ANNOUNCEMENT -- Guidelines for Issuers with Negative or Negligible Net Tangible Assets

Regulatory

03 May 2001

ANNOUNCEMENT

GUIDELINES FOR ISSUERS WITH
NEGATIVE OR NEGLIGIBLE NET TANGIBLE ASSETS

Main Board issuers with negative or negligible net tangible asset value may apply for a de-minimis concession and/or a modification in the calculation of the "assets test" and "consideration test" for the purposes of classifying notifiable transactions (other than "connected transactions"). This announcement sets out guidelines for considering these applications.

The guidelines are intended to strike a balance between investor protection and allowing issuers with negative or negligible net tangible asset value appropriate flexibility to carry on their business activities, whilst providing the market with sufficient information to appraise the position of such issuers. They will also help ensure consistency of approach by The Stock Exchange of Hong Kong (the Exchange) and transparency on how the Exchange deals with any application for such modification. A summary of the guidelines is as follows:

Eligible issuers can apply for a De-minimis Concession under which the "assets test" and "consideration test" would not apply to transactions carried out in the ordinary course of business of the issuer, which are entered into on normal commercial terms, and where the consideration or value of each transaction does not exceed a fixed amount (normally expected to be HK$1 million).
Issuers whose negative or negligible net tangible asset value did not arise from operating losses can also apply for a Modified Calculation Concession. In this case, the "assets test" and "consideration test" would be calculated by reference to the gross assets of the issuer less intangibles and current liabilities as disclosed in its latest annual accounts subject to adjustments in light of the interim accounts and transactions that have been completed by the issuer after publication of the annual accounts (if any). A different set of indicative percentage ratios will be used to determine applicable disclosure or approval requirements.

The "profits test" and "equity test" will remain applicable to the issuer. The modifications will also not apply to connected transactions.

The Exchange would consider each application based on its own merits using these guidelines. If an application is approved, the issuer will be required to release an announcement to inform investors of the concession given and the period for which it is applicable. The issuer will also be required to disclose such details in its next annual report.

In order to provide shareholders an opportunity to be informed of, or to participate in, major corporate decisions, the Listing Rules require announcements to be made, or shareholders approval be obtained, depending on the size of the proposed transaction. These tests are found in Chapter 14 of the Listing Rules and involve an "assets test", a "profits test", a "consideration test" and an "equity test". Where assets are used in a test, the net tangible assets are used as the denominator. If an issuer has negative or negligible net tangible assets, these tests can make it difficult for an issuer to continue its day-to-day operations if the "assets test" and "consideration test" in the Listing Rules were applied. In these circumstances, there might be a need for other ratios and tests that allow the issuer to continue its operations while protecting the shareholders right to information or to vote.

To ensure investor protection without restricting issuers business activities, Main Board issuers with negative or negligible net tangible asset value may apply for a de-minimis concession and/or a modification to the calculation of the "assets test" and "consideration test" for the purposes of classifying notifiable transactions (other than "connected transactions") into the categories of "very substantial acquisition", "major transaction", "discloseable transaction" and "share transaction" (each as defined in the Listing Rules). The Securities and Futures Commission has granted its consent under Rule 2.04 of the Main Board Listing Rules for the modification of Chapter 14 in line with the guidelines set out in this announcement. However, application of these guidelines to individual applications would depend on the specific circumstances of the issuer.

Modified Sets of Tests

The guidelines are set out below:

De-minimis Concession

Each transaction carried out in the ordinary course of business of the issuer, which is entered into on normal commercial terms, and where the consideration or value of the transaction does not exceed a fixed amount (normally expected to be HK$1 million) would be considered as de-minimis. The "assets test" and the "consideration test" will not apply.
Modified Calculation Concession
- An "assets test" will generally be expected to be performed by dividing the gross assets less intangibles and current liabilities of the asset to be acquired or disposed of by the gross assets less intangibles and current liabilities of the issuer; and
- A "consideration test" will generally be expected to be performed by dividing the consideration for the asset to be acquired or disposed of by the gross assets less intangibles and current liabilities of the issuer.
- These percentage ratios arising from the above modified tests will be used to determine the applicable disclosure or approval requirements:
- Ratio of 5% or above but below 15% - the requirements for discloseable transactions will generally apply;
- Ratio of 15% or above but below 25% - the requirements for major transactions will generally apply;
- Ratio of 25% or above - the requirements for very substantial acquisitions will generally apply; and
- For acquisition of assets (including securities but excluding cash) for consideration that include securities for which listing will be sought, the requirements for share transactions would generally apply if the ratio is less than 5%.
These ratios would apply only to the "assets test" and the "consideration test". The "profits test" and "equity test" will remain applicable to the issuer. The modifications will also not apply to connected transactions.

Eligibility for the Modified Calculation Concession or the De-minimis Concession

Main Board issuers who wish to apply for either of these concessions must have a negative or negligible net tangible asset value based on their latest published accounts subject to adjustments in light of the interim accounts and transactions that have been completed by the issuer after publication of the annual accounts (if any). Any issuer with a negative or negligible tangible asset value can apply for the De-minimis Concession. Issuers applying for the Modified Calculation Concession must show that their negative or negligible net tangible asset value did not arise from operational losses in the ordinary and usual course of business during the current and/or prior financial year(s).

An issuer whose net tangible assets are 10% or less of its market capitalisation will be generally regarded as having negligible net tangible assets. The relevant market capitalisation will be based on the average closing price of the issuers shares for the latest 20 trading days in the last quarter before the date of the application. In calculating the above, only those trading days where there are transactions recorded in the issuers shares will be taken into account.

Conditions

The main conditions for the approval of Modified Calculation Concession and De-minimis Concession are as follows:

an immediate release of a paid announcement by the issuer of the details of the De-minimis Concession or the Modified Calculation Concession to be used in the calculation of notifiable transactions. These details should include the relevant value or percentage thresholds, as the case may be, the basis for applying for such modifications and the period the issuer is entitled to use the modified sets of tests;
the same details as above are to be included in the issuers next published annual report and accounts; and
the approved Modified Calculation Concession and De-minimis Concession would only be valid from the date of approval to the publication or the due date of the next annual report of the issuer, whichever is earlier.

As the above are only guidelines, we may also impose further conditions on individual applicants should we consider this appropriate. We will not consider application from any issuer who has not released its final or interim results under the Listing Rules at the time of application.

Applications

Issuers who wish to apply for either concession should submit all relevant supporting information together with their application. We will consider all applications based on the above broad guidelines and the issuers own merits, on a case by case basis. We may or may not approve the application in relation to any particular request. For example, we may not approve an application where there have been unusual market fluctuations in the price and/or volume in the shares of an issuer. We reserve the right to revoke or modify any approved application should new information on the issuer come to light or information be provided in its application changes. Where other parts of the Listing Rules require comparisons to be made with an issuers net tangible assets and issuers with negative or negligible net tangible assets face similar difficulties with full compliance, we may adopt the above approach in considering any application for modification of the relevant requirements.

Way forward

The modified tests are an interim measure only. In our current review of the Listing Rules, we are considering whether using net tangible asset value is a suitable basis for the purposes of reporting, disclosure and shareholders approval requirements under the Listing Rules.

Updated 03 May 2001