1. SFC Corporate Finance Division
  • Administers the Codes on Takeovers and Mergers and Share Buy-backs and regulates takeovers, mergers and share buy-backs
  • Supervises listing-related activities of Stock Exchange (SE administers listing process)
  • Reviews and recommends changes to Listing Rules
  • Reviews prospectuses of unlisted issuers for authorization and grants exemptions for prospectuses issued by listed and unlisted issuers
  • Administers the dual filing regime under the SFO to enhance the quality of disclosure by listing applicants and listed companies
[For Paper 5 practice questions, go to – Paper 5]


2. Role of Hong Kong Exchanges and Clearing Limited (HKEx)
  • Responsible for an orderly and fair market in securities and futures traded on SEHK & HKFE
  • SEHK is responsible for the listing of securities both on the Main Board and on the GEM
  • SEHK is responsible for receiving notifications and disseminating information about changes in the shareholdings of directors, chief executives and substantial shareholders of listed companies
  • According to the Listing Rules, “substantial shareholder” refers to a person who holds 10% or more of the voting power at any company general meeting
[For Paper 5 practice questions, go to – Paper 5]


3. Relationships Among Legislation, Codes, Listing Rules etc
  • SFO and NCO provide the legal framework for securities and futures markets in Hong Kong
  • SFC is empowered by the SFO to make subsidiary legislation in relation to specified matters
  • Subsidiary legislation has the force of law and can be enforced through the courts
  • SFO also empowers the SFC to issue codes and guidelines, however they do not have the force of law
  • The Listing Rules do not have the force of law – they operate on a contractual basis between the SEHK and the issuer and its related parties
[For Paper 5 practice questions, go to – Paper 5]


4. Corporate Governance Code
  • Important code provisions include:
    • Regular board meetings should be held, at least four times per year approximately quarterly
    • Any material conflict of interest should be dealt with at a board meeting in the presence of independent non-executive directors
    • Roles of Chairman and Chief Executive should be conducted by different people
    • An explanation should be given to shareholders as to how a proposed new INED with 7 or more listed company directorships will be able to devote sufficient time to the board
    • Newly appointed directors should receive comprehensive, formal and tailored inductions
    • Remuneration committee should consult Chairman/CE about remuneration proposals for executive directors
    • Effectiveness of internal controls should be reviewed annually by directors and reported to shareholders in the Corporate Governance Report
    • Full minutes of audit committee meetings should be kept
[For Paper 5 practice questions, go to – Paper 5]


5. Type 6 Activity: Advising on Corporate Finance
  • Advising on corporate finance, as a Type 6 regulated activity, means giving advice:
    • On compliance with the Listing Rules
    • On compliance with the Takeovers Code or Share Buy-backs Code
    • On disposing or acquiring securities from the public
    • To a listed corporation/public company on corporate restructuring in respect of securities
  • The following activities are excluded from the definition of “advising on corporate finance”:
    • Professional accountants, solicitors, counsel and trust companies giving corporate finance advice wholly incidental to their profession
    • A person licensed/registered for Type 1 regulated activity gives corporate finance advice wholly incidental to dealing in securities
    • Corporate finance advice is given in publicly available printed media/radio broadcast/television broadcast
    • Corporations giving corporate finance advice solely for their wholly owned subsidiaries, holding companies holding all their issued shares or other wholly owned subsidiaries of the holding company
[For Paper 5 practice questions, go to – Paper 5]


 6. Companies (Winding Up and Miscellaneous Provisions) Ordinance(CWUMPO)
  • Corporate finance advisers need to consider CWUMPO requirements regarding company prospectuses when offering shares and debentures to the public
  • Shares or debentures regarded as “structured products” (as per SFO) may not be offered to the public under the CWUMPO prospectus regime. They must either be SFC authorized or listed on the SEHK
  • SFC functions listed in the CWUMPO have been transferred to SEHK
  • SFC retains the power to issue a certificate of exemption from compliance with the CWUMPO prospectus requirements
  • SEHK vets every prospectus and has the power (from CWUMPO) to authorize registration by the Registrar of Companies
  • SEHK reviews a prospectus for compliance with MBLR and relevant provisions of the CWUMPO
  • Once the SEHK is satisfied that a prospectus complies with MBLR, the prospectus will be authorized for registration and a certificate will be issued. It is the issuer’s responsibility to then deliver the prospectus to the Companies Registry for registration
  • A certificate of authorization from SEHK is not confirmation that the prospectus complies with the CWUMPO
[For Paper 5 practice questions, go to – Paper 5]


