Introduction

In July 2021, the Stock Exchange of Hong Kong Limited (the “Stock Exchange”) issued two listing decisions concerning reverse takeover by the listed issuers, which supplement the provisions relating to reverse takeovers under the Rules Governing the Listing of Securities on the Stock Exchange (the “Listing Rules”) and the guidance letter GL104-19 (the “Guidance Letter”).

The Listing Rules and the Guidance Letter

Under Rule 14.06B of the Listing Rules, a reverse takeover is an acquisition or a series of acquisitions of assets by a listed issuer which, in the opinion of the Exchange, constitutes, or is part of a transaction and/or arrangement or series of transactions and/or arrangements which constitute, an attempt to achieve a listing of the acquisition targets and a means to circumvent the requirements for new applicants set out in Chapter 8 of the Listing Rules. The Stock Exchange also issued the Guidance Letter, which was effective on 1 October 2019, to, among others, supplement the six assessment factors when determining a reverse takeover case under the principle based test.

The Listing Decisions

Stock Exchange-LD130-2021

In this listing decision, the listed issuer runs a property leasing business and education-related equipment business, which contributed over 95% of the listed issuer’s revenue in recent years. The listed issuer proposed to acquire a company (the “Target Company A”) from its controlling shareholder (the “Controlling Company”), which principally engages in provision of financial leasing and factoring services in the PRC and is different than the existing business of the listed issuer. The Target Company A was substantially larger than the listed issuer, with percentage ratios between 10 and 35 times over the existing business of the listed issuer.

Under Rule 14.06C of the Listing Rules, an “extreme transaction” is an acquisition or a series of acquisition of assets by a listed issuer which have the effect of achieving a listing of the acquisition targets, but where the listed issuer can demonstrate that it is not an attempt to circumvent listing requirements for new applicants under Chapter 8 of the Listing Rules and that:

1.         (a)        the listed issuer remains to be in control or de facto control of a person or a group of persons for at least 36 months and the transaction itself would not result in a change in control or de facto control; or 

(b)       the listed issuer has been operating a principal business of a substantial size, which will continue after the transaction; and

2.       the business of acquisition target must be suitable for listing, it must satisfy the listing requirement under Rule 8.05 of the Listing Rules (namely, the profit test or market capitalisation/revenue/cash flow test or market capitalisation/revenue test), and the enlarged group must meet all new listing requirements under Chapter 8 of the Listing Rules. 

In this case, the Stock Exchange made a ruling that the proposed acquisition was an extreme transaction but not a reverse takeover case. After considering the six assessment factors under the principle based test, although the Stock Exchange considered that the proposed acquisition would have the effect of achieving listing of the Target Company A’s business, since the existing business of the listed issuer would become immaterial after the acquisition and there would be a fundamental change in the listed issuer’s principal business, the Stock Exchange agreed that the proposed acquisition could be classified as an extreme transaction.

In the analysis given by the Stock Exchange, the Stock Exchange recognised that the proposed acquisition was not an attempt to circumvent the new listing requirements as:

1.       the listed issuer had demonstrated that the Target Company A could meet the profit test under Rule 8.05(1) of the Listing Rules; 

2.       the business of the Target Company A was suitable for listing under Rule 8.04 of the Listing Rules; 

3.       there has been no change in control for the past 36 months and the proposed transaction would not result in the change in control over the listed issuer.

Stock Exchange-LD131-2021

In this listing decision, the listed issuer operated port terminals in the PRC. The listed issuer proposed a merger with a company (the “Target Company B”), which also runs a port terminal business in the PRC (the “Proposed Merger”). Company X, being the controlling shareholder of the listed issuer and the Target Company B, was originally wholly-owned by a PRC provincial government. Around one year before the Proposed Merger, Company Y acquired 51% equity interest in Company X from the provincial government, which was regarded as a change in control of the listed issuer under the Takeovers Code. Given that the profit ratio of the size tests of the Proposed Merger was approximately 120%, the Proposed Merger would therefore constitute a reverse takeover under the bright line test under Note 2 to Rule 14.06B of the Listing Rules, since the Proposed Merger would be a very substantial acquisition and Company Y gained control over the listed issuer within 36 months. The listed issuer made an application to the Stock Exchange for waiving the application of the bright line test under Rule 14.06B of the Listing Rules.

In this case, the Stock Exchange agreed to waive the application of the bright line test under Rule 14.06B of the Listing Rules and the Proposed Merger was classified as a very substantial acquisition and a connected transaction. In its deliberation, the Stock Exchange pointed out that:

1.       the listed issuer’s existing port terminal business was of a substantial size. The Proposed Merger would not result in a fundamental change to the listed issuer’s principal business as it was in line with the listed issuer’s strategies to expand its port terminal business;  

2.   there was no injection of asset of business from Company Y and the Proposed Merger represented an internal restructuring of the port-related business held under the Target Company B. 

Conclusion

The listing decisions shed light on the Stock Exchange’s approach in considering reverse takeover cases. The listed issuers are strongly recommended to seek advice from professional advisers and consult the Stock Exchange in cases involving reverse takeover rules.