Notifiable Transactions

1. Notifiable Transactions Sammy Chau / Katherine Man Assistant Vice President Compliance and Monitoring Department Listing Division, HKEx

2. Agenda General Definition of transaction Classification of transactions and size tests computation Announcement, circular and shareholder approval requirements Special considerations for transactions 2

3. I. General

4. Purposes of NT Rules • Who are subject to NT Rules? • Points to note

5. Purposes of NT Rules • Assess the impact of a transaction: • Shareholders are informed • Shareholders can vote on significant transactions • Reinforce the general disclosure principle of price-sensitive information

6. Who are subject to NT Rules? (1) “Listed issuer” means: - the listed issuer itself; and - its subsidiaries. “Subsidiary” includes: • “subsidiary undertaking” under the Companies Ordinance; • a consolidated subsidiary under HKFRS / IFRS; and • an acquisition target to be consolidated in the next audited consolidated accounts. 6

7. Who are subject to NT Rules? (2) Example 1 Example 2 Listco A Company X Listco A Company Y 50% * 50% 51% * 49% JCE 1 JCE 2 * Listco A does not have control over JCE 1 and 2 Note: See FAQ Series 7 – No. 1 7

8. Who are subject to NT Rules? (3) Example Company Z Listco A 70% 30% Associated Co. 8

9. Points to note • A notifiable transaction may also be subject to other Rules, e.g. • Disclosure of price-sensitive information • Advances to entities • Connected transactions • Spin-offs

10. II. Definition of transaction

11. Definition of “transaction” • Examples

12. Definition of “transaction” • The Rules set out a non-exhaustive list. • They are principally outside the issuer’s ordinary and usual course of business and/or have an impact on the issuer’s operation, e.g. • Acquisition or disposal of assets • An option to subscribe for shares or buy or sell assets • Entering into or terminating a finance lease • Entering into or terminating operating leases with significant impact on the company’s operation • Providing financial assistance • Formation of JV • Exclude some transactions of a revenue nature in the ordinary and usual course of business 12

13. Example 1 – Acquisition of properties Acquisition of a property Listco A Fact: • Listco A is engaged in property development and property investment businesses. Is the acquisition of a property by Listco A subject to NT Rules?

14. Example 2 – Placing & top-up subscription (Listing Decision 75-3) Before placing & subscription After placing, but before subscription After placing & subscription Listco A Listco A Listco A 46 shares (46%) 36 shares (36%) 46 shares (42%) Listco B Listco B Listco B Fact: • Listco B conducts a standard top-up placing and subscription exercise. Whether the placing and top-up subscription constitute a “transaction” for Listco A?

15. Example 3 – Placing deposits to a non-banking company Parent Co. >50% >50% Listco A (PRC issuer) Company X (a non banking finance company) Place deposits Does placing of deposits by Listco A to Company X constitute a “transaction”?

16. Example 4 – Treasury activities (Listing Decision 53-2) Listco A Appoint a fund manager to manage and invest surplus cash Whether the above investment activities constitute a “transaction”?

17. Example 5 – Self construction of a factory Land Listco (Car manufacturer) Car manufacturing factory Construct into Building Materials Whether the acquisitions of land and building materials will be treated as a “transaction”? • Aggregation does not apply when: • “an asset is being constructed, developed or refurbished by or on behalf of a listed issuer for its own use in its ordinary and usual course of business…where the sole basis for aggregation is rule 14.23(3)* ” * Form parts of one asset

18. III. Classification of transactions and size tests computation

19. Classification of NT • 5 size tests • General principles • Specific circumstances • Alternative size tests • Aggregation of transactions

20. Classification of NT A transaction involving both an acquisition and a disposal will be classified by reference to the larger of the acquisition or disposal.

21. 5 size tests (1)

22. 5 size tests (2)

23. General principles (1) • The source of issuer’s figures is its published information. • The source of target’s figures is its audited accounts or other acceptable accounts.

24. General principles (2) • Acquisition/ disposal of equity capital • resulting in consolidation/ de-consolidation? • Yes - 100% • No - % bought or sold • Transaction via non wholly owned subsidiary • Same size test computation as for transactions via wholly owned subsidiary

25. Specific circumstances: Deemed disposal (1) • Assets, profits and revenue ratios • Consideration ratio: = Value of the shares issued to allottees, excluding those issued for maintaining the allottees’ % interest in the subsidiary

26. Example: Computation of consideration ratio Listco A Listco A Mr. X Mr. X 90% (90 shares) 82% (90 shares) 10% (10 shares) 18% (20 shares) Subsidiary B Subsidiary B Specific circumstances: Deemed disposal (2) Before After Numerator for the consideration ratio • No. of shares required for Mr. X to maintain his interest in Subsidiary B = 110 shares x 10% = 11 shares • Numerator for the consideration ratio: = (20 shares – 11 shares) x fair value of the shares

27. Specific circumstances: Financial assistance How should the percentage ratios apply to provision of financial assistance by an issuer?

28. Listco B JV partner 60% 40% JV Company Specific circumstances: Formation of JV (Listing Decision 2-1) Under the JV agreement: • Total investment cost: RMB330 million • Registered capital: RMB110 million (contributed in cash) • The difference will be funded by proceeds from property sales, bank loans or shareholders’ loan Which percentage ratios are applicable? What should be the numerator of the percentage ratios?

29. Specific circumstances: When the consideration differs from the asset value (R14.15(1)) Acquisition of a property Listco C Settled by consideration shares • Consideration: $50 million • Market price of the consideration shares: HK$70 million • Fair value of the property: HK$100 million What should be the numerator of the consideration ratio?