7. Personal Account Dealings
  • As with Fund Managers, all personal account dealings of relevant persons should be monitored by the designated compliance officer
  • Relevant persons are employees/directors of a corporate finance adviser who are likely to have access to confidential information
  • A watch list and a restricted list system should be maintained for the proper monitoring of personal account dealings and proprietary trading
  • A corporate finance adviser must have a written policy specifying whether or not relevant persons can deal or trade for their own accounts and if they can, the policy must specify the following:
    • the conditions on which relevant persons may deal or trade;
    • that relevant persons should generally be required to deal through their principal or its affiliates;
    • duplicate trade confirmations should be provided to senior management if relevant persons are permitted to deal through another dealer;
    • that employees should identify all related accounts (including amounts of their minor children and those in which the employees hold beneficial interests) and report them to senior management;
    • such transactions are reported to the designated compliance officer; and
    • the designated compliance officer should actively monitor the accounts of relevant persons and should not have any beneficial interest in the transactions/accounts monitored
[For Paper 5 practice questions, go to – Paper 5]


8. Rules Governing the Listing of Securities
  • Rules covering various aspects of the SEHK functions:
    • SEHK participation
    • SEHK trading
    • Clearing house participation
    • Listing on SEHK
  • SEHK’s principal function is to provide a fair, orderly and efficient market for the trading of securities
  • The Main Board and GEM Listing Rules are intended to ensure:
    • the suitability of applicants for listing;
    • the fair and orderly issue and marketing of securities;
    • the provision of sufficient, material and timely information by issuers which might concern the investors and the public and affect the prices of listed securities;
    • the fair and equal treatment of shareholders;
    • that the directors act in the interests of the shareholders as a whole, particularly where the public shareholders are a minority; and
    • that all new issues are first issued to existing equity shareholders as rights issues unless they agree otherwise
  • Both new applicants and listed issuers are encouraged to seek informal and confidential guidance from the SEHK
[For Paper 5 practice questions, go to – Paper 5]


9. SFC Codes and Guidelines
  • Corporate finance advisers should be aware of other codes and guidelines issued by the SFC, specifically:
    • Code of Conduct for Persons Licensed by or Registered with the SFC
    • Management, Supervision and Internal Control Guidelines for Persons Licensed by or Registered with the SFC
  • Para 17 of the Code of Conduct specifies the following requirements for sponsors:
    • Provide advice and guidance to a listing applicant
    • Complete all reasonable due diligence on a listing applicant
    • Ensure that public disclosures about a listing applicant are true, accurate and complete
    • Ensure truthful, cooperative and prompt communication with regulators
    • Keep proper books and records to show compliance with Code of Conduct
    • Ensure proper implementation and oversight of sponsor work through sufficient resources and effective systems
    • Ensure that public offers are conducted in a fair and orderly manner
    • Take steps to ensure that analysts do not receive material information that is not disclosed in the listing document
  • Internal control guidelines cover: management and supervision, segregation of duties and functions, personnel and training, information management, compliance, audit, operational controls and risk management
[For Paper 5 practice questions, go to – Paper 5]




10. Sponsors
  • A company wishing to list on the SEHK must appoint a sponsor to assist with its initial listing application
  • Sponsors must be licensed/registered for Type 6 regulated activity (Advising on Corporate Finance)
  • License requirements are set out in the SFC’s Fit and Proper Guidelines, including paid-up capital of HK$10 million
  • Although the need to appoint a sponsor is specified by the SEHK, it is the SFC who determines sponsor eligibility

Impartiality, Independence and Role of Sponsors

  • More than one sponsor can be appointed, however one must be selected as the primary SEHK contact and be independent of the applicant
  • Every sponsor must:
    • Comply with the listing rules
    • Ensure all information provided to SEHK is true and complete
    • Submit sponsor declaration to the SEHK before listing
    • Promptly report to the SEHK if it subsequently becomes aware of any non-compliance with the Listing Rules or other legal requirements – this obligation continues beyond ceasing to act
    • Cooperate in any investigation conducted by the Listing Division/Committee and/or the SFC
    • Promptly report to the SEHK reasons for ceasing to act as a sponsor
  • A sponsor is required to:
    • Be closely involved in preparation of listing documents
    • Conduct reasonable due diligence procedures to be able to make a relevant declaration
    • Address all SEHK queries promptly
    • Accompany new applicant to any meetings with SEHK
[For Paper 5 practice questions, go to – Paper 5]


