Corporate Finance, Listing Rules and Corporate Actions
This domain tests listing eligibility, the classification of transactions and the machinery of corporate actions - the daily work of corporate finance and compliance professionals.
Getting listed
A Main Board applicant under the profit test needs a three-year profit track record: at least HK$35 million in the most recent year and HK$45 million in aggregate for the two preceding years, with a market capitalisation of at least HK$500 million at listing. Alternatives are the market cap/revenue/cash flow test (HK$2 billion market cap, HK$500 million revenue, HK$100 million aggregate cash flow) and the market cap/revenue test (HK$4 billion, HK$500 million revenue). Public float must be 25%, or 15% where expected market cap at listing exceeds HK$10 billion, with at least 300 shareholders. A Type 6 licensed sponsor must be appointed at least two months before the listing application and must meet the due diligence standard in Practice Note 21; the prospectus must comply with the Companies (Winding Up and Miscellaneous Provisions) Ordinance.
Transaction classification
The Listing Rules classify acquisitions and disposals by percentage ratios (assets, profits, revenue, consideration, equity capital), using the issuer's figures as denominator:
- share transaction, 5% to under 25% - announcement;
- discloseable transaction, 25% to under 100% - announcement and circular;
- major transaction, 100% or more - announcement, circular and shareholder approval;
- very substantial acquisition - 100% or more with a control change or acquisition from a connected person. Transactions with connected persons fall under Chapter 14A whatever their size and normally need an independent financial adviser plus independent shareholders' approval by poll. Serial transactions within 12 months are aggregated.
Corporate actions and takeovers
Issuers may issue up to 20% of issued shares under a general mandate, refreshed annually. On-market buy-backs are capped at 10% of issued shares under a repurchase mandate. Under the Takeovers Code, acquiring 30% or more of the voting rights triggers a mandatory general offer, and a holder between 30% and 50% may not increase holdings by more than 2% in any 12 months.
Worked example
A Main Board issuer with market cap HK$8 billion buys a business for HK$12 billion cash from an independent vendor. Consideration ratio = 12/8 = 150%, a major transaction: announcement as soon as practicable, circular to shareholders, shareholder approval, and an accountant's report on the acquired business. If the vendor were connected, the deal would also need an IFA opinion and independent shareholder approval on a poll, with the vendor abstaining.
Traps
- Using book value or net assets rather than market capitalisation in ratios.
- Failing to aggregate transactions over 12 months.
- Assuming a connected transaction is exempt because it is small.
- Ignoring the Takeovers Code when a deal is structured as a share subscription.