In recent years, numerous dual-listed Hong Kong companies have decided to delist from their secondary listing markets. The main reasons for their decision to delist are (1) to enhance liquidity by consolidating the trading of shares (ie, by broadening the shareholder base and making their listed company a more attractive investment target); (2) to better geographically align their business operations in China; and (3) to achieve cost savings in compliance and management resources (ie, as they only need to comply with the listing rules and laws of the sole listing market).
Since 2013, Sound Global Ltd. (“Sound Global”), China XLX Fertiliser Ltd. (“China XLX”) and China New Town Development Company Limited (“CNTD”), dual-listed companies in Hong Kong and Singapore, all submitted proposals to voluntarily delist from the Singapore Exchange Securities Trading Limited (“SGX-ST”), among others. All proposals were subsequently approved by disinterested shareholders and relevant regulators. Each company appears to have been motivated to delist to enhance their liquidity and reduce their compliance costs, as each had relatively low portions of shareholding in the SGX-ST as compared to the Stock Exchange of Hong Kong Limited (“SEHK”) before delisting from SGX-ST.
In structuring delisting deals, professional parties must pay attention to relevant regulatory disclosure requirements, especially the release of quarterly results announcements during the offer period. The Code on Takeovers and Mergers issued by Securities and Futures Commission (“SFC”) in March 2014 (“HK Takeover Code”), the practice note issued by the SFC and some recent case studies provide good guidance on whether the reported on requirement is applicable to dual-listed companies in Hong Kong.
Reporting Requirements in Hong Kong
Financial advisers, companies and their counsel must work closely together to ensure companies comply with all regulatory requirements when structuring delisting deals from secondary listing markets. According to the HK Takeover Code, the offer period covers from the release of proposed or possible offer announcement to the closure for acceptances or the termination of offer.
During the offer period, companies and professional parties must be aware of certain disclosure restrictions under the HK Takeover Code. One of the key restrictions is the reporting of quarterly results, especially when the results fall within the offer period. Under r. 10.9, except with the consent of the Executive Director of the Corporate Finance Division of the SFC or his/her delegates (“SFC Executive”), any unaudited profit figures published during an offer period must be reported on (the “Reported on Requirement”).
Key Points to Note When Acting for a Financial Adviser
In satisfying the Reported on Requirement, r.10.1 of the HK Takeover Code requires profit forecasts to be compiled with due care and consideration by a company’s directors, who are solely responsible for compiling it; financial advisers must satisfy themselves that a company’s directors prepared the forecast in this manner. Therefore, if financial advisers are required to comply with the Reported on Requirement, they must conduct adequate due diligence work with due care as required by r. 5 of the Corporate Finance Adviser Code of Conduct issued by SFC in October 2013 (“Code of Conduct”). In general, any breaches of the Code of Conduct will prima facie cast doubts on the fitness and properness of the financial advisers concerned.
Exemption to the Reported on Requirement in Hong Kong
The HK Takeover Code provides some exemptions to the Reported on Requirement. Under r. 10.9, unaudited statements of annual or interim results which have already been published are exempted from the Reported on Requirement. The SFC also issued a practice note in relation to profit forecasts under r. 10 of the HK Takeover Code on 30 September 2013 (“Practice Note 2”), which was further amended on 31 March 2015, stating companies with dual listings of their shares may publish unaudited quarterly results pursuant to a requirement under the relevant laws or regulations of the overseas jurisdiction during an offer period.
Prior to the release of Practice Note 2, markets were uncertain of whether unaudited quarterly results by mainboard listed companies in Hong Kong were considered as a profit forecast under the HK Takeover Code. This uncertainty arose because the HK Takeover Code is silent as to whether the exemption applies to quarterly results reporting by mainboard listed companies (ie, it only explicitly covers quarterly results reporting by Growth Enterprise Market companies).
In Practice Note 2, the SFC Executive stated that dual-listed companies that are required to publish unaudited quarterly results by the relevant laws or regulations of the overseas jurisdiction should be exempt from the Reported on Requirement (ie, by virtue of r. 10.9). However, Practice Note 2 also states that if a company with a dual listing wishes to take advantage of any of the Reported on Requirement exemptions, it must consult the SFC Executive at the earliest opportunity.
Sound Global and China XLX announced their proposed voluntary delisting with general offer before and after the release of Practice Note 2, respectively; however, only Sound Global was exempted from the Reported on Requirement. A further interpretation of this practice note was promulgated with the recently proposed delisting case of CNTD in October 2016.
