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Capital Markets Quarterly - October 2024
2024-10-08

Chanhueng Law Firm' Capital Markets Quarterly aims to provide you an overview of the various regulatory and market updates in the third quarter of 2024, with summaries of some of the key amendments in the rules and guidelines, as well as important decisions made by the regulatory authorities in Hong Kong. We will also highlight some of the major market transactions over the last 3 months.

 

A) Regulatory Update

 

The Stock Exchange of Hong Kong Limited (the "Exchange")

 

Amendments to the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the "Listing Rules")

 

Following the publication of "Consultation Conclusions on Severe Weather Trading of Hong Kong Securities and Derivatives Markets" in June 2024, the amendments made to the Listing Rules to implement arrangements for securities and derivatives trading under severe weather conditions came into effect on 23 September 2024. The Exchange proceeded with the proposals to maintain trading, post-trade and listing arrangements in its securities and derivatives markets, including Stock Connect, derivatives holiday trading, and after-hours trading, during a severe weather event.

 

Consultation Paper on a New Phase of Paperless Listing Reforms

 

In August 2024, the Exchange published a consultation paper on proposals to further expand its paperless listing regime, which aim to modernise market infrastructure and enhance operational and regulatory efficiency. A summary of key proposals in the consultation paper is set out below:

 

  1. Electronic securities holders’ instructions: to provide securities holders with the option to send Requested Communications[1] to issuers electronically.
  2. Real-time electronic payment of Corporate Action Proceeds[2]: to provide securities holders with the option to receive Corporate Action Proceeds (including dividends) electronically via CHATS[3].
  3. Electronic subscription monies: to provide securities holders with the option to pay subscription monies for offers, which include open offers, rights issues, preferential offers and bonus issues of securities to existing securities holders, electronically.
  4. Hybrid general meetings & E-voting: to help ensure online participation at general meetings is possible and securities holders can vote by electronic means.
  5. Web accessibility of issuers’ corporate communications: to seek market feedback on the incorporation of web accessibility guidelines into listing requirements.

 

A copy of the Consultation Paper is available here.

 

Joint Announcement of the Securities and Futures Commission (the "SFC") and the Exchange in Relation to Temporary Modifications to Requirements for Specialist Technology Companies and De-SPAC Transactions

 

In August 2024, the SFC and the Exchange jointly published an announcement regarding temporary modifications to the Listing Rules and amendments to the Exchange's guidance materials which have become effective from 1 September 2024 for three years ("Implementation Period").

 

Firstly, the minimum initial market capitalisation at the time of listing required for the listing of Specialist Technology Companies pursuant to Main Board Listing Rule 18C.03(3) has been reduced. For a Specialist Technology Company ("STC") that has revenue of at least HK$250 million for its most recent audited financial year (the "Commercialisation Revenue Threshold"), the minimum initial market capitalisation at the time of listing is reduced from HK$6 billion to HK$4 billion, whilst for a STC that has not met the Commercialisation Revenue Threshold at the time of listing, the minimum initial market capitalisation at the time of listing is reduced from HK$10 billion to HK$8 billion. Such modification recognises recent market conditions and intends to provide a viable listing pathway for new economy companies with high growth potential.

 

With regard to STCs, the modified initial market capitalisation thresholds apply to all listing applicants under Main Board Chapter 18C of which (i) the expected date of listing is on or after the start of the Implementation Period (i.e. 1 September 2024); and (ii) the relevant listing applications (including all renewals of such applications) are submitted on or before the end of the Implementation Period (i.e. 31 August 2027).

