Market Turnover


Exchange Publishes Conclusions on Proposed Rule Changes Associated with Backdoor Listing and Shell Activities to Strengthen Long-term Health, Quality and Sustainability of the Market

26 Jul 2019

(A wholly-owned subsidiary of Hong Kong Exchanges and Clearing Limited)


  • Exchange to amend Listing Rules associated with backdoor listing and shell activities
  • Proposals will be implemented with modifications, reflecting comments received through the consultation process
  • Rule amendments to take effect on 1 October 2019

The Stock Exchange of Hong Kong Limited (the Exchange), a wholly owned subsidiary of Hong Kong Exchanges and Clearing Limited (HKEX), today (Friday) published conclusions on its consultation paper regarding backdoor listing, continuing listing criteria and other Listing Rule (Rule) amendments1.

The Exchange will implement the consultation proposals, with modifications, reflecting comments received, with amendments effective on 1 October 2019 (Effective Date).  The consultation is part of a series of measures undertaken by the Exchange to strengthen and enhance the long-term health, quality and sustainability of the Hong Kong market.

“These changes will enhance both the reverse takeover (RTO) Rules and the continuing listing criteria, helping to address evolving market practices in backdoor listing and improve the regulation of shell activities,” said David Graham, HKEX’s Head of Listing.  “The rule changes are a positive step forward for the whole market and will not restrict legitimate business activities, business expansion or diversification of listed issuers.”

The Exchange welcomed a total of 121 responses2 to the consultation paper from a broad range of stakeholders.  Respondents were supportive of the initiatives to address backdoor listing and shell activities, though some commented on specific RTO proposals and their possible application to normal business activities of issuers.

“The Exchange has carefully considered the comments received and has made some modifications to the proposals in order to reflect the market’s response.  We believe that the new RTO Rules, as modified, will provide sufficient flexibility to address changing RTO structures,” said Mr Graham.

In addition, the Exchange has modified some of the proposed amendments to the continuing listing criteria to provide exemptions for banking companies, insurance companies and securities houses that are subject to supervision by other regulatory authorities.

The Consultation Conclusionsrespondents’ submissions, amendments to the Main Board Listing Rules and amendments to the GEM Listing Rules are available on the HKEX website.

The Exchange also publishes (i) three new guidance letters to provide guidance on the application of the Rules as amended: Guidance on application of the reverse takeover rules (HKEX-GL104-19), Guidance on large scale issues of securities (HKEX-GL105-19), and Guidance on sufficiency of operations (HKEX-GL106-19), and (ii) a frequently asked question on the notifiable transaction requirements relating to securities transactions (FAQ Number 057-2019).

Key Listing Rule changes, as modified, include the following:

I. Amendments Relating to Backdoor Listings

  (a) Definition of an RTO transaction

    1. RTO – Principle based test:

      Codify the six assessment factors under the principle based test in Guidance Letter GL78-143, with modifications made to the last two factors:
      - Transaction size
      - Target quality
      - Nature and scale of issuer’s business
      - Fundamental change in principal business
      - Change in control/de facto control
      - Series of transactions and/or arrangements (this includes acquisitions, disposals and/or change in control or de facto control that take place in reasonable proximity (normally within 36 months) or are otherwise related);
    2. RTO – Bright line tests:
      Modify the bright line tests to apply to very substantial acquisitions from an issuer’s controlling shareholder within 36 months from a change in control of the issuer;

      Disposal restriction: modify the bright line tests to restrict disposals (or distributions in specie) of all or a material part of the issuer’s business proposed at the time of or within 36 months after a change in control of the issuer.  The Exchange may also apply the restriction to disposals (or distributions in specie) at the time of or within 36 months after a change in de facto control (as set out in the principle based test) of the issuer; and
    3. Backdoor listing through large scale issue of securities:

      Codify Guidance Letter GL84-154 to disallow backdoor listing through large scale issue of securities for cash, where there is, or will result in, a change in control or de facto control of the issuer, and 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.
  (b) Tighten the compliance requirements for RTOs and extreme transactions
  • Extreme transactions: (i) codify the “extreme VSAs” requirements in Guidance Letter GL78-14 and rename this category of transactions as “extreme transactions”; and (ii) impose additional eligibility criteria on the issuer that may use this transaction category: (a) the issuer must operate a principal business of substantial size; or (b) the issuer must have been under the control or de facto control of the same person(s) for a long period (normally not less than 36 months) and the transaction will not result in a change in control or de facto control of the issuer; and

