2017年2月28日
資訊洞見
Highlights
This client alert gives an overview of the recent developments on connected transaction requirements applicable to companies listed on The Stock Exchange of Hong Kong Limited:
Amendments to the Connected Transaction Rules – Effective from 1 July 2014
On 21 March 2014, The Stock Exchange of Hong Kong Limited (the “Stock Exchange“) published the consultation conclusions on “Review of Connected Transaction Rules” (the “Consultation Conclusions“) following its consultation on a number of proposals to refine the connected transaction rules as discussed in its consultation paper published in April 2013.
For the full text of the Consultation Conclusions, please click here.
The amendments to the connected transaction rules set out in Chapter 14A of the Rules Governing of the Listing of Securities on the Stock Exchange (the “Main Board Listing Rules“) and Chapter 20 of the Rules Governing of the Listing of Securities on the Growth Enterprise Market of the Stock Exchange (the “GEM Listing Rules“) for implementing the proposals adopted by the Stock Exchange will be effective from 1 July 2014.
Comparison between the current and revised rules
The table below sets out a comparison between the current connected transaction rules and the revised connected transaction rules effective from 1 July 2014.
| Current Rules | Revised Rules (effective from 1 July 2014) | |
| Plain Language Amendments | ||
| (1) | The current rules governing connected transactions are set out in Chapter 14A of the Main Board Listing Rules (or Chapter 20 of the GEM Listing Rules).
The Stock Exchange issued the “Guide on Connected Transaction Rules” in April 2012 (the “Guide“) which illustrates the connected transaction requirements in plainer language with diagrams and examples. This guide does not have the status of guidance/practice notes to the Listing Rules. |
A revamped version of Chapter 14A of the Main Board Listing Rules (or Chapter 20 of the GEM Listing Rules) will be adopted. This revamped version is based on the plain-language Guide with diagrams and examples, with minor modifications on drafting.
As the numberings of the provisions in Chapter 14A of the Main Board Listing Rules (or Chapter 20 of the GEM Listing Rules) have been revised, the following reference tables are published:
|
| Scope of connected persons | ||
| (2) | Connected transactions with persons who are connected persons by virtue of their relationship(s) with the listed issuer’s “insignificant” subsidiary or subsidiaries are fully exempt from the reporting, announcement, circular and independent shareholders’ approval requirements, subject to a 10% restriction on the consideration ratio for any transaction of a capital nature between the insignificant subsidiary and the persons connected with that subsidiary.
A subsidiary is an “insignificant subsidiary” for the purpose of this exemption if its total assets, profits and revenue are less than (a) 10% under the relevant percentage ratios for each of the latest three financial years; or (b) 5% under the relevant percentage ratios for the latest financial year. |
Persons connected with insignificant subsidiaries of the listed issuer will no longer be connected persons. |
| (3) | An associate of a director, chief executive or substantial shareholder of the listed issuer is a connected person of the listed issuer. The definition of “associate” includes the trustees acting in their capacity as trustees of any trust of which a director, chief executive or substantial shareholder of the listed issuer (or if such person is a natural person, any of his immediate family) is a beneficiary. | A trustee of an employees’ share scheme or occupational pension scheme established for a wide scope of participants will not fall within the definition of “associate” if the connected persons’ interests in the scheme are together less than 30%. |
| (4) | The definition of “associate” includes an entity in which a connected person has 30% or more direct or indirect interest (“30%-controlled company”). However, an entity which is a 30%-controlled company held by a connected person only because that connected person has an indirect interest in the entity through its shareholding in the listed issuer’s group is not a connected person. | The exemption is modified such that a “30%-controlled company” held by a connected person will not be regarded as his/its associates (and will therefore not a connected person) only if the interests held by the connected person and his/its associate(s) in that company, other than those indirectly held through the listed issuer’s group, are together less than 10%. |
| Scope of connected transactions | ||
| (5) | The following types of transactions between a listed issuer and a third party involving a controller (i.e. a director, chief executive or controlling shareholder of the listed issuer or any of its subsidiaries) are connected transactions for the listed issuer:
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The only type of transactions between a listed issuer and a third party involving a controller which constitute connected transactions is where the listed issuer acquires an interest in a company where a substantial shareholder of that company is (or is proposed to be) a controller at the listed issuer level or an associate of a controller at the listed issuer level.
