Connected Transactions in a Hong Kong IPO: Handling Approaches and Waiver Application Tactics

The Hong Kong Stock Exchange (HKEX) published its 2024 annual review of Listing Decisions in March 2025, revealing that connected transaction (CT) classification and waiver applications accounted for 38% of all pre-IPO enquiries submitted to the Listing Division. This represents a 12 percentage point increase from 2022, driven by the rising number of PRC-based applicants with complex group structures involving founder-controlled entities, employee incentive platforms, and related-party service providers. For issuers and their sponsors, the margin between a streamlined listing and a protracted regulatory review often hinges on how early and how precisely CT issues are identified and addressed in the draft prospectus.

The Regulatory Framework and Trigger Points

Definitional Scope under Chapter 14A

HKEX Listing Rules Chapter 14A defines a connected transaction as any transaction between a listed issuer (or any of its subsidiaries) and a connected person. For IPO applicants, the definition extends to persons who will become connected persons upon listing — typically controlling shareholders, directors, and their associates. The thresholds for classification as a non-exempt, discloseable, or shareholders’ approval-requiring transaction are calculated using the percentage ratios under Rule 14.07: assets, profits, revenue, consideration, and equity capital. A transaction exceeding any ratio at 0.1% but below 5% is a discloseable transaction; at 5% or above, it requires shareholders’ approval and an independent financial adviser’s recommendation.

Common Pre-IPO CT Scenarios

The most frequent CT triggers in IPO applications involve five categories: (i) continuing service agreements with the controlling shareholder’s group, such as IT support, property leasing, or logistics; (ii) trademark and technology licensing from the founder or a BVI-incorporated family trust; (iii) financial assistance, including shareholder loans or guarantees provided to the applicant; (iv) asset acquisitions or disposals between the applicant and connected persons during the track record period; and (v) employee share award schemes where the award vehicle is controlled by a director or substantial shareholder. Each category carries different exemption possibilities under Rule 14A.90 to 14A.103.

Structuring the Waiver Application

Grounds for Waiver under Rule 14A.104

HKEX may grant a waiver from strict compliance with Chapter 14A where the applicant demonstrates that the transaction is on normal commercial terms, is in the ordinary and usual course of business of the group, and will not disadvantage the company’s minority shareholders. The Listing Division’s published guidance HKEX-GL95-18 (updated December 2023) emphasises that waivers are not granted as a matter of course. The applicant must provide a detailed explanation of why the transaction cannot be restructured to eliminate the connected person element, and why the proposed alternative compliance measures — such as an annual cap, independent board committee oversight, or third-party benchmarking — are sufficient.

Timing and Documentation Requirements

A waiver application should be submitted no later than four months before the expected A1 filing date, according to HKEX’s internal processing benchmarks. The application must include: (i) a legal memorandum from Hong Kong counsel analysing the transaction under Chapter 14A; (ii) a valuation report from an independent valuer if the transaction involves asset transfers; (iii) a comparison table showing how the proposed terms compare with arm’s-length market data; and (iv) a draft announcement or circular section for the prospectus. The Listing Division typically responds within 6-8 weeks, but complex cases involving multiple connected persons or cross-jurisdictional elements may require a Listing Committee hearing.

Practical Handling Approaches

Restructuring to Eliminate Connected Status

The most effective approach is to eliminate the connected person element before filing. For example, if a founder’s family trust holds a trademark that the applicant licenses, the applicant can acquire the trademark for cash at a fair value determined by an independent valuer, thereby converting a continuing CT into a one-off, fully exempt transaction under Rule 14A.90. Similarly, shareholder loans can be capitalised into equity, removing the need for ongoing disclosure. Data from 2024 HKEX filings shows that 67% of applicants who restructured pre-existing CTs before the A1 submission received no further CT-related queries from the Listing Division.

Annual Caps and Independent Oversight

Where restructuring is not commercially viable — such as a long-term property lease from the controlling shareholder — the applicant must propose an annual cap and an independent oversight mechanism. The cap must be based on historical usage data plus a reasonable growth factor, supported by a board paper from the sponsor. The independent non-executive directors (INEDs) must review the cap annually and report to the exchange. In practice, HKEX has rejected caps exceeding 120% of the prior year’s actual usage without a compelling justification, as noted in Listing Decision LD127-2024.

Disclosure in the Prospectus

Full disclosure of all CTs, including those that are exempt, is mandatory in the prospectus under Practice Note 22. The disclosure must include: the identity of the connected person, the nature and terms of the transaction, the basis for determining the consideration, the annual cap (if applicable), and the reasons why the transaction is fair and reasonable. The sponsor must include a statement in the sponsor’s declaration confirming that it has no reason to believe the CTs are not on normal commercial terms. Failure to provide this statement has resulted in resubmission of A1 applications in at least three cases in 2024, according to HKEX’s enforcement record.

Key Takeaways for Issuers and Sponsors

• Engage Hong Kong counsel to conduct a CT audit at least six months before the planned A1 filing, identifying all transactions with persons who will become connected persons upon listing.
• Prioritise restructuring over waiver applications — acquiring or capitalising connected assets or liabilities before filing eliminates the need for ongoing compliance and reduces regulatory scrutiny.
• For unavoidable continuing CTs, propose annual caps based on audited historical data plus a maximum 15% growth buffer, and document the rationale in a board paper signed by the sponsor.
• Submit any waiver application at least four months before A1 filing, with a complete set of supporting documents including an independent valuation and a legal memorandum.
• Ensure the sponsor’s declaration explicitly addresses the fairness and normal commercial terms of all CTs, as any omission will trigger a Listing Division query and delay the listing timeline.