Source: Securities Times Author: Roman

Since the Hong Kong Stock Exchange's amendments to the “Listing Rules” relating to delisting provisions officially came into effect in August 2018, the number of Hong Kong stock listed companies delisted soared from 4 in 2018 to 47 in 2022, a record high. The number of delisted companies in 2022 accounted for 44% of the total over the past 11 years.

Since this year, it has been clearly felt that the pace of delisting of companies that have been suspended for a long time has accelerated. Since this year, 28 companies have been ordered delisted by the Hong Kong Stock Exchange, and 9 delisted companies have been approved by the Listing Committee.

28 listed companies were ordered to be delisted

On August 23, the Hong Kong Stock Exchange published an announcement stating that from 9:00 a.m. on August 28, 2023, the listing status of Guoyi Group Holdings will be cancelled in accordance with section 9.14A of the “GEM Rules”. The reason is that the company has suspended trading since August 1, 2022. According to relevant laws and regulations, if the company fails to resume trading on or before July 31, 2023, the Stock Exchange can delist the company.

However, the company failed to comply with the resumption guidelines on or before July 31, so the GEM Listing Committee cancelled its listing status. The Stock Exchange has requested the company to publish an announcement stating that its listing status has been cancelled. Before the suspension of trading of Guoyi Group Holdings, the total market value was only HK$18.978 million, and the stock price was HK$0.019/share.

It is worth mentioning that once the company is delisted, the shares held by shareholders instantly become waste paper, and the value is almost zero.

According to statistics from the Securities Times reporter, since August, 5 listed companies have been removed from the Hong Kong Stock Exchange, namely Guoyi Group Holdings, Taishan Petrochemical, Asia Asset, China Properties, and CNOOC.

According to the “Report on Initial Public Offering Applications, Delisting and Suspended Companies” published by the Hong Kong Stock Exchange as of July 31, from January 1 to July 31, the number of delisted companies was 30, of which 5 were privatized and delisted, 23 were ordered to be delisted according to the rules, and 2 were transferred from the GEM board to the main board. In other words, the number of listed companies that have been forcibly delisted since this year has reached 28.

In 2018, the Hong Kong Stock Exchange revised the listing regulations and introduced a “quick delisting” mechanism. If a company listed on the Main Board has been suspended for more than 18 months (Main Board “Listing Rules” section 6.01A), if a GEM listed company has been suspended continuously for more than 12 months (GEM “Listing Rules” section 9.14A), the Hong Kong Stock Exchange's ownership cancels the company's listing status, and may also publish delisting notices at any time depending on the specific matters and circumstances of each suspended company. The Hong Kong Stock Exchange will also give suspended listed companies a remedy period. If they fail to resume trading during the remedy period, the Hong Kong Stock Exchange will delist them.

A careful analysis of these 28 delisted listed companies has several characteristics: first, they have a small market capitalization, and second, most of them belong to the consumer industry, have no substantial business operations, and have insufficient performance to support their listing status. There is a suspicion that they are “nurturing their shell.”

The Hong Kong Stock Exchange's regulatory signals are becoming increasingly strict with regard to the waste of resources caused by the prolonged suspension of trading and the damage caused by “shell raising” to the reputation of Hong Kong stocks. According to statistics from the Securities Times reporter, since the “Listing Rules” revised delisting procedures came into effect in 2018, the number of delistings has surged year by year. In the past four years (2019-2022), the total number of delistings reached 131, accounting for 85.6% of the total number of companies ordered to be delisted since 2011. From 2011 to 2018, the total number of delisted listed companies was only 22.

At the beginning of 2023, it can be seen with the naked eye that the delisting rate of the Hong Kong Stock Exchange is still accelerating, and even the listing status of many companies was cancelled at the same time within one day. According to statistics from the Securities Times reporter, as of August 23, the number of listed companies suspended for more than 3 months or more had reached 111. Of these, 9 listed companies had been approved for delisting by the Listing Committee, 7 from the Main Board, and 9 from the GEM.

