…
Introduction
On 21 September 2026, The Stock Exchange of Hong Kong Limited (the “Exchange”) published a Consultation Paper on Listing Framework Competitiveness Review (Phase 2) (the “Consultation Paper”). It proposes a series of targeted reforms to the requirements that apply to notifiable transactions, connected transactions and spin-offs by listed issuers.
The Consultation Paper notes that the last major reform of the notifiable transaction rules took place in 2004. The market has changed significantly since then. The number of listed issuers had increased to 2,686 as at the end of 2025, and the issuer mix has become increasingly diverse. Other major markets, particularly the UK, have also moved towards a more disclosure-based regulatory approach. The Exchange therefore wants to give listed issuers greater flexibility to conduct corporate transactions while maintaining robust investor protection, thereby enhancing Hong Kong’s competitiveness as a listing venue.
In our view, these reforms are not simply a relaxation of regulation, but a reallocation of regulatory focus. On the one hand, the Exchange proposes to raise the threshold for transactions requiring shareholders’ approval and to streamline transaction classifications and approval processes, leaving more decisions to issuers and their boards of directors. On the other hand, it proposes to enhance announcement disclosure while retaining more stringent safeguards in higher-risk areas such as connected transactions, financial assistance and investment activities. In other words, issuers gain greater flexibility, but in return must disclose earlier and more fully, and their boards bear greater accountability. This article covers three areas in turn: notifiable transactions, connected transactions and spin-offs. For each, it sets out the proposals and the Exchange’s rationale. It ends with practical recommendations.
The consultation period ends on 30 November 2026. Everything discussed in this article is a proposal at the consultation stage. The final position will depend on the consultation conclusions and the amended Rules Governing the Listing of Securities on the Exchange (“MB Rules”) and Rules Governing the Listing of Securities on GEM of the Exchange (together with the MB Rules, the “Listing Rules”).
- Notifiable Transactions
Notifiable transactions are the most extensive part of the reforms. The Exchange proposes to raise the threshold for shareholders’ approval and to streamline transaction classifications and approval processes. This leaves more decisions to issuers and their boards of directors. At the same time, more stringent safeguards are kept for transactions involving provision of financial assistance and investment activities. The proposals cover four areas: size tests, classification thresholds, disclosure requirements and the scope of exemptions.
- Removal of the profits ratio
The first change concerns the size tests themselves. The Exchange proposes to remove the profits ratio from the five percentage ratios, because it is the ratio most likely to produce anomalous results. Only the assets ratio, revenue ratio, consideration ratio and equity capital ratio would remain.
Rationale: The profits ratio is the ratio most likely to produce anomalous results, particularly where the target company or the issuer has recorded losses. In 2024 and 2025, in all cases submitted by issuers involving anomalous results under the profits ratio, the Exchange consented to the issuer disregarding the ratio or adopting an alternative test. Retaining the revenue ratio and the assets ratio would still allow the impact of a transaction on the issuer to be measured. Moreover, the size tests for connected transactions already exclude the profits ratio, so removing it would make the percentage ratios under the two chapters consistent.
- Net asset value as an alternative denominator for the consideration ratio
The Exchange also proposes to change how the consideration ratio is calculated, so that it better reflects the position of asset-heavy issuers. Listed issuers could compare the consideration for the transaction with the higher of their market capitalisation or their net asset value. Net asset value means the equity attributable to the owners of the issuer, excluding non-controlling interests.
Rationale: In 2004, the denominator of the consideration ratio was changed from net asset value to market capitalisation, which resolved the problems faced by issuers with negative or minimal net asset value. However, for asset-heavy issuers or issuers whose shares are undervalued, some transactions that have little impact on their financial position may still be subject to regulation solely because they trigger the consideration ratio threshold. Net asset value is only an alternative denominator and does not replace market capitalisation; non-controlling interests are excluded to avoid overstating the issuer’s net asset value.
