Asia: Corporate Newsletter - August 2013

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Listing rule changes regarding the new IPO sponsors regime

The much anticipated new regulatory regime for IPO sponsors will come into effect this October. Details of the reforms under the new regime have been previously discussed in the January 2013 edition of our Corporate Newsletter. In essence, the new regime is aimed at improving sponsors' work quality and market confidence. It was previously stated that the Securities and Futures Commission (SFC) would work closely with the Hong Kong Stock Exchange (SEHK) to formulate specific measures to implement the relevant reforms, and the Listing Rules would also be amended where necessary to complement the new regime (eg to reflect the requirement to publish the listing application proof of the prospectus on the SEHK's website).

The SEHK has now published the key measures to complement the new sponsors regime. These include the following:

  • Requiring listing applicants to publish the application proof of a prospectus (in Chinese and English) on the HKEXnews website. The publication will take place at the same time when a new applicant files an A1 listing application with the SEHK. The application proof must be substantially complete except in relation to information that by its nature can only be finalised and incorporated at a later date,
  • Requiring sponsors to notify the SEHK in writing as soon as practicable after their appointment, regardless of whether a listing application has been submitted. For the purposes of the notification, a copy of its engagement letter must be provided to the SEHK. A listing application cannot be submitted less than two months from the date of the sponsor's formal appointment,
  • Requiring a sponsor that ceases to act for a listing applicant after its appointment to inform the SEHK as soon as practicable and in writing of its reasons for ceasing to act,
  • Imposing an eight-week moratorium on listing applications which have been returned on the grounds that application proofs are not considered by the SEHK to be substantially complete (although it is understood that there will be an accelerated review process in place for such applications),
  • Publishing the status mark and related information on the SEHK’s website to indicate the status of each listing application. In particular, listing applications will be categorised and shown as "active", "inactive" (eg applications which have lapsed or been withdrawn/rejected), "listed" and "returned". Relevant information for each category of listing applications will be shown on the SEHK’s website. For instance, in the case of "returned" applications the names of sponsors, listing applicants and their respective return dates will be shown; and
  • Streamlining the regulatory commenting process to focus on major issues such as eligibility, suitability, sustainability, disclosure deficiencies and compliance with the applicable laws/regulations. In addition, from 1 October 2013 the SEHK will introduce an initial three-day check for listing applications. This means that the SEHK will first conduct a three-day check of the application proof prospectus based on a prescribed checklist (ie the initial three-day checklist), and the SEHK will only go on to conduct more detailed vetting and qualitative assessment of the application proof if it satisfies the requirements in that checklist. At this stage the initial three-day check will continue until 30 September 2014, although it is understood that the SFC and the SEHK will review the effectiveness of the initial three-day checklist in due course to see whether the arrangement should continue.

The above requirements are scheduled to become effective on 1 October 2013. However as part of its transitional arrangements the SEHK will provide a six-month suspension period from 1 October 2013 until 31 March 2014. During this suspension period, the requirement for listing applicants to publish the application proof of their prospectus on the HKEXnews website will be suspended.

On a related note, the current requirement to post a Web Proof Information Pack (WPIP) will be replaced by the requirement to publish a Post Hearing Information Pack (PHIP) from 1 October 2013. The PHIP will be a near-final draft listing document and will need to be published on the HKEXnews website. The content requirements of a PHIP are set out in the new Practice Note 22 of the Listing Rules, and are broadly similar to those for a WPIP (eg there must be adequate warning and disclaimer statements to advise viewers of the legal status of the document). Listing applicants must post the PHIP at the earliest practicable time after receiving a post hearing letter together with a request to post a PHIP from the SEHK.

Whitewash waivers and disqualifying transactions under the takeovers code 

Under the Codes on Takeovers and Mergers and Share Repurchases (Takeovers Code), a party is obligated to make a general offer for the shares of a target company in certain circumstances, especially where that party has acquired the voting rights of the target company and such acquisition increases that party's holding to 30% or more of the target's voting rights. If the increase in voting rights arises as a result of an issue of new securities as consideration for an acquisition or a cash subscription, the Executive Director of the Corporate Finance Division of the Securities and Futures Commission (Executive) may consider waiving that party's obligation to make a general offer (ie a whitewash waiver). There are, however, requirements which must be met if such a waiver is to be granted. For instance, the whitewash proposal must be approved by the independent shareholders of the target company.

