Hong Kong Exchanges and Clearing Limited Enhancing Corporate Governance and Market Quality

1. Hong Kong Exchanges and Clearing LimitedEnhancing Corporate Governance and Market Quality

2. Corporate Governance - Notifiable Transactions

3. General • New Main Board Chapters on notifiable transactions (Chapter 14) and connected transactions (Chapter 14A) • Structure and format based on existing Chapters 19 and 20 of GEM Rules • New section on “Options” in Chapters 14 and 14A • New section on “Financial Assistance” in Chapter 14A • Based on: • Consultation Conclusions • Policy directions of Listing Committee • Codification of existing practices and interpretations • Further enhancement of transparency • Existing Practice Note 13 of Main Board Rules repealed • Merged into new Chapters 14 (Notifiable Transactions) and 13 (Continuing Obligations)

4. Major Rule amendments • Definition of “transactions” • Classification of transactions • Reverse takeovers • Size test computation • Notification, publication and shareholders’ approval requirements • Contents of announcements • Contents of circulars

5. Definition of “transactions” R14.04(1) • See Chart 1: Definition of “transactions” • Definition of “transactions” excludes: • Issue of securities by issuers for cash only* • In line with current Main Board practices • GEM Rules are amended in line with Main Board Rules • See Chart 2: Classification of transactions * Under the new Rules, these transactions fall under the definition of “transactions” for the purpose of connected transactions.

6. This chart does not form part of the Listing Rules Chart 1 Definition of “transactions” under R14.04 A transaction Rule 14.04(1)( g) Is the transaction of a revenue nature in the ordinary and usual course of business of the listed issuer? * No Yes With a significant impact on the listed issuer? Rule 14.04(1)(d) Yes Yes Granting of financial assistance? An operating lease? Yes No No Intra-group financial assistance? • A transaction that is not of a • revenue nature in the ordinary • and usual course of business of • the listed issuer and does not • involve granting of financial • assistance, includes: • (Non-exhaustive list) • Acquisition or disposal of assets • (R14.04(1)(a)) • Writing, accepting, transferring, • exercising or terminating an • option to acquire or dispose • of assets or to subscribe for • securities (R14.04(1)(b)) • Entering into or terminating • finance leases (R14.04(1)(d)) • Formation of a JV (R14.04(1)(f)) No Yes No Rule 14.04(1)(e) Rule 14.04(1)(g) Does not fall under the definition of “transaction” under R14.04 Does not fall under the definition of “transaction” under R14.04 Falls under the definition of “transaction” under R14.04 * Granting of financial assistance by a banking company in its ordinary and usual course of business will not be treated as a transaction for the purpose of notifiable transactions.

7. Chart 2 This chart does not form part of the Listing Rules Classification of “transactions” (R14.06(1) to (5), 14.08)

8. Reverse takeovers (1) • Treated as a deemed new listing (R14.54) • Comply with new listing requirements under Chapter 8 • Revised definition (R14.06(6)): • 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 • Modified basis of computing the classification that applies during the 24 month period

9. Reverse takeovers (2) • R14.55 • Outgoing controlling shareholder cannot vote for acquisition of assets from incoming shareholder if: - there is a change in control; and • - outgoing controlling shareholder disposes of his shares • to any person • R14.92 & 14.93 • Restriction on disposal of existing business (at the time of change in control) within 24 months after change in control: • Treated as a new listing if disposal within the restriction • period • Do not apply if assets acquired after change in control • can meet R8.05

10. Classification • See Chart 3: Classification of notifiable transactions

11. Chart 3 This chart does not form part of the Listing Rules Rule 14.06(6)(a) Involve a change in control and trigger VSA threshold ? Classification of notifiable transactions Yes No A transaction under R14.04 • Acquisitions of assets from the • incoming controlling shareholder or its • associates within 24 months of such • controlling shareholder gaining control • of the listed issuer; (b) such change in • control was not treated as a reverse • takeover; and(c) trigger VSA threshold ? What is the nature of the transaction? Rule 14.06(6)(b) Yes Financial assistance • Disposal of assets • Writing, accepting, • transferring or exercising • an option to dispose of • assets • Termination of a finance • lease or operating lease • Acquisition of assets • Writing, accepting, • transferring or exercising • an option to acquire assets • Entering into a finance • lease or operating lease • Formation of a JV No Rule 14.06(6) Yes Circumvent the new listing requirements? Reverse takeover Yes No Involve issue of shares as consideration? Rule 14.06(1) Yes No Rule 14.08 Share transaction Go through the classification Rules Yes Not subject to notifiable transaction provisions unless it is a share transaction All the percentage ratios are less than 5%? No Yes Rule 14.06(2) Any of the percentage ratios is 5% or more but all the percentage ratios are less than 25%? Discloseable transaction No Rule 14.06(3) Any of the percentage ratios is 25% or more but all the percentage ratios are less than 100% (for acquisition) or 75% (for disposal) ? Yes Major transaction No Yes Rule 14.06(4) VSD A disposal transaction and any of the percentage ratios is 75% or more? No Yes VSA Rule 14.06(5) An acquisition transaction and any of the percentage ratios is 100% or more?