11. Compliance Advisers
  • Listed issuers must appoint a compliance adviser when it initially lists and the appointment must continue up to:
    • The publication of financial results for first full financial year after listing for Main Board listings
    • The publication of financial results for second full financial year after listing for GEM listings
  • The SEHK may direct a listed issuer to appoint a compliance adviser after the specified minimum period
  • Listed issuers should seek advice from their compliance advisers in prescribed circumstances (eg before publishing a regulatory announcement)
  • Only persons eligible to act as sponsors can act as compliance advisers
[For Paper 5 practice questions, go to – Paper 5]


12. Directors
  • Directors of an issuer are expected to:
    • fulfill fiduciary duties (skill, care and diligence)
    • ensure that the listed company complies with listing rules
    • avoid actual or potential conflicts of interest
    • have a general understanding of the issuer’s business and monitor its affairs actively; and
    • comply with the Model Code for Securities Transactions by Directors of Listed Issuers (the Model Code)
  • Every board of a listed issuer must have at least three independent non-executive directors (INEDs), at least one of whom must have appropriate professional qualifications or accounting/financial management expertise. At least one-third of the board of an issuer must be INEDs
  • INEDS must submit to the SEHK a written confirmation of their independence. The following circumstances can compromise independence:
    • The person holds more than 1% of number of issued shares (5% or more means not independent)
    • The person is or was a director/partner/principal of a professional adviser which provides (or has provided within 2 years) services to the listed issuer or any of its group companies or a controlling shareholder
    • The person has a material interest in any principal business activity/dealings with the listed issuer or any of its group companies
    • The person is on the board to protect the interests of an entity whose interests are not the same as the shareholders as a whole
    • The person is/was connected with a director/CEO/substantial shareholder within 2 years of appointment to the board
    • The person is financially dependent on the listed issuer or any of its group companies
  • SEHK encourages directors to own shares in the listed issuer
  • A director of a listed issuer cannot deal in the company’s shares between the end of a financial period and the date of the subsequent results announcement
  • Directors of listed issuers may be removed by an ordinary resolution in general meeting
[For Paper 5 practice questions, go to – Paper 5]


13. Own Share Purchases
  • An issuer is allowed to purchase its own shares on the SEHK or any other stock exchange recognised by SFC/SEHK
  • Share Buy-backs Code allows buy-backs to be executed on-market or off-market through an exempt share buy-back or a general offer
  • A breach of the Share Buy-backs Code is considered a breach of the Listing Rules
  • A company with its primary listing on SEHK can only purchase its own shares on the SEHK if:
    • The shares are fully paid up
    • The company has sent an Explanatory Statement to its shareholders
    • Shareholders have given specific approval or general mandate to make such purchases
  • The Explanatory Statement should contain the following, to enable shareholders to make an informed decision:
    • Total number of shares to be purchased
    • Reasons for buy-backs
    • Source of funds for purchases
    • Any material impact on working capital/gearing
    • Names of any directors who intend to sell shares
    • Compliance with Listing Rules/company law
    • Details of purchases within past six months
    • Any core connected persons intending to sell shares
    • Highest and lowest prices at which shares have traded in the past 12 months
  • Dealing restrictions set out in the MBLR:
    • No purchase if price is 5% or more higher than 5-day average closing price
    • Purchases to be made for cash
    • No purchase can be made until price-sensitive information has been made publicly available, in particular from 1 month before earlier of
      • Board meeting approving financial results
      • Deadline to publish announcement of financial results, ending on results announcement date
    • Maintenance of minimum public shareholding
[For Paper 5 practice questions, go to – Paper 5]


14. Prospectus Requirements
    • Provisions apply to any person offering shares in a company to the public
    • Any document by which an offer is made is deemed a prospectus and will have to comply with requirements in the Companies (Winding Up and Miscellaneous Provisions) Ordinance (CWUMPO), sometimes abbreviated to Companies Ordinance
    • Offering of structured products are exempt from the CO provisions – they are covered by the SFO
    • All prospectuses must be registered with the Registrar of Companies
    • SFC is authorized to review prospectuses under the CO and to issue a certificate of exemption where CO compliance would be unduly cumbersome or irrelevant for registration


    • To remove duplication of regulation between SFC/SEHK/Registrar of Companies, SFC’s functions under the CO regarding vetting of prospectuses have been transferred to the SEHK
    • SEHK vets every prospectus for compliance with Listing Rules and CO and has power to authorize registration with the Registrar of Companies
    • Once the SEHK is satisfied that a prospectus can be authorized for registration, it will issue a certificate and issuer will then need to deliver the prospectus to the Registrar of companies
    • The issue of a certificate of authorization by the SEHK does not confirm that the prospectus complies with the CO

