High threshold for challenging delisting decisions

In examining the recent decisions of the HKEX in delisting-related cases, it is notable that the LC in general adopts a very strict approach to enforcing the Remedial Period, in that it would only in “exceptional circumstances” approve an extension of the Remedial Period to ensure the effectiveness and credibility of the delisting framework and prevent undue delay of the delisting process.³ For the LC to grant an extension, the issuer would be required to show with sufficient certainty that it had substantially implemented steps towards a resumption of trading, and only a short extension of time was required to finalise procedural matters that were beyond the issuer’s control. Even where a short extension is granted, the issuer must demonstrate to the HKEX’s satisfaction that it reasonably expects to ensure that resumption will be achieved within the extended period as no further extensions would normally be granted.⁴ Should the LC’s decision be unfavourable, it is always open for the issuer aggrieved by the said decision to ask the LRC to reconsider the issues afresh. The issuer will then have an opportunity to make full written and oral submissions at that juncture and the LRC’s decision will supersede the previous decision of the LC. However, in practice, since the LRC’s decision is based on the same set of facts, it will unlikely differ from the LC’s original decision in the absence of persuasive submissions from the issuer.

Recent judicial review challenges against the HKEX’s decisions

There have been a number of judicial review applications brought before the Hong Kong courts by issuers in recent years seeking to overturn the decisions of the HKEX in cancelling their listing or refusing to extend their respective Remedial Periods. The Hong Kong courts have repeatedly demonstrated that they will not be quick to intervene in the decisions of the HKEX and judicial review applications that have no realistic prospect of success as illustrated in the following recent court decisions:

1. Brightoil Petroleum (Holdings) Limited v The Stock Exchange of Hong Kong Limited (HCAL 825/2020) (Brightoil);

2. Tenwow International Holdings Limited (in provisional liquidation) v The Stock Exchange of Hong Kong Limited (HCAL 2294/2020) (Tenwow);

3. Bolina Holdings Co. Ltd. (in liquidation) v The Stock Exchange of Hong Kong Limited (HCAL 2328/2020) (Bolina);

4. Cai Zhenrong v The Stock Exchange of Hong Kong Limited (HCAL 2337/2020; CACV 359/2021) (Cai); and

5. China Trends Holdings Ltd v The Stock Exchange of Hong Kong Limited (HCAL 1158/2021) (China Trends).

The Hong Kong courts have also considered, in the context of judicial review applications from issuers, the application of Listing Rule 13.24, which requires issuers to maintain a sufficient level of operations and assets to warrant their continued listing. As this rule is one of the triggers for suspension and delisting, issuers should also be well informed of the implications of non-compliance (see our related article on Listing Rule 13.24).

Some interesting observations arising from the above case authorities include:

1. Judicial review should only be pursued by issuers as a last resort and issuers seeking to challenge a decision from the LC should first seek a review by the LRC before applying to the court unless there are “exceptional circumstances” requiring intermediate intervention by the court. The court’s judicial review jurisdiction should hardly ever be exercised to review decisions that go only to procedure rather than to the end result^.5

2. The LC’s decision-making process is not subject to the right of the issuer to make submissions. The LC may proceed to delist a suspended issuer following the expiry of the Remedial Period on the recommendation of the Listing Division, pursuant to Main Board Listing Rule 6.01A(1) or GEM Listing Rule 9.14A(1) respectively.⁶

3. Challenges on the basis of systemic procedural unfairness in the way the LC and/or the LRC handles delisting decisions are difficult to substantiate and this line of argument has been rejected by the court in various cases. The court has held that the delisting procedure as a whole is not in breach of procedural fairness as issuers are afforded an opportunity to make oral and written representations to the LRC at the review stage if they are dissatisfied with the LC’s decision and there are safeguards to ensure the process is not subject to bias.⁷

4. Where the issuer seeks to challenge the LRC’s decision on the basis of:

(a) a failure to give adequate reasons;

(b) a failure to take into account relevant considerations; or

(c) an error in law and/or unlawful fettering of the LRC’s discretion,

the Hong Kong court would scrutinise the basis for the LRC’s decision to determine if the issuer’s complaint is made out. However, if the written decision generally explains the reasoning and reiterates the points made by the issuer in its submissions, the court is unlikely to overturn the decision.⁸

5. Where the issuer seeks to assert that the LRC’s decision was Wednesbury unreasonable or irrational, the court has generally indicated that the HKEX is better placed to make a professional assessment as to whether the issuer should remain listed and the court will consider the rationality of the LRC’s decision based on the reasons given and the overall circumstances.⁹

