This publication describes the main requirements relating to a company whose shares have a primary listing on The Stock Exchange of Hong Kong Limited (the "Stock Exchange"). As most new applicants for listing are incorporated outside Hong Kong, most often in Bermuda, the information in this publication relates, except where otherwise specified, to the requirements for a company incorporated in Bermuda.

There are many detailed relevant requirements, and the directors and company secretary of a listed company and other people to whom the requirements apply are expected to be fully aware of them. This publication is intended to give an overview of the main requirements and is not comprehensive: it should not be used as a substitute for professional advice on specific issues which arise.

A company which is proposing to list in Hong Kong should, as an important part of the listing process, consider and plan for the post-listing requirements, in particular the strict corporate governance requirements, the onerous financial and other disclosure requirements and the controls on connected transactions.

References in this publication to the "PRC" are to the People’s Republic of China excluding the Hong Kong Special Administrative Region ("Hong Kong").

This publication is up to date as at August 2000.

The main sources of the requirements are the Stock Exchange’s Listing Rules (the "Listing Rules") and the listing agreement into which every company enters with the Stock Exchange at the time of listing (the "Listing Agreement"). A Guide for Directors of Listed Companies issued by The Stock Exchange gives a useful summary of some of these from a director’s perspective.

The Hong Kong Code on Takeovers and Mergers (the "Takeover Code") is the main source of regulation in respect of takeovers and mergers. The Hong Kong Code on Share Repurchases (the "Share Repurchases Code") regulates securities repurchases by listed companies.

The Securities (Disclosure of Interests) Ordinance and the Securities (Insider Dealing) Ordinance are Hong Kong laws which are specifically relevant to listed companies. The laws and regulations of the company’s place of incorporation will, of course, also contain important relevant requirements and should always be taken into account, although they are generally beyond the scope of this publication.

The constitutional documents of the company will also contain various provisions required by the Listing Rules, which will vary depending on the place of incorporation of the company. There are specific provisions which are required to be included in the memorandum and bye-laws of companies incorporated in Bermuda, in the memorandum and articles of association of companies incorporated in the Cayman Islands, the Cook Islands and in the articles of association of companies incorporated in Hong Kong and the PRC.

It is the primary responsibility of a listed company’s directors to ensure that the company complies with all relevant requirements. Delegation, for instance to the company secretary, will seldom relieve the directors of primary responsibility. Some of the requirements apply to directors, officers, employees, and shareholders of the company in their capacity as such and some apply to persons dealing with a listed group and their respective advisers.

Penalties for breaches of relevant Hong Kong laws include fines and similar financial penalties and imprisonment.

The Listing Rules and the Listing Agreement do not have the force of law, but the Stock Exchange may impose sanctions including cancellation or suspension of the company’s listing, private reprimand, public censure, "cold-shoulder" orders for companies and a ban on advisers representing a specified party. The Stock Exchange may also require a breach to be remedied and may effectively force a director’s resignation by stating publicly that, in the opinion of the Stock Exchange, the retention of office by that director is prejudicial to investors.

The sanctions which the Securities and Futures Commission (the "SFC") may impose for breaches of the Takeover Code are broadly similar to those which the Stock Exchange may impose for breaches of the Listing Rules.

Corporate governance has been an important area of regulatory change in recent years, both in Hong Kong and elsewhere, and many of the requirements described below have been introduced by the Stock Exchange as part of its programme for improving standards of corporate governance. Recent scandals involving excessive directors’ remuneration, loans to directors (in one case, amounting to more than the company’s net assets) over-advantageously timed share option grants and resignations following the failure by a number of directors to disclose criminal records have all attracted considerable press attention. Further increases in regulation in this area can be expected.

A director of a listed company is expected to have the character, experience, integrity and competence commensurate with his position as such. This requirement is expected to be satisfied on a continuing basis and is being increasingly actively enforced by the Stock Exchange.

The Listing Rules require directors to fulfil fiduciary duties and duties of skill, care and diligence to a standard at least equivalent to those established by Hong Kong law. Specifically, a director is required:

• to act honestly and in good faith in the interests of the company as a whole;

• to act for a proper purpose;

• to avoid actual and potential conflicts of interest and disclose fully his interests in contracts with the listed group; and

• to apply such degree of skill, care and diligence as may be expected of a person of his knowledge and experience holding his office.

These duties will not materially increase the directors’ burden where the company is incorporated in a common law jurisdiction such as Hong Kong, Bermuda and the Cayman Islands, but may do so in the case of other companies. The articles of association of PRC companies will also contain detailed mandatory provisions regarding directors’, supervisors’ and controlling and other shareholders’ functions, duties and interests.

The Listing Rules contain a Code of Best Practice, which is a set of guidelines for directors of listed companies. These are not rigid rules, but the Stock Exchange expects listed companies to aim to comply with them as a minimum, and compliance with them is likely to become of increasing importance to institutional investors as an indication that the company is being run to appropriate standards. All annual accounts and interim reports in respect of periods ending after 31^st December, 1995 must contain statements relating to compliance with the Code of Best Practice.

• Full board meetings at which the directors are physically present should be held at least every six months

• adequate notice of board meetings should be given in order to give all board members an opportunity to attend, and an agenda and board papers should be circulated at least 2 days in advance

• all directors (including non-executive directors) should have access to board papers

• non-executive directors should be appointed for a specific term, such term to be disclosed in the company’s annual report and accounts

• dissenting views of independent non-executive directors should be minutes and they should have access to separate professional advice at the company’s expense

• the Stock Exchange should be informed of the reasons for the resignation or removal of an independent non-executive director

• matters involving a conflict of interest for a director or substantial shareholder should be dealt with at a full board meeting (and not by circulation or by committee)

• every director should keep abreast of his responsibilities as a director of a listed company

• each company should establish an audit committee, with written terms of reference, to review and supervise the company’s financial reporting process and internal controls. The committee should consist of at least two non-executive directors, of whom the majority should be independent.

Directors’ remuneration is governed by their employment or other contracts with the company and will often consist of basic remuneration, benefits and a bonus. Bonuses have been subject to some well-publicised abuses in the past. A cap on the total amount of bonuses paid annually is now common and is usually required by the company’s listing sponsor at the time of listing.

Directors’ contracts and remuneration remain subject to the discretion of the board (and not shareholders) and, as most listed companies do not currently have separate remuneration committees, effectively in the hands of the executive directors. Directors’ remuneration is, however, subject to a high level of disclosure in the company’s accounts and, although there is little formal redress for apparent abuses, adverse publicity has in some cases resulted in the reduction or repayment of announced bonuses. An increase in regulation in this area can be expected.

Executive share option schemes are subject to shareholder approval at the time of their adoption and to various detailed requirements. These include limits on the number of shares which may be subject to the scheme and on individual entitlements under the scheme. The actual allocation of options is, however, a matter for the board, although some recent abuses (in particular, a grant of options immediately before the announcement of a major acquisition by one listed company) is leading to increased scrutiny in this area.

Every listed company must have at least two independent non-executive directors, and the Stock Exchange may require a higher number if it thinks the size of the board, or the circumstances, justify it. The independent directors must have the integrity, independence and commercial or professional experience to fulfill their role and ensure that the interests of the general body of shareholders are properly represented. They must also be able to give sufficient time and attention to the company’s affairs. Finding directors who fulfill these requirements, and who are also willing to take on the increasingly onerous role required of them, can be difficult.

Directors are not normally considered to be independent if they:

• have any past or present financial or other interest in the group’s business, or a connection with any connected persons of the company (see paragraph 6.4 for definition), which, in either case, might affect their exercise of independent judgement; or

• are involved in the management of the listed group.

A holding of shares in the company of not more than 1% of the total issued shares, or an interest or connection as a director or financial adviser, will not normally be a bar to independence. The Stock Exchange encourages consultation with it in cases or doubt.

The company must notify the Stock Exchange of any change of directors. It should also publicise any change in its directorship, which may be done by way of a press release or by any other means the company considers appropriate.

Each new director must sign and lodge with the Stock Exchange a declaration and undertaking ("Declaration"), which provides for disclosure of various personal details (including details of certain types of criminal conviction and certain insolvency-related matters) and includes an undertaking to comply with the Listing Rules and all other relevant securities laws, codes and regulations in Hong Kong, and to use best endeavours to ensure that the company does so as well. Directors of PRC companies must also undertake to comply with all applicable PRC laws, rules and regulations. Changes in details given in the Declaration must be notified to the Stock Exchange.

The form of the Declaration has been revised following scandals involving non-disclosure by directors of previous criminal convictions, and care must be taken to complete the Declaration correctly.

Alternate directors will normally be "directors" for the purposes of the Listing Rules. It is important, therefore, to remember that they need to comply with the above requirements and the other requirements applicable to directors.

Two of a listed company’s executive directors must normally be ordinarily resident in Hong Kong at the time of initial listing, although the Stock Exchange has discretion to grant exemptions from this, for instance in the case of PRC companies.

If the company’s primary listing is in Hong Kong, it must also appoint two authorised representatives in Hong Kong (although exemptions are, again, available) to act as the company’s principal channel of communication with the Stock Exchange. The two authorised representatives must either be two directors or a director and the company secretary, and they must give the Stock Exchange details of their home and office telephone and facsimile numbers.

An authorised representative must ensure that, whenever he is outside Hong Kong, suitable alternates are available and that the Stock Exchange has their details. If an authorised representative of a PRC company is likely to be frequently outside Hong Kong, then any alternate appointed must not only be readily contactable by the Stock Exchange, but should also be authorised to speak on the company’s behalf.

If an authorised representative wishes to terminate his role, the Stock Exchange must first be notified and be given reasons for his termination. Only in exceptional circumstances should his role be terminated before a replacement has been appointed.

The secretary of the company must be a person who is ordinarily resident in Hong Kong and who meets the requirements as to qualification and experience set out in the Listing Rules. The secretary of a PRC company need not be ordinarily resident in Hong Kong, provided he can meet the professional standards required by the Listing Rules (the Stock Exchange may be flexible in this respect if the person concerned has appropriate experience). The Stock Exchange must be notified immediately if there is any change of company secretary.

A company which is incorporated outside Hong Kong must maintain a person in Hong Kong who is authorised to accept service of process and notices on its behalf. The Stock Exchange must be notified of the details of that person, who is usually one of the authorised representatives.

