China Client Alert Hong Kong Regulator issues Guidelines on IPO Cornerstone Investments Last month, the Hong Kong Stock Exchange ("HKEx") issued new guidelines for cornerstone investments (the “Guidance Letter”). In the Guidance Letter, HKEx sets out its general policies on IPO cornerstone investments and expresses its concerns over side arrangements made between cornerstone investors and listing applicants. Paul, Weiss Asia Offices Highlights of HKEx's policies on IPO Cornerstone Investments: A) Principles for Approving IPO Cornerstone Investments BEIJING Unit 3601, Fortune Plaza Office HKEx approves a preferential placing to cornerstone investors Tower A based on the following principles: No. 7 Dong Sanhuan Zhonglu Chao Yang District, Beijing 100020 • Placing price is at IPO price, People’s Republic of China • +86 10 5828 6300 IPO shares are subject to lock-up (at least 6 months), • Investor has no board representation, HONG KONG Hong Kong Club Building, 12th Flo0r • Investor is independent of listing applicant, its connected persons 3A Chater Road, Central and their respective associates, Hong Kong • Details of placing arrangements are disclosed in the prospectus, +852 2846 0300 and TOKYO • IPO shares are counted as part of the public float so long as the Fukoku Seimei Building investor is a member of the public under Hong Kong Listing Rules. 2-2, Uchisaiwaicho 2-chome Chiyoda-ku, Tokyo 100-0011, B) Reclassification of Cornerstone Investors as Pre-IPO Japan Investors +81 3 3597 8101 HKEx may reclassify a cornerstone investor as a pre-IPO investor if, with respect to acquisition of IPO shares, such investor (whether by way of side letters or otherwise): (i) receives any direct or indirect benefit (other than a guaranteed allocation of IPO shares), for example: • waiver of brokerage commission, • ©2013 Paul, Weiss, Rifkind, Wharton & put option for other person to buy back shares after listing, Garrison LLP. In some jurisdictions, this • sharing of underwriting commissions, brochure may be considered attorney advertising. Past representations are no guarantee of future outcomes. China Client Alert • assurance that the applicant will re-invest the IPO proceeds in funds managed by the cornerstone investor, • agreement to allow allocation of shares in another IPO, or (ii) enters into any transaction or arrangement on non-arm's length commercial terms. Once a cornerstone investor is reclassified as a pre-IPO investor, its investment will be subject to the rules relating to pre-IPO investments, including the restrictions on timing of funding. Except in very exceptional circumstances, it must fund either (1) at least 28 clear days before the date of the first submission of listing application, or (2) 180 clear days before listing. C) Disclosure of Arm's Length Commercial Arrangements Any arm's length commercial arrangement between a cornerstone investor and a listing applicant which is considered as a "strategic dealing" (e.g. cornerstone investor being a major customer, supplier or joint venture partner) is acceptable to HKEx. However, details of such arrangement must be fully disclosed in the prospectus. The Guidance Letter is the first guidance letter issued by HKEx on IPO cornerstone investments. It specifies the general principles that HKEx has been adopting to ensure that preferential placings to cornerstone investors will not violate the fair and equal treatment under the Hong Kong Listing Rules. It also emphasizes that the only preferential treatment for cornerstone investors acceptable to HKEx is the guaranteed allocation of IPO shares at IPO price. Any other non-arm's length arrangement in connection with the acquisition of IPO shares may deem a "cornerstone investment" a "pre-IPO investment" to which additional rules (especially those on the timing of funding) will apply. To view the full Guidance Letter issued by HKEx “Guidance on Cornerstone Investment – No Direct or Indirect Benefits to Cornerstone Investors other than Guaranteed Allocation at IPO Price (GL51-13)” please click here http://www.paulweiss.com/media/1539377/gl51-13.pdf * * * This client alert is not intended to provide legal advice with respect to any particular situation and no legal or business decision should be based solely on its content. Questions concerning issues addressed in this article should be directed to any member of the Paul, Weiss China Practice Group, including: Jeanette K. Chan [email protected] +852 2846 0388/+86 10 5828 6388 Jack Lange [email protected] +852 2846 0333 Greg Liu [email protected] +8610 5828 6302 Hans-Günther Herrmann [email protected] +852 2846 0331 Spencer Park [email protected] +852 2846 0313 Corinna Yu [email protected] +852 2846 0383 .