30. Specific circumstances: When the consideration cannot be determined (FAQ Series 7- No. 8) Under the agreement, Listco D has to pay: • cash consideration: HK$1 million; plus • future amount payable upon completion, which is based on the valuation of the Target at the time of completion Listco D Target How should Listco D calculate the consideration ratio?

31. Specific circumstances: Option arrangements (1) • Issuers cannot exercise discretion: • Grant of option  a transaction • Exercise or transfer of option  not a transaction • Issuers can exercise discretion: • Grant of option  normally not a transaction unless there is a premium • Exercise or transfer of option a transaction

32. Specific circumstances: Option arrangements (2) Prior approval for exercise of option • At the time of entering into an option, issuer may seek shareholder approval for the exercise of the option. • Shareholder approval is not required upon exercise of the option if: • the relevant information is disclosed to shareholders; and • no change of the relevant facts at the time of exercise  No similar provision in the connected transaction Rules

33. Alternative size tests • We may disregard a size test calculation if: • it produces an anomalous result; or • it is inappropriate to the sphere of activity of the issuer. • Issuers must provide appropriate alternative tests for our consideration. • We will consider: • substance of transactions and not only their legal form • whether size tests results vary significantly

34. Example 1 – Acquisition of listed securities as investment(FAQ Series 7- No. 12) Fact: • Listco A proposes to acquire 5% interest in Target X as an investment which will be classified as available for sale financial assets. Our view: How should Listco A compute the assets, profits and revenue ratios?

35. Example 2 – Group restructuring(Listing Decision 62-2) Before After Listco B Listco B 70% 100% 70% 100% Subsidiary X Subsidiary Y Subsidiary Y Subsidiary X 100% 100% Target Target Facts: • Disposal of 100% in Target by Listco B (through Subsidiary X) • Acquisition of 100% in Target by Listco B (through Subsidiary Y)

36. Aggregation of transactions • Prevent circumvention of Rules by splitting a transaction • Aggregation of a series of transactions: • completed within 12 months or • are otherwise related. • Non-exhaustive factors we consider: • with the same party or parties connected • involve interests in one particular company or group of companies • parts of one asset • lead to substantial involvement in a new business

37. Points to note (1) • Aggregation is not automatic only because one factor is triggered. • We will also consider the effect of aggregation:  whether aggregation would result in a higher transaction classification. • New classification only applies to current transaction. e.g.

38. Points to note (2) • Prior consultation with the Exchange Exceptions: • The issuer has already decided to aggregate the proposed transaction with the previous transaction(s) • The proposed transaction, even when aggregated with the previous transaction(s), will not be a NT

39. Example 1 – Acquisition of machinery from related suppliers(Listing Decision 64-1) Facts: • Listco A proposes to acquire different models of machinery from members of Group X (a major supplier) under different contracts. • The machinery acquired under each contract is functional on its own and does not form part of an assembled machine. • Each contract was negotiated independently. Will the Exchange aggregate acquisitions of machinery?

40. Example 2 – Acquisition of adjacent lands(Listing Decision 64-2) Facts: • Listco B acquired Land 1 in June. • It acquires Land 2 one month later. • Land 1 and 2 are adjacent to each other. • They will be re-developed into a single residential property for sale. • The 2 acquisitions are not inter-conditional. Will the Exchange aggregate acquisitions of Land 1 and 2?

41. IV. Announcement, circular and shareholder approval requirements

42. Overview • Suspension • Announcement • Shareholder approval • Circular • Documentary requirements for listing applications by listed issuers

43. Overview

44. Suspension When required? • A short suspension is required for • a share transaction, major transaction, VSA, VSD or RTO; or • any discloseable transaction which is price sensitive, until publication of the announcement.

45. Announcement (1) When required? Initial announcement • After finalisation of the terms of a NT Further announcements • Expert reports • Exploration for natural resources activities • Profit forecast • within 21 days after discloseable transaction announcement • Poll results • after general meeting

46. Announcement (2) When required? Further announcements (cont’d) • Changes after initial announcement: • termination of a previously announced NT • material change in terms of the NT • material delay in completion of the agreement • Option arrangements: • expiry of the option • option holder notifying the grantor of non-exercise of the option • transfer of the option to a third party

47. Announcement (3) Content requirements • General principle • Information must be clearly presented, and must be accurate and complete in all material respects and not be misleading or deceptive • Specific disclosures e.g. - general nature of the transaction - description of the target - terms of the transaction (e.g. consideration) - reasons for and impact of the transaction

48. Announcement (4) Common pitfalls Frequent omissions: • Principal business activities of the counterparty • Date of the transaction and independence of the counterparty • Value of the subject asset • Net profits of the target asset • Gain or loss on disposal and the basis of calculation Inadequate disclosures: • Basis of consideration • Reasons for entering into the transaction

49. Announcement (5) Waivers from disclosure requirements • Granted only in limited circumstances • We will consider: • materiality of the information • alternative disclosures proposed by the issuer • sufficient information for shareholders/ investors to make an informed investment decision • unduly burdensome/ impractical

50. Example – Waiver from disclosure requirements Facts • Listco A proposes a major acquisition involving issuance of consideration shares  change in control • Listco A must disclose the Target’s financial information in the announcement. • Takeovers Code: Disclosure of “unaudited” financial information will constitute profit forecasts, which must be reported by an auditor and/or a financial advisor. Will the Exchange grant waiver?