The other types of transactions set out on the left column are no longer connected transactions. |
| Exemptions for connected transactions | ||
| (6) | Connected transactions between the listed issuer’s group and connected persons at subsidiary level are subject to the reporting, announcement, circular and independent shareholders’ approval requirements unless they fall within any of the exemptions under the provisions of Chapter 14A of the Main Board Listing Rules (or Chapter 20 of the GEM Listing Rules) or a waiver is granted by the Stock Exchange. | Transactions between the listed issuer’s group and connected persons at subsidiary level will be exempt from the circular and shareholders’ approval requirements. |
| (7) | A connected transaction is fully exempt from all the connected transaction requirements if each or all of the percentage ratios (except the profits ratio) is/are:
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The monetary threshold for fully exempt connected transactions is increased to HK$3 million. |
| (8) | Provision to or receipt from connected persons of consumer goods or services are fully exempt from all the connected transaction requirements, subject to certain conditions, among other things, the consideration or value involved being less than 1% of the listed issuer’s total revenue or total purchases. | The condition of 1% cap on transaction value is removed. |
| (9) | Granting an indemnity by a listed issuer for the benefit of a director is a connected transaction. However, the Stock Exchange may, on a case-by-case basis, exempt from the connected transaction requirements indemnities granted by a listed issuer in favour of its directors against any claims that may arise from the proper discharge of their duties. | Indemnities provided to, or purchase of insurance for, directors against liabilities incurred in the course of performing their duties are fully exempt from all the connected transaction requirements, provided that the indemnity or insurance is in the form permitted under the laws in Hong Kong and the place of incorporation of the company providing the indemnity or insurance.
Note: A listed issuer cannot apply the directors’ service contract exemption even if the directors’ service contract covers provision of indemnity or insurance. |
| Option arrangements | ||
| (10) | The termination of an option by a listed issuer will be treated as a transaction and classified by reference to the percentage ratio (other than the profits ratio), unless the termination is in accordance with the terms of the original agreement entered into by the listed issuer and does not involve payment of any amounts by way of penalty, damages or other compensation. | The termination of an option will be classified as if the option has been exercised, unless the termination is made under the terms of the original agreement and the listed issuer has no discretion over the termination. |
| (11) | The transfer or non-exercise of an option (the exercise of which is at the listed issuer’s discretion) by a listed issuer will be classified as if the option has been exercised. The exercise price, the value of the underlying assets, the revenue attributable to such assets and (if applicable) the premium for transferring the option will be used for the purpose of the percentage ratios.
The current rules do not specify how to calculate the percentage ratios for termination of an option. |
The classification rules for the termination of an option are aligned with those applicable to the transfer or non-exercise of an option such that the transfer, non-exercise or termination of an option will be classified by using the exercise price, the value of the underlying assets, the revenue attributable to such assets and (if applicable) the consideration for transferring the option, or the amount receivable or payable by the listed issuer’s group for the purpose of the percentage ratios.
For the transfer, non-exercise or termination of an option granted by a connected person, listed issuers may disregard the above percentage ratios and calculate the assets ratio and the consideration ratio based on the higher of:
The above alternative tests would be allowed only if the following conditions are satisfied:
# Examples of acceptable valuation standards include International Valuation Standards, Hong Kong Institute of Surveyor Valuation Standards on Trade-related Business Assets and Business Enterprise, The Hong Kong Business Valuation Forum Business Valuation Standards. |
| Others | ||
| (12) | A listed issuer must engage its auditors to review its continuing connected transactions every year and issue a letter confirming that the transactions:
In practice, the Stock Exchange accepts auditors’ confirmation prepared according to Practice Note 740 “Auditor’s Letter on Continuing Connected Transactions under the Hong Kong Listing Rules” issued by the Hong Kong Institute of Certified Public Accountants, despite that the confirmation is expressed in the form of negative assurance. |
The requirement on the auditors’ confirmation on continuing connected transactions is aligned with Practice Note 740 such that the auditors should confirm whether anything has come to their attention that causes them to believe that the transactions:
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| (13) | For connected transactions subject to independent shareholders’ approval, the listed issuer is required to establish an independent board committee to advise the independent shareholders as to:
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The independent board committee’s opinion on a connected transaction should also cover whether the transaction is:
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Transitional arrangements
The Frequently Asked Questions Series 28 released by the Stock Exchange on 21 March 2014 (the “New FAQ Series“), which is designed to provide further guidance on the revised rules effective from 1 July 2014, explains the following transitional arrangements relating to the application of the new exemptions available under the revised rules:
For the full text of the New FAQ Series, please click here.
