HKIPO

Listing on the Hong Kong Stock Exchange for mineral companies
FINANCIAL INSTITUTIONS ENERGY INFRASTRUCTURE AND COMMODITIES TRANSPORT TECHNOLOGY
A NORTON ROSE GROUP GUIDE NOVEMBER 2010
Norton Rose Group 2010 Edition No. NR8993 11/10 The whole or extracts thereof may not be copied or reproduced without the publishers prior written permission. No individual who is a member, partner, shareholder, employee or consultant of, in or to any constituent part of Norton Rose Group (whether or not such individual is described as a partner) accepts or assumes responsibility, or has any liability, to any person in respect of this publication. Any reference to a partner means a member of Norton Rose LLP or Norton Rose Australia or a consultant or employee of Norton Rose LLP or one of its affiliates with equivalent standing and qualifications.
Contents
04 08 11 19 22 24 28 31 33 37 47 Introduction Listing on the Hong Kong Stock Exchange (HKSE) Preparation The IPO team The regulators Prospectus Liability Marketing After Listing Appendix A Mineral company requirements Appendix B Norton Rose key strengths
Introduction
This guide has been prepared for mining clients of Norton Rose Group to provide a general introduction to the regulatory framework for an initial public offering (IPO) on the Hong Kong Stock Exchange (HKSE). Our overview is not exhaustive on all compliance matters in Hong Kong and does not constitute professional advice. This publication is not a substitute for and should not be relied on in the absence of specific professional advice in relation to particular circumstances. It has been recently updated to reflect the new Chapter 18 requirements of the HKSE Listing Rules for Mineral Companies effective 3 June 2010. A summary of these requirements is contained in Appendix A.
Norton Rose Group

Norton Rose Group is a leading international legal practice. We offer a full business law service across the globe from our offices across Europe, the Middle East and Asia Pacific. We can list your company in London, Hong Kong, Australia and a range of other exchanges. Knowing your business and understanding the drivers in your industry is fundamental to us. Our lawyers share industry knowledge and sector expertise across borders, enabling us to support our clients anywhere in the world. We are strong in: financial institutions energy infrastructure and commodities transport and technology.
04 Norton Rose Group November 2010
Introduction
We have over 1800 lawyers operating from 30 offices in Abu Dhabi, Amsterdam, Athens, Bahrain, Bangkok, Beijing, Brisbane, Brussels, Canberra, Dubai, Frankfurt, Hong Kong, London, Melbourne, Milan, Moscow, Munich, Paris, Perth, Piraeus, Prague, Rome, Shanghai, Singapore, Sydney, Tokyo and Warsaw and from associate offices in Ho Chi Minh City, Jakarta and Riyadh. Norton Rose Group comprises Norton Rose LLP, Norton Rose Australia and their respective affiliates. A more detailed summary of our core strengths is set out in Appendix B.
Greater China
Hong Kong The Hong Kong office consists of 16 partners and over 50 associates. We have a long history in Hong Kong and strong established relationships with a range of financial institutions, corporates, accounting firms, providers of independent reports and other key organisations. Most importantly, we are in regular contact with the Securities and Futures Commission (SFC) and HKSE, the primary corporate regulators in Hong Kong. Our main areas of focus are corporate finance (including equity capital markets, mergers and acquisitions, resources, private equity, corporate advisory and regulatory advice), banking, project finance, asset finance and dispute resolution. All of our lawyers in Hong Kong have Asian experience and many are Hong Kong, English or Australian qualified. The Hong Kong team has the resources to lead and manage large, complex transactions and projects in Hong Kong, mainland China and internationally.
Norton Rose Group November 2010 05
Shanghai and Beijing Our offices in Beijing and Shanghai comprise a team of eight partners and more than 20 lawyers, who have extensive experience advising on a wide range of legal issues and transactions in China. Our Chinese practice has advised clients on the setting up of joint ventures, representative offices and branches, acquisitions and disposals of stakes in local companies, corporate restructurings and regulatory issues. The team also represents clients based in China on their activities in Asia, the Middle East, Europe and Africa. Our lawyers in Shanghai and Beijing are fluent in Mandarin and English. A number of members of the China practice are also fluent in French and other languages.
US legal advice
We have a team of US-qualified lawyers offering US corporate finance advice which is often an essential component of any truly competitive international corporate finance service. Our US lawyers are based in offices throughout our network including London and Hong Kong. The US corporate finance group has advised on transactions involving the worlds leading investment banks. The group has a truly international client base with instructions from Europe, Asia, Africa, the Middle East, North America and Latin America.
Introduction
London
Our London office has more than 400 lawyers. We advise on matters across the spectrum of financial and corporate activities. Our clients are primarily international corporate, financial institutions and government organisations. We have a strong background in advising LSE and AIM companies.
Australia
We are the largest international legal practice in Australia, offering a full range of legal services, with 600 lawyers in five offices in Sydney, Melbourne, Perth, Brisbane and Canberra. Our Australian offices form an integral part of our Asia Pacific practice and we regularly advise some of Australias largest companies on ASX listings.
Listing on the Hong Kong Stock Exchange (HKSE)

