Update No. 18

Note to subscribers for the amendments to the rules governing the listing of securities on the Growth Enterprise Market ("GEM Listing Rules")

Update No. 18

31 March 2004

Dear Sirs,

Amendments to the GEM Listing Rules relating to corporate governance issues

We enclose reprinted pages of the GEM Listing Rules incorporating amendments to the GEM Listing Rules in relation to corporate governance issues, together with the filing instructions.

The principal amendments are as follows:

Directors and board practice

•   Independent non-executive directors ("INEDs") play a pivotal role in the corporate governance of issuers. Given the increasingly important role of INEDs and to ensure that the views of INEDs carry significant weight in the board's decisions, the minimum number of INEDs required under the GEM Listing Rules is increased from 2 to 3
•   One of the major responsibilities of INEDs is to provide an objective view on the assessment of the financial statements of issuers. Issuers are required to appoint at least one INED with appropriate professional qualifications or accounting or related financial management expertise
•   The quality and independent state of mind of INEDs are essential for ensuring the effectiveness of their contribution. Additional guidelines have been introduced to assist issuers in assessing the independence of proposed INEDs

Required standard of directors' dealings

•   The GEM Listing Rules have been amended to provide expressly that any breach of the required standard of directors' dealings will be regarded as a breach of the GEM Listing Rules
•   A definition of "dealing" has been introduced to the required standard of directors' dealings to explain under what circumstances a transaction constitutes a dealing by a director in the securities of an issuer. New requirements have also been introduced on the notification and disclosure of directors' dealings and reporting on compliance with the required standard so as to enhance transparency

Notifiable transactions and connected transactions

•   Amendments have been made to Chapters 19 (notifiable transactions) and 20 (connected transactions) to codify our interpretations in respect of certain provisions where the existing GEM Listing Rules were not clear or may have been ambiguous. The main changes are:
•   amendments to the definition of "connected person" to include persons who are connected by virtue of their relationship at the subsidiary level and to clarify under what circumstances a non wholly-owned subsidiary and relatives of a director, chief executive, management shareholder and substantial shareholder will be treated as a connected person
•   amendment to the definition of "connected transaction" to reflect the application of the connected transaction Rules in certain transactions between an issuer and a party which is not a connected person
•   introduction of a new category of notifiable transaction, namely "very substantial disposal". This will ensure that shareholders are given an opportunity to exercise their voting rights and to express their views at a general meeting to approve any disposal transaction that may have a significant impact on the remaining business of the issuer and its prospects
•   introduction of a total assets test to replace the net assets test to address the practical problems of the existing net assets test, in particular to provide issuers with net liabilities or negligible net assets with clarity on the application of the classification tests to their circumstances
•   introduction of a new classification test, the consideration to market capitalisation test to replace the consideration to net assets test
•   introduction of a new classification test, the revenue test as a stand-alone test to measure the impact of a transaction on the issuer in terms of level of business activity
•   introduction of new percentage thresholds for classifying notifiable transactions based on the new tests
•   all of the new tests except for the profits test will be used to classify connected transactions
•   abolition of the annual shareholders' approval requirement for "continuing connected transaction"
•   additional disclosure requirements for announcements and circulars relating to notifiable transactions and connected transactions

Financial reporting and disclosure obligations

•   The following major changes have been made to Chapter 18 of the GEM Listing Rules:
•   issuers will be permitted to distribute a summary half-year report rather than a full half-year report
•   the two-phased publication arrangement for annual results announcements has been abolished. To achieve this, the disclosure requirements for results announcements have been brought into line with the disclosure requirements for summary financial reports and summary half-year reports
•   introduction of new disclosure requirements relating to compliance with the required standard of directors' dealings and the requirements in respect of INEDs and establishment of an audit committee for annual reports and half-year reports to enhance transparency
•   introduction of recommended disclosures on management discussion and analysis for annual and half-year reports to enhance transparency
•   A new section on disclosure of pro forma financial information has been included in Chapter 7 to explain when pro forma financial information must be prepared and the standards of preparation and assurance associated with any disclosure of pro forma financial information whether mandated or voluntary

Continuing listing obligations

•   To safeguard minority shareholders from material or unfair dilution of their interests, issuers are required to obtain independent shareholders' approval for the second and subsequent refreshments of a general mandate in any one year. An issuer will not be allowed to place its securities for cash consideration under a general mandate at a discount of 20% or more, unless it can satisfy the Exchange that it is in a serious financial difficulty and that the only way it can be saved is by an urgent rescue operation
•   Voting by poll is required for connected transactions and other transactions which require approval by shareholders and shareholder(s) and their associates that have a material interest must abstain from voting
•   Shareholders' approval is required for directors' service contracts that may exceed 3 years or directors' service contracts that expressly require the issuer to give a period of notice of more than 1 year or to pay compensation of more than 1 year's emoluments on termination

Other corporate governance rule amendments

•   The definition of "associate" in Chapter 1 has been expanded to remove the loophole in the existing GEM Listing Rules in relation to trust arrangements involving a company under the control of the trustee of a trust of which the connected person or any of his family interests is a beneficiary or discretionary object
•   The definition of "subsidiary" has been expanded to include an entity which is accounted for in the audited consolidated accounts of an issuer as a subsidiary under applicable accounting standards
•   Guidelines have been introduced to assist issuers in determining whether a shareholder has a "material interest" in a transaction codifying our existing interpretation of the GEM Listing Rules
•   An issuer wishing to cancel/withdraw its primary listing on the Exchange in circumstances where the issuer has no alternative listing must obtain the prior approval of 75% or more of its shareholders, the same approval threshold for a privatisation offer under the Takeovers Code
•   Issuers may not purchase their own shares on the Exchange if the purchase price is more than 5% above the average closing market price of those shares for the 5 preceding business days
•   Amendments have been made to clarify the definition of "profit forecast" and reflect the practice that any estimate of profits or losses or reference to future profits or losses may be regarded as profits forecasts
•   The provisions of Appendix 3 (Articles of Association) regarding nomination of directors have been amended to ensure that shareholders are given sufficient time to consider information on any proposed nomination of a director

Coming into effect

Subject to the transitional arrangements set out in HKEx's news release of 30 January 2004 and its attachment, the rule amendments will be effective on 31 March 2004.

Yours faithfully
For and on behalf of
The Stock Exchange of Hong Kong Limited

Richard Williams
Head of Listing

The amendments to the relevant sections of the GEM Listing Rules have been marked-up for your reference, please click herehere to see the amendments to the respective chapters.