Stricter Disclosure Requirements for Listing Applicants on SEHK

Introduction
In July 2016, The Stock Exchange of Hong Kong Limited (“SEHK”) updated Guidance Letter GL25-11 (“Guidance Letter”), which has further explained and clarified SEHK’s position in relation to waiving a listing applicant’s strict compliance with the requirement to include in the accountant’s report its consolidated results for each of the preceding three financial years (two financial years for GEM applicants) (“Waiver System”). The updated Guidance Letter requires SEHK to more heavily scrutinize waiver applications and provides for a higher standard of disclosure in relation to the listing documents of an applicant with the waiver. This article will provide a brief commentary on the relevant updates in the Guidance Letter.
1. Background of the Waiver System
According to Main Board Rule 4.04(1) and GEM Rules 7.03(1) and 11.10, a listing applicant shall include in the accountant’s report its consolidated results for each of the three financial years (two financial years for GEM applicants) immediately preceding the issue of the listing document. In reality, if a listing applicant intends to issue listing documents shortly after the financial year end, it will usually experience difficulty in producing audited accounts for the latest financial year. In light of this issue, the common practice of SEHK is to consider granting a waiver to the relevant rules as long as the listing applicant has met certain conditions.
On the other hand, under Main Board Rule 13.46 and GEM Rule 18.03, a listed issuer shall dispatch to its shareholders its annual report no later than four months (three months for GEM issuers). It follows that SEHK will only consider granting a waiver if the proposed listing date is not later than one month before the deadline for dispatching the first audited report after the listing. In order to obtain a waiver, one condition that must be met is, Main Board applicants must be listed on SEHK within three months (two months for GEM applicants) after the latest financial year end.
2. SEHK’s considerations in deciding whether to grant a waiver
Before the update
First, where there is a downward trend in an applicant’s recent business performance to the extent that it may not meet the minimum profit requirement without a waiver, SEHK is unlikely to grant the waiver.
Where there are material adverse changes in an applicant’s performance (including revenue, net profit and profit margin), notwithstanding SEHK’s power to grant a waiver, in order to ensure the investing public can have reasonably sufficient information to make an assessment of the issuer, it is common practice for SEHK to impose conditions on the applicant’s listing documents requiring enhanced disclosure.
SEHK would ordinarily require the applicant to provide forecast on profit and loss and a qualitative analysis of the material changes in the applicant’s latest performance and comparison with the previous period. The applicant would also be asked to explain the reasons behind the material adverse changes and comment on whether these changes were one off and not likely to recur in the future.
After the update
First, in relation to applicants having a downward trend in their recent business performance to the extent that they are unable to meet the minimum profit requirement, SEHK will refuse to grant a waiver. As for applicants having material adverse changes in their performance, SEHK will also directly refuse to grant a waiver without considering the possibility to grant a waiver upon conditions.
If SEHK decides to grant a waiver to an applicant under other circumstances, the usual practice is to impose enhanced disclosure conditions and the scope of disclosure has also broadened. For instance, the qualitative analysis provided by the applicant in relation to its latest performance is not restricted to material adverse changes but has extended to cover all changes that could affect the assessment by investors. Finally, applicants are expected to explain these changes in greater details than before.
3. Implications on companies intending to be listed in Hong Kong
First, listing applicants should control the listing timeframe and avoid as far as practicable setting the proposed listing date in the months right after the financial year end. The safest practice is to set the proposed listing date in the second half of the financial year. This can minimize the difficulty in producing audited accounts for the latest financial year and in turn minimize the likelihood of requiring a waiver from SEHK.
Second, if the listing applicant has foreseen the possibility of not being able to produce audited accounts on time, it should immediately notify SEHK and seek a waiver. As the scope of enhanced disclosure after the update has substantially broadened, listing applicants should have discussions with SEHK to negotiate the terms of the disclosure as a means to proactively restrict the scope.
Third, as discussed above, as the listing applicant is required to disclose any changes relevant to the assessment by investors and provide detailed reasons, the scope of disclosure may cover information that could impact the pricing of shares to be issued. Listing applicants should be mindful of any adverse impact of the disclosure on the entire listing project.
4. Concluding Remarks
From the discussion above, SEHK has become more stringent in granting waivers to listing applicants in relation to the requirement to include the latest audited accounts. This development is likely to cause inconvenience to some companies intending to be listed in Hong Kong. We will keep a close eye on the update and inform our clients of the latest developments.