M & A

HKEX’s Discretion

The definition of a reverse takeover (RTO) under the HKEX Listing Rules gives the HKEX a very wide discretion to determine that a transaction is designed to circumvent the listing requirements and should be treated as a RTO. Even transactions which are in substance backdoor listings, but do not fall strictly within the RTO here, may still be considered RTOs subject to the HKEX Listing Rules.

An example of the HKEX’s application of its discretion can be seen in Listing Decision 75-1 of October 2009 (updated in October 2019). The case concerned a company (Company A) which had long been suspended from trading. At the time of suspension, Company A and its subsidiaries (the Group) were principally engaged in the business of nurturing, selling and trading tree seedlings and seeds. Company A agreed with a third party to dispose of its entire interest in a subsidiary, which at the time conducted the principal business of the Group (the Disposal). The Disposal constituted a very substantial disposal (VSD) for Company A.

As part of the proposal to resume trading, Company A would enter other transactions and arrangements including equity fund raising and acquisitions of serviced apartments and elderly home businesses (the New Businesses) from independent third party vendors for cash consideration (the Acquisitions). Following the Disposal, the Group had ceased to operate its original principal business. Company A intended to focus on the New Businesses.

The Company argued that notwithstanding that based on the percentage ratio calculations, the Acquisitions would be a VSA, the transaction did not constitute a RTO since the Acquisitions and other transactions did not involve a change in control. The HKEX disagreed stating that an acquisition is a RTO under the HKEX Listing Rules if the HKEX is satisfied that it is an attempt to:

list the assets to be acquired and/or to be acquired; and
circumvent the new listing requirements.

This may be the case irrespective of whether the acquisition would result in a change in control.

Ultimately, the HKEX determined that the Acquisitions would constitute a reverse takeover for Company A and Company A would be treated as a new listing applicant as:

the Group had disposed of the subsidiary and no longer retained any material operating assets and ceased to conduct its original principal business. Company A was in substance a listed shell; and

the Acquisitions formed part of a series of transactions and arrangements which constituted an attempt to achieve a listing of the New Businesses.

Note that the HKEX Listing Rules no longer include a “listed asset” exception to the RTO rules which allowed a transaction under which assets were injected into a listed issuer and which amounted to a VSA to be reduced to a major transaction if the assets or a large part of them were listed. Crucially, this meant that the transaction would be subject to shareholder approval, but would not be treated as a new listing even where the asset injection caused a change in majority control.

The removal of the listed asset carve out had significant consequences for restructurings of distressed companies. In the context of a change of control and rescue of the business, one of the principal routes had been an injection of a listed asset. With the exception gone, almost any asset injection resulting in a change of control would be treated as an RTO.