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 further tighten the listing rules on reverse takeover and continuing listing criteria; and (ii) a guidance letter on listed issuer’s suitability for continued listing (GL96-18) (the “New Guidance Letter”).

We will discuss the New Guidance Letter (which has become effective from 30 June 2018) in this article and the consultation paper in our next Update.

Shell Activities

Business wishes to tap into the capital markets and yet falls short of the requirements for listing may find its way through the “backdoor” by acquiring a listed “shell” company. The increase in demand for such shell companies in recent years, which has led to an increase in shell creation and maintenance activities (including disposals or termination of an issuer’s main business, and carrying on businesses with a very low level of operations to meet the continuing listing obligations), has raised concern about the quality of listed companies in Hong Kong.

The New Guidance Letter The New Guidance Letter, with a view to combating shell maintenance activities, addresses the suitability of those listed companies with only minimal operations. Instead of proposing "bright-line" criteria or a list of "pass-fail" suitability requirements, the New Guidance Letter sets out broad principles with examples of situation where HKSE may question an issuer's suitability for continued listing (the “Suitability Concerns”).

We set out below in tabular forms the Suitability Concerns enunciated in the New Guidance Letter.

If, in light of all pertinent facts, there are Suitability Concerns, HKSE has discretion to suspend trading of the issuer's securities and give the issuer a reasonable period to take appropriate remedial action. If the issuer fails to address such concerns within a reasonable period, HKSE may cancel its listing.