In January 2003, The Stock Exchange of Hong Kong Limited (the "Exchange"), a wholly-owned subsidiary of Hong Kong Exchanges and Clearing Limited ("HKEx"), published the Consultation Conclusions on Proposed Amendments to the Listing Rules Relating to Corporate Governance Issues (the "Corporate Governance Consultation Conclusion Report"). The Corporate Governance Consultation Conclusion Report summarised the results of the Consultation Paper on Proposed Amendments to the Listing Rules Relating to Corporate Governance Issues published by the Exchange in 2002 (the "Corporate Governance Consultation Paper"). It also gave the general direction of the proposed amendments to the Main Board Rules and GEM Rules (the "Rules") that would be implemented by the Exchange to enhance the corporate governance standards of listed issuers.
In July 2002, the Exchange published a Consultation Paper on Proposed Amendments to the Listing Rules relating to Initial Listing and Continuing Listing Eligibility and Cancellation of Listing Procedures (the "July 2002 Consultation Paper"). In the July 2002 Consultation Paper, the Exchange has reviewed the Main Board Rules generally applicable to issuers of equity securities (but not debt securities) applying for listing or already listed on the Main Board of the Exchange under Chapter 8 of the Main Board Rules, as well as mineral companies and infrastructure companies. The Exchange today released the Consultation Conclusions on Proposed Amendments to the Listing Rules Relating to Initial Listing Criteria and Continuing Listing Obligations (the "Conclusions on the July 2002 Consultation").
The objective of this press release is to provide the market with an update on the implementation of the Rule amendments relating to corporate governance issues since the publication of the Corporate Governance Consultation Conclusion Report and to give an overview of the major changes to the Main Board Rules covered in the Conclusions on the July 2002 Consultation.
Implementing Rule amendments relating to corporate governance issues
In the Corporate Governance Consultation Conclusion Report, we proposed Rule amendments to address a wide range of corporate governance issues which would impact upon various parts of the Rules. The areas that would be substantially affected include the notifiable transaction and connected transaction requirements, the Code on Corporate Governance Practices (the "Code") and the disclosure requirements for the report on Corporate Governance Practices (the "Corporate Governance Report").
The Listing Committee has held numerous meetings to consider policy issues relating to the Corporate Governance Consultation Paper and to ensure that the Rule amendments will properly address recent corporate governance issues and meet current market needs. At the meetings, the Listing Committee carefully assessed the proposed Rule amendments published in the Corporate Governance Consultation Conclusion Report and decided to re-examine policy issues relating to some of the more salient aspects of the Rule amendments. Further amendments to the Rules that have not been consulted on in the Corporate Governance Consultation Paper were also considered so as to enhance further the transparency of listed issuers, codify the Exchange's existing practice in interpreting and applying the Rules and make the Rules clearer and more concise. To ensure that the Rule amendments correctly reflect the underlying policies approved by the Listing Committee, the revised draft Rules have also been reviewed by members of selected professional organisations, professional advisers and listed issuers. We are extremely grateful to all the participants of the Rule review for the time and effort they have spent reviewing and providing input on the drafting of the revised Rules.
Major areas re-considered
The following are the major areas that have been re-considered since publication of the Corporate Governance Consultation Conclusion Report.
- Definition of "transactions" for the purpose of notifiable transactions
- Classification of notifiable transactions and connected transactions
- Definition of "reverse takeover"
- Disclosure of financial information in circulars on notifiable transactions
- Definition of "associate"
- "Relatives" of a connected person as deemed associates
- Financial assistance as a connected transaction
- Refreshment of general mandate
- Disclosure of directors' remuneration
- Disclosure of information relating to proposed directors before election at the general meeting
A summary of the major areas that have been re-considered is available on the HKEx's website at http://www.hkex.com.hk/news/hkexnews/0401304news.pdf.
Code on Corporate Governance Practices and Report on Corporate Governance Practices
We issued today an exposure paper to seek market views on the timing of the proposed implementation of the Code and Corporate Governance Report and to allow the market the opportunity to comment on the detailed wording of the Code with a view to removing ambiguities, providing clarity and ensuring that the language adopted in the Code is clear and concise.
