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Hong Kong Exchange and Clearing Limited

Press Conference on Enhancing Corporate Governance

and Market Quality

30 January 2004

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Corporate GovernanceUpdate on Progress

Paul ChowChief Executive

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Update on Progress

Release of Exposure Paper on Draft Code on Corporate Governance Practices and Corporate Governance Report

Implementation of corporate governance Rule amendments

Consultation conclusions and Rule amendments on initial listing criteria and continuing listing obligations

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Update on Progress (2)

Initiatives under Hong Kong’s Corporate Governance Action Plan

International standards as a benchmark Improving the transparency of our rules and

practices Address perceived inadequacies in the Rules Codify existing Exchange practices Make the Rules clearer and more concise (where

possible)

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Exposure of Draft Code on Corporate Governance Practices and

Corporate Governance Report

Richard WilliamsHead of Listing

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Public exposure of the draft Code and Corporate Governance Report

To allow the market to comment on:

timing of the proposed implementation of the Code

detailed wording of the draft Code

Objective of the Exposure Paper

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Non–mandatory Two tiers of board practices

1st tier: Code provisions – comply or explain approach

• Non-compliance does not constitute a breach of the Listing Rules

2nd tier: Recommended Best Practices – listed issuers encouraged to disclose their non-compliance

Structure of Draft Code

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Section A: Directors Section B: Directors’ remuneration Section C: Accountability and Audit Section D: Delegation by the Board Section E: Communication with Shareholders

Code Provisions

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Major Recommended Best Practices INEDs comprising at least one-third of the

board Establishment of a nomination committee with

a majority of INEDs Quarterly reporting for Main Board issuers Continuous training for directors Disclosure of senior management’s emoluments

on a named basis

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Corporate Governance Report

Three levels of disclosure requirements

1st level: Mandatory disclosure requirements

2nd level: Code provision disclosure – need to explain non-disclosure

3rd level: Recommended disclosure

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Comments on or before 31 March 2004 Target for publication of Code – end 1st half 2004 New Code effective for accounting periods commenc

ing: 1 January 2005 for all the Code provisions and rel

ated disclosure obligations (except for those on “internal control”)

1 July 2005 for the Code provisions on “internal control” and related disclosure obligations

Early adoption encouraged

Proposed Timetable

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Corporate Governance Rule Amendments

Anne ChapmanVice President, Listing

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New chapters of Main Board Rules on notifiable transactions and connected transactions

Revised classification of notifiable transactions and connected transactions

Revised definition of “reverse takeovers” Revised definition of “connected persons” Revised definition of “associate” of a

connected person Refreshment of general mandate Disclosure of directors’ remuneration

Major areas of corporate governance Rule amendments

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New Chapters of Main Board Rules

Chapter 14 (Notifiable transactions)

Chapter 14A (Connected transactions)

Alignment of the format and structure of Main Board and GEM Rules

Major Rule Amendments (1)

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Classification of notifiable transactions Categories of notifiable transactions:

• Introduced “VSD”• Introduced “reverse takeovers” (existing GEM Rules) into

Main Board Rules

Five size tests:• Total assets test which replaces the existing net assets test• Consideration to market capitalisation test which replaces the

existing consideration to net assets test• Revenue test as a new stand-alone test• Profits test (no change)• Equity capital test (no change)

Revised percentage thresholds: • Alignment of thresholds with international standards

Major Rule Amendments (2)

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Classification of connected transactions

Existing requirement:

• Assets test and consideration test only

New requirement:

• All size tests (except for profits test) apply

• Revised percentage thresholds apply

• Existing de minimis thresholds of $1 million and $10 million retained

Major Rule Amendments (3)

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Reverse takeovers: Treated as a deemed new listing

• Comply with new listing requirements

Revised definition:• Acquisitions involving a change in control

and triggering VSA threshold• Acquisitions within 24 months after a change

in control which individually or together trigger VSA threshold

Major Rule Amendments (4)

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Major Rule Amendments (5) Revised definition of “connected person”

Includes connected persons at subsidiary level Includes, for the purpose of connected transactions, non wholly owned subsidiaries of which connected

person(s) at the issuer’s level (individually or together) is/are a substantial shareholder Includes, for the purpose of connected transactions, “relatives” of a connected person as his deemed associates :

