Introduction

Victory Group Limited (stock code: 1139) (“Victory Group”) announced on 4 August 2017 that it had received a letter from The Stock Exchange of Hong Kong Limited (the “Stock Exchange”), notifying Victory Group that the Stock Exchange has, pursuant to Practice Note 17 of the Rules Governing the Listing of Securities on the Stock Exchange (the “Listing Rules”), decided to suspend trading in Victory Group’s shares under Rule 6.01(3) of the Listing Rules ) and place Victory Group in the first delisting stage (the “Decision”). The Stock Exchange considers that the issuer or its business is no longer suitable for listing as a result of Victory Group’s low level of operations in its principal business. Victory Group is the first company on the Main Board of the Stock Exchange (the “Main Board”) required to be delisted under the Listing Rule.

Background

Victory Group commenced trading of its shares on the Main Board in 16 February 1998, with its principal business consisting of second-hand motor vehicles trading and money lending. According to the announcement issued by Victory Group on 4 August 2017, the Stock Exchange’s reasons for arriving at the Decision can be summed up as follows:

• Victory Group had a very low level of operations as reflected in its published financial results. The revenue (HK$4.9 million in 2016) was insufficient to cover Victory Group’s costs and expenses, resulting in net loss and negative operating cash flow;
• There is a serious question about the viability and sustainability of Victory Group’s principal business. The low level of business operations does not appear to be a temporary downturn as there has been continued deterioration in the level of revenue in the last few years (where the second hand vehicle business generated HK$71.7 million in 2012 but only HK$1.7 million in 2016). The second-hand vehicle and money lending business employed a total of 8 employees only;
• Even though Victory Group commenced a new business in July 2017 involving the wholesale distribution of new motor vehicles in the People’s Republic of China (the “PRC”), Victory Group has no track record of using the new business model and the scale of operation is preliminary and small; and
• Victory Group has failed to demonstrate that it has assets of sufficient value to warrant the continued listing of its shares as its total assets were only about HK$56.6 million.

In the “Update on the Listing Status” announcement issued by Victory Group on 8 August 2017, Victory Group indicated that it had submitted a written request to the Listing Committee pursuant to Rule 2B.06 of the Listing Rules for reviewing the Decision, which has stalled the suspension of trading for the time being.

Delisting procedures

The delisting procedures can be found in Practice Note 17 of the Listing Rules. In general, Rule 13.24 of the Listing Rules requires an issuer to carry out a sufficient level of operations or have tangible assets of sufficient value, or intangible assets for which a sufficient potential value can be demonstrated. However, there are no numerical metrics on which to assess whether an issuer has satisfied the criteria in Rule 13.24. The Stock Exchange is of the view that Victory Group has failed to satisfy such requirements. Hence, the Stock Exchange decided to delist Victory Group’s shares and will follow a four-stage procedure as set out below:

• The first stage: the Stock Exchange will monitor developments during the initial six months following the suspension. The issuer must make periodic announcements of developments under Rule 13.24A of the Listing Rules. After the six month period, the Stock Exchange will decide whether to proceed to the second stage.
• The second stage: the Stock Exchange will write a letter to the issuer concerning the issuer’s continued failure to meet Rule 13.24 of the Listing Rules and will require the issuer to submit resumption proposals within the next six months. The directors of the issuers will also need to prepare monthly progress reports. The Stock Exchange will consider the issuer’s proposals and determine whether to proceed to the third stage.
• The third stage: the Stock Exchange will announce that the issuer does not have sufficient assets or operations for listing and impose a deadline (generally six months) for submitting resumption proposals.
• The fourth stage: If no resumption proposals have been received, the issuer’s listing will be cancelled.

Commentary

Scrutiny by the Stock Exchange has been extended from the Growth Enterprise Market of the Stock Exchange (“GEM”) to the Main Board as part of the Stock Exchange’s efforts to maintain the reputation and integrity of Hong Kong’s stock market. Previously, the Stock Exchange, in an attempt to tighten listing rules and regulations following the plunge in share price of small-cap stocks in Hong Kong, made use of Rule 17.26 of the GEM Listing Rules (the text of which is the same as Rule 13.24 of the Listing Rules) to commence procedures to delist China Bio Cassava Holdings Limited (stock code: 8129) and Union Asia Enterprise Holdings Limited (stock code: 8173), unless they are able to submit resumption proposals to the satisfaction of the Stock Exchange.

While the increased scrutiny by the Stock Exchange can raise the quality of companies listed in Hong Kong’s stock market, some have criticised the Stock Exchange’s actions as lacking specific guidance.

Such criticism could stem from the fact that Hong Kong lacks quantifiable delisting requirements. Unlike New York, London, Tokyo and the PRC, Hong Kong does not have a mechanism in place to forcibly expel listed companies that perform poorly financially. For example, the Shenzhen and Shanghai stock exchanges will remove companies that post three years of losses in a row, while the NASDAQ in the United States delists any company trading below US$1 for 30 days. Hong Kong has in the past issued two consultation papers in July 2002 and November 2002 respectively, whereby the Stock Exchange attempted to introduce rules to delist companies. However, the proposals were met with strong opposition and were scrapped in the end. Thus, it might not be entirely clear in what circumstances the Stock Exchange will determine that a company lacks sufficient operations under Rule 13.24 of the Listing Rules or Rule 17.26 of the GEM Listing Rules and should be delisted.

Conclusion

With the Stock Exchange extending its scrutiny to Main Board companies, it is evident that robust efforts are being made to cleanse the Hong Kong stock market of “zombie stocks” and shell companies. The Stock Exchange’s actions are in line with its vision to raise the standards and quality of Main Board and GEM issuers as indicated in the Stock Exchange’s consultation paper published in June 2017, “Review of GEM and Changes to the GEM and Main Board Listing Rules”.  The Victory Group incident serves as a reminder for listed companies to ensure compliance with the continuing obligations under the Listing Rules and the GEM Listing Rules, such as maintaining a sufficient level of operations and public float, to avoid falling victim to delisting proceedings.

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Important: The law and procedure on this subject are very specialised and complicated. This article is just a very general outline for reference and cannot be relied upon as legal advice in any individual case. If any advice or assistance is needed, please contact our solicitors.