Another fundamental requirement which must be met is that there have been no "disqualifying transactions" in the previous six months. In essence, this means that a waiver will not be granted if:

  • The party to be issued with new securities in the target company (or any person acting in concert with that party) has acquired voting rights in the target in the six months prior to the announcement of the whitewash proposal; and
  • That party has acquired or disposed of voting rights in the target in the period between the announcement of the whitewash proposal and the completion of the subscription of shares in the target.

These two conditions are aimed at ensuring the equal treatment of shareholders and also ensuring that they are able to make an informed decision on the whitewash proposal. In particular, with regards to b) above, since the whitewash applicant is proposing to increase their shareholding in the target company, disposals of voting rights before completion of the whitewash proposal would be contrary to the intended effect of the proposed whitewash transaction. Also, if the whitewash applicant is allowed to dispose of voting rights during the period between the announcement of the whitewash proposal and the completion of the share subscription, the target's shareholders will not be able to accurately understand the proposed shareholding position of the whitewash applicant (which will then affect their ability to make an informed decision when voting on the proposal).

But what if holders of convertible securities who are independent of the whitewash applicant exercise their conversion rights during the period between the announcement of the whitewash proposal and the completion of the share subscription? In such a case the whitewash applicant's shareholding in the applicant would be diluted which may then affect the target shareholders' ability to accurately understand the proposed shareholding position of the whitewash applicant. Will that conversion therefore become a "disqualifying transaction" as per b) above?

The Executive has recently clarified this issue in the June edition of the SFC's Takeovers Bulletin. The Executive has clarified that the conversion would not constitute a "disqualifying transaction" since the decrease/dilution of the whitewash applicant's voting rights would not have been caused by an actual disposal of voting rights by the whitewash applicant or their concert parties.

Consultation conclusions on the establishment of the independent insurance authority

Following a consultation toward the end of last year, the government published the consultation conclusions on the key legislative proposals for the establishment of an Independent Insurance Authority (IIA) on 26 June 2013. The government first consulted the public on the establishment of an IIA back in 2010 and conclusions for that consultation were published in June 2011. Based on these conclusions the government then formulated key legislative proposals and consulted on these proposals from October 2012 to January 2013. It was hoped that the establishment of the IIA would address the concerns regarding the effectiveness of supervision in a self-regulatory regime, and the need to modernise the regulatory infrastructure to align with international practice.

The key legislative proposals have been discussed in more detail in our alert from last December. To summarise, under these proposals:

  • The IIA would be established as a body corporate with a governing board. As the lead regulator for insurers and intermediaries, the IIA would take on the existing functions of the Insurance Authority but would also assume additional statutory functions such as regulating the conduct of intermediaries and promoting insurance literacy of the public,
  • The IIA would be responsible for licensing and regulation of insurance activities, and a person would need to be licensed in order to carry out "regulated activities" (eg negotiating/conducting insurance contracts). There would be five categories of licenses under the statutory regime, ie insurance agency, insurance broker, insurance agent, technical representative (agent) and technical representative (broker); and
  • Licensed insurance intermediaries would be required to comply with certain conduct requirements when carrying out regulated activities. A corporate licensee must also appoint a responsible officer to ensure there is proper internal control. That responsible officer is subject to statutory responsibilities and may be subject to disciplinary actions by the IIA (which would be given inspection/investigation powers and the power to impose sanctions).

Following the consultation process the government has now revised and refined some of the legislative proposals. These refinements cover a range of matters such as the constitution of the IIA, the appointment of responsible officers and the disciplinary powers/sanctions of the IIA. Some of the notable refinements include the following:

