Hong Kong Exchanges & Clearing Ltd. · HKEX:388
Hong Kong Exchanges & Clearing — Slide 1
56 slides from Hong Kong Exchanges & Clearing's investor presentation, January 2013
Slide 1: Connected transactions
connected transactions Listing Division, HKEx
Slide 2: Agenda
Agenda I. General II. Who are connected persons III. What are connected transactions IV. Connected transaction requirements V. Exemptions for connected transactions 2
Slide 3: I. General
HKEx BUSA I. General
Slide 4: Purpose of CT Rules
Purpose of CT Rules Ensure issuers take into account interests of shareholders as a whole when entering into connected transactions Safeguard against connected persons taking advantage of their positions − Shareholders are informed − Independent directors and independent financial adviser opine
Slide 5: Rules and guidelines
Rules and guidelines June 2010 Amendments to connected transaction Rules April 2012 Plain Language Guide on Connected Transaction Rules http://www.hkex.com.hk/eng/rulesreg/listrules/listguid/Documents/ctguide_e.pdf 5
Slide 6: Rule amendments in June 2010
Rule amendments in June 2010 Major changes included 1. Increased threshold for requiring shareholders’ approval from 2.5% to 5% 2. Increased threshold for requiring announcements from 0.1% to 1% for transactions with persons connected at the subsidiary level only 3. Introduced an insignificant sub
Slide 7: Reduction of reportable connected transactions after Rule amendments
Reduction of reportable connected transactions after Rule amendments 2011 2009 % change No. of connected transactions announced - Subject to announcement and 622 (33%) 838 (41%) -26% shareholder approval (1) - Subject to announcement only (2) 1,255 (67%) 1,195 (59%) +5% Total 1,877 (100%) 2,033 (100
Slide 8: Reduction of reportable connected transactions after Rule amendments
Reduction of reportable connected transactions after Rule amendments 2011 2009 Number % Number % Persons connected at issuer level 1,574 83.8% 1,423 70.0% Persons connected only at subsidiary level 248 13.2% 507 24.9% Other 55 3.0% 103 5.1% 1,877 100% 2,033 100% 8
Slide 9: Profile of connected transactions
Profile of connected transactions Transactions with persons connected at the issuer level and subsidiary level 2011 2009 Number % Number % Director 189 10.4% 183 9.5% Substantial shareholder - At the issuer level 1,403 77.0% 1,214 62.9% - At the subsidiary level 220 12.1% 470 24.4% Other 10 0.5% 63
Slide 10: Profile of connected transactions: revenue transactions
Profile of connected transactions Revenue transactions 2011 2009 Transaction nature Number % Number % Sales and Purchases 340 18.1% 363 17.9% Leases 278 14.8% 226 11.1% Others (e.g. provision/ receipt of management, 600 32.0% 623 30.6% advisory or other services) 1,218 64.9% 1,212 59.6% Transaction
Slide 11: Profile of connected transactions: capital transactions
Profile of connected transactions Capital transactions 2011 2009 Transaction nature Number % Number % Acquisitions and disposals 418 14.7% 544 18.4% Financial assistance 131 7.0% 104 5.1% Issue of securities 41 2.2% 78 3.8% Others (e.g. JV formation, grant of options) 69 3.6% 95 4.7% 659 35.1% 821 4
Slide 12: Plain language guide on connected transaction Rules
Plain language guide on connected transaction Rules Benefits of the Guide Sections I. Who are connected persons II. What are connected transactions III. Requirements for connected transactions IV. Content requirements – announcements; circulars; annual reports V.&VI. Exemptions & Waivers 12
Slide 13: II. Who are connected persons
II. Who are connected persons 13
Slide 14: Connected persons include
Connected persons include: persons connected at the issuer level persons connected at the subsidiary level Mr. X Mr. Z director director Listco Mr. Y ≥ 10% ≥ 10% and director Subsidiary A Subsidiary B 14
Slide 15: Scope of connected persons
Scope of connected persons Connected person Director, Director Supervisor Connected Deemed chief executive, in the last (for PRC subsidiary connected substantial 12 months issuer only) person shareholder Associate 15