Reporting Requirements in Singapore
To provide some context, in Singapore, listed companies are required to publish their financial results on a quarterly basis within 45 days from the end of the relevant period under the SG Listing Rules.
Since unaudited quarterly reports contain unaudited profit figures and must be published during an offer period, it must be reported on by the auditor or reporting accountant and financial adviser as required under r. 25.6(c) of the Singapore Code on Take-Overs and Mergers (“SG Takeovers Code”). Rule 25.3 of SG Takeovers Code requires (1) the auditor or reporting accountant to examine and report on the accounting policies and calculations for the forecast; and (2) the financial adviser, if he is mentioned in the document containing the forecast, to examine the forecast and report whether, in his view, the forecast has been made after due and careful enquiry.
In Singapore as well as in Hong Kong, listed companies are required to comply with the reporting requirements in each relevant listing market.
Sound Global Case
Sound Global announced its proposed voluntary delisting from SGX-ST (“Sound Global Delisting”) prior to the release of Practice Note 2. On 28 June 2013, the offer period of Sound Global Delisting commenced immediately upon the said announcement. On 14 November 2013, which was still within the offer period of Sound Global Delisting, Sound Global announced its 2013 third quarter results as required by the SG Listing Rules.
In the Sound Global case, it is noted that the unaudited quarterly results were published during the offer period and no Reported on Requirement was required by its auditors or financial advisers in Hong Kong. While not explicit, the SFC seems to have applied the r. 10.9 exemption and deemed the unaudited quarterly results to be interim results.
China XLX Case
Five months after the first announcement of the Sound Global Delisting, China XLX also announced its proposed voluntary delisting from SGX-ST (“China XLX Delisting”). However, it was not exempted from complying with the Reported on Requirement in relation to its quarterly results announcement.
China XLX announced its China XLX Delisting after the release of Practice Note 2. The China XLX Delisting period commenced on 11 December 2013, immediately upon its release of this announcement. On 30 May 2014, which was still within the offer period of the China XLX Delisting, China XLX announced its 2014 first quarter results, as required by the SG Listing Rules.
Even though the unaudited quarterly results were published during the offer period as required by SG Listing Rules, in this case, the SFC does not appear to have applied the Reported on Requirement exemptions automatically. In r. 10.9 of the HK Takeover Codes and Practice Note 2, there are four scenarios in which the Reported on Requirement exemption may apply. The only scenario that does not require prior consultation from the SFC Executive is the one that relates to a company publishing unaudited statements of annual or interim results.
Thus, even though Practice Note 2 acknowledges that a Reported on Requirement exemption may apply when unaudited quarterly results are published pursuant to the regulations of an overseas jurisdiction, prior consultation with the SFC Executive seems necessary. That is, it does not seem as if quarterly results will automatically be deemed to be interim results. As such, if no prior consultation is sought or consent obtained, there is a real risk that the exemption to the Reported on Requirement will not be applied.
On 18 October 2016, CNTD announced its proposed voluntary delisting from SGX-ST (“CNTD Delisting”). On 14November 2016, which was still within the offer period of CNTD Delisting, CNTD announced its 2016 third quarter results as required by the SG Listing Rules.
In this case, CNTD was exempted from complying with the Reported on Requirement in relation to its quarterly results announcement. It is reasoned that by virtue of CNTD’s prior consultation with the SFC, it was able to dispatch the CNTD Delisting circular within two months from its first announcement in October 2016. This facilitated the timely approval of the CNTD Delisting by the disinterested shareholders and relevant regulators on 17 January 2017.
Key Points to Note When Structuring a Delisting Deal
Legal practitioners to companies and financial advisers should note that their clients are required to comply with all applicable rules and regulations in each relevant listing market. If a dual-listed company in Hong Kong is required to publish quarterly results by regulators in overseas markets, legal practitioners should make their clients aware of the quarterly results disclosure requirements under the HK Takeover Codes and consult with the SFC prior to issuance of quarterly results, to ensure a Reported on Requirement exemption applies.
Failure to consult the SFC in advance may result in financial advisers incurring additional costs to conduct due diligence work as required under the Reported on Requirement. Legal practitioners may accelerate the completion of delisting deals by promptly consulting with the SFC to ensure the Reported on Requirement exemption applies. This may also, in turn, reduce the risk of financial advisers’ non-compliance with the Code of Conduct.