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Hong Kong Exchange and Clearing Limited
Press Conference on
Enhancing Corporate Governance
and Market Quality
30 January 2004
1
Corporate Governance
Update on Progress
Paul Chow
Chief Executive
2
Update on Progress
 Release
of Exposure Paper on Draft Code on
Corporate Governance Practices and Corporate
Governance Report
 Implementation
of corporate governance Rule
amendments
 Consultation
conclusions and Rule amendments
on initial listing criteria and continuing listing
obligations
3
Update on Progress (2)

Initiatives under Hong Kong’s Corporate
Governance Action Plan

International standards as a benchmark
 Improving
the transparency of our rules and
practices
 Address perceived inadequacies in the Rules
 Codify existing Exchange practices
 Make the Rules clearer and more concise (where
possible)
4
Exposure of Draft Code on
Corporate Governance Practices and
Corporate Governance Report
Richard Williams
Head of Listing
5
Objective of the Exposure Paper

Public exposure of the draft Code and Corporate
Governance Report

To allow the market to comment on:
 timing of the proposed implementation of
the Code
 detailed wording of the draft Code
6
Structure of Draft Code

Non–mandatory

Two tiers of board practices
 1st tier: Code provisions – comply or explain
approach
•
Non-compliance does not constitute a breach
of the Listing Rules
 2nd tier: Recommended Best Practices – listed
issuers encouraged to disclose their noncompliance
7
Code Provisions

Section A: Directors
Section B: Directors’ remuneration

Section C: Accountability and Audit

Section D: Delegation by the Board

Section E: Communication with Shareholders

8
Major Recommended Best Practices

INEDs comprising at least one-third of the
board

Establishment of a nomination committee with
a majority of INEDs
 Quarterly
reporting for Main Board issuers

Continuous training for directors

Disclosure of senior management’s emoluments
on a named basis
9
Corporate Governance Report
 Three
levels of disclosure requirements
 1st level: Mandatory disclosure requirements
 2nd level: Code provision disclosure – need to
explain non-disclosure
 3rd level: Recommended disclosure
10
Proposed Timetable

Comments on or before 31 March 2004

Target for publication of Code – end 1st half 2004

New Code effective for accounting periods
commencing:
 1 January 2005 for all the Code provisions and
related disclosure obligations (except for those on
“internal control”)
 1 July 2005 for the Code provisions on “internal
control” and related disclosure obligations
 Early adoption encouraged
11
Corporate Governance
Rule Amendments
Anne Chapman
Vice President, Listing
12
Major areas of corporate governance
Rule amendments
 New chapters of Main Board Rules on
notifiable transactions and connected
transactions
 Revised classification of notifiable transactions
and connected transactions
 Revised definition of “reverse takeovers”
 Revised definition of “connected persons”
 Revised definition of “associate” of a
connected person
 Refreshment of general mandate
 Disclosure of directors’ remuneration
13
Major Rule Amendments (1)

New Chapters of Main Board Rules
 Chapter 14 (Notifiable transactions)
 Chapter 14A (Connected transactions)
 Alignment of the format and structure of Main
Board and GEM Rules
14
Major Rule Amendments (2)

Classification of notifiable transactions
 Categories of notifiable transactions:
•
•
Introduced “VSD”
Introduced “reverse takeovers” (existing GEM Rules) into
Main Board Rules
 Five size tests:
•
•
•
•
•
Total assets test which replaces the existing net assets test
Consideration to market capitalisation test which replaces
the existing consideration to net assets test
Revenue test as a new stand-alone test
Profits test (no change)
Equity capital test (no change)
 Revised percentage thresholds:
•
Alignment of thresholds with international standards
15
Major Rule Amendments (3)

Classification of connected transactions
 Existing requirement:
•
Assets test and consideration test only
 New requirement:
•
All size tests (except for profits test) apply
•
Revised percentage thresholds apply
•
Existing de minimis thresholds of $1
million and $10 million retained
16
Major Rule Amendments (4)
Reverse
takeovers:
 Treated as a deemed new listing
• Comply with new listing requirements
 Revised definition:
• Acquisitions involving a change in control and
triggering VSA threshold
• Acquisitions within 24 months after a change
in control which individually or together
trigger VSA threshold
17
Major Rule Amendments (5)