Slide 16: Associates of a connected person (individual)
(1) Associates of a connected person (individual) Mr. A is a director and substantial shareholder of Listco Associates of Mr. A (MB R1.01/ GEM R1.01) Mr. A Associates of Mr. A (MB R14A.11(4)(b)/ Other Trustees Mr. A’s GEM R20.11(4)(b)) beneficiaries immediate family members Mr. A’s family members
Slide 17: Associates of a connected person (individual)
(1) Associates of a connected person (individual) Mr. A’s immediate family members and family members M = is married to Mother M Father Mr. A’s immediate family (step-mother) (step-father) members Mr. A’s family members Brother (step-brother) M Spouse Sister (step-sister) Mr. A Person cohabiting a
Slide 18: Associates of a connected person (individual): Example A
(1) Associates of a connected person (individual) Example A Mr. X Mr. X’s Mr. X’s (Listco’s director) spouse * Brother ** 10% 10% 40% * Mr. X’s immediate family member Company A ** Mr. X’s family member ≥ 50% Company B Are Companies A and B regarded as Mr. X’s associates? Yes, because Mr. X, his s
Slide 19: Associates of a connected person (company)
(2) Associates of a connected person (company) • Company A is a substantial shareholder of Listco Associates of Company A Holding company > 50% > 50% Other Trustee Fellow beneficiaries Company A subsidiaries >50% Subsidiaries I ndividually or together hold 30% or more voting power or control the boa
Slide 20: Associates of a connected person (company): Example B
(2) Associates of a connected person (company) Example B Parent Company (70% shareholder of Listco) 30% Company A 30% 60% Company B Company C Are Companies A, B and C regarded as Parent Company’s associates? Companies A and B are associates of Parent Company Company C is not an associate of Pare
Slide 21: Connected subsidiary
(3) Connected subsidiary Connected subsidiary includes: 1) an issuer’s non wholly-owned subsidiary which is substantially held by a person connected at the issuer level; and 2) any subsidiary of the non wholly-owned subsidiary referred to in (1). 21
Slide 22: Connected subsidiary: Example C
(3) Connected subsidiary Example C Mr. X director Listco Mr. Y ≥10% >50% ≥ 10% and director Subsidiary A Subsidiary D >50% >50% Subsidiary B Subsidiary C Connected subsidiary 22
Slide 23: Deemed connected persons
(4) Deemed connected persons The Exchange may deem a person to be connected, including: a) relatives of a connected person with close association with the connected person; b) the person has entered into an agreement or arrangement with the connected person, who, in the Exchange’s opinion, should
Slide 24: Relatives of connected persons
(a) Relatives of connected persons • Mr. A is a director and substantial shareholder of Listco Great- Great- M Great- M = is married to grandparents grandfather grandmother M Grand- Mr. A’s relatives Grand- Great- Great- Grand- parents aunt uncle father mother Parents Uncle M Aunt Mother M Father Mo
Slide 25: Persons entering into agreement with connected person: Example D
(b) Persons entering into agreement with connected person Example D: Sales agreement #1 Owned by Listco Purchaser Owned by Chairman Sales agreement #2 Facts: • Purchaser acquired the building for redevelopment purpose. • Sales agreements # 1 and 2 were signed on the same day and were inter- conditio
Slide 26: Persons entering into agreement with connected person: Example E
(b) Persons entering into agreement with connected person Example E: Agreement # 2 Mr. A (Director) Agreement #1 Listco Purchaser Subsidiary A Facts: • Under Agreement #1, Listco sells Subsidiary A to Purchaser • Under Agreement # 2, Mr. A will assist Subsidiary A to obtain a mining license. The d
Slide 27: Exempt connected persons
(5) Exempt connected persons Examples: a) PRC Governmental Body b) An entity which is an associate of a connected person only because of the connected person’s interest in the entity via the issuer [Note 1 to MB R14A.11(4)/ GEM R20.11(4)] Mr. A ≥ 50% Listco ≥ 30% Company A 27