12. Size test computation Five size tests (R14.07) • Total assets test - replaces the existing net assets test • Consideration to market capitalisation test- 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) Aggregation of transactions (R14.22, 14.23) • if transactions are all completed within 12 months • if transactions are related Factors for aggregating transactions are set out in Rule 14.23

13. Total assets test (1) R14.07(1), 14.09 to 14.12, 14.16, 14.18 and 14.19 Assets test = Total assets (the subject of the transaction) Total assets of the listed issuer Total assets = current assets + non-current assets + fixed assets + intangible assets* (R14.04(12)) * Includes goodwill (whether positive or negative)

14. Total assets test (2)

15. Consideration test (1) • R14.07(4), 14.15 • Consideration test = Fair value of the consideration Total market capitalisation of listed issuer • Determination of fair value of the consideration (R14.15(1)) • Calculation of total market capitalisation (R14.07(4))

16. Consideration test (2) • Where the transaction involves establishment of a joint venture  aggregate total capital commitment and any guarantee or indemnity provided (R14.15(2)) • Where the issuer discharges or assumes any actual or contingent liabilities of the vendor  add the total liabilities assumed or discharged to the consideration (R14.15(3)) • Where the issuer pays or receives consideration in the future  Consideration = maximum total consideration payable or receivable under the agreement (R14.15(4))

17. Revenue test R14.07(3), 14.14 and 14.17 • Revenue = Revenue generated by the target Total revenue of the listed issuer • “Revenue” means: • revenue arising from the principal activities of a company • excludes revenue and gains that arise incidentally

18. Figures used in total assets, profits and revenue calculations

19. Exceptions to classification rules R14.20 • If any of the size tests produces anomalous results → provide appropriate alternative tests (if any) to the Exchange • e.g. number of employees, production capacity and any industry-specific ratios → alternative profits test which compares profitability

20. Notification, publication and shareholders’ approval requirements • See Chart 4: Summary of notification, publication and shareholders’ approval requirements

21. This chart does not form part of the Listing Rules Chart 4 Summary of notification, publication and shareholders’ approval requirements (1)

22. Shareholders’ approval requirements (1) General voting requirements (R14.46, 14.49, 14.55) • All shareholders can vote unless: • have a material interest in the transaction (Existing requirements) • are associates of a shareholder with a material interest (Codification of existing practices) • Voting by way of poll if a shareholder needs to abstain from voting (R13.39)

23. Shareholders’ approval requirements (2) Definition of “material interest” (R2.15, 2.16) • Applicable throughout the Listing Rules • No financial or monetary benchmark • Determined on a case-by-case basis • Key factors (non-exhaustive) to consider: • The shareholder is a party to the transaction • Receives economic or other benefits not available to other shareholders Disclosure of control over the voting rights of shareholders that are required to abstain from voting (R2.17)

24. Written shareholders’ approval • Acceptable for major transactions* (R14.44) if: • no shareholder is required to abstain from voting; and • written approval is obtained from a shareholder or a closely allied group of shareholders holding more than 50% interest entitled to vote. • Definition of “closely allied group of shareholders” (R14.45) • Not acceptable for: • VSDs and VSAs (R14.49) • Reverse takeovers (R14.55) * In any event, a written shareholders’ approval will not be acceptable if the reporting accountants give a qualified opinion in the accountants’ report on the acquisition of business or companies (R14.86).

