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Description Background Market context

Most Hong Kong listed companies are incorporated outside Hong Kong and are “overseas issuers” under the CO and the Listing Rules. As at 31 January 2013, about 87 percent (1,346 out of 1,555) of Hong Kong listed companies were incorporated outside HK: 11 percent in the Mainland; 42 percent in the Cayman Islands; and 32 percent in Bermuda. A further 2 percent were incorporated in other jurisdictions. Most of the Cayman Islands and Bermuda

incorporated listed companies are Chinese companies that have operations and headquarters in Hong Kong or the Mainland.

HKEx operates a Main Board, and a Second board, the GEM. Around 200 companies are listed on GEM.

Public issues of shares or debt by non-listed entities (other than for structured products) are rare - there were ten issues in the period 2005-2010, most of them bond issues. There have been none since 2010.

Structured products issued and traded in HK are mostly equity linked products such as derivatives over stock indices etc.

Legislative and rule framework

The CO is the source of the legislative obligation to issue a prospectus for any offer of

securities to the public. Although it generally applies only to HK incorporated companies, Part XI (establishment of place of business in HK) and Part XII (prospectuses) specifically apply to overseas companies.

Public offers of securities are governed by:

a. Parts II and XII of the CO – Part II applies to Hong Kong incorporated companies; Part XII to overseas companies;

b. Part IV of the SFO which applies to public offers of structured products (defined in section 1A of Schedule 1 of the SFO);

These rules apply to all listed companies, regardless of their place of incorporation, and to listed structured products. Chapter 15A of the Listing Rules deals specifically with structured products.

Overseas issuers seeking a primary listing on the SEHK must satisfy the SEHK that they are incorporated or otherwise established in a jurisdiction where the standards of shareholder protection are at least equivalent to those in Hong Kong. The SEHK accepts Hong Kong, the Cayman Islands, Bermuda and the Mainland, as “Recognized Jurisdictions”. Issuers

incorporated in these jurisdictions can meet the equivalence requirement by complying with the additional contents requirements for their constitutional documents set out in Main Board Listing Rule Appendix 13 (GEM Listing Rule Appendix 11).

Regulatory responsibilities

A prospectus for securities must be authorized for registration and registered with the Registrar of Companies. The SFC is empowered to authorize prospectuses for registration under Sections 38D or 342C of the CO. The formal power to authorize prospectuses offering shares in or debentures of companies that are to be listed has been delegated to the SEHK. The SFC is responsible for vetting and considering applications for authorization to

prospectuses in respect of public offers of unlisted shares or debentures. For structured products, SEHK approves listing documents for listed products under the Listing Rules, and SFC approves public offering documents for unlisted products.

Under the “dual filing” regime established by the SMLR, an applicant for listing of its securities for trading on the SEHK must file copies of its listing application with the SFC after it is

submitted to the SEHK. The SFC may seek further information about the listing application by asking SEHK to request the information, and may object to the listing if the applicant fails to comply with requirements, if it appears to the SFC that the applicant has supplied false or misleading information in its application, or the listing is not in the interest of the investing public.

The SMLR provides similar dual filing requirements for public announcements and other on- going public disclosure of information by listed corporations pursuant to requirements under the Listing Rules or other applicable laws.

Disclosure requirements

For securities, the public offering regime includes disclosure and reporting requirements consisting of:

 a prospectus for public offerings of equity and debt securities;  annual reporting requirements;

 half-yearly reporting requirements;

 for some listed entities, quarterly reporting requirements;  inside information (material event) disclosure obligations. Public offerings of securities

prospectus that complies with Part II (for Hong Kong incorporated companies) or Part XII (for foreign companies) of the CO. Requirements for prospectus content are set out in detail in the Third Schedule of the CO. There also is a general requirement that the prospectus must contain sufficient particulars and information to enable a reasonable person to form as a result thereof a valid and justifiable opinion of the shares or debentures and the financial condition and profitability of the company at the time of the issue of the prospectus, taking into account the nature of the shares or debentures being offered and the nature of the company, and the nature of the person likely to consider acquiring them.

Where an issuer is seeking a listing of its equity or debt securities on the SEHK, it must also comply with the disclosure requirements in the Listing Rules. These are set out in Appendix 1 to the Listing Rules and comprise detailed requirements for issuers new to listing (Part A), for already listed issuers (Part B), for debt securities where listing is sought (Part C), and for depositary receipts (Parts E and F). Rule 11.07 requires listed companies to include in their listing documents, as an overriding principle, such particulars and information which, according to the particular nature of the company and the securities for which securities is sought, are necessary to enable an investor to make an informed assessment of the activities, assets and liabilities, financial position, management and prospects of the company and its profits and losses and of the rights attaching to such securities.

Disclosure requirements in Appendix 1 of the Listing Rules is largely the same as those of the Third Schedule of the CO, but in some areas additional disclosure is required, for example about group activities and finances. Some additional disclosures are also required for companies incorporated in the Mainland (see Chapter 19A of the Listing Rules and in particular Rule 19A.42).