In moving from private to public ownership, you will already understand the following benefits the transition can bring: your company can raise new capital to develop its business the existing shareholders can realise part of their investment in the company by selling some of their shares your company can offer its shares as consideration (rather than cash) when making investments, such as acquiring another business or shares in another company by way of regulated acquisition share option schemes can be used to recruit and retain key personnel your corporate profile will be higher in the market and your corporate governance perceived to be stronger and deeper access to capital for growth. There are many other potential benefits, some of which may be specific to your circumstances.
Listing on the Hong Kong Stock Exchange (HKSE)
The HKSE has its own distinct advantages: exposed to growth in the PRC and Asia potential for better earnings multiples than other comparable exchanges alignment with International Accounting Standards and strong corporate finance community. This guide is designed to give a brief summary of a typical IPO process by outlining the process in Hong Kong from the planning stage until the successful listing of your company. The steps typically undertaken in the process are shown in the diagram on the following page. Although these steps are shown in sequence, it is likely that they will overlap, so that at any given time more than one step could be proceeding in parallel.
IPO process
Start due diligence Undertake company reorganisation Start preparing financial statements, property valuation and profit forecast Competent persons report (if any) At least 25 business days before listing hearing, file with HKSE: Listing application form Draft prospectus Waivers (if any) Director confirmations Draft legal opinions
Appoint IPO team
Start prospectus drafting Parallel verification
Publish web proof information pack and commence investor roadshow red herring prospectus
Listing Committee hearing
At least 4 business days before listing hearing, file with HKSE: Final proof prospectus Working capital confirmation Legal confirmation
At least 15 business days before listing hearing, file with HKSE: Profit forecast memorandum Cash flow forecast memorandum
Sign public offer underwriting agreement
Register and publish prospectus (with price-range)
Public offer opens (normally four business days)
Public offer closes
Shares commence trading on HKSE
Issue shares
Announce results of pricing and allocations
Institutional placing and final pricing
Preparation
Preparation
Group reorganisation
During the early stages of the IPO, organising the appropriate group structure is essential. This will often involve the reorganisation or restructuring of the members of the group. A share option scheme for employees may also be required. Some of the steps may include: Setting up a new holding company (in Hong Kong it is common to top-hat companies from acceptable jurisdictions see paragraph 3.4.1 below) or converting the company into a type acceptable for listing Changing or replacing the constitutional documents Spinning off or separating companies which should not form part of the listing group Making sure that intellectual property rights, important assets and contractual rights are held or could be used by the listing group are transferred, revoked or assigned outside the Listing Group and reducing reliance on connected persons (eg, financing and commercial arrangements).
Strategic investor/pre-IPO placings

One of the often underestimated parts of any IPO process is obtaining strategic or cornerstone investors to subscribe for shares or other securities either before or as part of the IPO. Apart from providing interim capital, reputable strategic investors lend credibility to an offer. Although pre-IPO placings are generally permitted, if they involve pricing discounts or special rights being given to the placees, we will need to consider with you whether the arrangements meet the requirements of the HKSE and any possible restrictions on sale which may take place.
Corporate governance
Listed companies adhere to high standards of corporate governance. It is recommended that companies comply with the code provisions set out in the Code of Corporate Governance Practices (the Code) of the HKSE. There are also recommended best practices in the Code; however these are not mandatory and are published as guidance only. Every listed company is required to report on its compliance with the Code provisions in its interim and annual reports after listing. Any deviation from the Code must be disclosed, together with considered reasons for the deviation, in the companys interim and annual reports. Getting these practices established early and with a strong alliance to the companys own core values is valuable.
Qualification for listing

Leaving aside the commercial considerations of listing, a company must at the outset consider whether it is able to satisfy the listing requirements of the HKSE. Fundamentally, the HKSE must be satisfied that the company and its business are suitable for listing.
Acceptable jurisdictions
The majority of companies listed on the HKSE are incorporated outside Hong Kong, with Bermuda, the Cayman Islands and the PRC being the three main jurisdictions where Hong Kong listed companies are incorporated. The HKSEs requirement on acceptable jurisdictions is that a company must be subject to appropriate standards of shareholder protection, which are at least equivalent to those required under Hong Kong law. Many companies agree to amend their constitutional documents to adhere to a form subscribed by the HKSE to ensure that the required level of shareholder protection is achieved. Other jurisdictions which have been accepted (to date) are Australia, the British Virgin Islands, Canada (British Columbia and Ontario), Cyprus, Germany, Jersey, Isle of Man, Luxembourg, Singapore, Japan, Brazil and the UK.
Preparation
Financial requirements
If your company is not a Mineral Company (the conditions for listing a Mineral Company are set out in Appendix A), your company must fulfill one of the following three tests: 1) Profit Test; 2) Market Cap/Revenue Test; or 3) Market Cap/Revenue/Cashflow Test.
1) Profit test 2) Market Cap/ Revenue test 3) Market Cap/Revenue/ Cashflow test
Profit
At least HK$50 million in the last three years (with HK$20 million in the most recent year and an aggregate of HK$30 million in the two preceding years) At least HK$200 million at the time of listing
Market Cap Revenue
At least HK$4 billion at the time of listing At least HK$500 million for the most recent financial year
At least HK$2 billion at the time of listing At least HK$500 million for the most recent financial year Positive cashflow from operating activities of at least HK$100 million in aggregate for the three preceding financial years
Cashflow
A Mineral Company is a company whose major activity (25 per cent or more of the total assets, revenue or operating expenses of the company and its subsidiaries) is the exploration for and/or extraction of Natural Resources. Natural Resources include minerals and petroleum (which includes hydrocarbons in any form).
Operating history, management and ownership

Assuming you are not a Mineral Company, your company must have a trading record of at least three financial years and there must be: management continuity for at least the three preceding financial years and ownership continuity and control for at least the most recent financial year. The HKSE may accept a shorter trading record and management continuity period in some situations for example, if your company qualifies for listing using the Market Cap/Revenue Test mentioned earlier. Mineral Companies must initially satisfy the requirements above OR the five year management experience rule. That is, directors and senior managers, taken together, must have five years industry experience relevant to the exploration and/or extraction activity the Mineral Company is pursuing. Further requirements are set out below. There are also exemptions for project companies formed to build major infrastructure projects.
Public investors
The Listing Rules require at least 25 per cent of a listed company to be held by the public. This can be reduced to 15 per cent if its market capitalisation is over HK$10 billion at the time of listing.
1 Not required for a secondary listing.
Preparation
Spread requirements
There must be at least 300 public shareholders (which will generally apply to Mineral Companies) or 1000 public shareholders if the company is qualifying under the Market Cap/Revenue Test. An issuer must satisfy either a profit test or a capitalisation/revenue/ cash flow test. However, if a Mineral Company is unable to satisfy these it may still apply to be listed if it can establish to the HKSEs satisfaction that its directors and senior managers, taken together, have sufficient experience relevant to the exploration and/or extraction activity that the Mineral Company is pursuing. Individuals relied on must have a minimum of five years relevant industry experience.
Directors competence and board composition