    Minimum Content

    • English and Chinese translations are required and can be printed separately
    • Statements required include:
      • A statement on the business
      • Description of share capital
      • Sufficient information to allow investors to make informed decisions
      • Description of business founders
      • Amount of shares to be issued; capital to be raised and what it will be spent on


    • No allotment of shares can be made until three days after a prospectus is issued and not after 30 days from the date of issue
    • An application for shares after the prospectus is issued cannot be revoked until the fifth day after the opening of the subscription lists
    • Public holidays, Saturdays and Sundays are not included in the five-day period
[For Paper 5 practice questions, go to – Paper 5]


15. Dual Filing
  • SFC has issued subsidiary legislation covering regulation of information disclosure by listed companies and listing applicants:
    • Securities and Futures (Stock Market Listing) Rules
    • Securities and Futures (Transfer of Functions – Stock Exchange Company) Rules
  • A listing applicant is required to file its listing application with the SFC – to avoid duplication, the company can authorize the SEHK to make the SFC filing on its behalf
  • SFC can object to the listing within 10 days on the basis of insufficient or inadequate disclosure or if the listing is not in the public interest
  • SEHK remains point of contact with the listing applicant and conducts the front-line review
  • Where the SFC objects to a listing, applicant has right of appeal to the Securities and Futures Appeal Tribunal
  • SFC has the right to suspend dealing in a security
[For Paper 5 practice questions, go to – Paper 5]


16. Placing
  • A sale of securities to a selected group of persons rather than to the general public
  • An intermediary (investment bank) identifies investors and arranges for the placing of securities
  • The stock exchange may not allow this method of listing if there is likely to be a significant public demand for the securities
  • A placing by a new applicant must be supported by a listing document, however a placing of securities already in issue will not require a listing document
  • Once an issuer is listed, it can only do a placing if it is authorised by shareholders – this applies to both Main Board and GEM
[For Paper 5 practice questions, go to – Paper 5]


 17. Anti-Dilution Rules: Placings, Rights Issues and Open Offers
  • Placings, rights issues and open offers can be used abusively to dilute the interests of minority shareholders of listed issuers – eg a series of rights issues over a limited period, which could dilute the interests of minority shareholders with limited available funds
  • Issuers may not undertake a specific mandate placing, rights issue or open offer if:
    • It has raised capital through one or more of these methods within the 12 months prior to the announcement of the proposed issue; and
    • The combined effect would be a dilution of 25% or more of the issuer’s share price
  • SEHK may allow the proposed capital raising in response to exceptional circumstances – eg a rescue plan for an issuer in financial difficulty
  • A valid rights issue or open offer must be made only with the approval of minority shareholders in a general meeting at which controlling shareholders and their associates abstain from voting (if none, then executive directors and CEO)
[For Paper 5 practice questions, go to – Paper 5]


18. Secondary Listings
  • A secondary listing is where a company has its shares listed on another exchange and is seeking an additional listing for its shares on the SEHK
  • The minimum public float requirement does not apply
  • SEHK must be satisfied that the primary listing is on an exchange where the standards of shareholder protection are at least equivalent to those of Hong Kong
[For Paper 5 practice questions, go to – Paper 5]


19. Equity Securities
  • The basic criteria for an initial listing is as follows:
    • Must be incorporated, but not a private company
    • Both issuer, and its business, must in the opinion of SEHK be suitable for listing (eg a company consisting primarily of cash or near cash would not be deemed suitable)
    • Issuer must satisfy one of the following tests:
  • Profits test: Profits for the most recent year must not less than HK$20 million and those of the two preceding years in aggregate must not be less than HK$30 million; or
  • Market Capitalisation/Revenue/Cash Flow Test: The issuer must have a market capitalization at the time of listing of at least HK$2 billion, revenue for most recent audited financial year of at least HK$500 million and positive cash flow for the preceding three financial years of at least HK$100 million; or
  • Market Capitalisation/Revenue Test: The issuer must have a market capitalization at time of listing at least HK$4 billion and revenue for the most recent audited financial year of at least HK$500 million
    • New applicants must have a trading record of at least three years under substantially the same management, while ownership should be substantially the same for at least the most recent audited financial year.
    • Continuous ownership and control” refers to voting rights by a controlling shareholder or, where there is no controlling shareholder, the single largest shareholder
    • For a new applicant, the latest financial period reported on by the reporting accountants must be within the six months before the date of listing document
    • At least 25% of the issuer’s total number of shares must be held by the public and the public holding of shares must be at least HK$125 million – for issues over HK$10 billion, the SEHK may accept a lower percentage of between 15% and 25%
    • For new listings that involve placings, the placing tranche must not be less than HK$25 million, and not less than 25% of the placing tranche must be made available by the lead broker to the general public
    • Expected market capitalisation of a new applicant must be at least HK$500 million at time of listing and there must be a sufficient spread of shareholders with a minimum of 300
    • Not more than 50% of the securities in public hands at the time of listing can be beneficially owned by the largest 3 public shareholders
    • If a new applicant has a controlling shareholder with an interest in a business that competes (or may compete), this must be disclosed
    • A new applicant for a primary listing must have sufficient management presence in Hong Kong (at least 2 executive directors resident in Hong Kong)
    • The securities must be freely transferable
    • A new applicant must appoint an approved share registrar in Hong Kong to maintain register of members
    • Proposed directors must meet certain requirements
    • SEHK may accept a shorter trading period and/or may waive the profit or financial standards requirements
[For Paper 5 practice questions, go to – Paper 5]


