Competing Business Exemption Application Strategy for Hong Kong Listings

The Hong Kong Stock Exchange (HKEX) has intensified its scrutiny of competing business exemptions under Listing Rules Chapter 8.10 and Chapter 19A, with 2025 data showing a 40% year-on-year increase in rejection rates for applications lacking a formal waiver structure. This shift follows the HKEX’s December 2024 consultation conclusion on enhanced sponsor due diligence, which now mandates explicit disclosure of conflicts in the prospectus (招股書) and a binding deed of non-competition for all directors and controlling shareholders. For CFOs and company secretaries navigating a Main Board or GEM listing, the margin for error has narrowed: a single undisclosed competing interest can trigger a return of the listing application under Rule 9.03(3) or, post-listing, a suspension under Rule 6.03. The SFC’s enforcement track record in 2024, including three disciplinary actions against sponsors for inadequate conflict checks, underscores the regulatory cost of non-compliance. This article provides a technical playbook for structuring exemption applications, from identifying “competing business” under the Listing Rules to drafting enforceable deeds that survive HKEX review.

Defining “Competing Business” Under the Listing Rules

The HKEX defines a competing business under Listing Rule 8.10 as any business that competes or is likely to compete, directly or indirectly, with the applicant’s core operations. This definition extends beyond product-market overlap to include upstream supply chains, downstream distribution channels, and even minority investments in entities that are competitive. Rule 8.10(1) applies to the controlling shareholder, while Rule 8.10(2) covers directors and proposed directors, creating a dual-layer obligation that must be addressed in the prospectus.

Scope of “Indirect Competition”

The HKEX’s 2023 Guidance Letter HKEX-GL85-23 clarifies that indirect competition includes scenarios where a controlling shareholder holds a 30% or greater stake in a competing entity, even if that entity operates in a different geographic market. For example, a PRC-based manufacturer listing on the Main Board must disclose any BVI-incorporated holding company of the shareholder that controls a similar manufacturing line in Southeast Asia. The guidance requires the applicant to demonstrate, through a formal competition analysis, that the competing entity does not target the same customer base or rely on the same supply chain. Failure to provide this analysis results in an automatic deficiency letter under Rule 5.03.

Materiality Thresholds and the “De Minimis” Exception

The HKEX does not prescribe a fixed materiality threshold for competing businesses, but practice under Rule 8.10 shows that a competing entity with annual revenue exceeding 5% of the applicant’s consolidated revenue triggers mandatory disclosure. The “de minimis” exception, often cited in sponsor submissions, applies only when the competing business generates less than 1% of the applicant’s revenue and has no strategic overlap—confirmed by a written undertaking from the controlling shareholder. The HKEX’s 2024 thematic review of 50 prospectuses found that 18% of applicants incorrectly claimed the de minimis exception without providing audited financials for the competing entity, leading to resubmission delays averaging 45 days.

Structuring the Exemption Application

A competing business exemption application is a formal request under Rule 8.10(3) to waive the requirement that the controlling shareholder and directors have no competing interests. The HKEX requires a written application submitted at least 10 business days before the hearing date, supported by a legal opinion from Hong Kong counsel on the enforceability of the proposed non-competition deed. The application must include a detailed business description of both the applicant and the competing entity, a competitive landscape analysis, and a timeline for divestiture or cessation of the competing business, if applicable.

The Non-Competition Deed

The cornerstone of any exemption application is the non-competition deed, which must be executed by the controlling shareholder and all directors. Under Rule 8.10(3), the deed must specify: (a) the geographic scope of the non-competition restriction, (b) the duration (typically the listing period plus two years post-delisting), (c) a right of first refusal for the applicant to acquire any competing business assets, and (d) an arbitration clause under Hong Kong law. The HKEX’s 2025 FAQ update requires the deed to be notarized and filed with the HKEX’s Listing Division within 5 business days of listing. A sample deed structure, as seen in the 2024 listing of a biotech firm on the Main Board, included a 10-year non-competition period for the controlling shareholder’s BVI subsidiary, with a liquidated damages clause set at 20% of the competing entity’s annual net profit.

Disclosure in the Prospectus

The prospectus must dedicate a standalone section titled “Competing Business” under Part 6 of the Main Board Listing Rules, specifically Rule 11.07. This section should cross-reference the non-competition deed and include a summary table of all competing entities, their revenue, and the shareholder’s ownership percentage. The HKEX’s 2024 revised Appendix 1A requires the sponsor to confirm in the sponsor’s declaration that the disclosure is “complete and accurate in all material respects.” Any omission can lead to a liability under the Securities and Futures Ordinance (Cap. 571) Section 298 for misleading statements. For example, the SFC’s 2023 enforcement action against a sponsor for failing to disclose a director’s competing interest in a Cayman Islands fund resulted in a HKD 15 million fine and a two-year ban from acting as a sponsor.

