained in Hong Kong, the depositary must maintain a register of HDR holders through an approved Hong Kong share registrar. The issuer must ensure that the depositary performs its obligations under the deposit agreement and the Listing Rules and that the rights of the HDR holders are fully recognised and equivalent to rights of shareholders.
5. Group reorganisations
At the early stages of an IPO it is essential to ensure that the group of companies to be listed has the correct group structure and that the group holds all assets, intellectual property, licences, permits, approvals, contractual and other rights necessary to carry on its business operations. For large IPOs this reorganisation process may begin more than a year before the IPO process commences. Below are some of the issues which need to be considered. Group structure
As a group develops over time it will often end up with a large number of subsidiaries, some of which may have multiple divisions, while others may no longer be needed or should be excluded from the group. The pre-IPO reorganisation process gives the opportunity to restructure the overall group if desired including addressing issues such as: winding up any redundant companies; moving companies around the group to ensure they sit within the correct business groups and reporting lines; splitting up large subsidiaries with multiple divisions and placing the divisions within separate subsidiaries; ring-fencing any speculative or high risk business ventures in separate subsidiaries (and where possible excluding these companies from general group funding obligations to avoid triggering cross-defaults); enhancing tax efficiency of the group structure; and excluding subsidiaries whose operations are not relevant to the groups principal businesses.
Regard should also be had to potential competition issues where competing businesses may be excluded from the group, and connected transactions issues where part of the groups operations are held by connected persons following the reorganisation. The reorganisation process may also present an opportunity to eliminate minority interests in major subsidiaries, particularly where the minority shareholders are connected persons which may render the subsidiary itself a connected person of the company under the Listing Rules.
Sometimes the transfer of assets and contractual rights is subject to third party consents pursuant to prior arrangements or agreements with the third party. It is important to commence communications with the third parties as early as possible to avoid delays to the listing timetable. Where contractual rights or assets are to be transferred it is important to get all necessary approvals. If the assets being transferred constitute a stand-alone business in Hong Kong then you must take into account the provisions of the Transfer of Business (Protection of Creditors) Ordinance. The consideration paid for any transfer of assets must be carefully considered. If the transfer of assets is at less than market value or book value it may amount to a distribution of the transferor companys assets, in which case the company must have sufficient distributable reserves available. In addition, if the transferor company is insolvent at the time of the transaction or becomes so within certain time periods, a liquidator may be able to challenge the transaction if it is at an undervalue (where the company does not receive adequate consideration) or if it is an unfair preference (where a particular creditor is put in a better position on an insolvency than he would otherwise have been).
Tax
When implementing group reorganisations it is important to liaise with the groups accountants or auditors to ensure that the groups tax position is optimised. Often the use of offshore holding companies may be preferable both for minimising any tax liability and enabling easier distribution of cash from operating subsidiaries up to the parent company. The listing applicant may want to consider enhancing the tax efficiency of the group corporate structure, for example, when considering the jurisdiction of incorporation of immediate holding companies of key operating subsidiaries to take advantage of any preferential withholding rates applicable to dividends. In addition, any inter-group transfers of shares and assets must be reviewed from a tax perspective to consider issues such as the appropriate transfer price, stamp duty and protection of accumulated losses.
Financial assistance
On a share sale, it is important to ensure that the transaction does not involve any unlawful financial assistance by a company for the acquisition of its own shares. The financial assistance provisions of the Companies Ordinance or equivalent legislation in other jurisdictions can be quite far reaching.
Companies incorporated in Hong Kong may list on the Exchange. Chapter 19 of the Listing Rules sets out a general framework which applies to overseas companies seeking an Exchange listing. The Listing Rules are therefore not prohibitive with respect to the listing of overseas companies. Overseas companies are encouraged to contact the Exchange to seek guidance on compliance matters, including waivers and modifications to the Listing Rules based on the particular facts and circumstances of the company. There are a number of recognised jurisdictions which are acceptable to the Exchange comprising Bermuda, the Cayman Islands and the PRC. Beyond these, companies incorporated in other overseas jurisdictions may also be listed, provided the Exchange is satisfied that the company is incorporated in a jurisdiction where the standards of shareholder protection are at least equivalent to those provided in Hong Kong. The Exchange has indicated that Australia, British Virgin Islands, Canada (Ontario and British Columbia), Cyprus, Germany, Jersey, Luxembourg, Singapore and the UK are acceptable jurisdictions for the purpose of a primary listing on the Exchange. In case of any shortfall in the shareholder protection standards of an overseas applicants home jurisdiction, the applicant is expected to compensate by making changes to its constitutional documents. The Exchange has established a uniform approach for reviewing shareholder protection standards in such overseas jurisdictions covering matters such as the adoption of a corporate structure that protects shareholder rights, fair proceedings for general meetings to enable shareholders to utilise their rights in full, corporate governance measures to ensure that powers of directors are reasonably contained and subject to scrutiny and the adoption of standards to ensure capital maintenance. The Exchange has stated that it will view favourably an application by a company incorporated in a jurisdiction in which the securities regulator is either a full signatory to the IOSCO MMOU (the International Organisation of Securities Commissions Multilateral Memorandum of Understanding Concerning Consultation and Co-operation and the Exchange of Information) or has entered into a bi-lateral agreement with the SFC to provide mutual assistance and exchange of information to enforce and secure compliance with the laws and regulations of that jurisdiction and Hong Kong. However, an overseas applicant will be subject to greater scrutiny by the Exchange if there is only a distant relationship between its principal business operations and its jurisdiction of incorporation and, if there is no relationship, the applicant may be considered unsuitable for listing. In order to demonstrate that its place of incorporation is acceptable for the purposes of the Listing Rules, an overseas applicant from a jurisdiction not yet approved must provide to the Exchange: a comparative analysis of its constitutive documents against the articles requirements of the Listing Rules; an overview of the foreign regulatory regime, including its securities laws and stock exchange rules; a comparative analysis of the foreign and Hong Kong laws governing areas relevant to shareholder protection; and a legal opinion from the applicants advisers and a confirmation from the sponsor that the applicants constitutive documents are in full compliance with the Listing Rules requirements.
10
For issuers from jurisdictions which have already been accepted by the Exchange (referred to as second comers) a streamlined procedure is in place. No line-by-line comparison of shareholder protection matters is required to be given to the Exchange for its consideration. The Exchange will accept second comers putting in place similar arrangements to previous issuers from accepted jurisdictions regarding amendments to constitutional documents or other means to address shareholder protection issues. It should be noted that the company and the sponsors will need to give confirmations as to the shareholder protection measures and so in practice this often means that a line-by-line analysis may still be required in order to give the confirmations. The Exchange is also prepared to allow cross-benchmarking to demonstrate the acceptability of a new jurisdiction. This would allow a potential issuer to compare its shareholder protection measures with those of one of the accepted jurisdictions rather than requiring a comparison with Hong Kong. The Exchange has stated that it will adopt a purposive interpretation of the requirements for equivalence to Hong Kong corporate regulation standards. It will not rigidly require issuers to change their constitutional documents where this is not permitted by local laws or may be too burdensome. For listing entities incorporated outside the PRC, the business of the group is generally injected into the listing entity by way of a share swap. For H Share companies, the listing entity will need to be converted into a joint stock limited company or the business operations and assets injected into a newly established listing entity. Such reorganisation will require approvals from relevant PRC governmental authorities and a valuation of the PRC issuers assets by a PRC valuer will need to be carried out. From August 2006, the PRC has enacted new regulations relating to the reorganisation of PRC entities into offshore vehicles to facilitate listings, under which approval from MOFCOM is required in respect of such offshore vehicles incorporation, and approval from CSRC is required in respect of such offshore vehicles listing. It will be important to check early in the transaction whether the listing applicants PRC legal advisers consider that the applicant will require approvals under the applicable requirements. It is important that the reporting accountants review the reorganisation proposal to ensure that the proposed reorganisation would permit the preparation of the companys accounts on an appropriate basis for inclusion in the prospectus.
11
Nature of investment
Where the investment is made at the same time as the IPO, the investor will invariably take ordinary shares like the other IPO investors. However, where the investment is made prior to the IPO, the investor may wish to subscribe for securities which offer the investor a greater degree of protection than ordinary shares. Convertible bonds or preference shares are commonly used for these pre-IPO investments as they can be converted into ordinary shares on the IPO (or later), but can also be redeemed for cash in certain situations thus providing the investor with priority in liquidation over ordinary shareholders without limiting the potential upside associated with an equity investment.
12
Terms which the Exchange has generally had difficulty with include where: the investment would only be completed after or was otherwise conditional on in-principle listing approval or other IPO milestones listing decisions 55-1, 55-2 and 59-3; the pre-IPO investor was given rights to nominate a certain number of directors to the board of the applicant and such rights were over and above what other shareholders were given under the articles listing decisions 59-1 and 59-6; discounts are pegged to the IPO listing price - listing decisions 55-1, 59-2 and 59-3; . there are guaranteed returns for the pre-IPO investor by way of compensation from the company (cash or securities) or put options at prices which effectively ensure that the preIPO investor makes a minimum profit from his investment -listing decisions 55-1, 55-3 and 59-5; and there are veto rights which give the pre-IPO investor the ability to block certain corporate decisions such as mergers, incurring indebtedness, amending the constitution and issuing shares where these rights are not available to the IPO investors - listing decisions 59-2, 59-4 and 59-6. However, veto rights which are defined narrowly and which are made subject to the directors overriding fiduciary duties may be acceptable, depending on the nature of the right listing decision 59-1.
Application of LR 2.03
The application of LR 2.03 is not limited to arrangements between the company and the preIPO investor. In its Listing Committee Report for 2007, the Listing Committee clarified that while the controlling shareholders of a listing applicant may be at liberty to enter into private arrangements with pre-IPO investors (as was recognised in listing decision 59-5), where the combined effect of such arrangements means that the pre-IPO investors are not exposed to equity risks prior to the IPO, the Exchange may view this absence as being inconsistent with LR 2.03 (for example see listing decision 55-3).
13
Please note that there are no hard and fast rules as to whether a proposed arrangement with a pre-IPO investor is acceptable. The Exchange will examine each arrangement in light of its prevailing circumstances. When a pre-IPO placing is undertaken, its terms must be carefully considered as the Exchange may require the investor to give a lock-up undertaking (regardless of whether one is already given to the company and/or the underwriters under the terms of the placing or investment) or may require other changes to the terms of the placing or investment to ensure that such terms do not breach the intent of LR 2.03. In these situations, the consent of the investor will be required to any such changes and this may delay the listing or result in the investor trying to renegotiate the terms of its investment.
Size of investment
Often a strategic investor will acquire less than 10% of the shares of the company as once the investor holds 10% or more, the investor will be treated as a connected person of the company. This would mean that the strategic investor would not constitute part of the public for the purposes of calculating the minimum public float. Further, if the strategic investor has ongoing business dealings with the company, any such transactions would need to comply with the connected transaction regime in Chapter 14 A of the Listing Rules.
To deal with a potential trigger of the clawback rules, given that a strategic investor usually invests as part of the placing tranche of the IPO, strategic investors sometimes negotiate a guarantee of a specific allocation of shares which will not be reduced in the event of a clawback due to an over-subscription for the public tranche of the IPO. This is a commercial decision for the company to make, provided that sufficient shares would otherwise be available for reallocation to the public offer tranche pursuant to any clawback.
14
The alternative is to seek a prior waiver from the Exchange from strict compliance with the clawback provisions under PN 18 in particular circumstances.
In addition, if the investment agreement is likely to be a material contract of the company, it has to be disclosed as such in the prospectus and a copy made available for public inspection.
Publicity restrictions
Upon submission of the Form A1 to the Exchange, the company will be bound by LR 9.08 which provides that all publicity material (including an announcement of a possible pre-IPO investment) must be reviewed and cleared by the Exchange before release. In the event of any leakage of information regarding a proposed investment, the Exchange is likely to require written submissions on the reasons for the leak which can result in the timetable for the listing being delayed.
15
Other jurisdictions
There may be potential securities law issues relating to offers and sales of securities to investors in other jurisdictions (such as the US). For example, if the pre-IPO investor is in the US, the offer and sale of the securities to such pre-IPO investor must comply with the requirements of the US securities laws, including but not limited to restrictions on publicity, provision of information, the manner of the offer and sale and the status of the investor to qualify for applicable exemptions from registration requirements under the US securities laws. If the restrictions under applicable securities laws are such that the investor has to consider using a Hong Kong affiliate to hold the shares, the investor should ensure that the relevant applicable securities laws do not apply to the affiliate. For example, US securities laws generally require that a Hong Kong affiliate holds the shares for its own account and not for the account of its US affiliate unless certain requirements under the US securities laws are complied with.
Documentation
Where the investment is made prior to the IPO process starting, the documentation may include a subscription agreement, the terms of the securities (if the investor wishes to take convertible notes or other quasi-equity securities) and possibly a shareholders agreement. Where the investment is to be made in the IPO shares, an investment agreement will generally be entered into and the global coordinator should be a party to this agreement to enjoy the benefit of the subscription undertaking and any lock-up undertakings. At a minimum, the investor would give an irrevocable undertaking to subscribe for a certain number, or value, of shares in the IPO.
7. Prospectus liabilities
At the start of the IPO process it is important that the directors of the company are informed of the potential civil and criminal liabilities they face in connection with the issue of the prospectus, in particular liability for any untrue statements or for the omission of any material information. A number of the regulatory provisions are wide enough to impose liability not only on the company and its directors but also on persons who authorised the issue of the prospectus such as the sponsor. Common law
Misrepresentation A prospectus is a document upon which potential investors rely to assess whether they wish to subscribe for shares in the company. As a general principle, where representations are made by one party to induce another party to enter into a contract and those representations are false, the other party may be entitled to rights of rescission and/or damages if it suffers loss as a result, regardless of whether the misrepresentation was made deliberately, negligently or innocently. Negligent misstatements Directors may also be liable for negligent misstatements in a prospectus if persons whom the directors intend will rely on those statements suffer financial loss as a result of such reliance and it was reasonable for those persons to have relied on those statements. Deceit Directors may be liable under the tort of deceit if it can be shown that they signed or authorised the issue of a prospectus containing a false statement which they did not honestly believe to be true, with the intention that another person would rely upon such statement, and that other person acted upon the statement and suffered a loss as a result. Verification There is no strict legal requirement to prepare verification notes for a prospectus. Verification is carried out for the protection of the company, the directors, sponsors and all those upon whom liability for misstatements in the prospectus may fall. The object of verification is to ensure, as far as practicable, that statements in the prospectus can be independently verified and are made by the directors and other relevant parties based upon a reasonable belief in the truth of the statements. For a number of offences, it is a valid defence to claim that the person had reasonable grounds to believe the accuracy of the statement.
Listing Rules
The Listing Rules require that the prospectus includes a statement that the directors of the company collectively and individually accept full responsibility for the document and confirm, having made all reasonable enquires, that to the best of their knowledge and belief the information contained in the prospectus is accurate and complete in all material respects and not misleading or deceptive and there are no other matters the omission of which would make any statement in the prospectus misleading. This statement can be relied upon by investors.
17
Companies Ordinance
Sections 38 and 342 These sections, in conjunction with the Third Schedule to the Companies Ordinance, set out the minimum level of information which should be contained in a prospectus. If a prospectus does not comply with or contravenes such requirements, the Company and any person who is knowingly a party to the issue, circulation or distribution of the prospectus is liable to a fine. Section 40(1) This section provides that where a prospectus invites persons to subscribe for shares in a company, the following persons will be liable to pay compensation to all persons who subscribe for any shares on the faith of the prospectus for the loss or damage they may have sustained by reason of any untrue statement included in such prospectus (which includes the omission of material information): directors of the company at the time of the issue of the prospectus; any person who has authorised himself to be named and is named in the prospectus as a director or as having agreed to become a director; every promoter of the company; and every person who has authorised the issue of the prospectus (which we believe includes the sponsor).