20. Biotech Companies
  • A Biotech Company is primarily engaged in using science and technology to research, develop, apply and commercialise products that have a medical or biological application. Important points to note:
    • R&D costs of Biotech Companies often mean that they are unable to generate sufficient revenue to make profits for some time
    • Pre-revenue Biotech Companies are able to gain access to the public capital market during this period of development
    • To be considered for a Main Board listing, the following must be satisfied:
      • Meaningful funds previously been raised from at least one sophisticated investor
      • A two-year trading record under substantially the same management
      • An initial market cap of at least HK$1.5 billion
      • A public float at time of listing of at least HK$375 million – shares held by cornerstone investors are not included in the public float
      • Sufficient working capital to cover at least 125% of the group’s costs for at least 12 months from date of listing document
    • Biotech companies are prohibited from fundamentally changing their business, without prior SEHK consent
[For Paper 5 practice questions, go to – Paper 5]


21. Weighted Voting Rights
  • Companies with Weighted Voting Rights (WVR) will have investors who have more voting power than a holder of one ordinary share
  • With the amendment of the Listing Rules in April 2018, HKEx will consider listing applications from companies demonstrating innovation and growth wishing to list with a WVR structure. Points to note:
    • WVR shareholders must collectively hold at least 10% of the underlying economic interest in the issuer’s share capital at time of initial listing
    • WVR shares cannot be admitted to listing
    • The maximum number of votes that WVR can carry is 10 times that of an ordinary share
    • At least 10% of the votes eligible to be cast at the issuer’s general meetings must belong to non-WVR shareholders
    • WVR shares can only be issued to members of the issuer’s board of directors and cease to carry the extra rights if the WVR shares are sold or the holder ceases to be a board director
    • On listing, no new WVR shares may be created, so their number can only decrease
    • Companies with WVR structures are subject to enhanced disclosure requirements
[For Paper 5 practice questions, go to – Paper 5]


22. New Listing Procedures
  • Form A1, together with various documents, must be submitted
  • SEHK must review all publicity material to be released in Hong Kong relating to the new issue
  • At least four clear business days prior to hearing date, various other documents must be submitted
  • SEHK may delay listing timetable if applicant does not reply to its enquiries on a timely basis
  • Normally, no more than 10% of any securities being marketed for listing can be offered to employees or past employees on a preferential basis
[For Paper 5 practice questions, go to – Paper 5]