Slide 28: Exempt connected persons
(5) Exempt connected persons c) A subsidiary (Subsidiary A) becomes connected only because of its substantial shareholding in another subsidiary (Subsidiary B) Listco ≥ 50% Subsidiary A ≥ 50% ≥ 10% Subsidiary B 28
Slide 29: Exempt connected persons
(5) Exempt connected persons d) A subsidiary (Subsidiary C) is an associate of a person only connected at the subsidiary level (e.g. Mr. X) Listco Mr. X ≥ 50% ≥ 30% Subsidiary C 29
Slide 30: III. What are connected transactions
III. What are connected transactions 30
Slide 31: Connected transactions overview
CT Rules apply to connected transactions conducted by issuers and their subsidiaries Connected transactions include: − Transactions with connected persons − Transactions with independent third parties which may confer benefits to connected persons 31
Slide 32: Connected transactions involving independent third parties
Connected transactions involving independent third parties Rationale: Avoid conferring benefits to a connected person through his interest in the target company Two specific circumstances: 1) Financial assistance to/ from commonly held entity [MB R14A.13(2)(b)(ii)/ GEM R20.13(2)(b)(ii)] 2) Buy/
Slide 33: Financial assistance to/from commonly held entity
(1) Financial assistance to/ from commonly held entity Example F: Mr. A (connected person at the issuer level) Listco Listco subsidiaries ≥ 10% Any shareholding Company A Provision of financial assistance to/ from Company A is a connected transaction 33
Slide 34: Buy/sell shareholding interest from/to third party
(2) Buy/ sell shareholding interest from/ to third party Example G: Before acquisition After acquisition Mr. A Mr. A ≥30% ≥30% Listco Mr. X Listco Mr. X 5% >10% 20% 15% >10% 10% Company A Company A Acquisition of 10% of Company A from Mr. X is a connected transaction 34
Slide 35: Nature of connected transactions
Nature of connected transactions Connected transactions include both capital and revenue nature transactions − whether or not conducted in the group’s ordinary and usual course of business They can be one-off or continuing transactions 35
Slide 36: Contrast with Chapter 14
Contrast with Chapter 14 (1) Definition of “transaction” in MB Chapter 14/ GEM Chapter 19 − excludes revenue transaction in the group’s ordinary and usual course of business − excludes financial assistance to subsidiaries 36
Slide 37: Contrast with Chapter 14: treatment of options
Contrast with Chapter 14 (2) Treatment with options MB Chapter 14/ GEM Chapter 19 - Issuer may seek shareholder approval of exercise of an option in future at the time of acquiring the option MB Chapter 14A/ GEM Chapter 20 - Transfer of option by issuer is treated as if the option is exercised
Slide 38: IV. Connected transaction requirements
IV. Connected transaction requirements 38
Slide 39: Requirements for connected transactions
Requirements for connected transactions Written Announcement Annual Independent Additional agreement reporting shareholder reporting for approval CCTs * Fully exempt Yes No No No No Subject to Yes Yes Yes No Yes announcement only Subject to Yes Yes Yes Yes Yes announcement and independent shareholde
Slide 40: Points to note
Points to note (1) For CCTs, issuers must re-comply with the connected transaction requirements before: − the annual cap is exceeded − the agreement is renewed − material change to terms of agreement 40
Slide 41: Points to note
Points to note (2) Annual confirmation of CCTs by auditors according to HKICPA Practice Note 740 is acceptable (http://app1.hkicpa.org.hk/ebook/HKSA_Members_Handbook_Master/volumeIII/pn740.pdf) “… Based on the foregoing, in respect of the disclosed continuing connected transactions: a. nothing has c
Slide 42: Points to note
Points to note (3) Issuers must disclose in their annual reports whether their related party transactions constituted connected transactions (MB App 16 – para 8(3)/ GEM R 18.09(3)) 42
Slide 43: V. Exemptions for connected transactions
