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Advising on Asset “Spin Offs”

Charltons advises mineral companies seeking to effect the separate listing on the Hong Kong Stock Exchange (HKEX) or elsewhere of assets or businesses wholly or partly within their existing groups (Spin-Offs). We advise spun-off entities and their parent companies on compliance with the Hong Kong Stock Exchange Listing Rules (HKEX Listing Rules) and in particular the additional provisions imposed by the HKEX on Spin-Offs.

Mining Spin-Offs can potentially give rise to a number of unique issues. The board and senior management team of the spun-off company may be required to establish to the HKEX’s satisfaction that, taken together, they have a minimum of 5 years’ experience relevant to the exploration and/or extraction activity that the spun-off mineral company is pursuing. Members of the parent company’s Board and senior management are likely to have to join the spun-off entity. This is not always a straightforward exercise, particularly if the parent company is interested in a number of different categories of mineral assets and the personnel it stands to lose are also experienced in the exploration and/or extraction of assets which will continue to be controlled by the parent company. Furthermore the HKEX requires that the spun-off entity demonstrates management continuity for at least the preceding three financial years. If the spun-off entity is newly established it will be required to demonstrate that its Board and senior management had oversight for and/or were responsible for the development of the spun-off mineral assets.

It is worth noting that in recognition that the original listing of the parent company will have been approved on the basis of the parent company’s portfolio of mining/mineral assets and that the expectation of investors at that time would have been that the parent company would continue to develop those businesses, the HKEX would not normally consider a spin-off application within three years of the date of listing of the parent company.

Mining Spin-Offs can be further complicated due to the fact that the spun-off entity may need access to infrastructure owned or controlled by its parent and/or may want to rely on its parent for certain administrative or technical services. Such arrangements can constitute a connected transactions under the Listing Rules. Generally, continuing connected transactions are limited to three year terms under the Listing Rules, which will be problematic for mineral companies seeking long term access to infrastructure.

The HKEX emphasizes that it retains an absolute discretion to accept or reject a proposal submitted by issuer to effect the separate listing of assets or businesses wholly or partly within its existing group. The HKEX may impose additional requirements or make a Spin-Off proposal subject to special conditions whenever it considers it appropriate.

The Exchange has issued a Practice Note on the basic principles it applies to Spin-Off listings.

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