In the Corporate Governance Consultation Paper, we sought market views on the framework and certain key provisions of the Code, including establishing remuneration committees and nomination committees and the duties and functions of audit committees, and the Corporate Governance Report. We did not set out in detail the proposed changes to the Code or disclosure requirements for the Corporate Governance Report. There are accordingly further amendments to the Code which are largely an elaboration and extension of the recommendations in the Corporate Governance Consultation Conclusion Report. In drafting the Code, we have made reference to, among other things, the principles and guidelines set out in the revised UK Combined Code published in July 2003 and the proposals set out in the Consultation Paper on Proposals made in Phase II of the Corporate Governance Review by the Standing Committee on Company Law Reform in June 2003. The draft Code represents a significant enhancement of the existing Code.
We have established a working group to review and consider the principles of good governance, the Code provisions and the recommended good practices set out in the draft Code, to provide views on the practical aspects of such standards and practices and to ensure that the Code provisions are on a par with the best current international market practices, having regard to Hong Kong's own particular circumstances. Membership of the working group is widely drawn to ensure a diverse representation of views. It comprises members working in the business, academic and public practice sectors, together with members of the Listing Committee.
Way Forward
In the light of the evolving standards of corporate governance in international markets, it is important to review the Rules from time to time to keep pace with the best that international standards have to offer. We have identified a number of policy areas where consideration should be given to further amendments to the Rules. Further consideration will be given to the merits of:
- enhancing the requirements of the Model Code for directors' securities transactions;
- tightening the deadlines for annual and half-yearly financial reporting by listed issuers;
- adopting quarterly financial reporting or quarterly summary trading statements for Main Board issuers;
- requiring more than three independent non-executive directors appointed to the board; and
- regulating transactions between connected persons and associated companies.
We do not propose for the time being to implement changes to the Rules in these areas. However, we will continue to monitor developments in Hong Kong and other international markets and, if appropriate, consult on any proposed enhancements.
The Exchange has finalised its conclusions on the July 2002 Consultation Paper (except for Part C on continuing listing eligibility criteria and Part E on cancellation of listing procedures) and announced the conclusions today.
The Conclusions on the July 2002 Consultation represent the results of the July 2002 Consultation Paper, focusing on three elements of the July 2002 Consultation Paper:
- Initial listing criteria
- Continuing obligations
- Certain disclosure requirements at the time of initial listing
The Exchange received 93 responses. Analysis of the responses was conducted on the basis of respondent category so as to reflect a balanced view. The majority of the respondents' categories generally support most of the proposals and the Exchange recommends the adoption of these proposals.
Key proposed changes to the Main Board Rules
The following sets out the major changes to the Main Board Rules covered in the Conclusions on the July 2002 Consultation. A discussion of all the issues covered in the Conclusions on the July 2002 Consultation, a statistical analysis of the responses by respondent category and a profile of the respondents are available on HKEx's website at www.hkex.com.hk.
Introduction of alternative financial standards to profit requirement
While the current profit requirement has been maintained as one of the quantitative tests for assessing the track record financial performance of a listing applicant, the Exchange has amended the Main Board Rules to introduce 2 alternative financial tests to provide more flexibility and cater for the wide variety of issuers seeking to list on the Main Board.
Market capitalisation / revenue test:
The Exchange has amended the Main Board Rules to introduce a market capitalisation / revenue test which is to apply to listing applicants with a market capitalisation of at least HK$4 billion at the time of listing and revenue of at least HK$500 million for the most recent financial year comprising 12 months. This test caters particularly for those listing applicants that are of substantially larger size, are able to generate substantial revenue and can demonstrate that they are able to command significant investor interest (having at least 1,000 shareholders at the time of listing). They may or may not have a full 3-financial-year trading record.
Market capitalisation / revenue / cash flow test:
The Exchange has also amended the Main Board Rules to introduce a market capitalisation / revenue / cash flow test which is to apply to listing applicants with a market capitalisation of at least HK$2 billion at the time of listing, and revenue of at least HK$500 million for the most recent financial year comprising 12 months and a positive cash flow from operating activities that are to be listed of at least HK$100 million in aggregate for the 3 preceding financial years. Listing applicants under this test will still be required to comply with the trading record period requirement of not less than 3 financial years.
