Exchange to Change Some of its Connected Transaction Rules

The Stock Exchange of Hong Kong Limited (the Exchange), a wholly-owned subsidiary of Hong Kong Exchanges and Clearing Limited (HKEx), published today (Friday) its consultation conclusions on the following proposed changes to the Listing Rules (the Rules) set out in the consultation papers of 26 April 2013 on:

• Proposed changes to the connected transaction Rules; and
• Proposed changes to align the definitions of connected person and associate in the Rules.

The Exchange will implement the two sets of proposals with some modifications to take into account the respondents' comments.  The Exchange received 63 and 47 submissions to the two consultation papers from listed issuers, professional and industry associations, practitioners, individuals and other entities.  The consultation period ended on 26 June 2013.  The Rule amendments will be effective from 1 July 2014 to give sufficient time for issuers and market practitioners to familiarise themselves with the changes.

"The Rule amendments will simplify and improve the clarity of the connected transaction Rules and ease the compliance demands on issuers while maintaining the same level of investor protection," said David Graham, HKEx's Chief Regulatory Officer and Head of Listing.

Review of connected transaction Rules

Most of the Exchange's proposals to simplify the connected transaction Rules received support from a large majority of the respondents and will be adopted.  A summary of those proposals is in the attachment to this news release.

The proposals in the following areas will not be adopted or will be adopted partly:

• Transactions with connected persons at the subsidiary level – The Exchange will adopt the proposal that exempts transactions with these connected persons from the independent shareholder approval requirement while retaining the requirement for disclosure of these transactions by announcements.
   
• Monetary limits for the de minimis exemptions – The Exchange will increase the monetary limit for fully exempt connected transactions to $3 million in light of the market views that the current limit of $1 million is too low for issuers generally.  It has decided to retain the monetary limit of $10 million for connected transactions exempt from the shareholder approval requirement.
   
• Deeming provision – The Exchange has decided not to adopt the proposal to specify in the Rules that the deeming provision will cover a shadow director or de facto controlling shareholder of an issuer, and any person who is accustomed to acting according to a connected person’s direction or instruction.  The Exchange will continue to use the deeming provision under the current Rules in individual cases where connected persons stand to benefit from issuers' transactions.
   
• Continuing connected transactions – The Exchange has decided not to adopt: (a) the proposal to codify in the Rules the current waiver practice to allow an issuer to obtain a shareholder mandate for continuing connected transactions over a period in lieu of a framework agreement; and (b) the proposal to allow percentage caps for continuing connected transactions of a revenue nature.

Proposed changes to align the definitions of connected person and associate in the Rules

The proposals to align the definitions of connected person and associate in other parts of the Rules with those used in Chapter 14A (Growth Enterprise Market, or GEM, Chapter 20) also received support from a majority of the respondents.  However, some respondents noted that implementation of the proposals may extend the requirements in some of the Rules and significantly increase issuers' compliance burdens, which is not the Exchange's intention.  The Exchange has reviewed the proposals and decided to apply the Chapter 14A definitions of connected person and/or associate in the following areas:

• The reverse takeover Rules in Chapter 14 (GEM Chapter 19) which will apply to significant acquisitions from the incoming controlling shareholders' extended family members (Note 1) and companies controlled by them.
   
• Significant corporate actions (Note 2), spin-off proposals and director's service contracts that require shareholders' approval, where the controlling shareholder or directors and their associates may not vote.  In other words, the connected persons' extended family members and companies controlled by them cannot vote in a general meeting to approve these matters. 
   
• Grant of share options to connected persons under Chapter 17 (GEM Chapter 23).  In other words, the connected persons' extended family members and companies controlled by them cannot vote in a general meeting to approve the grant of share options to connected persons.
   
• Independence of a sponsor in the case of a new listing application.  In other words, the sponsor must confirm that it is not a connected person (as defined in Chapter 14A) of the new applicant (Note 3).
   
• Independence of an independent financial adviser in the case of a connected transaction by a listed issuer.  In other words, the independent financial adviser must confirm that it is not, and does not hold more than 5 per cent interest in, an associate (as defined in Chapter 14A) of the counterparty of the transaction (Note 3).
   
• Other Rules where the use of the Chapter 14A definitions of connected person and associate are corollary to the connected transaction requirements. 

The Exchange has decided to rename the definitions of "connected person" and "associate" in Chapter 1 as "core connected person" and "close associate" respectively to distinguish them from the Chapter 14A definitions.

A summary of the Rule amendments to implement the proposals adopted is set out in the attachment to this news release.

Seminars on Rule amendments

To assist the market in understanding the Rule amendments, the Exchange plans to hold 12 issuer seminars in Hong Kong and the Mainland in the next few weeks to explain the amendments and answer any questions.

The Consultation Conclusions for Review of Connected Transaction Rules and Proposed Changes to Align the Definitions of Connected Person and Associate in the Listing Rules can be downloaded from the "News & Consultations – Market Consultations – Consultation Conclusions" section of the HKEx website.

The Rule amendments can be downloaded from the "Rules & Regulations – Rules and Guidance on Listing Matters – Amendments to Main Board Listing Rules" and the "Rules & Regulations – Rules and Guidance on Listing Matters – Amendments to GEM Listing Rules" sections of the HKEx website.

The Exchange has published the following guidance materials for the Rule amendments:

• A guidance letter on the pricing policies in agreements for continuing connected transactions and their disclosure.  (It can be downloaded from "Rules & Regulations – Rules and Guidelines on Listing Matters – Guidance Letters - Guidance Letters for New Applicants" and "Rules & Regulations – Rules and Guidelines on Listing Matters – Guidance Letters - Guidance Letters for Listed Issuers" sections of the HKEx website.)
   