Directors must satisfy the requirements of the HKSE that a director has the necessary character, experience and integrity and a standard of competence commensurate with his position as a director of a listed company. The board must include at least three independent non-executive directors and at least one of them must have appropriate professional qualifications or accounting or financial management expertise. Your sponsor (being the lead manager) will be in a position to give valuable guidance as to market expectations in relation to independent non-executive directors. The company should consider putting in place a written service contract on customary terms with each of its executive directors and key employees. The contract should specify a minimum term of employment and contain reasonable restraint of trade provisions. It should be noted that all contracts over a term of one year, which are terminable with payment of compensation, are required to be summarized in the prospectus and put on display.
The sponsor will require and our services will include providing training to the directors on their responsibilities and duties under the Listing Rules once the composition of the board is finalised.
Management presence in Hong Kong

Your company needs to have a sufficient management presence in Hong Kong (although this requirement may be waived). Many companies have only one director resident in Hong Kong if the waiver is granted.
Share allocation and claw back

There are restrictions on the allocation of shares in an IPO. Companies are generally not allowed to list by way of a placing unless a Hong Kong public offer is made. A minimum 10 per cent of the shares offered must be allocated to a Hong Kong public offer tranche. This portion may be increased to as much as 50 per cent (which may be clawed back from institutional investors) depending on a formula based upon the amount of over-subscription by the public.
Offer structure
It is typical for an IPO to consist of a public offer of shares in Hong Kong and an international placing. Although the details of the offer structure tend to be decided at a later stage, one of the first things for the company to consider is whether shares will be offered to qualified institutional buyers in the US. Such an offer is made through a Rule 144A placing. A Rule 144A placing is very common for significant IPOs. The additional US law requirements will impact on many of the processes undertaken in the IPO process which is why a Rule 144A placing should be decided early on.
Secondary listing
If your company is already listed on another stock exchange, it can apply for either a dual primary listing or a secondary listing on the HKSE. The HKSE retains considerable discretion in relation to secondary listings and may refuse a secondary listing if it considers it is not in the public interest to list the company or it is not satisfied that the companys
Preparation
primary listing is an exchange where the standards of shareholder protection are at least equivalent to those provided in Hong Kong. There are a small number of companies with a secondary listing on the HKSE; the Australian Stock Exchange, London Stock Exchange (Main market), Singapore Stock Exchange and the Toronto Stock Exchange are accepted primary regulators. Unlike the majority of other listing regimes which rely on the primary listing regulator to regulate the company, the HKSE requires that the company comply, in the first instance, with the majority of the provisions in the HKSE Listing Rules. However, the HKSE will agree to modify the HKSE Listing Rules if it considers that there are equivalent obligations on the primary market. For each modification, a formal waiver must be applied for and granted by the HKSE. Each waiver application for a secondary listing is more unique in nature. We will work closely with your company and your domestic legal advisers to ensure that sufficient waivers are applied for and granted to ensure that your business and your listing is not unnecessarily restricted going forward.
New requirements for mineral companies

Norton Rose Hong Kong was involved in consultations with the HKSE on the recent changes to Chapter 18 of the Listing Rules. The new Chapter 18 of the Listing Rules sets out additional listing conditions, disclosure requirements and continuing obligations for Mineral Companies and has been effective since 3 June 2010. Some of the key requirements for Mineral Companies in Chapter 18 are: a company must be able to demonstrate at a minimum: a) for petroleum companies, at least a meaningful portfolio of contingent resources or b) for mining companies, at least a meaningful portfolio of indicated resources
a company is required to demonstrate that it has rights to participate actively in the exploration for and/or extraction of minerals or petroleum a company is allowed to list notwithstanding that they might be unable to satisfy the profit test, the Market Capitalisation/Revenue Test or the Market Capitalisation/Revenue Test, provided that they can establish that their directors and senior managers have sufficient experience relevant to the exploration and/or extraction activity that the company is pursuing (individuals relied upon must have a minimum of five years relevant industry experience as set out above) a company is required to include a Competent Persons report on reserves and resources which complies with or is reconciled to JORC, NI-43-101 or SAMREC requirements in its listing documents. The HKSE is willing to consider other codes provided that they give a comparable standard of disclosure and sufficient assessment of the underlying assets Mineral Companies that have not commenced production are required to disclose plans to proceed to production with indicative dates and costs. Such plans must be supported by at least a scoping study, substantiated by the opinion of a competent person. A company in production must provide a detailed estimate of its cash operating costs a company is required to demonstrate that it has available working capital for 125 per cent of its requirements for the next twelve months from listing and a company must provide comprehensive risk disclosure guidance in its listing document. A summary of all of the requirements for Mineral Companies is set out in Appendix A.
The IPO team
The IPO team

