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:
- a reduction in the number of the submission documents; and mandatory submission by electronic means;
- the mandatory electronic dissemination of corporate communications by listed issuers to the extent permitted by the laws and regulations; and
- 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:
- remove the rule requirements that reflect the requirements set out in the Mandatory Provisions, which include:
- the class meeting and related requirements for the issuance and repurchase of shares by PRC issuers;
- the requirements for disputes involving H shareholders to be resolved through arbitration; and
- the requirements for PRC issuers’ articles of association to include the Mandatory Provisions and other ancillary provisions; and
- 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:
- 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);
- 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;
- align minor requirements on compliance advisers under Chapter 19A (for PRC issuers) with those in Chapter 3A (for all issuers); and
- 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:
- 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.
- 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.
- 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 |
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Two Former Directors of Hope Life International Holdings Limited (Stock Code: 1683)
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A former director of Global Mastermind Holdings Limited (Stock Code: 8063)
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China Saite Group Company Limited (Delisted, Previous Stock Code: 153) and ten directors
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Two former directors of Ourgame International Holdings Limited (Stock Code: 6899)
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Lisi Group (Holdings) Limited (Stock Code: 526)
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E&P Global Holdings Limited (Stock Code: 1142)
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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)
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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. |
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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)
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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)
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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. |
[1] The “Decision of the State Council to Repeal Certain Administrative Regulations and Documents” issued by the State Council of the PRC on 17 February 2023 and the “Trial Administrative Measures of Overseas Securities Offering and Listing by Domestic Companies” and 5 supporting guidelines issued by the China Securities Regulatory Commission ("CSRC") on 17 February 2023.
[2] The Special Regulations on the Overseas Offering and Listing of Shares by Joint Stock Limited Companies (國務院關於股份有限公司境外募集股份及上市的特別規定) issued by the State Council of the PRC on 4 August 1994, as amended, supplemented or otherwise modified from time to time.
[3] The Mandatory Provisions for Companies Listing Overseas set forth in Zheng Wei Fa (1994) No. 21 issued on 27 August 1994 by the State Council Securities Policy Committee and the State Commission for Restructuring the Economic System.
[4] The Company Law of the PRC adopted at the Fifth Session of the Standing Committee of the Eighth National People’s Congress on 29 December 1993 and effective from 1 July 1994, as amended, supplemented or otherwise modified from time to time.
[5] The reference to “trading days” excludes the number of trading days on which trading of the applicant’s securities was halted or suspended.
[6] A streamlined transfer applicant must: (a) not have been held to have committed a serious breach of any Listing Rules in the 12 months preceding the transfer application and until the commencement of dealings in its securities on the Main Board; and (b) not be the subject of any investigation by the Exchange, or any ongoing disciplinary proceedings under Chapter 3 of the GEM Listing Rules, in relation to a serious breach or potentially serious breach of any Listing Rules as at the date of the transfer application and the date when dealing in its securities commences on the Main Board.
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Disclaimer: The information contained in this article is intended to be a general guide only and is not intended to provide legal advice. Please contact [email protected] if you have any questions about the article.