A person will not be liable under section 40(1) if he proves that: having consented to become a director, he withdrew his consent before the issue of the prospectus and that it was issued without his authority or consent; the prospectus was issued without his knowledge or consent and that on becoming aware of its issue he forthwith gave reasonable public notice that it was issued without his knowledge or consent; after its issue, but before allotment of the shares, he became aware of an untrue statement in the prospectus, withdrew his consent and gave reasonable public notice of the withdrawal of his consent and the reason for it; if the untrue statement was not purported to have been made on the authority of an expert or a public official document or statement, he had reasonable grounds to believe, and did until the time of allotment of shares believe, it was true; if the untrue statement was purported to have been made by an expert or copied or extracted from an experts report and it fairly represented the statement or was a correct and fair copy of or extract from such a report, he had reasonable grounds to believe and did up to the time of the issue of the prospectus believe that the person making the statement was competent to make it and that the person had given his consent to the inclusion of the statement and had not withdrawn the consent prior to delivery of a copy of the prospectus for registration or (to the knowledge of the director) had not withdrawn his consent prior to allotment of the shares pursuant to the prospectus; or if the untrue statement was purported to have been made by an official person or contained what purported to be a copy or extract from a public official document, it was a correct and fair representation of the statement or extract.
18
Section 40A In addition to the civil liability under section 40(1), section 40A provides that any person who authorised the issue of a prospectus containing any untrue statement (or omits any material information) shall be liable to imprisonment and a fine, unless he proves either that the statement was immaterial or that he had reasonable grounds to believe and did up to the time of issue of the prospectus believe that the statement was true. The Hong Kong prospectus legislation has been under review for some years. In September 2006, the SFC published its Consultation Conclusions on the Consultation Paper on Possible Reforms to the Prospectus Regime in the Companies Ordinance which proposed various changes to the prospectus regime including the scope of the prospectus liability regime and the categories of persons who should be liable for the prospectus. Further consultation will be required on the draft bill once it is available and so it is presently not possible to predict when any of the proposed reforms will be effected.
Besides criminal liability, a person guilty of fraudulent or reckless misrepresentation may also incur civil liability under section 108 to compensate persons who have suffered pecuniary loss as a result of having relied on the misrepresentation.
19
Negligent misrepresentation Section 108 also imposes civil liability for negligent misrepresentation inducing another person to enter into or offer to enter into an agreement to acquire, dispose of, subscribe for or underwrite securities. A negligent misrepresentation is a statement, promise or forecast which is false, misleading or deceptive and was made without reasonable care. However, if a remedy is available under section 40 of the Companies Ordinance, no right of action arises under section 108 of the SFO.
Misrepresentation Ordinance
Section 3(1) of the Misrepresentation Ordinance provides that a party to a contract who is induced to enter into that contract by a misrepresentation made by the other party and who suffers loss as a result of the misrepresentation can rescind the contract or recover damages in lieu of rescission from the party who made the misrepresentation. The only exception to this is where the misrepresenting party proves that he had reasonable grounds to believe, and did believe up to the time the contract was made, that the facts represented were true.
Theft Ordinance
In addition to any civil liability for misrepresentation, directors should also be aware of criminal liability under the Theft Ordinance. The Theft Ordinance contains a number of offences relevant to directors and officers of companies regarding the publication of various documents and announcements, such as the prospectus and other information disclosed to the public. In particular, if a director of a company intends to deceive members or creditors about the companys affairs, publish or concur in publishing a written statement or account which he knows is or may be misleading, false or deceptive in a material way, he may be held criminally liable and punishable by a maximum of 10 years imprisonment.
US securities laws
Several key provisions under the US securities laws create liability in connection with offering documents. Liability provisions applicable to Rule 144A and other exempt offerings Section 12(a)(1) Pursuant to Section 12(a)(1) of the United States Securities Act of 1933, as amended (the Securities Act), purchasers of any security offered in violation of the registration requirements of the US securities laws may recover from the seller the consideration paid for such securities. Strict liability exists for the seller of the securities. In order to prevail, plaintiffs need show only that the defendant was a seller or broker, the defendant failed to comply with the Section 5 registration requirements, there was use of the means and instrumentalities of interstate commerce, the applicable statute of limitations has not elapsed (ie, the suit was filed within one year of the violation) and adequate tender of the securities is made by a plaintiff seeking rescission. The only practical defence available to a defendant is that the security or the transaction was exempt from the registration requirements of Section 5.
20
Rule 10b-5 Pursuant to Rule 10b-5 under the Securities Exchange Act of 1934, purchasers of a security have a cause of action against any person who makes an untrue statement of a material fact, or omits to state a material fact necessary in order to make the statements made in connection with the purchase or sale of any security, in the light of the circumstances under which they were made, not misleading. If successful, private litigants in Rule 10b-5 claims may be awarded damages, or may seek to rescind the transaction and obtain a refund of the original purchase price. In addition to establishing materiality, a plaintiff must demonstrate each of the following elements: Reliance the plaintiff must prove that it relied on the misstatement or omission. Under the fraud on the market theory, US courts will presume reliance on a material misstatement or omission if the securities are traded on an established trading market. Under the fraud on the market theory, a material misstatement or omission will be deemed to have affected the market price of the stock, and courts will presume that the plaintiff traded in reliance on the integrity of the price set by the market. Scienter the plaintiff must prove that the defendant made the material misstatement or omission with some intent to defraud or manipulate. US courts have held that recklessness may constitute scienter, but mere negligence will not. This is in contrast to claims under Sections 11 or 12(a)(2) of the Securities Act, which principally apply to SECregistered offerings, for which only a failure to show reasonable care is required. Causation of Loss US courts have required claimants under Rule 10b-5 to prove that they relied on and suffered loss as a result of the misstatement or omission.
The exercise of reasonable care, in the form of a carefully conducted due diligence investigation, may provide strong evidence to refute the existence of an intent to deceive. As a consequence, underwriter due diligence has become a critical component of a defence to liability in Rule 144A and other exempt transactions.
21
US securities background
Generally, liability will arise under US securities laws in the case of either materially misleading misstatements or an omission of material information that would have been necessary to make statements in the offering document not misleading. Explicitly or implicitly, a due diligence type defence generally exists for underwriters, which provides that liability can be avoided if a defendant can prove it was duly diligent in investigating the business and financial condition of the issuer to ensure that the disclosure in the offering document is adequate. In an SEC registered offering, due diligence allows underwriters, directors and officers to establish that a reasonable investigation of the contents of the registration statement was made, thereby meeting the requirements of the due diligence defence against Section 11 and Section 12 liability available under the Securities Act. In a Rule 144A or other exempt offering, due diligence allows underwriters, directors and officers to refute the scienter element of a Rule 10b-5 claim.
22
23
Underwriters counsel normally prepares a set of due diligence questions (generally comprising legal, financial and business sections and prepared before the prospectus is drafted) to which the company will provide responses. A typical due diligence request list is comprehensive, although tailored to the type of transaction being conducted and the issuers business. The issuer will make available its corporate books and records, material contracts and other documents relating to matters identified in the due diligence question list. The primary goal of legal counsel in reviewing the documents provided by the issuer is to identify potential issues that may expose those working on the transaction to liability under US securities laws. Generally, the risk of 10b-5 liability can be reduced if any risks or potential problems involving the issuer or the securities being offered are disclosed to potential investors in the offering documentation. Accordingly, legal counsel conducting the documentary due diligence review should look for any information that could affect the value of the securities to ensure that potential problems identified are rectified prior to the offering and/or disclosed to potential investors in the offering document. The review forms a basis for further questions to be asked of the issuer and its management at face-to-face meetings. The documentary due diligence process also allows the reviewing counsel to identify any obstacles that might prevent the transaction completing (eg, debt covenants which may require lender consents or changes in capital structure which could be triggered by an IPO).
24
Legal counsel generally will begin the drafting process by utilising precedent documentation used in similar offerings by issuers in the same business or industry as the subject issuer and based on information on the issuer from the due diligence review and management discussions. US counsel should ensure that the offering document discloses all material information discovered in the documentary due diligence review and through discussions with management and the accountants. It is also important in the process of drafting to obtain a confirmation from the issuers management that the disclosure accurately reflects the reality of the issuers business. This is most important for three key sections of the disclosure document: the description of the business, the managements discussion and analysis of the issuers financial condition and results of operations and the risk factors.
25
26
in the offering circular. The auditors will also note that they have performed certain procedures with respect to the unaudited interim financial statements and specified financial statement line items during the stub period, and on that basis are providing negative assurance comfort to the underwriters. Negative assurance refers to the auditors confirmation that, after having carried out the specified procedures, including certain review procedures described below on the unaudited interim financial statements: nothing has come to their attention that would cause them to believe that any material modifications should be made to the unaudited interim financial information in the offering circular for it to be in conformity with the applicable generally accepted accounting principles (GAAP) and that it complies as to form in all material respects with the applicable GAAP; and nothing has come to their attention that would cause them to believe that there have been material changes in certain financial statement line items since the date of the latest financial statements included in the offering circular.
The specific financial statement line items included in the negative assurance are subject to negotiation between the underwriters and the accountants but they are usually items which are considered to be important indicators of the issuers financial condition or that directly affect pricing sensitive attributes of the issuer or are good predictors of the issuers future performance. Another important source of auditor comfort letter procedures is SAS 100, which was adopted in October 2002. This standard governs the review of interim financial information and the comfort that is permissible on such information by limiting the situations where auditors are permitted to perform reviews of interim financial statements. SAS 100 provides that auditors may conduct a review of interim financial information of an issuer in preparation for a public offering or listing, if its latest annual financial statements have been or are being audited. The goal of a SAS 100 review is to provide the auditors with a basis for reporting whether material modifications should be made to conform the interim financial statements in the offering circular to the applicable GAAP. Without a SAS 100 review, a comfort letter cannot contain negative assurance comfort as to the interim unaudited financial statements. As a practical matter, comfort letters delivered in connection with Hong Kong IPOs which have Rule 144A/Regulation S tranches rely on HKSRE 2410, a Hong Kong accounting standard that is similar to SAS 100. Auditors may not give negative assurance on interim financial statements if 135 days or more have passed between the date of the most recent financial statements that have been audited or reviewed and the date of the comfort letter. On negative assurance comfort letters, the auditors also deliver a circle draft as an attachment to their comfort letter, whereby financial information in the offering document is circled and comfort provided by the auditors to the extent of certain procedures identified in the comfort letter, with each specific piece of circled financial information being ticked and tied to a specific procedure identified in the comfort letter.
27
US legal opinions
A variety of US legal opinions may be requested in connection with an IPO being offered into the US pursuant to an exemption. Some commonly requested US legal opinions are the following: a no registration opinion an opinion that the sale of the securities to the initial purchasers, and from the initial purchasers to subscribers, does not require registration under the Securities Act. a 1940 Act opinion an opinion that the issuer is not required to register as an investment company under the Investment Company Act of 1940. a 10b-5 letter a letter from US counsel which states that nothing has come to such counsels attention that leads it to believe that the offering circular contains material misstatements or omissions.
28
Liability insurance
A Hong Kong company may purchase liability insurance for any officer which can cover: any liability to any party in respect of any negligence, default, breach of duty or breach of trust (save for fraud) of which he may be guilty in relation to the company or a related company; and any liability incurred by him in defending any proceedings taken against him for any negligence, default, breach of duty or breach of trust (including fraud) of which he may be guilty in relation to the company or a related company.
29
Global coordinator, bookrunner and lead manager (which is usually also a sponsor) Other underwriters Legal adviser to the company (as to Hong Kong law) Legal adviser to the company (as to US law)
Legal adviser(s) to the company for any other jurisdiction(s) where the company may have material business interests or otherwise where the company is incorporated, eg, the PRC
30
Legal adviser to the sponsors and the underwriters (as to Hong Kong law) Legal adviser to the sponsors and the underwriters (as to US law) Legal adviser(s) to the sponsors and the underwriters for any other relevant jurisdiction(s) Reporting accountants
Providing legal advice to the sponsors and the underwriters in relation to Hong Kong legal and regulatory requirements pertaining to various matters arising in the course of the IPO Providing legal advice to sponsors and the underwriters in relation to US legal and regulatory requirements pertaining to various matters arising in the course of the IPO, including providing a Rule 10b-5 letter and no-registration legal opinion if required Providing legal advice to the sponsors and the underwriters in respect of legal and regulatory issues relevant to that jurisdiction, assisting with local due diligence and providing any legal opinions which may be required Acting as the reporting accountants of the company to prepare, among other things (a) an accountants report; (b) a report on unaudited pro forma financial information; (c) an opinion on profit forecast and (d) appropriate comfort letters Preparing an independent valuation on the property interests held by the group for inclusion in the prospectus Receiving and processing applications under the Hong Kong public offering tranche of the international offering Processing and balloting public offer applications, liaising with the sponsors, Hong Kong Securities Clearing Co. Ltd. and the company on the preparation and dispatch of share certificates to successful applicants and processing of share transfers of the company after listing Providing strategic advice on communications, media relations and event support to the IPO, including developing content of speeches and media materials
Independent property valuer Receiving banks Share registrar and transfer office
The following persons and committee must also be appointed for the purposes of the companys listing. However, they will not necessarily have an active role in the listing process. Compliance adviser The compliance adviser must be acceptable to the Exchange (and may be the sponsor or someone who has acted as a sponsor). The adviser is appointed from the date of listing until the publication of the issuers accounts for its first full financial year commencing after the date of listing. Under the Listing Rules, the company must seek advice from the compliance adviser if it wishes to undertake certain specific matters such as issuing a regulatory announcement or entering into a notifiable or connected transaction
31
Company secretary
The company secretary must be an individual ordinarily resident in Hong Kong, have the requisite knowledge and experience to discharge the functions of a company secretary and be either (i) an ordinary member of the Hong Kong Institute of Chartered Secretaries, (ii) a solicitor, barrister or professional accountant, or (iii) an individual with academic or professional qualifications or relevant experience acceptable to the Exchange The company must appoint two authorised representatives to act as the companys principal channel of communication with the Exchange, being two directors or a director and the company secretary The audit committee must comprise non-executive directors only, have a minimum of three members, the majority of the members and the chairman must be independent nonexecutive directors and they must include at least one independent non-executive director with appropriate professional qualifications or related financial management expertise as set out in LR 3.10
Authorised representatives
Audit committee
In addition, the Code on Corporate Governance Practices sets out requirements in relation to the establishment of the following committees. Remuneration committee Under the Code on Corporate Governance Practices, the company must appoint a remuneration committee to determine, among other things, the directors remuneration policy. A majority of the members must be independent nonexecutive directors. If no such committee is appointed, the company must disclose and explain the reasons for such fact in its annual and interim reports Under the Code on Corporate Governance Practices, it is a recommended best practice that a nomination committee is established to determine the policy for appointing directors. Again a majority of the members must be independent nonexecutive directors. Issuers are encouraged, but not required, to state whether they have complied with this requirement in their annual and interim reports
Nomination committee
For companies listing Hong Kong Depositary Receipts, the issuer will need to appoint a depositary to issue the depositary receipts as the agent for the issuer. Further details are set out in Hong Kong Depositary Receipts.
