The Hong Kong Stock Exchanges and Clearing Limited (the “Exchange”) has published Guidance Letter HKEx-GL84-15 in December 2015 which provides guidance on the Exchange’s approach to applying the cash company Rules in cases concerning listed companies proposing large scale fundraisings that involved investors injecting substantial amounts of cash into the companies. Such Guidance Letter was issued following an increase number of these cases.
Purpose and reasoning
Pursuant to Rule 14.82 of the Rules Governing the Listing of Securities on the Exchange (“Listing Rules”), a cash company is a company whose assets consist wholly or substantially of cash or short-dated securities. “Short dated securities” means securities such as bonds, bills or notes which have less than 1 year to maturity. Once a company is found to be a cash company by the Exchange for any reason, it will not be regarded as suitable for listing and trading in its securities will be suspended. The company must apply to the Exchange to lift the suspension as if it were an application for listing from a new applicant (Rule 14.84). Consequently, the company would be required to comply with all new listing requirements and issue a full listing document.
However, there is no prescribed quantitative threshold in the cash company Rules for assessing whether a company's assets consist substantially of cash. Factors to be taken into consideration for assessment are the background facts and circumstances of the company's business, operation and financial position, and not merely an analysis of a company's cash to assets ratio.
The purpose of these Rules is to enable the Exchange to maintain market quality and avoid speculative trading in the securities of cash companies.
Application of cash company Rules
The cash company Rules apply to cases with some or all of the following features:
- The size of the fundraising would bear little or no correlation with the needs of the company's existing principal business and would be very significant to the company.
- Funds raised would be used in largely greenfield operations of new businesses with little or no relation to the company's existing principal business. In certain cases, these new businesses were the same as or similar to the businesses of the investor(s). There were also cases where the company claimed to have started the new businesses shortly before the proposed fundraisings (e.g. obtained a money lending license or acquired a small size money lending company).
- Employing the cash obtained from the fundraising, the company would proceed to operate new businesses which are expected to be substantially larger than the original business.
- The investor(s) would obtain control (or de facto control) of the company and would intend to manage the new businesses. In most cases, a significant proportion of the directors of the company would resign and new directors would be nominated by the investor(s).
The Exchange considers that the proposed fundraisings in these cases would result in the companies' assets consisting substantially of cash upon completion. The facts of these cases also suggested that the investors were in effect listing, through the listed company, the new businesses which would not have otherwise met the new listing requirements as the lack of a track record would render these businesses unsuitable for listing.
Two examples has been given in Guidance Letter HKEx-GL84-15 where the Exchange considers that should the listed company (Companies A or B, as the case may be) proceed to complete its proposed subscription and engage in new business (i.e. distributing and marketing mobile games and money lending, respectively), it would become a cash company engaging in new business that has no track record, no correlation and completely disproportionate to the listed company’s existing business, and its business plans would be evaluated against the new listing requirement under Rule 14.84.
The Exchange believes that the current approach adopted in applying the cash company Rules would not prohibit equity fundraisings by companies for legitimate business expansions. The expression of “wholly or substantially” in Rule 14.82 is referring to the main or as of the greater part. Generally, a company with less than half (50%) of its assets being cash as a result of a fundraising would not be regarded to have assets consisting wholly or substantially of cash under the rule. Nonetheless, if the Exchange considers that any fundraising, acquisition or other corporate action of the company in the future together with the current fundraising are a means to list new businesses that are not suitable for listing or otherwise circumvent the new listing requirements, the Exchange would impose additional requirements or conditions on such future arrangement(s).
Consultation with the Exchange
Pursuant to Rule 13.52(2)(c), announcements relating to cash companies are required to be pre-vetted by the Exchange. Listed companies who intend to undertake large scale fundraisings are encouraged to contact the Exchange at the earliest possible opportunity to seek guidance on the application of the cash company Rules.