On 11 November 2016, The Stock Exchange of Hong Kong Limited (the “Exchange”) published a new Guidance Letter GL89-16 (the “Guidance Letter”) on issues related to "controlling shareholder" under The Rules Governing the Listing of Securities on The Stock Exchange on Hong Kong Limited (the “Listing Rules”).

The Guidance Letter clarifies the Exchange’s interpretation and practice in relation to, among other things:

  • the definition of "controlling shareholder";
  • the ownership continuity and control requirement; and
  • the lock-up requirements.

Identifying the “controlling shareholder” of the listing applicant

The Exchange stressed that the process of identifying the “controlling shareholder(s)” of a listing applicant is a case-specific exercise and depends on the facts and circumstances of each case.

The Guidance Letter sets out some simplified examples of ownership structures of a listing applicant that are commonly seen and the way the Exchange would interpret the definition of "controlling shareholder" in these situations. It is noteworthy that the examples include the two scenarios described below in which the Exchange will presume certain shareholders to be a group of controlling shareholders. To rebut the presumption, the listing applicant must provide a detailed submission providing the reasons as part of their listing applications for the Exchange’s consideration.

Shareholders holding their interests indirectly through a common investment holding company 

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It is obvious that each of SPV and Mr. A falls within the definition of “controlling shareholder” of the listing applicant.

On the basis that Mr. A, Mr. B and Mr. C have decided to restrict their ability to exercise direct control over the listing applicant by holding their interests through a common investment holding company (namely SPV), the Exchange will presume Mr. A, Mr. B and Mr. C to be a group of controlling shareholders of the listing applicant.

Shareholders who are close associates of each other

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The Exchange will presume Spouse A and Spouse B to be a group of controlling shareholders by virtue of their relationship of being spouses.

The Exchange will apply the same presumption to all shareholders who are “close associates” of each other as defined in Main Board Rule 1.01 (GEM Rule 1.01).

Ownership continuity and control requirement

The Guidance Letter sets out the Exchange’s practice in considering how listing applicants should demonstrate compliance with the ownership continuity and control requirement as one of the listing eligibility requirements under Main Board Rules 8.05(1)(c)/8.05(2)(c)/8.05(3)(c) (or GEM Rule 11.12A(2)). Below are the key points:

(1) What is the time requirement for controlling shareholder’s ownership continuity and control?

The Exchange requires listing applicants to demonstrate that for at least the most recent financial year up until the time immediately before the offering and/or placing becomes unconditional (the “Relevant Period”), there has been continuous ownership and control of the voting rights attaching to the shares by the controlling shareholder(s) of the listing applicant; and there has been no change to any controlling shareholder(s) identified at the beginning of the most recent financial year.

(2) How should a listing applicant with a group of controlling shareholders holding their interests directly or indirectly (such as through SPV) in the listing applicant meet the ownership continuity and control requirement?

For at least the Relevant Period,

  • the shareholders constituting the group of controlling shareholders must not change (i.e. no addition or departure of shareholders);
  • there must be no material changes in the voting interests in the listing applicant (or SPV as the case may be) held by each shareholder; and
  • such group of controlling shareholders together remains a group of controlling shareholders of the listing applicant (or, as the case may be, SPV remains a controlling shareholder of the listing applicant) and there are no new controlling shareholders.

(3) What amounts to a material change in the voting interests in the listing applicant (or SPV as the case may be) as referred to in item (2) above?

The Exchange will assess whether any change in the voting interests held by each shareholder constituting the group of controlling shareholders amounts to a material change on a case-by-case basis. The Exchange encourages potential listing applicants to consult with the Exchange in advance on any plans to transfer any voting interest in the listing applicant (or SPV as the case may be).

Lock-up requirements

Controlling shareholder(s) of a listing applicant is/are subject to certain lock-up requirements under Main Board Rule 10.07(1) (or GEM Rule 13.16A(1)) upon listing. The Guidance Letter sets out the Exchange’s practice in applying those requirements. Below are the key points:

(1) What are the lock-up requirements applicable to a controlling shareholder who is identified as at the date of the published listing document if its interest will decrease to below 30% in the following scenarios:

  1. as a result of an occurrence of event(s) which is certain to happen, e.g. the issuance of shares by the issuer and/or sale of shares by any existing shareholder as part of the offering and/or placing;
  2. as a result of the exercise of an over-allotment option?

For scenario (a), such shareholder shall be subject to lock-up during the period commencing on the date by reference to which disclosure of the shareholding of the controlling shareholder is made in the listing document and ending on the date which is 6 months from the date of listing (the “First Six-month Period”), but not during the following six-month period (the “Second Six-month Period”).

For scenario (b), such shareholder shall be subject to a 12-month lock-up of its shares after the listing of the issuer, i.e. such shareholder must maintain at least the same number of shares immediately after listing as stated in the issuer’s listing document for at least 12 months after the listing of the issuer.

(2) How should a group of controlling shareholders holding their interests directly or indirectly (such as through SPV) in the listed issuer comply with the lock-up requirements?

In the First Six-month Period:

 

  • he shareholders constituting the group of controlling shareholders must not change (i.e. no addition or departure of shareholders);
  • there must be no material changes in the voting interests held by each shareholder constituting the group of controlling shareholders in the listed issuer (or among the shareholders of SPV as the case may be); and
  • such group of controlling shareholders (or SPV as the case may be) must maintain the same aggregate voting interests in the listed issuer; and

in the Second Six-month Period:

  • the shareholders constituting the group of controlling shareholders must not change (i.e. no addition or departure of shareholders);
  • there must be no material changes in the voting interests held by each shareholder constituting the group of controlling shareholders in the listed issuer (or by each shareholder of SPV as the case may be); and
  • such group of controlling shareholders (or SPV as the case may be) must maintain an aggregate voting interests of at least 30% in the listed issuer.

Remarks

The issuance of the Guidance Letter is welcomed as it clarifies the Exchange’s interpretation and practice regarding issues concerning identification of “controlling shareholders” and related Listing Rules implications.

The Guidance Letter has helpfully set out some examples of ownership structures to illustrate how the Exchange would interpret the definition of “controlling shareholder”. Yet, the ownership structures in actual cases may be more complicated and the process of identifying the “controlling shareholder(s)” or the “group of controlling shareholder(s)” of a listing applicant may not be straightforward. In these cases, it would be prudent to make prior consultation with the Exchange in order to comply with the relevant Listing Rule requirements.

Click here to read the full text of the Guidance Letter.