Member Article

“Financial assistance” includes granting credit, lending money, providing security for or guaranteeing a loan. (This is the definition in relation to connected transactions, but a similar concept would apply generally.) We will first discuss the treatment of price-sensitive information, in respect of which there is a general obligation. We will next consider, in the case of financial assistance given by or to a listed company, what constitutes: • a connected transaction • a discloseable transaction • an advance to an entity • financial assistance to affiliated companies and their related disclosure and approval requirements. A. Price-sensitive information A listed company is required to keep the stock exchange and its shareholders informed as soon as reasonably practicable of any information relating to the group (including information on any major new developments in the group’s sphere of activity which is not public knowledge) which: • is necessary to enable them and the public to appraise the position of the group; or • is necessary to avoid the establishment of a false market in its securities; or • might be reasonably expected materially to affect market activity in and the price of its securities. The guiding principle is that information which is expected to be price-sensitive should be released immediately it is the subject of a decision. Until that point is reached, the strictest security within the listed company and its advisers must be observed. It is the responsibility of the directors of the listed company to determine what information is material in the context of the company’s business, operations and financial performance. An event that is “significant” in the context of a smaller listed company is often not material to a large company. Decisions on disclosure require careful subjective judgments. B. Connected transactions The Listing Rules regulate financial assistance by a listed company to: 1. a connected person; as well as 2. any company (10% connected company), where 2 conditions are satisfied: (a) the listed company is a shareholder of the 10% connected company; and (b) a connected person of the listed company (excluding connected persons at the subsidiary level) is entitled to exercise 10% or more of the voting power at any general meeting of the 10% connected company. A transaction with a connected person is, of course, a connected transaction - this is paragraph 1 above. The provision of financial assistance to a company in which there is the 10% connection is also a connected transaction, although such a company is not “connected person”. This is paragraph 2 above. An interest in the company which is held through the listed company is excluded from the 10% calculation. A non wholly-owned subsidiary of the listed company is a connected person, if any connected persons of the listed company (excluding connected persons at the subsidiary level) are entitled to exercise 10% or more of the voting power at any general meeting of the non wholly-owned subsidiary. 10% connected companies (which are not a connected person) therefore exclude subsidiaries - they are, e.g., companies in which the listed company holds 50% or less of the voting power. The provision of financial assistance to a listed company by the above categories of persons is also a connected transaction. Exempt from reporting, announcement and independent shareholders’ approval requirements The following connected transactions are exempted: 1. Financial assistance provided by a listed company for the benefit of a connected person on normal commercial terms (or better to the listed company), where: (a) each of the percentage ratios (other than the profits ratio) is less than 0.1%; or (b) each of the percentage ratios (other than the profits ratio) is equal to or more than 0.1% but less than 2.5% and the total value of the assistance plus any preferential benefit to the connected person is less than HK$1,000,000. Paragraph (a) will only permit a higher amount of assistance than the HK$1 million under paragraph (b), where the listed company’s total assets and total market capitalisation both exceed HK$1 billion. “Normal commercial terms” are terms which a party could obtain if the transaction were on an arm’s length basis, or on terms no less favourable to the listed company than terms available to or from independent third parties. 2. Financial assistance provided by a listed company for the benefit of a 10% connected company on normal commercial terms (or better to the listed company), where: (a) The assistance is in proportion to the listed company’s equity interest in the company. In addition, any guarantee given by the listed company must be on a several (and not a joint and several) basis. Proportionate financial assistance is calculated by reference to the equity interest of the company in the listed group which directly holds the interest in the company receiving the financial assistance. This may be the most useful exemption in practice, since it is not subject to a small monetary limit. (b) Alternatively, if (a) is not satisfied: (i) each of the percentage ratios (other than the profits ratio) is less than 0.1%; or (ii) each of the percentage ratios (other than the profits ratio) is equal to or more than 0.1% but less than 2.5% and the total value of the assistance plus any preferential benefit to the relevant company is less than HK$1,000,000. 3. Financial assistance provided by a connected person, or a 10% connected company, for the benefit of a listed company on normal commercial terms (or better to the listed company), where no security over the assets of the listed company is granted in respect of the financial assistance. This is the reverse of the usual case where financial assistance is provided by, not to, the listed company. Exempt from independent shareholders’ approval requirements The following connected transactions are only subject to the reporting and announcement requirements: 4. Financial assistance provided by the listed company on normal commercial terms (or better to the listed company) for the benefit of: (a) a connected person; or (b) a 10% connected company if the assistance is not in proportion to the listed company’s equity interest in the relevant company or any guarantee given by the listed company is not on a several basis, in either case if: (i) each of the percentage ratios (other than the profits ratio) is less than 2.5%; or (ii) each of the percentage ratios (other than the profits ratio) is equal to or more than 2.5% but less than 25% and the total value of the assistance plus any preferential benefit to the connected person or the relevant company is less than HK$10,000,000. Only those listed companies with both total assets and total market capitalisation