Howse Williams' Capital Markets Quarterly aims to provide you an overview of the various regulatory and market updates in the third quarter of 2023, with summaries of some of the key amendments in the rules and guidelines, as well as important decisions made by the regulatory authorities in Hong Kong. We will also highlight some of the major market transactions over the last 3 months.

 

A) Regulatory Update

 

The Stock Exchange of Hong Kong Limited (the "Exchange")

 

Amendments to the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the "Listing Rules")

 

Expansion of the Paperless Listing Regime

The Exchange published conclusions to its consultation on "Proposals to Expand the Paperless Listing Regime and other Rule Amendments" on 30 June 2023. The Listing Rules have been amended for the implementation of the proposals. Most of the amended Listing Rules will take effect on 31 December 2023 with transitional arrangements for certain issuers as set out in the consultation conclusions.

 

Below are the key changes to the Listing Rules:

 

1. a reduction in the number of the submission documents; and mandatory submission by electronic means;

 

2. the mandatory electronic dissemination of corporate communications by listed issuers to the extent permitted by the laws and regulations; and

 

3. simplification of the appendices to the Listing Rules.

 

Updated regulatory framework for PRC issuers

In order to reflect the recent changes in Mainland China regulatory framework for the People’s Republic of China ("PRC") issuers, the Exchange has made consequential amendments to the Listing Rules to implement the proposals of the "Consultation Conclusions on Rule Amendments Following Mainland China Regulation Updates and Other Proposed Rule Amendments Relating to PRC Issuers" published on 21 July 2023.

 

In connection with the implementation of the New Regulations[1] on overseas listing and the repeal of the Special Regulations[2] and the Mandatory Provisions[3], the Exchange has made consequential rule amendments to:

 

1. remove the rule requirements that reflect the requirements set out in the Mandatory Provisions, which include:

 

1. the class meeting and related requirements for the issuance and repurchase of shares by PRC issuers;
2. the requirements for disputes involving H shareholders to be resolved through arbitration; and
3. the requirements for PRC issuers’ articles of association to include the Mandatory Provisions and other ancillary provisions; and

 

2. amend the documentary requirements for new listing applications to reflect Mainland China’s new filing requirements for overseas listings of Mainland-based companies.

 

The Exchange also made other rule amendments to align the requirements for PRC issuers with those applicable to other issuers, as follows:

 

1. allow the limits on general mandate for issuance of new shares and scheme mandate for share schemes to be calculated with reference to a PRC issuer’s total issued shares (instead of referencing to each of domestic shares and H shares);

 

2. remove the requirements for directors, officers and supervisors of PRC issuers to provide undertakings to the issuers and their shareholders to comply with the PRC Company Law[4] and the articles of association;

 

3. align minor requirements on compliance advisers under Chapter 19A (for PRC issuers) with those in Chapter 3A (for all issuers); and

 

4. remove certain requirements in Chapter 19A relating to (i) online display or physical inspection of documents and (ii) disclosure in listing documents of new applicants.

 

The amendments came into effect on 1 August 2023.

 

PRC issuers are reminded to adhere to their existing articles of association concerning class meetings and other provisions that were originally formulated based on the Mandatory Provisions until and unless they amend their articles of association to remove such provisions. In general, where PRC issuers voluntarily propose to amend their articles of association to remove the class meeting requirements, they should obtain approvals of domestic shareholders and H shareholders at separate class meetings based on their existing articles of association.

 

Fast Interface for New Issuance (FINI)

The Exchange has announced that FINI, Hong Kong’s new digitalised IPO settlement platform, will be launched on 22 November this year. The existing IPO settlement platform using CCASS, will no longer be used to initiate IPOs following market close on 21 November. All new listings whose prospectus is published on or after 22 November will be processed on the FINI platform.

 

FINI is a major initiative of the Exchange that will significantly shorten the time between the pricing of an IPO and the trading of shares from five business days (T+5) to two business days (T+2). It is a cloud-based platform which will enable different stakeholders such as IPO sponsors, underwriters, legal advisers, banks, Clearing Participants, share registrars and regulators to collaborate and perform their respective roles in an IPO, digitally. The new platform will also introduce a new public offer pre-funding model to help alleviate the scale of locked-up funds in over-subscribed IPOs.

 

Relevant FINI related Listing Rules, Hong Kong Securities Clearing Company Limited (HKSCC) Rules and HKSCC Operational Procedures will also take effect from the FINI launch date.

 

More details about FINI and the transitional arrangements are available on the designated FINI webpage on the Exchange's website.

