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Hong Kong Stock Exchange proposes rule changes to tighten regulation of backdoor listing

On 29 June 2018, The Stock Exchange of Hong Kong Limited (Exchange) published a consultation paper on backdoor listing, continuing listing criteria and other rule amendments, seeking market views on its proposed changes to the Listing Rules to address concerns over backdoor listings and “shell” activities.

The key proposals are summarised below.

A. Proposals relating to backdoor listing

The proposals are to codify the Exchange’s current practices set out in various guidance letters published in recent years, and to impose additional requirements to address specific issues concerning backdoor listing. 

1. Modifying the definition of “reverse takeover” (RTO)

(a)    Principle based test

 Current position


RTO is defined under the Listing Rules as an acquisition (or series of acquisitions) which constitute, in the opinion of the Exchange, an attempt to achieve a listing of the assets to be acquired and a means to circumvent the requirements for new applicants. This is a “principle based test”.

In May 2014, the Exchange published Guidance Letter GL78-14 which provides guidance on its application of the RTO rules. In particular, it sets out the following six assessment criteria that the Exchange would take into account in considering whether the “principle based test” applies:

  • transaction size
  • quality of the business to be acquired
  • nature and scale of the issuer's business
  • any fundamental change in the issuer's principal business
  • issue of restricted convertible securities providing de facto control
  • series of transactions and/or arrangements to circumvent the RTO rules



Codify the six assessment criteria set out in Guidance Letter GL78-14 for the principle based test with modifications to two assessment criteria:

Change in control or de facto control

Extend the criterion “issue of restricted convertible securities” to include any change in control or de facto control of the issuer.  

Indicative factors of a change in de facto control: 

  • substantial change in board / key management;
  • change in single largest substantial shareholder; and
  • issue of restricted convertible securities.

Series of transactions and/or arrangements

Clarify that:

  • transactions and/or arrangements (completed or   proposed) may be considered to form a series if they are in reasonable   proximity (normally within 36 months) or are otherwise related. Such transactions and/or arrangements may include not only, changes in control/ de facto control and acquisitions, but also disposals or termination of the original businesses, and in some circumstances, greenfield operations or equity fundraisings related to acquisitions of new lines of businesses; and
  • the entire series of transactions and/or   arrangements would be treated as if it were one transaction (consequently, a disposal may trigger a RTO ruling on a previously completed acquisition in the same series, or a number of smaller acquisitions may form a RTO). 

(b)    Bright line tests  

Current position


The Listing Rules set out two specific forms of RTOs:

(a) an acquisition or a series of acquisitions of assets constituting a very substantial acquisition where there is or which will result in a change in control (as defined in the Takeovers Code); or

(b) very substantial acquisition(s) of assets (individually or in aggregate) from the new controlling shareholder and its associates within 24 months following a change in control (as defined in the Takeovers Code).

Extend the aggregation period from 24 months to 36 months.



(c)    Disposal restriction

  Current position  


To complement the bright line tests, the Listing Rules restrict an issuer from disposing of its existing business within 24 months after a change in control, unless the asset injection(s) from the new controlling shareholder and his associates and any assets acquired during the period leading to and after the change in control would meet the requirements for a new listing application.

Extend the restriction period from 24 months to 36 months.

Apply the restriction to any material disposal (rather than a disposal) of existing business at the time of, or within the 36-month period after change of control or change in the single largest substantial shareholder of the issuer.

Dis-apply the restriction if the remaining business of the issuers (and not only any assets acquired after the change in control under the current rules) can meet the new listing requirements.

(d)    Backdoor listings through large scale issue of securities

 Current position


In December 2015, the Exchange issued Guidance Letter GL84-15 explaining the circumstances under which the Exchange would apply the cash company rules to disallow large scale issues of securities where the funds raised would be used to start a greenfield operation which, in the opinion of the Exchange, is a means to circumvent the new listing requirements and to achieve a listing of that greenfield operation.

Codify Guidance Letter GL84-15 into the Listing Rules as an anti-avoidance provision to disallow backdoor listings through large scale issue of securities for cash, where the proceeds will be applied to develop a new business through future acquisitions, in addition to greenfield operations as described in Guidance Letter GL84-15.

2. Codifying the “extreme very substantial acquisition” requirements with modifications

Current position


Guidance Letter GL78-14 provides that a transaction which falls outside the bright line tests but which is considered to be “extreme” by the Exchange with reference to six assessment criteria mentioned in section A1(a) above would be treated as an “extreme very substantial acquisition” (but not a RTO) where the issuer can demonstrate that the target business   meets the eligibility and suitability for new listing requirements and that   circumvention of the new listing requirements would not be a material concern.

