Corporate (ECM+DCM)

Exercise 4

Post-listing Compliance-

Connected Transaction
(Answer & Tips)

Key Point Checklist

Transaction Classification
□ Identified all three transactions correctly
□ Distinguished one-off vs continuing connected transaction
□ Recognized Jason as connected person through Rule 14A.07/14A.12
□ Noted total values: HK$10m, HK$6m (2m x 3), HK$5m

Percentage Ratio Calculations
□ Used market cap (HK$1bn) as reference
□ Applied 0.1% de minimis threshold
□ Applied 5% major threshold
□ Checked against Rule 14A.76 thresholds

Individual Transaction Analysis
Software License (HK$10m):
□ Classified as one-off transaction
□ Applied Rule 14A.76(2)
□ Listed specific requirements
□ Noted annual report disclosure

Office Lease (HK$2m x 3):
□ Identified as continuing connected transaction
□ Calculated total three-year value
□ Listed Rule 14A.31-35 requirements
□ Included annual cap requirement
□ Noted auditor review requirement

AI Investment (HK$5m):
□ Applied correct thresholds
□ Listed announcement requirement
□ Noted disclosure obligations
□ Applied partial exemption rules

Aggregation Analysis
□ Referenced Rule 14A.81
□ Calculated combined value (HK$21m)
□ Identified upgraded requirements
□ Listed additional obligations when aggregated

Supporting Rules Cited
□ Rule 14A.76 (de minimis)
□ Rule 14A.35 (announcement)
□ Rule 14A.81 (aggregation)
□ Rule 14A.36 (shareholder approval)
□ Rule 14A.69 (circular contents)

Model Answer


Question 1
These transactions fall squarely within Chapter 14A of the Listing Rules as connected transactions. Jason Wong, as the son of HappyTech's Chairman Mr. Wong (who holds 30% of HappyTech), is an associate of a connected person. Under Rule 14A.07, any person who is a director, chief executive or substantial shareholder is a connected person, and under Rule 14A.12, their immediate family members are deemed associates. Therefore, any transaction between HappyTech and SmartSoft (owned by Jason) automatically triggers the connected transaction requirements.

Question 2
The compliance obligations vary for each transaction based on their size and nature.
Software License Purchase (HK$10 million)
• This is a one-off connected transaction
• Using HK$1 billion market cap as reference:

  • Likely exceeds 0.1% de minimis threshold (HK$1m)

  • But below 5% threshold (HK$50m)

  • Rule 14A.76(2): Falls into "partial exemption"

    • Requirements:

      • Announcement required (Rule 14A.35)

      • No shareholder approval needed

      • Must be disclosed in annual report (Rule 14A.71)

Office Lease (HK$2 million per year, 3 years)
• This is a continuing connected transaction
• Total value = HK$6 million over 3 years
• Under Rule 14A.76(2) and 14A.81:

  • Exceeds 0.1% threshold

  • Below 5% threshold

    • Rule 14A.31-35 requirements:

      • Announcement required

      • Written agreement needed

      • Annual cap must be set

      • Annual reporting required

      • Annual review by auditors

      • No shareholder approval needed

AI Project Investment (HK$5 million)
• One-off connected transaction
• Against HK$1 billion market cap:

  • Exceeds 0.1% de minimis

  • Below 5% threshold

    • Requirements under Rule 14A.76(2):

      • Announcement required

      • No shareholder approval

      • Annual report disclosure

Aggregation Impact (Rule 14A.81)
• Total value: HK$21 million
• If within 12 months:

  • Now exceeds 5% threshold

  • Triggers Rule 14A.36

    • Enhanced requirements:

      • Announcement

      • Circular with IFA opinion

      • Independent shareholder approval

      • Independent Board Committee

      • Detailed disclosure per Rule 14A.69

      • Excluded from voting: Mr. Wong and associates

Question 3
The board must ensure preparation of detailed announcement(s) complying with Rule 14A.68. For transactions requiring shareholder approval, a circular must be prepared containing independent financial advice, an independent board committee opinion, and detailed information about the transactions' terms. Example could be found here. The company secretary should also prepare board resolutions, relevant agreements for each transaction, and where needed, independent shareholder voting procedures. Letters of engagement for the independent financial adviser would be necessary for transactions requiring shareholder approval.