 

Consultation Paper on GEM Listing Reforms

With the aim to broaden GEM’s appeal to issuers, while maintaining market confidence and important high standards of investor protection, the Exchange published a consultation paper on GEM listing reforms on 26 September 2023.  The key proposals are as follows:

 

1. Transfer Mechanism

Under the proposed new streamlined transfer mechanism, qualified GEM companies will be able to transfer to the Main Board without appointing a sponsor to carry out due diligence, or producing a “prospectus-standard” listing document. Instead, the transfer applicant must (i) meet all the qualifications for listing on the Main Board; (ii) have published financial results for three full financial years as a GEM issuer with ownership continuity and control and no fundamental change in its principal business; (iii) meet:

• a daily turnover test – a streamlined transfer applicant must have reached a prescribed minimum daily turnover threshold on at least 50% of the trading days over a prescribed reference period of 250 trading days[5] before the transfer application and until the commencement of dealings on the Main Board (Reference Period);
• a volume weighted average market capitalisation test – a streamlined transfer applicant must have a volume weighted average market capitalisation over the Reference Period that could meet the minimum market capitalisation requirement for Main Board listing; and
• a clean compliance record requirement over the 12 months preceding the transfer application and until the commencement of dealings on the Main Board.[6]

On the other hand, a GEM issuer may apply for a transfer under the existing regime if the above eligibility requirements cannot be met.

 

2. Initial Listing Requirements

In respect of initial listing requirements, the Exchange has proposed a new alternative eligibility test which targets high growth enterprises that are heavily engaged in research and development ("R&D") activities. A GEM listing applicant using this test must, among other criteria, have R&D expenditure of at least HK$30 million in aggregate for the two financial years prior to listing, where the R&D expenditure incurred for each financial year must be at least 15% of the total operating expenditure for the same period.

 

3. Continuing Obligations

In relation to continuing obligations, the Exchange has proposed the removal of mandatory quarterly reporting requirements and the alignment of other ongoing obligations with those of the Main Board, which includes the removal of the existing requirement for one of the executive directors of a GEM issuer to assume responsibility for acting as the issuer’s compliance officer, (b) the shortening of engagement period of a GEM issuer’s compliance adviser so that it ends on the date on which the issuer publishes its financial results for the first (instead of the second) full financial year commencing after the date of its initial listing; and (c) the removal of other requirements relating to a compliance adviser’s responsibilities that only apply to GEM issuers.

 

Enforcement Bulletin (September 2023)

 

The September 2023 edition of the Enforcement Bulletin published by the Exchange focuses on the wide scope of requirements of a director with regard to conflicts, highlights some of the recent cases which illustrate pitfalls on this topic, and offers practical steps and best practices on how conflicts can be managed.

 

The Exchange noted that the duty to avoid conflict of interest is sometimes described as part of a director’s fiduciary duty of loyalty owed to the company, which means directors must always put the interests of the company before their own. This duty is encompassed in the Listing Rules and applies to both executive and non-executive directors. The Exchange emphasised that the duty is not limited to cases where there is an actual or obvious conflict. The obligation has been given a very wide scope and a director will normally need to take steps to address and manage a possible conflict situation. The threshold is very low – action may be required even if there is only the potential for conflict, and even if the risk might seem indirect, low or remote. Some scenarios are laid out to illustrate the wide scope of the duty to avoid conflict.

 

A company must have an adequate and effective internal control and risk management system in place. The Exchange has set out some examples of good corporate governance practices in relation to conflicts, such as, among others, declaration of interests by directors upon joining the board and update of any changes in a timely manner; procedures and practices to be set out in writing including conflict management; a conflicted director be abstained from voting in the transaction for which the conflict is declared; having different people to carry out different roles to mitigation over-concentration of power and to provide checks and balances; and seeking professional advice if necessary.

 

Directors are reminded that as with any aspect of corporate governance, there is no "one size fits all" solution to the management of conflicts and they should keep in mind how they conduct themselves in discussions, meetings, and voting – if they are in a position of conflict, they should not allow their influence to lead to a result, even if they have made formal declarations and abstained.

 

The Exchange’s Disciplinary Actions

 

In the third quarter of 2023, the Exchange published sanctions in 6 cases which involve (i) transactions involving connected parties or parties related to the failure on disclosure and shareholder approval, (ii) directors’ failure to safeguard listed issuer’s interests and cooperate in investigations and (iii) deficiencies in the listed issuer’s internal controls and risk management systems. Listed issuers should exercise caution and put in place proper check and balance, and transaction monitoring mechanisms.