- Increasing the major transaction threshold from 25% to 50%
The core proposal of this reform is to raise the threshold for major transactions requiring shareholders’ approval from 25% to 50%. Transactions with any percentage ratio of 25% or more but less than 50% would be reclassified as discloseable transactions, which would only require an enhanced announcement, without the need for a circular or shareholders’ approval. Where such transactions involve properties, mineral assets or infrastructure projects, the expert report(s) must still be disclosed. For transactions involving the provision of financial assistance, or securities or other investment activities (including wealth management products and digital assets), the threshold would remain at 25%.
Rationale: Almost all transactions that required shareholders’ approval in 2024 and 2025 were approved. However, preparing circulars and accountants’ reports and engaging professional advisers add time and cost, and the outcome of shareholders’ votes also creates uncertainty in transaction execution, affecting issuers’ ability to seize opportunities in competitive or time-sensitive transactions. The 50% threshold still captures transactions that would result in a significant change in an issuer’s business or financial position, and shareholders retain the right to vote on such transactions. As financial assistance and investment activities are inherently higher-risk and may be used for shell activities or the improper use of funds, and as the Exchange has also noted an increase in such cases, the 25% threshold would be retained for these transactions.
Removal of the “Very Substantial Acquisition” and “Very Substantial Disposal” classifications
With the higher threshold, the Exchange also takes the opportunity to simplify transaction classifications by removing the “Very Substantial Acquisition” (“VSA”) and “Very Substantial Disposal” (“VSD”) classifications, so that such transactions would all be classified as major transactions, with the following arrangements:
- for an acquisition where any percentage ratio is 100% or more, or a disposal or other transaction where any percentage ratio is 75% or more, written shareholders’ approval would not be accepted in lieu of holding a general meeting;
- for an acquisition where any percentage ratio is 100% or more, the accountants’ report must be issued by a PIE Auditor; and
- announcements for these two types of transactions would no longer need to be pre-vetted by the Exchange.
Rationale: The aim is to simplify the transaction classification system. Retaining the above general meeting requirement ensures that transactions with a material impact on the issuer are still subject to approval at a general meeting. Since 2009, the Exchange has moved towards post-vetting, and these two types of announcements are among the few categories still subject to pre-vetting. Removing pre-vetting is in line with this policy direction, helps promote issuers’ self-compliance with the Listing Rules and facilitates the timely dissemination of information. Announcements relating to reverse takeovers and extreme transactions would still be subject to pre-vetting.
Enhanced announcement disclosure
With fewer transactions requiring circulars, the information available to investors would decrease accordingly. To fill this gap, the Exchange proposes to significantly enhance the disclosure in the initial announcement for all notifiable transactions. The initial announcement would be required to disclose the following additional information:
- material terms;
- the basis of consideration and details of valuation;
- key financial information of the target company for the previous two financial years;
- a qualitative and quantitative analysis of the impact of the transaction on the issuer; and
- a directors’ responsibility statement.
Where audited financial information is not available, the board would be required to explain the reasons, the basis for still proceeding with the transaction and the associated risks, and to disclose the source of the information and the basis of its preparation. A further announcement would be required upon completion of the transaction, extension of the long stop date, a change in the payment schedule, or determination of the final amount of any variable consideration.
Rationale: Transactions with percentage ratios between 25% and 50% would no longer require circulars. The Exchange wishes investors to obtain, at the announcement stage, the key information already available to the board when it approved the transaction, so that they can assess the significance, merits and risks of the transaction in a timely manner. Introducing the requirements for a directors’ responsibility statement and disclosure of the source of information would strengthen the board’s accountability for the accuracy and completeness of the information disclosed.
Refinement of circular disclosure
For major transactions that still require a circular, the proposals aim to make the circular focus on information directly relevant to the transaction. The main amendments are as follows:
- aligning the circular requirements for major transactions;
- removing the requirement for the financial information of the disposal target to be reviewed by auditors;
- removing the disclosure requirements for the indebtedness statement of the issuer group, material contracts entered into within the last two years, and management discussion and analysis on the issuer group;
- introducing disclosure of risk factors; and
- allowing directors’ information to be incorporated by reference.
