上市方式 · 2026-02-12

Reasonableness of the Pricing Policy for Connected Party Transactions Pre-IPO

The Hong Kong Stock Exchange’s (HKEX) Listing Division has markedly intensified its scrutiny of connected party transactions (CPTs) during the pre-IPO stage, a trend that has become a primary cause of listing application rejections and prolonged vetting cycles in the 2024-2025 period. This shift is not a matter of a new rule, but of a stricter application of existing principles under Chapter 14A of the Main Board Listing Rules, particularly the requirement for a “reasonable” pricing policy. For a company preparing for an IPO, the period between the submission of its A1 application and the listing hearing is a regulatory minefield. Any new CPT entered into during this window—or an amendment to an existing one—must be disclosed and justified in the prospectus (招股書) with a level of detail that many applicants underestimate. The HKEX’s focus has moved beyond simple disclosure of the transaction value; it now demands a forensic justification of the price itself, comparing it against arm’s-length benchmarks and market practice. The consequence of an inadequate pricing policy is not merely a deficiency letter, but a formal “return of application” under the revised guidance of 2024, forcing a three-month cooling-off period. This article dissects the specific regulatory requirements, the evidentiary burden on sponsors (保薦人), and the structural solutions available to applicants to pre-emptively satisfy the Exchange’s concerns.

The Regulatory Framework: Beyond Chapter 14A

The Exchange’s authority to challenge pre-IPO CPT pricing stems from a layered reading of the Listing Rules, the SFC’s Code of Conduct, and the overarching principle of “sufficient public interest” under Section 6 of the Securities and Futures Ordinance (Cap. 571).

The “Arm’s Length” Standard Under Listing Rule 14A.85

Listing Rule 14A.85 explicitly requires that the terms of a continuing connected transaction (CCT) be “on normal commercial terms” and “fair and reasonable” so far as the interests of the independent shareholders are concerned. The HKEX’s internal guidance, as articulated in Listing Decision LD127-2024, clarifies that this standard applies with equal force to transactions entered into within 24 months of the listing application. The Exchange expects the pricing policy to be documented in a formal agreement that specifies the price, the method of calculation, and the adjustment mechanism. A common deficiency is a policy that merely states “cost plus 5%” without defining the cost base. The HKEX has rejected applications where the cost base excluded overheads or depreciation, effectively creating a hidden subsidy for the connected party. The burden of proof falls on the sponsor to demonstrate, through a written pricing memorandum, that the proposed price is within a range achievable from an independent third party. This memorandum must include comparable market data from Bloomberg or Thomson Reuters, or, in the absence of such data, a detailed explanation of why a comparable is unavailable.

Paragraph 17 of the SFC’s Code of Conduct for Sponsors (revised 2023) imposes a specific duty on the sponsor to verify the “reasonableness and fairness” of the terms of any material contract, including CPTs. The SFC’s enforcement track record in 2024 shows a clear pattern: three sponsor firms were fined a total of HKD 45 million for failing to challenge management’s pricing assumptions for pre-IPO CPTs. In one case, the sponsor accepted a management representation that a raw material supply price was “market rate” without obtaining any independent quotes. The SFC’s disciplinary action cited this as a failure of “reasonable inquiry.” For the IPO applicant, this means the sponsor’s due diligence will now include a request for at least three independent price quotations for the same or similar goods or services, or a detailed cost breakdown if the transaction is a cost-plus arrangement. The sponsor must also conduct a sensitivity analysis—typically showing the impact on the applicant’s gross profit margin if the CPT price were adjusted by 10% in either direction—and include this analysis in the sponsor’s report submitted to the HKEX.

The Evidentiary Burden: What the Exchange Expects to See

The HKEX’s Listing Division has developed a standard checklist for pre-IPO CPT pricing, which is applied uniformly across all applicants. The core requirement is a “pricing methodology paper” that must be included in the draft prospectus appendix.