Question 4
The 12-month aggregation rule under 14A.81 is crucial here. These transactions, while seemingly discrete, would be aggregated if they are entered into within a 12-month period. The aggregated value would be HK$21 million (HK$10m + HK$6m + HK$5m), which would almost certainly trigger higher compliance thresholds. The board should consider timing these transactions strategically, though any artificial splitting to avoid compliance obligations would be viewed dimly by regulators.

Question 5
Non-compliance with connected transaction requirements carries severe consequences. The Exchange could publicly censure the company and directors under Rule 2A.10, require remedial actions, and impose a trading suspension. Directors face personal liability for breach of duties. The Exchange typically requires immediate disclosure and ratification by independent shareholders. In my experience, such breaches often lead to regulatory investigations and mandatory internal control reviews, damaging both company reputation and director standings in the market.

Common Mistakes

Basic Identification Mistakes
• Failing to spot indirect connections (e.g., only checking directors, missing family members)
• Missing associate relationships through joint ventures or partnerships
• Overlooking historical connections (e.g., former directors within 12 months)
• Not identifying all transaction parties in complex arrangements
• Assuming transactions with non-wholly owned subsidiaries are exempt

Calculation Errors
• Using wrong financial reference figures for percentage ratios
• Forgetting to include total contract value for continuing transactions
• Not considering contingent or variable consideration
• Missing the aggregation of multiple small transactions
• Using outdated financial figures for calculations (always check on www.hkexnews.com for latest figure, some client may not send you the latest financials)

Documentation Oversights
• Late announcement preparation leading to trading suspension (extremely important to avoid!)
• Insufficient detail in announcements about connection relationship
• Missing mandatory content requirements in circulars
• Poor explanation of transaction terms and rationale
• Inadequate disclosure of directors' interests

Procedural Mistakes
• Wrong voting arrangement (not excluding connected persons)
• Late formation of Independent Board Committee
• Appointing IFA without proper independence check
• Missing annual review requirements for continuing transactions
• Not obtaining all necessary internal approvals before announcement

Compliance Process Errors
• Starting transaction execution before completing compliance steps
• Missing reporting deadlines for regular disclosure
• Failing to set proper annual caps for continuing transactions
• Not maintaining proper connected transaction registers
• Overlooking the need for supplemental announcements when terms change

Threshold Application Mistakes
• Not applying de minimis thresholds correctly
• Missing aggregation triggers
• Wrongly splitting transactions to avoid thresholds
• Not considering multiple percentage ratio tests
• Failing to spot when exempt transactions become non-exempt

Timing Issues
• Late discovery of connected nature after transaction started
• Missing announcement deadlines
• Not allowing sufficient time for circular preparation (circular will need to be vetted by HKEx)
• Poor planning of shareholder meeting timing

Documentation Strategy:
In practice, the key is to start documentation early. When advising listed companies, we always recommend preparing a transaction checklist at the outset. For HappyTech, this would mean drafting announcement shells and beginning circular preparation even before final terms are agreed (however, please check with your partner first before doing so to avoid incurring additional time cost in case the client refused to pay). This parallel processing saves crucial time in fast-moving transactions.

Board Process Management:
Experience shows that proper board process is vital. Independent directors should be briefed early, not just at formal meetings. For HappyTech, I would recommend informal discussions with independent directors about the SmartSoft relationships before formal proposals. This prevents surprises and allows concerns to be addressed proactively.

Regulatory Communication:
Many junior lawyers hesitate to approach regulators. However, in complex connected transactions, early consultation with the Exchange can be invaluable. For example, in HappyTech's case, discussing the aggregation approach informally with the Exchange could prevent issues later. You can find the HKEx team responsible that particular listed company online and their contact details.

Practical Timeline Management:
A common mistake is underestimating time needed for independent financial adviser work and circular preparation. Always build in buffer time for regulatory comments and revisions. For HappyTech, the entire process from announcement to shareholder approval could easily take 2-3 months.

Record-Keeping Advice:
The best practice is maintaining a connected transaction register showing:

  • Transaction parties and their connections

  • Value and nature of each transaction

  • Compliance steps taken

  • Relevant dates and deadlines

  • Supporting calculations and analyses

Forward Planning:
Experienced lawyers maintain a forward calendar of:

  • Annual caps expiry dates

  • Continuing connected transaction renewals

  • Regular announcement obligations

  • Annual review requirements

Professional Tips