The guidance letter provides that the issuer would be required to prepare a transaction circular under an enhanced disclosure and vetting approach, and to appoint a financial adviser to conduct due diligence, for extreme very substantial acquisitions.


Codify the extreme very substantial acquisition requirements set out in Guidance Letter GL78-14 with the   modifications set out below and rename this category of transaction as “extreme transaction”.

Additional requirements for an acquisition to qualify as an “extreme transaction”:

The issuer must either:

  • operate a principal business of substantial sizeor
  • have been under the long-term (normally not less than three years) control of a large business enterprise and the acquisition forms part of a business restructuring with no change in control.

*  A “principal business with substantial size" may include a principal business with annual revenue or total asset value of HK$1 billion or more, excluding any revenue or assets not attributable to the issuer’s original principal business e.g. any significant investments or surplus cash of the issuer, and any revenue or assets attributed to a newly acquired or developed business.

3. Tightening the compliance requirements for RTOs and “extreme transactions”

 Current position


Under the current Listing Rules, the Exchange will treat a listed issuer proposing a RTO as if it were a new listing applicant, and accordingly, the enlarged group or the acquisition targets must be able to meet the track record requirements and the enlarged group must be able to meet all the other basic listing conditions. This requirement also applies to extreme very substantial acquisitions currently.

The current Listing Rules require an issuer proposing a RTO to comply with the procedures and requirements for new listing applications, including documentary requirements such as accountants’ reports and pro forma financial information. For RTO involving a series of acquisitions, some of which may have taken place over a few years, the current Listing Rules do not provide guidance on how the track record of the acquisitions would be determined and the financial information to be presented.

Impose additional requirements on the acquisition targets and enlarged group:

  • both the acquisition targets and the enlarged group must be suitable for listing;
  • the acquisition targets must meet the track record requirements; 
  • the enlarged group must meet all the new listing requirements, except the track record requirements;
  • for an issuer that has failed to comply with Main   Board  Rule 13.24 / GEM Rule 17.26, each of the acquisition target(s) and the enlarged group must meet all the new listing requirements; and
  • where an RTO or an extreme transaction involves a series of transactions and/or arrangements, issuers are required to include in the listing document or circular the pro forma income statement (or pro forma cash flow statement) of all acquisition targets and any new business developed that are part of the series. 

B. Proposals relating to continuing listing criteria

The proposed amendments to the continuing listing criteria aim to address specific concerns about some issuers that attempt to maintain the listing status by holding significant assets or investments, rather than operating businesses that have substance and are viable and sustainable in the longer term.

1. Sufficiency of operations

Current position


The current Listing Rules requires that an issuer must carry out a sufficient level of operations or have tangible assets of sufficient value and/or intangible assets for which a sufficient potential value can be demonstrated to the Exchange to warrant the continued listing of the issuer’s securities. The relevant provision itself does not provide guidance on what constitutes “sufficient operations or assets”. According to various listing decisions and a guidance letter published by the Exchange, an issuer must demonstrate that it has a viable and sustainable business.

Clarify that:

  • a listed issuer must carry out a business with a sufficient level of operations and assets of sufficient value to warrant its continued listing;
  • a listed issuer would not meet this requirement if it does not operate a business that has substance and/or is viable and sustainable; and
  • any securities trading and/or investment activities (other than a Chapter 21 investment company) are excluded when considering the sufficiency issue. 

Cash companies

Current position


Under the current Listing Rules, where for any reason the assets of a listed issuer consist wholly or substantially of cash or short-dated securities, it will not be regarded as suitable for listing.

Short-dated securities mean securities such as bonds, bills or notes that have less than one year to maturity.

A listed issuer that is solely or mainly engaged in the securities brokerage business is not be subject to this rule.

Extend the definition of “short-dated securities” to include investments that are easily convertible into cash (e.g. investments in listed securities, advances to third parties repayable within 1 year (excluding trade receivables arising from the issuer’s ordinary and usual course of business)).

Confine the exemption for securities brokerage companies to clients’ assets. 

Transitional arrangements

The Exchange proposes to provide a 12-month transitional period from the effective date of the rule amendments for the proposals set out in sections B1 and B2 above to allow issuers to bring themselves into compliance with the new rules.