32
Listing criteria
The qualifications for a primary listing on the Main Board of the Exchange are detailed in Chapter 8 of the Listing Rules. The principal qualifications are set out below. Incorporated in an acceptable jurisdiction - Companies incorporated in Hong Kong, the Cayman Islands, Bermuda and the PRC may be listed on the Exchange. The Exchange also considers listing applications from companies incorporated in other overseas jurisdictions, provided the applicant can show that its home jurisdiction offers equivalent standards of shareholder protection as are provided in Hong Kong. The Exchange has indicated that Australia, British Virgin Islands, Canada (Ontario and British Columbia), Cyprus, Germany, Jersey, Luxembourg, Singapore and the UK are acceptable jurisdictions for the purpose of a primary listing on the Exchange.
33
The Exchange has established a uniform approach for reviewing shareholder protection standards of companies incorporated in other overseas jurisdictions, and will view more favourably those jurisdictions whose securities regulators are either full signatories to the IOSCO MMOU (International Organisation of Securities Commissions Multilateral Memorandum of Understanding Concerning Consultation and Co-operation and the Exchange of Information) or have entered into bi-lateral co-operation agreements with the SFC. However, an overseas applicant will be subject to greater scrutiny if there is only a distant relationship between its principal business operations and its jurisdiction of incorporation and, if there is no relationship, the applicant may be considered unsuitable for listing. Suitability for listing (LR 8.04) the company and its business must, in the opinion of the Exchange, be suitable for listing. Sufficient trading record (LR 8.05) the company must have (i) a trading record of not less than three financial years, (ii) management continuity for the last three financial years, (iii) ownership continuity for at least the most recent audited financial year, and (iv) one of the following: profit test a profit in the most recent year of not less than HK$20 million, and in respect of the previous two years, an aggregate profit of not less than HK$30 million (such profits to exclude any income or loss generated by activities outside the ordinary and usual course of the business or by associated companies or entities whose results are recorded in the companys accounts using the equity method of accounting); market capitalisation/revenue/cash flow test a market capitalisation of at least HK$2 billion, revenue of at least HK$500 million in the most recent financial year, and positive cash flow of at least HK$100 million in aggregate in the last three years; or market capitalisation/revenue test a market capitalisation of at least HK$4 billion and revenue of at least HK$500 million in the most recent financial year, and at least 1,000 shareholders at the time of listing. The Exchange is currently consulting the market on a proposal to reduce the minimum shareholder spread under this test to 300.
The Exchange may accept a shorter trading record period or may modify or waive the profit or other financial standards for mineral companies, newly formed project companies and in exceptional cases. In addition, in June 2009 the Exchange clarified that it would consider granting waivers in certain circumstances to individual listing applicants from complying with the profit test requirement where the profit over the track record period has been temporarily and adversely affected by the financial crisis. Latest financial accounts (LR 8.06) the most recent financial period reported on in the prospectus must not have ended more than six months before the date of the prospectus. Sufficient public interest (LR 8.07) the Exchange must be satisfied that there will be sufficient public interest in the company. Minimum public shareholding (LR 8.08) the shares held by the public must constitute at least 25% of the issued shares, although if the market capitalisation of the company is over HK$10 billion, the Exchange may accept a lower percentage of between 15% and 25%. In addition, there must be a minimum of 300 public shareholders and not more than 50% of the shares in public hands at the time of listing can be beneficially owned by the three largest public shareholders.
34
Minimum market capitalisation (LR 8.09) the expected initial market capitalisation of the company must be at least HK$200 million, with at least HK$50 million held by members of the public. Competing businesses of controlling shareholder (LR 8.10) if the controlling shareholder (being a person, or group of persons, who exercise or control the exercise of 30% or more of the voting power of the company or who is in a position to control the composition of a majority of the board), or any director of the company has an interest in a business which competes or is likely to compete, either directly or indirectly, with the companys business, various disclosures must be made in the listing document. See page 71. Voting power of shares (LR 8.11) the share capital of the company must not include shares which have a voting power which does not bear a reasonable relationship to the equity interest of such shares. Local management presence (LR 8.12) the company must have a sufficient management presence in Hong Kong. This will usually require at least two of the executive directors to be ordinarily resident in Hong Kong. In its July 2009 guidance letter (GL9-09), the Exchange sets out the conditions it would normally expect to see in any application for a waiver from strict compliance with this requirement which focus on the communication arrangements with the Exchange. Shares freely transferable (LR 8.13) the shares for which listing is sought must be freely transferable. Directors qualifications (LR 8.15) each director must satisfy the requirements of Chapter 3 of the Listing Rules including satisfying the Exchange that he has the necessary character, experience and integrity to act as a director of a listed company. The board must include at least three independent non-executive directors and at least one of the independent non-executive directors must have appropriate professional qualifications or accounting or related financial management expertise.
If a mineral company is unable to satisfy the profit test, market capitalisation/revenue/cash flow test or the market capitalisation/revenue test, it may still be suitable for listing if it can satisfy the Exchange that its directors and managers have sufficient experience in the relevant mineral exploration or extraction activities of the company. This will require individuals to have a minimum of five years relevant industry experience which must be disclosed in the prospectus.
35
Listing flowchart
The key steps in a listing are set out below. Application for listing (Form A1) (at least 25 clear business days before hearing) Further documentary submissions to the Exchange (profit and cash flow memoranda) (at least 15 clear business days before hearing) Further documentary submissions to the Exchange (at least four clear business days before hearing) Recommendation/rejection by Listing Division (if rejected can appeal to Listing Committee) Formal hearing by Listing Committee to approve listing application (if rejected may appeal to Listing (Review) Committee and Listing Appeals Committee) Issue of pre-deal research Posting of Web Proof Information Pack (WPIP) on the Exchange website Issue of red-herring offering circular and roadshow Further documentary submissions to the Exchange (before bulk print, and before issue, of the prospectus) HK underwriting documents signed and prospectus registered, issued and posted on the Exchanges website Public offer opens and closes IPO price fixed and international underwriting documents signed and final offering circular issued Announcement of results of public offer share applications Further documentary submissions to the Exchange (before dealings commence) Dealings in shares commence on the Exchange
36
Commence preparation of all listing documents this is an indicative date only and, depending on the circumstances, the commencement date may need to be significantly earlier Main documents to be submitted when making the listing application at least 25 clear business days before the expected hearing date include: Form A1 Listing Application Form Listing application fee Draft prospectus (must generally include draft accountants report for three full financial years) Drafts of all waiver applications (eg, continuing connected transactions, management presence, qualification of company secretary (if applicable)) Draft statement of adjustments relating to accountants report (if any) Various checklists (eg, listing qualifications, prospectus content, accountants report, offering mechanism, property valuation report) Various prescribed additional information (eg, information on top five suppliers and customers, comparison of the groups performance with peer group companies, details of reorganisation and corporate structure) Confirmation from the independent non-executive directors on their understanding of the obligations and duties of an independent non-executive director Confirmation and undertaking from the directors and supervisors on the accuracy of their biographical information For companies with operations in the PRC, a PRC legal opinion on issues including corporate matters and property interests (if applicable) For companies with operations in the PRC, tax confirmations from relevant PRC tax bureaux (if applicable) Sponsors undertaking to use reasonable endeavours to ensure all information provided to the Exchange is true and does not omit material information Sponsors statement of independence Specified matters to be brought to the attention of the Exchange which include confirmation on various aspects of the companys operations (eg, compliance with relevant laws, litigation or other investigations) Draft share option scheme (if any)
56
Responses to various standard comments are required when responding to the Exchanges first comments
37
Action required
Documents to be submitted at least 15 clear business days before the expected hearing date: Boards draft profit forecast memorandum covering (a) the period of the profit forecast if the prospectus will include a profit forecast and (b) if no profit forecast will be included in the prospectus, covering the period up to the forthcoming financial year end date after listing Boards draft cash flow forecast for the period ending at least 12 months from the expected prospectus date
28
Advance notification to the Exchange of proposed date for registration of the prospectus Documents to be submitted at least 4 clear business days before the expected hearing date include: Hearing proof of the prospectus Sponsors draft confirmation regarding the statement in the prospectus as to the sufficiency of the issuers working capital For PRC issuers, certified copy of the approval from the CSRC Confirmation from the companys legal advisers that the articles of association are not inconsistent with the Listing Rules and laws of the place of its incorporation Summary of new listing particulars Summary of key financial ratios during the track record period Unless previously provided, all executed waiver applications
26
21 17
Exchange Listing Committee hearing date When the Exchange sends out the comments letter after the Listing Committee hearing, assuming a second hearing is not required, it will also issue a request for posting requiring the company to submit the Web Proof Information Pack (WPIP) for posting on the Exchanges website not later than the earlier of the first distribution of the red herring prospectus or the first meeting with institutional investors for bookbuilding purposes
38
Action required
Documents to be submitted before bulk-printing of the prospectus include: Final form of formal notice and application forms Certified copy of the certificate of incorporation or equivalent document Final form sponsors confirmation regarding the statement in the prospectus as to the sufficiency of the issuers working capital Undertaking from the issuers controlling shareholder as required by LR 10.07 Undertaking from connected persons that they will provide information to auditors for the purpose of reviewing connected transactions If applicable, an undertaking from directors to exercise share repurchase powers in accordance with the Listing Rules and a confirmation from the company that the explanatory statement and proposed share repurchase doesnt contain any unusual features Confirmation as to adoption of Standard Transfer Form (STF) Consent to include website hyperlinks(s) on the Exchanges website E-submission system registration Authorised representatives and company secretary form Sponsors confirmations regarding (1) the date on which it is proposed to register a prospectus and (2) the posting of the WPIP Submission on responses to the updates of the standard comments (if any)
39
Action required
Documents to be submitted as soon as practicable after Listing Committee hearing but before 11 am on the intended date of registration of the prospectus include: Application for authorisation for registration of the prospectus Signed prospectus Translators certificate certifying the accuracy of the Chinese translation Sponsors certificate relating to competency of the translator Certified copy of each power of attorney pursuant to which the prospectus is signed Submission of soft copies of the prospectus and application forms and related confirmations for publication on the Exchange website
Filing of prospectus and accompanying registration documents with the Companies Registry Prospectus registered Documents to be submitted as soon as practicable after Listing Committee hearing but before the date of issue of the prospectus: Formal notice Notification issued by HKSCC that shares will be eligible securities Sponsors confirmation in relation to publication of the prospectus on the Exchange website together with a copy of the letter from the Companies Registry confirming the registration of the prospectus Sponsors declaration under LR 3A.13 (see Chapter 14) Undertaking from the Company and other persons to the Exchange not previously provided Final forms of all documents previously submitted to the Exchange in draft
13
Prospectus issued
40
Action required
Documents to be submitted after issue of prospectus but before dealings in the securities commence include: Certified copies of board and shareholders resolutions authorising the issue of securities for which listing is sought List of successful applicants showing the names and addresses Form D Placing letter and marketing statement and placee lists Form E Sponsors declaration Form F Declaration by issuer Form B/H/I Declaration by the directors/supervisors and proposed directors/supervisors on various matters and undertaking regarding exercise of powers and duties Letter from the registrar confirming despatch of share certificates Letter from the receiving bank confirming receipt of cleared funds Compliance advisers undertaking
Where a listing does not take place within six months from the filing of the original application for listing, the initial listing fee will be forfeited and the company will need to reactivate its listing application. Guidance letter GL7-09 provides that where the renewed application is made within three months of the lapse of the original application, a further listing fee will be required but the A1 documents do not need to be re-filed, unless there have been material changes. Beyond three months from the lapse of the original application, a full set of A1 documents will need to be filed together with the further listing fee. For any reactivation, the sponsor will be required to make a submission to the Exchange to address all outstanding matters from the original application and any material changes in the listing application, business or circumstances of the applicant since the original application.
If a Rule 144A and/or Reg S tranche is included alongside the Hong Kong listing, an international wrap will be prepared by US counsel containing certain summary terms, risk factors and other disclosures that are specific to US or other international investors. This is wrapped around the Hong Kong prospectus approximately 7-10 days prior to bulk printing the Hong Kong prospectus to create the preliminary offering circular or red herring. The preliminary offering circular, which generally does not contain pricing information, is primarily used to market the shares to US and other international investors on the international roadshow. Following the finalisation of the share price and just prior to listing, the offering circular will be finalised and circulated to investors who have committed to purchase shares together, where relevant, with a pricing term sheet.
42
43
the company has established procedures, systems and controls (including accounting and management systems) which are adequate having regard to the obligations of the company and its directors to comply with the Listing Rules and other relevant legal and regulatory requirements (in particular Rules 13.09, 13.10, 13.46, 13.48 and 13.49, Chapters 14 and 14A and Appendix 16) and which are sufficient to enable the companys directors to make a proper assessment of the financial position and prospects of the company and its subsidiaries, both before and after listing; the directors of the company collectively have the experience, qualifications and competence to manage the companys business and comply with the Listing Rules, and individually have the experience, qualifications and competence to perform their individual roles, including an understanding of the nature of their obligations and those of the company as an issuer under the Listing Rules and other legal or regulatory requirements relevant to their role; in relation to each expert section in the prospectus, having made reasonable due diligence inquiries, the sponsor reasonably believes (to the standard reasonably expected of a sponsor which is not itself expert in the matters dealt with in the relevant expert section) that: where the expert does not conduct its own verification of any material factual information on which the expert is relying for the purposes of any part of the expert section, such factual information is true in all material respects and does not omit any material information, where factual information includes: factual information that the expert states the expert is relying on; factual information the sponsor believes the expert is relying on; and any supporting or supplementary information given by the expert of the company to the Exchange relating to an expert section;
all bases and assumptions on which the expert sections of the prospectus are founded are fair, reasonable and complete; the expert is appropriately qualified, experienced and sufficiently resourced to give the relevant opinion; the experts scope of work is appropriate to the opinion given and the opinion required to be given in the circumstances (where the scope of work is not set by a relevant professional body); the expert is independent from the company and its directors and controlling shareholder(s); and the prospectus fairly represents the views of the expert and contains a fair copy of or extract from the experts report.
44
In addition, it should be noted that the Exchange expects the sponsor to remain primarily responsible for being satisfied itself as to the overall due diligence conducted and therefore it would not be appropriate to appoint third party professionals to undertake all due diligence inquiries. The sponsor should lead all core aspects of due diligence, for example business and financial due diligence.
45
assessing individually and collectively the financial literacy, corporate governance experience and competence generally of the directors with a view to determining the extent to which the board of the company as a whole has the depth and breadth of financial literacy and understanding of good corporate governance required; and reviewing the financial and regulatory track record of each publicly listed company (including those listed on other exchanges) of which any of the directors is or was an executive or non-executive director, for example, by reference to company disclosures, media articles and information about these companies on the website of the relevant stock exchange.
Qualifications for listing typical due diligence inquiries in relation to the qualifications for listing and suitability of the company for listing include: searching the company registry in the companys place of incorporation to confirm that the company is duly established in that place and that the company is in compliance with its memorandum and articles of association or equivalent constitutive documents; reviewing material financial information, including: financial statements of the company; financial statements of all subsidiaries of the company and other companies that are material to the groups financial statements; and the internal financial records, tax certificates and supporting documents to the tax certificates for the track record period.
The Exchange expects that in conducting such review, the sponsor should in most cases interview the companys accounting staff and internal and external auditors and reporting accountants and, where relevant, obtain comfort from the companys external auditors or reporting accountants based upon agreed procedures; and assessing the accuracy and completeness of the information submitted by the company in demonstrating that it satisfies the trading record requirement.