  • Statutory functions of the IIA - specifically, "promoting the competitiveness of the insurance industry in the global insurance market" has now been added as one of the IIA's statutory functions,
  • Composition of the IIA board - under the original proposals the IIA board should comprise of no more than two directors. However, the proposals have now been refined to require the Board to have no less than two directors with knowledge of and experience in the insurance industry in order to ensure a mix of talents on the board. In addition, there will be representatives from insurers and intermediaries on the industry advisory committees (whose function is to advise the IIA and keep the IIA abreast of market developments),
  • Responsible officers - some respondents commented during the consultation that a responsible officer's statutory responsibilities could be onerous. As such, the refined proposals now allow the appointment of an additional responsible officer (subject to that person meeting the relevant requirements (eg being fit and proper) and being approved by the IIA). The two responsible officers will then be jointly and severally responsible for fulfilling the regulatory requirements,
  • Powers of the IIA - the original proposals empowered the IIA to suspend a licensee or responsible officer from carrying on regulated activities for a specified period if it envisages that a decision on the disciplinary action to be brought against that party may not be made timely (eg if the facts of the case are complex). This was aimed at protecting the interests of the public and insurance policyholders. During the consultation there were strong objections to the introduction of this power as it effectively imposed a punishment before a disciplinary decision. As a result, the government has now decided not to introduce this power in the revised proposals, and
  • Disciplinary fines - the original proposals provided the IIA the power to impose disciplinary fines of up to HK$10 million or three times the amount of the profit gained or loss avoided by the regulated person as a result of his misconduct (whichever amount is greater). There were industry concerns during the consultation that the upper limit of this pecuniary penalty was too high, but despite these concerns the government has decided that such limit is appropriate as it is comparable to the disciplinary sanctions under the regimes for intermediaries regulated by the Mandatory Provident Fund Schemes and the SFC. The government has also emphasised that the IIA would need to publish a guideline before it may impose any disciplinary fine, and that any aggrieved party can appeal to the Insurance Appeals Tribunal against the IIA's disciplinary sanctions.

With regards to next steps, the government is currently finalising a Bill to amend the Insurance Companies Ordinance based on the refined legislative proposals. It is understood that the government would introduce that Bill into the Legislative Council by the end of this year, with a view to setting up the IIA in 2015.

Latest developments in the PRC: PRC strengthens approval and administration of foreign-invested finance leasing companies 

The Ministry of Commerce (MOFCOM) has issued the Notice on Strengthening and Improving the Approval and Administration of Foreign-invested Finance Leasing Companies (?????????????????????????????????), which entered into effect on 11 July 2013 (Notice). The Notice aims to strengthen the approval and administration of foreign-invested finance leasing companies in China.

Back in 2005, MOFCOM released the Administrative Measures on Foreign Investment in the Leasing Industry (???????????) (Administrative Measures), which at that time were the main piece of legislation regulating foreign investment in the leasing sector (including finance leasing). In recent years, the foreign-invested finance leasing industry has developed rapidly with a great degree of diversity and innovation. To facilitate and strengthen the approval of foreign-invested finance leasing companies, MOFCOM released the Notice to provide clarifications and guidance to local branches of MOFCOM, which are the main approval authorities in this area.

The Notice clearly provides that a foreign-invested finance leasing company is not allowed to take in deposits, grant loans, grant entrusted loans, and engage in interbank lending or equity investment. A foreign-invested finance leasing company is also prohibited from providing direct or indirect financing to any financing platforms established by local governments for any government public welfare projects.

The Notice also contains approval guidance for local branches of MOFCOM to follow when reviewing establishment applications of foreign-invested finance leasing companies (Approval Guidance). The Approval Guidance provides clarifications and supplements to several qualification requirements contained in the Administrative Measures and which relate to the setting up of a foreign-invested finance leasing company, for example:

  • Qualifications for the foreign investor(s) of a foreign-invested finance leasing company
    • Good creditworthiness and engaging in substantive business activities,
    • Owning total assets of no less than US$ 5 million,
    • Operating for at least a year (not applicable to any SPVs established by a qualified foreign parent company),
  • Clarifications on the qualification requirements of professionals and senior management of a foreign-invested finance leasing company
    • One of the requirements for setting up a foreign-invested finance leasing company (as provided in the Administrative Measures) is that the company must employ relevant professionals and the senior management must have relevant professional qualifications and no less than three years of work experience. However, the relevant provisions in the Administrative Measures are very vague which make it difficult for the approval authority to assess matters when reviewing the application. To rectify this, the Notice provides detailed definitions of "professionals" and "senior management", as well as the types of "relevant" professional qualifications and work experience required for senior management etc.
  • Application documents
    • For any foreign investor (and its parent company) to set up more than one finance leasing company in China, the company to be established must have a different business scope from the finance leasing company that has already been set up. Additional application documents regarding the existing finance leasing company are also required to be submitted.
  • Others
    • The name of a foreign-invested finance leasing company must include the word "finance leasing (????)" and cannot include words such as "financial leasing (????)" or "guarantee (??)",
    • A foreign-invested finance leasing company may provide guarantees related to the leasing business, but such guarantees cannot be its main business,
    • A foreign-invested finance leasing company's registered capital must be no less than US$ 10 million. There is no need to provide the amount of total investment in the company's incorporation documents or approval documents.