HKEx Publishes Consultation Conclusions on Proposed Changes to Connected Transaction Rules and Requirements for Circulars and Listing Documents of Listed Issuers

Corporate

Regulatory

20 May 2010

Hong Kong Exchanges and Clearing Limited (HKEx) today (Thursday) published its consultation conclusions on:

	Proposed changes to connected transaction rules set out in the consultation paper of 2 October 2009; and
	Proposals to streamline requirements for issuers’ circulars and listing documents set out in the consultation paper of 18 September 2009.

Connected transaction rules

The consultation paper on connected transaction rules included proposals to review the definition of connected person, provide exemptions for connected transactions which are immaterial or involve persons not in a position to exercise significant influence, and amend the Listing Rules to address technical issues.

HKEx received 70 submissions. Overall market feedback indicated strong support on the proposals. HKEx will implement the proposals with minor modifications based on respondents’ suggestions. Two proposals will not be adopted:

	HKEx has decided not to proceed with the proposal to exclude persons connected at the subsidiary level from the definition of connected person at this time. While a majority of the respondents supported this proposal, some respondents expressed concerns about possible abuse if a general exemption is granted to all these persons at one time. HKEx will adopt the insignificant subsidiary exemption proposal and exempt persons connected with those subsidiaries from the connected transaction requirements.
	HKEx will continue to review the scope of the connected transaction rules. It will consider whether the definition of connected person at the issuer level is sufficiently broad to cover the kinds of persons that can exert significant influence over an issuer’s action. HKEx will also consider relaxing the definition of connected person at the subsidiary level.
	HKEx has decided that the connected transaction rules will continue to govern revenue transactions with connected persons. While the market views on this issue were diverse, a substantial number of respondents supported the position of HKEx that it is inappropriate to introduce a general exemption for these transactions in the Hong Kong market.
	Nevertheless, HKEx acknowledges there may be areas of refinement in terms of governing continuing connected transactions of revenue nature, and in terms of further identifying areas where revenue transactions may be exempt from the connected transactions. They will be covered in the next phase of HKEx’s review of the Rules.

“In this consultation, we have addressed issues about some specific connected transaction requirements that are burdensome, restrictive or have unintended effects. We will conduct further review of the connected transaction rules, which will take into account the respondents’ views in this consultation, the corporate structures of Hong Kong-listed issuers, and the developments of regulations in overseas jurisdictions. We will consult the market on new proposals.” said Mark Dickens, HKEx's Head of Listing.

Requirements for circulars and listing documents

The consultation paper sought market views on proposals to streamline the requirements for issuers’ documents and codify existing practices. They were intended to make the contents of these documents relevant for shareholders and eliminate unnecessary burdens on issuers.

HKEx received 34 submissions. An overwhelming majority of the respondents supported the proposals. HKEx will implement the proposals with minor modifications based on suggestions from respondents.

One proposal will not be adopted. The current requirement for including an indebtedness statement in a notifiable transaction circular will be retained, given the respondents’ views that the information is useful to shareholders.

“The Rule amendments will improve disclosure standards for circulars and listing documents and facilitate timely despatch of circulars for investors to make informed decisions. We will continue our efforts to further improve the disclosure requirements for issuers’ documents.” Mark Dickens added.

Implementation

A summary of the proposals adopted is set out in the Attachment to this news release.

The Consultation Conclusions for Proposed Changes to Connected Transaction Rules and Proposed Changes to Requirements for Circulars and Listing Documents of Listed Issuers can be downloaded from the “News & Consultations – Market Consultations – Consultation Conclusions” section of the HKEx website.

The Rule amendments can be downloaded from the “Rules & Regulations – Rules and Guidance on Listing Matters – Amendments to Main Board Listing Rules" and the “Rules & Regulations – Rules and Guidance on Listing Matters – Amendments to GEM Listing Rules” sections of the HKEx website.

The Rule amendments will be effective from 3 June 2010.

HKEx has published a series of frequently asked questions relating to the Rule amendments. They are can be downloaded from the “Rules & Regulations – Rules and Guidelines on Listing Matters – Frequently Asked Questions” section of the HKEx website.