All new applications for listing of equity securities must have a sponsor (Rule 2.09 and Chapter 3A of the Listing Rules). The sponsor must be a corporate adviser licensed under the SFO and must use reasonable endeavors to ensure that all information provided to SEHK during the listing application process is true in all material respects and does not omit any material information. New provisions in the SFC’s Corporate Finance Adviser Code of Conduct require the sponsor, among other things, to review compliance with all relevant rules and regulations. Structured products are subject to a separate, specific regime, both in the legislation and the Listing Rules. Before an unlisted structured product can be offered to the public it must be authorized by the SFC under section 104A of the SFO. SEHK approves listed structured products.

Part D of Appendix 2 of the Listing Rules contains specific disclosure requirements for structured products. In addition, Rule 15A.66 of the Listing Rules requires that listing documents must, as an overriding principle, contain such particulars and information necessary to enable an investor to make an informed assessment of the assets and liabilities and financial position of the structured products issuer and of the structured products. Disclosure requirements for unlisted structured products to be authorized for public offering are set out in a Code issued by the SFC under section 399 of the SFO, the Code on Unlisted Structured Investment Products (the SIP Code). Under paragraph 6.1 of the Code, an offering document must contain the information necessary for investors to be able to make an

informed judgment of the investment which is the subject matter of the authorization. Paragraph 6.3 of the Code also requires every offering document to contain a Product Key Fact Statement, which forms part of the offering document and must contain information to enable investors to comprehend the key features and risks of the product.

If, after a prospectus or listing document has been issued, there are significant changes affecting any matter in the prospectus or new matters arise which require disclosure, an issuer must provide the disclosure in a supplemental prospectus or listing document approved by the SEHK.

Annual reports

Section 122 of the CO requires directors of public companies to lay before its shareholders at its annual general meeting a profit and loss account and a balance sheet. The accounts must not be more than 6 months out of date. By section 129D, the balance sheet must include a directors’ report containing the information specified in that section. This requirement applies only to HK incorporated companies. Overseas companies that are registered with the

Companies Registrar must deliver their latest published accounts which comply with the laws of their place of incorporation to the Registrar.

For listed companies (both Main board and GEM), Rule 13.46 of the Listing Rules requires every listed company to send to its shareholders a copy of either:

a. its annual report including its audited annual or group accounts; or

b. its summary financial report (provided that it complies with Section 141 of the CO and the Companies (Summary Financial Reports of Listed Companies) Regulation);

not less than 21 days before the company’s Annual General Meeting and in any event not more than four months after the end of the financial year to which they relate.

The company’s annual report must comply with the disclosure requirements set out in Appendix 16 to the Listing Rules.

For structured products:

a. for listed products, Rule 15A.21 of the Listing Rules requires the annual report of the issuer and, where appropriate, the guarantor, to be submitted to SEHK within 4 months after the date to which the financial statements relate. The issuer must also make the reports publicly available;

b. for unlisted products, SIP Code 7.6 (a) requires the issuer to make available to investors not later than four months after the date to which they relate, the annual report and audited financial statements in respect of the issuer, the guarantor and/or the key product counterparty, as applicable, and where group accounts are prepared, the relevant group accounts, together with the auditor’s report.

Half yearly and quarterly reports

The Listing Rules require listed companies to send to shareholders either an interim report or a summary interim report that complies with the Companies (Summary of Financial Reports

for Listed Companies) Rules. For main board companies this must be done within 3 months after the end for the half year. However they are required to publish their preliminary half-year results announcements within two months from the end of the half-year. The main difference between the contents of the half-year results announcement and the half-year report is that the half-year report will contain the cashflow statement and a statement of changes in equity, and comparative figures for the corresponding previous period. Generally the half-year report and the results announcement will contain similar information, except for the Chairman’s statement. The authorities explained that HK listed companies require more time to issue their half-year report as they are required to send hard copies of their half-year report to their shareholders (although shareholders have the choice of receiving electronic copies instead of printed copies).

For companies listed on GEM, the report must be published within 45 days of the end of the relevant half year.

Main board companies are not required to prepare quarterly reports, but it is one of the recommended best practices under the Corporate Governance Code and Corporate Governance Report in Appendix 14 to the Main Board Listing Rules (Recommended Best Practices C.1.6 and C.1.7 of the Corporate Governance Code). Companies are encouraged to but not required to comply with recommended best practices.

Companies listed on GEM must provide to shareholders quarterly reports for each of first 3 and nine month period of the financial year by no later than 45 days after the period end. Content requirements for quarterly reports are set out in GEM Listing Rules 18.68-18.77. For listed structured products, Rule 15A.21 of the Listing Rules requires the annual report and half yearly report of the issuer and, where appropriate, the guarantor, to be submitted to SEHK within 4 months after the date to which the financial statements relate. The issuer must also make the reports publicly available

For unlisted structured product issuers must provide half yearly reports, to investors as soon as practicable and not later than four months after the close of the relevant period (SIP Code 7.6(a)(ii)). In practice, many unlisted structured products are short dated instruments, with a life of 6 to 9 months. The material adverse event disclosure regime has more application to these products (see below).