 

Secondly, the minimum independent third party investment required for a De-SPAC Transaction conducted by special purpose acquisition companies ("SPACs") has been modified to the lower of: (a) the currently prescribed percentage of the negotiated value of the De-SPAC Target as set out in Main Board Listing Rule 18B.41, or (b) HK$500 million in value. It must be demonstrated by a SPAC that the required minimum independent third party investment has been committed by the time of announcing the De-SPAC Transaction. In respect of the independence requirements for third party investors in a De-SPAC Transaction, the test pursuant to Main Board Listing Rule 18B.40 will be aligned with that for sophisticated independent investors (SIIs) in STCs ("Chapter 18C Independence Test"), as such:

 

  1. the independence of a third party investor will be determined as at the date of the signing of the definitive agreement for the relevant investment in the De-SPAC Transaction, and up to listing of the company resulting from the completion of a De-SPAC Transaction;

 

  1. the following persons will not be considered as independent third party investors:
  1. core connected persons of the SPAC or the De-SPAC Target, except for any substantial shareholder of the SPAC or the De-SPAC Target that is considered a core connected person only because of the size of its shareholding in the SPAC or the De-SPAC Target (subject to paragraph (b)(ii) below);
  2. controlling shareholder (or any person within the group of persons who are considered as controlling shareholders) of the SPAC or the De-SPAC Target;
  3. the founders of the De-SPAC Target and their respective close associates; and

 

  1. the Exchange retains the discretion to deem any other person to be not independent based on the facts and circumstances of an individual case. For example, a person who has an acting-in-concert agreement or arrangement with a SPAC Promoter or with a controlling shareholder of the SPAC or the De-SPAC Target or with a founder of the De-SPAC Target, normally will not be considered as independent.

 

The modified independent third party investment threshold and independence requirements for third party investors apply to all De-SPAC Transactions that are expected to be announced during the three-year Implementation Period. The purpose of requiring mandatory independent third party investment to complete a De-SPAC Transaction is to mitigate the risk of artificial valuation. Similarly, the modification in the independence requirements is to mitigate concerns related to difficulty in valuation and the applying of the independent financial adviser test, which was formulated for a different purpose.

 

Update to Guidance Letter, FAQs and Guide for New Listing Applicants

 

The following Guides and FAQ11.2 – No.29 have been updated by the Exchange to reflect the Listing Rules amendments relating to severe weather trading:

 

 

Subsequent to the joint announcement published by the SFC and the Exchange in August 2024, Guidance Letter HKEX-GL113-22 and the FAQs on SPACs have been updated to provide guidance for SPACs with, or seeking, a listing on the Exchange pursuant to Chapter 18B of the Main Board Listing Rules and to reflect the temporary modifications to Chapter 18B of the Main Board Listing Rules regarding the independent third party investment requirements for De-SPAC Transactions. On the same day, marked up changes to the Guide for New Listing Applicants were made available on the website of the Exchange to reflect the temporary modifications to Chapters 18B and 18C of the Main Board Listing Rules regarding (i) the minimum initial market capitalisation requirement for STCs; and (ii) independent third party investment requirements for De-SPAC Transactions.

 

The Exchange’s Disciplinary Actions

 

In the third quarter of 2024, the Exchange published sanctions in 7 cases which involve (i) transactions involving connected parties or failure to disclose and comply with procedural requirements, (ii) directors’ failure to safeguard listed issuer’s interests and cooperate in investigations, (iii) directors’ breach of duties to exercise reasonable skill, care and diligence in respect of transactions or obligations under the Model Code; and (iv) inaccurate and incomplete disclosure of financial information or delay in publication of financial results. Listed issuers should exercise caution and put in place proper check and balance, and transaction monitoring mechanisms.