25. Other announcement requirements • Announcements required (R14.36) on: • termination of transactions • material variation of terms • material delay in the completion of the agreement

26. Contents of announcements • Confirmation of independence of the counterparty and its ultimate beneficial owner from the issuer and connected persons (R14.58(3)) • Book value and valuation (if any) of the target asset (R14.58(6)) • Name of the shareholders giving written shareholders’ approval approving major transactions, number of securities held by each such shareholder and the relationship between the shareholders (R14.60(5)) • Profit forecast (R14.62) : • Principal assumptions • Letter from auditors or reporting accountants • Report from financial advisers

27. Contents of circulars (1) • Competing interests of each director and his associates (R14.64(8)) • Statement of working capital sufficiency (R14.66(4)) • For both major acquisitions and disposals, VSAs, VSDs and reverse takeovers • Management discussion and analysis: • on the target (major acquisitions) (R14.66(5)) • on the remaining group (VSDs) (R14.68(3)) • on the enlarged group (VSAs) (R14.69(7))

28. Contents of circulars (2) • Prepare a business valuation report or traffic study report where the subject matter of a major transaction, VSA, VSD or reverse takeover is an interest in an infrastructure project or an infrastructure or project company (R14.71) • All fundamental underlying assumptions • Sensitivity analysis • If the business valuation is based on a profits forecast, • report by auditors or reporting accountants • report by financial advisers • For reverse takeovers, listed issuers must comply with the prospectus disclosure requirements.

29. Application of new Rules

30. Corporate Governance - Connected Transactions

31. General New Main Board Chapter 14A on connected transactions • New section on “Options” • New section on “Financial assistance” • New definitions e.g. “controller”, “transactions”, “listed issuer” A “connected transaction” can also be a notifiable transaction – Main Board Chapter 14/ GEM Chapter 19 applies

32. Major Rule amendments • Definition of “connected persons” • Definition of “associates” • Definition of “connected transactions” • Classification of connected transactions • De minimis thresholds • Continuing connected transactions

33. Definition of “connected persons” • See Chart 5: Category 1 of “connected persons” • See Charts 6 to 8: Categories 2A & B of “connected persons” – non wholly owned subsidiaries • See Chart 9: Deemed associates • See Chart 10: “Associates” of a connected person

34. This chart does not form part of the Listing Rules Chart 5 Definition of “connected person” (1) Category 1 “Connected persons” include: Rule 14A.11(1) Directors, chief executive and substantial shareholders* of the listed issuers and any of its subsidiaries** Rule 14A.11(2) Directors within the preceding 12 months Rule 14A.11(3) Promoter and supervisor of a PRC issuer Rule 14A.11(4) Associates Rule 1.01 * For GEM issuers, a “connected person” also includes management shareholders. ** Under pre-existing GEM Rules, directors, chief executive or substantial shareholders of the issuer’s subsidiaries are not treated as connected persons. The GEM Rules have now been amended along the same lines as the Main Board Rules.

35. This chart does not form part of the Listing Rules Chart 6 Definition of “connected person” (2) • Category 2A: Non wholly owned subsidiaries • Any non wholly owned subsidiary of the listed issuer in which the connected • person(s) (at the listed issuer’s level) hold(s) 10% or more interest (R14A.11(5)) • Any subsidiary of such non wholly owned subsidiary (R14A.11(6)) Director B of Listed Co. Listed Co. >50% or have “control” under HKFRS or IFRS 10% or more interest Company A and its subsidiaries are connected persons of Listed Co. because Director B is a connected person at the listed issuer level and he holds 10% or more interest in Company A. Company A (a non wholly owned subsidiary of Listed Co.) and its subsidiaries (wholly owned or non wholly owned)

36. Chart 7 This chart does not form part of the Listing Rules Definition of “connected person” (3) Non wholly owned subsidiary - not a connected person under R14A.11(5) Listed Co. Director C is a connected person of Listed Co. at the subsidiary level. There is no connected person at the issuer level holding 10% or more interest in Company D. In addition, Company D is not an associate of Director C under R1.01. Company D is therefore not a connected person of Listed Co under Chapter 14A, but any transactions between Director C and Listed Co. will be treated as connected transactions. Director C of Company D >50% or have “control” under HKFRS or IFRS Company D (a non wholly owned subsidiary of Listed Co.) 10% or more but less than 30% and does not control board composition

37. Chart 8 This chart does not form part of the Listing Rules Definition of “connected person” (4) Category 2B: Non wholly owned subsidiary as a connected person under R1.01 Listed Co. Director F of Company E Director F is a connected person of Listed Co. at the subsidiary level. Although there is no connected person at the issuer level holding 10% or more interest in Company E, Company E is a connected person of Listed Co under Chapter 14A as it is an associate of Director F under R1.01. >50% or have “control” under HKFRS or IFRS 30% or more interest Company E (a non wholly owned subsidiary of Listed Co.)