For the purpose of calculating revenue under these alternative tests, only revenue arising from the principal activities of the listing applicants and not items of revenue and gains that arise incidentally will be recognised. Revenue arising from "book" transactions, such as banner barter transactions or writing back of accounting provisions, will be disregarded.
Waiver of the 3-financial-year trading record requirement for certain listing applicants
Given their size and ability to generate substantial revenues as well as to attract significant investor interest, listing applicants that propose to list under the market capitalisation / revenue test will be granted a waiver of the full 3-financial-year trading record requirement. Where such alternative requirement is applied, the Exchange must be satisfied that such listing applicants are able to demonstrate, among others, that their management have sufficient and satisfactory experience of at least 3 years in the line of the business and industry of the listing applicants, and that they have a minimum of 1,000 shareholders at the time of listing.
Increase of the minimum expected market capitalisation at the time of listing
The current Main Board Rules require the expected market capitalisation of a listing applicant at the time of listing to be at least HK$100 million. The Main Board Rules also require the expected market capitalisation at the time of listing of the shares which are held by the public to be at least HK$50 million and that there is a minimum public float of 25%. Given these requirements and the market practice of listing applicants generally only offer 25% of their enlarged issued share capital to the public at the time of listing, normally a listing applicant will have a minimum market capitalisation of HK$200 million at the time of listing. The Exchange's listing statistics for each of the 5 years ended 31 December and up to 30 June 2003 show that a majority of listing applicants have been able to meet the HK$200 million threshold. Accordingly, the Main Board Rules have been amended to increase the initial minimum expected market capitalisation to HK$200 million.
Determination of market capitalisation
To provide a level playing field for all applicants for listing on the Exchange, the term "market capitalisation" has been defined to refer to the entire size of a listing applicant, which would include both the class to be listed on the Exchange and other class(es), if any, that are either unlisted or listed on other regulated markets of a listing applicant at the time of listing. For these purposes, the extrapolated share offer price of the securities to be listed on the Exchange will be used as the basis for determining the market value of the other class(es) of securities that are unlisted, or listed on other regulated markets.
Increase in the minimum number of shareholders at the time of listing
The minimum number of shareholders required of issuers at the time of listing has been increased to 300. For listing applicants to be listed under the market capitalisation / revenue test, the required minimum number of shareholders has been raised to 1000, given that these applicants should be able to demonstrate significant investor interest and public following.
Suspension on failure to publish financial information on time
Financial information is essential to enable investors to make informed investment decisions. Failure by an issuer to publish financial results on time may be indicative of the issuer not being able to keep proper books and records, and therefore may raise serious concerns over the issuer's transparency. For the protection of investors and to promote a higher standard of financial reporting, the trading of securities of issuers that fail to publish their financial results on the due date will be immediately suspended.
A transitional period up to 31 December 2004 will be accorded to existing issuers to comply with this new continuing obligation.
Implementation of Rule amendments
The Exchange has revised the Rules based on the results of the Corporate Governance Consultation Conclusion Report and the Conclusions on the July 2002 Consultation and subsequent policy directions of the Listing Committee on corporate governance issues. The revised Rules have been approved by the Exchange's Board and the Securities and Futures Commission. The English version of the revised Main Board Rules and GEM Rules are available on the HKEx's website at http://www.hkgem.com/listingrules/amendments/e_main.htm. Amendments to the Rules (except for the new Chapters 14 and 14A of the Main Board Rules which relate to notifiable transactions and connected transactions respectively) have been marked up for ease of reference. Appendices 7A, 7B and 7I have been deleted. Chapter 13 is marked up against Appendix 7A. Printed copies of the relevant pages of the Rules (both the English and Chinese) will be sent to listed issuers and subscribers at a later date.
The revised Rules will take effect on 31 March 2004, except that certain corporate governance Rule amendments will be subject to transitional arrangements and a transitional period up to 31 December 2004 will be given to existing Main Board listed issuers to comply with the new continuing obligation to publish timely periodic financial information (failing which their securities will be subject to immediate suspension). The transitional arrangements in relation to the corporate governance Rule amendments can be found on the HKEx's website at http://www.hkex.com.hk/news/hkexnews/0401304news.pdf.