Revised definition of “connected person”
 Includes connected persons at subsidiary level
 Includes, for the purpose of connected transactions,
non wholly owned subsidiaries of which connected
person(s) at the issuer’s level (individually or
together) is/are a substantial shareholder
 Includes, for the purpose of connected transactions,
“relatives” of a connected person as his deemed
associates :
•
includes his spouse, parents, children and siblings
•
includes his mother-in-law, father-in-law, son-in-law,
daughter-in-law, brother-in-law, sister-in-law, grandparents,
grand-children, uncle, aunt, cousin, nephew and niece,
whose association with the connected person is such that, in
the opinion of the Exchange, the proposed transaction
should be subject to the connected transaction provisions
18
Major Rule Amendments (6)

Revised definition of “associate” :
 in relation to an individual,
•
a trustee-controlled company
•
a subsidiary of a trustee-controlled company
•
a holding company of a trustee-controlled company and a
subsidiary of any such holding company
 in relation to a corporation,
•
a trustee
•
a trustee-controlled company
•
a subsidiary of a trustee-controlled company
•
a holding company of a trustee-controlled company and a
subsidiary of any such holding company
19
Major Rule Amendments (7)

Limit on general mandate:
 Existing limit of 20% of issued share capital retained
 Further consideration will be given to lowering the limit

Refreshment of general mandate
 Revised requirements:
•
Refreshment subject to shareholders’ approval
once a year
•
Independent shareholders’ approval for
subsequent refreshments in a year
•
GEM and Main Board rules aligned
20
Major Rule Amendments (8)

Disclosure of directors’ remuneration in annual
reports
 Existing Main Board Rule:
•
By bands only
 Existing GEM Rule:
•
On an individual but “no name” basis
 New Main Board and GEM Rules:
•
On a “named” basis
21
Implementation
 New Rules effective on 31 March 2004
 Transitional arrangements :
•
Refer to the attachment to the HKEx’s press
release
 New Rules will be published on HKEx’s website at
www.hkex.com.hk today
22
Consultation Conclusions
on Proposed Amendments to the Listing Rules
Relating to Initial Listing Criteria
and Continuing Listing Obligations
Keniel Wong
Senior Vice President, Listing
Focus
The Consultation Conclusions focus on:

initial listing eligibility criteria

continuing obligations

disclosure requirements at the time of initial
listing
24
Initial listing eligibility criteria
Introduction of alternative financial standards
to the profit requirement:
 Market capitalisation / revenue test
 Market capitalisation / revenue / cash flow test
Market Capitalisation
Public Float
 Number and spread of shareholders
25
Initial listing eligibility criteria
Market capitalisation / revenue test
 Market capitalisation: at least HK$4
billion
 Revenue: at least HK$500 million
 requirement for a higher minimum
number of shareholders : 1,000
26
Initial listing eligibility criteria
Waiver of the 3-financial-year trading
record requirement for listing applicants
 applying to list under market
capitalisation / revenue test
 Pre-requisites:
• management experience
• management and ownership continuity
27
Initial listing eligibility criteria
Market capitalisation / revenue / cash flow test
 Market capitalisation: at least HK$2 billion
 Revenue: at least HK$500 million
 Positive cash flow: at least HK$100 million
28
Initial listing eligibility criteria
Minimum expected market capitalisation at
the time of listing

Current requirement:
 at least HK$100 million

Increased to at least HK$200 million

Definition of “market capitalisation”
29
Initial listing eligibility criteria
Public float

Current requirement:
 25% (if market capitalisation does not
exceed HK$4 billion)
 floor: 10% (discretionary, if market
capitalisation exceeds HK$4 billion)

New:
 25% by reference to aggregate market
capitalisation of all securities of
applicant
 floor: 15% (discretionary, if market
capitalistaion exceeds HK$10 billion)
30
Initial listing eligibility criteria
Number and spread of shareholders

increased to 300

for issuers applying to list under the market
capitalisation / revenue test, minimum
requirement is 1,000

top 3 public shareholders hold not more than
50% of public float
31
Continuing obligations
Public float

suspension if public float falls below 15%

may consider waiver in general offer situation – 3 months

not extended to share repurchase situation

where lower % accepted for issuers (with market
capitalisation over HK$10 billion)
 lower % only applicable at time of listing
 % fixed
 applicable throughout issuers’ listing on the Exchange
 will not be considered post listing

confirmation of sufficiency in annual reports
32
Continuing obligations
Timeliness of accounts

immediate suspension – on failure to
publish financial results on due date

transitional period
33
Disclosure requirements
at the time of Initial Listing

Over-allotment option and price
stabilising activities

Persons in control of the listing applicant

Management experience / qualification

Applicant group prospects
34
Implementation

Effective Date : 31 March 2004

Except:
 for initial listing eligibility criteria:
•
Form A1 submitted before this date, and
listed within three months afterwards
 for continuing obligations:
•
a transitional period up to 31 December 2004
in respect of new rule on timely publication
of financial information
35