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Practice Note 10.1 Acquisitions and Realisations

Details Cross References
Issue date: 5 July 2002

Effective date: 8 July 2002
29 September 2011
7 February 2020

Revised on: 24 March 2009
14 September 2011
9 January 2020
Chapter 10

1. Introduction

1.1 This Practice Note sets out, in relation to acquisitions and realisations, the following:
(a) the types of acquisitions and disposals that are regarded to be in, or in connection with, the ordinary course of an issuer's business;
(b) the considerations to apply in computing the relative figures under Rule 1006;
(c) the applicability of Chapter 10 where any of the relative figures computed pursuant to Rule 1006 involves a negative figure;
(d) the factors to be taken into account in arriving at the consideration value of a transaction for the purposes of Chapter 10;
(e) the considerations to apply where a transaction requires shareholders' approvals for inter-conditional proposals; and
(f) the circumstances under which the Exchange may grant a waiver of the requirement for shareholders' approval of any major transactions.
1.2 Issuers and their professional advisers may consult the Exchange on the application of the rules in respect of a particular transaction, if necessary. Issuers and their professional advisers are required to furnish the Exchange with the full facts and information on the matters consulted.
1.3 Notwithstanding the classification of the transaction, the Exchange may, in appropriate circumstances, exercise its powers under Chapter 14 to impose additional requirements on the transaction, including to require that the issuer appoint an independent professional, or that the transaction be made conditional upon the approval of shareholders or the Exchange.
1.4 In this Practice Note, "issuer" refers to the issuer or a subsidiary that is not listed on the Exchange or primary listed on an approved exchange, unless the context otherwise requires.

2. Acquisitions and Disposals in, or in Connection with, the Ordinary Course of an Issuer's Business

2.1 Rule 1002(1) states, among others, that, unless the context otherwise requires, "transaction" refers to the acquisition or disposal of assets by an issuer or a subsidiary that is not listed on the Exchange or on an approved exchange, including an option to acquire or dispose of assets. It excludes an acquisition or disposal which is in, or in connection with, the ordinary course of its business or of a revenue nature.
2.2 An acquisition that is regarded to be in, or in connection with, the ordinary course of an issuer's business, is not subject to the requirements under Chapter 10 (except for Part VIII on very substantial acquisitions or reverse takeovers).
2.3 An acquisition can be regarded to be in, or in connection with, the ordinary course of an issuer's business, if:
(a) the asset to be acquired is part of the issuer's existing principal business; and
(b) the acquisition does not change the issuer's risk profile.
2.4 Existing principal business: An asset is part of the issuer's existing principal business if the acquisition of the asset is required to be reported under the applicable accounting standards within a specific reportable operating segment (excluding any miscellaneous "any other segment" category) that:
(a) contributes more than 20% of the issuer's net profits or total assets; and
(b) has been reported in the issuer's latest audited financial statements.
2.5 Change of risk profile: The following are indications that an acquisition would change the risk profile of an issuer:
(a) notwithstanding Rule 1002(3)(c), a proposed acquisition will result in reduction of the issuer's net profits or net asset value by 20% or more, based on the latest audited financial statements, and assuming that the proposed acquisition had been effected at the end of that financial year;
(b) the asset proposed to be acquired is loss-making or is in a net liability position;
(c) the proposed acquisition will have a significant adverse impact on the issuer's gearing;
(d) the proposed acquisition will result in an expansion into a new jurisdiction that will expose the issuer to significant new risks; or
(e) in the case of a mineral, oil and gas company, a proposed acquisition will result in an expansion into a new resource or commodity type, or into a new jurisdiction. The exploration and extraction methods of different types of minerals, oil and gas are different. Minerals, oil and gas resources are also necessarily situated in specific geographical areas, which may be subject to specific licensing or regulatory regimes. An expansion into a new resource or commodity type, or into a new jurisdiction, is likely to require a reconsideration of the applicable risks.
These indicators are neither exhaustive nor conclusive.
2.6 A disposal of an issuer's business (or a substantial part of its business) will usually not be considered to be in the ordinary course of business. In respect of REITs and property trusts, Rule 1014(3) provides that a disposal of property is considered to be in the ordinary course of business, provided that the relative figures as computed on the bases set out in Rule 1006 do not exceed 50% based on the aggregate value of all disposals in the last twelve months. Notwithstanding that the disposal of the property may be within the 50% threshold, the REIT or property trust will need to comply with Rule 1010 to immediately announce information relating to the disposals. However, where the disposal of the property is executed in conjunction with a view to reinvest the disposal proceeds into an acquisition of another property, the Exchange may grant a waiver of Rule 1014(3) provided that:
(a) the property to be acquired has been identified and is within the issuer's investment mandate, including being in a similar sector that the issuer has been investing in and located in a similar jurisdiction where its current portfolio of properties is located; and
(b) a legally binding agreement for the acquisition of the property has been signed.