Preparation of listing document and supporting information typical due diligence in respect of the preparation of the listing document and supporting information includes: assessing the financial information to be published in the listing document including: obtaining written confirmation from the company and its directors that the financial information (other than that already reported upon by a reporting accountant) has been properly extracted from the relevant underlying accounting records; and being satisfied that the confirmation referred to above has been given after due and careful inquiry by the company and its directors;
assessing the companys performance and finances, business plan and any profit forecast or estimate, including an assessment of the reasonableness of budgets, projections and assumptions made when compared with past performance, including historical sales, revenue and investment returns, payment terms with suppliers, costs of financing, long-term liabilities and working capital requirements.
The Exchange expects that this would normally include interviewing the companys senior management and often the companys major suppliers, customers, creditors and bankers;
46
assessing whether there has been any change since the date of the last audited balance sheet included in the listing document that would require disclosure to ensure the listing document is complete and not misleading;
assessing whether it is reasonable to conclude that the proceeds of the issue will be used as proposed by the company, taking into account the outcome of the sponsors assessment of, in particular, the companys existing cash and liquid reserves, projected liabilities, working capital requirements and expenditure controls; undertaking a physical inspection of material assets, whether owned or leased, including property, plant, equipment, inventory and biological assets (for example, livestock or crops) used or to be used in connection with the companys business;
The Exchange expects the sponsor to visit the site of the asset in order to view the asset and to assess its extent, quality and quantity and the purpose for which it is used. Nevertheless, the Exchange understands that where, in the reasonable opinion of the sponsor, assessment of an asset, including as to its extent, quality, quantity and use, genuinely cannot be achieved without the use of an expert (for example, in undertaking the physical inspection the sponsor becomes suspicious that the asset does not exist as to the extent represented or exists but is not used for the purpose claimed) the company may instruct an appropriately qualified independent expert to conduct all or part of the inspection. In such cases the sponsor should ensure the expert is required to provide a written report in respect of the inspection: reaching an understanding of the companys production methods; reaching an understanding of the manner in which the company manages its business, including as relevant actual or proposed marketing plans, including distribution channels, pricing policies, after-sales service, maintenance and warranties; reviewing the business (ie non-legal) aspects of all contracts material to the companys business; reviewing legal proceedings and other material disputes that are current or recently resolved (for example, resolved in the previous 12 months) and in which the company is involved, and all proceedings or material disputes the company knows to be contemplated and which may involve the company or one of its subsidiaries; analysing the business aspects of economic, political or legal conditions that may materially affect the companys business; considering the industry and target markets in which the companys business has principally operated and is intended to principally operate, including geographical area, market segment and competition within that area and/or segment (including existing and potential principal competitors and their relative size, aggregate market share and profitability); assessing whether there is appropriate documentation in place to confirm that the material assets, whether owned or leased, including property, plant, equipment, inventory and biological assets used or to be used, in connection with the companys business, are appropriately held by the company (for example, reviewing the relevant certificates of title and rights of land use); assessing the existence, validity and business aspects of proprietary interests, intellectual property rights, licensing arrangements and other intangible rights of the company;
47
reaching an understanding of the technical feasibility of each new product, service or technology developed, being developed or proposed to be developed pursuant to the companys business plan that may materially affect the companys business; and assessing the stage of development of the companys business and assessing the companys business plan and any forecasts or estimates, including reaching an understanding of the commercial viability of its products, services or technology, including an assessment of the risk of obsolescence as well as market controls, regulation and seasonal variation. Experts typical due diligence inquiries in relation to the expert sections of the listing document include: interviewing the expert, reviewing the terms of engagement (having particular regard to the scope of work, whether the scope of work is appropriate to the opinion required to be given and any limitations on the scope of work which might adversely impact on the degree of assurance given by the experts report, opinion or statement) and reviewing publicly available information about the expert to assess: the experts qualifications, experience and resources; and whether the expert is competent to undertake the required work;
reviewing the expert sections of the draft listing document in order to form an opinion as to whether the following are disclosed and commented on appropriately: the factual information on which the expert relies; the assumptions on which the expert opinion is based; and the scope of work performed by the expert in arriving at his/her opinion;
verifying factual information where the expert does not conduct its own verification of any material factual information on which the expert is relying for the purposes of any part of the expert section, and ensuring that such factual information is true in all material respects and does not omit any material information; where the sponsor is aware that the company has made formal or informal representations to an expert in respect of an expert section or in respect of a report made in connection with the listing application, assessing whether the representations are consistent with the sponsors knowledge of the company, its business and its business plans; by reference to the sponsors knowledge of the company, its business and its business plans assessing whether the assumptions disclosed by the expert as those on which the experts opinion is based, are fair, reasonable and complete; if the experts opinion is qualified, assessing whether the qualification is adequately disclosed in the listing document; and where the standard of independence is not set by a relevant professional body, obtaining written confirmation from the expert that it is independent from the company and its directors and controlling shareholder(s), and being satisfied that there is no cause to inquire further about the truth of such confirmation. This would include confirming that the expert does not have a direct or indirect material interest in the securities or assets of the company, its connected persons, or any associate of the company beyond those allowed by LR 3A.07.
48
Accounting and management systems typical due diligence inquiries in relation to the companys accounting and management systems and in relation to the directors appreciation of their and the companys obligations include: assessing the companys accounting and management systems that are relevant: to the obligations of the company and its directors to comply with the Listing Rules and other legal and regulatory requirements, in particular the financial reporting, disclosure of price sensitive information and notifiable and connected transaction requirements; and to the directors ability to make a proper assessment of the financial position and prospects of the company and its subsidiaries, both before and after listing. Such assessment should cover a review of the companys compliance manuals, policies and procedures including corporate governance policies and any letters given by the reporting accountants to the company that commented on the companys accounting and management systems or other internal controls. interviewing all directors and senior managers with key responsibilities for ensuring compliance with the Listing Rules and other legal and regulatory requirements (including the staff responsible for the accounting and financial reporting function, the company secretary and any compliance officers) to assess: their individual and collective experience, qualifications and competence; and whether they appear to understand relevant obligations under the Listing Rules and other relevant legal and regulatory requirements and the companys policies and procedures in respect of those obligations.
To the extent that the sponsor finds that the companys procedures or its directors and/or key senior managers are inadequate in any material respect in relation to the issues referred to above, the sponsor should typically discuss the inadequacies with the companys board of directors and make recommendations to the board regarding appropriate remedial steps. The Exchange also expects the sponsor to ensure that any such steps are taken prior to listing, which could include training tailored to the needs of individual directors and senior managers.
49
where information and representations are provided by a client for incorporation in a public document (eg, the prospectus) or submission to the regulators, the corporate finance adviser should advise its client to take all reasonable steps to ensure, and obtain confirmation from the client, that the information and representations provided are true, accurate, complete and not misleading, and that no material information or facts have been omitted or withheld.
50
For mineral companies, Chapter 18 of the Listing Rules sets out additional information which must be included in the prospectus including: a technical report by a suitably qualified and independent person as to resources and/or reserves of the company prepared in accordance with prescribed standards, with a confirmation that no material changes have occurred since the date of the report or details of any material changes; details of the nature and extent of the companys prospecting, exploration, exploitation, land use and mining rights; a statement of any legal claims or proceedings that may influence the rights to explore or mine; disclosure of specific risks and general risks with reference to a new Guidance Note 7 for suggested risk analysis;
51
disclosure of other material issues related to the business operation including environmental, social and health and safety issues, compliance with host country laws and regulations, sufficiency of funding plans for remediation and rehabilitation and other prescribed information; and an estimate of the operating cash cost for the minerals or petroleum produced, if the company has begun production or, if it hasnt yet begun production, its plans to proceed to production with indicative times and costs.
Prior to certain US rule revisions with respect to US GAAP reconciliation in November 2007, the international wrap also contained discussions on the summary of significant differences between the GAAP under which the audited financial statements were prepared and US GAAP. After the rule revisions, such discussions are often no longer included, particularly if the financial statements of the issuer are prepared in compliance with International Financial Reporting Standards (IFRS).
52
Of the sections in the Hong Kong prospectus, those sections of particular importance to US counsel are the following: Risk factors: the risk factors section in both the international wrap and the Hong Kong prospectus contains a discussion of the principal factors that make an investment in the issuer speculative or of high risk. Business: the business section is a description of the principal business, products and services of the issuer, frequently addressing total sales and revenue by categories of activity and geographic market. Financial information: in a Hong Kong prospectus, the financial information section is the functional equivalent of the management discussion and analysis (MD&A) commonly found in Rule 144A offering circulars. As discussed further below, this section of the prospectus presents a discussion of the historical performance and current financial condition of the issuer and calls for disclosure of information as to trends, uncertainties and other circumstances that may have a material impact in the future on the issuers financial performance.
MD&A
As noted above, the MD&A section is frequently referred to in Hong Kong prospectuses as the Financial Information section. In a Rule 144A offering, the MD&A includes information with respect to results of operations, liquidity, capital resources and other information necessary to an understanding of a companys financial condition, changes in financial condition and operating results. The purpose of the MD&A is to improve overall financial disclosure and provide the context within which financial statements should be analysed, to provide information about the quality of, and potential variability of, a companys earnings and cash flow and to provide a narrative explanation of the issuers financial statements to enable the investor to see the company through the eyes of management. This is achieved by presenting in the MD&A, on a periodon-period basis, the issuers financial condition, changes in financial condition and results of operations for each year and interim period for which financial statements are included in the prospectus and explaining causes of material period-to-period changes in key financial statement line items, focusing on the issuers profit and loss statement and statement of cash flows. The MD&A also typically includes a summary of the issuers critical accounting policies (estimates and assumptions involved in the application of GAAP which have a material impact on the issuers reported financial condition and operating performance), principal factors affecting financial performance and a narrative summary of the components of key line items. An issuer must also provide a description of any known trends or uncertainties that have had, or that the issuer reasonably expects will have, a material impact on the issuers net revenues or income. Where, in the issuers judgment, a discussion of segment information would be appropriate to an understanding of the issuers business, segment discussion and analyses of the issuers financial condition and results of operation should also be included in the MD&A. Segment information would be commonly included in a MD&A if a segment contributes in a materially disproportionate way to revenues, profitability or cash needs, or if failure to discuss a segment would present an incomplete and misleading picture of the enterprise.
53
In the past, extensive US-style MD&A sections were not typical in Hong Kong listings, but such sections have become increasingly common and expected by the Exchange. SEC-registered offerings must include an MD&A section and hence it is market practice to include them in Rule 144A offering circulars as well. US-style MD&As are also being included in some Regulation S offerings, as investors and the Exchange have become accustomed to such disclosure.
54
Registration process
Once the listing application and the prospectus have been approved, the final step before issuing the prospectus to the public is registration of the prospectus with the Registrar of Companies. Registration of the prospectus with the Registrar of Companies is a two stage process involving an application to the Exchange for authorisation for registration followed by an application to the Registrar of Companies for registration. The Exchange must be given at least 14 days advance notice of the intended date of registration of the prospectus (LR 11A.09).
55
any statement of adjustments; and certified copies of the material contracts referred to in the prospectus.
In addition, the Exchange may request additional documents are filed such as the application forms.
56
H share listing
Chapter 19A of the Listing Rules Chapter 19A of the Listing Rules deals specifically with the listing on the Exchange of companies incorporated in China setting out additional requirements, modifications and exceptions to the other relevant chapters of the Listing Rules to take account of the following: the PRC legal system is not a common law system; restrictions on use of foreign exchange in the PRC and its remittance out of the PRC are imposed by PRC law; and only PRC citizens and legal persons are permitted to own domestic shares and only foreign investors and investors from Hong Kong, Taiwan and Macau may own overseas listed foreign shares the two types of shares therefore operate in separate markets.
Among such additional requirements are that: PRC issuers are expected to present their accounts in accordance with Hong Kong or international accounting standards; the articles of association of PRC issuers must contain provisions reflecting the different nature of domestic shares and H shares and the different rights of their respective holders; and disputes involving holders of H shares arising from a PRC issuers articles or from any rights or obligations under the PRC Company Law or other relevant PRC laws and regulations are to be settled by arbitration in Hong Kong or the PRC at the election of the claimant.
57
Basic qualifications: The Exchange will consider an application for listing by a PRC issuer only in the following circumstances: Due incorporation the issuer is duly incorporated in the PRC as a joint stock limited company; Arrangement with regulators the Exchange is satisfied that there are adequate communication and cooperation arrangements in place between the Exchange and relevant securities regulatory authorities in the PRC; Stock Exchange communication where a PRC issuer has equity securities listed (or to be listed) on another stock exchange, the Exchange is satisfied that there are adequate communication arrangements in place between the Exchange and such other stock exchange; and Shareholder protection the Exchange is satisfied that applicable PRC law and the articles of association of the PRC issuer provide a sufficient level of shareholder protection to holders of H shares.
Additional requirements, modifications and exceptions to the Listing Rules under Chapter 19A Sponsors sponsors for a listing application by a PRC issuer have a particular responsibility to satisfy themselves that: the PRC issuer is suitable to be listed; and the PRC issuers directors and supervisors appreciate the nature of their responsibilities and can be expected to honour their obligations, and understand what is required of them, under the Listing Rules and applicable PRC laws and regulations.
Compliance advisers a PRC issuer is required to appoint a compliance adviser for the period of time from its IPO on the Exchange until it sends to its members its annual report and accounts for the first full financial year after its IPO. The PRC issuer should ensure that there are adequate and efficient means of communication between itself, its authorised representatives, directors and officers and the compliance adviser and should keep the compliance adviser fully informed of all communications with the Exchange. The compliance adviser must inform the PRC issuer on a timely basis of any amendment or supplement to the Listing Rules and any applicable new or amended law, regulation or code in Hong Kong applicable to the issuer. Where the authorised representatives of the PRC issuer are expected to be frequently outside Hong Kong, the compliance adviser must act as the principal channel of communication with the Exchange. Accountants reports accountants reports must have been audited to a standard comparable to that required in Hong Kong. Reports will normally be required to conform with the requirements of the Hong Kong Financial Reporting Standards or International Financial Reporting Standards (IFRS). PRC issuers may, in addition, present in a separate part of the report, financial information conforming with applicable PRC accounting rules and regulations provided that the report contains a statement of the financial effect of the material differences from HKFRS or IFRS as appropriate. In August 2009, the Exchange issued a Consultation
58
Paper setting out proposals to accept Mainland accounting and auditing standards and Mainland audit firms endorsed by the Ministry of Finance and the CSRC for PRC issuers listed on the Exchange. The outcome of the consultation exercise is not yet known, but if the proposals are implemented, compliance costs in respect of audit related matters for PRC issuers should be reduced. Qualifications for listing The following modifications and additional requirements apply: Public interest The Exchange has absolute discretion to refuse a listing of securities of a PRC issuer if it believes that it is not in the public interest to list them. Authorised person The PRC issuer must appoint and maintain while its shares are listed on the Exchange a person authorised to accept service of process and notices on its behalf in Hong Kong. The contact details (and any changes to such details) of such person must be provided to the Exchange. Hong Kong register For registered securities, the PRC issuer must maintain a register of holders in Hong Kong for local registration/transfers of shares. Unless the Exchange otherwise agrees, only securities registered on the Hong Kong register may be traded on the Exchange. Competing business LR 8.10 requires disclosure of any competing business in which a controlling shareholder or directors of the company have any interests. For these purposes, the Exchange will normally not consider a PRC governmental body (including central, provincial or local level governments, but excluding entities under the PRC government carrying out commercial business or operating a commercial entity) as a controlling shareholder of a PRC issuer. Management presence the requirement in LR 8.12 for sufficient management presence in Hong Kong, i.e., at least two executive directors to be ordinarily resident in Hong Kong, shall apply except as otherwise permitted by the Exchange. PRC issuers will commonly seek a waiver from the Exchange from the requirements of LR 8.12. In considering any such waiver application, the Exchange will have regard to factors set out in its July 2009 guidance letter (GL9-09) which include, among others, the PRC issuers arrangements for maintaining regular communication with the Exchange. Company secretary the secretary of a PRC issuer need not be ordinarily resident in Hong Kong, provided such person can meet the other requirements of LR 8.17. If the secretary does not meet the qualification requirements of LR 8.17(2) (ordinary member of The Hong Kong Institute of Chartered Secretaries, solicitor, barrister or professional accountant) the PRC issuer will have to satisfy the Exchange that the secretary has the relevant experience to be capable of discharging the functions of a company secretary. In assessing relevant experience, the Exchange will have regard to, among others, the period of the persons employment with the PRC issuer, and his familiarity with the Listing Rules. A submission must be made to the Exchange setting out details of the training provided to the person for these purposes. A waiver is commonly sought from LR 8.17 providing for the appointment of joint company secretaries for a period of at least three years following listing, one of whom meets the qualification requirements under LR 8.17(2) (listing decision 35-1).
