Mergers and Acquisitions

RTOs under the Exchange's Listing Rules

The Hong Kong Stock Exchange Listing Rules ("Listing Rules") introduced RTOs as a specific category of "notifiable transaction".

The definition of an RTO is an acquisition or a series of acquisitions by a listed issuer which, in the opinion of the Hong Kong Stock Exchange, constitutes, or is part of a transaction or arrangement or series of transactions or arrangements which constitute:

  • An attempt to achieve a listing of the assets to be acquired; and
  • A means to circumvent the requirements for new applicants set out in Chapter 8 of the Listing Rules. (our emphasis added)

The Listing Rules do not however define the specific transactions which amount to an RTO. Instead, the Listing Rules set out two examples of transactions which will normally constitute RTOs:

  • An acquisition or a series of acquisitions of assets by a listed issuer which constitute a very substantial acquisition ("VSA") under the Listing Rules where there is, or which will result in, a change of control (as defined in the Hong Kong Takeovers Code (i.e. 30%)) of the listed issuer (other than at the level of its subsidiaries); or
  • An acquisition or a series of acquisitions of assets by a listed issuer which constitute a VSA from a person or group (or their associates) under any agreement or arrangement entered into by the listed issuer within 24 months of that person or group gaining control of the listed issuer (where the original transaction did not constitute an RTO).

The period during which a series of transactions must be aggregated for the purposes of the above tests is 24 months. As a result, acquisitions in the 24 months after a change in control, which individually or together cross the threshold of a VSA, will constitute an RTO and be treated as a new listing.

The difficulty that this rule poses in the context of a restructuring is that the net worth of companies following a restructuring is generally not that large. Hence almost any acquisition of a reasonable size is likely to trigger the RTO rules retrospectively. The first hurdle faced by a listed issuer following a restructuring is the requirement under the Listing Rules for listed companies to carry out sufficient operations or have assets of a sufficient value to justify their continued listing which effectively renders cash companies unsuitable for continued listing. Since no further additions to the business can be made for 24 months (unless the assets acquired or the enlarged group are able to satisfy the listing criteria for new listings), it will be necessary to ensure that the business is sustainable for the 24 month period.