 

News release date

Issuer/ directors involved – summary of conduct

 

24 September 2024

 

Three Former Directors of National Arts Group Holdings Limited (Delisted, Previous Stock Code: 8228)

  • In 2021, the directors approved the listed issuer’s acquisitions of two target companies which held property units under construction in Malaysia. At the time of the acquisitions, the target companies had not yet fully paid the developers for the property units. Under the acquisition terms, the vendors and/or their related parties would remain responsible for the target companies’ outstanding payment obligations to the developers.
  • The listed issuer made full payment upfront by issuing new shares in the listed issuer to the vendors with a total value of $108.8 million. There was a lock-up arrangement in respect of the consideration shares allotted to one vendor, but the listed issuer later agreed for this to be partially released.
  • The vendors and/or their related parties failed to discharge their outstanding payment obligations. Construction was delayed. None of the property units had been delivered to the listed issuer. The vendors had sold most of the consideration shares.
  • The directors should have been aware that the acquisitions involved major risks, including that the vendors and their related parties might not fulfil the outstanding payment obligations, and/or the property construction might not be completed. The credit risk in respect of the vendors was material.
  • The directors failed to conduct due diligence in respect of the financial capability of the vendors and their related parties. The directors failed to properly monitor the projects after the acquisitions, including that payments were being made and the construction was progressing. The directors breached their duties to exercise reasonable skill, care and diligence in respect of the acquisitions.
  • Three former directors were criticised.
  • The Exchange further directed 15 hours of training on regulatory and legal topics and Listing Rule compliance for each of the three former directors. The training must include three hours on each of (a) directors’ duties; and (b) the Corporate Governance Code, as a pre-requisite of any future appointment as a director of any company listed or to be listed on the Exchange.

 

10 September 2024

 

China ZhengTong Auto Services Holdings Limited (Stock Code: 1728) and Five Former Directors

  • In 2016, a subsidiary of the listed issuer entered into an undertaking to pay any shortfall if a company majority-owned by the son of the chairman failed to repay a loan and redeem certain investments totalling approximately RMB1.8 billion. The 2016 undertaking was replaced by three agreements in March 2020.
  • Each of the 2016 undertaking and the 2020 agreements (in aggregate) were major and connected transactions. The listed issuer did not comply with the Listing Rules in respect of the transactions.
  • The chairman approved the 2016 undertaking and the 2020 agreements without declaring and avoiding his conflict of interest in the transactions. He did not disclose that the transactions involved his son’s company. He also did not abstain from approving the transactions.
  • In approving the transactions, the chairman put the interest of his family over that of the listed issuer. He concealed the 2016 undertaking from the board. He failed to inform the directors who were not involved in the approval of the 2020 agreements about the agreements. He also did not take steps to procure the listed issuer’s compliance with the Listing Rules in respect of the transactions.
  • Three former directors approved the 2020 agreements without independent consideration of whether they were in the listed issuer’s interest, the potential risks to the listed issuer, and risk mitigation. They also did not inform the rest of the board about the 2020 agreements. They over-relied on the Company’s compliance department to handle the listing rule compliance in respect of the 2020 agreements, without taking steps to check whether the obligations had been properly handled.
  • The chairman and a former director failed to cooperate in the Exchange’s investigation.
  • The listed issuer and two former directors were criticised.
  • Censures were made against five former directors.
  • In addition to a public censure, Director Unsuitability Statements were imposed against two of the former directors.
  • The Exchange further directed three former directors to attend 21 hours of training on regulatory and legal topics and Listing Rule compliance, as a pre-requisite of any future appointment as a director of any company listed or to be listed on the Exchange, including at least three hours on each of (i) directors’ duties; (ii) the Corporate Governance Code; (iii) the Listing Rule requirements under Chapter 14; and (iv) the Listing Rule requirements under Chapter 14A.

 

27 August 2024

Brilliance China Automotive Holdings Limited (Stock Code: 1114) and Three Former Directors