 

News release date	Issuer/ directors involved – summary of conduct
5 September 2023	Two Former Directors of Hope Life International Holdings Limited (Stock Code: 1683) The listed issuer suffered a significant loss as a result of a series of sale and purchase transactions pursuant to a joint venture arrangement All the monies paid by the listed issuer in respect of the joint venture were misappropriated The joint venture was proposed to a director by a new acquaintance of hers. It involved a new business for the listed issuer, and was with previously unknown counterparties The director was found to have undertaken no or very limited due diligence, not conducted any commercial or risk assessment in respect of the joint venture business, and not informed or consulted the other directors. Nevertheless, the director agreed on behalf of the listed issuer to enter into the joint venture One of the directors had failed to respond to the Exchange’s enquiries at all, and other director responded only after disciplinary action had been commenced against him In addition to a public censure against each of them, a Director Unsuitability Statement and a Prejudice to Investors' Interests Statement were made against the two directors respectively
30 August 2023	A former director of Global Mastermind Holdings Limited (Stock Code: 8063) A subsidiary of the listed issuer made three acquisitions. Shortly after, the balance in the subsidiary's bank account was withdrawn in its entirely The acquisitions and cash withdrawals were not authorised by the board of directors of the listed issuer and led to a significant amount of impairment loss At the time of the acquisitions and cash withdrawals, the director had overall supervision and oversight of the business and affairs of the subsidiary An independent investigation commissioned by the listed issuer concluded that the director was involved in and/or had knowledge of the acquisitions and cash withdrawals No evidence showed the director had obtained information about the acquisitions, despite their questionable legitimacy. The director appeared to have actively concealed the acquisitions and allowed the cash withdrawals to occur without the supporting documents normally required for such payments The director also failed to cooperation with the Exchange's investigation In addition to a censure, a Director Unsuitability Statement was made against the director
24 August 2023	China Saite Group Company Limited (Delisted, Previous Stock Code: 153) and ten directors A director caused the listed issuer to provide him with financial assistance through a series of loans and advances of a significant amount The director did not disclose the transactions to the board, and the loans and advances were for the director's personal benefit, against the commercial interest of the listed issuer and being forbidden under the listed issuer's articles of association The listed issuer had failed to provide timely and accurate information to the Exchange and/or the investing public regarding the loans and advances for multiple times Despite the questionable conduct of the director, evident conflict of interest, and the significance of the issues, the other directors did not raise enquiries or take follow-up actions to procure the listed issuer’s Listing Rule compliance, even when the events were brought to their attention The Exchange took the view that all of the directors have failed to discharge their duties to ensure the listed issuer had adequate and effective internal controls Censures were made against the listed issuer and nine directors while Prejudice to Investors’ Interests Statements were imposed against five directors One of the directors was criticised Five directors were also directed to attend training on regulatory and legal topics and Listing Rules compliance
17 August 2023	Two former directors of Ourgame International Holdings Limited (Stock Code: 6899) The listed issuer granted loans to a borrower which was introduced to the listed issuer by its substantial and single largest shareholder at the time, a company of which a director of the listed issuer was a substantial shareholder The borrower subsequently defaulted and the substantial shareholder of the listed issuer arranged for a third party to take over the obligation to repay the loans In the absence of any apparent commercial rationale, the director provided a personal guarantee with respect to the third party’s obligations and purported to waive the third party’s repayment obligations to the listed issuer under a separate agreement The listed issuer took the view that the director had misappropriated the funds through the loans and via the borrower Another director responsible for arranging and approving the loans did not conduct any due diligence in respect of the borrower In addition to a public censure, a Director Unsuitability Statement was made against a director The other director was criticised and further directed to attend training on regulatory and legal topics and Listing Rules compliance
19 July 2023	Lisi Group (Holdings) Limited (Stock Code: 526) The listed issuer entered into various discloseable, major and continuing connected transactions without making timely disclosure or obtaining the necessary approvals from its shareholders as required under the Listing Rules Despite previous, similar instances of non-compliance, and being formally warned by the Exchange, the listed issuer continued to fail to maintain adequate and effective internal controls A censure was made against the listed issuer and the Exchange further directed the listed issuer to appoint a compliance advisor for two years, review its internal controls, and procure each of the current directors to attend trainings
5 July 2023	E&P Global Holdings Limited (Stock Code: 1142) A subsidiary of the listed issuer entered into five transactions involving an acquisition of convertible bonds, the conversion of those bonds into shares and subsequent share disposals Each of the transactions constituted either a major transaction or a very substantial disposal The listed issuer failed to comply with the disclosure and shareholders’ approval requirements in the Listing Rules Upon discovery of the non-compliance, the listed issuer voluntarily reported its non-compliance to the Exchange and took various remedial measures, such as the publication of an announcement, delivery of training on Listing Rule compliance, and enhancement of internal controls The listed issuer was criticised

 

Securities and Futures Commission (the “SFC”)

Takeovers Bulletin No. 66

Consultation conclusions on amendments to the Codes on Takeovers and Mergers and Share Buy-backs ("Takeovers Codes")

 

The SFC published the consultation conclusions on its proposed amendments to the Takeovers Codes on 21 September 2023. The amended Takeovers Codes were gazetted on 29 September 2023 and took effect on the same day. The amendments mainly codified the existing practices of the Executive Director of the SFC’s Corporate Finance Division or its delegates, and clarified the Takeovers Codes where necessary. Changes include revising the definitions of important terms, streamlining processes to enhance efficiency, and introducing green initiatives to reduce the carbon footprint of Takeovers Codes documents. Consequential amendments have been made to a number of Practice Notes to the Takeovers Codes. The revised Practice Notes are available on the Takeovers and mergers section on the SFC website.