3. Computation of Relative Figures under Rule 1006

3.1 Rule 1006 sets out the following bases for computing the relative size of a transaction:
(a) Rule 1006(a): The net asset value of the assets to be disposed of, compared with the group's net asset value. This basis is not applicable to an acquisition of assets;
(b) Rule 1006(b): The net profits attributable to the assets acquired or disposed of, compared with the group's net profits;
(c) Rule 1006(c): The aggregate value of the consideration given or received, compared with the issuer's market capitalisation based on the total number of issued shares excluding treasury shares;
(d) Rule 1006(d): The number of equity securities issued by the issuer as consideration for an acquisition, compared with the number of equity securities previously in issue; and
(e) Rule 1006(e): The aggregate volume or amount of proved and probable reserves to be disposed of, compared with the aggregate of the group's proved and probable reserves. This basis is applicable to a disposal of mineral, oil or gas assets by a mineral, oil and gas company, but not to an acquisition of such assets.
3.2 For the purposes of computing the relative figures of Rule 1006, an issuer shall consider the following:
(a) in computing the net asset value of a business to be disposed of under Rule 1006(a), if there is a capitalisation, or a waiver or write-off of a loan (in full or in part) extended by the issuer to the business, the amount of the loan, waiver or write-off shall be added to the net asset value of the business; and
(b) in computing the aggregate value of consideration given or received under Rule 1006(c):
(i) any deferred consideration that may be payable or receivable by the issuer in the future shall be included in the aggregate value of consideration (i.e., the consideration is the maximum total consideration payable or receivable under the agreement);
(ii) any additional amounts related to the transaction, including loans or guarantees extended by the purchaser or the provision of other forms of security, shall be included in the aggregated value of consideration;
(iii) any additional liabilities (whether actual or contingent) to be assumed by the purchaser or waived by the seller under the terms of the transaction shall be included in computing the aggregate value of consideration. For example, in the case of a disposal of a business at a nominal consideration but which obliges the purchaser to repay a loan, or the seller to waive or write-off a loan, that was extended to the business, the value of consideration shall include the amount of the loan; and
(iv) if a business to be acquired has negative net asset value, the absolute value of the negative net asset value shall be taken into account in computing the aggregate value of consideration. For example, in the case of an acquisition at a nominal value of a business with negative net asset value, the value of consideration shall include the absolute value of the negative net asset value of the business.