59
Independent non-executive directors in addition to the requirements under Chapter 3 of the Listing Rules, the INEDs of a PRC issuer must demonstrate an acceptable standard of competence and adequate commercial or professional experience to ensure that the interests of shareholders will be adequately represented. At least one INED must be ordinarily resident in Hong Kong. Supervisors supervisors of a PRC issuer must have the character, experience and integrity and demonstrate a standard of competence commensurate with their positions. Connected persons connected persons of PRC issuers include its directors, supervisors, chief executive and substantial shareholders. The Exchange will normally not consider a PRC governmental body (as defined above) as a controlling shareholder of an issuer for these purposes.
Application procedures Chapter 19A contains certain modifications to the application procedures, including the documents to be filed with the Exchange. The PRC issuer will be required to submit a copy of the approval of the State Council Securities Policy Committee or other PRC competent authority approving the PRC issuers listing on the Exchange and the issue of equity securities which, in practice, is required prior to the Listing Committee hearing. A PRC issuer will also be required to submit to the Exchange a PRC legal opinion covering a range of PRC legal issues including the obtaining of all requisite PRC approvals for the listing, all requirements under applicable PRC laws and regulations relevant to the conduct of its business in the PRC and the companys compliance the relevant requirements, including details of the licences, permits or certificates obtained. Listing Documents Chapter 19A contains modifications to the content requirements for listing documents for PRC issuers, including in particular: Constitutive documents a summary of provisions of its constitutive documents affecting shareholders rights and protection and directors powers. Summary of PRC law a summary of relevant PRC law including taxation, taxation of dividends, foreign exchange controls, company law, securities regulations and relevant PRC regulations affecting the issuers industry and major businesses. Warning statements and risk factors specified warning statements and risk factors. Company law a description of applicable company law including material differences between PRC and Hong Kong laws.
Language All documents submitted to the Exchange in a language other than English must be accompanied by a certified English translation. Documents for inspection which are not in English must, unless otherwise provided by the Companies Ordinance, be accompanied by a certified English translation. Offering structure National Social Security Fund Pursuant to applicable PRC regulations, shareholders who hold State-owned shares are required to reduce their shareholdings in an amount of 10% of the entire offering (i.e., including any additional shares offered upon the exercise of an over-allotment option) in any overseas public offering by remitting the sales proceeds of such shares to the National Social Security Fund (NSSF), transferring such shares to the NSSF for retention or pursuant to other methods that are approved by the competent PRC authorities. Such shares will be converted from domestic shares to H shares upon listing.
60
Where the red chip listing applicant is State-owned, the State-owned shareholder may be subject to a requirement to sell part of its shareholding and remit the sales proceeds to the NSSF or to transfer such shares to the NSSF for retention etc.
61
62
The Exchange encourages potential listing applicants who have made acquisitions during the track record period, who intend to make an acquisition prior to listing or where there has been a material change in management or ownership of the company during the track record period to contact the Exchange for confidential advice before submitting a listing application. While a company is free to dispose of assets at any time, it may be difficult to satisfy the Exchange that the company meets the management and ownership continuity requirements where it has acquired new businesses during the track record period or where the companies comprising the group to be listed have been recently organised into a group. Paragraph 4 of PN3 sets out the factors the Exchange will take into account where the company has acquired new businesses during the track record period: whether the new business forms a material part of the companys business at the time of listing; whether the new business is forecast to make a material contribution to the companys profit forecast; whether the new business is in a similar line to that of the companys previous business activities and is part of the logical growth trend of the business; whether the company has retained the management of the new business and whether it can be demonstrated to the Exchange that necessary continuity and synergy of the management is provided; the period of time which has elapsed since completion of the acquisition; and whether the new group has been formed solely for the purpose of satisfying the listing requirements or to enhance the apparent attractiveness of the group as a new applicant for listing.
The issue of materiality and compliance generally with the requirements of LR 8.05 will be determined by the Exchange, in its sole discretion.
Listing decisions/guidelines
The Exchange has issued a number of rulings on management and ownership continuity, each addressing slightly different factual situations.
Management continuity
An Exchange Consultation issued in July 2002 states that the Exchange has interpreted the management continuity requirement to mean that applicants must demonstrate that there has been no change in the majority of the applicants board of directors and senior management of its principal operating subsidiaries during the three financial year track record period. In the 2005 listing decision 45-1 the Exchange noted that management continuity was a question of fact and clarified that it would focus on the substance of management of the business when examining management continuity particularly considering whether: (a) an identifiable group of individuals most relevant and responsible for the track record results of a listing applicant remained in positions of responsibility throughout the relevant track record period; and
63
(b) such group of individuals would form the core management of the applicant at the time of listing and thereafter. When assessing the relevance of individual members of a management team to the track record results of the company and its predecessor, the Exchange followed the practice of ordinarily attributing proportionately greater responsibility to officers with more senior positions, reflecting the formal responsibilities of senior officers in their corporate roles. The Exchange will also consider special facts and circumstances in making its decision. Provided that the company demonstrates management continuity within the core management group responsible for the track record results of the company, the management continuity requirement may be satisfied notwithstanding that such core management may constitute a minority in number on the board of directors. The principles laid down in the above decision were largely followed in the 2006 listing decisions 54-1 and 54-2. The Exchange indicated in listing decision 54-2 that the extent of the responsibilities bestowed on particular directors during the relevant track record may be more relevant than the number of directors. The Exchange decided that on the facts, the requirement for management continuity was satisfied even though only one director was on the companys board during the relevant track record period. The Exchanges decision was influenced by the fact that the director was the groups founding member, chairman, legal representative and general manager throughout the track record period and was responsible for the overall management and the strategic development of the group.
Ownership continuity
The Exchange defines ownership continuity and control as the continuous ownership and control of the voting rights attaching to the shares for the latest financial year on the trading record period by a controlling shareholder, or where there is no controlling shareholder, the single largest shareholder (Exchange Frequently Asked Questions Series 1). In listing decision 44-4, the Exchange confirmed that the requirement for ownership continuity and control under LR 8.05(1)(c) could be satisfied by aggregating the shareholding interests and control of a group of individual shareholders, where such shareholders could, on the facts, be regarded as a controlling group for the purposes of the Listing Rules. This principle was extended in listing decision 51-4, where the Exchange went on to confirm that two separate groups of controlling shareholders could be viewed as the controlling shareholders exerting management influence on the group for the purpose of satisfying the ownership continuity and control requirement of LR 8.05(1)(c). The Exchange considered that the management influence exerted by the controlling shareholders in aggregate had not changed in the last financial year of the track record period. The two controlling shareholders continued to work together in the operations of the group and were the only two parties who could exert influence on the management of the group in the last financial year of the track record period.
64
19. Accounts
A prospectus must contain an accountants report which reports on the last three audited financial years results and, if the latest financial year ended more than six months before the date of the prospectus, then an audited interim (or stub) set of accounts is required for part of the current financial year. Relevant Listing Rules
The main Listing Rules dealing with the accountants reports to be included in a prospectus are: LR 4.01 (1) and 4.01(2) a listing document must contain an accountants report. The accountants report must be prepared by independent, certified public accountants qualified under the Professional Accountants Ordinance. LR 4.04 and 4.05 these set out the content requirements for an accountants report, which include income statements and cashflow statements for the last three year financial years or such shorter period as may be acceptable to the Exchange and balance sheets as at the end of each of the last three financial years. In addition, financial information is required in relation to any business or subsidiary acquired, agreed to be acquired or proposed to be acquired since the date to which the audited accounts have been made up. LR 4.05A if the company has acquired any material subsidiary or business during the three year trading record period and such acquisition if made by a listed issuer would have been classified as a major transaction or a very substantial acquisition, then certain pre-acquisition financial information must be included. LR 4.09 the reporting accountants must report on the consolidated or combined results and balance sheet of the company and its subsidiaries and any business or subsidiary which has been acquired or is proposed to be acquired since the last accounts date. LR 4.11 such results and balance sheet must normally be drawn up in conformity with Hong Kong Financial Reporting Standards or International Financial Reporting Standards. LR 4.14 where adjustments are made by the reporting accountants in preparing the accountants report, a written statement of adjustments must be prepared, signed by the reporting accountants and must be made available for public inspection. LR 4.18 where the reporting accountants qualify or modify their report, they must refer to all material matters about which they have reservations and give all reasons for the modification or qualification and its effect, quantified if relevant and practical. A qualified or modified accountants report may not be acceptable where the modification or qualification relates to a matter of significance to investors. LR 4.28 where the company has acquired or proposes to acquire any businesses or companies (which would be classified as a major subsidiary) since the date to which its latest audited accounts have been made up, it must include specified pro forma financial information in respect of the enlarged group in the prospectus.
65
LR 4.29 where pro forma financial information is included in the prospectus, such information must comply with the requirements of LR 4.29 and must be reported on by the reporting accountants. LR 8.06 the latest financial period reported on by the reporting accountants must not be more than six months before the date of the prospectus and must include a comparison with the corresponding interim period for the previous financial year. Thus where the prospectus will be dated more than six months after the end of the latest financial year a set of interim (or stub) accounts must be prepared (with the comparable financial information for the previous financial period being subject to a review). In August 2009 the Exchange issued a consultation paper on the acceptance of Mainland accounting and auditing standards and Mainland audit firms for Mainland incorporated companies listed on the Exchange.
66
SFC for waivers from the requirements of LR 4.04 and paragraphs 27 and 31 respectively. In listing decision 31-2, the Exchange ruled that such a waiver would not be granted where the proposed listing date is more than three months after the latest financial year end.
An applicant must apply to the Exchange for permission if it intends to file its Form A1 within 45 days after the end of the trading record period and cannot include the third financial year figures in audited or advanced draft form in its first draft listing document. For the Exchange to accept the Form A1 for vetting, the applicant must satisfy the Exchange that: the applicant and the sponsor have made a demonstrable effort in good faith to produce an advanced draft of the listing document; the Exchange will have enough information to begin a substantive review of the listing application; and following its due diligence review, the sponsor considers beyond a reasonable doubt that the applicant will satisfy the listing criteria under LR 8.05 or other financial requirements (the Acceptance for Vetting Conditions).
The first draft listing document must contain (i) audited figures for the two financial years before the most recent balance sheet date and related management discussions; and (ii) stub period figures as of a date within 230 days of the filing of the Form A1 in audited or advanced draft form and the prior year stub comparative figures and related management discussions. The applicant is not required to provide any prior year stub period comparatives and related management discussions if the final listing document will not include any stub period figures. Applicants filing within 230 days of their latest audited financial statements
The Exchange will normally reject a Form A1 if the latest financial period reported on in the draft listing document is more than six months old at the date of filing the Form A1. However, the applicant may apply for permission to file the Form A1 if: it satisfies the Exchange of the Acceptance for Vetting Conditions; and it undertakes to include in the first draft listing document audited figures for the three financial years before the most recent audited balance sheet date and related management discussions (provided that the latest audited financial statements are within 230 days of the filing of the Form A1).
67
If the latest audited financial statements are of a date more than 230 days from the filing of the Form A1, the applicant must include in the first draft listing document (i) audited figures for the three financial years preceding the most recent audited balance sheet date and related management discussions; and (ii) stub period figures in audited or advanced draft form that are not more than six months old at the time of filing the Form A1 and the prior year stub period comparative figures and related management discussions. The applicant is not required to provide with the A1 filing any prior year stub period comparatives and related management discussions if the final listing document will not include any stub period figures. This guidance enables the Exchange to start reviewing the prospectus earlier without having to wait for the latest period and interim accounts to be finalised. The above administrative practices only apply to Form A1 filings submitted to the Exchange after the end of the trading record period, preventing a listing applicant from filing its Form A1 prior to the end of the trading record period relying on GL6-09.
68
Listing decisions/guidelines
The Exchange has issued a number of rulings on the requirement for independence, each addressing different aspects of the independence requirement. When considering independence issues, the Exchange will generally require the company to take into account the following: financial independence; operational independence; and management independence.
Where the degree of dependence on the controlling or substantial shareholders is excessive, this may give rise to concerns as to the suitability of the company for listing under LR 8.04. When reviewing the reliance issue, the Exchange ordinarily would consider the particular facts and circumstances of the applicant. In listing decision 46-1 the Exchange noted that the issue of reliance on controlling shareholders can usually be dealt with by disclosure in the prospectus but where the degree of reliance could not be addressed by disclosure alone the company must take concrete steps to address the issue of reliance before listing. Financial independence Historically, the Exchanges practice was to ordinarily require a listing applicant, barring exceptional circumstances, to repay all outstanding loans due to, and discharge all guarantees provided by, its controlling/substantial shareholders (even though such loans may constitute exempt financial assistance allowed under the Listing Rules connected transactions regime). However, in listing decision 69-1 issued in July 2009 the Exchange stated that it has accepted other methods than release of parent guarantees and repayment of funding in demonstrating an applicants financial independence. In this decision, the Exchange determined that, where it was satisfied that the listing applicant was financially independent from its parent company, the company was not required to release parent
69
company guarantees of the companys banking facility prior to or at the time of listing. Further, the company was permitted to ask its parent company for a secured loan facility if the terms offered by independent third parties were considered less favourable by the directors. Operational independence In listing decision 46-1, the Exchange noted that the reliance which the listing applicant placed on its controlling shareholder for provision of sales and procurement functions gave rise to concerns including conflicts of interests, substantial reliance on the protection mechanisms offered by the connected transaction requirements under the Listing Rules and how performance of the listed company may be independently evaluated. Reliance on a controlling shareholder for supply of raw materials may, in certain circumstances, be dealt with by prospectus disclosure including a description of the associated risks provided that adequate mechanisms are put in place to protect minority shareholders (listing decision 46-2). Independence of management In assessing the level of independence of management of the company, the Exchange will consider the level of overlap between the management of the company and its controlling shareholder. In listing decision 52-2, the Exchange considered factors including the number of common directors between the company and its controlling shareholder, the role of the common directors in the management of the companys business and daily operation, the extent of delineation of the business of the company and that of its controlling shareholder, the number and amount of continuing connected transactions between the company and that of its controlling shareholder and the independence of the senior management of the company and the controlling shareholder group.
70
Non-competition undertakings
Although not specifically required under the Listing Rules, it is common market practice for the controlling shareholder of a new listing applicant to enter into a non-competition agreement with the listing applicant to delineate their businesses following listing and to eliminate future competition. Such undertakings may include provisions for referral of future business opportunities to the listing applicant, approval procedures prior to the controlling shareholder entering into future competing businesses and rights of first refusal for the listing applicant to acquire any excluded business retained by the controlling shareholder.
