Hong Kong: Amendments to the Connected Transaction Rules of the Hong Kong Stock Exchange Listing Rules

Last Updated: 12 October 2010

In May 2010, the Hong Kong Stock Exchange (the "Exchange") released its Consultation Conclusions on proposed changes to connected transaction rules which included a review on the definition of connected person, provided exemptions for connected transactions which are immaterial or involve persons not in a position of significant influence, etc. The proposal did not exclude persons connected at the subsidiary level from the definition of connected person, and the connected transaction rules will continue to govern transactions with connected persons on a revenue basis.

The amendments to the Listing Rules which have significant effect on issuers' continuing obligations have become effective on 3 June 2010.

We now briefly summarize the Amendments as follows :-

1. Exemption for transactions with persons connected with "insignificant subsidiaries" (Rule 14A.31(9))

(a) To reduce the issuers' compliance burden on transactions with connected persons at the subsidiary level, transactions between the issuer and a connected person are exempted if he is connected to the issuer only by virtue of his relationship with an "insignificant subsidiary".

(b) A subsidiary is "insignificant" if :-

  1. the values of its total assets, profits and revenue represent less than 10% of the issuer's total assets, profits and revenue based on the accounts for each of the latest three financial years (or if less, the period since the establishment of the subsidiary); or
  2. the values of its total assets, profits and revenue represent less than 5% of the issuer's total assets, profits and revenue based on the accounts for the latest financial year.

(c) If the person is connected to more than one subsidiary, the total assets, profits and revenue of all the relevant subsidiaries would be aggregated.

(d) If any percentage ratio calculation produces an anomalous result, the Exchange may disregard the calculation and consider an alternative test.

(e) The exemption is not available if the insignificant subsidiary is itself a party to the transaction or its securities/assets are the subject of the transaction, the transaction is capital in nature and the transaction's size is 10% or more based on the consideration ratio.

2. De minimis thresholds that trigger disclosure or shareholders' approval requirements for connected transactions (Rules 14A.31-14A.34 and Rules 14A.65 to 14A.66)

To strike a proper balance between shareholder's protection and compliance where the size of a connected transaction is immaterial to the issuer, the percentage thresholds for the de minimis exemptions have been revised :-

(a) from 0.1% to 1% for fully exempt transactions which involve persons connected only at the subsidiary level; and

(b) from 2.5% to 5% for exemption from shareholder approval requirements.

3. Exemption for revenue transactions with associates of a passive investor (Rule 14A.31(10))

To lessen the issuers' compliance burden in circumstances where the potential for a substantial shareholder to abuse its position is small, a connected transaction of a revenue nature in the ordinary and usual course of the issuer's business and on normal commercial terms has been exempted where :-

(a) the transaction is a connected transaction only because it involves an associate ("Relevant Associate") of a substantial shareholder of the issuer; and

(b) the substantial shareholder is a passive investor in the issuer and meets the following criteria :-

  1. it is a sovereign fund, or a unit trust or mutual fund authorised by the Commission or an appropriate overseas authority;
  2. it has a wide spread of investments other than the securities of the issuer and the Relevant Associate;
  3. it and the Relevant Associate are connected persons only because it is a substantial shareholder of the issuer;
  4. it is not a controlling shareholder of the issuer;
  5. it does not have any representative on the board of directors of the issuer, and is not involved in the management of the issuer (including any influence over the issuer's management through negative control (e.g. its veto rights) on material matters of the issuer); and
  6. it is independent of the directors, chief executive, controlling shareholder(s) and any other substantial shareholder(s) of the issuer.

4. Modification of exemption for provision of consumer goods or consumer services (Rule 14A.31(7)(b))

To reduce the issuers' compliance burden, Rule 14A.31(7)(b) has been amended to allow an issuer to acquire consumer goods or consumer services from connected persons for the purpose of or in connection with the issuer's business if :-

(a) there is an open market and transparency in pricing the goods or services concerned and all; and

(b) all other conditions for the exemption have been fulfilled.

5. Definition of associate in Rule 1.01 (for non-PRC issuers) and Rule 19A.04 (for PRC issuers) (Rule 1.01 and Rule 19A.04)

Since it is unlikely that the connected person can exert significant influence over the entities described in (1) and (2) below and take advantage in the transactions between the issuer and these entities, the following persons have been removed from the definition of associate :-

(a) the holding company of an investee company, or a fellow subsidiary of this holding company; and

(b) a company controlled by the investee company (not being a subsidiary of the investee company), and its subsidiary, holding company or fellow subsidiary.

6. Extended definition of associate in Rule 14A.11(4) (Rules 14A.11(4))

To address the potential loophole where the connected person may take advantage in a transaction between the issuer and a company under the control of his relatives, the scope of associate in each of Rules 14A.11(4)(b) and (c) has been expanded to a company in which any relative referred to in Rules 14A.11(4)(b) and (c) has a majority control (i.e. control of more than 50% of the voting power at the company's general meetings or the composition of a majority of the board of directors of the company).

The Exchange will consider the interests of the connected person and his relatives in the company to determine whether they together have a majority control over the company.

7. Definition of connected person (Rule 1.01, Rule 14A.11, Rule 19A.04, Rule 19A.19)

Since the risk of potential abuse by the persons or entities in (1) and (2) below is low and the provisions for PRC Governmental Body in Chapter 19A of the Listing Rules should equally apply to non-PRC issuers because some non-PRC issuers encountered problems in identifying their connected persons, changes have been made to the definition of connected person :-

1. to restrict the circumstances in which a non-wholly owned subsidiary is a connected person by:

a. excluding a non wholly-owned subsidiary which is connected only because it is (i) a substantial shareholder of another subsidiary or (ii) an associate of a person connected only at the subsidiary level; and

b. introducing an exemption for intra-group transactions between a "connected subsidiary" (as defined in Rule 14A.11(5)) and its subsidiaries or between subsidiaries of this connected subsidiary;

2. to remove "promoter" from the definition of connected person for PRC issuers; and

3. to exclude "PRC Governmental Body" from the scope of connected persons for non-PRC issuers.

8. Exemption for small transaction involving issue of new securities by subsidiary (Rule 14A.31 and Rule 14A.32)

The de minimis exemptions have been extended to apply to the issue of securities by an issuer's subsidiary (i.e. deemed disposal).

9. Exemption for financial assistance provided on a pro-rata basis (Rule 14A.13(2)(a), Rule 14A.65(3))

As the risk of potential abuse is remote in the specific circumstances described in 14A.65(3), financial assistance given by an issuer to a company which is a connected person will be exempted for the benefit of (i) "commonly held entity", or (ii) a connected person in which the issuer is a shareholder, as long as the financial assistance provided is on normal commercial terms and on a several and pro-rata basis.

10. Transactions with third parties involving joint investments with connected persons (Rule 14A.13(1)(b)(i))

Since the risk that the substantial shareholder of the target company can exert significant influence over the issuer or the third party is remote, a disposal where a substantial shareholder of the disposal target is a controller only because of its position and/or shareholding in the disposal target immediately prior to the disposal will be exempted, but there must be no change in the substantial shareholder's interest in the disposal target as a result of the issuer's disposal or other transaction or arrangement related to the disposal.

11. Annual review of continuing connected transactions (Rules 14A.33-14A.35, Rules 14A.37-14A.38)

Since it is unclear whether the annual review requirements under Rules 14A.37 and 14A.38 apply to all continuing connected transactions, amendments have been made to clarify that the annual review requirements under Rules 14A.37 and 14A.38 apply to continuing connected transactions that are subject to reporting, disclosure and independent shareholders' approval requirements in Chapter 14A.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions