Hong Kong bourse’s decisions on back door listings offer better protection for investors
It is a great pleasure to see the Hong Kong stock exchange crack down on so-called back door listings — a move that has given the bourse a reputation as a “farm for shell companies.”
It is a great pleasure to see the Hong Kong stock exchange crack down on so-called back door listings — a move that has given the bourse a reputation as a “farm for shell companies”.
Backdoor listings, irregular ways for a company to take on another firm’s publically-traded status, have been a characteristic of the Hong Kong stock market.
The exchange issued seven listing decisions last week. Six are said to relate to planned back-door listings that were rejected, though the companies were not named. The move highlighted the bourse’s intentions to ban such activities.
It followed moves in December when the exchange issued new rules for listing under which cash companies — whose assets consist wholly or substantially of cash — will not be allowed to list. It also meant if any listed company suspends trading to issue a large number of shares to a fresh investor in return for cash that becomes greater than the original business, they will not be allowed to resume trading.
Even if the company uses the cash to buy new businesses, the exchange will consider this as a new listing application.
Three cases last week involved existing enterprises that wanted to sell their core and profitable business, a common way to prepare a shell company for others to takeover and enter into a back door listing on the exchange.
The exchange said that in those cases the companies wanted to sell off their major business lines and would result in them becoming too small to meet rules for public trading.
In three other cases the exchange tackled reserve takeovers; when a company buys new business lines with no relation to its own core activities. Once done, the original business becomes marginal and the new lines dominant. This is another way of listing through the back door and has become popular over the past two years.
Creating a “shell” for backdoor listing can be worth HK$200 million to over HK$500 million and be a short cut for companies otherwise disqualified from listing to become a publically-traded firm.
There is a question of honest dealing here. It is not fair to investors as the business nature of the companies they put money in to would be changed substantially after any takeover. Transactions would also increase volatility when shares are traded.
Additionally some companies would just plainly not meet criteria for listing through the usual methods.
Backdoor listing will be part of a review by the stock exchange and the Securities and Futures Commission this year.
Prior to that, these latest moves by the exchange are a welcome precurser to protect the interests of small shareholders.