It is crucial that you have the right team of advisers to support and guide you through the listing process. An IPO in Hong Kong is an expensive and demanding process, so you need to be surrounded by advisers who have the right experience, expertise and authority. Complex issues will be encountered throughout the process. However, the critical thing is that your advisers can exercise the necessary judgment and have the capabilities to deal with these issues laterally, quickly and efficiently. In addition to these skills, expertise in your industry is essential, particularly in relation to Mineral Companies. The IPO team should be selected as early as possible. It is important to ensure that responsibilities are properly allocated and the terms of engagement of each adviser are settled. Typically, the IPO team will include: Sponsor: The role of the sponsor is to drive and lead the IPO process, to provide independent and impartial advice to the company on the structure and timing of the IPO, the merits of proceeding with the float, liaise with the HKSE and provide corporate and financial advice throughout the process. A sponsor, usually an investment bank, is often the first point of call when considering a listing. A lot of time and cost can be saved if the structure of the listing is settled up front, rather than down the track when the process has gained momentum. The sponsor will often also be the global coordinator, lead underwriter and manager of the offering (either alone or with other banks). It has overall responsibility for coordinating the offering of shares in the various jurisdictions and the underwriting process. An IPO must be fully underwritten in Hong Kong.
Once a listing is completed, the company must appoint a compliance adviser, a role prescribed under the Listing Rules for the first financial year of the company after listing. Legal adviser to the company: The companys lawyers advise the company on compliance with the legal requirements in an IPO including the content of the prospectus. Particular issues that they address include the duties and responsibilities of the directors, implementation of any group reorganisation, considering the application of the Listing Rules and applying for any waivers, drafting the Listing Application and the prospectus, drafting the companys new constitution, any new executive service contracts and any share option schemes. They are usually involved in negotiating an agreement with the underwriter that will detail the underwriters role and level of compensation. They will work closely with the sponsor in overcoming any legal obstacles to listing. Legal adviser to the sponsor: The sponsors lawyers will advise the sponsor in its capacity as sponsor and also underwriter. They need to make sure that the sponsor fulfills its legal obligations. They will also prepare the underwriting agreement and lead in the verification exercise for the prospectus. The sponsor is the lead on compliance issues and is required to sign off to the HKSE on a large number of IPO issues. The sponsors lawyers are therefore intimately involved in the process. Reporting accountants: The reporting accountants role is to prepare a report on the historical financial position and performance of the company for inclusion in the prospectus. The reporting accountants also need to opine on any financial forecasts and provide appropriate comfort letters. The reporting accountants will conduct accounting due diligence and advise on accounting issues which arise during the IPO process.
The IPO team
Property valuer: The independent property valuer will value all the companys interests in land and buildings and prepare a valuation report. The contents of the report are prescribed in detail and will form part of the prospectus. The effective date of valuation must not be more than three months before the date the prospectus is issued. Property is classified as property held for development, investment, owner occupation and sale. Leased property will also have to be included. For owned properties, the valuer must be satisfied that the company has good title. Waivers are available to group properties together (without individual addresses and valuations) if there are a large number of properties. Competent person: A Mineral Company must provide a Competent Persons Report with its prospectus. A Competent Person with knowledge of the HKSE Listing Rules is preferable, as the HKSE will rely heavily on this report. Major issues can arise in reconciling non-JORC based codes back to JORC based codes. Other advisers: There are a number of other advisers, including public relations consultants, share registrars, receiving banks to receive applications for shares, translators and printers. One or more directors together with other representatives of management with appropriate seniority and expertise should be nominated to assist the IPO team. The role of these representatives is to facilitate the information flows between the company and the IPO team and to provide instructions about (and make decisions concerning) critical structural issues. These representatives may also become heavily involved in preparing the prospectus (depending upon their workload and capacity). This is a time consuming task which will stretch over a period of three to six months. Accordingly, it is important to ensure that these representatives have the right level of commitment and support to ensure that the listing process receives the appropriate attention and that the operations of the company are not adversely impacted.
The regulators
HKSE
The HKSE operates the stock exchange in Hong Kong where shares of listed companies are traded. Although its holding company is itself a listed company operating for profit, it is also the frontline regulator in administering its listing rules and admitting companies shares to trade on the stock exchange. Once the listing application is made, the HKSE will allocate a listing team to the company who will be the point of contact for all discussions with the HKSE during the listing process. During the listing process, the HKSE will thoroughly vet the listing application rather than simply rely on disclosure in the prospectus. While we can anticipate many of the likely questions from the HKSE, the vetting process is interrogative and can be very time consuming, involving a number of rounds of detailed and formal questions from the HKSE. The IPO team will need to liaise closely with the HKSE and assist you in responding to the queries raised. Any issues for discussion with the HKSE should be identified as early as possible in the listing process to give the best possible chance of meeting the listing timetable.
The regulators
SFC
The SFC is the ultimate regulator of the securities market in Hong Kong. Under an arrangement between the HKSE and SFC, listing applicants need only file their listing applications with the HKSE and the HKSE will send copies of the IPO documentation to the SFC for their review. Any comments on the listing documents from the SFC will usually be sent to the company via the HKSE. The SFC is also the body which grants waivers from requirements under the Companies Ordinance, where necessary. A common SFC waiver is the grouping of properties under the Property Valuation Report as mentioned above. Waivers under the Listing Rules are handled by the HKSE. However, the HKSE may send copies of the waiver application to the SFC for its review and comment.
Prospectus
The prospectus is the principal disclosure document in an IPO and its preparation and completion is key to a listing. It must be prepared in both English and Chinese, although the HKSE and SFC only review the English version during the listing application. Preparation of a prospectus inevitably involves a tension between the desire to present the investment opportunity in the most favourable light (so that the offer is a success) and the risk of criminal and civil liability in the event that there is a misstatement in, or omission from, the prospectus. Given the potential liability associated with an offer of securities under a defective prospectus, the process of preparing a prospectus is driven by the twin objectives of ensuring that: the prospectus satisfies the content requirements of the Companies Ordinance, the Securities and Futures Ordinance and the Listing Rules. If there is a Rule 144A placing, the prospectus will also be prepared with US disclosure standards in mind and so far as is possible, each person potentially liable could establish a defence against liability on the basis that the person had reasonable grounds to believe the statements were true. Any person who is potentially liable in connection with the prospectus should participate in its preparation. Those persons include the company and the directors (and proposed directors) of the company. In addition, some of the liability provisions are wide enough to impose liability on others who authorised the issue of the prospectus such as the sponsor.
Prospectus
General disclosure
The general test for information that must be disclosed in a prospectus is that it must contain all the information that is necessary to enable an investor to make an informed assessment of: the activities of the company the assets and liabilities and financial position of the company at the time of its application and its profits and losses the management and prospects of the company and the rights attaching to the shares. It is worth noting that the general disclosure test does not exclude confidential information. It is often necessary to obtain third party consent to the disclosure of confidential information in order to prevent a breach of confidentiality obligations. Often, a company may choose to include a profit forecast in the prospectus as it permit, a greater deal of forecasting to be made in the analysts research reports. If a forecast is included, the company must ensure that the statements and assumptions are accurate, and the reporting accountants and the sponsor must be satisfied that the directors have made the forecast only after due and careful enquiries.
Specific disclosure
The HKSE Listing Rules and the Companies Ordinance impose an extensive list of specific disclosure items to be set out in a prospectus. To assist in making sure that all the specific disclosures are covered, the HKSE has produced a number of checklists that need to be completed and filed during the application process. If any of the disclosures cannot be complied with, formal waivers should be obtained from either the HKSE or the SFC (depending on the particular waiver sought).
Key contents of a prospectus