6. The resumption conditions carry equal weight and it is necessary for the issuer to comply with all such conditions within the Remedial Period before the trading suspension can be lifted. Partial compliance is inadequate. The LC/LRC is not obliged to place more weight on the company’s compliance with Listing Rule 13.24 on sufficiency of operations and assets.¹⁰

7. The Remedial Period sets a hard deadline for resolution of the relevant issues and resumption of trading, as opposed to submission of a resumption proposal. What constitutes exceptional circumstances to extend the Remedial Period is a matter for the HKEX, and not the court, to decide. The court further noted that as per the Consultation Conclusions, the HKEX did not adopt the proposal that special arrangements should be made for an issuer in financial distress where a liquidator or provisional liquidator has been appointed by the court and is working on a resumption plan, but the prescribed Remedial Period might not be sufficient for the completion of a restructuring process or a scheme of arrangement.¹¹

8. Each case will need to be considered on its merits and each decision represents an exercise of judgment by the LC and LRC. However, the LC and LRC’s decisions will not constitute binding precedents for future cases.¹²

9. While COVID-19 has been previously asserted by issuers as an exceptional circumstance necessitating an extension of the Remedial Period, the courts have required the issuers to provide evidence to substantiate how COVID-19 has affected them and show that they would have been able to fulfill the resumption conditions but for the effect of COVID-19. In the absence of evidence to this effect, the courts would not readily accept that COVID-19 constitutes an exceptional circumstance.¹³

10. In the event that the lower court dismissed the application for judicial review of the HKEX’s delisting decision, it would be difficult for the company to delay the delisting process by lodging an appeal against the lower court’s decision and applying for an interim injunction pending appeal, to prohibit the HKEX from proceeding to cancel its listing. The Court of Appeal made it clear that:

(a) It is insufficient merely to assert that the appeal would be rendered nugatory if no injunction is granted and the company is delisted. If it is contended that irreparable harm would likely be occasioned as a result of the delisting, this will need to be proven on evidence and properly analysed as to whom would be subject to such harm.¹⁴

(b) Delaying the delisting process by way of an injunction may have an adverse impact on the effectiveness of the delisting regime and it would be contrary to the policy of the HKEX to create a fixed deadline for resumption of trading. Since it would remain open for the issuer to apply for a renewed listing following a delisting, provided it is able to meet the appropriate listing requirements, it would be difficult to persuade the court that the balance of convenience points firmly towards the grant of an injunction.¹⁵

In light of the above, issuers should consider carefully whether they have arguable grounds to seek judicial review or an injunction before taking out an application against the HKEX, since an unsuccessful application would typically result in the issuer being liable for the legal costs of the HKEX, as well as their own.

Conclusion

With the threshold for challenging the HKEX’s suspension and delisting decision being so high, issuers should not expect to easily stave off their delisting at the end of the Remedial Period or reverse a delisting decision.

As evident in the recent dismissals by the Hong Kong courts of judicial review applications against delisting decisions made by the HKEX, the courts will not readily interfere with the HKEX’s decisions. The courts will also adopt an equally stringent interpretation of “exceptional circumstances” in enforcing the Remedial Period to avoid exploitation of the judicial review regime to cause undue delay to the delisting process.

From an issuer’s perspective, prevention is therefore better than cure. Suspended issuers facing potential delisting should proactively resolve the problems leading to their trading suspension and comply with all resumption conditions to the HKEX’s satisfaction as early as possible within the Remedial Period. Advanced planning in devising and executing a comprehensive resumption plan, and working diligently to remedy the issues and ensure re-compliance with the Listing Rules, would greatly improve an issuer’s chances of success and avoid placing reliance on last resort appeal mechanisms where the odds are stacked against the issuer.

1. For completeness, it should be noted that the 18-month Remedial Period applies to Main Board Listed Companies under Main Board Listing Rule 6.01A(1), whereas a 12-month Remedial Period applies to GEM Board Listed Companies under GEM Listing Rule 9.14A(1).
2. See paragraph 28 of the HKEX’s “Consultation Conclusions – Delisting and Other Rule Amendments” published on 25 May 2018 (Consultation Conclusions) and paragraph 8 of Guidance Letter HKEX-GL95-18.
3. See paragraph 19 of Guidance Letter HKEX-GL95-18.
4. See paragraph 43 of Guidance Letter HKEX-GL95-18.
5. See Brightoil.
6. See Brightoil and Cai.
7. See Brightoil and Cai.
8. See Tenwow and China Trends.
9. See Tenwow and China Trends.
10. See Tenwow and Bolina.
11. See Bolina and Cai.
12. See Bolina and Cai.
13. See Bolina.
14. See Cai.
15. See China Trends.

Client Alert 2021-266