V. Exemptions for connected transactions 43
Slide 44: Exemptions for connected transactions
The Rules exempt specific categories of connected transactions − immaterial to issuers − low risk of potential abuse Examples: 1) De minimis exemption 2) Transactions with persons connected with insignificant subsidiaries 3) Financial assistance provided by banking issuers 4) Pro rata financial
Slide 45: De minimis exemptions
(1) De minimis exemptions Exempt immaterial transactions if − are on normal commercial terms − do not involve issue of new securities by issuers to connected persons Size test computation − Compute all size tests in MB Chapter 14/ GEM Chapter 19 (except profits test) − Use the annual cap to calc
Slide 46: De minimis exemptions
(1) De minimis exemptions Fully exempt Size test transactions – < 0.1%; or – < 1% (for transaction involves persons only connected at the subsidiary level); or – < 5% and the consideration < HK$1 million. Transactions Size test subject to – < 5%; or announcement – < 25% and the consideration < HK$10
Slide 47: Transactions with persons connected with insignificant subsidiaries
(2) Transactions with persons connected with insignificant subsidiaries Exempt transactions with connected persons related to “insignificant subsidiary” only (e.g. JV Partner and its Associate) [MB R14A.31(9)/ GEM R20.31(9)] Listco >50% >50% ≥10% JV Partner Other Subsidiary A Associate subsidiarie
Slide 48: Insignificant subsidiaries: Example H
(2) Transactions with persons connected with insignificant subsidiaries Example H: March 2012: Listco published its accounts for year ended 31/12/2011 June 2012: Transaction between Listco and JV Partner (substantial shareholder of Subsidiary A) Percentage ratios for Subsidiary A 2009 6% to 8% 2010
Slide 49: Financial assistance provided by banking issuers
(3) Financial assistance provided by banking issuers Exempt financial assistance provided by an issuer (a banking company) to its connected persons or commonly held entities [MB R14A.65(1)/ GEM R20.65(1)] “Banking company” means a bank, a restricted licence bank or a deposit taking company defin
Slide 50: Pro rata financial assistance provided by issuers
(4) Pro rata financial assistance provided by issuers Exempt financial assistance provided by an issuer to its connected person/ commonly held entity if: − provided on a pro rata basis; − normal commercial terms; and − any guarantee given is on a several basis (but not a joint and several basis).
Slide 51: Pro rata financial assistance: Example I
(4) Pro rata financial assistance provided by issuers Example I : Mr. A (connected person at issuer level) Listco 30% 70% Company A (connected subsidiary) Each of Listco and Mr. A provides guarantee to Company A in proportion to their interests in Company A and on a several basis Exempt connected
Slide 52: Pro rata financial assistance: Example J
(4) Pro rata financial assistance provided by issuers Example J : Mr. B (connected person at issuer level) Listco Other shareholders 20% 60% 20% Company B (connected subsidiary) Listco and Mr. B provide loan to Company B in the amount of HK$60 million and HK$20 million respectively (>5%). Not exem
Slide 53: Financial assistance provided to issuers
(5) Financial assistance provided to issuers Exempt financial assistance received by an issuer from its connected person/ commonly held entity if: − normal commercial terms; and − no security over issuer’s assets [MB R14A.65(4)/ GEM R20.65(4)] If an issuer provides its assets as security for a loa
Slide 54: Issue of securities
(6) Issue of securities Exempt the following issue of securities by an issuer or its subsidiary to connected persons: 1. pro rata issue to shareholders (e.g. rights issue, bonus issue) 2. For rights issue/ open offer − excess application − taking up shares as underwriter/ sub-underwriter 3. Share
Slide 55: Recap
Recap Who are connected persons What are connected transactions Connection transaction requirements Exemptions for connected transactions 55
Slide 56: Thank you
HKEx BUSA Thank you