Set out below is some key information which is contained in a prospectus: details of the offer, including its size, the price, expected timetable and application procedures the companys capital structure the companys business, operations, products and future plans financial information about the company and the prospects of the group, including a management discussion, financial analysis of the company and a working capital statement stating the company has sufficient working capital for 100 per cent of its groups present requirements (125 per cent for Mineral Companies) for at least 12 months from the date of the prospectus material risks faced by the company, in general and as part of its industry the companys controlling shareholder and any competing interest and/or business dealings with the company the biographical details of directors and senior management and information about directors emoluments, service contracts and holdings in the company intended use of the listing proceeds accountants report Property Valuation Report (if applicable)
Prospectus
Competent Persons Report (for Mineral Companies) disclosure of all waivers granted by the HKSE summaries of the companys constitution and applicable law, material contracts, material litigation, share option scheme, the underwriting agreement and other technical information required under the Companies Ordinance summaries of the principal laws and regulations relevant to the groups business operations and documents which will be available for public inspection.
Liability
Listing rules
Directors must state in the prospectus that they collectively and individually accept full responsibility for the accuracy of information contained in the prospectus and confirm, having made all reasonable enquiries, that there are no other facts the omission of which would make any statement in the prospectus misleading. For the sponsor, one of its obligations under the HKSE Listing Rules is to conduct reasonable due diligence on the company.
Criminal and civil liability

Certain persons involved in an IPO are exposed to potential civil and criminal liabilities if the prospectus is inaccurate or omits material information. They include not only the directors and the company, but also those who have authorised the issue of the prospectus (such as the sponsor). They may have to pay compensation for any loss sustained by investors who subscribe for shares relying on an untrue statement. Also, they may be liable to a fine or imprisonment. In addition to liability arising under statutes, liability may also arise under common law for misrepresentation and under the tort of deceit. Apart from liability under Hong Kong law, if shares are offered to US persons, there is potential liability for misstatements under US securities law and an investor may claim damages or seek to rescind the transaction and obtain a refund of the original purchase price.
Defences
It is a defence to some of these legislative provisions imposing prospectus liability if a person can establish that when he made the relevant statement, he had reasonable grounds to believe the statement made was true.
Liability
There are a number of steps which can and should be taken to maximise the availability of this defence. These include undertaking a verification and due diligence process to ensure that the prospectus neither omits any matter or induces any statement that is misleading or deceptive.
Due diligence
Due diligence is a comprehensive investigation of the companys business, financial position, prospects and the major risks associated with its business. Apart from providing a defence to some of the prospectus liability laws, due diligence also helps the IPO team in drafting a high quality prospectus from both a marketing and disclosure standpoint. For US offerings, it is also needed to enable the legal advisers to issue the necessary legal opinion. Due diligence exercise tends to be extremely thorough in Hong Kong and can usually be divided into: business due diligence financial and accounting due diligence and legal due diligence. In addition to director protection and disclosure issues, the HKSE and the SFC take their respective roles as gatekeeper very seriously and will interrogate the company on many aspects of the prospectus. You need to be very well prepared. The due diligence exercise will be co-ordinated by the sponsor and depending on the type of due diligence, the sponsor, legal advisers, reporting accountants or property valuers will be involved in the discussions with the management of the company.
Before the due diligence meetings, a due diligence questionnaire will usually be sent to the company to allow the company to put together responses to the questions and assemble relevant documents for review by the IPO team.
Verification
Verification is the checking process for all material statements in the prospectus to ensure that they are accurate and not misleading. It can be a tedious and very time consuming process. However, it is done largely for the protection of the directors by: supporting the responsibility statement that the directors have taken all reasonable care to ensure the accuracy of information in the prospectus and assisting in establishing defences to potential prospectus liability. The verification process forces each person involved in the preparation of the prospectus to carefully consider and reconsider each material statement, which helps to ensure that any factual statement that has no independent basis will be either amended or deleted from the prospectus. In the case of a statement of opinion, the verification process is designed to check that there are reasonable grounds for making the statement. However, verification cannot assist in determining whether the prospectus omits material information. We recommend that you implement internally a methodology for verification at the beginning of the drafting process this will minimise time spent and maximise accuracy. We can assist you in designing this process.
Marketing
Marketing
Publicity
Restrictions apply to the advertising or offer of securities to investors in Hong Kong until such time as the prospectus has been formally registered. The IPO team shall put specific publicity guidelines in place to ensure that there is no breach of the rules. In general, no information relating to the offer should be disclosed until after the Listing Committee hearing. Non-adherence to these rules can cause serious consequences for the company. The company and its sponsor will develop a strategy to attract potential investors to subscribe for the offered shares. After the Listing Committee hearing but before the prospectus is registered, the sponsor will organise presentations to institutional investors. These road shows are the principal means of marketing the shares. They also offer underwriters and management the opportunity to promote the company and to continue building a reputation in the investment community. Information released at road shows should be limited to that contained in the final form draft prospectus (known as the red herring) which is distributed at the meetings. The investors who attend the meetings are required to keep that information confidential until the prospectus is formally registered. Once the prospectus is registered, it can be made available more widely to investors. Retail interest in Hong Kong IPOs is traditionally strong. The HKSE is also traditionally very protective of retail investors. If the IPO involves a Rule 144A placing, care should be taken to ensure that no activities can be characterized as a general solicitation or general advertising, or as directed selling efforts in the US. Otherwise, the company risks losing the ability to offer shares in the US through a private placement. The company needs to appoint an experienced investor relations team to manage these issues, particularly in relation to US media management.
Research reports
The publication of information by analysts who are connected with the sponsor or members of the underwriting syndicate is also restricted during the IPO period. The general requirement is that reports of this nature are prepared completely independently of the company and present an outsiders view of it. The sponsors research report guidelines usually require that no research reports are published or distributed anywhere in the world by members of the underwriting syndicate from the date of the Listing Committee hearing until some time after the closing date of the offer. During the period when distribution is permitted, the manner and extent of that distribution is typically closely contained. If the IPO includes a Rule 144A placing, then the blackout period will be extended and the distribution of research reports into the US will be subject to even more restrictions.
After Listing
After Listing
General disclosure obligations
Once it is listed, a company is expected to disclose as soon as is reasonably practicable, any price sensitive information relating to the company or its group. Information which is expected to be price sensitive must be kept strictly confidential and should be announced immediately if it is the subject of a decision. Where confidentiality cannot be guaranteed, it is normal practice to ask the HKSE for a suspension of dealings in the companys shares until an announcement is made.
Lock up
After a company is listed, its controlling shareholder (which is a shareholder with 30 per cent or more interest) must not sell its shares for six months from the date of listing and must not sell its shares for a further six months if, after the sale, its interest will fall below 30 per cent. This is commonly called the lock up period.
Restrictions on directors dealings

