Biotech applicant with a one-off gain and a 20% float
GreenField Biotech applies for a Main Board listing. Its latest-year profit attributable to shareholders is HK$38 million and the aggregate for the two preceding years is HK$50 million. Revenue is HK$480 million and the expected market capitalisation at listing is HK$3.2 billion. The founder wants to retain 80% of the post-IPO shares. A cornerstone investor has agreed to take 9% with a six-month lock-up, no board seat and no special rights; the remaining 11% would be sold to other public investors. The latest-year profit includes a HK$11.4 million gain from the sale of a plant; excluding it, profit would be HK$26.6 million. The sponsor says the profit test is met because the headline numbers exceed the thresholds. The company also has a three-year trading record and management continuity.
1. Assess whether GreenField satisfies the Main Board profit test and any alternative financial eligibility test.
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Headline profit is HK$38 million and two-year aggregate is HK$50 million, which appear to meet the numerical profit test of HK$35 million in the latest year and HK$45 million aggregate. But the HK$11.4 million plant sale gain is non-recurring; excluding it gives HK$26.6 million, below HK$35 million. The Exchange looks at profit from ordinary and usual course, so the sponsor cannot ignore the adjustment. The market cap/revenue test requires revenue of HK$500 million and market cap of HK$4 billion; revenue is HK$480 million and market cap is HK$3.2 billion, so that test fails. The cash flow test also requires revenue of HK$500 million, so it fails. The applicant is therefore not eligible on the current figures and should not file a prospectus claiming eligibility.
2. Will the proposed shareholding structure satisfy the public float requirement? Explain the treatment of the cornerstone investor and calculate the maximum founder stake if the float must be 25%.
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Post-IPO, the founder wants 80%, the cornerstone 9% and other public 11%. If the cornerstone counts as public float, the float is 20%, below the Main Board 25% minimum. The cornerstone can count only if it is independent, has no special rights and is subject to a lock-up; the six-month lock-up and no board seat help, but the 25% test is still not met. To meet 25%, the founder must hold no more than 75%. With 9% cornerstone, at least 16% must go to other public investors. The company should either increase the offer size or have the founder sell down. The 15% float for market caps above HK$10 billion does not apply.
3. What due diligence and disclosure issues should the sponsor focus on regarding the plant sale and the cornerstone arrangement?
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The sponsor must verify the plant sale: the buyer's identity, whether it is a connected person, the gain calculation, and whether the proceeds are recurring. It should not simply accept the accountant's headline profit. The cornerstone agreement must be disclosed in the prospectus, including the lock-up and absence of side letters; the sponsor should interview the cornerstone to confirm independence. If the cornerstone is a connected person or has a side arrangement, it may not count as public float. The sponsor must also be satisfied that the company has a three-year trading record and management continuity, and that the listing document is not misleading.