ATTACHMENT

Summary of Proposals Adopted

Rule amendments have been prepared to implement the following changes to the connected transaction rules and the requirements for issuers’ circulars and listing documents:

Connected transaction rules

Introduce new exemptions

1. exempt transactions with connected persons at the subsidiary level where the size of the subsidiary is insignificant to the issuer (insignificant subsidiary exemption)
2. exempt revenue transactions with associates of a substantial shareholder who is a passive investor

Relax existing exemptions

3.	relax the percentage thresholds for de minimis exemptions as follows:

Connected transaction type	Percentage thresholds
Fully exempt	0.1%	- 1% for transactions with persons connected only at the subsidiary level - 0.1% for other connected transactions
Exempt from shareholder approval	2.5%	5%

Connected transaction type

Percentage thresholds

Before Rule change

After Rule change

Fully exempt

0.1%

- 1% for transactions with persons connected only at the subsidiary level

- 0.1% for other connected transactions

Exempt from shareholder approval

2.5%

4.	extend the de minimis exemptions to issues of securities by an issuer’s subsidiary (ie deemed disposals)
5.	exempt provision of financial assistance by an issuer to a connected person in which the issuer is a shareholder provided it is on normal commercial terms, pro- rata and on a several basis
6.	exempt a disposal by an issuer of its interest in a subsidiary to a third party where the subsidiary has a substantial shareholder that is a controller only because of his/its relationship with the subsidiary under Main Board Rule 14A.13(1)(b) / GEM Rule 20.13(1)(b)
7.	extend the exemption for an issuer acquiring consumer goods or services from connected persons for the purpose of or in connection with the issuer’s business if there is an open market and transparency in pricing the goods or services concerned

Revise the scope of connected persons

8	restrict the circumstances in which a non-wholly owned subsidiary is a connected person by:
	-	excluding a non-wholly owned subsidiary which is connected only because it is (i) a substantial shareholder of another subsidiary or (ii) an associate of a person connected only at the subsidiary level; and
	-	introducing an exemption for intra-group transactions between a “connected subsidiary” (as defined in Main Board Rule 14A.11(5) / GEM Rule 20.11(5)) and its subsidiaries or between its subsidiaries
9.	remove the following persons from the definition of connected person:
	-	promoters of PRC, or Mainland China, issuers
	-	“PRC Governmental Body” for non-PRC issuers
	-	management shareholders of GEM issuers
10.	remove the following persons from the definition of associate:
	-	the holding company of an investee company¹, or a fellow subsidiary of this holding company; and
	-	a company controlled by the investee company (not being a subsidiary of the investee company), and its subsidiary, holding company or fellow subsidiary
11.	extend the definition of “associate” to a company in which a connected person’s relative has a majority control

Other amendments

12.	clarify that the annual review requirements apply to continuing connected transactions subject to reporting and disclosure requirements under the connected transaction Rules

Requirements for issuers’ circulars and listing documents

Streamline requirements for circulars and listing documents

1.	for very substantial disposal circulars, introduce options to allow (i) the issuer to disclose its disposal target’s financial information, and (ii) the issuer’s auditors or reporting accountants to conduct a review of the financial information. These options are alternatives to the current requirement for an accountant’s report on the issuer group (including separate note disclosure on the disposal target)
2.	relax the reporting period deadline in an acquisition circular. Under the new Rule, the reporting period will include at least three consecutive financial years and end not more than six months before the circular date
3.	allow issuers to incorporate previously published financial information in their circulars or listing documents by reference
4.	for listing documents of listed PRC and overseas issuers, remove disclosure and inspection requirements regarding provisions in their constitutional documents and regulatory provisions in the relevant jurisdictions
5.	for a notifiable transaction involving an acquisition and a disposal, allow each of the acquisition and disposal to comply with the circular content requirements applicable to its respective transaction classification, rather than the higher classification

Codify existing practices

6.	require the working capital sufficiency statement in transaction circulars to take into account the effect of the transaction
7.	remove the requirement to disclose combined financial information of the enlarged group
8.	allow PRC issuers to despatch circulars after issuing notice of general meeting and before the deadline for giving such notice under the PRC Company Law

Improve disclosure standards

9.	require information in board minutes for connected transactions to be disclosed in circulars instead of in submissions to the Exchange
10.	remove the 21-day deadline for despatching circulars (other than information circulars), and require disclosure of the expected date of despatch and any delay
11.	change the timing for despatching information circulars from calendar days to business days
12.	align the directors’ responsibility statement with the general disclosure principles under Main Board Rule 2.13 / GEM Rule 17.56

Note:

GEM is HKEx’s Growth Enterprise Market

1	An investee company includes a company over which a connected person and/or any party closely related to this connected person, individually or together, has control

Ends

Updated 20 May 2010