Hong Kong: New Hkex Guidance Concerning Prospectus To Be Issued Within 3 Months Of End Of The Latest Financial Year

Last Updated: 17 October 2011
Article by Raymond Li, Christopher Betts, Sammy Li and Catherine Tsang


On 12 October 2011, The Stock Exchange of Hong Kong Limited (the "HKEx") issued "HKEx Guidance Letter HKEx-GL25-11" ("GL25-11") regarding the conditions for waivers from strict compliance with the requirement to include three years' financial statements in prospectuses pursuant to Rule 4.04(1). This client alert explains the new requirements under the conditions, the significance of GL25-11 and its implications for listing applicants issuing prospectuses within the first three months of their financial year. GL25-11 will affect listing applicants whose financial year-end falls on or after 31 December 2011.

Relevant Listing Rules Requirements

Rule 4.04(1) of The Rules Governing the Listing of Securities on the Main Board of the Stock Exchange of Hong Kong Limited (the "Main Board Listing Rules") requires a listing applicant to include in the accountants' report its consolidated results for each of the three financial years immediately preceding the issue of the prospectus. These rules mirror similar requirements under the Companies Ordinance (the "Companies Ordinance Requirements").1

Existing Practice in Granting Waivers

A listing applicant intending to issue a prospectus shortly after its financial year-end would experience practical difficulty in producing audited accounts for the latest financial year. In light of this, it has been the HKEx's practice to grant a waiver from Rule 4.04(1), subject to the following conditions (the "Existing Conditions"):

(i) the financial statements in the prospectus must be no older than six months at the prospectus date;

(ii) the applicant must list on the HKEx within three months after the latest year-end;

(iii) the applicant must obtain a certificate of exemption from the Securities and Futures Commission on compliance with the requirements of the section 342(1), paragraphs 27 and 31 of the Third Schedule to the Companies Ordinance;

(iv) a profit estimate for the latest financial year (which must comply with Main Board Listing Rules 11.17 to 11.19) must be included in the prospectus or the applicant must provide justification why a profit estimate cannot be included in the prospectus; and

(v) there must be a directors' statement in the prospectus that there has been no material adverse change to the issuer's financial and trading positions or prospect with specific reference to the trading results from the end of the stub period to the latest financial yearend.

Historically, an issuer was required to publish its full year preliminary results announcement within four months of the end of its financial year. However, effective for financial years ending on or after 31 December 2010, Rule 13.49 (1) (ii) of the Main Board Listing Rules requires a listed issuer to publish its preliminary results announcement no later than three months after the end of its financial year.

This means that listing applicants that have obtained a waiver from Rule 4.04(1) are required under Rule 13.49(1) (ii) to release their preliminary results announcements for the latest financial year shortly after their listing (in one case in 2011 the full-year 2010 results were announced the day immediately following the listing date of the issuer). In such circumstances, investors may reasonably expect that the financial information for the latest financial year to have been included in the prospectus at the time it was issued.

New Practice in Granting Waivers

In view of the shortened deadline for releasing preliminary results announcements and to enable potential investors to have adequate and timely information, the HKEx has revised the conditions for granting a waiver from Rule 4.04(1) as follows:

(i) where an applicant issues its prospectus within two months after its financial year-end, a waiver from Rule 4.04(1) would be subject to the Existing Conditions;

(ii) where an applicant issues its prospectus in the third month after its financial year-end, a waiver from Rule 4.04(1) would be subject to the following conditions:

(a) the prospectus must include the financial information for the latest financial year and a commentary on the results for the year. The financial information included in the prospectus must (a) follow the same content requirements as for a preliminary results announcement under Rule 13.49; and (b) be agreed with the reporting accountants following their review under Practice Note 730 "Guidance for Auditors Regarding Preliminary Announcements of Annual Results" issued by the Hong Kong Institute of Certified Public Accountants ("New Condition");

(b) the applicant must list on the Exchange within three months after the latest yearend; And

(c) the applicant must obtain a certificate of exemption from the Securities and Futures Commission on compliance with the Companies Ordinance Requirements.

The New Condition will undoubtedly increase the workload of the issuer and professional parties in respect of a prospectus to be issued in the third month following the issuer's financial year-end and in respect of which a waiver from Rule 4.04(1) is sought. However, it is worth noting that the financial information need only be reviewed (rather than audited) and we understand that the big four accounting firms were consulted prior to the issuance of GL25-11 and are cognizant of the work that they will be required to perform in such cases. Nevertheless, we anticipate that in many cases issuers will simply choose to update their prospectus to include the full three financial years' results rather than apply for a waiver and comply with the New Condition.

Effective Date

The guidance set out in GL25-11 must be complied with by listing applicants with their most recent financial years ending on or after 31 December 2011.

Pre-Deal Research

Rule 8.21B of the Main Board Listing Rules states that where pre-deal research reports are issued by the sponsor, each of the underwriters or their associates must not incorporate any profit forecast or other forward looking statements unless such statements are included, in substantially the same form, in the applicant's listing document.

The HKEx considers that the financial information for the latest financial year included in the prospectus under the conditions of a waiver from Rule 4.04(1) would be regarded as a profit estimate for that year for the purpose of Rule 8.21B. Sponsors and underwriters should review their pre-deal research reports carefully against Appendix 16 to ensure the exclusion of such information.

The content of this article does not constitute legal advice and should not be relied on in that way. Specific advice should be sought about your specific circumstances.

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