The proposals formalise the Exchange’s practices in regulating backdoor listings, and impose additional requirements to address specific issues and backdoor transaction structures, including concerns about new investors acquiring de facto control of an issuer and subsequently using it as a listing platform to acquire new businesses and circumvent the new listing requirements, or issuers breaking up acquisitions into a series of small acquisitions, or acquiring a new business that does not meet new listing requirements and subsequently, disposing its original businesses.
 

• Codify the principle based test (set out in Guidance Letter GL78-14) with modifications to two assessment criteria: 

• Retain and modify the bright line tests:

• RTO rules apply to very substantial acquisition(s) from the controlling shareholder within 36 months from a change in control (as defined under the Takeovers Code).
   
• Disposal restriction applies to restrict any material disposal at the time of or within 36 months after a change in control of the issuer (as defined under the Takeovers Code), unless the remaining business, or any assets acquired after the change in control, can meet Rule 8.05.The Exchange may also apply this disposal restriction to a material disposal proposed at the time of or within 36 months after a change in the single largest substantial shareholder of the issuer.  

• Codify Guidance Letter GL84-15 into the Rules to disallow backdoor listings through large scale issue of securities for cash, where the proceeds will be applied to acquire and/or develop new business that is expected to be substantially larger than the issuer’s existing principal business.   

The proposals aim to discourage the use of “shell” companies for backdoor listings and to ensure the acquisition targets that are the subject of new listing under the RTO Rules are suitable for listing. 

• The acquisition targets must be suitable for listing (Rule 8.04) and meet the trading record requirements for new applicants (Rule 8.05), and the enlarged group must meet all the new listing requirements (except Rule 8.05).For issuers that do not comply with Rule 13.24 (normally suspended companies), each of the acquisition targets and the enlarged group must comply with all the new listing requirements.
   
• Codify the “extreme VSAs” category set out in Guidance Letter GL78-14 and rename as “extreme transactions”. “Shell companies” are not eligible for this category and accordingly, the issuer must either i) operate a principal business of substantial size; or
  ii) have been under the long-term control of a large business enterprise and the acquisition forms part of a business restructuring with no change in control.
   
• Where an RTO or an extreme transaction involves a series of transactions and/or arrangements, issuers are required to include in the listing document or circular the pro forma income statement of all acquisition targets and any new business developed that are part of the series. 

The proposed amendments to the continuing listing criteria aim to address specific concerns about some issuers that attempt to maintain the listing status by holding significant assets or investments, rather than operating businesses that have substance and are viable and sustainable in the longer term: 
  

• Requires a listed issuer to carry out a business with a sufficient level of operations and assets of sufficient value to warrant its continued listing (and not sufficient operations or assets set out in the current Rule).  This excludes any securities trading and/or investment activities (other than a Chapter 21 investment company).  A listed issuer would not meet this Rule if it does not operate a business that has substance and/or is viable and sustainable.

• Amend the definition of “short-dated securities” in the cash company Rules to include investments that are easily convertible into cash (eg investments in listed securities).The exemption for securities brokerage companies will only apply to clients’ assets. 

• A 12-month transitional period applies for issuers not meeting the continuing listing criteria as amended.No transitional period for the proposed amendments to the RTO Rules, however, if issuers conduct transactions with a view to re-comply with the new Rules, the Exchange would take this into account with the objective of facilitating their re-compliance. 

The Exchange also proposes to enhance the Rule requirements in the following areas:

• Securities transactions:
   
  
  • confine the revenue exemption from the notifiable transaction requirements to purchases and sales of securities only if they are conducted by members of the issuer group that are subject to the supervision of prudential regulators (ie banking companies, insurance companies, or securities houses); and
     
  • add a specific requirement for issuers to disclose in their annual reports details of each securities investment that represents 5 per cent or more of their total assets;
     
• Significant distribution in specie of unlisted assets
  
  
  •  codify Listing Decision LD75-4 to impose additional requirements on distribution in specie that is equivalent in size to a very substantial disposal, comparable to requirements for a withdrawal of listing;
    
    
• Other matters relating to notifiable or connected transactions
  
  
  • require (i) disclosure on the outcome of any guarantee on the financial performance of an acquisition target that is subject to the notifiable or connected transaction requirements (irrespective of whether the guaranteed financial performance is met) in the next annual report; and (ii) disclosure by way of an announcement if (a) there is any subsequent change to the guarantee; or (b) the actual financial performance of the target acquired fails to meet the guarantee (currently required for a connected transaction only);
    
    
  • require (i) disclosure on the identities of the parties to a transaction in the announcements of notifiable transactions; and (ii) disclosure on the identities and activities of the parties to the transaction and of their ultimate beneficial owners in the announcements of connected transactions; and
    
    
  • amend the Rules to make it clear that where any calculation of the percentage ratios produces an anomalous result or is inappropriate to the sphere of activity of the listed issuer, the Exchange (or the issuer) may apply an alternative size test that it considers appropriate to assess the materiality of a transaction under Chapter 14 or 14A.