Reed Smith Client Alerts

In the wake of the COVID-19 pandemic and the U.S.-China trade disputes, an increasing number of listed companies in Hong Kong face uncertain business conditions and unprecedented financial difficulties. Whether they can maintain sufficient operations and assets to warrant their continued listing status, as required under the Main Board Listing Rule 13.24(1) (or the equivalent GEM Listing Rule 17.26(1)), is a growing concern and of paramount importance. The recent Hong Kong Court of Appeal’s judgment in China Trends Holdings Ltd v. Stock Exchange of Hong Kong Ltd (CACV 652/2020) once again demonstrates that it would be an uphill battle for listed companies to challenge the Hong Kong Stock Exchange’s decisions by seeking judicial review.

The requirements for sufficient operations and assets under Listing Rule 13.24

The Main Board Listing Rule 13.24(1) (or the equivalent GEM Listing Rule 17.26(1)) (collectively defined as Listing Rule 13.24) requires an issuer to carry out a business with “a sufficient level of operations and assets of sufficient value to support its operations to warrant the continued listing of the issuer’s securities”.1

The Court of Appeal’s recent judgment in China Trends Holdings Ltd v. Stock Exchange of Hong Kong Ltd (CACV 652/2020) (China Trends), which is consistent with the decisions in Sanyuan Group Ltd v. Stock Exchange of Hong Kong Ltd (FAMV 52/2009 and CACV 191/2008 respectively) (Sanyuan Group), provides helpful clarifications with respect to the application of Listing Rule 13.24. In China Trends:

1. China Trends Holdings Ltd (China Trends Holdings), which was listed on the GEM Board of the Hong Kong Stock Exchange (HKEX), recorded five consecutive years of net losses and mostly negative operating cash flows, and maintained low levels of business operations. The HKEX therefore suspended trading of its shares. China Trends Holdings requested a review of the suspension decision, but the GEM Listing Committee and the GEM Listing (Review) Committee upheld the suspension.

2. China Trends Holdings subsequently applied to the Hong Kong court for judicial review against the decision based on irrationality and Wednesbury unreasonableness. It argued that the GEM Listing (Review) Committee failed to, among other grounds, take into account the solvent status of the company, its level of operations and that it had sufficient assets. It also claimed that the GEM Listing (Review) Committee did not provide adequate reasons in rendering the decision.

3. Similar to the outcome of Sanyuan Group, which was the first case that came before the appellate court regarding HKEX’s decision on Listing Rule 13.24, the application made by China Trends Holdings was dismissed by both the Court of First Instance (see judgment) and the Court of Appeal (see judgment).

In Sanyuan Group, the Court of Appeal overturned the lower court’s judgment (see judgment) and upheld the delisting decision on the basis that the Listing Appeals Committee had made a qualitative decision as to the inadequacy of the resumption proposal, and there were no grounds to impugn the decision (see judgment). Sanyuan Group Ltd’s subsequent application for leave to appeal to the Court of Final Appeal was also refused (see judgment).

The appellate court’s decisions in both cases confirmed, in general, the considerations set out in the listing decisions and the HKEX’s Guidance Letter 106-19 (GL106-19).

We set out below the important principles that issuers should be aware of for ensuring compliance with Listing Rule 13.24 in light of the court’s findings and the recent listing decisions.