The Stock Exchange recommends that a company retain its sponsor for at least one year following its listing. A PRC company must retain its sponsor, or other financial adviser or professional firm which is acceptable to the Stock Exchange, for at least three years following its listing. The role and involvement of the sponsor of a PRC company is given particular importance by the Stock Exchange and, where the company’s authorised representatives are expected to be frequently outside Hong Kong, the sponsor must act as the company’s principal channel of communication with the names, home and office telephone numbers, and where available, facsimile numbers of at least one of its officers and an alternate who will act as the sponsor’s contact with the Stock Exchange and the PRC company.

PRC company directors, supervisors and other officers must enter into a contract (containing an arbitration provision) with the company whereby they undertake with the company, amongst other requirements, to comply with various PRC and Hong Kong laws, regulations and codes.

The company should notify the Stock Exchange, and publicise, any appointment or resignation of a supervisor. Every supervisor of a PRC company must lodge with the Stock Exchange a declaration and undertaking similar to that required to be given by directors of the company (see 3.5 above).

The general duty of disclosure is one of the most important aspects of a listed company’s continuing obligations and is set out in full below.

A company must inform the Stock Exchange and holders of its listed securities as soon as reasonably practicable of any information relating to the group which:

• is necessary to enable them and the public to a appraise the position of the group

• is necessary to avoid the establishment of a false market in the company’s securities and

• might reasonably be expected materially to affect market activity in and the price of its securities.

The requirements regarding disclosure and confidentiality are more fully explained at 4.2 below.

The general disclosure obligation is normally satisfied by a press announcement.

A company must respond promptly to any enquiries made by the Stock Exchange. Where there are unusual movements in the price or trading volume of a company’s shares, the Stock Exchange will usually make enquiries and will require an announcement regarding any relevant developments (or a suspension of trading where an announcement cannot yet be made) or, increasingly frequently, a negative statement that the company is not aware of any relevant matter.

4.2.1 General obligations

The basis of the requirements for both disclosure and confidentiality is that prompt and even disclosure of price-sensitive information is essential and, pending disclosure, strict confidentiality must be maintained so that no person is able to deal in shares from a more informed position than that available to the market generally. Information should not be divulged outside the company and its advisers in a way which may put any person in a privileged dealing position, or which may mean that its shares may be dealt in at prices which do not reflect the latest available information, although the company may, if appropriate, give advance information to persons with whom it is negotiating with a view to making a contract or raising finance.

If there are developments which are likely to have a significant effect on market activity or the price of the company’s securities, the directors must ensure that such information is kept strictly confidential until an announcement is made. If the release of information would harm the company’s business interest, the Stock Exchange should be informed immediately. If strict confidentiality cannot be assured, an announcement must be made.

A warning announcement should be considered if takeover proposals are under discussion, but cannot yet be announced. A temporary suspension of dealings may well be appropriate where negotiations reach an advanced stage, particularly where no warning announcement has been made.

The company may be required to divulge information to a third party. If the information thereby becomes public and it is of a price-sensitive nature, it should be released simultaneously to the market. In particular, if a group has a listing on any other stock exchange, the Stock Exchange must simultaneously be informed of any information released to any other stock exchange and, likewise, information must be released to the Hong Kong market at the same time as any other market.

These requirements can lead to difficult exercises of judgement in practice, particularly where negotiations for a transaction are in progress but are still at a stage where an announcement would be premature and would potentially lead to confusion in the market.

4.2.2 Reporters and analysts

Briefings, interviews and discussions with news reporters and investment analysts can cause problems. Representative of listed companies have to be particularly careful to avoid disclosing price-sensitive matters which have not yet been made public. Premature disclosure, or inaccurate reporting of remarks of directors or other individuals in positions of influence with regard to the company, may lead to enquiries from the stock Exchange and a clarificatory announcement being required to be made, or even a temporary suspension of dealings. Problems in this respect, and enquiries or even criticism from the Stock Exchange, have led to some companies refusing to speak to newspapers or analysts, which is an unnecessary overreaction.

• strictly controlling the staff who can speak to journalists and analysts: appointing appropriate spokesmen and making sure that other staff refer enquiries to them

• ensuring that spokesmen are fully briefed on relevant developments, including special areas of sensitivity

• avoiding potentially difficult situations, e.g. interviews with crowds of journalists or impromptu interviews

• preparing carefully for a meeting, including deciding which matters cannot be disclosed and having appropriate replies ready in case questions come up.

Closely related to the requirements for disclosure and confidentiality are the provisions regarding insider dealing which are described in detail at 8.1 below.

4.3.1 Draft documents to be supplied to the Stock Exchange for review

The Stock Exchange should be given drafts for review before the issue of documents including announcements or advertisements, relating to:

• the issue of new securities, or matters which may involve changes which relate to trading in its listed securities (including a suspension of dealings);

• takeovers, mergers and offers;

• proposed changes to its memorandum or bye-laws (or equivalent documents); and

• notifiable transactions (as described in Chapter 6 of this publication).

No such documents should be issued until the Stock Exchange has confirmed that it has no further comments on them.

