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1
Hong Kong Exchange and Clearing LimitedPress
Conference on Enhancing Corporate
Governanceand Market Quality 30 January
2004
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Corporate GovernanceUpdate on ProgressPaul
ChowChief Executive
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Update on Progress

• Release of Exposure Paper on Draft Code on
  Corporate Governance Practices and Corporate
  Governance Report
• Implementation of corporate governance Rule
  amendments
• Consultation conclusions and Rule amendments on
  initial listing criteria and continuing listing
  obligations

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Update on Progress (2)

• Initiatives under Hong Kongs Corporate
  Governance Action Plan
• International standards as a benchmark
• Improving the transparency of our rules and
  practices
• Address perceived inadequacies in the Rules
• Codify existing Exchange practices
• Make the Rules clearer and more concise (where
  possible)

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Exposure of Draft Code on Corporate Governance
Practices and Corporate Governance Report
Richard WilliamsHead of Listing
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Objective of the Exposure Paper

• Public exposure of the draft Code and Corporate
  Governance Report
• To allow the market to comment on
• timing of the proposed implementation of the Code
• detailed wording of the draft Code

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Structure of Draft Code

• Nonmandatory
• Two tiers of board practices
• 1st tier Code provisions comply or explain
  approach
• Non-compliance does not constitute a breach of
  the Listing Rules
• 2nd tier Recommended Best Practices listed
  issuers encouraged to disclose their
  non-compliance

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Code Provisions

• Section A Directors
• Section B Directors remuneration
• Section C Accountability and Audit
• Section D Delegation by the Board
• Section E Communication with Shareholders

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Major Recommended Best Practices

• INEDs comprising at least one-third of the board
• Establishment of a nomination committee with a
  majority of INEDs
• Quarterly reporting for Main Board issuers
• Continuous training for directors
• Disclosure of senior managements emoluments on a
  named basis

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Corporate Governance Report

• Three levels of disclosure requirements
• 1st level Mandatory disclosure requirements
• 2nd level Code provision disclosure need to
  explain non-disclosure
• 3rd level Recommended disclosure

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Proposed Timetable

• Comments on or before 31 March 2004
• Target for publication of Code end 1st half
  2004
• New Code effective for accounting periods
  commencing
• 1 January 2005 for all the Code provisions and
  related disclosure obligations (except for those
  on internal control)
• 1 July 2005 for the Code provisions on internal
  control and related disclosure obligations
• Early adoption encouraged

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Corporate Governance Rule AmendmentsAnne
ChapmanVice President, Listing
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Major areas of corporate governance Rule
amendments

• New chapters of Main Board Rules on notifiable
  transactions and connected transactions
• Revised classification of notifiable transactions
  and connected transactions
• Revised definition of reverse takeovers
• Revised definition of connected persons
• Revised definition of associate of a connected
  person
• Refreshment of general mandate
• Disclosure of directors remuneration

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Major Rule Amendments (1)

• New Chapters of Main Board Rules
• Chapter 14 (Notifiable transactions)
• Chapter 14A (Connected transactions)
• Alignment of the format and structure of Main
  Board and GEM Rules

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Major Rule Amendments (2)

• Classification of notifiable transactions
• Categories of notifiable transactions
• Introduced VSD
• Introduced reverse takeovers (existing GEM
  Rules) into Main Board Rules
• Five size tests
• Total assets test which replaces the existing net
  assets test
• Consideration to market capitalisation test which
  replaces the existing consideration to net assets
  test
• Revenue test as a new stand-alone test
• Profits test (no change)
• Equity capital test (no change)
• Revised percentage thresholds
• Alignment of thresholds with international
  standards

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Major Rule Amendments (3)

• Classification of connected transactions
• Existing requirement
• Assets test and consideration test only
• New requirement
• All size tests (except for profits test) apply
• Revised percentage thresholds apply
• Existing de minimis thresholds of 1 million and
  10 million retained

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Major Rule Amendments (4)

• Reverse takeovers
• Treated as a deemed new listing
• Comply with new listing requirements
• Revised definition
• Acquisitions involving a change in control and
  triggering VSA threshold
• Acquisitions within 24 months after a change in
  control which individually or together trigger
  VSA threshold

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Major Rule Amendments (5)

• Revised definition of connected person
• Includes connected persons at subsidiary level
• Includes, for the purpose of connected
  transactions, non wholly owned subsidiaries of
  which connected person(s) at the issuers level
  (individually or together) is/are a substantial
  shareholder
• Includes, for the purpose of connected
  transactions, relatives of a connected person
  as his deemed associates
• includes his spouse, parents, children and
  siblings
• includes his mother-in-law, father-in-law,
  son-in-law, daughter-in-law, brother-in-law,
  sister-in-law, grandparents, grand-children,
  uncle, aunt, cousin, nephew and niece, whose
  association with the connected person is such
  that, in the opinion of the Exchange, the
  proposed transaction should be subject to the
  connected transaction provisions