38. Chart 9 This chart does not form part of the Listing Rules Definition of “connected person” (5) Category 3 “Deemed associates” Where the connected person is an individual Where the substantial shareholder is a company Close family (R14A.11(4)(b)) Persons cohabiting as a spouse, parents, brothers, sisters and children Other close family (R14A.11(4)(c)) whose association with the connected person is such that, in the opinion of the Exchange, the proposed transaction should be subject to the requirement of Chapter 14A Other parties (R14A.11(4)(a)) Any person or entity with whom the connected person has entered, or proposes to enter, into any agreement, arrangement, understanding or undertaking, whether formal or informal and whether express or implied with respect to the transaction which is such that, in the opinion of the Exchange, that person or entity should be considered a connected person

39. This chart does not form part of the Listing Rules Chart 10 M = is married to “Associates” of a connected person (R14A.11(4)(c)) Close family M Great-grandfather Great-grandmother “Deemed associates” where their association with the connected person is such that, in the Exchange’s opinion, the transaction should be subject to the connected transaction provisions Great-grandparents M Grand-father Grandparents Great-aunt Great-uncle Grand-mother M M M Parents Uncle Aunt Mother father Mother-in-law Father-in-law M M Cousin Cousin Connected person Spouse Sister-in-law Brother-in-law Brother (and step-brother) Sister (and step-sister) Brother-in-law/ Sister-in-law M M Children Nephew Son (and Step-son) Daughter-in-law Niece Son-in-law Daughter (and Step-daughter) M Grand-children Grandson Granddaughter Grandson- in-law Great-grandchildren Great-grandson Great-granddaughter

40. Definition of “associate” (1) – See also Chart 11

41. This chart does not form part of the Listing Rules Chart 11 “Associates” of an individual who is a connected person Settlor and Protector Company D (1.01(a)(v)) Individual Trustee (1.01(a)(iii)) Note 1 Family interest (1.01(a)(i) and (ii)) Other beneficiaries > 50% or have control under HKFRS or IFRS Company F (1.01(a)(iv)) Acting in its capacity as such trustee, holds 30% or more or controls the board composition 30% or more or controls board composition Company B (1.01(a)(v)) > 50% or have control under HKFRS or IFRS > 50% or have control under HKFRS or IFRS Company G and its subsidiaries (1.01(a)(iv)) Company E and its subsidiaries (1.01(a)(iii)) Company A and its subsidiaries (1.01(a)(v)) Company C and its subsidiaries (1.01(a)(v)) “Individual” means directors, chief executive, substantial shareholders or (in the case of a GEM issuer) management shareholders of a listed issuer and its subsidiaries Company I (1.01(a)(v)) Together hold 30% or more interest or control board composition Associates under the pre-existing Rules > 50% or have control under HKFRS or IFRS Extension of “Associates” under the new Rules Note1: Individual or any of the Family interest is a beneficiary of the Trust or, in the case of a discretionary trust, is a discretionary object. For this purpose, interest of the Individual and his Family interest include all beneficial interest directly or indirectly held (e.g. a company beneficially controlled by the Individual, which is the beneficiary of a trust) Company J and its subsidiaries (1.01(a)(v)) Company H and its subsidiaries (1.01(a)(v))