of exceeding HK$400 million will be able to give assistance under paragraph (i) of more than the HK$10 million limit under paragraph (ii). Controlling shareholders" - Disclosure is required, where: 1. a controlling shareholder (holds 30% of the voting power or controls the composition of a majority of the board) pledges shares of the listed company to secure the company's debts; or 2. a listed company (or its subsidiary) enters into a loan agreement with specific performance obligations on a controlling shareholder (e.g., that the shareholder maintains a specified minimum shareholding), if a breach will cause a default of loans that are significant to the listed company's operations. Percentage ratios – these ratios compare the size of the financial assistance to the size of the listed company. The ratios are: Assets ratio - the total assets which are the subject of the transaction divided by the total assets of the listed company (as shown in its accounts or latest published interim report, whichever is more recent). For financial assistance, the numerator is the total value of the indemnity, guarantee or financial assistance plus any monetary advantage accruing to the entity benefiting from the assistance. “Monetary advantage” includes the difference between the actual value of consideration paid and the fair value of consideration that would be paid if the assistance were provided by someone other than the listed company. Consideration ratio - the consideration divided by the total market capitalisation of the listed company. The total market capitalisation is the average closing price of the listed company’s securities as stated in the stock exchange’s daily quotations sheets for the five business days immediately preceding the date of the transaction. Normally, only the total assets and consideration ratios are relevant in relation to financial assistance. Profits ratio - the profits attributable to the assets which are the subject of the transaction divided by the profits of the listed company. Revenue ratio - the revenue attributable to the assets which are the subject of the transaction divided by the revenue of the listed company. Equity capital ratio - the nominal value of the listed company’s equity capital issued as consideration divided by the nominal value of its issued equity capital immediately before the transaction. Where a calculation of the percentage ratios produces an anomalous result or is inappropriate to the sphere of activity of the listed company, the stock exchange may substitute other relevant indicators of size. “Connected person” means: Level 1: a director, chief executive or substantial shareholder of: (a) the listed company; or (b) its subsidiaries. In relation to a PRC listed company, its promoters and supervisors are also included. For connected transactions, the definition includes any person who was a director of the listed company within the preceding 12 months. Level 2: an associate of any of the above. (See “Associate” below) In deciding whether a company is an associate, an indirect interest in that company through shareholding in the listed company is not counted. Level 3: a non wholly-owned subsidiary (10% connected subsidiary) of the listed company, where any connected persons of the listed company (excluding connected persons at the subsidiary level) are entitled to exercise 10% or more of the voting power at any general meeting of the non wholly-owned subsidiary. An interest of a connected person in the subsidiary which is held through the listed company is excluded from the 10% calculation. The subsidiaries of a 10% connected subsidiary are also caught. Wholly-owned subsidiaries of the listed company are not connected persons. The stock exchange has specific power to deem a person to be connected and to specify that certain exemptions will not apply to particular transactions. “Associate” means: in relation to an individual: 1. his spouse, child or step-child (natural or adopted, under the age of 18) of such individual or his spouse (family interests). 2. (a) 30% company in which he and his family interests are interested. (b) its subsidiary, parent or a fellow subsidiary. A 30% company is a company in the equity capital of which the individual, his family interests, trustees and trustee interests are, directly or indirectly, interested so as to exercise 30% (the level from time to time in the Takeovers Code for triggering a mandatory general offer) or more of the voting power at general meetings, or to control the composition of a majority of the board of directors. 3. trustees, where the individual or any family interest is a beneficiary or (to his knowledge) a discretionary object. 30% company (trustee-controlled company) in which the trustees are interested, and its subsidiaries (trustee interests). A parent of a trustee-controlled company or a subsidiary of the parent. in relation to a company: 1. its subsidiary, parent or fellow subsidiary. 2. 30% company in which it and the above companies are interested. 3. (a) 30% company in which it, the companies in 1, 2 and 4 are interested. (b) its subsidiary or parent or a fellow subsidiary. 4. trustees, where the company is a beneficiary or (to its knowledge) a discretionary object. 30% company in which the trustees are interested (trustee-controlled company), and its subsidiaries. A parent of a trustee-controlled company or a subsidiary of the parent. For connected transactions, an associate also includes: (a) any person or entity with whom a connected person or his associate has entered, or proposes to enter, into any agreement, arrangement, understanding or undertaking, formal or informal, express or implied, with respect to the transaction such that, in the opinion of the stock exchange, that person or entity should be considered a connected person. (b) any person cohabiting as a spouse with, and any child, step-child, parent, step-parent, brother, sister, step-brother and step-sister of, a connected person or his associate. (c) an extended range of family members, i.e., a father-in-law, mother-in-law, son-in-law, daughter-in-law, grandparent, grandchild, uncle, aunt, cousin, brother-in-law, sister-in-law, nephew and niece of a connected person or his associate whose association with such person is such that, in the opinion of the stock exchange, the proposed transaction should be considered a connected transaction. “Chief executive” means a person who alone or together with one or more other persons is or will be responsible under the immediate authority of the board of directors for the conduct of the business of the listed company. “Director” includes any person who occupies the position of a director, by whatever name called. “Subsidiary” includes: 1. those defined in the Companies Ordinance (over 50% of voting power. The Companies (Amendment) Bill 2004 would amend the definition of “subsidiary” for the purposes of group accounts to make it more closely aligned with the International Accounting Standards); 2. any entity which is accounted for and consolidated in the audited consolidated accounts of another entity as a subsidiary pursuant to applicable Hong Kong Financial Reporting Standards or International Financial Reporting Standards; and 3. any entity which will, as a result of acquisition of its equity interest, be accounted for and consolidated in the next audited consolidated accounts. “Substantial shareholder”, in relation to a company, means a person who is entitled to exercise 10% or more of the voting power at any general meeting of the company. C. Notifiable transactions The following transactions are discloseable transactions, where any percentage ratio is 5% or more, but less than 25%: • indemnities, guarantees or financial assistance provided by a listed company (or by its subsidiaries), except to its subsidiaries. • entering into or terminating finance leases where the financial effects have an impact on the balance sheet or profit and loss account. • entering into or terminating operating leases which have a significant impact on operations, e.g., leases representing a 200% or more increase in the scale of the existing lease operations. In the case of a discloseable transaction, the listed company must inform the stock exchange, send a circular to its shareholders and publish an announcement in the newspapers. Where any percentage ratio is 25% or more, the transaction would be a Major Transaction and, in addition, a short suspension of dealings in the listed company's securities and shareholders' approval are required. Aggregation of transactions The stock exchange may require a listed company to aggregate a series of transactions and treat them as if they were one transaction if they are all completed within a 12 month period or are otherwise related. Factors which the Exchange will take into account in determining whether transactions will be aggregated include whether the transactions: • are entered into with the same party or with parties connected or otherwise associated with one another; • involve the acquisition or disposal of securities or an interest in one particular company or group of companies; • involve the acquisition or disposal of parts of one asset; or • together lead to substantial involvement by the listed company in a business activity which did not previously form part of the listed company’s principal business activities. D. Advance to an entity This refers to (a) amounts due from and (b) guarantees given on behalf of any entity (it does not matter whether or not the listed company holds any shares in or otherwise controls the entity), its controlling shareholder, subsidiaries and affiliated companies. A listed company is required to make disclosure, where any of the percentage ratios of the advances exceeds 8%. Disclosure means publication of relevant information in the newspapers. Where the event continues to exist, inclusion in the interim and annual reports is required. Further disclosure is required, where additional advances increase any percentage ratio by 3% or more. However, an advance to a subsidiary of the listed company will not be regarded as an advance to an entity. These advances, and also financial assistance under E below, should be viewed on a group basis, including those arising either from a direct relationship or indirectly through subsidiaries and affiliated companies. E. Financial assistance and guarantees to affiliated companies The same 8% threshold applies. However, this relates only to financial assistance to affiliated companies of a listed company, and guarantees given for facilities granted to affiliated companies. An “affiliated company” refers to a company which is recorded in listed company’s financial statements using the equity method of accounting, in accordance with Hong Kong Financial Reporting Standards. This includes associated companies and jointly controlled entities. Under the Hong Kong Statements of Standard Accounting Practice: A joint venture is a contractual arrangement whereby two or more parties undertake an economic activity which is subject to joint control. No single venturer is in a position to control unilaterally the joint venture. If one party has the power to govern the financial and operating policies of the joint venture, it controls the venture and the venture is a subsidiary of that party. It is not a joint venture. An associate is an enterprise in which the investor has significant influence and which is neither a subsidiary nor a joint venture. Significant influence is the power to participate in the financial and operating policy decisions of the enterprise but is not control over those policies. If an investor holds, directly or indirectly through subsidiaries, 20% or more of the voting power of the enterprise, it is presumed that the investor does have significant influence, unless it can be clearly demonstrated that this is not the case. Further, the existence of significant influence is usually evidenced in one or more of the following ways: • representation on the board of directors; • participation in policy making processes; • material transactions between the investor and the investee; • interchange of managerial personnel. Sanctions under the Listing Rules In addition to its powers to suspend or cancel a listing, if the Listing Committee finds there has been a breach of the Listing Rules by a relevant party, such as, the listed company, its directors, members of senior management, substantial shareholders and professional advisers, the Listing Committee may, among other things: • issue a public censure. • report the offender’s conduct to the Securities and Futures Commission or another regulatory authority or to an overseas regulatory authority. • in the case of wilful or persistent failure by a director of a listed company to discharge his responsibilities under the Listing Rules, state publicly that in the stock exchange’s opinion the retention of office by the director is prejudicial to the interests of investor. • in the case of wilful or persistent failure by a listed company to discharge its responsibilities under the Listing Rules, order that the facilities of the market be denied for a specified period to that listed company and prohibit dealers and financial advisers from acting or continuing to act for that listed company. • take such other action as it thinks fit. Interpretation The Listing Rules are to be interpreted, administered and enforced by the stock exchange. The decisions of the stock exchange shall be conclusive and binding on a listed company.