Price Adjustment Provisions

Any price adjustment provisions (e.g., a guaranteed discount to the IPO price or share price, or an adjustment linked to the market capitalization of the Proposed ListCo) are not allowed. Price adjustment mechanisms effectively create two different prices for the same securities for pre-IPO investors and other shareholders at the time of listing, which potentially could have a disruptive effect. These mechanisms are contrary to the Equal Treatment Principle.

Put or Exit Options

All put or exit options granted to pre-IPO investors to sell back the investments to the Proposed ListCo or its controlling shareholder(s) are against the Equal Treatment Principle since such investment protection significantly reduces the investment risk for pre-IPO investors and is not available to other shareholders. The put/exit option is only allowed if the Proposed ListCo remains a private company. Namely, put or exit options are allowed only in the event of a failure to achieve a qualified IPO within a specified timeframe.

Director Nomination Rights

Any contractual right of a pre-IPO investor to nominate a director should not survive after listing, as such right generally is not available to other shareholders.

However, the pre-IPO investors may nominate or appoint one or more directors to the board before the Proposed ListCo's listing. Such director(s) will be subject to the resignation/retirement and re-appointment requirements under the Proposed ListCo's articles of association after listing.

Veto Rights

Any contractual rights to exercise veto power over the Proposed ListCo's major corporate actions (e.g., the making of any petition or passing of any resolution for winding-up, the carrying on of any business other than the business being carried on by the group, or the amalgamation or merger by any member of the group with any other company or legal entity, etc.) should be terminated upon listing.

Anti-dilution Rights

Anti-dilution rights should be extinguished upon listing to comply with Rules 13.36 (pre-emptive rights to all shareholders unless general mandate obtained at the annual general meeting) and 10.04 (no preferential treatment when allocating securities) of the Listing Rules. However, exercise of these anti-dilution rights by the pre-IPO investors in connection with the IPO is permissible at the time of the listing when:

• the allocation is necessary to give effect to the pre-existing contractual rights of the pre-IPO investors under the relevant investor rights agreement;
• full disclosure of the pre-existing contractual entitlement of the pre-IPO investors contained in the relevant investor rights agreement and the number of shares to be subscribed by the pre-IPO investors will be made in the prospectus and the allotment results announcement; and
• the proposed subscription will be conducted at the IPO price.

Profit Guarantee

Profit guarantee is not allowed if (i) it is settled by the Proposed ListCo or (ii) the compensation thereunder is linked to the market price or market capitalization of the Proposed ListCo.

However, where compensation is settled by a shareholder as a private arrangement between a shareholder and a pre-IPO investor and the compensation thereunder is not linked to the market price or capitalization of the Proposed ListCo, such guarantee will be allowed to survive upon listing.

Negative Pledges

Negative pledges that may survive the listing (i) must be widely accepted provisions in loan agreements, (ii) must not be egregious, and (iii) do not contravene the fairness principle in the Listing Rules.

Negative pledge provisions that are regarded as "widely accepted" include:

• those that prohibit the creation or effecting of any mortgage, charge, pledge, lien, or other security interest on a listing applicant's assets and revenues; and
• those that prohibit the disposal of any interest in the economic rights or entitlements of a share the controlling shareholder owns or controls to any person.

The HKSE will review all other negative pledges and may require confirmation from the sponsor that those that remain after listing are in line with normal terms of debt issues.

Prior Consent for Corporate Actions

Examples of the corporate actions subject to prior consent of pre-IPO investors include:

• a declaration of dividend by any member of the Proposed ListCo group;
• the sale, lease, or transfer of a substantial part of the Proposed ListCo's business or assets;
• any amendments to the applicant's constitutional documents; and
• any change in executive directors.

The above terms should be removed before listing unless the Proposed ListCo can demonstrate that the relevant terms are not egregious and do not contravene the Equal Treatment Principle.

Exclusivity Rights and No More Favorable Terms

A pre-IPO investment agreement may include terms that the Proposed ListCo is not allowed to issue or offer any shares or other forms of securities to any direct competitor of the pre-IPO investor or to other investors on terms more favorable than the terms on which the shares are issued to the pre-IPO investor.

These rights potentially can prevent the board of the Proposed ListCo from considering bona fide alternative proposals that would be in the best interest of the Proposed ListCo and its shareholders as a whole.

These rights can survive after listing if the investment agreement is modified to include an explicit "fiduciary out" clause so that directors are allowed to ignore such restrictions if complying with such restrictions would constitute a breach of their fiduciary duties. The directors would not be prevented from exercising their judgment in deciding whether to undertake certain corporate actions in the best interest of the Proposed ListCo.

Information Rights

Information rights can survive after listing if the pre-IPO investor is only entitled to receive published information or information that is made available to the public shareholders at the same time. If the Proposed ListCo provides price-sensitive information to the pre-IPO investor, the Proposed ListCo needs to comply with the disclosure requirement under Listing Rule 13.09 unless safe harbors in the Listing Rules apply.

Management Representation / Attendance Rights

These contractual rights allow a pre-IPO investor to nominate senior management and committee representatives, but any such appointment is subject to the decision of the board. The board is not contractually bound to approve the pre-IPO investor's nomination(s) without further review, as it owes fiduciary duties to all shareholders.

Right of First Refusal and Tag-Along Rights Granted by Controlling Shareholder

The HKSE considers these rights, which are intended to protect the pre-IPO investor's interest in the Proposed ListCo by placing certain selling restrictions on the controlling shareholder to prevent it from selling its shares to other parties, to be purely contractual rights between two shareholders.

Conversion Price Linked to IPO Price or Market Capitalization

The conversion price for the CBs should be at a fixed dollar amount or at the IPO price. Where the CBs are to be converted into shares at a price based on a guaranteed discount to the Proposed ListCo's IPO price or the conversion is linked to market capitalization, this essentially creates two different prices for the same securities at listing, which is inconsistent with the Equal Treatment Principle. This also may give rise to concerns that the pre-IPO investor does not bear the same investment risk as public investors.

Conversion Price Reset

Any conversion price reset mechanism of the CBs should be removed, as they are considered to be contrary to the Equal Treatment Principle.

Partial Conversions

Partial conversion of the CBs is allowed only if all special rights attached to the CBs are terminated after listing. This avoids the situation where a pre-IPO investor continues to enjoy special rights as a bondholder by holding a small portion of CBs after converting a significant portion of such CBs into shares.

Redemptions and Early Redemptions

Certain CBs provide the option for bondholders to redeem the outstanding CBs early at a price that enables the bondholders to receive a fixed internal rate of return on the CBs' principal amount. Upon maturity, all outstanding CBs shall be payable such that the bondholders shall receive the same fixed IRR. Such early redemption is allowed and should be distinguished from other cases where the bondholders do not undertake any risk and the investment money is not paid.

Disclosure Requirements

Certain prescribed information is required to be disclosed in the "Financial Information" and "Risk Factors" sections of the prospectus to explain the impact of the CBs on the Proposed ListCo. Such information includes:

• qualitative analysis on the cash flow and cash position in the event of the redemption;
• terms and impact of early redemption;
• maximum number of shares that would be converted and the corresponding change in shareholding in the Risk Factors section; and
• expected source of cash inflows upon listing, particularly the Proposed ListCo's existing cash position, the additional positive operating cashflow it expects to generate, and estimated net proceeds from the IPO.

Certain additional information also should be disclosed in the Proposed ListCo's interim and annual reports upon listing to enable investors to be aware of the potential dilution impact on the shares of the Proposed ListCo.