42. Definition of “associate” (2) – See also Chart 12

43. This chart does not form part of the Listing Rules Chart 12 “Associates” of a corporation which is a connected person > 50% or have control under HKFRS or IFRS Company C (1.01(b)(i)) Settlor and Protector Corporation > 50% or have control under HKFRS or IFRS Trustee (1.01(b)(ii)) Note 1 Other beneficiaries Company F (1.01(b)(iii)) Acting in its capacity as such trustee, holds 30% or more or controls the board composition > 50% or have control under HKFRS or IFRS Company B and its subsidiaries (1.01(b)(i)) > 50% or have control under HKFRS or IFRS Company A and its subsidiaries (1.01(b)(i)) Company G and its Subsidiaries (1.01(b)(iii)) Company E and its Subsidiaries (1.01(b)(ii)) Together hold 30% or more interest or control board composition Company D (1.01(b)(i)) “Corporation” means substantial shareholders or (in the case of a GEM issuer) management shareholders of a listed issuer and its subsidiaries Together hold 30% or more interest or control board composition Company I (1.01(b)(iv)) Associates under the pre-existing Rules Extension of “Associates” under the new Rules > 50% or have control under HKFRS or IFRS Note 1: The Corporation is a beneficiary of the Trust or, in the case of a discretionary trust, is a discretionary object. For this purpose, interest of the Corporation include its subsidiaries (e.g. a subsidiary of the Corporation, which is the beneficiary of a trust) Company H and its subsidiaries (1.01(b)(iv)) Company J and its subsidiaries (1.01(b)(iv))

44. Connected transactions • See Chart 13: Definition of “connected transaction” • See Chart 14: Classification of connected transactions • See Chart 15: De minimis thresholds • See Chart 16: Classification of connected transactions not involving financial assistance

45. Chart 13 This chart does not form part of the Listing Rules Definition of “connected transaction” under R14A.13 A transaction under R14A.10(13) which is not a financial assistance Is the counter-party a connected person? Yes No R14A.13(1)(a) R14A.13(5) R14A.13(6) • Fall under any of the following categories? • Any transaction between a listed issuer and a person • who is not a connected person and the transaction involves: • the listed issuer acquiring or disposing of an interest in a company where • a substantial shareholder of that company is, or is proposed to be, a • controller or is (or will become) an associate of the controller • (R14A.13(1)(b)(i)); • the listed issuer acquiring an interest in a company (or an option to • acquire such interest) of which a controller (or its associate) is, • or will become, a shareholder where the interest being acquired is: • (A) of a fixed income nature; or • (B) on less favourable terms than those to controller; or • (C) of a different class from those held by the controller (R14A.13(1)(b)(ii)); • the controller subscribing on more favourable terms shares in a company • in which the listed issuer is a shareholder (R14A.13(1)(b)(iii)); • the controller subscribing shares in a company in which the listed issuer • is a shareholder but which are of a different class of shares • (R14A.13(1)(b)(iv)). R14A.13(1)(b) Yes No Falls under the definition of “connected transaction” Does not fall under the definition of “connected transaction”

46. Exemption for R14A.13(1)(b) Before the acquisition of 60% interest in Company A Director of Company A Independent third party 40% 60% Company A After the acquisition of 60% interest in Company A Listed Co. Director of Company A 40% 60% Company A

47. Chart 14 This chart does not form part of the Listing Rules Classification of connected transactions (R14A.16) Connected transaction provisions apply to: One-off connected transactions Continuing connected transactions • Transactions exempt from announcement, reporting and shareholders’ approval requirements (Fully exempt transactions) • Transactions exempt from shareholders’ approval requirements • Transactions subject to shareholders’ approval requirements • Establish an independent board committee (IBC) with INEDs only • Appoint an IFA to advise IBC and shareholders on the terms of the transaction

48. This chart does not form part of the Listing Rules Chart 15 De minimis thresholds * All size tests (except for profits test) apply for classification of the transaction to the extent applicable. ** Determined on an annual basis for continuing connected transactions. *** Annual consideration for continuing connected transactions.

49. This chart does not form part of the Listing Rules Chart 16 Classification of connected transactions not involving financial assistance A connected transaction that does not involve financial assistance Fully exempt transaction under R14A.31(1), (3) to (8)? Yes No On normal commercial terms? Yes No Below de minimis threshold 1? R14A.31(2) Yes No R14A.32 Below de minimis threshold 2? Yes No Fully exempt Subject to disclosure & reporting requirements Subject to disclosure, reporting & shareholders’ approval requirements

50. Fully exempt connected transactions (1) • Intra-group transactions (R14A.31(1)) • – unless the non wholly owned subsidiary is a connected person • Pro-rata issue of securities (R14A.31(3)(a)) • Issue of securities under share option schemes (R14A.31(3)(b)) • Underwriting or sub-underwriting rights issue or open offers (R14A.31(3)(c)) • Top-up placing (R14A.31(3)(d)) • – up to the number of securities placed by the connected person • Certain Stock Exchange dealings (R14A.31(4)) • Purchase of own securities (R14A.31(5))