Rationale: Following the removal of the VSA and VSD classifications, the circular requirements for major transactions need to be aligned. The disclosure items being removed relate to information not directly relevant to the transaction.
- Exemption for acquisitions or leasing of assets in the ordinary and usual course of business
Besides adjusting the thresholds, the Exchange proposes a new exemption that would mainly benefit capital-intensive issuers. Where an issuer acquires or leases assets to maintain or expand its existing principal business and the following conditions are met, the transaction would be exempt from the circular and shareholders’ approval requirements even if it constitutes a major transaction, although an announcement would still be required:
- the principal business has been disclosed as a continuing business in the financial statements for the previous two full financial years; and
- the board confirms that the transaction is fair and reasonable.
Examples include acquiring vessels or aircraft, and acquiring land development rights or mining rights. The exemption would not apply to the following transactions:
- acquisitions or disposals of companies, businesses or securities;
- formation of joint ventures;
- provision of financial assistance; or
- securities or other investment activities.
Rationale: Although these transactions may be material to the issuer, they are carried out in the ordinary course of business and do not change the nature of the principal business. The exemption gives management more flexibility in planning capital expenditure. The “two full financial years” requirement is intended to prevent issuers from abusing the exemption through newly established or newly acquired businesses. Transactions that would fundamentally change an issuer’s business, risk profile or investment strategy would still be subject to the circular and shareholders’ approval requirements.
The Exchange also proposes to widen an existing exemption. The revenue exemption for securities transactions carried out by securities houses would be extended to PRC securities houses regulated under the PRC securities law.
- Connected Transactions
The reforms for connected transactions are more modest than those for notifiable transactions. The Exchange considers that, given that a significant proportion of listed issuers have concentrated shareholdings, which may lead to a higher risk of connected transactions being conducted on terms that are not fair and reasonable to independent shareholders, and that Hong Kong continues to rely on ex ante regulatory safeguards as the primary means of investor protection, the existing framework remains appropriate for the Hong Kong market, and it does not intend to make fundamental changes. The proposals involve only a number of targeted refinements, which provide appropriate flexibility for transactions with a lower risk of abuse while maintaining core investor protection, as set out below:
- Increasing the connected subsidiary threshold from 10% to 30%
The main relaxation for connected transactions is to narrow the scope of “connected subsidiary”: a non-wholly owned subsidiary would only be regarded as a connected subsidiary if connected person(s) at the issuer level can exercise, or control the exercise of, 30% or more of the voting power at its general meeting (currently 10%).
Rationale: The issuer still controls a connected subsidiary and consolidates its results into the group accounts, so the conflict-of-interest risk of such transactions differs from that of transactions with external connected persons. Where the connected person’s interest in the subsidiary is limited, the risk of abuse is relatively lower. The 30% threshold is consistent with the thresholds for “associate” and “controlling shareholder”, and can more accurately identify cases where a person has substantive influence.
- Alignment with notifiable transactions
Some of the proposals for notifiable transactions would also apply to connected transactions: the consideration ratio could likewise use net asset value as the denominator; the enhanced announcement disclosure requirements would apply; and directors’ information in circulars could be incorporated by reference.
Rationale: This keeps the two sets of rules consistent. Connected transactions typically carry higher risks, so enhancing transparency is particularly important.
- Removal of the joint venture partner requirement that applies to PRC issuers only
The Exchange also proposes to remove an additional requirement that applies only to PRC issuers. Under the current rules, if connected person(s) together hold 30% or more of the interests in a cooperative or contractual joint venture, any joint venture partner of that joint venture is regarded as an associate of the connected person(s).
Rationale: A joint venture partner is generally not in a position to control the issuer, or to benefit from transactions with it, merely because of its joint venture arrangements with a connected person. Applying the connected transaction requirements to such parties by default may therefore be disproportionate and unduly burdensome. Removing the requirement would make the rules for PRC issuers consistent with those for other issuers.