How can suspended companies avoid delisting?

The reporter statistically analyzed the two main reasons for common suspensions:

First, the listed company failed to publish the performance announcement on time or the auditor was unable to issue an audit report;

Second, listed companies do not have sufficient operating capacity, and the two are often interrelated.

Liu Kuang-yiu, a partner at Hong Kong Deheng Law Firm, told reporters that long-term suspension of trading will also have serious consequences, including the listing company or triggering early repayment conditions in bank loan agreements as a result, causing a greater liquidity crisis. Share loan agreements pledged by majority shareholders may also be triggered by early repayment and execution of share pledges, leading to changes in actual controllers. Of course, minority shareholders' shares cannot be traded and cashed out. Of course, the most serious is that their listing status has been cancelled and they have lost their ability to finance.

Addressing the specific issues that led to the long-term suspension of trading, Lau Kuang-yiu believes that the underlying factors of the suspension must be addressed in a targeted manner. The Hong Kong Stock Exchange will list the conditions for resumption of trading according to the actual situation of listed companies. Listed companies should also deal with the problem as soon as possible before it worsens further. The longer the problem is delayed, the more concerned the regulators will also have greater concerns about the internal control of the listed company and the integrity of management.

For example, if listed companies fail to publish performance announcements on time or auditors are unable to issue audit reports, listed companies should publish unaudited performance announcements as soon as possible, complete the audit work with the auditors as soon as possible, and issue audit reports. If the auditor fails to issue an unqualified report, they should also issue a qualified report as soon as possible. Although the report with reservations is not sufficient to allow listed companies to resume trading, the advantage is that it avoids the Hong Kong Stock Exchange from making worse assumptions about the financial situation of listed companies, and also narrows the scope of problems, increases the transparency of listed companies' financial information, and increases the possibility of obtaining external financing.

If trading is suspended due to an illegal transaction, before seeking resumption of trading, the listed company must first convince the Hong Kong Stock Exchange that it has resolved or remedied all significant issues, including resolving any audit issues raised by the auditors, and resolving any other allegations or findings of significant misconduct raised through forensic investigations, media, market comments or rumors, or by regulators. The relevant work should be checked by the independent board committee of the listed company, and the management of the listed company should cooperate fully. If listed companies do not cooperate fully, there is a high chance that they will miss the mentioned remedy period. The Hong Kong Stock Exchange generally does not approve additional hours.

There is also the issue of continuing operations. In reality, listed companies have such problems. In many cases, they need more capital to increase investment and develop their business. Since it is difficult for listed companies that have been suspended to obtain loans from third parties, it is more effective to handle them with equity financing solutions. Generally speaking, the Stock Exchange and the Hong Kong Securities Regulatory Commission will have a more open attitude when it comes to equity financing for listed companies with major liquidity problems and financial difficulties (there is a real risk of bankruptcy), and the Hong Kong Securities Regulatory Commission also has a greater chance of exempting them from the requirement of a comprehensive offer.

However, during the interview, the reporter discovered that in reality, some suspended listed companies had no incentive to resume trading. The market value of this type of company is small, and the trading volume is very poor, and the human, material, and financial resources spent on the resumption of trading are also quite a bit of money. Coupled with the current severe crackdown on “speculation” by the Hong Kong Stock Exchange, the resumption of trading is of little significance, so some listed companies just sit back and wait for delisting.

Delisting is not the end result, and management is likely to face more serious regulatory investigations and complaints from minority shareholders. Lau Kwong-yiu said that although there is currently no class action lawsuit system in Hong Kong, there is still a risk of being sued and punished. In addition, the Hong Kong Securities Regulatory Commission has begun to cooperate closely with mainland regulators, so listed companies should not take the suspension and delisting issues lightly, and should deal with them immediately before or once problems arise.

edit/lambor