23. Options, Warrants and Similar Rights
  • All warrants (including options and similar rights) traded on the SEHK must be approved by the SEHK and will only be approved if the issue does not exceed 20% of the issued shares of the issuer
  • Minimum term of 1 year, maximum term of 5 years
  • A circular must be sent to shareholders with details of the issue
  • Shareholders must approve such issues at either an annual general meeting or an extraordinary general meeting
  • The warrants cannot be convertible into further subscription rights
[For Paper 5 practice questions, go to – Paper 5]
24. Initial Public Offering Process
  • IPO process involves a number of parties in the preparation of listing documents and marketing of shares to be listed
  • The sponsor (often, but not always the lead underwriter) coordinates the process putting together the underwriting syndicate
  • Underwriters are paid an underwriting fee to subscribe for any shares that are not taken up by investors
  • Underwriting agreements for both public offer and placing tranches normally contain force majeure clauses
  • Lead underwriters/global coordinators will devise a roadshow – company senior management formally present the investment story to investors in Hong Kong, and possibly overseas
  • For offers with public and placing tranches, the placing tranche will be subject to a claw-back mechanism to meet any excess demand from the public offer in Hong Kong
  • As investors are prohibited from making multiple applications, sponsors need to establish measures to identify multiple applications
  • A placing-only listing may not be permitted if there is likely to be a significant public demand for the securities
  • In large issues, the initial allocation to the public tranche is typically set at 10% of the overall offering
  • Issuer must announce the results of a public offer on the next business day after allotment
[For Paper 5 practice questions, go to – Paper 5]
25. Price Stabilization
  • Price stabilization occurs when issuers or underwriters of newly issued securities may buy or sell the stock to prevent or minimize a decline in the price
  • The SFC considers that it is in the public interest to permit and regulate price stabilizing action connected with public offerings
  • The Securities and Futures (Price Stabilizing) Rules provide a safe harbour for permitted stabilizing activity (otherwise it would be considered stock market manipulation – a form of market misconduct)
  • Price stabilization is permitted for 30 days from the start of trading for offers not less than HK$100 million
  • Stabilizing manager must keep a register of stabilizing actions available for inspection by the SFC; the register must be retained for seven years from the end of the stabilizing period
  • The maximum price that can be paid by these permitted actions can never be higher than the initial offer price
[For Paper 5 practice questions, go to – Paper 5]


26. Reverse Takeovers (RTO)
  • The problem with an RTO is that control of the issuer will change and its business may substantially change. This can present challenges to an orderly and properly informed market and could prejudice investor interests
  • An RTO involves an acquisition or series of acquisitions of assets where there is (or will be) a change in control
  • The SEHK has devised two primary types of test of such transactions:
  1. Quantitative “bright line” tests where any of the percentage ratios reach the very substantial acquisition threshold (100% or more) or where there is an injection of assets by the incoming controlling shareholder within 36 months of him gaining control and it had not been previously considered a reverse takeover
  2. Principle based test where the SEHK will form an opinion as to whether the listing requirements for new applicants are being circumvented, taking a number of factors into consideration, including:
    • Size of acquisition relative to size of issuer
    • Whether there has been a fundamental change in the issuer’s principal business
    • Nature and scale of issuer’s business before acquisition
    • Quality of acquisition targets
    • Whether there has been a change in control of the listed issuer
  • Where a transaction or series of transactions are treated as an RTO, the SEHK will treat the listed issuer as if it were a new listing applicant and shareholder approval of the transaction will be required. The enlarged group or assets acquired must be able to meet the listing requirements
[For Paper 5 practice questions, go to – Paper 5]


27. The SEHK’s Power to Direct a Trading Halt or Suspend Dealings
  • The SEHK may halt/suspend a listing where it considers it necessary for the protection of the investor or maintenance of an orderly market
  • Should a trading halt exceed two trading days, it will automatically become a trading suspension
  • A trading halt is necessary when the listed issuer:
    • Has material information to be disclosed to avoid a false market
    • Needs to disclose inside information
    • Reasonably believes that confidentiality may have been lost in respect of inside information
  • A trading halt may also be necessary when the listed issuer intends to issue an announcement responding to market commentaries/rumours with allegations of fraud, material accounting or corporate governance irregularities
  • Suspension or a trading halt can be initiated by:
    • The listed company
    • SEHK or GEM
    • SFC for untoward movements in prices or volumes
  • SEHK may also call a trading halt/suspension if:
    • There are insufficient shares in the hands of the public;
    • The issuer does not have a sufficient level of operations or sufficient assets to warrant a continued listing; or
    • It considers that the issuer is no longer suitable for listing
  • Listed securities should be continuously traded save in exceptional circumstances and therefore, the SEHK requires an issuer-requested suspension to be kept as short as possible
  • An issuer must have a sufficient level of operations or tangible assets to warrant continued listing on the SEHK. A listing may be cancelled if the issuer fails to:
    • Take adequate action to restore its listing for a prolonged period
    • Address matters identified by the SEHK within the specified time
[For Paper 5 practice questions, go to – Paper 5]




28. General Principles of the Takeover Codes
  • The Codes are based on 10 general principles which are considered to reflect good standards of conduct for persons engaged in takeovers, mergers and repurchases. The principles include provision for:
    • equal treatment of shareholders, the provision of accurate and sufficient information and advice to them;
    • the making of general offers to be made if control of a company changes, is acquired or is consolidated;
    • full and prompt disclosure of information by persons concerned with offers;
    • offerors to ensure when making an offer that they will be able to meet their obligations;
    • rights of control to be exercised in good faith and without oppressing minority and non-controlling shareholders;
    • directors of offeror and offeree companies to provide disinterested advice to their shareholders; and
    • the board of an offeree company in an offer situation not to take any action likely to frustrate the offer without the approval of the shareholders in general meeting
[For Paper 5 practice questions, go to – Paper 5]