• A new series of frequently asked questions (FAQs) on "Rule Requirements Relating to Connected Transactions" (Series 28), which include new FAQs relating to the Rule amendments to be effective on 1 July 2014.  (They can be downloaded from the "Rules & Regulations – Rules and Guidelines on Listing Matters – Frequently Asked Questions" section of the HKEx website.)
   
• Reference tables relating to the revised connected transaction Rules. (They can be downloaded from the "Rules & Regulations – Rules and Guidance on Listing Matters – Amendments to Main Board Listing Rules" and the "Rules & Regulations – Rules and Guidance on Listing Matters – Amendments to GEM Listing Rules" sections of the HKEx website.)

Noted:	1.	The extended family members of a person include any person cohabiting with him as a spouse; his or his spouse's children of age of 18 years or above; his parents; his siblings; and companies controlled by them.
	2.	They include voluntary withdrawal of listing of an issuer from the Exchange, large scale rights issue or open offer, refreshment of general mandate for issue of securities and transactions that would result in a fundamental change in the issuer’s principal business activities within 12 months after listing.
	3.	Connected persons (as defined in Chapter 14A) of a new applicant will also include any former directors of the new applicant or its subsidiaries in the last 12 months and their associates, and the extended family members (see Note 1) of any director, chief executive or substantial shareholder of the new applicant or its subsidiaries, and their controlled companies.   Associates (as defined in Chapter 14A) of the counterparty in the connected transaction will also include his extended family members (see Note 1) and companies controlled by them.

ATTACHMENT

Summary of Proposals Adopted

Review of Connected Transaction Rules 

Plain language amendments
1.	Simplify the language of the Rules by replacing the current Chapter 14A (GEM Chapter 20) with the plain language Guide on the Connected Transaction Rules issued in April 2012, with minor modifications on drafting.
Exemption for connected persons at the subsidiary level
2.	Exempt transactions with connected persons at the subsidiary level from the shareholders' approval requirement.
	Mr. X is a director or substantial shareholder of the Subsidiary.   Transactions between the Issuer Group and Mr. X is exempt from shareholder approval requirement.
3.	Exclude persons connected with insignificant subsidiaries of the issuer from the definition of connected person, rather than exempting transactions with these persons as provided under the current Rules.
	Mr. Y is a director or substantial shareholder of the Subsidiary.    Mr. Y is not a connected person of the Issuer so long as Subsidiary is an insignificant subsidiary.
Refine the scope of associates
4.	Exclude from the definition of "associate" any trustee of an employee share scheme or occupational pension scheme if the connected persons' interests in the scheme are together less than 30 per cent; and the scheme is established for a wide scope of participants.
5.	In defining a "30%-controlled company"1, exclude any company in which the connected person and his/its associate together have an interest of less than 10 per cent, other than the indirect interest held through the issuer.
	Neither Company A nor B is an associate of X because X's direct interest in it is less than 10%.
Exclude certain transactions with third parties from the scope of connected transactions
6.	Exclude from the definition of connected transaction the following transactions with third parties, where a controller2 is, or will be, a shareholder of the target company: any disposal of interests in the target company to a third party where a controller at the issuer level is the target company’s substantial shareholder;   X is a controller of the Issuer.    any acquisition/disposal of interests in the target company from/to a third party where a controller at the subsidiary level is the target company's substantial shareholder; and     Y is a controller of the Subsidiary. transactions with third parties described in paragraphs (ii) to (iv) of current Rule 14A.13(1)(b).
Further exemptions from the connected transaction requirements
7.	Increase the monetary threshold for fully exempt connected transactions from $1 million to $3 million.
8.	Remove the one per cent cap on transaction value which is currently a condition for the exemption for provision/receipt of consumer goods or services to/from a connected person.
9.	Exempt indemnities provided to, or purchase of insurance for, directors against liabilities incurred in the course of performing their duties, provided that the indemnity or insurance is in the form permitted under the laws in Hong Kong and the place of incorporation of the company providing the indemnity or insurance.
Refine or clarify the connected transaction requirements
10.	For connected transactions involving option arrangements: classify the termination of an option granted by a connected person as if the option is exercised, unless the issuer has no discretion over the termination;   introduce alternative classification Rules for the transfer, non-exercise or termination of an option granted by a connected person.
11.	Align the auditors’ confirmation on continuing connected transactions with Practice Note 740 "Auditor’s Letter on Continuing Connected Transactions under the Hong Kong Listing Rules" issued by the Hong Kong Institute of Certified Public Accountants.
12.	Clarify that the independent board committee's opinion on a connected transaction must also cover whether the transaction is on normal commercial terms and in the issuer's ordinary and usual course of business.

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1		A "30%-controlled company" means a company held by a person who can: (a) exercise or control the exercise of 30 per cent (or an amount for triggering a mandatory general offer under the Takeovers Code, or for PRC issuers only, an amount for triggering a mandatory general offer or establishing legal or management control over a business enterprise under the PRC law) or more of the voting power at general meetings; or (b) control the composition of a majority of the board of directors.
2		A "controller" refers to a director, chief executive or controlling shareholder of the issuer or any of its subsidiaries.

Alignment of the definitions of connected person and associate in the Rules

1.	Rename the definitions of connected person and associate in Chapter 1 as "core connected person" and "close associate" respectively.
2.	Apply the Chapter 14A definitions of connected person or associate in other parts of the Rules as follows:

Ends