Note to subscribers for the amendments to

the rules governing the listing of securities (the “Listing Rules”)

Update No. 80

31 March 2004

Dear Sirs,

Amendments to the Listing Rules relating to corporate governance issues,

initial listing criteria and continuing listing obligations

We enclose reprinted pages of the Listing Rules incorporating amendments to the Listing Rules in relation to corporate governance issues, initial listing criteria and continuing listing obligations, together with the filing instructions. 

The Listing Rule amendments cover two major areas:

• corporate governance rule amendments which aim to raise the standards of corporate governance practices of issuers, in particular, by enhancing the transparency of issuers and improving investor protection; and
• rule amendments relating to initial listing criteria and continuing listing obligations which also enhance issuer transparency and investor protection.  They also introduce alternative listing criteria that should help broaden the range of enterprises seeking a listing and better position Hong Kong to meet the needs of Mainland enterprises for risk capital.

One of our secondary objectives in introducing the amendments was to improve the transparency of the Listing Rules and the Exchange’s practices.  Where possible, we have tried to express the Listing Rules in simple terms.  We have also codified much of the Exchange’s existing practice in interpreting and applying the Listing Rules, which will provide greater certainty for issuers in applying the Listing Rules.

The principal amendments are as follows:

Directors and board practice

• Independent non-executive directors (“INEDs”) play a pivotal role in the corporate governance of issuers.  Given the increasingly important role of INEDs and to ensure that the views of INEDs carry significant weight in the board’s decisions, the minimum number of INEDs required under the Listing Rules is increased from 2 to 3 
• One of the major responsibilities of INEDs is to provide an objective view on the assessment of the financial statements of issuers.  Issuers are required to appoint at least one INED with appropriate professional qualifications or accounting or related financial management expertise
• The quality and independent state of mind of INEDs are essential for ensuring the effectiveness of their contribution.  Additional guidelines have been introduced to assist issuers in assessing the independence of proposed INEDs
• Issuers are required to establish an audit committee and appoint a qualified accountant to ensure that proper financial reporting procedures and internal controls are in place and compliance with the Listing Rules with regard to financial reporting and other accounting-related issues 

Notifiable transactions and connected transactions

• The existing chapter (Chapter 14) on notifiable transactions and connected transactions is more frequently referred to than any other part of the Listing Rules.  New Chapters on notifiable transactions (Chapter 14) and connected transactions (Chapter 14A) have been introduced.  The format and layout of the notifiable transaction and connected transaction Rules have been changed in an attempt to make them more accessible and user-friendly.  Amendments have been made to codify the Exchange’s interpretation of certain provisions where the existing Listing Rules were not clear or may have been ambiguous.  Amendments have also been made to enhance issuer transparency and shareholder protection.  The main changes are:

  • amendments to the definition of “connected person” to clarify under what circumstances a non wholly-owned subsidiary and relatives of a director, chief executive and substantial shareholder will be treated as a connected person
  • amendment to the definition of “connected transaction” to reflect the application of the connected transaction Rules in certain transactions between an issuer and a party which is not a connected person
  • introduction of a new category of notifiable transaction, namely “very substantial disposal”.  This will ensure that shareholders are given an opportunity to exercise their voting rights and to express their views at a general meeting to approve any disposal transaction that may have a significant impact on the remaining business of the issuer and its prospects
  • introduction of a new category of notifiable transactions, namely “reverse takeover”, to deal with backdoor listings (the circumvention of the requirements for a new applicant)
  • introduction of a total assets test to replace the net assets test to address the practical problems of the existing net assets test, in particular to provide issuers with net liabilities or negligible net assets with clarity on the application of the classification tests to their circumstances
  • introduction of a new classification test, the consideration to market capitalisation test to replace the consideration to net assets test
  • introduction of a new classification test, the revenue test as a stand-alone test to measure the impact of a transaction on the issuer in terms of level of business activity
  • introduction of new percentage thresholds for classifying notifiable transactions based on the new tests
  • all of the new tests except for the profits test will be used to classify connected transactions
  • introduction of a definition of “continuing connected transactions” and associated requirements to codify our current practice with respect to exemptions and ongoing review requirements for such transactions
  • introduction of a new section on “options” for notifiable transactions and connected transactions to codify our treatment of options and to clarify the application of the classification rules to transactions involving option(s)
  • introduction of a new section on “financial assistance” for connected transactions to codify our existing practice in respect of transactions involving financial assistance and connected persons
  • additional disclosure requirements for announcements and circulars relating to notifiable transactions and connected transactions

Financial reporting and disclosure obligations

• The following major changes have been made to Appendix 16 to the Listing Rules:
  • issuers will be permitted to distribute a summary interim report rather than a full interim report
  • the two-phased publication arrangement for annual and interim results announcements has been abolished. To achieve this, the disclosure requirements for results announcements have been brought into line with the disclosure equirements for summary financial reports and summary interim reports
  • introduction of new disclosure requirements relating to compliance with the Model Code on directors’ dealing and the requirements in respect of INEDs  and establishment of an audit committee for annual reports and interim reports to enhance transparency
  • introduction of recommended disclosures on management discussion and analysis for annual and interim reports to enhance transparency
• A new section on disclosure of pro forma financial information has been included in Chapter 4 to explain when pro forma financial information must be prepared and the standards of preparation and assurance associated with any disclosure of pro forma financial information whether mandated or voluntary

