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Hong Kong Stock Exchange revises its policy on pre-IPO investments

On 10 March 2017, The Stock Exchange of Hong Kong Limited (the “Stock Exchange”) published revised versions of its three sets of guidance letters on pre-IPO investments, namely, GL29-12 (Interim Guidance on Pre-IPO Investments), GL43-12 (Guidance on Pre-IPO Investments) and GL44-12 (Guidance on Pre-IPO Investments in convertible instruments) (collectively, the “Pre-IPO Investment Guidance”).

According to the Stock Exchange, the revisions were made after a holistic review of its treatment of pre-IPO investments in view of market feedback and developments with the aim of streamlining and clarifying the requirements.

The major changes are highlighted below:

Clarification of the ambit of the Pre-IPO Investment Guidance

  • The revised version of GL43-12 clarifies that the Pre-IPO Investment Guidance applies to the acquisition of shares (for the purpose of GL43-12) or convertible or exchangeable securities (for the purpose of GL44-12) from a listing applicant or its shareholder by a new or existing shareholder prior to the applicant’s IPO, but does NOT apply to:

–       shares of the applicant acquired in an exchange of shares of a company operating the applicant’s business prior to the formation of the applicant or an operating subsidiary of the applicant or otherwise as part of a corporate restructuring of the applicant in connection with the listing; or

–       shares awarded to directors or employees of the applicant as part of a defined share award scheme.

28 Day/180 Day Requirement 28 Day/120 Day Requirement

  • The Stock Exchange will generally delay, except in very exceptional circumstances, the first day of trading of the applicant’s securities until 120 clear days after the later of the completion or divestment of the last pre-IPO investments (“120 Day Delay”) if:
    1. the applicant has a pre-IPO investment completed within 28 clear days before the date of the first submission of the first listing application form (the “First Filing”) and the relevant pre-IPO investor remains as a shareholder at the First Filing; or
    2. the pre-IPO investment is completed on or after the First Filing and before the date of the listing.

Treatment of Divestments

  • Divestments (including put or call options, redemption or repurchase rights, etc) on or after the First Filing is highly disruptive to the listing process and will be subject to a 120 Day Delay, regardless of when the pre-IPO investment was made or whether divestment is pursuant to a contractual right.
  • A divestment right may exist on or after the First Filing if it is only exercisable if the listing does not take place and will terminate upon listing.

Treatment of Special Rights

  • All special rights, which do not comply with GL43-12 and GL44-12, must be amended or terminated prior to listing.
  • The revised version of GL43-12 clarifies that rights granted by one shareholder to another or agreements among shareholders (including controlling shareholders) are private arrangements and generally not subject to the Pre-IPO Investment Guidance.  For example, any agreement among the shareholders to nominate and/or vote for certain candidates as directors may survive listing whereas any right granted by the applicant to nominate or appoint a director must terminate upon listing.

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