Listing decisions/guidelines
The Exchange has issued a number of rulings on the issue of competing interests, each addressing slightly different factual situations. In listing decision 51-3, the Exchange stated that it normally requires the company to take into account factors relating to the conduct of the companys business independently from its controlling shareholder, in areas including financial independence, operational independence and management independence. An applicant may be dependent on its controlling shareholders in one or more of these areas. Where the degree of dependence is excessive, this may translate into a concern about the suitability of an applicant for listing.
71
Competition is normally regarded by the Exchange as a disclosure issue. However, in extreme cases where in the view of the Exchange, there are inadequate arrangements to manage conflicts of interest and delineation of businesses between the applicant and other businesses under common control, the Exchange would consider the impact on the applicants suitability for listing. A review of whether the company is or is not capable of carrying on its business independently of its controlling shareholder in the light of competing businesses operated by the controlling shareholder therefore involves careful balancing of all the relevant factors. The giving of noncompetition undertakings by the controlling shareholder on a voluntary basis is a relevant factor but is not decisive. Non-competition undertakings may or may not effectively contain competition within acceptable boundaries. Enforceability of non-competition undertakings, in turn, is often dependent on a number of other factors, including but not limited to (a) the effect of exemption clauses on non-competition undertakings, (b) how independently a listing applicant can exercise its right to enforce the non-competition undertakings in light of its own corporate governance and (c) the degree to which the management of the listing applicant and its controlling shareholders are closely connected. If there are indications that a noncompetition agreement may not function effectively in light of the facts and circumstances of an individual case, the Exchange may disregard the agreement when determining whether the requirements of the Listing Rules have been satisfied. In its Listing Committee report for 2006, the Listing Committee clarified that it is not the ordinary practice of the Exchange to request the use of a non-competition undertaking where one is not proposed to exist. However, the Listing Division does review the delineation arrangement and arrangements for managing conflicts and may comment on the corporate governance arrangements of the company. The Listing Committee also considered other arrangements which have been adopted by applicants to regulate the management of companies controlled by a single controlling shareholder. These arrangements will also be subject to review and commentary from the Exchange during the listing process and include: Independent director review undertakings by the independent directors to review options, pre-emptive rights or rights of first refusal granted by the controlling shareholder over its existing or future competing businesses and to decide whether to exercise these rights. This is consistent with the principles in the Code on Corporate Governance Practices which promote a strong independent element on the board; Increased transparency undertaking by the controlling shareholder to provide all information necessary for the enforcement or the options, pre-emptive rights or rights of first refusal. This is particularly relevant where the listed issuer holds rights of first refusal over future opportunities. This practice is consistent with the principles concerning access to information in the Code on Corporate Governance Practices; and Public disclosure of decisions agreement by the listed issuer explicitly to disclose decisions on matters reviewed by the independent directors relating to the exercise or non-exercise of options, pre-emptive rights or rights of first refusal either through the annual report, or by way of announcements to the public.
72
Exemptions
Once the transactions have been identified it is then necessary to determine which of them are exempt under the Listing Rules. The main exemptions for continuing connected transactions are noted below. The first five are exemptions from reporting, annual review, announcement and shareholders approval, while the last is solely an exemption from shareholders approval: the acquisition as consumer or realisation in the ordinary course of business of consumer goods or services on normal commercial terms; the sharing of administrative services on a fair and equitable cost basis; a transaction on normal commercial terms where each of the applicable percentage ratios (other than the profit ratio) is either (i) less than 0.1% on an annual basis, (ii) less than 1% on an annual basis and the transaction is connected only because it involves a person connected by virtue of its/his relationship with the issuers subsidiaries or (iii) less than 5% and the total consideration is less than HK$1 million on an annual basis; a transaction on normal commercial terms with persons connected only at the level of the issuers subsidiaries where the value of the relevant subsidiarys total assets, profits and revenue falls below certain thresholds and, where relevant, the consideration ratio is less than 10%; a transaction of a revenue nature in the ordinary and usual course of business and on normal commercial terms with an associate of a substantial shareholder who is a passive investor; and a transaction on normal commercial terms where each of the applicable percentage ratios (other than the profit ratio) is on an annual basis either (i) less than 5%, or (ii) less than 25% and the total consideration is less than HK$10 million.
The company must enter into written agreements with relevant parties in respect of its continuing connected transactions unless the transaction is exempt from the reporting, announcement and shareholder approval requirements (ie fully exempt). The agreement must be for a fixed period and must not exceed three years, save in special circumstances. Each transaction must be subject to an annual cap which must be expressed in monetary terms
73
rather than as a percentage of annual revenue and, where available, based on previous transactions.
Other requirements
Following listing, unless they are fully exempt, continuing connected transactions are subject to an annual review by the INEDs to confirm that they have been entered into in the ordinary and usual course of business, are on normal commercial terms (or terms no less favourable to the company than terms available to or from independent third parties) and are in accordance with the relevant agreements on terms that are fair and reasonable and in the interests of the shareholders as a whole. The INEDs confirmation, together with details of the connected transactions must be set out in the companys annual report and accounts. In addition, the auditors must provide a letter to the company confirming that the continuing connected transactions have (i) received the approval of the board of directors of the company; (ii) are in accordance with the pricing policies of the company if the transactions involve the provision of goods or services by the company; (iii) have been entered into in accordance with the relevant agreement; and (iv) have not exceeded the annual caps.
Waiver submission
If shareholder approval would be required upon listing for any of the continuing connected transactions then a waiver must be sought from the Exchange. Waivers will also generally be sought from the announcement requirements, although the ongoing annual review and reporting requirements will still need to be complied with. Details of the connected transactions and any waivers granted by the Exchange need to be disclosed in the prospectus. The sponsor is also required to opine in the prospectus whether the continuing connected transactions for which waivers are sought are in the ordinary and usual course of business of the company, on normal commercial terms, are fair and reasonable and in the interests of the shareholders as a whole.
74
75
24. Forecasts
Profit forecasts are not required to be included in a prospectus. However, where a forecast is included, or any language is used which implies a forecast (eg, the companys profit should increase next year) then various rules must be followed, assumptions must be prepared, the accounting policies and calculations must be reviewed and reported on by the reporting accountant and the sponsor must be satisfied that the directors have made due and careful enquiries in making their forecast. The inclusion of a profit forecast in the prospectus will also determine whether profit forecasts or other forward looking financial information may be included in analysts research reports. It is therefore common for companies seeking a listing in Hong Kong to include a profit forecast or profit estimate in their prospectus. Where a company does not include a profit forecast in its prospectus, the Listing Rules prohibit the inclusion of profit forecasts and forward looking information in pre-deal research. Profit forecasts Relevant Listing Rules
Listing Rules 11.16 to 11.19 set out the rules relating to profit forecasts which include: LR 11.16 the prospectus must not contain any general or particular reference to future profits or contain dividend forecasts based on an assumed future level of profits unless supported by a formal profit forecast. The term profit forecast is defined very widely in LR 11.17 to include any profit or loss forecast however worded and includes any estimate for a period which has already passed but for which results have not yet been audited or published. In addition, any valuations of assets (other than land and buildings) or businesses purchased by the company based on discounted cashflows or projections of profits, earnings or cashflows will be treated as profit forecasts. LR 11.17 the company may elect to include a profit forecast if it wishes to, however if one is included it must be clear, unambiguous, and presented in an explicit manner. The principal assumptions must be stated, it must be prepared on a basis consistent with accounting policies adopted by the issuer, the reporting accountants must report on the accounting policies and calculations and the sponsor must report that it has satisfied itself that the forecast has been made by the directors after due and careful enquiry. LR 11.18 a profit forecast should normally cover a period which ends on the financial year-end. If it is only prepared to the half year-end then the relevant interim accounts will need to be audited in due course. A profit forecast cannot cover a period not ending on the financial year end or the half year-end. LR 11.19 the assumptions must provide useful information to investors to help them form a view of the reasonableness and reliability of the forecast, draw attention to and where possible quantify factors which could materially affect the achievement of the forecast, and be specific and definite rather than vague and general. It will not normally
76
be acceptable for assumptions to relate to matters which the directors are best able to take a view on or are able to exercise control over since such matters should be directly reflected in the profit forecast. Following listing, the company must consult with and seek advice from its compliance adviser if its results deviate from any profit forecast or estimate contained in its prospectus. In such circumstances, the company will be required to issue an announcement and include an explanation of the difference in its annual report. If the prospectus will not contain a profit forecast, the board must still prepare and submit to the Exchange for review a profit forecast memorandum covering the period up to the forthcoming financial year end date after the listing and a cash flow forecast memorandum covering at least 12 months from the expected prospectus date.
Listing decisions
In listing decisions 35-2 and 50-4, the Exchange determined that it was inappropriate to include in the prospectus a risk factor in respect of the profit forecast or a disclaimer in respect of the accountants report on the profit forecast.
77
expected prospectus date with the principal assumptions, accounting policies and calculations for the forecasts. The memoranda must be submitted to the Exchange for review at least 15 clear days before the expected listing hearing date. The profit forecast memorandum will be reviewed by and discussed with the reporting accountants and sponsor prior to submission to ensure that such forecast is prepared on a basis consistent with the accounting policies used in the preparation of the companys audited accounts contained in the prospectus and to check the calculations. The sponsor needs to be satisfied that the profit forecast has been prepared by the directors after due and careful enquiry. Reports from the reporting accountants and the sponsor are included in the prospectus.
US considerations
The inclusion of forecasts and projections in offering documents is generally disfavored in the context of offerings to be sold in the US. Even where forecasts and projections are qualified, the risk of liability in the US may exist with regard to such forecasts and projections. In general, projections, forecasts and other forward-looking statements are considered inherently unreliable, involving known and unknown uncertainties which may cause actual results to be materially different from any projected or forecasted results. The international wrap prepared by US counsel in connection with Hong Kong-listed IPOs typically contains one or more risk factors stating that forecasts and projections provided in the base prospectus pursuant to local legal requirements should be disregarded as unreliable. Many offering circulars set out detailed assumptions made in providing forecasts and projections, the incorrectness of any of which may cause the forecast or projection to be inaccurate. The US Private Securities Litigation Reform Act, as amended, contains a safe harbour from anti-fraud liability in private securities litigation for certain forward-looking information under certain conditions. As a result, market practice on Rule 144A transactions is to comply with the requirements of the safe harbour. These include accompanying the forward-looking information with meaningful cautionary language identifying important factors that could cause results to differ. It is common to exclude from the international offering circular copies of the letters from the reporting accountants and the sponsor in respect of the profit forecast.
78
79
announcement has been made. In particular, no option may be granted in the period beginning one month preceding the earlier of (i) the board approval of any annual, interim or quarterly financial results; or (ii) the deadline for the announcement of such results and ending on the date of the results announcement. The Exchange also issued a directive to all listed companies in 2005 clarifying the application of LR 17.03(13) which deals with adjustments to option exercise prices on the issue of new shares by the company. While this clarification did not expressly amend the Listing Rules (and is arguably inconsistent with the Listing Rules) regard to this ruling should be had when preparing the option scheme and when issuing new shares while there are options outstanding.
US Considerations
If the issuer has employees in the US who will receive shares, options or other securities as part of its employee compensation scheme, the issuance of these securities will require registration under, or an exemption from, US securities laws. Under Rule 701 of the Securities Act, a non-US issuer that is not required to file periodic reports with the SEC may offer and sell securities in the US to its employees, officers, directors and advisers pursuant to a written option, savings, bonus or other compensatory plan or contract without registration of those shares under the Securities Act. Sales under Rule 701 may not exceed various limits stated in the Rule, and securities issued to employees in reliance upon this Rule would be considered to be restricted securities and, as such, may only be resold pursuant to US registration statement or an available exemption. The issuance of securities under Rule 701 is not exempt from the anti-fraud, civil liability or other provisions of the US federal securities laws.
80
Clawback arrangements
Practice Note 18 provides for a reallocation of shares from the placing tranche to the public offer tranche where the public offer tranche is significantly over-subscribed, as follows: a clawback mechanism that increases the number of shares under the public offer to 30% of the shares initially available under the IPO when total demand in the public offer tranche is at least 15 times, but less than 50 times, the initial allocation; a clawback mechanism that increases the number of shares under the public offer to 40% when total demand in the public offer tranche is at least 50 times, but less than 100 times, the initial allocation; and a clawback mechanism that increases the number of shares under the public offer to 50% when total demand in the public offer tranche is at least 100 times or more the initial allocation.
Shares may be transferred from the public offer tranche to the placing tranche where there is insufficient demand in the public offer tranche to take up the initial allocation. In addition, underwriting agreements may provide an additional discretion to the underwriters to reallocate shares from the placing tranche to the public offer tranche to satisfy excess applications in the public offer tranche, to cater for the position where the level of over-subscription in the public offer is insufficient to trigger the clawback provisions of PN18.
81
when demand in public offer is at least 50 times, but less than 100 times: clawback to 10% when demand in public offer is 100 times or more: clawback to 20%
The Exchange may be prepared to consider waivers outside the typical PN18 waivers scenario subject to the following guidelines which are set out in listing decisions 60-1 and 60-2: due regard must be had to the interests of local investors and whether there is significant public demand the trigger points for the clawbacks should be set as early as possible the number of shares that Hong Kong retail investors would obtain under the actual offering structure should not be less than the number under a typical PN18 waiver the trigger points for clawbacks should be easy to implement and easy for an average retail investor to understand.
Over-allotment option
It is common for companies and/or selling shareholders to grant an option to the underwriters to require the company to issue and/or the selling shareholder to sell additional shares representing up to 15% of the number of shares initially available under the IPO for the purpose of covering over-allocations in the placing tranche. Such additional shares will generally be allocated to the placing tranche. Please refer to Chapter 30.
Multiple applications
The company, its directors, the sponsor and the underwriters should take reasonable steps to ensure that multiple or suspected multiple applications are identified and rejected. For these purposes multiple applications means circumstances where (i) more than one application is made under the public offer by the same person; (ii) an application under the public offer is made for more than 100% of the total number of shares originally allocated to each pool; or (iii) an application is made under the public offer by an investor who has also applied for or been placed shares in the placing tranche. In March 2007, the SFC, the Federation of Share Registrars, the HKMA and the Hong Kong Association of Banks jointly issued a set of preventative measures to deter multiple applications in IPOs. These measures must be complied with on IPOs.
82
83
84
Termination provisions the Hong Kong underwriting agreement will also set out comprehensive events of termination, including force majeure events, material restrictions on trading on major securities markets, adverse changes in the business of the company, breaches of warranties, litigation being brought or threatened against the company and material omissions or misstatements in the prospectus, on the occurrence of which prior to a specified time (generally 8:00am on the morning of listing) the underwriters have the right to terminate their obligations under the underwriting agreement. Lock-up provisions the company and controlling shareholders will give undertakings not to issue shares (in the case of the company) or dispose of their interests in the shares of the company for a specified period of time following the listing of the companys shares on the Exchange.
These include, in the case of Regulation S offerings, that no directed selling efforts have been made in the US by the issuer, a distributor, any of their respective affiliates or any person acting on behalf of the foregoing, that applicable offering restrictions have been complied with and that there is no substantial US market interest in the securities offered. Where Rule 144A or other exemptions for offers into the US are relied upon, typical representations, warranties and covenants include that no general solicitation or general advertising has been made in the US by the issuer, a distributor, any of their respective affiliates or any person acting on behalf of the foregoing, and that no securities of the same class are listed in the US.
Intersyndicate agreement
A separate agreement, referred to as the intersyndicate agreement, is an agreement among the underwriters of the Hong Kong offering and the underwriters of the international offering, and will govern reallocation between the offerings, commissions and expenses and agreed selling restrictions.