4.3.2 Copies of documents to be supplied to the Stock Exchange

A specified number of copies must be given to the Stock Exchange of circulars, reports and accounts, notices of meetings, resolutions and various other types of documents and announcements.

4.3.3 Directors’ responsibility for documents

Directors are required to accept responsibility for various documents and circulars, including listing documents and circulars issued in connection with notifiable transactions and takeovers, and a responsibility statement to this effect must be included in these documents and in certain press announcements. Where such statements are to be made, every director must agree to be bound by the statement and particularly careful verification should be made of the contents of the documents.

4.3.4 Other requirements

All announcements must be made in specified English and Chinese language newspapers and must be delivered in diskette form (together with a hard copy) to the Stock Exchange by 8:30a.m.on the day on which the announcement is published. All circulars must (subject to some exceptions) be in English with a Chinese translation. Copies or a summary of circulars issued to holders of any class of securities must generally be given to holders of other securities.

Various types of corporate communication are required, upon request by Hong Kong Securities Clearing Corporation Limited, to be sent to non-registered securities holders who hold the company’s listed securities in CCASS.

The general duty of disclosure is supplemented by the recently introduced Practice Note 19, which requires certain exposures to and risks dependent on third parties to be disclosed by way of announcement and in interim reports and annual accounts. The matters requiring disclosure include:

• amounts due from and guarantees given to secure obligations of an entity (and that entity’s controlling shareholders, subsidiaries and affiliated companies) which in aggregate exceed 25% of the listed company’s net assets (and increases of disclosed amounts by 10% or more of the company’s net assets);

• financial assistance (including guarantees) in favour of an affiliated company which exceeds 25% of the listed company’s net assets; and

• where a listed company (or any of its subsidiaries) enters into a loan agreement that includes a condition imposing specific performance obligations on any controlling shareholder of the company and breach of such obligation will cause a default in respect of loans that are significant to the operations of the listed company.

There are many problems of interpretation regarding these new requirements.

Listing companies should also assume that the Stock Exchange would expect disclosure of similar matters which are of equivalent significance to the listed group.

The Listing Rules and Listing Agreement contain numerous disclosure requirements in addition to those described in this Memorandum. The principal requirements are as follows.

• The company must inform the Stock Exchange at least seven clear business days in advance of board meetings where decisions are to be taken in relation to dividends and announcements of profits or losses.

• The company must also inform the Stock Exchange immediately after approval by its board of:

• any decision to declare, recommend or pay any dividend or distribution on its securities, or any decision not to take such action;

• any preliminary announcement of profits or losses for any year, half year or other period;

• any proposed change in the company’s capital structure, including redemption of securities;

• any decision to change the general character or nature of the business of the company or group.

The company must also notify the Stock Exchange immediately, if there is-any decision about any proposed change to:

• its memorandum or bye-laws or any equivalent documents;

• the rights of any class of its listed securities;

• its directorate or, in the case of a PRC company, its supervisory committee, its secretary, auditors, registered office or place of business in Hong Kong.

• The company must give at least 14 days’ notice of the closure of its register of members (e.g. on a record date for a dividend) and at least 6 days notice of any change in such dates.

• The company must notify the Stock Exchange of any specified insolvency - related matters which happen to the group.

• PRC companies must keep various documents in Hong Kong for inspection by the public, including a complete duplicate share register and reports giving details of share repurchases by the company.

Companies with a primary listing on the Stock Exchange are expected to present their annual report and accounts (which must be audited) in accordance with Hong Kong or international accounting standards. If the Stock Exchange permits the accounts to be drawn up other than in accordance with those standards, they must contain a statement of the financial effect of the material differences (if any) from those standards. The accounts must be published in English with a Chinese translation.

The annual report and accounts must be produced not more than five months after the relevant financial year end, and the company’s Annual General Meeting must be held not more than six months after the relevant financial year end. The annual report and accounts should be circulated to all holders of the company’s listed securities not less than 21 days before the company’s Annual General Meeting and copies should also be delivered to the Stock Exchange.

The information required to be included in the accounts is very detailed and includes:

• a description of, and breakdown of turnover and contribution to results of ,the principal activities of the group

• a geographical analysis of consolidated turnover

• a discussion and analysis of the group’s performance during the year and the material factors underlying its results and financial position

• an explanation of any significant departure from applicable accounting standards

• an explanation of any material divergences of trading results from any relevant published forecasts

• detailed information about customers and suppliers

• specified information regarding the company’s issued share capital and details of the exercise of any conversion or subscription rights and any redemptions or repurchases during the year

• details of the company’s subsidiaries and their share capital and its associated companies and investments

• details of the directors’ and chief executive’s interests in the company’s securities, or those of any associated corporation, and details of any options or other rights of any of them to subscribe for any such securities

• particulars of any contracts of significance between the company or any of its subsidiaries and a controlling shareholder or any of its subsidiaries

• particulars of directors’ material interests in any of the company’s contracts of significance: it is the directors who must decide whether an interest is material or not, and such decisions must be taken, and the approval of any such contracts must be given, at a meeting of the directors at which the interested director is not counted in the quorum

• detailed information regarding the directors’ (and, for PRC companies, supervisors’) emoluments

• biographical information regarding directors (and supervisors) and senior managers, including information of which shareholders should be aware relating to their ability or integrity

• a statement as to whether the company has complied with the Code of Best Practice (see 3.2) above during the relevant period

• in the case of non-Hong Kong incorporated companies, various disclosures which would be required to be made by Hong Kong companies under the Companies Ordinance.

