Last year the Hong Kong Stock Exchange launched a public consultation to revisit the main sections of the listing rules for the Growth Enterprise Market of the Hong Kong Stock Exchange ("GEM"). The process was concluded in October 2001 with some important changes to the rules.
When GEM was first set up in July 1999, the SFC and the Hong Kong Stock Exchange intended to conduct an overall review of the Rules Governing the Listing of Securities on GEM (the "GEM Rules") in six months’ time. However, the market soon found that the Hong Kong Stock Exchange was in practice prepared in many cases to waive the requirements of the GEM Rules. The regulators decided to review the GEM Rules ahead of time and to regularise the granting of such waivers.
In March 2000 proposals were made to relax some of the major listing requirements for GEM companies. For instance, under the then current GEM Rules an applicant for listing must have actively pursued one focused line of business under substantially the same management and ownership for at least 24 months (usually called the "active business pursuit" requirement). The Hong Kong Stock Exchange proposed to reduce the requirement to 12 months. The Exchange also proposed reducing the so- called "management shareholders moratorium" (i.e. the period during which the initial management shareholders of a GEM company are prohibited from disposing of their interests in the company) from two years to six months. Whilst the proposals did not officially become new rules, from March 2000 onwards the Hong Kong Stock Exchange was prepared to waive some of the listing requirements based on such proposals.
After further deliberation, in July 2001 the regulators finalised and announced the changes to the GEM Rules, which differed in some important respects from the March 2000 proposals. These changes came into effect on 1 October 2001. Here is a brief summary of the more important provisions:
- The minimum period of "active business pursuit" remains 24 months in general but, subject to certain conditions, this can be reduced to 12 months for companies of a substantial size and with significant public following. (Rule 11.12)
- The minimum coverage of the accountants’ report prepared for a listing applicant will correspond with the minimum "active business pursuit" requirement. (Rule 7.03, Rule 11.10)
- The GEM Rules provide that a newly listed company may not issue new shares within six months after listing. The rules have always allowed waivers from this requirement to be granted by the Hong Kong Stock Exchange, but the considerations applying to such waivers are now set out in more detail. Broadly speaking, the six-month rule can now be relaxed if (a) the issue of new shares is made to acquire assets which complement the company’s business, (b) the size of the acquisition does not exceed certain thresholds and does not result in a change of control in the listed company, and (c) the shareholders have been informed about the acquisition and have approved it by way of poll. (Rule 17.29)
- The "management shareholders moratorium", originally two years, has been reduced to 12 months. A further relaxation is available to a shareholder holding no more than 1% in the company, for whom the moratorium is six months. (Rule 13.16)
- The "minimum public float requirement" (i.e. the number of shares which must be in public hands to maintain a listing) has been revised. For companies with a market capitalisation of HK$4 billion or less, a minimum of 25% of the company’s issued shares must be in public hands; for companies with a market capitalisation of more than HK$4 billion, a minimum of 20% is required. (Rule 11.23)
- The provisions relating to share option schemes have been considerably revised. Some restrictions have been tightened, others relaxed. The new rules provide for the following (Chapter 23):
- Participants in the scheme need not be full-time employees, but have to be a defined class of persons.
- The total number of shares which may be issued upon exercise of all options to be granted under the scheme and any other schemes of the company must not exceed 10% of the relevant class of issued shares as at the date of approval of the scheme. This limit may be renewed by shareholders’ approval.
- The total number of shares which may be issued upon the exercise of all outstanding options granted and yet to be exercised under the scheme and any other schemes of the company must not exceed 30% of the relevant class of issued shares from time to time. No option may be granted under any of the company’s share option schemes if the grant will cause the 30% limit to be exceeded.
- The total number of shares issued and to be issued upon the exercise of options granted within 12 months before the date of a further grant of options to any participant must not exceed 1% of the company’s issued shares, unless the further grant is separately approved by independent shareholders in general meeting.
- If options are to be granted to a substantial shareholder or an independent non-executive director, so that the total number of securities to be issued to such person upon the exercise of options already granted and to be granted in the 12 months before the date of such grant exceeds 0.1% of the relevant class of the company’s issued shares and an aggregate value of HK$5 million, then the grant will be subject to independent shareholders’ approval.
The joint announcement of the regulators dated 27July 2001 and a further announcement dated 25 September 2001 set out transitional arrangements for the new rules. In very limited circumstances the Hong Kong Stock Exchange may continue to grant waivers pursuant to the March 2000 announcement described above. Arrangements are also set out regarding the application of the new rules to companies that are already listed on GEM.
In the meantime, other amendments were introduced in September 2001 regarding the financial information and documents to be included in the results announcements, half-yearly reports, annual reports, listing documents and circulars issued by GEM companies. Also introduced were additional disclosure obligations concerning major market upheavals, changes in exchange rates and other significant matters affecting the company’s business or finances.
© Herbert Smith 2002
The information contained in this article is of a general nature. and should not be relied on in that way. Specific advice should be sought about your specific circumstances