In December 2013, the Stock Exchange of Hong Kong Limited (the Exchange) published Listing Decision LD76-2013 (the Decision) addressing whether two companies’ activities in countries targeted by international economic sanctions rendered them unsuitable for listing under MB Listing Rule 8.04. We provide a link to the Decision at the end of this briefing.
The Decision reflects an increasingly conservative approach by the Exchange towards sanctions risk posed by issuers’ business activities. The Decision suggests that in some cases the Exchange may be concerned even when an issuer has a de minimis amount of revenue from sanctionable activities, and provides a standard commitment not to use the proceeds of the share offering to fund those activities.
The Exchange may also expect a disclosure about an issuer's compliance mechanisms to monitor and enforce the use of proceeds provisions or otherwise seek a commitment by the issuer to monitor all potentially sanctionable business activities.
The Decision also states that the applicants had undertaken to provide ongoing reporting about potentially sanctionable activities (and compliance measures) and states that there is a "risk of possible delisting of the Applicant’s shares should the Applicant be in breach of its undertakings to the Exchange."
The Decision also reflects recent Exchange practice to require an applicant to provide legal opinions on its exposure under US, EU, United Nations and Australian sanctions, in the course of the Exchange application process.
The Listing Decision
The applicants discussed in the Decision were PRC entities that had entered into engineering or construction contracts with companies in one or more sanctioned countries. Notably, the percentage of revenue derived from these potentially sanctionable activities was low: accounting for less than 1% and 3-8% respectively, of their total revenue during the track record period.
The Exchange determined that each company was suitable for listing, but stated that in light of the broad scope of the potential sanctions and the potential extra-territorial application of some sanctions regimes, it should take specific steps to protect potential underwriters, investors, shareholders and other entities who may be involved in the listing process.
The Exchange indicated that each applicant should:
- obtain confirmation from legal advisors (US, EU, United Nations, and AU) on whether involved parties, including investors and shareholders, would be subject to sanctions risk in light of the applicant’s business activities; and
- consider terminating the business relationships giving rise to the sanctions risk.
Possible additional steps
In addition, the Listing Decision listed the following factors relating to sanctioned country business as relevant to whether an applicant is suitable for listing:
- whether the applicant would terminate or transfer its projects/businesses in the sanctioned countries before listing, and whether this action would have a material adverse impact on the applicant;
- whether the legal advice indicated that the sanctions risk was very low;
- the scope and extent of the applicant’s sanctions compliance measures;
- whether the applicant had undertaken measures to "ring fence" the proceeds of the issuance; and
- the quantum of revenue derived from, and the nature of, the potentially sanctionable activities.
Additional disclosures to be considered
The Exchange noted that the applicants made robust disclosures about their potentially sanctionable activities in the listing document. These disclosures included details about the relevant activities, the legal advice (with basis) of the sanctions risk, the termination of the relevant business relationships and the potential legal and commercial exposure resulting therefrom, as well as the applicant's plans on embarking on new business that posed a risk of violating sanctions.
The disclosure also addressed the applicant’s undertaking not to use IPO proceeds to finance or facilitate sanctionable activities, including details about the compliance measures employed to effect the use of proceeds and control and monitor the applicant’s exposure to sanctions risk.
The application of the Decision in practice will need to be worked through, notably in the context of prior listings where the Exchange determined that an applicant was suitable despite being involved in conduct that could give rise to sanctions risk. The Decision states that a different approach may be acceptable, but in such circumstances the applicant should consult the Exchange early in the process. Applicants, underwriters and investors alike should bear it in mind in determining the correct course of action with respect to any listing or filing with the exchange raising sanctions issues.
The Listing Decision is available here.