  • Requirements for RTOs and extreme transactions: modify the Rules to require the acquisition targets in a RTO or extreme transaction to meet the requirements of Rule 8.04 and Rule 8.05 (or Rule 8.05A or 8.05B), and the enlarged group to meet all the new listing requirements in Chapter 8 of the Rules except Rule 8.05.  Where the RTO is proposed by a Rule 13.24 issuer5, the acquisition targets must also meet the requirement of Rule 8.07.
II. Amendments to Continuing Listing Criteria for Listed Issuers
  • Rule 13.24 (sufficient operations): amend Rule 13.24 to require an issuer to carry out a business with a sufficient level of operations and to have assets of sufficient value to support its operations to warrant its continued listing (and not sufficient operations or assets set out in the current Rule). Proprietary securities trading and/or investment activities by an issuer’s group (other than a Chapter 21 company) are normally excluded when considering whether the issuer can meet Rule 13.24 (except for those carried out by a member of the issuer’s group that is a banking company, an insurance company, or a securities house that is mainly engaged in regulated activities under the Securities and Futures Ordinance); and

  • Rules 14.82 and 14.83 (cash companies): (i) extend the definition of “short-dated securities” in Rule 14.82 to cover investments that are easily convertible into cash and rename it as “short-term investments”; and (ii) confine the exemption under Rule 14.83 to cash and short-term investments held by members of an issuer’s group that are banking companies, insurance companies or securities houses.

  • Transitional arrangement: A transitional period of 12 months from the Effective Date will apply to listed issuers that do not comply with the new Rule 13.24 or 14.82 strictly as a result of the Rule amendments.  The transitional arrangement will minimise the impact of the Rule amendments on those issuers by allowing them a 12-month period to comply with the Rules as amended.  For the avoidance of doubt, the transitional arrangement will not apply to issuers that do not comply with the current requirements under Rule 13.24 or 14.82, or become non-compliant with the new Rule 13.24 or 14.82 after the Effective Date.

The Exchange will also adopt other proposed Rule amendments relating to issuers’ securities trading and/or investments, significant distributions in specie, notifiable transactions and connected transactions as set out in the consultation paper with minor modifications.

Following the consultation, major modifications made to the RTO proposals include:

  • Revising the indicative factors under the “change in control or de facto control” factor of the principle based test of the RTO Rules to the following: a change in (i) controlling shareholder of the issuer; or (ii) the single largest substantial shareholder who is able to exercise effective control;

  • Removing references to greenfield operations, equity fundraisings and termination of business from the “series of transactions and/or arrangements” factor of the principle based test of the RTO Rules to address concerns about possible application of the RTO Rules to issuers’ transactions in the normal course of business;

  • Removing the proposal to apply additional requirements where the issuer aborted transactions that are considered part of a series of transactions and there is a “pre-ordained” strategy to circumvent the new listing requirements, to address concerns about regulatory uncertainty;

  • Removing the proposed RTO compliance requirement for the enlarged group to meet Rule 8.05 applicable to Rule 13.24 issuers, to address concerns that smaller issuers would be particularly restricted; and

  • Revising the proposed additional requirements on issuers that may use the extreme transaction category, to address concerns about unfair treatment of mid or small sized issuers.
(1) The consultation paper on backdoor listing, continuing listing criteria and other Rule amendments was published on 29 June 2018.
(2) Submissions were received from 121 respondents, of which 68 were identical in content. Submissions with identical content were counted as one response in the quantitative analysis.
(3) It will be replaced by the new guidance letter (HKEX-GL104-19) from the Effective Date.
(4) It will be replaced by the new guidance letter (HKEX-GL105-19) from the Effective Date.
(5) A Rule 13.24 issuer generally describes an issuer that does not meet Rule 13.24 (which requires an issuer to have sufficient operations to warrant a continued listing).

Updated 22 May 2020