Continuing listing obligations

• The provisions of the Listing Agreements for issuers of equity securities set out in Parts A, B and I of Appendix 7 and Practice Note 19 have been incorporated without substantial revisions into a new Chapter 13 on continuing obligations or have been merged into Chapters 19 and 19A
• To safeguard minority shareholders from material or unfair dilution of their interests, issuers are required to obtain independent shareholders’ approval for the second and subsequent refreshments of a general mandate in any one year.  An issuer will not be allowed to place its securities for cash consideration under a general mandate at a discount of 20% or more, unless it can satisfy the Exchange that it is in a serious financial difficulty and that the only way it can be saved is by an urgent rescue operation
• Voting by poll is required for connected transactions and other transactions which require approval by shareholders and shareholder(s) and their associates that have a material interest must abstain from voting
• To ensure an open, fair and orderly market, trading in an issuer’s securities will be suspended if it fails to meet the minimum public float required under the Listing Rules
• To protect investors and to promote high standards of financial reporting, trading in an issuer’s securities will be suspended if it fails to publish periodic financial information in accordance with the Listing Rules
• Issuers are required to publish announcements as soon as practicable following any changes in directors, auditors or the financial reporting year-end
• Shareholders’ approval is required for directors’ service contracts that may exceed 3 years or directors’ service contracts that expressly require the issuer to give a period of notice of more than 1 year or to pay compensation of more than 1 year’s emoluments on termination 

Other corporate governance rule amendments

• The definition of “associate” in Chapter 1 has been expanded to remove the loophole in the existing Listing Rules in relation to trust arrangements involving a company under the control of the trustee of a trust of which the connected person or any of his family interests is a beneficiary or discretionary object
• The definition of “subsidiary” has been expanded to include an entity which is accounted for in the audited consolidated accounts of an issuer as a subsidiary under applicable accounting standards
• Guidelines have been introduced to assist issuers in determining whether a shareholder has a “material interest” in a transaction codifying our existing interpretation of the Listing Rules
• An issuer wishing to cancel/withdraw its primary listing on the Exchange in circumstances where the issuer has no alternative listing must obtain the prior approval of 75% or more of its shareholders, the same approval threshold for a privatisation offer under the Takeovers Code
• Issuers may not purchase their own shares on the Exchange if the purchase price is more than 5% above the average closing market price of those shares for the 5 preceding business days.  To address the problems encountered by issuers with a low share trading volume, the existing 25% monthly share repurchase restriction has been abolished
• Amendments have been made to clarify the definition of “profit forecast” and  reflect the practice that any estimate of profits or losses or reference to future profits or losses may be regarded as profits forecasts
• Appendix 10 (Model Code for Securities Transactions by Directors of Listed Issuers) has been amended to provide expressly that any breach of the required standard set out in Appendix 10 will be regarded as a breach of the Listing Rules
• A definition of “dealing” has been introduced to the Model Code to explain under what circumstances a transaction constitutes a dealing by a director in the securities of an issuer.  New requirements have also been introduced on the notification and disclosure of directors’ dealings and reporting on compliance with the Model Code provisions so as to enhance transparency
• The provisions of Appendix 3 (Articles of Association) regarding nomination of directors have been amended to ensure that shareholders are given sufficient time to consider information on any proposed nomination of a director

Initial listing criteria

• To provide more flexibility and cater for a wider variety of issuers seeking to list on the Main Board, alternative financial standards to the profit requirement have been introduced, namely:
  • a market capitalisation / revenue test
  • a market capitalisation / revenue / cash flow test
• The Exchange will accept a shorter trading record period for applicants able to demonstrate that the directors and management of the new applicant have sufficient and satisfactory experience of at least 3 years in the line of business and industry of the new applicant, and management continuity for the most recent financial year
• The minimum expected initial market capitalisation for new applicants has been increased to HK$200 million
• The minimum number of shareholders and the minimum spread of shareholders required at the time of listing has been increased to 300 shareholders and in the case of applications under the market capitalisation/revenue test to 1,000 shareholders

Coming into effect

Subject to the transitional arrangements set out in HKEx’s news release of 30 January 2004 and its attachment, the rule amendments will be effective on 31 March 2004.

The amendments to the relevant sections of the Main Board Listing Rules have been marked-up for your reference, please click HERE to see the amendments to the respective chapters. The revised version of the entire Main Board Listing Rules are located in the section headed "Listing Rules (Main Board)".

Yours faithfully

For and on behalf of

The Stock Exchange of Hong Kong Limited

Richard Williams

Head of Listing