Directors of a listed company are prohibited from dealing in the companys securities when they are in possession of price sensitive information relating to the company. They are also subject to a dealing black out period for 60 days before the publication of the companys annual results and for 30 days before the publication of its interim results. During this time, it is presumed they are in possession of price sensitive information.
Pre-emption rights
Once listed, a listed company is required by the HKSE Listing Rules to offer new shares pro-rata to existing shareholders. However, listed companies are permitted to put in place a general mandate, which allows the directors freely to allot shares up to a maximum of 20 per cent of the existing issued share capital. The general mandate must be approved by the shareholders in general meeting and renewed at each subsequent annual general meeting.
Disclosure of interests
The substantial shareholders, directors and chief executive of a listed company are required to disclose their interests and short positions in the companys shares, as well as those of their family and controlled corporations. Family is defined widely and includes an individuals spouse, child or step-child, whether natural or adopted, under the age of 18 years. Subsequent changes in those interests and short positions often must also be disclosed. A substantial shareholder is one holding an interest in 5 per cent or more of the companys shares. The rules are complex and wide in their application and legal advice on the extent of the disclosure obligation should always be obtained.
Notifiable transactions
The HKSE Listing Rules require transactions of a certain size when compared to the size of the listed company, to be treated in a special manner. The largest transactions require notification to the HKSE, an announcement and shareholder circular, shareholder approval and the preparation of an accountants report. Smaller transactions require one or more of these. These requirements do not apply to transactions which are of a revenue nature in the ordinary course of business.
Connected transactions
The HKSE Listing Rules contain certain safeguards against directors and substantial shareholders in a listed company and their associates taking advantage of their positions when entering into transactions with the listed company. For the purposes of the connected transactions restrictions, substantial shareholders are those with 10 per cent or more interest in the company or its subsidiaries and so may include joint venture partners. The definition of associate is wide and complex and legal advice should be obtained prior to proceeding with such a transaction. Transactions of this nature require notification to the HKSE, an announcement and shareholder circular, independent shareholder
After Listing
approval, independent financial advice and an independent valuation unless they are exempt. There is no exemption for transactions in the ordinary course of business unless the transaction can be classified as de minimis.
Code on takeovers and mergers and share repurchases (codes)

The Codes apply to takeovers, mergers and share repurchases affecting public companies in Hong Kong (including those companies with a secondary listing on the HKSE). The Codes provide that any person, or group of persons acting in concert, who acquire more than 30 per cent of the voting rights in a company must make a mandatory offer for the remaining shares in that company. A mandatory offer is also triggered if the persons hold more than 30 per cent and less than 50 per cent and acquire more than 2 per cent of the voting rights in the company. The Codes also regulate any share repurchases made by the company. In general, on-market share repurchases are accepted by the HKSE but any off-market share repurchases require prior approval from the SFC.
Other requirements
A listed company is also required to do the following: respond promptly to HKSE enquiries and notifications comply with the 25 per cent public float requirement comply (or explain non-compliance) with the principles of the Code on Corporate Governance Practices publish an annual report within four months of its financial year end and an interim report within three months of its half-year end and apply to the HKSE for pre-vetting of certain documents prior to issue.
Non-compliance
Non-compliance with any of the disclosure requirements outlined above carries serious consequences, including potential civil and criminal liability of the company and its directors.
Annual listing fee

All listed companies must pay an annual listing fee to the HKSE. The fee is calculated by reference to the nominal value of the listed securities. The minimum fee (for a company with a nominal share capital of HK$200 million) is currently HK$145,000. The maximum fee (for a company with a nominal share capital of over HK$5,000 million) is currently HK$1,188,000. A table of annual listing fees can be found on the HKSE website: www.hkex.com.hk
Appendix A Mineral company requirements

