Friday 29 Mar 2024
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This article first appeared in The Edge Malaysia Weekly on October 16, 2017 - October 22, 2017

THE Hong Kong Exchanges and Clearing (HKEX) has been tightening rules on reverse takeovers (RTOs) following a number of controversial backdoor listings through shell companies, notably one involving the Hanergy group.

The case began with loss-making toy maker turned property developer RBI Holdings Ltd, which was used as a vehicle for a backdoor listing by Apollo Solar Energy Tech Holdings in 2009.

In 2010, Hanergy Holdings Group Ltd bought a controlling stake in Apollo Solar, with the latter subsequently renamed Hanergy Thin Film Power Group Ltd.

Half a decade later, in May 2015, Hanergy Thin Film was the subject of an investigation by the Securities and Futures Commission (SFC), although the regulator did not specify the reason behind the investigation.

It was reported that Hanergy Thin Film had used controversial accounting practices to book unpaid receivables from its parent as profits.

A week prior to the investigation, the company saw a plunge in its share price, wiping out US$18.6 billion in market value and ending Hanergy chairman and CEO Li Hejun’s brief status as the richest man in China.

The stock has been suspended since then.

Just last month, the court barred Li from being a director of any Hong Kong company for eight years and ruled that he had been involved in misconduct in the management of Hanergy.

The Hanergy case likely had a bearing on the regulations enforced in Hong Kong regarding reverse takeovers amid calls for the regulator to take action to restore confidence in the bourse.

HKEX enforces strict regulations around asset injections through the bright line test and the principle-based test.

The bright line test specifically outlines two instances of RTOs, namely when a very substantial acquisition (VSA) involves a change in control of a listed issuer, or a series of acquisitions undertaken within a period of 24 months constitute a VSA.

If the exercise does not meet the bright line test, the principle-based test is applied, which aims to determine whether an acquisition is an attempt to list assets and circumvent the requirement for new listings.

Other exchanges in Asia-Pacific are not as strict. The Singapore Exchange, for example, requires RTO exercises to meet at least one of its quantitative criteria. 

An issuer either has to have a minimum pre-tax profit of least S$30 million for the latest financial year and an operating track record of at least three years, be profitable in the latest financial year with an operating track record of at least three years and have a market capitalisation of at least S$150 million, or report operating revenue and market capitalisation of not less than S$300 million for the latest financial year.

The issuer must also meet a profit test, which states that the issuer must have been engaged in substantially the same business and substantially the same management throughout the three-year operating track record.

Meanwhile, the Australian Securities Exchange carefully examines any proposed transaction that involves a listed company acquiring a business from or merging with a non-listed entity, which would result in a doubling of consolidated total assets, total equity interests, annual revenue, Ebitda, annual profit before tax or total securities issued, to determine whether it is an RTO.

It also considers any series of acquisitions, regardless of whether it is done by related parties, as long as the transactions happen “in reasonable proximity” that would result in a change in the business direction of the company.

When a transaction is deemed a backdoor listing, the exercise will be subject to the listing requirements under a conventional IPO.

 

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