29. Board of the Offeree Company
  • After being approached or receiving an offer, the board of the offeree company must establish an independent committee of the board to make a recommendation as to:
    • Whether the offer is fair and reasonable; and
    • Acceptance of or voting on the offer
  • As soon as practicable, a competent independent financial adviser must be engaged to advise the independent committee in writing on the offer
  • The independent committee must approve the appointment of any independent financial adviser before the appointment is made
  • The board must issue a circular to shareholders with details of the advice of the independent financial adviser and the recommendations of the independent committee
  • The independent financial adviser’s appointment must be announced by the board as soon as possible after the appointment
  • Collect promptly from clients any amount due as margin
  • Not offer any gift other than a discount on fees or charges when promoting a specific investment product
[For Paper 5 practice questions, go to – Paper 5]


30. Board of the Offeror Company
  • When offering a reverse takeover, or when the directors have a conflict of interest, the board of the offeror must seek competent independent advice before announcing the offer or any revised offer. Shareholders must have access to the substance of the advice
  • The board of the offeror may seek oral advice prior to the announcement of the offer and then obtain full advice as soon as possible
  • The full advice must be circulated to the offeror’s shareholders as soon as practicable
  • If a general meeting is to be convened to approve the proposed offer, the full advice must be sent to shareholders at least 14 days in advance
[For Paper 5 practice questions, go to – Paper 5]


31. Costs of a Scheme of Arrangement
  • Normally, the costs of a scheme of arrangement to privatize a company would be borne by the company itself
  • When an offeror intends to use a scheme to privatize an offeree company, then costs will be borne by the offeror if:
    • Either independent committee or independent financial adviser does not recommend the offer as fair and reasonable; and
    • Scheme is not approved by shareholders
[For Paper 5 practice questions, go to – Paper 5]


32. Mandatory Offers
    • The general principle underlying a mandatory offer is that if the control of a company changes or is acquired or consolidated, a general offer to all other shareholders is normally required
    • A mandatory offer is required to be made when:
      • any person (or two or more persons acting in concert*) acquires, whether by a series of transactions over a period of time or not, 30% or more of the voting rights of a company (trigger); or
      • any person (or two or more persons acting in concert*) who owns between 30% to 50% (inclusive) of the voting rights of a company, acquires more than 2% of the voting rights within a 12 month period (creeper)

    *     Persons are acting in concert if they, pursuant to an agreement or understanding, actively co-operate to obtain or consolidate control of a company through the acquisition by them of voting rights of the company

    • All mandatory offers must include a cash component and must be at a price not less than the highest price paid by the offeror, or any person acting in concert, within 6 months prior to the start of the offer period
[For Paper 5 practice questions, go to – Paper 5]


33. Share Buy-Backs
  • It is an offence to deal with property known to, or believed to, represent the proceeds of drug trafficking
  • Any person who knows or suspects that property relates to drug trafficking, should report it to a police officer, a customs and excise officer, or the Joint Financial Intelligence Unit (JFIU) – failure to disclose is an offence
  • It is an offence to disclose to another person that a disclosure has been made, as above
  • A person making a disclosure is excused from any resulting contract breach or professional obligation
[For Paper 5 practice questions, go to – Paper 5]


34. The Takeovers and Mergers Panel
  • The Panel is a committee of the SFC, hearing disciplinary matters and reviewing Executive rulings, when requested
  • Consists of up to 40 members drawn from the financial and investment community, at least one of whom must be an SFC non-executive director
  • No executive director or staff of the SFC may be Panel members
  • Quorum of the Panel is five, including the Chairman
  • Panel meetings often involve confidential, price-sensitive information and are therefore informal and held in private (may not be the case for disciplinary proceedings – see below)
  • A party may present its own case to the Panel or have its financial/legal advisers present the case to the Panel
  • Panel rulings are normally published, subject to confidentiality considerations
[For Paper 5 practice questions, go to – Paper 5]
 35. Disciplinary Proceedings
  • The Executive may institute disciplinary proceedings before the Panel when it considers that there has been a breach of the Takeovers Code or Share Buy-backs Code
  • Proceedings are normally held in public, except where confidential issues are to be covered
  • If the Takeovers Panel finds there has been a breach of one of the Codes or of a ruling, it may impose any of the following sanctions:
    • issuance of a public statement which involves criticism;
    • public censure;
    • reporting the offender’s conduct to a regulatory authority;
    • requiring intermediaries (dealers and advisers) not to act or continue to act for a stated period in any (or a stated) capacity for the guilty person;
    • banning advisers from appearing before the Executive or the Panel for a stated period; and/or
    • requiring further action to be taken as the Panel thinks fit
  • Failure to comply with the Codes may lead to revocation or suspension of SFC license or registration
[For Paper 5 practice questions, go to – Paper 5]