Guidance on the Pricing Policies for Continuing Connected Transactions
One of the areas on which the Stock Exchange has sought market views in its consultation paper on “Review of Connected Transaction Rules” concerned disclosure in relation to continuing connected transactions conducted under framework agreements. As stated in the Consultation Conclusions, the Stock Exchange decided not to introduce additional requirements in this regard. Instead, it published HKEx Guidance Letter HKEx-GL73-14 (March 2014) – “Guidance on pricing policies for continuing connected transactions and their disclosure” (the “Guidance Letter“) to provide guidance on the disclosure of pricing terms or mechanism for continuing connected transactions to assist listed issuers to comply with the rules.
Salient points of the guidance are highlighted below:
– the pricing mechanism and the terms of the transactions set out in the agreement are clear and specific;
– the annual caps are reasonable taking into account historical transactions and management projections;
– the methods and procedures established by the listed issuer are sufficient to ensure that the transactions will be conducted on normal commercial terms and not prejudicial to the interests of the listed issuer and its minority shareholders;
– appropriate internal control procedures are in place, and its internal audit would need to review these transactions; and
– they are provided by the management with sufficient information for the discharge of their duties.
For the full text of the Guidance Letter, please click here.
Guidance on the Application of the Connected Transaction Rules in Various Scenarios Involving the Provision of Financial Assistance by or for the Benefit of Listed Issuers
While the New FAQ Series mainly discuss the rules amendments to be effective from 1 July 2014, some of the questions contained in this series have also clarified, among other things, the application of the connected transaction rules in various scenarios involving the provision of financial assistance by or for the benefit of listed issuers.
Scenario 1:
Q: Does the provision of the indemnity by the Listed Issuer to its Substantial Shareholder constitute a connected transaction for the Listed Issuer?
A: No. The indemnity is a financial assistance provided by the Listed Issuer in favour of its wholly-owned subsidiary, and is not a connected transaction.
Scenario 2:
Q: Will the provision of the guarantee by the Listed Issuer be regarded as provision of financial assistance to Mr. A on the basis that he is not required to provide any guarantee for the loan facility in proportion to his interest in the Subsidiary?
A: No. The guarantee is provided by the Listed Issuer for the benefit of the Subsidiary. It is not regarded as provision of financial assistance to Mr. A.
Scenario 3:
Q: The provision of the guarantee for the bank loan obtained by the Connected Subsidiary constitutes a connected transaction for the Listed Issuer.
Both the current and revised rules provide for an exemption from the connected transaction requirements for financial assistance provided by a listed issuer’s group to a connected person if it is conducted (i) on normal commercial terms; and (ii) in proportion to the listed issuer’s equity interest in the connected person, and in case of a guarantee given by the listed issuer’s group, it must be on a several basis.
Can the Listed Issuer apply the above exemption on the basis that the Controlling Shareholder has agreed to provide the counter-guarantee?
A: No. The exemption applies only if the guarantee provided by the Listed Issuer is in proportion to its interest in the Connected Subsidiary and on a several basis.
Scenario 4:
Q: A listed issuer proposes to obtain a loan from its controlling shareholder on normal commercial terms and such loan will be secured by certain assets of the listed issuer. Can the listed issuer apply the de minimis exemption, and if so, how should the size tests be computed?
A: The listed issuer may apply the de minimis exemption.
It should compute the assets ratio and consideration ratio based on the principal amount of the loan and the revenue ratio based on the annual interests payable to its controlling shareholder.
Given the loan is to be secured by the listed issuer’s assets, the listed issuer should also compute the asset ratio and consideration ratio based on the value of the assets and also the revenue ratio based on any identifiable revenue stream generated from the assets.