86
Publicity guidelines
Guidelines It is recommended that a set of publicity guidelines is prepared and distributed to directors, senior management and all other parties involved in the IPO. Approval by Authorised Person The company should appoint an internal Authorised Person to approve all written publicity material (including any oral presentations) relating to the IPO, current or future trading prospects, or the operations of the group other than material issued in the ordinary course of business. Where the Authorised Person is in doubt as to whether the information may breach the regulations he should consult with the companys legal advisers. All approved information should be copied to the legal advisers.
87
Enquiries by press or public Before registration of the prospectus, if the company is asked to respond to any enquiry from the press or any member of the public relating to the IPO, or the current or future trading prospects of the group, then the company should decline to comment. If the enquiry relates only to the general business of the group (excluding trading prospects) or relates to publicly available information then the company can respond to the enquiry, but caution is required. After registration of the prospectus the directors or employees can respond to enquiries provided that they do not provide more information than is contained in the prospectus. Press releases and other materials Prior to registration of the prospectus the company should not issue any press releases or other written material relating to the IPO, except for the very limited information as permitted by the SFC Offer Awareness Guidelines discussed below. After registration of the prospectus all press releases and other written material relating to the IPO or the operations of the group must be approved by the Authorised Person and, if such release relates to the IPO, it must comply with the SFC Offer Awareness Guidelines. SFC Offer Awareness Guidelines The SFC guidelines set out details of certain offer awareness materials which the SFC considers will not constitute a prohibited advertisement under the SFO or give rise to a prospectus (or abstract or abridged version of a prospectus) under the Companies Ordinance. The guidelines permit offer awareness materials to be issued before publication of the prospectus without the prior approval of the SFC provided this contains only very limited procedural and administrative information (as specified in the guidelines) concerning the IPO and does not contain any information promoting the company or the offer of shares under the IPO. Such materials should not be issued earlier than 14 days before the prospectus date and should not be used after the close of the offer period. The guidelines also permit offer awareness materials to be issued without the prior approval of the SFC on or after registration of the prospectus, provided the contents are restricted to limited offer awareness information set out in the guidelines. Again, any such materials should not be used after close of the offer period. Offer awareness materials complying with the guidelines do not need to be vetted by the SFC. As mentioned above, if the offer awareness materials comply with the guidelines, the Exchange will treat them as approved for the purpose of LR9.08 and will in practice not vet them. Following the issue of a prospectus, a company may wish to issue a mini-prospectus or fact sheet to highlight key information about the company and the IPO. Any such document will constitute an abridged prospectus or prospectus extract under the Companies Ordinance and will need to comply with the requirements for summary disclosure materials set out in the guidelines. The guidelines require that summary disclosure materials must not contain any substantive information that is not contained in the prospectus and must reflect whether the materials are a fair summary of the material information in the prospectus. The guidelines also prescribe certain information and warning statements which must be included, together with various other requirements regarding the manner of publication. Summary disclosure materials must be approved by the Exchange, but are rare in practice. Unsolicited communications No director, officer or employee of the group should make any unsolicited communications to any analyst, potential investor or other person regarding the IPO or the business of the group.
88
Company website Save for information required by the Listing Rules to be published on the companys website, the website should not refer to the IPO or include any material which is not usually placed on its website, as this information may be viewed as conditioning the market to the IPO. In addition, prior to submission of the Form A1, the companys website should be screened for any information which is inconsistent with the draft prospectus. Press conferences No press conferences regarding the IPO should be held until the prospectus is registered. Once registered, a press conference is often called the same day, at which the prospectus can be made available and the company can respond to questions. No material should be released which goes beyond that contained in the prospectus. If a press conference is held prior to registration of the prospectus on matters not related to the IPO, the company should decline to answer any questions concerning the IPO or its trading prospects. Underwriter marketing and roadshow Before the Listing Committee hearing, the sponsor and underwriters should not discuss the IPO with the press or any potential investors other than any cornerstone or anchor investor(s) who should be required to enter into a confidentiality undertaking. Following the Listing Committee hearing, the pre-marketing process is commenced. Roadshow meetings with potential investors will generally commence after the Listing Committee hearing and pre-marketing process but before the prospectus is registered. At these meetings the practice is to release the red-herring draft of the prospectus to institutional investors and give presentations supported with slides and answer questions. The presentation and any answers should not include any substantive material which goes beyond that included in the prospectus. Those attending these meetings should be required to keep the information confidential until the prospectus is registered. Web Proof Information Pack (WPIP) The WPIP contains essentially the same information as the red herring prospectus but must not contain any information about the proposed offering, price or means to subscribe for shares in the company. When the Exchange sends out the comments letter after the Listing Committee hearing, the Exchange will also issue a request for posting requiring the company to submit the WPIP for posting on the Exchanges website not later than the earlier of the first distribution of the red herring prospectus and the first meeting with the institutional investors for bookbuilding purposes. The roadshow meetings cannot therefore commence until the WPIP has been published.
89
Where Regulation S is the safe harbour relied upon, Regulation S bars all directed selling efforts made in the US by the issuer or a distributor, any of their respective affiliates or any person acting on behalf of the foregoing. Where Rule 144A or another exemption for offers into the US as the exemption relied upon, general solicitation or general advertising is prohibited in connection with an offering. Directed selling efforts, as defined in Regulation S, include any activity undertaken for the purpose of, or that reasonably could be expected to have the effect of, conditioning the market in the US for securities being offered in reliance on Regulation S. General solicitation or general advertising includes, but is not limited to: publishing any advertisement, article or notice in any US newspaper, magazine or similar media in the US or broadcasting such over US television or radio; or any seminar or meeting in the US whose attendees have been invited by any general solicitation or general advertising.
Examples of marketing activities or publicity that could be deemed to be directed selling efforts, general solicitation or general advertising include: the promotion of feature articles about the issuer or management interviews in US publications by representatives of the issuer; advertisements for the offering in any US publication; and meetings between representatives of the issuer and research analysts or brokers in which the offering is discussed, if such analysts or brokers then distribute such information in the US.
Any distribution of publicity by any offering participant in the US that was found to be directed selling efforts or a general solicitation or general advertising could (i) result in a loss of the exemption from the registration requirements of the Securities Act for either the US or the nonUS portions of the offering, (ii) create a risk that the SEC could prevent or delay the US portion of any such offering and (iii) subject offering participants to liability to US investors under US laws for statements made in such publicity.
Protective measures
As a result of these considerations, in general, underwriters should ensure that no press conferences are held in the US and no press releases or other announcements relating to the IPO are issued or disseminated in the US by any person involved with the IPO or the company. Press conferences may be held outside the US in accordance with local market practices and US journalists may be invited provided that access to the conference is provided to both US and non-US journalists. One-on-one interviews may be held with US journalists provided similar opportunities are given to non-US journalists. The issuer should not solicit media coverage in US media or non-US media commonly disseminated in the US (such as The Financial Times or The Economist). Any written press-related materials must contain an appropriate legend. The legend should state that the written press-related materials are not an offer of securities for sale in the US, that securities may not be offered or sold in the US absent registration or an exemption from registration, that any public offering of securities to be made in the US will be made by means
90
of a prospectus that may be obtained from the issuer or the selling security holder and that will contain detailed information about the company and management, as well as financial statements. Since materials posted on a website are generally available to persons located in the US, any offering materials posted on the issuers websites could be construed as an offer of securities into the US, as directed selling efforts in violation of the Regulation S safe harbour and/or as a general solicitation or general advertising, rendering Rule 144A unavailable. Other restrictions on publicity on offerings sold into the US are similar to those referred to above in relation to offerings generally.
91
Usually the day before the Global Blackout Period Usually 14 days prior to the printing of the preliminary prospectus and commencement of the IPO roadshow Usually 40 days after the date of listing Immediately upon commencing planning of offering Usually 40 days after the closing date of the offering or the completion of the distribution of the securities if later
End of Global Blackout Period Start of US Blackout Period End of US Blackout Period
92
Own research each research report should be based on the syndicate members own research. Internal compliance procedures all research reports should be reviewed by the syndicate members research compliance officer (or internal legal compliance officer) before publication to ensure that the report is in accordance with internal guidelines. In addition, research reports should also be cleared with a designated person from the syndicate members corporate finance team before publication. This is to check that there are no factual errors in the research report, and no material inconsistencies with the draft prospectus. Compliance with regulatory requirements each syndicate member issuing a research report is responsible for ensuring that all applicable regulatory requirements and standards of professional conduct in relation to the preparation, publication and distribution of the research report are complied with in all relevant jurisdictions. Chinese Walls appropriate information barriers should be maintained between the analyst(s) preparing the research and those other divisions of the financial organisation advising the company or involved in the IPO. Such analysts should not attend due diligence meetings in relation to the offering or have other contact with the company, save that they will often attend formal analysts presentations. Date and disclaimer all research reports should be dated and must include a disclaimer of liability and an indication statement in the form recommended by the underwriters legal advisers. The disclaimer should appear prominently at the front of the research report and the indication should appear on each page. The disclaimer is of assistance in avoiding liability but is not conclusive. To the extent disclosure of an underwriters participation in the offer is required in its research report due to regulatory or liability considerations, such disclosure must not be given greater prominence than any other disclaimers, legends and qualifying statements in the research report. Basis of preparation each research report must be produced using a high standard of care. This requires that: the research report should be, and present itself as, an outsiders view of the company which has been independently produced; qualifications, explanations and caveats should be clearly stated; it should be clear what information is a matter of fact and what is a matter of the authors judgment; to the extent that information is based on published or historic information, and particularly if this has not been updated, this should be made clear; the facts should where possible be checked against authoritative sources (and the relevant source should be stated in the research report); where this is not possible, this should be made clear and appropriate qualifications should be included; the research report makes clear that it does not, and does not attempt to, contain everything material about the company; research reports must be accurate and not misleading by omission; and where there is a reference to the authors belief, there must be a reasonable basis for that belief.
93
No reference to the IPO the research report should not contain any reference to the IPO or suggest in any way that it is being issued in connection with or because of the IPO. Forecasts, projections and valuations subject to the restrictions set out below, research reports may include forecasts, projections and valuations prepared independently of the company. Inclusion of forecasts, projections or valuations in the research report may lead to increased liability with respect to such research report and great care should be taken. If forecasts, projections or valuations are to be included, in order to minimise the potential risk: they must comply with the requirements of local law; they must be fairly based; there must be no price target or fair value per share. Comments on valuation should be restricted to general remarks about the methods that the market generally uses to value comparable companies. It should be made clear that any suggested valuation framework is based upon long-term analysis and is not linked to a short-term assessment of the likely performance of the securities; it must be made clear that they represent the opinion of the authors alone and not of anyone responsible for the preparation of the prospectus or in possession of confidential information regarding the company or any of the subsidiaries and must be accompanied by appropriate cautionary language indicating that such forecasts, projections or valuations may or may not occur, as well as any other applicable risk factors; and detailed assumptions on which they are based must be clearly stated, the sources used must be identified and the sensitivity of the projections to any exogenous factors must be estimated.
The Listing Rules provide that pre-deal research issued by the sponsor, each of the underwriters or their associates must not incorporate any profit forecast or other forward looking statements unless such statements are included, in substantially the same form, in the applicants listing document. Historically, a practice had developed where a submission would be made to the Exchange requesting a confirmation that the Exchange would not comment on the inclusion of independently prepared profit forecasts covering a limited period (of an additional one to two years) beyond that covered in the prospectus. The Exchange has recently indicated that it does not require such a submission and so current market practice is that generally no submission is made. No recommendations the research report must not include any investment recommendation or any wording that implies such a recommendation. Independent production except as referred to in the disclaimer, nothing in the research report should suggest that the report is definitive or authoritative or that any part of the research report is based on information provided by, represents the views of, or has been written, verified or approved by, the company, the sponsor or any other syndicate member or any of their directors. Submission of final draft for review at least three days prior to the publication of the research report and after review by the syndicate members legal and research compliance departments, a final draft of the research report must be provided to the sponsor and the sponsors lawyers. Any drafts submitted to the company should have any sections covering forecasts or projections, the research summary and assumptions removed.
94
Basis of review the sponsor may review the research reports for factual accuracy and consistency with the prospectus. The sponsors legal advisers will review the research reports for compliance with the research report guidelines. Global Blackout Period no research report may be published or distributed anywhere in the world during the Global Blackout Period. US Blackout Period no research report may be published or distributed in, or transmitted to, the US or to US persons during the US Blackout Period which commences immediately upon preparation of the offering and which is expected to end (a) 40 days after the closing date of the offering or (b) upon the completion of the distribution of the securities, whichever is later (the US Blackout Period). During the US Blackout Period, syndicate members should: screen potential recipients of research reports to ensure that only persons who are outside the US and institutional investors on the relevant analysts current research mailing list with addresses outside the US receive research reports. A list should be kept of all recipients; adopt procedures to ensure that all personnel responsible for the preparation, storage or distribution of research reports and the recipients of the research reports understand that the research reports are not to be distributed in the US; and if any reasonable doubt exists regarding a persons US status, the syndicate member should refrain from sending research reports to such person.
Distribution of research reports in Hong Kong research reports may not be issued, circulated, or distributed in Hong Kong other than to persons whose ordinary business is to buy or sell shares or debentures, whether as principal or agent (except in circumstances which do not constitute an offer to the public within the meaning of the Companies Ordinance), and either (i) such persons fall within the meaning of professional investors as defined in the Securities and Futures Ordinance and the Securities and Futures (Professional Investor) Rules or (ii) the issue of the document to such persons is exempt from the Securities and Futures Ordinance. No research reports should be distributed before the formal hearing by the Listing Committee of the Exchange. Distribution of research reports outside Hong Kong reports should only be distributed to potential investors in jurisdictions outside Hong Kong in compliance with local laws. The distribution of research reports in certain jurisdictions may be prohibited. Hard copy distribution only research reports must be delivered in physical form in one mail shot only and must not be published on the internet, sent by email or other electronic form or put on an electronic retrieval system. Each individual research report should be numbered and records kept of the recipient to whom such report was sent. Any such records are subject to review at any time by the sponsor. No distribution at roadshows, to press or public research reports must not be distributed, discussed or reviewed at large meetings, such as roadshow presentations, or given to the press (including information vendors and wire services) or any other media organisation, private investors or members of the public anywhere in the world. Distribution consistent with past practice all syndicate members who distribute research reports should issue only such number of research reports as is consistent with their past practice on similar transactions and should maintain records of the names and addresses of all recipients of research reports.
95
Distribution of final reports only research reports should not be sent to clients until they are in final form. If a draft research report is circulated internally, it should be stamped or marked for internal use only. The company should in any event be provided with a final copy of each research report as soon as it is disseminated to clients. Distribution of prospectus each syndicate member should ensure that any person to whom a research report has been sent also receives a copy of the preliminary offering circular and, to the extent such recipient is an investor in the offering, any final offering circular when published.
96
97
In order to facilitate over-allocation, the lead manager will either enter into stock borrowing arrangements (typically with a controlling shareholder taking advantage of the exemption from the lock up requirements in LR 10.07(3)) or enter into delayed settlement arrangements, for instance with cornerstone investors. Even if there is no over-allocation in relation to the share offer, under the PS Rules, the stabilising manager may still engage in market purchases of the shares in order to stabilise the market price of the shares so as to create a net long position in the shares.
