Trade Blog

Hong Kong Stock Exchange Proposes to Restrict “Backdoor Listings” and Shell Activities

 By Jeffrey A. Rinde and Jing Li


On June 29, 2018, the Hong Kong Stock Exchange (the “Exchange”) published a consultation paper (the “Consultation Paper”) on backdoor listing, continuing listing criteria and other rule amendments[1], which contained proposals to amend the Rules of the Exchange (the “Rules”) in order to prevent such activities. Separately, the Exchange published a guidance letter on listed issuer’s suitability for continued listing (GL96-18)[2].

According to the Exchange, it would apply a three-pronged approach in curbing shell activities:

(1)    Tightening its suitability review of new applicants to address concerns on shell creation through initial public offerings (“IPOs”);

(2)    Enhancing the continuing listing criteria for listed issuers to deter the manufacturing and maintenance of listed shells; and

(3)    Tightening the reverse takeover (“RTO”) rules to prevent backdoor listings particularly those involving shell companies.


The Consultation Paper proposed to impose additional requirements to address specific issues in connection with backdoor listings.

1. Amendments to Definition of RTO

Under the principle based test, it was proposed that (1) change in control / de facto control[3] and (2) series of transactions and/or arrangements[4] be included in the definition of RTO.

The bright line tests were proposed to be modified so that:

(1)    The RTO rules apply to very substantial acquisition(s) from the controlling shareholder within 36 months from a change in control; and

(2)    Disposal restriction applies to restrict any material disposal at the time of or within 36 months after a change in control of the issuer, unless the remaining business, or any assets acquired after the change in control, can meet Rule 8.05[5]. The Exchange may also apply this disposal restriction to a material disposal proposed at the time of or within 36 months after a change in the single largest substantial shareholder of the issuer. 

Finally, the Consultation Paper proposed to prohibit backdoor listings through large scale issues of securities.

2. Discouragement of the Use of Shell Companies

Additionally, the Consultation Paper proposed to tighten requirements for RTOs and extreme transactions, and to ensure the acquisition targets are suitable for listing. By way of example, shell companies are not eligible for extreme transactions, and hence, the issuer must either (i) operate a principal business of substantial size, or (ii) have been under the long-term control of a large business enterprise and the acquisition forms part of a business restructuring with no change in control.

3. Amendments to Continuing Listing Criteria

The Consultation Paper also aimed to address specific concerns over issuers that attempt to maintain the listing status by holding significant assets or investments, rather than operating businesses that have substance and are viable and sustainable in the longer term.

The proposal required a listed issuer to meet both requirements that (i) it carries out a business with a sufficient level of operations and (ii) it holds assets of sufficient value to warrant its continued listing. The Consultation paper also proposed to expand the definition of “short-dated securities” in the cash company Rules to include investments that are easily convertible into cash, for example, investments in listed securities.

A listed issuer is allowed a transitional period of 12 months to meet the continuing listing criteria as amended.


The Exchange claimed that concerns of backdoor listings and shell activities are over a small amount of activities of the market. Nevertheless, David Graham, Head of Listing, made it clear in the Exchange’s News Release that “[these activities] undermine investors’ confidence and overall market quality,” and “[a]t this point there is a need to formali[z]e our guidance into the Rules, and to make Rule amendments to address some issues in a more effective manner.”[6]

Over the last few years, while regulations and compliance in the U.S. market have become more and more difficult and expensive to meet, many mainland Chinese companies have turned to the Exchange to raise capital by way of backdoor listings. Most of these companies generally would not otherwise qualify or be suitable to list through an IPO.

We believe that small to midsize companies from mainland China which are considering a backdoor listing will reconsider or be deterred by the proposed heightened scrutiny by the Exchange.

Interested parties can comment on the Consultation Paper by August 31, 2018.

CKR Law will continue to monitor developments surrounding the Consultation Paper.  Should you require further information on this or other China-related matters, feel free to contact our New York-based China Law team, including Partners Jeffrey A. Rinde ( and Jing Li ( 

DISCLAIMER:  This article is not intended to provide legal or tax advice, and no legal, tax or business decision should be made based on its contents.  This article may be considered attorney advertising in some jurisdictions.

[3] For example, (i) substantial change in board / key management; (ii) change in single largest substantial shareholder, and (iii) issue of restricted convertible securities.

[4] The entire series of transactions and/or arrangements would be treated as if it were one transaction (consequently, a disposal may trigger an RTO ruling on a previously completed acquisition in the same series, or a number of smaller acquisitions may form an RTO).