A copy of the consultation conclusions is available here.

 

Calculation of acceptances under Rules 2.2 and 2.11

In the consultation conclusions published on 21 September 2023, the SFC also clarified the calculation of acceptances under Rules 2.2 and 2.11 of the Takeovers Codes. Under Rules 2.2 and 2.11, an offeror must receive 90% acceptances of the disinterested shares before it can exercise compulsory acquisition rights or delist a company (where compulsory acquisition is not available). The SFC clarified that both shares acquired by an offeror and its concert parties from the date of the Rule 3.5 announcement as well as acceptances under an offer would count towards the 90% threshold.

Nonetheless, in a mandatory general offer triggered by a share acquisition, shares that are acquired by an offeror under a share purchase agreement would not be treated as disinterested shares for the purpose of calculating 90% acceptances under Rules 2.2 and 2.11. The reason is that shares acquired under the share purchase agreement would not form part of the shares subject to the general offer.

 

B) Market Update

 

With a sign of recuperation in the Hong Kong IPO market, there were 38 new Main Board, 1 new GEM IPO applications accepted by the Exchange and 14 IPOs launched in the third quarter of 2023 that consists of a diverse range of businesses. Examples of some of the recent Main Board listings are:

 

Issuer	Description
ZX Inc. (Stock Code: 9890)	An online game products publisher devoted to marketing and operating online games, in particular mobile games, in China. Its retail offering was over-subscribed by 103 times with an estimated net proceeds from the IPO of approximately HK$138.1 million. To date, its market capitalisation reaches approximately HK$6.56 billion.
ImmuneOnco Biopharmaceuticals (Shanghai) Inc. (Stock Code: 1541)	A clinical-stage biotechnology company dedicated to the development of immune-oncology therapies. Its retail offering was over-subscribed by 9.0 times with an estimated net proceeds from the IPO of approximately HK$234.5 million. To date, its market capitalisation reaches approximately HK$7.07 billion.
Wuhan YZY Biopharma Co., Ltd. - B - H Shares (Stock Code: 2496)	A biotechnology company dedicated to developing bispecific antibody-based therapies to treat cancer-associated complications, cancer and age-related ophthalmologic diseases. Its retail offering was over-subscribed by 12.8 times with an estimated net proceeds from the IPO of approximately HK$121.4 million. To date, its market capitalisation reaches approximately HK$1.74 billion.
Starplus Legend Holdings Ltd. (Stock Code: 6683)	The business operations of the company consist of two segments, namely new retail segment and IP creation and operation segment. Its retail offering was over-subscribed by 12 times with an estimated net proceeds from the IPO of approximately HK$245.2 million. To date, its market capitalisation reaches approximately HK$6.42 billion.
Keep Inc. (Stock Code: 3650)	A growing and result-oriented platform that provides users with a comprehensive fitness solution by offering fitness content with AI-assisted personalised curriculums, that dynamically adjust course content and workout intensity based on different users. Its retail offering was over-subscribed by 2.1 times with an estimated net proceeds from the IPO of approximately HK$192.0 million. To date, its market capitalisation reaches approximately HK$18.71 billion.
Sichuan Kelun-Biotech Biopharmaceutical Co., Ltd.  - B - H Shares (Stock Code: 6990)	A biopharmaceutical company committed to the research and development, manufacturing and commercialization of novel drugs in oncology, immunology and other therapeutic areas. Its retail offering was over-subscribed by 0.3 times with an estimated net proceeds from the IPO of approximately HK$1,258.9 million. To date, its market capitalisation reaches approximately HK$4.91 billion.
New Media Lab Ltd. (Stock Code: 1284)	A digital media company that operates in Hong Kong, providing integrated advertising solutions to advertisers ranging from multi-national brand owners, advertising agencies to SMEs primarily through its digital media platforms. Then company produce and distribute contents on diverse areas of interest under its media brands. Its retail offering was over-subscribed by 43.2 times with an estimated net proceeds from the IPO of approximately HK$101.0 million. To date, its market capitalisation reaches approximately HK$288.00 million.