98
activities of the stabilising manager and its agent as long as their transactions are executed through the normal order matching mechanism in the open market and neither the stabilising manager nor the agent concerned know, or ought reasonably to have known, the identity of the counterparty. The PS Rules will not prohibit client transactions for which the stabilising manager is merely an agent of its clients. Other restrictions under the PS Rules the stabilising manager is prohibited from taking any stabilising action in relation to the Relevant Securities where at the time the market price of the Relevant Securities was or could reasonably be expected to be an artificial price and the stabilising manager knew or ought reasonably to have known that the artificiality in the market price was attributable in whole or in part to any conduct which constitutes market misconduct or an offence under Part XIV of the SFO. No restrictions on the size of any net long position created as a result of primary stabilising actions the PS Rules do not impose any limit on the size of any net long position which may be created as a result of primary stabilising actions. The number of shares which may be purchased pursuant to primary stabilising actions can thus exceed the number of shares under the over-allotment option. However, in practice, other regulatory requirements, such as the public float requirement under the Listing Rules and the disclosure of interests requirements under the SFO, would limit the size of the net long position.
Disclosure obligations
The PS Rules impose prior, interim and post-stabilisation disclosure obligations. Prior disclosure requirement the stabilising manager may not take any stabilisation actions in relation to the Relevant Securities unless, from the date of the first public announcement indicating (or which might reasonably be understood as indicating that) that a public offer of the Relevant Securities is intended to be made, adequate disclosure is made in relevant documents, including any announcement, invitation or prospectus, that stabilising action may take place in relation to the offer. Interim disclosure requirement as soon as reasonably practicable after any exercise or partial exercise of an over-allotment option, the stabilising manager is required to ensure that a public announcement is made by or on behalf of the issuer or the stabilising manager stating (i) the number of the Relevant Securities to be subscribed for or purchased on such exercise or partial exercise; and (ii) the number of Relevant Securities remaining available thereafter under any unexercised portion of the option. Other than in relation to an exercise of the over-allotment option, the PS Rules do not impose any other obligation on a stabilising manager to flag any stabilisation bid in the market in the course of its stabilising actions by way of simultaneous public announcement. Post stabilisation disclosure within seven days after the end of the stabilising period the stabilising manager is obliged to ensure that a public announcement is made (whether by or on behalf of the offeror company or the stabilising manager) setting out the following: the date of the end of the stabilising period; whether or not stabilising action was undertaken; the price range between which stabilising purchases were undertaken;
99
the date and price of the last stabilising purchase; and where applicable, the extent to which any over-allotment option was exercised.
There is no obligation under the PS Rules to disclose the volume of stabilising purchases undertaken.
details of the allocation of the Relevant Securities (name of offeree and amount allotted); and details (so far as is known to the stabilising manager) of transactions other than those which are effected by or in accordance with the instructions of the stabilising manager at a price above the current stabilising price for the purposes of determining the maximum stabilising price (referred to as Price C in the section Pricing restrictions above).
In addition details of any agents appointed by the stabilising manager together with the terms and general parameters of their appointment must be included in such register. The SFC expects the stabilising manager to properly separate its activities as stabilising manager and its other trading activities, including proprietary trading, to avoid committing market misconduct not covered by the safe harbour under the PS Rules. All stabilising actions should be recorded in the register in order to be eligible for the safe harbour under the PS Rules.
100
101
102
Examples of marketing activities or publicity that could be deemed to be directed selling efforts, general solicitation or general advertising include: the promotion of feature articles about the issuer or management interviews in US publications by representatives of the issuer; advertisements for the offering in any US publication; and meetings between representatives of the issuer and research analysts or brokers in which the offering is discussed, if such analysts or brokers then distribute such information in the US.
An issuer offering securities under Regulation D must file with the SEC five copies of a notice on Form D no later than 15 days after the first sale of securities in the Regulation D offering (typically considered to be the receipt of the first subscription agreement or acceptance of subscription funds). The Form D, a fairly short form requiring only general information about the issuer and the offering, is a notice filing only; it does not subject the offering to review by the SEC. In practice, however, most issuers do not file the Form D in connection with their private placements on the theory that compliance with all other requirements of Regulation D would suffice to ensure that the exemption under Section 4(2) would be available. However, a Form D may nonetheless need to be filed to meet state exemption requirements.
Regulation S offerings
In a Regulation S offering, two general conditions must be satisfied: (i) any offer/sale must have occurred in an offshore transaction, and (ii) there must have been no directed selling efforts into the US by the issuer, any distributor or any of their respective affiliates. Directed selling efforts are activities undertaken to, or that reasonably could be expected to, condition the US market for the securities.
103
Additional restrictions apply if US holdings (for debt securities) or trading volumes (for equity securities) indicate the presence of substantial US market interest, or SUSMI. In such cases, the following additional restrictions apply: sales may not be made to US persons, as defined for purposes of Regulation S; offering restrictions must be complied with (ie, distributors must agree that offers and sales during a distribution compliance period will be made under Regulation S); and notice requirements applicable to inter-dealer sales will apply during a 40-day distribution compliance period.
Liability on disclosure
Although the above exemptions provide for exemption from the securities registration requirement of Section 5 of the Securities Act, they do not provide exemption from US antifraud rules, in particular Rule 10b-5.
104
Financial statements
Disclosure documents for SEC registered offers require the issuer to provide five years of selected financial data1, three years of audited income statements and two years of audited balance sheets. Furthermore, issuers making an initial public offering generally must use audited financial statements (which may cover a period of less than a full year) not older than 12 months at the time the registration statement is filed. If the registration statement is dated more than nine months after the end of the last audited financial year, it should contain consolidated interim financial statements (which may be unaudited) covering at least the first six months of the financial year and comparative statements for the same period in the prior financial year. Moreover, if at the date of the registration statement the issuer has published interim financial information that is more current than required under this standard, the more current information must be included in the document. An additional consideration that may influence the parties decision regarding the financial statements to be included is the unavailability of negative assurance comfort from the auditors with respect to subsequent changes in financial statement items as of a date more than 135 days after the most recent period for which the accountants have performed an audit or interim review. Prior to certain rule revisions in November 2007, financial statements of non-US private issuers reporting under the Exchange Act had to be prepared in accordance with US GAAP, or contain reconciliations of key items to US GAAP and a discussion of material variations between home country and US GAAP. Although the revised rules will allow foreign private issuers filing Form 20-F to continue to provide a full reconciliation to US GAAP if desired, they may instead provide IFRS financial statements, if (a) the issuer also states in a prominent footnote to its financial statements that such financial statements are in compliance with IFRS (as published by the International Accounting Standards Board (ISAB)) and (b) the issuers independent auditor delivers an opinion stating that the issuers financial statements comply with IFRS (as published by IASB).
FN Data for either or both of the earliest two years of the five year period may be omitted if the issuer represents to the SEC that it cannot provide the information without unreasonable effort or expense.
106
that each material statement of fact or of opinion in the offering circular is not only accurate but is not misleading in its context; that nothing has been omitted which would affect the import of the information in the offering circular; that, taken as a whole, the document gives, so far as possible, a true and fair impression of the history, business and prospects of the issuer (as part of this exercise the offering circular must clearly cover the risks as well as the attractions of the investment); and, that nothing has been omitted so as to make the document misleading.
107
National Association of Securities Dealers (the NASD) and the Blue Sky administrators within four to five weeks following the filing. The SEC will contact the issuer with comments, orally or in writing, and may then schedule meetings to discuss necessary revisions. The SEC may require an interim amendment to the registration statement prior to declaring it effective. During this period oral selling efforts, such as a roadshow, are permitted. In connection with an IPO by a foreign private issuer, preliminary prospectuses which contain substantially all of the information required by the Securities Act are the only permitted written offering materials during this period and no sales may be made or confirmed during this period.
The roadshow
In order to market the securities to be sold, the issuer and bankers will visit potential investors during the SEC comment period, making presentations to them about the issuer and the securities, as part of a so-called roadshow. The roadshow typically covers several cities over a relatively short time frame (one to three weeks). The presentation is prepared in advance with information drawn from the offering circular and is often followed by a question and answer section. No written materials may be distributed at a roadshow other than the preliminary or red herring prospectus.
Interim amendment
Depending on the extent to which SEC staff concerns can be resolved in any confidential review process, an issuer making its initial filing may be required to file amendments to its registration statement with the SEC before the registration statement becomes effective. If an amendment reflects material changes that ought to be known by public investors before they receive their sale confirmations after the effective date, a full re-circulation of the revised preliminary prospectus must be made to all persons to whom the underwriters expect to send confirmation not less than 48 hours prior to the mailing of such confirmations. If the changes are not of the type that would require re-circulation, but the SEC staff still wish to review the revised language, the staff may accept a printers proof of the final pricing amendment, or a letter containing the proposed language. On some occasions, insignificant changes can be discussed over the telephone with the examiner, and be included in the pricing amendment without formal review by the SEC staff.
Pricing
On the day prior to the effective date of the registration statement, the issuer and the managing underwriter will conduct a pricing meeting to determine the IPO price, based on demand for the securities. Once the price is decided upon, the final underwriting agreement is signed.
Effective date
Once the SEC receives the amended registration statement and approves the disclosure, the staff will declare the registration statement effective and public trading may commence.
Closing
Within three days of commencement of public trading, the closing will generally take place. This is the point at which the underwriters receive the securities and required documents, comfort letters and opinions set forth in the underwriting agreement in exchange for remitting the proceeds of the offering to the issuer and any selling shareholders.
108
DTC trading
The Depository Trust Company (DTC) is a clearing agency which holds securities for its participants and facilitates the clearance and settlement of securities transactions between participants through electronic book-entry changes in the accounts of its participants, thereby eliminating the physical movement of certificates. Securities which are registered with the SEC are eligible to be cleared through the facilities of DTC. Investors hold the beneficial interests in securities directly through DTC if they are participants or through their accounts with participants such as securities firms, banks and other institutions. The European clearing agencies Euroclear and Clearstream also participate in DTC through their nominees.
Consequences of registration
As a result of registering securities in the US, issuers will become subject to a number of requirements under US law.
109
issuers that are large accelerated filers (ie, seasoned issuers with a public float of at least US$700 million) was proposed to remain unchanged (first applying to fiscal years ending on or after July 15, 2006). However, the SEC approved extending the Section 404 auditor attestation compliance deadline for foreign private issuer accelerated filers that are not large accelerated filers from fiscal years ending on or after July 15, 2006 to fiscal years ending on or after July 15, 2007. The SEC also approved extending the Section 404 auditor attestation compliance deadline for foreign private issuers that are not accelerated filers from fiscal years ending on or after December 15, 2009 and the Section 404 management report deadline for such filers to December 15, 2007.
Form 20-F
Form 20-F must be filed annually, within six months of the end of the reporting companys fiscal year. The information required to be disclosed is similar to that provided in the registration statement and is intended to provide the SEC and the public with annual updates of the information that was provided during the initial offering. The Sarbanes-Oxley Act requires that Form 20-F be accompanied by two written statements, each signed by the chief executive officer and the chief financial officer certifying that the CEO or CFO has reviewed the disclosure and that in the view of the officer the information is not misleading, that it fairly presents the condition of the issuer in all material respects and that the report complies with the Exchange Act. The certification must also include statements with respect to the quality and the effectiveness of an issuers disclosure controls and procedures. A CEO or CFO who knowingly or wilfully certifies a report that does not meet the requirements of the Exchange Act faces fines and/or imprisonment.
Form 6-K
Form 6-K requires information to be filed with the SEC and any stock exchange on which the issuers securities are listed if such information is (i) required to be made public pursuant to the law of the issuers country of domicile or incorporation, (ii) filed with a non-US stock exchange and made public by such exchange, or (iii) distributed to the security holders of the issuer. Information meeting one of the above tests is only required to be disclosed on Form 6-K if it is material to the issuers business.
110
NASD Rules
The rules of the NASD will apply to the underwriters involved in a registered offering. Primarily, the rules focus on the fairness of the underwriting compensation. The SEC will not declare a registration statement effective until it receives from the NASD a letter which states that it does not object to the compensation arrangements. Offerings of investment grade debt securities are exempt from the NASD fair compensation rules.
111
NYSE requirements
The NYSE requires issuers to provide security holders with annual reports within three months of the close of their fiscal year and at least 15 days in advance of their annual meeting. Quarterly reports must be provided as soon as they become available. Non-US issuers may be able to obtain waivers of these requirements. Issuers are also required to promptly release information that could materially affect the market for their securities. Material negotiations do not need to be disclosed so long as discussions are limited to members of top management and their confidential advisors. Once it becomes necessary to involve outsiders, however, public disclosure must be made. Issuers must provide prompt written notice to the NYSE upon the occurrence of certain events. These events include changes to the charter or by-laws, a change of auditors, changes in directors or officers, increases in the outstanding amount of securities and other changes affecting the issuers securities.
NASDAQ requirements
The disclosure requirements are similar to those of NYSE. Issuers must (i) file annual reports, (ii) provide NASDAQ with any information filed with the SEC on Form 6-K, and (iii) disclose any information that could materially affect the value of their securities.
Liability issues
Various potential legal liabilities exist for issuers failing to comply with the registration requirement under the US securities laws.
Section 12(a)(1)
In terms of the consequences of a failure to register, Section 12(a)(1) of the Securities Act creates a private cause of action for purchasers of securities that were required to be registered under the registration requirement of Section 5 of the Securities Act but were not registered by the seller. Purchasers may bring civil suits against the seller to have the sale
112
rescinded. Recovery is limited to the purchase price plus interest (less any income received on the security) but this may be a significant amount for purchasers if the share value has fallen from its initial offering price.
Section 20
Section 20 of the Securities Act empowers the SEC to bring an action in a US district court when it discovers a violation of the registration requirements. The SEC may seek the disgorgement of any profits resulting from the prohibited acts and the imposition of a fine. If the violation was wilful, criminal proceedings may be instituted.
Section 11
Section 11 of the Securities Act applies when a registration statement contains a material misstatement or omission. Purchasers, whether they bought the security in the initial offering or the secondary market, may bring civil suits to recover monetary damages. The issuer, underwriters, signers of the registration statement, directors, accountants and others are all potential defendants.
113
Section 12(a)(2)
Under the civil liability provisions of Section 12(a)(2) of the Securities Act, liability attaches to any person who offers or sells a security, by the use of any means or instruments of transportation or communications in [US] interstate commerce or of the [US] mails, by means of a prospectus or oral communication, which includes an untrue statement of a material fact or omits to state a material fact necessary in order to make the statements, in the light of the circumstances under which they were made, not misleading...and who shall not sustain the burden of proof that he did not know and in the exercise of reasonable care could not have known, of such untruth or omission.
Section 15
Under Section 15 of the Securities Act, liability may be extended to any person who controls any person liable under Sections 11 or 12, as described above. Under the Securities Act control is defined in terms of the power to, directly or indirectly, direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract, or otherwise. There is an exception for controlling persons if the person had no knowledge of or reasonable ground to believe in the existence of the facts by reason of which the liability of the controlled person is alleged to exist. Section 20(a) of the Exchange Act imposes similar liability on persons who directly or indirectly control any person who has violated any provision of the Exchange Act. An exception is available to a controlling person who can demonstrate good faith and a lack of positive action to encourage the violation.
Section 18
Under Section 18 of the Exchange Act, filers of Exchange Act reports (such as Form 20-F) are potentially liable for material misstatements and omissions contained in their filings. A purchaser or seller of securities who acted in reliance on the misstatement or omission may bring a suit against any person responsible for the misleading statements. Plaintiffs must demonstrate that they actually relied on the misleading information. The defendant can avoid liability by showing that he acted in good faith and had no knowledge of the misstatement or omission.
114
115
116
In addition, an exemption applies for the issue of shares by a company which has transferred from GEM to the Main Board pursuant to Chapter 9A of the Listing Rules. In listing decision 68-1, a company listed on a foreign exchange which sought a dual primary listing by way of introduction on the Main Board was also granted a waiver from compliance with LR 10.08, subject to compliance with various conditions.
117