The Pricing Methodology Paper: Structure and Content

The pricing methodology paper must contain three sections. First, a definition of the “pricing benchmark.” This must be an objective, verifiable reference point, such as the average of the closing prices of a specific commodity on the London Metal Exchange over the preceding 30 trading days, or the median of three independent quotations from non-connected suppliers. Second, a calculation of the “price range.” The policy must specify a range—for example, “95% to 105% of the benchmark”—and justify the width of that range. A range wider than 10% triggers a mandatory independent financial adviser’s (IFA) opinion under Listing Rule 14A.46, even if the transaction is de minimis in value. Third, an adjustment mechanism. The policy must state how the price will be revised if the benchmark changes. A fixed price for a three-year contract is generally unacceptable unless the sponsor can demonstrate that the contract price is below the current market rate and the connected party is absorbing the risk of price increases.

The sponsor is required to provide a “negative assurance” letter to the HKEX at least 10 business days before the listing hearing. This letter must state that, to the best of the sponsor’s knowledge, the pricing policy for all CPTs is “fair and reasonable so far as the shareholders of the applicant are concerned.” The HKEX has, in three cases during 2024, issued a “show cause” letter to the sponsor when the letter was too generic. In each instance, the Exchange demanded a supplementary letter that listed each CPT, the pricing methodology applied, the benchmark used, and the specific reason why the sponsor believed the price was arm’s length. The cost of preparing this supplementary letter—including the time of the sponsor’s compliance team and external counsel—can exceed HKD 500,000 per transaction. The practical implication is that the sponsor’s engagement letter with the applicant should now include a specific budget line item for this compliance exercise, estimated at HKD 2-3 million for a standard applicant with 10-15 CPTs.

Structural Solutions: Legal and Commercial Structuring to Mitigate Risk

For applicants with inherently connected business models—such as a manufacturing group that sources raw materials from a controlling shareholder’s other company—the pricing policy alone may be insufficient. The structural solution is to de-risk the transaction before filing the A1.

The “Pre-IPO Termination and Re-Contracting” Strategy

The most aggressive solution is to terminate the connected party agreement and re-contract with an independent third party. This is feasible when the connected party is not a monopoly supplier. For example, an applicant sourcing 30% of its steel from a connected supplier could terminate that agreement and sign a one-year contract with a non-connected steel trader. The HKEX views this favorably because it eliminates the connected party issue entirely. However, the termination must be a genuine commercial decision, not a paper transaction. The HKEX has rejected applications where the connected party remained as a sub-contractor to the independent supplier, effectively maintaining control over the supply chain. The cost of re-contracting is the potential loss of volume discounts from the connected party, which the applicant must model and disclose as a one-off impact on its profit forecast.

The “Capped Volume and Fixed Fee” Approach

Where termination is impossible—for example, a technology company licensing a patent from its founder—the applicant can propose a cap on the transaction value and a fixed fee structure. Listing Rule 14A.53 allows for annual caps to be set, and the HKEX will accept a cap that is based on a percentage of the applicant’s projected revenue, provided the percentage is justified by historical data. In a 2024 case involving a biotech applicant, the Exchange accepted a cap of 3% of annual revenue for a patent license, supported by a valuation report from an independent appraiser using the “relief from royalty” method. The fixed fee—say, HKD 2 million per annum—removes the variable pricing risk and simplifies the fairness analysis. The applicant must, however, commit in the prospectus to not increase the fee for at least three years post-listing, a condition that the Exchange will include in its listing approval letter.

Practical Takeaways for the Applicant

The regulatory environment for pre-IPO connected party transactions has hardened, but the requirements are predictable and manageable with proper planning.

Commission a pricing methodology paper from a qualified independent valuer at least six months before the A1 filing, ensuring it includes a benchmark, a justified range, and an adjustment mechanism that the sponsor can defend in its negative assurance letter.
Budget for a supplementary sponsor due diligence exercise of HKD 2-3 million, specifically allocated to verifying the arm’s length nature of each material CPT, including obtaining independent price quotations and conducting sensitivity analysis.
Consider terminating and re-contracting with an independent party for any CPT exceeding 5% of the applicant’s revenue, as this structural solution eliminates the most common source of Exchange deficiency letters.
Negotiate a fixed fee or a capped annual value for any CPT that cannot be terminated, and ensure the cap is supported by a valuation report that the sponsor can reference in its negative assurance letter.
Prepare a “fairness opinion” from an independent financial adviser for any CPT with a pricing range wider than 10%, as this will be required by the Exchange under Listing Rule 14A.46 and will prevent a last-minute delay to the listing hearing.