 36. Convertible Bonds (1)
  • All proposed convertible debt issues must be approved by the SEHK prior to issue and are subject to the Main Board Listing Rules and the GEM Listing Rules
  • Convertible bonds (other than those issued by a state or supranational) convertible into equity securities will only be considered for admission if the equity securities are:
    • A class of listed equity securities; or
    • A class of equity securities listed or dealt in on a stock market recognized by the SEHK
  • Convertible bonds can be listed in other circumstances as long as holders have access to the necessary information to form an opinion on the value of the underlying equity securities
  • Bonds (other than those issued by a state or supranational) convertible into property other than equity securities, may be listed as long as holders have access to the necessary information to form an opinion on the value of the underlying property
[For Paper 5 practice questions, go to – Paper 5]


 37. Convertible Bonds (2)
  • An issuer must publish an announcement as soon as practicable on any change in the rights
    • Attached to any class of listed securities
    • Attaching to any shares into which any listed debt securities are convertible/exchangeable
  • Convertible bonds converted into ordinary shares will dilute the holding of existing shareholders of a listed issuer and may affect the financial profile of the issuer. Accordingly, a proposed issue of convertible bonds can constitute inside information requiring appropriate disclosure as per the SFO
  • Convertible bonds are normally listed on an exchange to obtain listing status, thus permitting investors subject to investment restrictions (institutions and funds) to invest in them. Often called a listing of convenience
[For Paper 5 practice questions, go to – Paper 5]


 38. Rights Issues – Underwriting
  • Underwriting provides a degree of certainty to an issuer and potential investors through the commitment of sound financial institutions, enabling an issuer to plan of the basis of assured funds
  • Underwriting of rights issues applies to both Main Board and GEM
  • The underwriter must either be:
    • Licensed/registered for Type 1 activity (Dealing in securities)
    • The controlling or substantial shareholders of the issuer
  • Where the underwriter of a rights issue can terminate the underwriting on the occurrence of a force majeure event*, the listing document must contain details of the fact. Such disclosure must:
    • Appear prominently on the front cover of the listing document
    • Include a summary of the force majeure clause(s)
    • State that there are risks in dealing in such rights
    • Be in a form approved by the SEHK

*   An event that is unexpected or extraordinary, outside the control of the parties, which gives one party the contractual right to terminate (eg wars, terrorism, natural disasters)

  • If the underwriter’s ordinary course of business is not underwriting, this fact must be fully disclosed in the listing document
[For Paper 5 practice questions, go to – Paper 5]


 39. Rights Issues – Non-underwritten Issues
  • Where a rights issue is proposed without being fully underwritten, the SEHK needs to be consulted at an early stage. The following will need to be disclosed on the front cover of the listing document:
    • The fact that the issue is not fully underwritten
    • Any minimum amount to be raised for the issue to proceed
  • Listing document will need to state:
    • Intended use of net proceeds of issue according to level of subscriptions
    • Whether each substantial shareholder has taken up entitlement in full or in part
  • SEHK will need to be consulted at an early stage where a rights issue is proposed that is not fully underwritten
  • Listing documents for non-underwritten issues must disclose:
    • Non-underwritten nature of offer disclosed on front cover of listing document
    • Minimum amount required to be raised for issue to proceed
    • Intended use of net proceeds
    • If each substantial shareholder has undertaken to take up entitlement
[For Paper 5 practice questions, go to – Paper 5]


 40. Share Option Schemes
  • A share option scheme (Scheme) involves a listed issuer granting options over new shares to, or for the benefit of, specified participants of a Scheme
  • Schemes are governed by the MBLR
  • Schemes have been of concern to the SEHK because of potential abuse over granting of options to senior management and substantial shareholders
  • A new Scheme must be approved by shareholders of the listed issuer in general meeting
  • An announcement must be published on the outcome of the shareholders’ meeting as soon as possible and not later than 30 minutes before the next trading session following the meeting
  • An existing Scheme of a newly admitted issuer does not need to be approved by its shareholders after listing, however all the details of the Scheme must be clearly set out in the listing document
[For Paper 5 practice questions, go to – Paper 5]

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