- Annual caps for continuing connected transactions expressed as a percentage
For continuing connected transactions, the proposals give more flexibility in how annual caps are set. Where the transactions are of a revenue nature in the ordinary and usual course of business, the annual cap could be expressed as a percentage of the issuer’s revenue or other financial items in its audited accounts, but the issuer would have to disclose the basis for determining the annual cap and the internal control procedures used to monitor it.
Rationale: For some issuers, a fixed monetary cap may set an arbitrary ceiling, or may be hard to set reliably because there is not enough historical transaction data. The Exchange has previously granted similar waivers to individual issuers.
- Spin-offs
On the one hand, the Exchange maintains the core principle under Practice Note 15 (“PN15”) that “one business cannot support two listings”, so as to address the concern about shell creation; on the other hand, it recognises that listed issuers may need to carry out strategic restructuring from time to time in response to their business environment and operational needs. The proposed reforms therefore aim to streamline the process for assessing whether spin-off proposals comply with PN15, and to relax certain existing requirements that may be overly restrictive, while the core safeguards under PN15 would be retained and the reforms are not expected to reduce the level of shareholder protection. The key proposals are as follows:
- Refining the scope of PN15
First, the Exchange proposes to remove duplicate regulation within a listed group. Where a spin-off is carried out by a subsidiary listed on the Exchange, its listed holding company would no longer need to comply with PN15.
Rationale: The listed subsidiary is already subject to PN15, so imposing the same requirements again at the holding company level would largely be duplicative. If the spin-off constitutes a notifiable transaction, the holding company would still have to comply with the requirements of Chapter 14 and its obligations to disclose inside information.
- Introducing a self-assessment route
The most important procedural reform for spin-offs is to allow large issuers to proceed without the Exchange’s prior approval. A Main Board parent company (“ParentCo”) could self-assess whether its spin-off proposal complies with PN15 if it meets all of the following conditions:
- its market capitalisation is at least HK$10 billion;
- the revenue of its principal business(es) is at least HK$1 billion; and
- the revenue and total assets attributable to the business(es) of the Remaining Group each account for more than 50% of the issuer group.
In addition, when the spin-off company (“SpinCo”) lodges its new listing application, the ParentCo must submit the Board PN15 Self-assessment Confirmation and the Computation.
Rationale: The market capitalisation and revenue thresholds are at least double the requirements under MB Rule 8.05(3), and issuers of this size generally do not raise the concern of one business supporting two listings. The 50% Remaining Group threshold ensures that the ParentCo retains most of its original businesses, and is also consistent with the major transaction threshold. This route gives ParentCos more certainty over the timetable for their spin-offs, and allows the Exchange to focus its resources on other spin-off cases.
- Specifying the contents of spin-off announcements
Alongside the self-assessment route, the Exchange proposes to enhance the disclosure requirements for spin-off announcements. The announcement would have to include the following information:
- the identity and a description of the principal business activities of the SpinCo and the remaining group;
- the revenue and net profits (both before and after taxation) attributable to the SpinCo for the two consecutive financial years immediately preceding the proposed spin-off;
- details of the spin-off, including venue to which the SpinCo will be listed (i.e. the relevant stock exchange) and structure of the spin-off;
- the ParentCo’s expected shareholding in the SpinCo before and after the completion of the spin-off, and whether the SpinCo is expected to continue to be a subsidiary of the ParentCo;
- the total funds expected to be raised by the ParentCo and/or the SpinCo, if any, and the proposed use of proceeds by the ParentCo;
- reasons for, and the benefits which are expected to accrue to the ParentCo as a result of the spin-off, together with a statement that the directors confirm that the terms of the spin-off are fair and reasonable and in the interests of the shareholders as a whole; and
- a statement that the ParentCo has obtained the Exchange’s approval for the spin-off or relies on its self-assessment, in each case together with a confirmation from the board of directors that the spin-off complies with all the applicable principles and requirements under PN15.
Rationale: The current rules do not specify what a spin-off announcement must contain.