Checklist of compliance with Chapter 18 of the Listing Rules of the HKSE
No. Listing rule ref Description of requirement
Definition of mineral company 1 18.01 An applicant must meet the definition of Mineral Company. A Mineral Company means, among other things, a new applicant whose Major Activity is the exploration for and/or extraction of Natural Resources. For the purposes of the above definition, the exploration for and/or extraction of Natural Resources will be a Major Activity if it represents 25 per cent or more of the total assets, revenue or operating expenses of the issuer and its subsidiaries. The calculation should be based on the issuers latest audited consolidated financial statements. 2 18.02 In addition to the requirements in Chapter 8, a Mineral Company which has applied for listing must also satisfy the conditions for listing set out in Chapter 18.
No.
Listing rule ref
Description of requirement
Sufficient rights to explore or extract minerals, and evidence of portfolio of indicated resources 3 18.03(1) A Mineral Company must establish to the Exchanges satisfaction that it has the right to participate actively in the exploration for and/or extraction of Natural Resources, either: a) through control over a majority (by value) of the assets in which it has invested together with adequate rights over the exploration for and/or extraction of Natural Resources or b) through adequate rights (arising under arrangements acceptable to the Exchange), which give it sufficient influence in decisions over the exploration for and/or extraction of the Natural Resources 4 18.03(2) A Mineral Company focused on hard rock minerals (as opposed to petroleum) must establish to the Exchanges satisfaction that it has at least a portfolio of Indicated Resources. The portfolio must be meaningful and of sufficient substance to justify listing. That portfolio of Indicated Resources must be identifiable under a Reporting Standard and substantiated in a Competent Persons Report (these requirements are described further below). Reporting standard 5 18.03(2) and 18.29 A Mineral Company must disclose information on Mineral Resources, Ore Reserves and/or exploration results under a Reporting Standard. However, reporting against another standard (eg, Russian or Chinese standard), may be acceptable provided reconciliation is made to a Reporting Standard and such reconciliation is provided.
No. 6
Listing rule ref 18.30
Description of requirement A Mineral Company must ensure that: any estimates of Ore Reserves disclosed are supported, at a minimum, by a Pre-feasibility Study estimates of Ore Reserves and Mineral Resources are disclosed separately Indicated Resources and Measured Resources are only included in economic analyses if the basis on which they are considered to be economically extractable is explained and they are appropriately discounted for the probabilities of their conversion to Mineral Reserves. All assumptions must be clearly disclosed. Note that valuations for Inferred Resources are not permitted under the Listing Rules 4 For commodity prices used in Pre-feasibility Studies, Feasibility Studies and valuations of Indicated Resources, Measured Resources and Ore Reserves: a) the methods to determine those commodity prices, all material assumptions and the basis on which those prices represent reasonable views of future prices are explained clearly and b) if a contract for future prices of mineral reserves exists, the contract price is used and 5 For forecast valuations of Ore Reserves and profit forecasts, sensitivity analyses to higher and lower prices are supplied. All assumptions must be clearly disclosed.
No.
Listing rule ref
Competent person and competent persons report 7 18.03(2) and 18.21(1) 18.21(2) Competent Persons Report must be prepared by a Competent Person, being a person with a minimum of five years experience relevant to the style of mineralisation and type of deposit under consideration. Competent Person must be professionally qualified, and be in good standing of a relevant Recognised Professional Organisation, in a jurisdiction where, in the Exchanges opinion, the statutory securities regulator has satisfactory arrangements with the SFC of Hong Kong for mutual assistance and exchange of information for enforcing and securing compliance with the laws and regulations of that jurisdiction and Hong Kong. A Competent Person must be independent of the applicant, its directors, senior management and advisers, and in particular must: have no economic or beneficial interest (present or contingent) in any of the assets being reported on not be remunerated with a fee dependent on the findings of the Competent Persons Report in the case of an individual, not be an officer, employee or proposed officer of the applicant or any group, holding or associated company of the applicant and in the case of a firm, not be a group, holding or associated company of the applicant. Any of the firms partners or officer must not be officers or proposed officers of any group, holding or associated company of the applicant.
18.22
No. 9
Listing rule ref 18.21(3)
Description of requirement The Competent Person must take overall responsibility for the Competent Persons Report. To this end, the Competent Persons Report must not contain any disclaimers of the report in its entirety. The Competent Person must prominently disclose in the CPR the nature and details of all indemnities provided by the applicant. Indemnities for reliance placed upon information provided by the applicant and third party experts are generally acceptable; however indemnities for fraud and gross negligence are generally unacceptable. A Competent Persons Report must: Be addressed to the Mineral Company Have an effective date (being the date when the contents of the Competent Persons Report are valid) less than six months before the date of publishing the listing document or circular, as the case may be and Set out what Reporting Standard has been used in preparing the Competent Persons Report, and explain any departure from the relevant Reporting Standard.
18.25
18.26
10
18.24
11
18.27
Sponsor must ensure that any Competent Person (and a Competent Evaluator if a valuation of the mining rights is included, as described below) meets the requirements of Chapter 18.
No.
Listing rule ref
Disclosure of cash operating costs in respect of production activities 12 18.03(3) If a Mineral Company has commenced production, it must provide an estimate of cash operating costs including the costs associated with: a) workforce employment b) consumables c) fuel, electricity, water and other services d) on and off-site administration e) environmental protection and monitoring f) transportation of workforce g) product marketing and transport h) non-income taxes, royalties and other governmental charges and i) contingency allowances. In providing the above estimate, a Mineral Company must: set out the components of cash operating costs separately by category explain the reason for any departure from the list of items to be included under cash operating costs and discuss any material cost items that should be highlighted to investors.
No.
Listing rule ref
Working capital requirements 13 18.03(4) A Mineral Company must demonstrate to the Exchanges satisfaction that it has available working capital for 125 per cent of the groups present requirements, that is for at least the next 12 months, which must include: a) general, administrative and operating costs b) property holding costs and c) the cost of any proposed exploration and/or development. (Note: Capex does not need to be included, although interest costs must be included). 18.03(5) The Mineral Company must also ensure that its working capital statement in the listing document under Listing Rule 8.21A states it has available sufficient working capital for 125 per cent of the groups present requirements (that is for at least 12 months from the date of its listing document).
Waiver of Listing Rule 8.05 14 18.04 If a Mineral Company is unable to satisfy the profit test, market capitalisation/revenue/cash flow test or the market capitalisation/ revenue test in Listing Rule 8.05 it may still apply to be listed if it can establish to the Exchanges satisfaction that its directors and senior managers, taken together, have sufficient experience relevant to the exploration and/or extraction activity of the Mineral Company.
No.
Listing rule ref
Content of listing documents for new applicant mineral companies 15 18.05 In addition to requirements of Appendix 1A of the Listing Rules, a Mineral Company must include in its listing document: Competent Persons Report A statement that no material changes have occurred since the effective date of the CPR. If there have been material changes, these must be prominently disclosed Nature and extent of its prospecting, exploration, exploitation, land use and mining rights and a description of the properties to which those rights attach, including the duration and other principal terms and conditions of the concessions and any necessary licenses and consents. Details of material rights to be obtained must also be disclosed A statement of any legal claims or proceedings that may influence its rights to explore or mine Disclosure of specific risks and general risks, having regard to Guidance Note 7 on suggested risk analysis and If relevant and material to the Mineral Companys business operations, information on the following: a) Project risks arising from environmental, social and health and safety issues b) Any non-governmental organization impact on sustainability of mineral and/or exploration projects
No.
Listing rule ref
Description of requirement c) Compliance with host country laws, regulations and permits, and payments made to host country governments in respect of tax, royalties and other significant payments on a country by country basis d) Sufficient funding plans for remediation, rehabilitation and, closure and removal of facilities in a sustainable manner e) Environmental liabilities of its projects or properties f) Its historical experience of dealing with host country laws and practices, including management of difference between national and local practice g) Its historical experience of dealing with concerns of local governments and communities on the sites of its mines, exploration properties, and relevant management arrangements and h) Any claims that may exist over the land on which exploration or mining activity is being carried out, including any ancestral or native claims.
Additional disclosure requirements for certain new applicant mineral companies 16 18.06 If a Mineral Company has begun production, it must disclose an estimate of the operating cash cost per appropriate unit for the minerals produced. If a Mineral Company has not yet begun production, it must disclose its plans to proceed to production with indicative dates and costs. These plans must be supported by a Scoping Study, substantiated by a Competent Person. If exploration rights or rights to extract Resources and/or Reserves have not yet been obtained, relevant risks to obtaining these rights must be prominently disclosed.
17
18.07
No. 18
Listing rule ref 18.08
Description of requirement If a Mineral Company is involved in the exploration for or extraction of Resources, it must prominently disclose to investors that its Resources may not ultimately be extracted at a profit.
Presentation of data on resources and/or reserves 19 18.18 Any data presented on Mineral Resources and/or Ore Reserves by a Mineral Company must be presented in tables in a manner readily understandable to a non-technical person. All assumptions must be clearly disclosed and statements should include an estimate of volume, tonnage and grades. All statements referring to Mineral Resources and/or Ore Reserves in an applicants listing document must be substantiated in a Competent Persons Report (which must form part of that listing document).
20
18.19
Appendix B Norton Rose key strengths
Appendix B Norton Rose key strengths