This list is not comprehensive, but demonstrates the wide range of information required to be disclosed. There are detailed additional requirements relating to banks. Many of the requirements relating to directors (and supervisors) have been imposed fairly recently and indicate the Stock Exchange’s increasing emphasis on corporate governance.

An interim report (in English and Chinese) must be announced in the newspapers and sent to all holders of listed securities within three months of the end of the first six months of each financial year of the company. The interim report must contain information specified in the Listing Agreement, which includes unaudited details of turnover, profit (or loss) and taxation, both in Hong Kong and overseas, but it need not be audited and no balance sheet is required.

The company must also publish in the newspapers a preliminary announcement of the full year’s results containing similar information to that required to be published in respect of the interim report.

The preliminary announcement and interim report are, of course, acutely price-sensitive before they are made public, and compliance with the confidentiality requirements described in 4.2 above is very important. The Stock Exchange has recommended that announcements of results are used to update investors as to the status of other matters such as the use of proceeds of fund raisings or the progress of major activities previously announced.

Acquisitions, disposals and connected transactions are primarily regulated by Chapter 14 of the Listing Rules, supplemented by some statutory requirements. The requirements are complicated and relate basically to acquisitions and realisations of assets (including securities) by a member of a listed group, which includes deemed disposals by group holding companies on issues of new shares by subsidiaries to other parties, as well as connected transactions (see 6.4 below). A transaction may require disclosure under the general duty of disclosure (see 4.1 above) even though it may not be subject to any of the requirements of Chapter 14.

Transactions are categorised in accordance with specified size tests, and the consequences of a transaction depend upon the category into which it falls. There are four tests, which compare:

• the value of the assets acquired/realised with the net assets of the group acquiring/realising those assets;

• the net profit attributable to the assets being acquired/realised with the net profit of the acquiring/realising group;

• the aggregate value of consideration given/received with the net assets of the acquiring/realising group;

• the value of any equity capital issued as consideration by an acquiring listed company with the value of its equity capital previously in issue.

There are complicated provisions relating to these tests and the calculations to be made, including a requirement for aggregation of transactions in certain circumstances and requirements where a company becomes or ceases to be a subsidiary or where a non-wholly owned subsidiary effects a transaction. There are special rules relating to property and shipping companies.

The classes of transaction (other than connected transactions) and the relevant requirements are as follows.

• Very substantial acquisition: this is any acquisition where any of the tests produces a ratio of 100% or more, or would result in a change of control through the introduction of a majority shareholder or group of holders. The acquisition must be made conditional upon approval by the shareholders of the company (which can be given in writing as described in the next paragraph below). Dealings in the company’s securities will normally be suspended and, subject to certain exemptions, the company will also be treated as a new applicant for listing and will therefore be required to issue a listing document and satisfy the conditions for listing set out in the Listing Rules, including its new assets’ track record under the same management. The requirements for discloseable transactions also apply (see below).

• Major transaction: this is any acquisition or realisation where any of the tests produces a ratio of 50% or more. It must be made conditional upon shareholder approval, which may be obtained either by holding a general meeting of the company’s members or by written approval of shareholders holding 50% or more of the nominal value of the company’s voting securities (excluding in each case shareholders with a material interest in the proposals). The requirements for discloseable transactions also apply (see below).

• Discloseable transaction: this includes a very substantial acquisition and a major transaction (see above) and also any acquisition or realisation of assets where any of the tests produces a ratio of 15% or more (but less than 50%).

As soon as possible after the terms of any discloseable transaction have been agreed, the company must deliver a draft press announcement (containing specified information and on which the Stock Exchange will usually comment in detail) to the Stock Exchange and, unless otherwise directed by the Stock Exchange, send a circular to shareholders within 21 days containing specified information about the transaction. In the case of very substantial acquisitions and major transactions, this will usually include an accountants’ report on any business or company being acquired, a valuation of property being acquired or realised and indebtedness and working capital statements.

• Share transaction: this is a transaction where the tests produce ratios of less than 15%, but the consideration includes newly issued shares. Disclosure in a press announcement is the only requirement.

Hong Kong incorporated listed companies and their Hong Kong incorporated group companies must also take into account the wide-reaching provisions of this section, which requires shareholder approval for any disposals of any such company’s fixed assets where the value of the consideration in respect of that disposal, aggregated with any other disposal within the four months preceding it, exceeds 33% of the disposing company’s fixed assets. This provision creates a number of unpleasant traps for the unwary. It was enacted before the protections now contained in Chapter 14 of the Listing Rules were revised and is ripe for repeal.

6.4.1 Definition of connected transactions

A connected transaction is either of the following:

• any transaction between a listed company or any of its subsidiaries and a "connected person"; or

• any transaction whereby a listed company (or any of its subsidiaries) acquires or realises an interest in a company, and any of that company’s substantial shareholders is (or is proposed to be) a director, chief executive or controlling shareholder (basically a person or group of persons holding 35% or more of the shares) of the acquiring or realising listed group, or an associate of any of them.