- Removal of the assured entitlement requirement
The Exchange proposes to remove the current requirement that every spin-off must give the parent company’s existing shareholders an assured entitlement to shares in the spin-off company. Going forward, no assured entitlement would be needed, regardless of where the spin-off company is listed and whether the parent company has a primary or secondary listing.
Rationale: Assured entitlements have generally been small, with the preferential offering being less than 1.5% of the parent company’s market capitalisation in over half of the cases, and were very often undersubscribed. Cross-jurisdictional legal and regulatory constraints also make it increasingly impracticable to provide assured entitlements. An assured entitlement only gives shareholders priority in the offering and is not additional shareholder protection. Shareholders’ interests would remain protected by the notifiable transaction rules, and shareholders may also keep an indirect interest in the spin-off company through the parent company.
- Shortening the spin-off moratorium period from three years to one year
For newly listed issuers, the proposal would shorten the moratorium period after listing, during which no spin-off may be made, from three years to one year. Secondary listed issuers, and dual-primary listed issuers that had been listed on another exchange for at least two full financial years before listing in Hong Kong, would be exempt.
Rationale: Given issuers’ needs for business expansion, diversification and funding after listing, a three-year moratorium may be unduly onerous. One year is consistent with MB Rule 14.89, which stops an issuer from fundamentally changing its principal business within 12 months of listing. The exempt issuers already have a listing track record in other markets, and investors can refer to the information those issuers have previously made public.
- Other amendments
The other amendments are mainly consequential. They keep the Spin-off requirements consistent with the other proposals:
- the threshold for shareholders’ approval of spin-offs would be raised to 50%, to match the major transaction threshold;
- decision-making power for spin-off cases would be delegated to the Listing Division; and
- it would be clarified that SpinCos may be listed under the listing regime that applies to them (e.g. MB Rules Chapter 18A or Chapter 18C).
- Concluding Remarks and Practical Observations
Overall, the proposals bear out the view set out at the start of this article: the Exchange is moving towards a regulatory approach that is “more disclosure-based, with greater emphasis on board accountability”. Raising thresholds, simplifying classifications and introducing the self-assessment route should lower compliance costs for issuers carrying out M&As, restructurings and spin-offs, and reduce timing uncertainty. However, the core safeguards for connected transactions stay the same, the 25% threshold still applies to financial assistance and investment activities, and announcement disclosure requirements are significantly higher.
For issuers, the compliance focus will shift from managing the approval process to preparing disclosure and internal records in advance. We recommend that issuers note the following:
- Starting work earlier: Much more financial information and impact analysis will be needed at the announcement stage, so issuers should arrange due diligence and prepare information early in the transaction.
- Directors’ responsibility: Where the board relies on unaudited information, it should keep written records showing that it has assessed how reliable that information is.
- Making use of exemptions: Capital-intensive issuers should review how they have disclosed their principal business in the past, to see whether they meet the conditions for the ordinary and usual course of business exemption; large Main Board issuers may consider using the self-assessment route to plan spin-offs.
Looking ahead, these proposals are still at the consultation stage, and the final rules and implementation arrangements will depend on the consultation conclusions published by the Exchange. The consultation period ends on 30 November 2026, and issuers with views on particular proposals may wish to respond before then. In our view, even if individual thresholds or details change, the direction of travel towards a disclosure-based approach with enhanced board accountability is largely settled. Issuers may wish to review their current transaction approval processes, lists of connected persons and internal control arrangements now, so that they can adapt quickly once the new rules take effect.
For further information on how these proposals may affect specific transactions, please contact our Partner Gordon Tsang, Senior Associate Gary Kwok or Associate Sam Liu.
This article is for general reference only. It does not constitute legal advice or investment advice, and it does not create a solicitor-client relationship. The proposals discussed remain at the consultation stage, and how they apply will depend on the particular facts and the laws and regulations in force at the time. To the maximum extent permitted by applicable law, the firm and its lawyers accept no liability for any loss arising from any person’s reliance on the contents of this article.