The Hong Kong Stock Exchange rules seek to prevent connected persons of listed issuers from taking advantage of their positions. 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 are subject to reporting, disclosure and independent shareholders' approval requirements. In certain cases it is also necessary to establish an independent board committee and appoint an independent financial adviser to advise the shareholders as to whether the transaction is fair and reasonable and in the interests of the shareholders as a whole. A number of exemptions are available, including where the transaction falls below certain size specifications. For a more in-depth description of connected transactions please refer to our note on connected transactions.
It is not uncommon for listed mineral companies (and prospective listing applicants) to enter into Off-Takes with connected persons. The connected persons in such instances are typically end users of the mineral company's products who have also made a strategic investment in the mineral company. An investor holding 10% or more of the mineral company's shares will be treated as a connected person.
A mineral company can apply to the Hong Kong Stock Exchange for a waiver from the reporting, disclosure and independent shareholders' approval requirements normally required in relation to connected transactions. The Hong Kong Stock Exchange will examine the relevant caps and the intended duration of the Off-Take agreement before deciding whether or not to grant a waiver. It is possible that the waiver may not cover the entire lifespan of the agreement (especially life of mine Off-Takes) and that at some stage further disclosure and independent shareholders' approval will be required.
Off-Takes often include "take-or-pay" clauses. Generally a take-or-pay clause will stipulate that in the event a buyer is unable to take a pre-agreed minimum quantity of product, the buyer is still required to pay for the pre-agreed minimum quantity. The laws of certain jurisdictions do not permit the enforcement of contractual provisions which impose penalties on a party in default. In this regard an important distinction must be made as to whether or not a particular clause constitutes a liquidated damages clause (generally permitted) or a penalty clause (not permitted in certain jurisdictions). Factor which may be relevant in determining whether or not a take-or-pay clause constitutes a penalty include the following:
In certain cases a take-or-pay provision may be found to be a penalty clause and may be unenforceable. Careful consideration should always be given when drafting of take-or-pay provisions. In particular, they should be commercially justifiable and not have the primary aim of deterring breach of contract.