Disclosure of inside information (material events)

Part XIVA of the SFO sets out requirements for listed companies to disclose material information as soon as reasonably practicable when the information has, or ought to reasonably have come to the knowledge of their directors, managers or company secretary. Section 307B of the SFO requires listed companies to disclose to the public price sensitive information (called “inside information”) as soon as reasonably practicable.

“Inside information” is defined to mean specific information that: a. is about:

i. the corporation;

iii. the listed securities of the corporation or their derivatives; and

b. is not generally known to the persons who are accustomed or would likely to deal in the listed securities of the corporation but would if generally known to them be likely to materially affect the price of the listed securities. (See Section 307A of the SFO) The requirement to disclose inside information under Part XIVA came into effect on 1 January 2013. The Listing Rules also provide for material event disclosure in terms broader than the SFO definition of inside information, as they require an issuer to announce any information needed to correct or prevent a false market in its securities (Listing Rule 13.09(1)).

SFC senior staff indicated that the main reason for bringing the requirement to disclose price sensitive information under the SFO has been to provide “teeth” to the regime, as under the Listing rules strong enforcement actions are not available. Market participants interviewed indicated that the change in the regime has in fact translated into more rigorous processes in issuers to determine what type of information needs to be communicated to the market. For structured products

a. for listed products, the provisions of Part XIVA of the SFO apply. The Listing Rules also require an issuer to announce information necessary to avoid a false market in the securities. A specific rule in the Listing Rules applies to guaranteed products and requires the guarantor to make announcements about any information that may have a material effect on its ability to meet obligations (Paragraphs 2 and 2A of Appendix 7H) ;

b. for unlisted products, SIP Code 7.6 requires the issuer to inform the SFC and all investors in the structured products as soon as reasonably practicable of changes in the financial condition of the issuer or other circumstance which could reasonably be expected to have a material adverse effect on the ability of the issuer or, if applicable, the guarantor or a key product counterparty, to fulfill its commitments of the

structured product. Shareholder voting decisions

Sections 114 and 116 of the CO set out the timing requirements for notices of general meetings:

a. annual general meeting - 21 days' notice in writing;

b. meetings at which it is proposed to pass a special resolution - 21 days; and

c. meetings that are neither an annual general meeting nor a meeting for the passing of a special resolution - 14 days.

For listed companies, the Listing Rules provide detailed provisions dealing with disclosure to shareholders in relation to matters requiring shareholder approval. These include certain types of “notifiable transactions” (Chapter 14 of the Listing Rules) and “connected transactions” (Chapter 14A). Notifiable transactions include major and very substantial transactions (as defined in the Listing Rules) that require shareholder approval. Connected transactions are related party transactions (see further under Principle 17).

circular to its shareholders at the same time or before the company gives notice of the general meeting to approve the transaction.

Rule 14.41 of the Listing Rules require that the circular to be dispatched to shareholders at the same time as or before the listed company gives notice of the general meeting to approve the transaction.

If any material information comes to the directors’ attention after the issue of the circular on the transaction, a listed company must send to its shareholders a revised or supplementary circular and provide at least 10 business days before the date of the relevant general meeting (see Rules 13.73, and 14.42 of the Listing Rules).

Detailed content requirement for circulars about transactions requiring shareholder approval are set out in Listing Rules 14.66-14.71A. (See further description in Principle 17)

Rule 13.39 of the Listing Rules requires listed companies to announce the results of their general meetings as soon as possible, but in any event at least 30 minutes before the earlier of either the commencement of the morning trading session or any pre-opening session on the business day after the meeting.

Advertising

The SFO, the CO and the Listing Rules all contain provisions relating to advertisements. Section 103(1) of the SFO makes it an offence to issue advertisements, invitations or

documents which are or contain a public offer of securities or structured product unless it falls within one of the safe harbors in Section 103(2) or (3) of the SFO. Safe harbors include a complying prospectus or an advertisement, invitation or document relating to securities the listing of which SEHK has approved and which comply with the Listing Rules.

Section 38B of the CO makes it unlawful to publish an advertisement unless it has been approved by the SFC or it is within the exemptions in Schedule 19 of the CO. The Schedule sets out the contents and publication requirements for advertisements. The advertisement must contain:

a. a statement to the effect that the advertisement is issued by the company to which the advertisement relates;

b. a warning statement that potential investors should read the prospectus for detailed information about the company and the proposed offering before deciding whether or not to invest in the shares or debentures concerned; and

c. a statement that the advertisement does not constitute an offer or an invitation to induce an offer by any person to acquire, subscribe for or purchase the shares or debentures concerned.

Rules 9.08 and 24.08 of the Listing Rules require all publicity material released in HK relating to an issue of securities and debt securities by a new applicant to be reviewed by the SEHK before release. The publicity materials must not be released until the SEHK has confirmed to the applicant that it has no further comments on the materials.

For structured products:

a. for listed products, Rule 15A.53 of the Listing Rules permits issuers to release publicity material relating to their products if it complies with all relevant legislation and rules. Issuers are required to adopt the disclosure and presentation principles in the SEHK’s Guidelines on Marketing Materials for Listed Structured Products;

b. for unlisted products, under Part IV of the SFO, advertisements in respect of publicly