Generally, when listed issuers intend to carry out asset disposal transactions, Chapter 14 and 14A of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the “Listing Rules”) are the rules they would primarily focus on. However, a recent case serves as a reminder that the Code on Takeovers and Mergers (the “Takeovers Code”), and in particular Note 7 to Rule 2 and Rule 2.10 of the Takeovers Code, should not be overlooked when listed issues carry out asset disposal transactions or otherwise there could be serious consequences including suspension of trading.

Recent case

In a recent case, the Securities and Futures Commission (the “SFC”) has directed The Stock Exchange of Hong Kong Limited (the “Stock Exchange”) to suspend dealings in the shares of LET Group Holdings Limited (“LET”) and Summit Ascent Holdings Limited (“Summit Ascent”) (collectively, the “Companies”) with effect from 14 February 2024 following a proposed disposal of a major asset of the Companies, namely the sale of assets in Russia for US$116 million (“VSD”), which came into the SFC’s attention in January 2024 and would have constituted a very substantial disposal for each of the Companies pursuant to Chapter 14 of the Listing Rules.

The SFC took such a decisive action due to its concerns that (i) in light of the change of control in LET in May 2022, the VSD might have breached Rule 14.06E of the Listing Rules which, among other things, prohibits a listed issuer from carrying out a disposal of all or a material part of its existing business for a period of 36 months from a change in control unless the remaining group can meet the requirements of Rule 8.05 of the Listing Rules which sets out the minimum requirements in terms of profit, market capitalisation, revenue or cash flow a listing applicant must satisfy in order to be listed; and (ii) both Companies might have breached Rule 13.24 of the Listing Rules as it appears that, after the completion of VSD, they may not have a business with a sufficient level of operations and assets of sufficient value to support their operations to warrant the continued listing of their shares. In other words, both Companies may not be regarded as suitable for listing under the Listing Rules.

Implications of the Takeovers Code

In addition to the above, the SFC noted that both Companies might have also breached Note 7 to Rule 2 and failed to meet the requirements under Rule 2.10 of the Takeovers Code. Under Note 7 of Rule 2, if a listed issuer proposes to dispose of assets and/or operations and as a result of such proposal the listed issuer might not be regarded as suitable for listing for the purpose of the Listing Rules, the SFC must be consulted at the earliest opportunity and in such circumstances would normally apply Rule 2.10 of the Takeovers Code. Pursuant to Rule 2.10 of the Takeovers Code, in addition to satisfying any voting requirements imposed by law, the VSD must be approved by at least 75% of the votes attaching to the disinterested shares that are cast either in person or by proxy at a duly convened meeting of shareholders and the number of votes cast against the resolution to approve the VSD at such meeting is not more than 10% of the votes attaching to all disinterested shares.

However, it appears to the SFC that the VSD has not complied with the above-mentioned requirements.  In particular, the sale and purchase agreement relating to the VSD had been executed and the completion of which was not made subject to obtaining the required approval of shareholders.

Despite that LET and Summit Ascent have been given the opportunity to address the SFC’s concerns by providing an undertaking that the completion of VSD is made conditional on shareholders’ approval and in full compliance with the relevant rules and regulations, both Companies have failed to respond to the SFC. In view of the above, the SFC therefore directed the Stock Exchange to suspend the dealing of their shares in order to maintain a fair and orderly market and protect the interest of the investing public.

Subsequent share repurchase order sought by the SFC

Subsequently in September 2024, the SFC further commenced legal proceedings to seek a share repurchase order under section 214 of the Securities and Futures Ordinance to protect the interests of independent minority shareholders of LET and Summit Ascent as a result of alleged misconduct of Mr Lo Kai Bong (“Mr Lo”), being the chairman, executive director and controlling shareholder of the Companies. According to the SFC, since it is uncertain as to whether and when the shares would be able to resume trading, the share repurchase order would provide an exit for independent minority shareholders.

Although the VSD was subsequently terminated, the SFC alleges that Mr Lo failed to, among other things, disclose all relevant material information to LET and Summit Ascent and their shareholders; apply reasonable skill, care and diligence in the performance of his duties as director of both Companies; and ensure their full compliance with the Listing Rules and the Takeovers Code. As part of the legal proceedings, the SFC is also seeking a disqualification order against Mr Lo for his misconduct towards members of LET and Submit Ascent:-

1.       he disregarded legal advice regarding non-compliance with the Listing Rules and the disapproval by the other directors of the Companies, who subsequently resigned as a result of the VSD;

2.       he caused the Companies to announce that the VSD would proceed, without disclosing the non-compliance issues to the shareholders of both Companies; and

3.       he disregarded the regulatory concerns raised by the SFC and the Stock Exchange regarding the non-compliance issues and continued to procure the Companies to proceed with the VSD, resulting in the trading suspension of the shares of both Companies.

Takeaway

This case serves as a reminder to other listed issuers of the importance of strictly adhering to regulatory requirements of not only the Listing Rules but also the Takeovers Code, especially in proposed asset disposal transactions. Listed issuers should always ensure that they are in full compliance with all the requirements under the Listing Rules and the Takeovers Code and the consequence of failing to do so could be severe. It is always advisable for any listed issuers to seek legal advice should they require any further information or assistance in relation to the above.