  • Between 2019 and 2021, certain subsidiaries of the listed issuer provided financial assistance exceeding RMB53.4 billion for the benefit of entities including the listed issuer’s then controlling shareholder. The financial assistance included guarantees, deposit pledges and fund transfers, and had no apparent commercial benefit to the listed issuer. The listed issuer ended up suffering substantial losses. The financial assistance came about after the then controlling shareholder had used its influence in its capacity as the then controlling shareholder.
  • Despite the three former executive directors' clear conflict of interest, they were involved in the provision of the financial assistance from the listed issuer to the then controlling shareholder. They failed to report the matter to the listed issuer’s board and failed to procure the listed issuer’s compliance with the Listing Rules applicable to the financial assistance.
  • The listed issuer’s subsequent discovery of the hidden financial assistance led to the delayed publication and dispatch of its financial results and reports.
  • Given the above, the three former executive directors breached their director’s duties and their obligations to use their best endeavours to procure the listed issuer’s compliance with the Listing Rules. Two of them had also failed to cooperate in the Exchange’s investigation.
  • Censures were made against the listed issuer and the three former directors.
  • In addition to a public censure, Director Unsuitability Statements were imposed against two of the former executive directors and a Prejudice to Investors' Interests Statement was imposed against one of the former executive directors.

 

1 August 2024

Directors of GSN Corporations Limited (Delisted, Previous Stock Code: 8242) and Times Universal Group Holdings Limited (Stock Code: 2310)

  • The Listing Division conducted investigations into Mr G’s (the executive director at the time of delisting of GSN Corporations Limited ("GSN") and former executive director of Times Universal Group Holdings Limited ("Times Universal")) and Ms L’s (former executive director of GSN) discharge of directors’ duties and obligations under the Listing Rules. Both of them did not respond to the Listing Division’s investigations and reminder letters. They failed to cooperate in the investigations.
  • Censures and Director Unsuitability Statements were imposed against both of them.

 

11 July 2024

Former Director of China Ruifeng Renewable Energy Holdings Limited (Stock Code: 527)

  • The Listing Division conducted an investigation into the discharge of directors’ duties and obligations of a former executive director of the listed issuer under the Listing Rules.  The former executive director did not respond to the Listing Division’s investigation and reminder letters.  He failed to cooperate in the investigation.
  • A Director Unsuitability Statement and censure were imposed against him.

 

8 July 2024

Wisdom Wealth Resources Investment Holding Group Limited (Stock Code: 7) and 12 Directors

  • In January 2018, the listed issuer announced the acquisition of some land in Zhanjiang. The value of the land that was disclosed in the listed issuer’s announcements and financial results varied significantly within a year of the acquisition. The value was disclosed as RMB 1.15 billion in December 2017, RMB 8 billion as at 30 June 2018, and then RMB 3.1 billion as at 31 December 2018.
  • The seven-fold increase in the value of the land disclosed in the listed issuer’s 2018 interim results had a dramatic effect on the listed issuer’s disclosed financial position, contributing to a reported profit of HK$3 billion in the listed issuer’s 2018 interim results, contrasted with its position of reporting a loss or below HK$100 million profit in its annual results for the three preceding years.
  • In approving the 2018 interim results, the directors had relied on a valuation. However, they did not take sufficient steps to ensure that their reliance on the valuation was reasonable, and accordingly they failed to properly discharge their duties. They had no expertise in the valuation of land, but did not take any steps to make enquiries with the valuer about the substantial increase, and did not consider seeking a second opinion or other professional advice. As regards the value of the land and/or the valuation methodology, the disclosure in the 2018 interim results was not accurate and complete in all material respects.
  • The listed issuer and 10 former and current directors were criticised.
  • Censures were made against one independent non-executive director and one former independent non-executive director.
  • The Exchange further directed 7 of the directors to attend 17 hours of training on regulatory and legal topics including Listing Rule compliance and 5 of the directors to attend 17 hours of training on regulatory and legal topics including Listing Rule compliance as a pre-requisite of any future appointment as a director of any company listed or to be listed on the Exchange.