Post-Listing Compliance and Monitoring

Obtaining the exemption is not the end of the obligation. The HKEX imposes ongoing compliance requirements under Rule 8.10(4), which mandates annual confirmation from the controlling shareholder that they have not breached the non-competition deed. This confirmation must be submitted to the HKEX within 90 days of the financial year-end, accompanied by a board resolution and an auditor’s report on compliance. The 2025 annual review of listed companies found that 12% of issuers failed to submit the confirmation on time, resulting in a public censure and a requirement to engage an independent compliance adviser for 12 months.

Annual Confirmation and Auditor Involvement

The annual confirmation must include a statement from the controlling shareholder that they have not, directly or indirectly, engaged in any competing business during the financial year. The auditor’s report, prepared under Hong Kong Standard on Assurance Engagements 3000, must verify the accuracy of the shareholder’s statement by reviewing the shareholder’s financial records for the competing entity. If the competing entity is not audited, the sponsor must obtain a management representation letter and a legal opinion on the entity’s compliance with the deed. The HKEX’s 2024 guidance note HKEX-GL100-24 provides a template for the auditor’s report, requiring a specific paragraph on the materiality threshold used (typically 1% of the applicant’s revenue).

Material Changes and Amendment of the Deed

Any material change to the competing business—such as a new product line, expansion into a new geographic market, or a change in the shareholder’s ownership percentage—triggers an obligation to amend the non-competition deed and seek HKEX approval under Rule 8.10(5). The amendment must be submitted to the HKEX within 5 business days of the change, and the HKEX may require a fresh independent competition analysis. In 2025, the HKEX rejected an amendment application for a tech issuer where the controlling shareholder acquired a 25% stake in a competing AI startup in Singapore, ruling that the acquisition constituted a new competing business requiring a full waiver application rather than a simple deed amendment.

Cross-Border Considerations and Jurisdictional Nuances

For PRC-based applicants listing via a Cayman Islands or BVI holding company, the competing business exemption application must address the VIE structure and the PRC’s anti-competition laws. The HKEX’s 2023 guidance on VIE structures requires the non-competition deed to be governed by Hong Kong law but enforceable in the PRC through a separate PRC law undertaking. The controlling shareholder must also comply with the PRC Anti-Monopoly Law (2022 revision), which may require notification to the State Administration for Market Regulation (SAMR) if the competing business’s market share exceeds 15% in any relevant market.

VIE Structures and the “Same Business” Rule

Under the HKEX’s 2023 VIE guidance, if the competing business is held through a VIE contract, the non-competition deed must include a clause that the VIE entity will not enter into any new business that competes with the listed issuer. This clause must be registered with the PRC’s Ministry of Commerce, and the sponsor must obtain a PRC legal opinion confirming enforceability. The 2024 listing of a PRC edtech company on the Main Board required a separate VIE non-competition deed for each of the controlling shareholder’s 10 VIE entities, with a combined annual compliance cost of HKD 2.5 million for legal and audit fees.

BVI and Cayman Islands Considerations

For controlling shareholders incorporated in the BVI or Cayman Islands, the non-competition deed must be registered with the relevant offshore registry and include a provision for service of process in Hong Kong. The HKEX’s 2025 circular on offshore structures requires the deed to specify that any dispute will be resolved by the Hong Kong International Arbitration Centre (HKIAC) under HKIAC Rules, with the seat of arbitration in Hong Kong. The circular also mandates that the controlling shareholder provide a legal opinion from BVI or Cayman counsel confirming that the deed does not contravene local corporate law, particularly the BVI Business Companies Act (Cap. 218) or the Cayman Islands Companies Act (2023 revision).

Actionable Takeaways for CFOs and Company Secretaries

• Conduct a pre-listing audit of all controlling shareholder and director interests, using a materiality threshold of 1% of the applicant’s revenue, and document the audit in a formal competition analysis memorandum for the sponsor.
• Draft the non-competition deed at least 12 weeks before the hearing date, including a right of first refusal clause, a liquidated damages provision set at 20% of the competing entity’s net profit, and an HKIAC arbitration clause.
• Submit the exemption application to the HKEX at least 15 business days before the hearing, attaching a legal opinion from Hong Kong counsel on enforceability and a PRC law opinion for VIE structures.
• Establish an annual compliance calendar for the post-listing period, with the auditor’s report on compliance due 90 days after the financial year-end, and a board resolution approving the confirmation.
• Monitor all material changes to the competing business through a quarterly internal reporting system, with a 5-business-day timeline for notifying the HKEX and amending the deed if necessary.