Caution: A Discloseable Transaction for Acquiring a Greenfield Project Was Ruled a Reverse Takeover by HKEX

Contrary to common perception that Reverse Takeover (RTO) Rules normally come into play when an acquisition (or series of acquisitions spanning a 36-month period) amounts to a 'Very Substantial Acquisition' or at least a 'Major Transaction' under the Listing Rules, the Stock Exchange of Hong Kong Limited (the Exchange) says in its recent Listing Decision (HKEX-LD136-2022) that a single 'Discloseable Transaction' suffices. 

In this case, subject issuer (Company A) owned a hotel property principally engaged in comparatively small hotel hospitality business. It proposed to acquire from a third party vendor majority interest in a target (Target) newly established to carry out a natural gas project involving construction and operation of gas pipes and gas stations in the PRC.

Target had signed relevant contracts but yet to commence operations. It had not recorded any revenue and did not own any material assets. Based on the percentage ratios, the proposed acquisition constituted a discloseable transaction.

The Exchange, after taking into account future profitability of Target and the nature and scale of Company A’s existing business, considered the proposed acquisition an attempt to circumvent new listing requirements under the principle based test (Rule 14.06B):

• Target's natural gas business would be significantly larger than the existing business of Company A in terms of revenue and profits - based on the financial forecast of Target, its projected annual revenue would be over 20 times of that of Company A.
• Target's natural gas business was different from, and unrelated to, Company A’s existing business. The proposed acquisition would lead to a fundamental change in Company A’s principal business given the significant size of the natural gas business.
• Target had not generated any revenue. It did not have a track record and could not meet the new listing requirements. 

The decision no doubt casts a warning to Hong Kong listed issuers in planning business expansion or diversification – particularly those involving important strategic moves and/or investments in greenfield projects.