 

4 July 2024

 

 

Former Director of Green Future Food Hydrocolloid Marine Science Company Limited (Stock Code: 1084)

  • A former non-executive director who was also a controlling shareholder of the listed issuer (by virtue of a concert party agreement), made 44 trades in the listed issuer’s securities on 18 trading days during the blackout periods in 2022 and 2023. He was a director of the listed issuer at the time. He did not comply with the Model Code requirements.
  • The former non-executive director failed to inform the listed issuer of his trades under a mistaken belief that the Model Code did not apply to non-executive directors. This led to the listed issuer making an inaccurate disclosure of the controlling shareholder’s interest in an announcement.
  • After being notified by the Exchange about his obligations under the Model Code, he admitted his breaches. The former non-executive director has since contributed to an expedited resolution of the matter by agreeing to settle this disciplinary action.
  • Censure was made against the former non-executive director.
  • The Exchange further directed the former non-executive director to attend 17 hours of training on regulatory and legal topics and Listing Rule compliance, including at least three hours on each of (i) directors’ duties and (ii) the Corporate Governance Code; and two hours on the Listing Rule requirements for the Model Code.

 

The SFC

Takeovers Bulletin No. 70

Reminder to factor in the time required for ESS registration

 

The Codes on Takeovers and Mergers and Share Buy-backs (the "Takeovers Code") require an offeror (including a potential offeror) and a potential vendor[4] of shares[5] of an offeree company to make announcements under certain circumstances (Rules 3.1 and 3.3 of the Takeovers Code). Where an offeree company is listed on the Exchange, the related Takeovers Code documents must be published on the HKEXnews website in accordance with the requirements of the Listing Rules (Rule 12.2 of the Takeovers Code).

 

The announcements made by an offeror or a potential vendor are often issued together with or with the help of the offeree company. However, at times, an offeror or a potential vendor may need to make the requisite disclosures on its own as soon as practicable to keep the market informed. For instance, the responsibility for making an announcement normally rests with an offeror under the Takeovers Code before the board of the offeree company is approached. Actions of an offeror or a potential vendor listed in Hong Kong or elsewhere may also trigger disclosure requirements under the rules of the relevant exchanges or the laws of the relevant jurisdictions. In addition, an offeror may sometimes choose to issue, inter alia, the firm intention announcement without involving the offeree company.

 

The SFC emphasised that if an offeror or a potential vendor is not listed on the Exchange and intends to issue Takeover Codes documents without involving the offeree company, it must factor in the time required to complete prior registration for accessing the e-Submission System ("ESS") of Hong Kong Exchanges and Clearing Limited in planning the transaction timetable. It is the responsibility of the relevant parties to familiarise themselves with the relevant procedures (including the requirements to submit supporting materials for ESS registration) and allow sufficient time to complete the registration process to avoid any delay in publication.

 

Reminder on severe weather arrangements

The Exchange’s new operational model and arrangements for severe weather trading commenced on 23 September 2024. The SFC reminded market participants that, for the purpose of the Takeovers Codes, a severe weather trading day[6] counts as a business day, and except as otherwise provided in Practice Note 27, a waiver is required for an extension of a deadline regulated under the Takeovers Codes in view of severe weather conditions[7].

A copy of the Takeovers Bulletin is available here.

 

B) Market Update

 

There were 27 new Main Board IPO applications accepted by the Exchange and 15 IPOs launched in the third quarter of 2024 that consists of a diverse range of businesses. Examples of some of the recent Main Board listings are:

 

Issuer

Description

Midea Group Co., Ltd. - H shares (Stock Code: 300)

A leading technology-driven global provider of Smart Home Solutions and Commercial & Industrial Solutions. Its retail offering was over-subscribed by 4.3 times with estimated net proceeds from the IPO of approximately HK$30,668 million. To date, its market capitalisation is approximately HK$48.33 billion.

 

Black Sesame International Holding Ltd. (Stock Code: 2533)

 

An automotive-grade computing system-on-chips ("SoC") and SoC-based intelligent vehicle solution provider. Its retail offering was over-subscribed by 1.5 times with estimated net proceeds from the IPO of approximately HK$950.8 million. To date, its market capitalisation is approximately HK$18.04 billion.

