The Hong Kong Stock Exchange has issued its consultation conclusions on proposals to enhance its delisting framework, aimed in particular at addressing companies that have been suspended for a prolonged period of time. The new regime introduces a standalone provision which enables the Stock Exchange to cancel a listing where a company’s securities have been continuously suspended from trading for 18 months. For GEM listed companies, the 18-month period is reduced to 12 months. A new delisting process is also being introduced which replaces the current three stage delisting procedure in Practice Note 17 of the Main Board rules.
These reforms are part of a general tightening of regulation in Hong Kong driven by recent regulatory concerns about questionable market conduct by certain listed companies and a desire to maintain the quality and integrity of the Hong Kong market. The new delisting regime will come into effect on 1 August 2018, with transitional arrangements for companies whose shares were already suspended before that date.
Summary of the new features of the delisting regime
Stock Exchange power to delist after a prescribed period
Under the new regime, the Stock Exchange will be able to delist Main Board-listed companies if their securities have been continuously suspended from trading for 18 months (or 12 months for GEM-listed companies). In the consultation conclusions, the Stock Exchange indicated that these timeframes would not normally be extended. This represents a tightening of the delisting regime from that currently in force. During the consultation exercise, the Stock Exchange invited feedback on the appropriate timeframe, proposing fixed periods ranging from 12 months to 24 months. The Stock Exchange settled on 18 and 12 months for Main Board and GEM respectively, but indicated that it will revisit the time periods after gaining further experience with the new regime.
New delisting process allowing immediate delisting or delisting following remedial period
Rule 6.10 of the Main Board Listing Rules will also be amended to implement a new delisting process. This will enable the Stock Exchange, when any of the applicable delisting criteria in Rule 6.01 apply, to either delist a company immediately (following publication of an announcement notifying the cancellation of the listing) or to give notice by way of announcement specifying a remedial period. If the company fails to remedy matters within the specified timeframe, the Stock Exchange can cancel the listing.
Adjusted delisting criteria
The delisting criteria set out in Rule 6.01 are where the Stock Exchange considers that (i) there are insufficient securities in public hands; (ii) the company does not have sufficient assets or operations to justify its continued listing; or (iii) the business is no longer suitable for listing. Under the current Rule 6.01, there is an additional delisting criterion for companies which materially breach the Listing Rules. From 1 August 2018, this will be deleted. Material breaches may still be relevant to the assessment of whether a company is still suitable for listing. Deleting this as a separate criterion, however, clarifies that breaches of the Listing Rules would be dealt with as a disciplinary offence under Chapter 2A. Decisions on delisting as non-disciplinary decisions are subject to the review procedure in Chapter 2B.
Quarterly updates by suspended companies
Rule 13.24A will be amended to specifically require quarterly announcements to be made by suspended companies on developments. The current Listing Rules only require “periodic” announcements. This is a helpful clarification for suspended companies on the Stock Exchange’s expectations as to the frequency of updates.
New guidance letter on long suspension and delisting
The Stock Exchange has also issued a new guidance letter, HKEX-GL95-18, which provides guidance on the operation of the new regime for long suspended companies, being companies whose securities have been suspended from trading for more than three months. The guidance letter sets out the general obligations on companies, the Stock Exchange’s regulatory actions during the resumption process and guidance on certain types of suspension cases. The key aspects of the guidance letter are summarised below.
Approach to applying the delisting regime
The guidance letter sets out how the Stock Exchange will apply the delisting framework, based on the principles that suspensions should be kept to a minimum, issuers who no longer meet the continuing listing criteria should be delisted in a timely manner and suspended companies should be incentivised to act promptly towards resumption.
The Stock Exchange will impose a specific remedial period shorter than the prescribed 18 month resumption period in new Rule 6.01A(1) where it considers that the company either ought to be able to remedy the issues within a shorter period (for example by restoring the public float) or has failed to take adequate action to remedy issues, thus prolonging the suspension. Only in exceptional cases (such as fraud) will the Stock Exchange delist a company immediately under the revised Rule 6.10.
Obligations on suspended companies
The guidance letter sets out steps that a suspended company should take including:
- After suspension, promptly review the reason for the suspension and identify the relevant issues.
- Devise and diligently follow a resumption plan with a clear timeframe for each stage, factoring in the time required by the Stock Exchange to be satisfied that issues have been remedied.
- Announce the resumption plan, timetable and material developments. Announcement should also be made of corporate actions under the resumption plan, quarterly updates (under Rule 13.24A) and periodic financial results and reports as required by the Listing Rules.
- Maintain adequate internal controls and procedures to ensure full compliance with the Listing Rules and the statutory requirements on the disclosure of inside information.
- Seek the Stock Exchange’s confirmation when issues have been remedied and provide a draft resumption announcement for pre-vetting.
The Stock Exchange’s regulatory actions during remedial period
During a remedial period, the Stock Exchange will:
- Issue resumption conditions and guidance to the company as to the requirements before trading can resume and confirm whether the company has met those conditions and its resumption status.
- Review the company’s quarterly update announcements and other announcements, and seek clarifications and, where appropriate, supporting documents.
- Vet announcements and circulars as necessary and, where the resumption plan is treated as a new listing, process the listing application.
- Publish monthly long suspension reports on its website.
- Where a company fails to fulfil the resumption conditions before the end of the remedial period, refer the matter to the Listing Committee with a recommendation to delist. The Listing Committee may only extend the remedial period in exceptional circumstances, namely where the company has substantially fulfilled the conditions and there is sufficient certainty that the trading will resume but there are factors outside its control that have prevented the company meeting the timeframe (for example a court timetable in a scheme of arrangement).
Guidance applicable to certain suspension cases
The Stock Exchange provides specific guidance for the types of suspension cases referred to below and provides guidance in each case on the process for resumption:
- Failure to maintain sufficient operations – The Stock Exchange will normally apply the 18 month remedial period in such circumstances and require the company to demonstrate that it has a business of substance that is viable and sustainable in the longer term. The guidance letter refers to other guidance letters and listing decisions to elaborate on what this means.
- Failure to publish financial results or inside information due to material irregularities – The guidance letter notes that the suspension will normally remain in force until the relevant issues are addressed or remedied and the outstanding financial results or inside information has been announced. The guidance letter sets out a series of criteria for resumption that the company must satisfy including addressing any audit issues and any allegations of material irregularities, rectifying material misstatements in financial statements or other published information, publishing outstanding financial statements and addressing any audit qualifications or modifications, demonstrating there is no reasonable regulatory concern about management integrity (where relevant), rectifying any internal control weaknesses and announcing all inside information.
- Insufficient public float – The Stock Exchange expects this to be addressed within a reasonably short period of time, and where an issuer fails to take adequate steps, it may impose a specific remedial period of not more than six months. Based on its experience, the Stock Exchange does not consider the inability to obtain the cooperation from a major shareholder as a valid ground for failing to restore the public float.
Companies suspended at the direction of the SFC
The Stock Exchange will consult with the SFC prior to exercising its right to delist in respect of companies suspended at the direction of the SFC.