To address concerns about backdoor listings and shell activities in Hong Kong, the Stock Exchange of Hong Kong Limited (HKSE) recently published (i) a consultation paper proposing to further tighten the listing rules on reverse takeover and continuing listing criteria; and (ii) a guidance letter on listed issuer’s suitability for continued listing (GL96-18) (the “New Guidance Letter”).

We will discuss the New Guidance Letter (which has become effective from 30 June 2018) in this article and the consultation paper in our next Update.

Shell Activities

Business wishes to tap into the capital markets and yet falls short of the requirements for listing may find its way through the “backdoor” by acquiring a listed “shell” company. The increase in demand for such shell companies in recent years, which has led to an increase in shell creation and maintenance activities (including disposals or termination of an issuer’s main business, and carrying on businesses with a very low level of operations to meet the continuing listing obligations), has raised concern about the quality of listed companies in Hong Kong.

The New Guidance Letter

The New Guidance Letter, with a view to combating shell maintenance activities, addresses the suitability of those listed companies with only minimal operations. Instead of proposing "bright-line" criteria or a list of "pass-fail" suitability requirements, the New Guidance Letter sets out broad principles with examples of situation where HKSE may question an issuer's suitability for continued listing (the “Suitability Concerns”).

We set out below in tabular forms the Suitability Concerns enunciated in the New Guidance Letter. 

Suitability Concerns



Issuer with "shell" characteristics

Minimal operations

very low level of operations/activities to maintain a listing status rather than genuinely operating and developing business

Exhibiting some
GL68-13A1 characteristics

  • pure trading business with high concentration of customers  
  • asset-light businesses where a majority of the assets is liquid
  • superficial delineation of business from the parent

Blue-sky companies

public investors have little or no information about issuer's business plans and prospects, leaving much room for the market to speculate on future possible acquisitions

New greenfield business

newly acquired business which forms a material part of issuer's businesses is not a business of substance that is sustainable or substantial

Issuers with prolonged suspension of trading


  • failure to demonstrate a reasonable prospect of remedying the issues and resume trading within a reasonable period of time
  • directors cannot be contacted


Compliance failure

  • persistent failure to comply with the listing rules in a material manner
  • failure to provide HKSE with requested information


Breach of laws

intentional, systemic and/or repeated breaches of laws and regulations


Lack of internal control

failure to maintain a sound system of internal controls over their financial, operational and compliance matters


Director unsuitable to act

a director (who is able to exert control or substantial influence over the issuer's operation and management) is no longer suitable to act as director


Excessive reliance

excessive reliance on a single major customer/ supplier; or issuer becoming a captive company merely serving the controlling shareholder


Secrecy obligation

engaging in arrangements which impose secrecy obligations (e.g. state secret), thereby prohibiting issuer from disclosing material information to the market, or providing necessary information to its auditors


Sanction risks

engaging in businesses in countries subject to trade or economic sanctions imposed by governments such as the United States, the member states of the European Union and Australia, and the sanction risks to issuer's business (or to investors and HKSE ) are significant


VIE business structure

failure to take necessary actions to ensure the legality and validity of its business structure, e.g. not in strict compliance with the conditions set out in Guidance Letter
GL77-142  when using contract- based arrangements or structures  (commonly known as VIE, Variable Interest Entity) to indirectly own and control any part of its businesses


Gambling activities

engaging in gambling activities which (i) fail to comply with the applicable laws in the areas where such activities operate; and/ or (ii) contravene the Gambling Ordinance of the Laws of Hong Kong



financial statements based on fraudulent accounts with significant overstatement of profits, or false documents, or there existed serious discrepancies among different sets of books and accounts which the issuer failed to explain or reconcile


If, in light of all pertinent facts, there are Suitability Concerns, HKSE has discretion to suspend trading of the issuer's securities and give the issuer a reasonable period to take appropriate remedial action. If the issuer fails to address such concerns within a reasonable period, HKSE may cancel its listing.

If you have any questions or comments in relation to the above, please contact the authors or your usual Mayer Brown contact.

1 Under the Guidance Letter GL68-13A issued in June 2016, listing applicants exhibiting some of the following "shell" characteristics will be subject to a "more focused review on suitability" in IPO vetting: the three characteristics listed above; plus (a) small market capitalisation; (b) only marginally meeting the listing eligibility requirements; (c) funds raised disproportionate to listing expenses; and (d) little or no external funding at pre-listing stage.

2 Under Guidance Letter GL77-14 (last updated in April 2018), issuer using a VIE structure in an acquisition should obtain a PRC legal opinion that the contractual arrangements comply with PRC laws, rules and regulations, including those applicable to the business of its PRC subsidiaries and the operating entity.