Cirrus Aircraft Ltd. (Stock Code: 2507)

 

A company that designs, develops, manufactures, and sells premium aircraft recognised across the personal aviation industry, which incorporate innovations in safety, technology, connectivity, performance, and comfort. Its retail offering was over-subscribed by 0.6 times with estimated net proceeds from the IPO of approximately HK$1,392.02 million. To date, its market capitalisation is approximately HK$6.95 billion.

Shanghai Voicecomm Information Technology Co., Ltd. - H shares (Stock Code: 2495)

 

An IT solution provider in China. The company provides services for enterprise-level users to improve the level of convenience and intelligence for their information exchanges and business interactions. Its retail offering was over-subscribed by 2.5 times with estimated net proceeds from the IPO of approximately HK$571.65 million. To date, its market capitalisation is approximately HK$2.91 billion.

Fangzhou Inc. (Stock Code: 6086)

The largest online chronic disease management platform in China in terms of average monthly active users in 2023, according to CIC. Its retail offering was over-subscribed by 15.6  times with estimated net proceeds from the IPO of approximately HK$67.09 million. To date, its market capitalisation is approximately HK$9.50 billion.

Baiwang Co., Ltd. - H Shares (Stock Code: 6657)

An enterprise digitalisation solutions provider in China, focusing on offering SaaS financial & tax digitalisation and data-driven analytics services through its Baiwang Cloud platform. Its retail offering was over-subscribed by 5.6 times with estimated net proceeds from the IPO of approximately HK$228.87 million. To date, its market capitalisation is approximately HK$3.26 billion.

 

 

 

[1] Requested Communications comprise (i) instructions regarding a meeting of securities holders, including an indication as to attendance at such meeting, and proxy-related instructions (including the appointment and revocation (if any) of proxies and indications as to how they shall vote on any particular matter at the meeting); and (ii) instructions made in response to actionable corporate communications (as defined under the Listing Rules), save for those made in response to any provisional allotment letter in connection with a rights issue.

[2] Corporate Action Proceeds are proceeds paid by an issuer to securities holders in connection with its corporate actions, including but not limited to the distribution of dividends and other entitlements, refunds in respect of applications for, and/or (where applicable) excess applications in connection with, rights issues, open offers and preferential offers; and payment in connection with takeovers and privatisations.

[3] Clearing House Automated Transfer System, a payment system in Hong Kong operated by Hong Kong Interbank Clearing Limited for settling inter-bank payments on a real-time gross settlement basis.

[4] refers to a shareholder or shareholders involved in negotiations or discussions with a potential offeror and holding 30% or more of the voting rights of the relevant listed company.

[5] references to shares in the bulletin are taken to include REIT units and HDRs where applicable.

[6] A “severe weather trading day” refers to a trading day on which one or more severe weather conditions are in effect during the trading session.

[7] A severe weather condition means a typhoon warning signal no. 8 or above, or a black rainstorm warning issued by the Hong Kong Observatory, or an “extreme conditions” warning announced by the HKSAR Government.

 

 

About Us

 

Chanhueng Law Firm is a leading, full service, Hong Kong law firm. We combine the in-depth experience of our lawyers with a forward thinking approach.

 

Our key practice areas are corporate/commercial and corporate finance; commercial and maritime dispute resolution; clinical negligence and healthcare; insurance, personal injury and professional indemnity insurance; employment; family and matrimonial; trusts and wealth preservation; wills, probate and estate administration; property and building management; banking; fraud; distressed debt; investment funds; virtual assets; financial services/corporate regulatory and compliance.

 

As an independent law firm, we are able to minimise legal and commercial conflicts of interest and act for clients in every industry sector. The partners have spent the majority of their careers in Hong Kong and have a detailed understanding of international business and business in Asia.

 

Disclaimer: The information contained in this article is intended to be a general guide only and is not intended to provide legal advice. Please contact info@chanhuenglawfirm.com if you have any questions about the article.

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