Hong Kong Exchanges and Clearing Limited (HKEx) published a listing decision "HKEx-LD35-2012" on 31 July 2012 in which it determined that the subject listed company (Listco) would not have sufficient operations or assets of sufficient value after completion of a series of proposed transactions to warrant its continued listing on The Stock Exchange of Hong Kong Limited (SEHK).
The Listco and its parent company (Parentco) intended to enter into the following series of transactions (Transactions):
- Step 1 - The Listco would inject a substantial part of its existing business into its wholly-owned subsidiary (Subsidiary). On a pro-rata basis, all the shares of the Subsidiary would be distributed to the Listco's shareholders (Distribution). The Distribution was conditional on approval by the Listco's shareholders (excluding the Parentco).
- Step 2 - After the Distribution, the Parentco would make a voluntary cash offer to acquire all the remaining shares in the Subsidiary held by its other shareholders (Subsidiary Offer).
- Step 3 - The Parentco would also sell its controlling interest in the Listco to a third-party investor (Investor) who would then make an offer to acquire all the remaining shares in the Listco that were held by its other shareholders (Listco Offer). The sale of the controlling interest in the Listco by the Parentco was conditional on the shareholders’ approval of the Distribution.
Both the Listco Offer and the Subsidiary Offer would be subject to the Takeovers Code.
After completion of the Transactions, the business remaining (Remaining Business) would be a business that had recorded a loss and negative operating cash flow in the latest financial year. Its total assets and revenue represented about 6% of that of the Listco before the Transactions.
The Investor would not inject capital into the Listco nor implement any fund raising activities. The plan for the Listco was to expand the Remaining Business by expanding its customer base, and to explore new business opportunities and investments. However, no concrete step had been taken.
Relevant Listing Rule
Rule 13.24 states that "An issuer shall carry out, directly or indirectly, a sufficient level of operations or have tangible assets of sufficient value and/or intangible assets for which a sufficient potential value can be demonstrated to the Exchange to warrant the continued listing of the issuer’s securities."
Whether the Listco would have a sufficient level of operations or assets of sufficient value to warrant its continued listing on SEHK upon completion of the Transactions.
SEHK determined that the Listco would not have a sufficient level of operations or assets of sufficient value to warrant its continued listing on SEHK upon completion of the Transactions in view of the following:
- The Transactions were in essence a privatisation of the Listco's existing business, although it was structured with the intention to allow the Listco to maintain its listing status.
- After the Transactions, the Listco would be left with insignificant operations and this would lead to a market quality issue. Also, the Listco had failed to show that it would have a feasible and sustainable business operation upon completion of the Transactions.
- The Remaining Business was immaterial when compared to the Listco's business operations and assets value before the Transactions. Its absolute size was also small, with an asset value and annual turnover of only HK$20 million or less in recent financial years. In addition, it had recorded net losses and negative operating cash flow.
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