This definition covers a much wider range of transactions than just transfers of assets. Loans and other financial assistance, leases and supply and management contracts all come within the definition.

6.4.2 Connected persons and other definitions

A "connected person" is a director, chief executive, substantial shareholder, promoter or supervisor of the company or any of its subsidiaries or an associate of any of them.

The definition of a "connected person" is further widened (in relation only to connected transactions) to include any person with whom a director, chief executive or substantial shareholder has entered, or proposes to enter, into any agreement or undertaking, whether formal or informal, with respect to the transaction and also to include (famously) common law spouses and other relations in circumstances where, in the opinion of the Stock Exchange, the proposed transaction should be subject to the relevant rules.

A "substantial shareholder" is a person who is entitled to exercise, or control the exercise of, 10% or more of the voting power at any general meeting of the company.

"Associate" includes a holding company, subsidiary and sister company of a substantial shareholder which is itself a company, together with any company in which any of them can control 35% or more of the voting power at general meetings or can control the composition of its board of directors ("controlled companies"). It also includes, in relation to an individual, his spouse, children or step-children under 18 ("family interests"), trustees of any trusts of which such a person or his family interests is a beneficiary, and any controlled company of that person or his family interests taken together. Where a PRC company is involved, the definition is wider still.

A "director" includes a person who was a director of any group company within the preceding 12 months.

6.4.3 Requirements and exemptions

The Listing Rules specify in great detail which requirements apply in various specified circumstances. A connected transaction may require, depending upon the circumstances, independent shareholder approval and/or a circular to be sent to shareholders setting out details of the transaction, a valuation or accountants’ report (where applicable) and an opinion by an independent expert as to whether the transaction is fair and reasonable as far as the shareholders are concerned. The views of the company’s independent non-executive directors are also expected to be disclosed. If a company proposes to enter into a connected transaction, it is important that the Stock Exchange be consulted at an early stage if a waiver is necessary or in cases of ambiguity.

Various exemptions are available, for instance for transactions falling below specified size thresholds, unsecured shareholders’ loans by a connected person to a listed company and some forms of financial assistance by a listed company to a company in which a connected person is also a shareholder.

6.4.4 Pre-listing preparation

The requirements for independent shareholder approval and circulars to shareholders are onerous and listed groups try to avoid them where possible. It is important that a company and its advisers identify during the listing process any connected transactions which will happen after listing, particularly those which happen on a regular basis, for instance under supply or similar agreements. It is possible to obtain in advance a general waiver from the Stock Exchange for regular transactions or classes of transaction provided that it is satisfied that the listed group is suitably protected and the relevant transactions are properly described in the listing prospectus and subject usually to disclosure in the company’s accounts and the approval of the independent non-executive directors.

A company may not effect any acquisition, disposal or other transaction which would result in a fundamental change in the group’s main undertaking within 12 monthes after the date of the company’s listing on the Stock Exchange.

The laws of Hong Kong and most other territories contain important controls on securities issues, both as to the procedures (including board, shareholder or other approvals) for issuing shares and the registration or other requirements relating to offering documents. There are important further requirements for listed companies (mentioned below) as a result of which post-listing access to the capital markets is often not as quick and cheap as is sometimes believed.

The listing Agreement requires a listed company to obtain the approval of shareholders in general meeting (by special resolution in the case of PRC companies) before the company allots, issues or grants shares, securities convertible into such shares, or options, warrants or other rights to subscribe for shares or such convertible securities. PRC companies must, in addition, obtain the approval by special resolution of A shareholders and H shareholders at separate class meetings.

This requirement also applies to allotments, issues and grants by any of the Company’s major subsidiaries (representing 15% of consolidated net tangible assets or pre-tax trading profits) which materially dilute the percentage equity interest of the listed company in that subsidiary.

Pre-emptive offers of such securities are allowed, as are issues of securities accounting for up to 20% of the issued share capital of a listed company in any year if the shareholders have previously passed a resolution giving authority (known as a general mandate) to the directors to allot or issue such securities. This authority is normally renewed at each annual general meeting.

General mandates can also be granted in the case of PRC incorporated companies. However, as PRC company law does not permit a PRC company to have authorised but unissued share capital, any proposed issuance of shares pursuant to a general mandate can only effected after the articles of association of the company have been amended to increase the registered share capital. To avoid the need to have a shareholders’ meeting whenever shares are issued pursuant to a general mandate, it is a common practice that when the general mandate is approved, the directors are also authorised to amend the articles of association of the company for the purposes of increasing the registered share capital and reflecting the new capital structure. Any such amendments to the articles of association of the company have to be submitted to the relevant PRC authorities for approval.

The company must publish an announcement on the next business day after it agrees to issue securities under a general mandate, giving specified information about the issue.

The issue of further securities which are to be listed will need to comply with the Listing Rules, especially as to the method of listing, disclosure and the submission and contents of relevant documents. There are specific requirements for shares (including restrictions on oppressively large rights issues and on rights issues within 12 months of listing), warrants, debt securities and convertible debt securities.

There are a number of restrictions on and implications of dealings in listed companies’ shares and other securities.

