Chapter 14A (Main Board) and Chapter 20 (GEM) of the Exchange's Listing Rules contain certain safeguards intended to ensure that the interests of shareholders as a whole are taken into account by a listed issuer when the listed issuer enters into connected transactions.
There is a general requirement for connected transactions to be disclosed and subject to independent shareholders' approval. Connected transactions may be either one-off transactions (in the case of listed issuers) or continuing transactions (in the case of both listed issuers and new applicants). Different rules apply in each case. A listed issuer must, in respect of all connected transactions, enter into a written agreement with the relevant parties. Connected transactions require notification to the Exchange, an announcement and shareholder circular, independent shareholder approval, independent financial advice and an independent valuation. There is no general exemption for transactions in the ordinary course of business unless the transaction can be classified as de minimis. A mineral company can apply to the Exchange for a waiver from the reporting, disclosure and independent shareholders' approval requirements.
Depending on the nature of the relationship between the parties, off-takes, infrastructure access agreements, mining services agreements, ECPs and ECPMs, royalty agreements, product marketing agreements and non-compete agreements may constitute connected transactions. A connected transaction may also be a notifiable transaction under the Listing Rules.
The Listing Rules requirement that continuing connected transactions be re-approved by shareholders every three years is particularly onerous for mineral companies as longer term "life-of-mine" agreements are common in the industry. Key project development agreements such as infrastructure access agreements and ECPs / ECPMs go to the very core of mining projects. Mining companies naturally seek security and value through longer term partnerships. The mining industry is also unique in that it is often clustered in certain mineral rich geographical areas. This often leads to the enactment of local and/or national legislation in relation to the allocation and use of limited infrastructure and utilities. Mineral companies may, in certain circumstances, be forced to share infrastructure or use particular service providers. These persons may be connected, and the mineral company may not have the alternative option of engaging an independent third party. In addition, farm-in/farm-out arrangements and structures where mine operators and contractors take equity positions in mineral companies in consideration of work to be performed may also create connected person relationships with the listing applicant. The Exchange has generally shown itself to be flexible as regards the renewal periods for continuing connected transactions in this respect and will, if a persuasive argument can be made as to why such a waiver should be granted, grant a limited waiver from the reporting, disclosure and independent shareholders' approval requirements.
Although the Exchange has shown some flexibility as regards waivers from the usual three year periods for continuing connected transactions, it is unlikely the Exchange will contemplate a waiver for the duration of the life of mine. This creates an additional problem for Hong Kong listed mineral companies who will need to consider the inclusion of a break clause in their life of mine agreements with connected parties, or alternatively run the risk having to seek independent shareholders' approval as the Exchange requires. While shareholders might not be expected to act to the company's and their own detriment by voting down a key agreement, the listed issuer should not presume that such a scenario will not arise.
Please also refer to our analysis of the Listing Rules relating to connected transactions on the Main Board and GEM