Financial institutions
Financial institutions across the globe are going through significant change. Our research has underlined the need to support our clients in three key areas: restructuring; regulatory systems; and risk management. We are on the panels of more than 40 major players in the global markets. The worlds leading banks, finance providers and market participants are among our clients, as well as corporate and sovereign borrowers. We operate at a policy-making and strategic level, at a corporate level and on high-profile, complex cross-border transactions.
Energy
We have a market-leading climate change practice, are known for our profile in renewables and clean energy and have a well-established reputation in oil and gas. We advise energy providers, consumers and policy-makers on strategic development and transactions throughout the global markets. Our energy clients operate in some of the toughest environments in the world, and we are right there with them.
Infrastructure and commodities

Our experience in the infrastructure, mining and commodities sector covers every market and every region of the world. We advise clients who are involved in every stage of the commodities cycle whether you are looking to grow organically or by way of acquisition, through exploration capital and debt, financing, mine establishment, production, trading, shipping and sale. We are pioneers in the area of resources mergers and acquisitions, including Chinas first successful hostile takeover bid. We specialise in water, soft commodities, bulk commodities, metals and oil and are known for the outstanding quality of our work in mining. Our reputation in infrastructure sees us playing a role in almost every major project around the world, including complex cross-border transactions involving large amounts of development finance and mergers and acquisitions expertise.
Transport
We have over 200 transport specialists worldwide and a longstanding reputation for world-class expertise in the aviation, rail and shipping sectors. We are supporting our clients through a time of considerable change involving consolidation, increased state investment and intensified funds and financing activity. In particular, we assist our clients in benefiting from connections between transport, real estate and infrastructure within a sustainable framework, closing highly technical transactions and advising on future policy requirements. Together with our clients, we are charting the way ahead for transport.
Technology
We advise clients throughout the technology sector. Our research into procurement processes has highlighted the need to place procurement at the core of corporate strategy, strengthen vendor-customer relationships and adopt a more sophisticated approach to risk: our technology and outsourcing capabilities include senior people with specialised knowledge of this area. We advise on all aspects of technology law.
Corporate legal services

We provide legal services that will help you to build and develop your business. This applies whether you are conducting a major transaction, undergoing an investigation, fielding a dispute or dealing with the many ongoing legal, tax and compliance issues that are a common feature of business now. Our corporate legal services offering includes the competition and regulatory, dispute resolution, employee benefits, employment, environment, intellectual property and technology, outsourcing, pensions, real estate, and tax areas of our business, all of whom provide ongoing advice to our clients.
Investment funds
The investment funds team regularly advises on retail and institutional funds, onshore, offshore, open and closed ended, investing in equities, bonds, real estate and alternative classes, including private equity. Our investments funds practice also includes specialist funds such as Islamic funds and capital protected/guaranteed and structured products.
www.nortonrose.com
Contacts
Shaun McRobert Partner Norton Rose Hong Kong Tel +852 3405 2333 Mob +852 6462 3713 shaun.mcrobert@nortonrose.com Jon Perry Partner Norton Rose Hong Kong Tel +852 3405 2316 Mob +852 9014 9940 jon.perry@nortonrose.com

Norton Rose Group is a leading international legal practice. We offer a full business law service from offices across Europe, the Middle East and Asia Pacific. We are strong in financial institutions; energy; infrastructure and commodities; transport; and technology. Norton Rose Group comprises Norton Rose LLP, Norton Rose Australia and their respective affiliates. The Group has over 1800 lawyers in 30 offices worldwide.

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Listing on the Hong Kong Stock Exchange for mineral companies

FINANCIAL INSTITUTIONS ENERGY INFRASTRUCTURE AND COMMODITIES TRANSPORT TECHNOLOGY

Listing on the Hong Kong Stock Exchange for mineral companies

A NORTON ROSE GROUP GUIDE NOVEMBER 2010

Listing on the Hong Kong Stock Exchange for mineral companies

Listing on the Hong Kong Stock Exchange for mineral companies

Norton Rose Group

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Listing on the Hong Kong Stock Exchange for mineral companies

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Listing on the Hong Kong Stock Exchange for mineral companies

Listing on the Hong Kong Stock Exchange (HKSE)

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Listing on the Hong Kong Stock Exchange (HKSE)

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Listing on the Hong Kong Stock Exchange for mineral companies

Appoint IPO team

Start prospectus drafting Parallel verification

Listing Committee hearing

Sign public offer underwriting agreement

Register and publish prospectus (with price-range)

Public offer opens (normally four business days)

Public offer closes

Shares commence trading on HKSE

Announce results of pricing and allocations

Institutional placing and final pricing

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Strategic investor/pre-IPO placings

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Listing on the Hong Kong Stock Exchange for mineral companies

Qualification for listing

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Market Cap Revenue

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Listing on the Hong Kong Stock Exchange for mineral companies

Operating history, management and ownership

1 Not required for a secondary listing.

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Directors competence and board composition

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Listing on the Hong Kong Stock Exchange for mineral companies

Management presence in Hong Kong

Share allocation and claw back

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New requirements for mineral companies

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Listing on the Hong Kong Stock Exchange for mineral companies

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The IPO team

The IPO team

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Listing on the Hong Kong Stock Exchange for mineral companies

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The IPO team

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Listing on the Hong Kong Stock Exchange for mineral companies

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Listing on the Hong Kong Stock Exchange for mineral companies

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