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Major Rule Amendments (6)

• Revised definition of associate
• in relation to an individual,
• a trustee-controlled company
• a subsidiary of a trustee-controlled company
• a holding company of a trustee-controlled company
  and a subsidiary of any such holding company
• in relation to a corporation,
• a trustee
• a trustee-controlled company
• a subsidiary of a trustee-controlled company
• a holding company of a trustee-controlled company
  and a subsidiary of any such holding company

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Major Rule Amendments (7)

• Limit on general mandate
• Existing limit of 20 of issued share capital
  retained
• Further consideration will be given to lowering
  the limit
• Refreshment of general mandate
• Revised requirements
• Refreshment subject to shareholders approval
  once a year
• Independent shareholders approval for subsequent
  refreshments in a year
• GEM and Main Board rules aligned

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Major Rule Amendments (8)

• Disclosure of directors remuneration in annual
  reports
• Existing Main Board Rule
• By bands only
• Existing GEM Rule
• On an individual but no name basis
• New Main Board and GEM Rules
• On a named basis

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Implementation

• New Rules effective on 31 March 2004
• Transitional arrangements
• Refer to the attachment to the HKExs press
  release
• New Rules will be published on HKExs website at
  www.hkex.com.hk today

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Consultation Conclusionson Proposed Amendments
to the Listing Rules Relating to Initial Listing
Criteriaand Continuing Listing
ObligationsKeniel WongSenior Vice President,
Listing
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Focus

• The Consultation Conclusions focus on
• initial listing eligibility criteria
• continuing obligations
• disclosure requirements at the time of initial
  listing

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Initial listing eligibility criteria

• Introduction of alternative financial standards
  to the profit requirement
• Market capitalisation / revenue test
• Market capitalisation / revenue / cash flow test
• Market Capitalisation
• Public Float
• Number and spread of shareholders

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Initial listing eligibility criteria

• Market capitalisation / revenue test
• Market capitalisation at least HK4 billion
• Revenue at least HK500 million
• requirement for a higher minimum number of
  shareholders 1,000

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Initial listing eligibility criteria

• Waiver of the 3-financial-year trading record
  requirement for listing applicants
• applying to list under market capitalisation /
  revenue test
• Pre-requisites
• management experience
• management and ownership continuity

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Initial listing eligibility criteria

• Market capitalisation / revenue / cash flow test
• Market capitalisation at least HK2 billion
• Revenue at least HK500 million
• Positive cash flow at least HK100 million

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Initial listing eligibility criteria

• Minimum expected market capitalisation at the
  time of listing
• Current requirement
• at least HK100 million
• Increased to at least HK200 million
• Definition of market capitalisation

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Initial listing eligibility criteria

• Public float
• Current requirement
• 25 (if market capitalisation does not exceed
  HK4 billion)
• floor 10 (discretionary, if market
  capitalisation exceeds HK4 billion)
• New
• 25 by reference to aggregate market
  capitalisation of all securities of applicant
• floor 15 (discretionary, if market
  capitalistaion exceeds HK10 billion)

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Initial listing eligibility criteria

• Number and spread of shareholders
• increased to 300
• for issuers applying to list under the market
  capitalisation / revenue test, minimum
  requirement is 1,000
• top 3 public shareholders hold not more than 50
  of public float

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Continuing obligations

• Public float
• suspension if public float falls below 15
• may consider waiver in general offer situation
  3 months
• not extended to share repurchase situation
• where lower accepted for issuers (with market
• capitalisation over HK10 billion)
• lower only applicable at time of listing
• fixed
• applicable throughout issuers listing on the
  Exchange
• will not be considered post listing
• confirmation of sufficiency in annual reports

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Continuing obligations

• Timeliness of accounts
• immediate suspension on failure to publish
  financial results on due date
• transitional period

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Disclosure requirementsat the time of Initial
Listing

• Over-allotment option and price stabilising
  activities
• Persons in control of the listing applicant
• Management experience / qualification
• Applicant group prospects

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Implementation

• Effective Date 31 March 2004
• Except
• for initial listing eligibility criteria
• Form A1 submitted before this date, and listed
  within three months afterwards
• for continuing obligations
• a transitional period up to 31 December 2004 in
  respect of new rule on timely publication of
  financial information