New Delisting Regime – a Fairer Game for Investors?

The Stock Exchange of Hong Kong Limited (“Exchange”) published a consultation paper on delisting in September 2017 (“Consultation Paper”). After feedback from the market, the Exchange issued its consultation conclusion in May 2018 (“Consultation Conclusion”) which announced the amendment of certain rules from the Rules Governing the Listing of Securities on the Stock Exchange (“Listing Rules”) and GEM Listing Rules. These changes were related to delisting criteria and timing, and took effect on 1 August 2018 (“New Delisting Regime”). According to the Consultation Paper, the New Delisting Regime aims to provide an effective delisting procedure to facilitate the orderly exit of poor-quality issuers as well as to incentivise suspended issuers to act promptly towards resumption.

In comparison to the old delisting regime, which existed before 1 August 2018, the New Delisting Regime allows the Exchange to delist issuers whose trading has been suspended for a prescribed period of 18 months (12 months for GEM board issuers) (“Prescribed Period”). Additionally, it allows the Exchange to set a specific period of time, which is shorter than the Prescribed Period, for the issuers whose shares are suspended from trading (“Suspended Issuers”) to remedy the relevant underlying issues. In exceptional circumstances, the issuer may be delisted immediately.

While the New Delisting Regime does provide a clearer path and timeline of the delisting process, the rights of the public shareholders of those Suspended Issuers may change to a certain extent. On the one hand, suspension of trading itself protects potential investors from dealing in shares of a listed company with quality issues, but on the other hand, largely limits the ability of the existing public shareholders of Suspended Issuers to realise the remaining value of their investments. If a Suspended Issuer was able to resolve the issues which led to its suspension and resume trading, its public shareholders would be able to recover at least some of their investments. According to the Exchange’s own record (as stated in the Consultation Paper), out of the 50 Suspended Issuers who resumed trading during 2012 to 2016, only 33 of them were able to do so within 18 months of their respective suspension. That means if the New Delisting Regime was adopted in 2012, 17 of those 50 Suspended Issuers (about one-third) would have been delisted before their remedial measures took effect and the relevant public shareholders would have had a loss in value in their investments. As the period of time given to Suspended Issuers to resume trading was 36 months, double the time of the Prescribed Period, 46 Suspended Issuers were able to regain trading status, and only four companies were delisted.

In some circumstances, especially for Suspended Issuers who are suspended due to insufficient operations, it may take a longer while to achieve results from newly deployed business strategies or acquired business lines, or to go through the vetting process if the new business is deemed as a new listing application by the Exchange. Similarly, for Suspended Issuers who are in financial difficulty, time is needed to obtain consensus on remedial plans from the shareholders and/or the creditors, to search for interested investors, and to enable interested investors to conduct thorough due diligence exercises. Therefore, even though it is reasonable for the Exchange to set a time limit for Suspended Issuers to implement their resumption plans and avoid unnecessary delays in taking remedial actions, if the Prescribed Period were longer it would protect the interests of the relevant public shareholders as well as satisfy the needs of the Suspended Issuers.

Under the amended rule 6.10 of the Listing Rules, when the Exchange considers that any factors set out in rule 6.01 which cause a listing to be cancelled have occurred, it can specify a period of time within which the relevant issuer must have those matters remedied. In the Consultation Conclusion, the Exchange requests that the Suspended Issuer resolve the matter within a reasonably short period of time, due to insufficient public float. There are concerns that a short time limit could be used by controllers of a listed company to squeeze out minority public shareholders. They could do this by intentionally keeping a low public float in order to encourage the Exchange to suspend and then delist the company.

If the controller of a listed company wishes to privatise the company but does not have enough funds to support a general offer, they could ensure the public float drops below 15 percent. The Exchange will then suspend trading of this listed company and impose a specified period (which can be a lot less than 18 months) for remedial action. If the public float has not been restored, the Exchange will henceforth delist the company upon expiry of the specified period. After delisting, the controller can easily buyout the public shareholders at a low price as there is no longer an open market for the shares of the company. In this way, the controller is able to avoid all required procedures for a general offer under the Codes on Takeovers and Mergers and Share Buy-backs and eliminate the uncertainties of a general offer while the minority public shareholders are deprived of their rights and protections under the Listing Rules.

In addition, newly proposed Listing Rule 13.50A pursuant which states that the Exchange can suspend trading of securities of a listed company whose auditor has issued or has indicated that it will issue, a disclaimer or adverse opinion on its financial statements when it publishes its preliminary annual results. There could be many reasons for the auditor of a listed company to issue a disclaimer in relation to its financial statements. Some reasons could be material and pervasive while others might only have limited impact on the operation or financial condition of the listed company. Once this new rule 13.50A is implemented, together with the New Delisting Regime, it is possible for a rather healthy listed company to eventually be delisted due to certain technical difficulties in resolving the underlying reasons which led to a disclaimer in its financial statements within the period of 18 months (or 12 months for GEM listed companies). Even if the company is financially distressed, the shareholders would benefit from the chance to realise whatever value is left in their shares. The company should also be given the chance to raise the necessary funds from the market before its suspension of trading, as if it doesn’t have this opportunity the situation could worsen and lead to the eventual delisting of the company. For details on our views on the proposed Rule 13.50A, please see the article headed “Listing Rules 13.50A: A Double-Edged Sword” in the March 2019 edition of the Hong Kong Lawyer.

The New Delisting Regime provides a clearer framework and a degree of certainty in the delisting process of long suspended listed companies. However, it seems to affect minority public shareholders with very little effects on the management or controllers of those long suspended listed companies. Given that the New Delisting Regime only came into effect on 1 August 2018, and up till this point there has been no Suspended Issuer delisted under the New Delisting Regime, it is not possible to tell whether the benefits of market quality and the reputation of the Exchange will overcome the possible disadvantages to the public shareholders of delisted companies. In order to strive for balance between regulatory needs and public shareholders’ interests, the Exchange will have to carefully consider the background of each individual case.

Jurisdictions: 

Partner, Withersworldwide

Mike is a partner in Withers’ corporate team. He has over seventeen years’ experience in corporate finance and specialises principally in initial public offerings on the Main and Growth Enterprise Market Boards of the Hong Kong Stock Exchange, including the listing of real estate investment trusts. He also has extensive experience in mergers and acquisitions, corporate reorganisations, compliance pertaining to Hong Kong listing rules and local securities regulatory compliance. Mike is a fellow member of the Association of Chartered Certified Accountants and an associate member of the Hong Kong Institute of Certified Public Accountants.

Associate, Withersworldwide

Douglas is an associate in the corporate team at Withers. He has been involved in Hong Kong IPOs for many years and he also has extensive experience in listing rules compliance matters. Douglas was qualified as a lawyer in 2013.