To address concerns about backdoor listings and shell activities in Hong Kong, the Stock Exchange of Hong Kong Limited (HKSE) recently published (i) a consultation paper proposing to tighten the Listing Rules on reverse takeover, continuing listing criteria and others (the Consultation Proposals); and (ii) a guidance letter on listed issuer’s suitability for continued listing (GL96-18).

We have examined the new guidance letter GL96-18 in our earlier Update and we will discuss HKSE's Consultation Proposals in this article.

Consultation Proposals at a Glance

In curbing recent increase in the trading and the creation of “shell’ companies, the Consultation Proposals seek to amend the Hong Kong Listing Rules in the following areas:


1. The bright line test refers to two specific forms of RTOs: (a) an acquisition (or a series of acquisitions) of assets constituting a very substantial acquisition involving a change in control; or (b) very substantial acquisition(s) of assets (individually or in aggregate) from the new controlling shareholder and its associates within 36 months following a change in control.

2. The principle based test gives HKSE broad discretion to deem an acquisition to be a new listing if, in the opinion of HKSE such acquisition constitutes an attempt to achieve a listing of the assets to be acquired and a means to circumvent the new listing requirements.

A new assessment criterion is proposed to replace the current “issue of restricted convertible securities” criterion, namely any change in control or de facto control of issuer after taking into account:

i. any substantial change in the board and key management;

ii. any change in single largest substantial shareholder; and 

iii. any issue of restricted convertible securities (with a conversion restriction mechanism to avoid triggering a change in control under the Takeovers Code) to vendor as acquisition consideration.

Other assessment criteria remain unchanged including:

a. size of the acquisition targets relative to that of issuer;

b. nature and scale of issuer’s business;

c. any fundamental change in issuer’s principal business;

d. quality of the acquisition targets; and/or

e. any series of arrangements (historical, proposed or intended) within a three-year period to list the acquisition targets.

3. HKSE may regard acquisitions and other transactions or arrangements (proposed or completed) as a series if they take place in a reasonable proximity to each other (which normally refers to a period of three years or less) or are otherwise related.

4. For a RTO or Extreme Transaction, both the acquisition targets and the enlarged group must be suitable for listing; the acquisition targets (and in certain RTO, each target) must meet the track record requirement; and the enlarged group must meet all the new listing requirements. Waiver from management/ownership continuity requirement may be granted in certain Extreme Transactions.

5. Issuer must demonstrate that it has been under the control of a large business enterprise for not less than three years, and the transaction forms part of a business restructuring and would not result in a change in control.

6. The Extreme Transaction classification would not be available if issuer demonstrates “shell” like characteristics. As general guidance, “a principal business with substantial size” may include a principal business with annual revenue or total asset value of HK$1 billion or more, excluding any revenue or assets not attributable to issuer’s original principal business e.g. any significant investments or surplus cash, and any revenue or assets attributed to a newly acquired or developed business.