4. Negative Relative Figures under Rule 1006

4.1 In some cases, tests based on assets under Rule 1006(a) and profits under Rule 1006(b) may involve a negative figure in the numerator, denominator or both, which may not give a meaningful indication of the significance of the transaction to the issuer. Such situations arise where a transaction concerns any of the following:
(a) an issuer with a negative net asset value;
(b) a disposal of an asset with negative net asset value;
(c) a loss-making issuer; and
(d) an acquisition or a disposal of a loss-making asset.
By way of example, (i) the disposal of an asset with negative net asset value by an issuer with a negative net asset value; or (ii) the acquisition or disposal of a loss-making asset by a loss-making issuer, will result in a negative relative figure computed pursuant to Rule 1006(a) and Rule 1006(b) respectively.
4.2 Under Rule 1007(1), if any of the relative figures computed pursuant to Rule 1006 involves a negative figure, Chapter 10 may still be applicable to the transaction in accordance with the applicable circumstances in this Practice Note 10.1.
4.3 In the following situations, unless Rule 703, Rule 905 or Rule 1009 applies, no announcement and shareholders' approval of the transaction is required:
(a) the acquisition of a loss-making asset by an issuer (whether profitable or loss-making), where:
(i) the absolute relative figure computed on the basis of each of Rule 1006(c) and Rule 1006(d) amounts to 5% or less; and
(ii) the net loss attributable to the asset to be acquired amounts to 5% or less of the consolidated net profit or net loss of the issuer (in each case taking into account only the absolute values);
(b) the acquisition of a profitable asset by a loss-making issuer, where:
(i) the absolute relative figure computed on the basis of each of Rule 1006(c) and Rule 1006(d) amounts to 5% or less; and
(ii) the net profit attributable to the asset to be acquired amounts to 5% or less of the consolidated net loss of the issuer (taking into account only the absolute value);
(c) the disposal of an asset by an issuer (where either or both the asset or the issuer has negative net asset value), where:
(i) the absolute relative figure computed on the basis of each of Rule 1006(b), Rule 1006(c) and (if applicable) Rule 1006(e), amounts to 5% or less; and
(ii) if the disposal will result in a loss on disposal, the loss on disposal amounts to 5% or less of the consolidated net profit or net loss of the issuer (in each case taking into account only the absolute values);
(d) the disposal of a profitable asset by a loss-making issuer, where:
(i) the absolute relative figure computed on the basis of each of Rule 1006(a), Rule 1006(c) and (if applicable) Rule 1006(e) amounts to 5% or less; and
(ii) the net profit attributable to the asset to be disposed of and, if the disposal will result in a loss on disposal, the sum of such net profit and the loss on disposal, amounts to 5% or less of the consolidated net loss of the issuer (in each case taking into account only the absolute value); and
(e) the disposal of a loss-making asset by an issuer (whether profitable or loss-making), where:
(i) the absolute relative figure computed on the basis of each of Rule 1006(a), Rule 1006(c) and (if applicable) Rule 1006(e) amounts to 5% or less; and
(ii) if the disposal will result in a loss on disposal, the loss on disposal amounts to 5% or less of the consolidated net profit or net loss of the issuer (in each case taking into account only the absolute values).
However, if the issuer wishes to announce the transaction, the announcement must include the information required under Rule 1008(2).
4.4 In the following situations, an issuer must, in relation to the transaction, immediately announce the information required in Rule 1010, Rule 1011, Rule 1012 and Rule 1013, where applicable:
(a) the acquisition of a loss-making asset by an issuer (whether profitable or loss-making), where:
(i) the absolute relative figure computed on the basis of each of Rule 1006(c) and Rule 1006(d) does not exceed 20%; and
(ii) the net loss attributable to the asset to be acquired exceeds 5% but does not exceed 10% of the consolidated net profit or net loss of the issuer (in each case taking into account only the absolute values);
(b) the acquisition of a profitable asset by a loss-making issuer, where:
(i) the absolute relative figure computed on the basis of each of Rule 1006(c) and Rule 1006(d) does not exceed 20%; and
(ii) the net profit attributable to the asset to be acquired exceeds 5% of the consolidated net loss of the issuer (taking into account only the absolute value);
(c) the disposal of an asset by an issuer (where either or both the asset or the issuer has negative net asset value), where:
(i) the absolute relative figure computed on the basis of each of Rule 1006(b), Rule 1006(c) and (if applicable) Rule 1006(e) does not exceed 20%; and
(ii) if the disposal will result in a loss on disposal, the loss on disposal exceeds 5% but does not exceed 10% of the consolidated net profit or net loss of the issuer (in each case taking into account only the absolute values);
(d) the disposal of a profitable asset by a loss-making issuer, where:
(i) the absolute relative figure computed on the basis of each of Rule 1006(a), Rule 1006(c) and (if applicable) Rule 1006(e) does not exceed 20%; and
(ii) the net profit attributable to the asset to be disposed of and, if the disposal will result in a loss on disposal, the sum of such net profit and the loss on disposal, exceeds 5% but does not exceed 10% of the consolidated net loss of the issuer (in each case taking into account only the absolute value); and
(e) the disposal of a loss-making asset by an issuer (whether profitable or loss-making), where:
(i) the absolute relative figure computed on the basis of each of Rule 1006(a), Rule 1006(c) and (if applicable) Rule 1006(e) does not exceed 20%; and
(ii) if the disposal will result in a loss on disposal, the loss on disposal exceeds 5% but does not exceed 10% of the consolidated net profit or net loss of the issuer (in each case taking into account only the absolute values).
4.5 In relation to Rule 1010(13), notwithstanding that a relative figure computed on the bases set out in Rule 1006 is negative, the issuer must still announce its value.
4.6 If the transaction does not fall within all the situations in paragraphs 4.3 and 4.4, Rule 1014 shall apply to the transaction. By way of example, unless the disposal of a loss-making asset with negative net asset value falls within paragraphs 4.3(c), 4.3(e), 4.4(c) and 4.4(e), Rule 1014 shall apply to the transaction.

