The Hong Kong Stock Exchange (“HKSE”) has recently updated an important decision in relation to distribution of assets of a listed company (“Listco”) and published the consultation conclusions on the review of its listing rules on disclosure of financial information with reference to the new Companies Ordinance and Hong Kong financial reporting standards and the Environmental, Social and Governance Reporting Guide. These changes are summarised below.
A. Update on Disposals of a Listed Company’s Assets
The listing decision HKSE-LD75-4 (“the Decision”) regarding a Listco’s distribution of shares in a subsidiary to its shareholders (“the Distribution”) has been updated in November 2015.
Previously, such Distribution has been determined as not being notifiable transactions in accordance with Chapter 14 of the Listing Rules as it was not a transaction outside the Listco’s ordinary and usual course of business. It is also not a connected transaction in accordance with Chapter 14A of the Listing Rules. Rule 14A.92(1) provides that a connected person receiving a pro rata entitlement to securities (including a dividend payment) in its capacity as shareholder is fully exempt from connected transaction requirements. However, the following measures have to be taken by the Listco :-
1. a special general meeting would be held for the Listco’s shareholders to consider and approve the resolution(s) in respect of the Distribution and other related arrangements. The shareholder who initiated the Distribution and its associates would abstain from voting on the relevant resolution(s); and
2. the independent shareholders to be allowed to make an informed decision on how to vote, through :-
(a) a circular relating to the Distribution which would be comparable to those for a very substantial disposal circular; and
(b) appointing an independent financial adviser and the circular would contain its opinion on the Distribution and related arrangements.
In reaching the new Decision, the HKSE reviewed a number of cases in the past year involving Listcos distributing significant portions of their businesses in specie relative to the operations left in the Listcos. The HKSE now considers such distributions as comparable to delistings of the assets to be distributed and accordingly, shareholders should be afforded the same level of protection available for a withdrawal of listing. Therefore, where a disposal of the assets by a Listco amounts to a very substantial disposal under the Listing Rules, the proposed distribution would now also be subject to the requirements applicable to a withdrawal of listing, in addition to the above measures to be taken by the particular Listco. These additional requirements include :-
1. the Listco should obtain prior approval of the distribution by independent shareholders in a general meeting. The approval should be given by at least 75% of shareholders voting either in person or by proxy at the meeting, and not more than 10% of the shareholders may vote against the resolution; and
2. the Listco’s shareholders (other than the directors (excluding independent non-executive directors), chief executive and controlling shareholders) should be offered a reasonable cash alternative or other reasonable alternative for the distributed assets.
B. Update on Financial Information Disclosure
Listing Rules Appendix 16 which covers disclosure of financial information in preliminary announcements of results, interim reports and annual reports has been amended to align with the New Companies Ordinance (Chapter 622 of the Laws of Hong Kong) to create additional disclosures that apply to directors’ reports or financial statements, such as :-
1. a new Business Review section;
2. directors’ names to be on a consolidated basis;
3. directors’ interests to include transactions, arrangements or contracts;
4. permitted indemnity provisions;
5. equity-linked agreements; and
6. reasons for a director resigning or not seeking re-appointment.
Other areas of the Listing Rules have been amended to streamline the disclosure requirements of financial information in the Listing Rules with reference to Hong Kong Financial Reporting Standards (“HKFRS”). The amendments include :-
1. amendment of Listing Rules Chapter 4 which covers disclosure of financial information in the accountants¡¦ report applicable to listing applications, reverse takeovers, major transactions and very substantial acquisitions and Listing Rules Appendix 16 in order to streamline the Listing Rules and to avoid potential duplications with HKFRS and minor Rule amendments in Listing Rules Chapter 1 to align the accounting terms used in the Listing Rules with HKFRS;
2. repeal of the disclosure requirements in relation to financial conglomerates in Listing Rules Chapter 4 and Appendix 16; and
3. repeal of Listing Rules Appendix 15 in relation to bank reporting.
There are also new requirements when a Listco decides to revise its published financial reports or make prior period adjustments due to correction of material errors in the result announcements. The amendments include :-
1. making an announcement when the board of directors decides to revise its published financial statements and a new headline category is created to flag “Revision of Published Financial Statements and Reports”;
2. disclosing in the results announcements prior period adjustments due to correction of material errors and a new headline category is created to flag “Prior Period Adjustments due to Correction of Material Errors”; and
3. providing references in Listings Rules Appendix 16 to disclosures relating to periodic financial reports required in other parts of the Listing Rules.
C. Update on Environmental, Social and Governance Reporting Guide of Listed Companies within the Listing Rules
The HKSE will also amend the Environmental, Social and Governance (“ESG”) Reporting Guide (“the Guide”) within Appendix 27 in the Listing Rules. The main changes to the Guide and related Listing Rules include :-
1. amending the Listing Rules to require Listcos to state in their annual reports or ESG reports whether they have complied with the “comply or explain” provisions set out in the Guide for the relevant financial year; and if not, to give reasons in their ESG reports;
2. re-arranging the Guide into two Subject Areas, “Environmental” and “Social”;
3. upgrading the “General Disclosures” under the Guide to “comply or explain”; and
4. upgrading the Key Performance Indicators, or KPIs, in the “Environmental” Subject Area of the Guide to “comply or explain”.
The amendments to the Guide and related Rules will come into effect in two
1. the Listing Rules amendments and the upgrade of the General Disclosures in the Guide from recommended to “comply or explain”, as well as the revised recommended disclosures, will be effective for Listcos¡¦ financial years commencing on or after 1 January 2016; and
2. the upgrade of the KPIs in the “Environmental” Subject Area of the Guide from recommended to “comply or explain” will be effective for Listcos’ financial years commencing on or after 1 January 2017.
This above is not intended to be an exhaustive summary of all recent amendments to the Listing Rules. If you have any queries regarding the above eNews or any other questions relating to corporate or securities matters, experienced lawyers in our Corporate Finance and Securities departments would be happy to assist you.