Under the Hong Kong Stock Exchange Listing Rules (HKEX Listing Rules), at least one sponsor must be independent of the new listing applicant. The HKEX Listing Rules sets out a number of independence tests, relating to shares in the applicant held by the sponsor group and its directors and certain other persons, debts due from the applicant and its controlling shareholder(s) to the sponsor group, and business relationships between the applicant and sponsor group and its directors and certain employees.
A sponsor is not independent if any of the following circumstances exist at any time from the date of submission to the HKEX of a listing application up to the date of listing:
- the sponsor group and any director or associate of a director of the sponsor collectively holds or will hold, directly or indirectly more than 5% of the number of the applicant’s issued shares (except arising from an underwriting obligation);
- the fair value of the direct or indirect current or prospective shareholding of the sponsor group in the new applicant exceeds 15% of the net equity of the sponsor’s ultimate holding company or, where there is no ultimate holding company, the sponsor;
- any member of the sponsor group or any director or associate of a director of the sponsor is an associate or connected person of the applicant;
- the sponsor is a connected person of the new applicant;
- 15% or more of the proceeds raised from the IPO will be used to directly or indirectly settle debts due to the sponsor group (other than fees for sponsorship services);
- the amounts due to the sponsor group from the applicant’s group and all guarantees given by the sponsor group on behalf of the applicant’s group exceeds 30% of the applicant’s total assets;
- the amounts due to the sponsor group from – and guarantees given by the sponsor group on behalf of – the applicant’s group and the applicant’s controlling shareholders (and associates of such controlling shareholders) exceeds 10% of the total assets of the sponsor’s ultimate holding company or, where there is no ultimate holding company, the sponsor;
- the value of the direct or indirect shareholding of any director of the sponsor or any holding company of the sponsor (or any of his or her associates) in the applicant exceeds HK$5 million;
- a sponsor employee or director directly engaged in providing sponsorship services to the applicant (or any of associate of any such employee or director), holds or will hold shares or has a beneficial interest in the applicant;
- any of the following has a current business relationship with the applicant or any of its directors, subsidiaries, holding company or substantial shareholders which would be reasonably considered to affect the sponsor’s independence or might reasonably give rise to a perception that the sponsor’s independence would be so affected (except where that relationship arises under the sponsor’s engagement to provide sponsorship services):
- any member of the sponsor group;
- any sponsor employee directly engaged in providing sponsorship services to the applicant (or any close associate of such employee);
- a director of any member of the sponsor group (or any close associate of such director);
- the sponsor or a member of the sponsor group is the auditor or reporting accountant of the applicant.
The HKEX has issued guidance on assessing an “actual or perceived effect” on sponsor independence arising from certain business relationships, which can be accessed here, as well as guidance on procedures for assessing a sponsor’s independence when a partnership is the controlling shareholder of the sponsor, which can be accessed here.