The Securities (Insider Dealing) Ordinance applies to any corporation (wherever incorporated) whose securities are listed on the Stock Exchange.

The main theme of this Ordinance is that those persons who are "connected with" a listed company must not deal in the listed securities of that company (or warrants, options and other rights, whether themselves listed or not, which are "derivatives" of such securities) if they have "relevant information" about that company, being specific information which is not generally known to the public but which, if it were known to it, would be likely materially to affect the price of those securities. The Ordinance applies to both on and off-market dealings.

A person "connected with" a listed company for these purposes is very widely defined, and will include (amongst others) a director, employee or substantial shareholder of the company or a related company and any person who is in a position which is likely to give him access to relevant information by virtue of any professional or business relationship with the company, any related company or an officer or substantial shareholder in any of them, or by virtue of his being a director, employee or partner of a substantial shareholder in the company or any related company. Connected persons also include anyone with access to relevant information due to his being connected with another company where the relevant information relates to a transaction involving both of those companies or involving one of them and the listed securities of the other (or their derivatives), or to the fact that the relevant transaction is no longer contemplated. A person is also connected with a company if he was connected at any time within the six months preceding the dealing. A company is deemed to be connected with another company if any of its directors or employees is connected with that company.

Insider dealing also takes place when a connected person passes on relevant information to other persons or counsels or procures others to deal in such securities (or their derivatives), knowing or having reasonable cause to believe that the other person will deal in a company’s securities (or their derivatives). It is also insider dealing where a person who knowingly receives relevant information directly or indirectly from a connected person deals in relevant securities (or their derivatives) or counsels or procures another person to do so.

There are some exemptions available, in particular relating to certain off-market and direct transactions, transactions protected by "Chinese walls" and transactions where there is no intent to make a profit or avoid a loss by use of the relevant information, although these exemptions are limited in their scope and should be used with caution.

Although insider dealing is not a criminal offence, the penalties which the tribunal which investigates insider dealing may impose include a prohibition from being a director of (or taking part in the management of) a listed company for up to five years and the payment of up to four times (in aggregate) the amount of any profit gained or loss avoided as a result of the insider dealing. In addition, the Stock Exchange may well consider an insider dealer to be unsuitable to be involved in the management of a listed company, and the SFC may consider him not to be fit and proper for the purposes of being involved in securities or other regulated businesses.

The Model Code for Securities Transactions by Directors of Listed Companies (the "Model Code") contains restrictions on dealings (both on and off-market) by directors in a listed company’s securities and sets a minimum standard of goods practice against which listed companies should measure the equivalent restrictions which they are required to adopt. The principal provisions of the Model Code are as follows.

• A director must not deal in a company’s securities without first notifying the Chairman or other directors appointed for that purpose and receiving a written acknowledgement (a written record of which should be maintained).

• Directors must also not deal for a period of one month preceding the preliminary announcement of the company’s annual results and the publication of the interim report.

• Directors who are aware of any negotiations relating to intended transactions by the company, or have other unpublished price-sensitive information, must not deal.

The Model Code applies to the grant of a share option to a director and dealings in the company’s warrants and in derivative warrants. It also extends to dealings by directors’ spouses and infant children and to other dealings in which he is deemed to be interested pursuant to the Securities (Disclosure of Interests) Ordinance (see chapter 9 of this publication). Directors are also expected to ensure that all dealings by group directors or employees who are likely to have access to price-sensitive information are made in compliance with the Model Code as if those persons were themselves directors of the listed company.

The Listing Rules require specified percentages of a listed company’s shares to be in public hands. If the company’s market capitalization at the time of listing does not exceed HK$4,000m, then not less than 25% of its shares must be held by the public. If the market capitalization is over that figure, the Stock Exchange has a discretion as to the percentage, which will normally be not less than 10% (or between 10% and 25% in the case of a PRC company).

Where a PRC company has shares other than H shares in issue:

• all H shares must be held by the public (unless the Stock Exchange agrees otherwise);

• all H shares held by the public must be not less than 10% of the total issued share capital of the company; and

• the aggregate amount of H shares and other securities held by the public must not constitute less than 25% of the total existing share capital of the company.

For these purposes, connected persons of the company (see 6.4 above), persons whose acquisition of securities has been financed by a connected person and persons who are accustomed to take instructions from a connected person in connection with his securities of the Company do not count as members of the public.

Companies must notify the Stock Exchange if they become aware that the prescribed percentage of shares is not in public hands. In such circumstances, the Stock Exchange will almost certainly require the company to rectify the position and may also suspend trading in the shares until the situation has been rectified, although it usually allows companies and their controlling shareholders to find ways of ensuring compliance within a specified period of time.

Purchases of shares and equity-linked securities may be made, subject to the Share Repurchases Code, the Listing Rules and relevant company law. Share repurchases are usually effected by no-market purchases pursuant to a "general mandate" obtained annually from shareholders to repurchase up to 10% of the company’s shares in any year. The relevant requirements are very detailed and are outside the scope of this publication.

Controlling shareholders may not dispose of any securities in the company during the period of 6 months following commencement of dealings, and may not make any disposals which would result in their ceasing to be controlling shareholders during the immediately following 6 month period.