Guidance on listed issuer’s suitability for continued listing

On 29 June 2018, the Exchange has also issued a new Guidance Letter GL96-18 on listed issuer’s suitability for continued listing (effective on 29 June 2018), citing the following examples of circumstances where the Exchange may question a listed issuer’s suitability for continued listing: 

C. Other proposed rule amendments

1.  Securities transactions

Current position


Transactions that are of a revenue nature in the issuer’s ordinary and usual course of business are fully exempt from the notifiable transaction requirements under the current Listing Rules (revenue exemption).   

In recent years, some issuers have reported securities trading / investment as one of their principal business activities and claimed revenue exemption for their securities trading activities.

Confine the revenue exemption to purchases and sales of securities only if they are conducted by banking companies, insurance companies and securities houses within the listed issuers’ group.

The current Listing Rules require issuers to disclose in annual reports significant investments held, their performance during the financial year, and future prospects.

Require issuers to disclose in their annual reports details of each securities investment that represents 5% or more of their total assets.

2.  Significant distribution in specie of unlisted assets 

Current position


As set out in Listing Decision LD75-4, the Exchange requires issuers who intend to conduct significant distributions in specie of unlisted assets (which amounts to a very substantial disposal) to obtain prior approval of the distribution from independent shareholders in a general meeting. The approval should be given by at least 75% of the votes attaching to any class of listed securities held by holders voting either in person or by proxy at the meeting, and the number of votes cast against the resolution must not be more than 10% of the votes attaching to any class of listed securities held by holders permitted to vote in person or by proxy at the meeting. Further, the issuers’ shareholders (other than the directors (excluding independent non-executive directors), chief executive and controlling shareholders) should be offered a reasonable cash alternative or other reasonable alternative for the distributed assets.

Codify the requirements set out in Listing Decision LD75-4 into the Listing Rules.

Other matters relating to notifiable or connected transactions

Current position


The current Listing Rules set out the information required to be disclosed in an announcement and the next annual report in relation to any financial performance guarantee given by a connected person where the actual financial performance fails to meet the guarantee.

Where an independent party provides a financial performance guarantee, the current rules do not provide any specific disclosure requirements in this regard, but the Exchange has recommended in a report on its review of annual report disclosures that as a matter of accountability and transparency, issuers should follow the disclosure requirements even where the counterparty is independent, and should make these disclosures in all circumstances involving financial performance guarantees (including where the financial performance guaranteed was met).

Require (i) disclosures on the outcome of a guarantee on the financial performance of an acquisition target that is subject to the notifiable or connected transaction requirements (irrespective of whether the guaranteed financial performance is met) in the next annual report; and (ii) disclosure by way of an announcement if (a) there is any subsequent change to the terms of the guarantee; or (b) the actual financial performance of the target acquired fails to meet the guarantee (or the guarantee as amended).


The current Listing Rules require issuers to disclose in notifiable transaction and connected transaction announcements a general description of the principal business activities of the parties to the transaction (if the counterparty is a company or entity).

For connected transactions, the current Listing Rules require issuers to disclose the identity and activities of the parties to the transaction and of their ultimate beneficial owners in the circulars.

Require disclosure on the identities of the parties to a transaction in the announcements and circulars of notifiable transactions.

Extend the requirement to disclose the identity and activities of the parties to the transaction and of their ultimate beneficial owners to the announcements of connected transactions.

Under the current Listing Rules, issuers are required to classify the size of a notifiable or connected transaction using five percentage ratios, which are generally based on the latest published financial positions of the issuers, which may not reflect the current financial position of the issuer in some cases, e.g., where the issuer made a material disposal shortly before an acquisition.

Clarify that where any calculation of the percentage ratios produces an anomalous result or is inappropriate to the sphere of activity of the listed issuer, the Exchange (or the issuer) may apply an alternative size test that it considers appropriate to assess the materiality of a notifiable or connected transaction.

Consultation period will end on 31 August 2018.

Key Contacts

Ronny Chow

Partner | Corporate Finance

Email or call +852 2825 9435

Alexander Que (Alex)

Partner | Corporate Finance

Email or call +852 2825 9770

Rhoda Yung

Partner | Corporate Finance

Email or call +852 2825 9624

Sabrina Fung

Partner | Corporate Finance

Email or call +852 2825 9478

Gary Wong

Partner | Corporate Finance

Email or call +852 2825 9798

Eugina Chan

Consultant | Corporate Finance

Email or call +852 2825 9786

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