• includes his spouse, parents, children and siblings• includes his mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, sister-in-law, grandparents, grand-children,

uncle, aunt, cousin, nephew and niece, whose association with the connected person is such that, in the opinion of the Exchange, the proposed transaction should be subject to the connected transaction provisions

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Major Rule Amendments (6) Revised definition of “associate” :

in relation to an individual, • a trustee-controlled company• a subsidiary of a trustee-controlled company• a holding company of a trustee-controlled company and a subsidiary of any such holding company

in relation to a corporation, • a trustee• a trustee-controlled company• a subsidiary of a trustee-controlled company• a holding company of a trustee-controlled company and a subsidiary of any such holding company

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Major Rule Amendments (7) Limit on general mandate:

Existing limit of 20% of issued share capital retained Further consideration will be given to lowering the limit

Refreshment of general mandate Revised requirements:

• Refreshment subject to shareholders’ approval once a year• Independent shareholders’ approval for subsequent refreshments in a year• GEM and Main Board rules aligned

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Major Rule Amendments (8) Disclosure of directors’ remuneration in annual reports

Existing Main Board Rule: • By bands only

Existing GEM Rule:• On an individual but “no name” basis

New Main Board and GEM Rules:• On a “named” basis

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Implementation New Rules effective on 31 March 2004 Transitional arrangements :

• Refer to the attachment to the HKEx’s press release New Rules will be published on HKEx’s website at www.hkex.com.hk today

Consultation Conclusionson Proposed Amendments to the Listing Rules

Relating to Initial Listing Criteriaand Continuing Listing Obligations

Keniel WongSenior Vice President, Listing

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The Consultation Conclusions focus on: initial listing eligibility criteria continuing obligations disclosure requirements at the time of initial

listing

Focus

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Introduction of alternative financial standards to the profit requirement: Market capitalisation / revenue test Market capitalisation / revenue / cash flow test

Market Capitalisation

Public Float Number and spread of shareholders

Initial listing eligibility criteria

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Market capitalisation / revenue test

Market capitalisation: at least HK$4 billion

Revenue: at least HK$500 million

requirement for a higher minimum number of shareholders : 1,000

Initial listing eligibility criteria

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Waiver of the 3-financial-year trading record requirement for listing applicants

applying to list under market capitalisation / revenue test

Pre-requisites:

• management experience

• management and ownership continuity

Initial listing eligibility criteria

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Market capitalisation / revenue / cash flow test

Market capitalisation: at least HK$2 billion

Revenue: at least HK$500 million

Positive cash flow: at least HK$100 million

Initial listing eligibility criteria

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Minimum expected market capitalisation at the time of listing Current requirement:

at least HK$100 million

Increased to at least HK$200 million

Definition of “market capitalisation”

Initial listing eligibility criteria

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Public float Current requirement:

25% (if market capitalisation does not exceed HK$4 billion)

floor: 10% (discretionary, if market capitalisation exceeds HK$4 billion)

New: 25% by reference to aggregate market capitalisation

of all securities of applicant floor: 15% (discretionary, if market capitalistaion ex

ceeds HK$10 billion)

Initial listing eligibility criteria

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Number and spread of shareholders increased to 300 for issuers applying to list under the market ca

pitalisation / revenue test, minimum requirement is 1,000

top 3 public shareholders hold not more than 50% of public float

Initial listing eligibility criteria

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Public float suspension if public float falls below 15% may consider waiver in general offer situation – 3 months not extended to share repurchase situation where lower % accepted for issuers (with market

capitalisation over HK$10 billion) lower % only applicable at time of listing % fixed applicable throughout issuers’ listing on the Exchange will not be considered post listing

confirmation of sufficiency in annual reports

Continuing obligations

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Timeliness of accounts immediate suspension – on failure to

publish financial results on due date transitional period

Continuing obligations

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Over-allotment option and price stabilising activities

Persons in control of the listing applicant Management experience / qualification Applicant group prospects

Disclosure requirementsat the time of Initial Listing

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Effective Date : 31 March 2004 Except:

for initial listing eligibility criteria:

• Form A1 submitted before this date, and listed within three months afterwards

for continuing obligations:

• a transitional period up to 31 December 2004 in respect of new rule on timely publication of financial information

Implementation