5. Factors taken into Account in Arriving at Consideration Value

5.1 Where the relative figures under Rule 1006 exceeds 5%, Rule 1010, Rule 1014 and Rule 1015 require the issuer to announce certain information about the transaction. Among others, the issuer must announce the aggregate value of the consideration, stating the factors taken into account in arriving at it and how it will be satisfied.
5.2 Substantive factors should be disclosed to justify the aggregate value of the consideration. The mere fact that the consideration was arrived at on a "willing buyer willing seller" basis is not a sufficient factor.

6. Shareholders' Approvals for Inter-conditional Proposals

6.1 If a transaction requires shareholders' approvals for inter-conditional proposals, the issuer should consider whether separate resolutions on the different aspects of the proposal are to be voted on by shareholders.
6.2 In reviewing circulars to be sent to shareholders, the Exchange will consider whether the resolutions have been constructed in a manner that allows shareholders to properly exercise their voting rights.

7. Waiver of Shareholders' Approval for Major Transactions

7.1 A major transaction is one where any of the relative figures as computed on the bases set out in Rule 1006 exceeds 20%. Under Rule 1014, a major transaction must be made conditional upon approval by shareholders in general meeting and a circular containing the information in Rule 1010, Rule 1011, Rule 1012 and Rule 1013 must be sent to all shareholders.
7.2 Where an issuer seeks a waiver from the requirement for shareholders' approval, the issuer must submit an opinion from its board of directors that there has been or will be no material change in the risk profile of the issuer arising from the transaction, including the basis for its opinion.
7.3 The Exchange may grant the waiver in the following circumstances:
(a) a proposed transaction has been foreshadowed or investors have had the opportunity to consider and vote in favour of the proposal at a previous general meeting; and
(b) a proposed disposal involves a non-core asset. This is because a non-core asset is not likely to affect the nature of the issuer's principal business. A non-core asset is one that meets all of the following criteria:
(i) it is not critical to the principal business activity of the issuer;
(ii) it is ancillary to the principal business activity of the issuer; and
(iii) it is not an existing principal business (as described in paragraph 2.4) of the issuer.
7.4 The Exchange will not grant a waiver from the requirement for shareholders' approval solely on the basis that the substantial shareholders of the issuer have undertaken to vote in favour of the transaction. As a general rule, shareholders should be given the opportunity to vote on the issuer's proposal.
7.5 The Exchange would not in normal circumstances regard only the cost and inconvenience of convening a meeting as sufficient reasons to grant a waiver.
7.6 Under Rule 107, where a waiver is granted, the issuer must announce the waiver, the reasons for seeking the waiver and the conditions, if any, upon which the waiver is granted as soon as practicable.

Amended on 29 September 2011 and 7 February 2020.