Hong Kong exchange explores rule change to curb back-door listings, formation of shell companies

PUBLISHED : Saturday, 30 June, 2018, 8:01am
UPDATED : Saturday, 30 June, 2018, 8:01am

Hong Kong Exchanges and Clearing on Friday proposed a number of new rules to crack down on back-door listings and related “shell companies”, including a ban that prohibits listed companies from selling major assets or shareholdings within three years after a change of ownership.

The proposal marked the latest effort of the HKEX, which operates Asia third largest stock market, to clean up problematic corporate behaviour and to enhance market quality and investor protection. The exchange in April carried out a large scale listing reform in an effort to overtake Nasdaq within five years as the favourite listing destination for tech companies.

The bourse issued a two-month consultation paper on Friday evening after it noted an increase in market activities related to the trading of, and the creation of “shell companies”.

A back-door listing is when a company sells its major assets or shareholding, enabling the new buyer to effectively secure listing status without passing the normal application process. The new buyers usually inject their own businesses into the existing entity.

There is strong demand for back-door listings, especially among buyers who would not otherwise qualify for a new listing. Buyers typically pay a premium for the listed companies.

“While shell activities are limited to a small segment of our market, they undermine investors’ confidence and overall market quality,” said David Graham, HKEX’s head of listing.

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As part of its crackdown, the HKEX proposed banning listed companies from major disposals of business or assets within 36 months of a change of control.

The bourse will also tighten its review on new buyers to make sure they are qualified, in a bid to prohibit low-quality companies from gaining access through the back door channel instead of an initial public offering.

“Our proposals are targeted at shell activities and seek to address specific identified issues. They are not intended to restrict listed issuers from legitimate business expansion or diversification that are part of the issuers’ business strategies,” Graham said.

“We are mindful of the impact of the proposed changes to the continuing listing criteria on a limited number of issuers. Under the proposals, there will be a transitional period of 12 months for those issuers to take corporate actions to comply with the rules as amended.”

The Securities and Futures Commission issued a statement supporting the HKEX proposal, saying it was in line with reforms in recent years, including rules designed to curb sharp share price movements of GEM stocks on their trading debuts and highly dilutive capital-raisings that are prejudicial to minority shareholders.

“We will continue to focus on behaviour in the listed market which is harmful to the investing public. We will not hesitate to step in at an early stage under our ‘front-loaded’ approach where we see misconduct or other serious issues which justify intervention under the Securities and Futures Ordinance,” said Ashley Alder, chief executive of the SFC.