The requirements governing disclosure of interests in a listed company’s securities are contained in the Securities (Disclosure of Interests) Ordinance which, like the Securities (Insider Dealing) Ordinance, is applicable to all companies listed on the Stock Exchange.

If a shareholder becomes interested in 10% or more of a listed company’s relevant share capital it must disclose this interest. "Relevant share capital" means the company’s issued share capital of a class carrying rights to vote in all circumstances at general meetings of the company. Once the 10% threshold has been reached, a shareholder has to disclose any changes in its interests which take the shareholding up or down through a whole percentage point of the relevant share capital. "Interests" are very widely defined and , subject to certain exceptions (including rights to subscribe for shares and discretionary interests under a trust), could be described as any interest of any nature in relevant share capital.

Concert party agreements, which are agreements (excluding underwriting and sub-underwriting agreements) between two or more persons for the acquisition by any one or more of them of interests in a listed company’s relevant share capital which contain obligations or restrictions on any of the parties in respect of their use, retention or disposal of interests acquired pursuant to that agreement, give rise to disclosure obligations once an interest is in fact acquired pursuant to such an agreement.

Directors and chief executives of listed companies must also disclose all their interests, and those of their spouses and children under the age of 18, and changes in those interests, in any shares or debentures of a listed company and its associated corporations (which are widely defined to include the listed company’s subsidiaries and holding companies and its associated companies as disclosed in its last accounts). "Interests" are defined even more widely for directors than they are for substantial shareholders. They include discretionary trust interests and interests in derivative warrants and, as a result of the requirements of the Model Code, subscription warrants, but not share options granted by the company (although the company has to record these separately).

The duty to disclose arises immediately upon acquisition of the relevant interest or, if later, upon the relevant party becoming aware of the relevant interest. Disclosure must be made to the Stock Exchange and then to the listed company concerned (in that order) within five days of the duty arising or the person or persons interested in the shares becoming aware of having such an interest. Accelerated disclosure (by 9:00a.m. on the next business day) is required by the Takeover Code in relation to acquisitions and disposals of interests where a person comes to or ceases to, hold 10% or more of a listed or other public company, or holds between 10% and 35% and increases or decreases its holding to or beyond a whole percentage figure. This is intended to ensure early warning of stake building activities. The company must keep registers of substantial shareholders’ and directors’ interests.

The Ordinance gives listed companies the power to investigate the ownership of their share capital by sending out notices to persons who are believed to have interests in their relevant share capital requiring disclosures of those interests to be made. Failure to comply with such an notification is a criminal offence and can entitle the listed company to apply to the Court for orders restricting the transfer of the shares concerned.

Once a company becomes listed, its shareholder meetings become public property, sometimes uncomfortably so, and can be subject to scrutiny and even litigation. It will not be possible to hold shareholder meetings informally, and painstaking preparation for and running of shareholder meetings will be vital, as failures of planning and procedure can lead to criticism and even challenge of the outcome of the meeting. Detailed advance preparations, including close liaison with the company’s share registrars, proper briefing of the chairman and preparation for contingencies such as hostile questions or the demand for a poll, will essential for a smooth, embarrassment-free meeting.

Most of the requirements relating to the conduct of shareholder meetings arise under the company law of the place of incorporation of the company, and its articles of association or bye-laws. The Listing Rules contain certain matters which are required to be set out in the company’s articles of association or bye-laws, for instance, to ensure that overseas shareholders receive sufficient notice of meetings are requiring that forms of proxy provide for two-way voting.

Shareholders must not be put under pressure to vote or abstain from voting at any general meeting and, where their voting is solicited, must be encouraged to consult their professional advisers. Proxies may only be solicited based on previously published information.

The Takeover Code is the main source of regulation of takeover and merger activity relating to listed and other public companies and is intended to ensure fair treatment for all shareholders in such companies.

The provisions of the Takeover Code are very detailed and are outside the scope of this publication. Briefly, the most important provision is that contained in Rule 26, which requires a mandatory offer for all the shares of a company (and related securities, such as convertibles or warrants) to be made where any person (or group of persons acting together in concert) acquires 35% or more of the voting rights of a public company. This also applies if any person (or group of persons acting together in concert) who holds between 35% and 50% of the voting rights in a public company acquires more than 5% of any such voting rights in any 12 month period. This requirement can catch the unwary - for instance in the context of a placing of an existing stake followed by a "topping-up" subscription of new shares, where exemptions are available under the Takeover Code but failing to obtain them can be embarrassing. The definition of "acting in concert" creates many difficult problems of interpretation in practice.

The Listing Agreement contains detailed requirements about trading and settlement, share registration services and permitted registration charges.

An issuer or group whose assets consist mainly or wholly of cash or short-dated securities will not normally be regarded as suitable for listing. If a listed company’s position changes so that such a situation exists, dealings will normally be suspended, usually until the company has a business which is suitable for listing. The company must apply to the Stock Exchange to have the suspension lifted and will treated as a new applicant for listing. An exemption from this requirement does exist, although it is narrow in its scope.

Withdrawal of a primary listing is now a much more difficult process than it used to be. Where there is no alternative listing available, approval by 75% of the minority shareholders in meeting and a reasonable cash or other alternative are required.