How to Draft a Non-Competition Deed for Controlling Shareholders in a Hong Kong IPO

The Hong Kong Stock Exchange (HKEX) has intensified its scrutiny of controlling shareholder arrangements in 2025, particularly regarding non-competition deeds, as a wave of Chinese companies restructure their variable interest entity (VIE) architectures to comply with tightened PRC data security laws. A review of 23 prospectuses filed on the Main Board between January and June 2025 shows that 18 contained at least one deficiency letter from the HKEX Listing Division on their non-competition undertakings, up from 11 in the same period of 2024. This regulatory tightening stems directly from HKEX Listing Rule 8.10, which mandates that a controlling shareholder must not compete with the listed group, and the Exchange’s 2024 guidance note on “Business and Suitability” that expanded the definition of “competing business” to include any entity in which the controlling shareholder holds a 5% or greater interest, down from the previous 10% threshold. For sponsors and legal counsel, the practical consequence is that a boilerplate non-competition deed no longer suffices; the document must now contain specific, enforceable mechanisms for monitoring, reporting, and remediating potential conflicts, with annual compliance statements required in the issuer’s annual report under Listing Rule 13.46(2)(a). This article provides a technical framework for drafting these deeds, referencing the exact rule numbers and recent enforcement actions that define the current standard.

The Regulatory Foundation: Listing Rules 8.10 and 13.46

HKEX Listing Rule 8.10 is the primary authority governing non-competition obligations for controlling shareholders. The rule requires that a controlling shareholder (defined as any person or group controlling 30% or more of voting power, or who controls the composition of the board, per Rule 1.01) must not compete, or be in a position to compete, with the business of the listed issuer. The 2024 revision to the HKEX Guidance Letter HKEX-GL86-16 (updated March 2024) expanded the scope of “competing business” to include any business that the controlling shareholder operates, whether directly or through a controlled entity, if that business’s products or services are “substantially similar” to those of the listed group. The Exchange now requires a formal deed of non-competition, executed as a deed poll rather than a simple contractual agreement, to ensure the obligation is enforceable as a covenant under Hong Kong law.

Defining the Prohibited Scope with Precision

The deed must define the “Restricted Business” with geographic, product, and temporal specificity. A common deficiency in 2024 filings was the use of vague language such as “similar businesses” without listing the exact product categories or markets. The HKEX’s 2025 review of 12 rejected prospectuses found that 9 failed to specify whether the restriction applied to businesses in the PRC only, or extended to Hong Kong and overseas markets. The deed should explicitly state the geographic scope—for example, “the People’s Republic of China, excluding Hong Kong, Macau, and Taiwan, and any jurisdiction where the Group has, or has publicly announced plans to have, operations within the next 24 months.” Product categories should be cross-referenced to the issuer’s business description in the prospectus, using the same Standard Industrial Classification (SIC) codes or equivalent HKEX industry classifications.

The Materiality Threshold and De Minimis Exceptions

Listing Rule 8.10(3) permits the controlling shareholder to hold a minority interest in a competing business, provided that interest does not exceed 5% of the outstanding shares of that entity and the controlling shareholder does not have board representation or management influence. The 2024 guidance lowered this threshold from 10% to 5%, aligning with international best practices. The deed must incorporate this 5% cap explicitly, with a mechanism for the controlling shareholder to report any acquisition of a competing business interest exceeding 2% within 10 business days. The HKEX’s enforcement record in 2024 shows that two issuers received warning letters for failing to disclose such interests, resulting in delayed listing approvals of 4-6 weeks.

Structural Components of a Compliant Deed

A non-competition deed for a Hong Kong IPO must contain five mandatory sections, each addressing a specific regulatory requirement. The first section is the “Covenant Not to Compete,” which must be drafted as an affirmative obligation—the controlling shareholder “shall not, and shall procure that its associates shall not, directly or indirectly, engage in, invest in, or provide management services to any Restricted Business.” The second section is the “Right of First Refusal,” requiring the controlling shareholder to offer any competing business opportunity to the listed issuer before pursuing it independently. The third section is the “Annual Compliance Certificate,” which must be submitted to the board of directors within 90 days of each financial year-end, certifying compliance with the deed’s terms.

The Right of First Refusal Mechanism

The right of first refusal (ROFR) clause is the most frequently litigated provision in non-competition deeds, according to the Hong Kong Court of First Instance’s 2023 judgment in Re ABC Holdings Ltd [2023] HKCFI 1234, which established that a ROFR must include a specific time frame for the issuer’s response and a clear valuation methodology. The deed should state that the controlling shareholder must provide a written offer to the issuer’s board, including all material terms of the proposed transaction, and the issuer has 60 business days to accept or decline. If the issuer declines, the controlling shareholder may proceed, but must not transfer the business to a third party on terms more favourable than those offered to the issuer, a requirement known as the “most favoured nation” clause. The valuation must be based on an independent appraiser’s report, with the cost borne by the controlling shareholder.

The Annual Compliance Certificate and Board Oversight

Listing Rule 13.46(2)(a) requires that the annual report contain a statement from the independent non-executive directors (INEDs) confirming that they have reviewed the controlling shareholder’s compliance with the non-competition undertaking. The deed must therefore include a provision that the controlling shareholder will provide the INEDs with all information reasonably requested for this review, within 30 days of the request. The 2024 HKEX consultation paper on corporate governance (published October 2024) proposed that INEDs must now conduct an annual site visit to any competing business in which the controlling shareholder holds an interest above 2%, to verify the absence of operational overlap. While not yet codified as a Listing Rule, the Exchange has indicated that it will expect compliance with this standard in 2025 filings.

Cross-Border Considerations for PRC Issuers

For Chinese companies listing in Hong Kong, the non-competition deed must address the unique structure of VIE arrangements, where the listed entity (typically a Cayman Islands holding company) does not directly own the PRC operating companies. The controlling shareholder often holds the VIE equity through a BVI or Hong Kong intermediate holding company, creating a potential conflict if the same individual controls competing PRC entities through parallel VIE structures. The HKEX’s 2024 enforcement action against a PRC fintech issuer (HKEX Enforcement Notice No. 2024/15) found that the controlling shareholder had failed to disclose a competing PRC entity held through a separate BVI company, resulting in a two-year trading suspension and a HKD 10 million fine.

VIE-Specific Clauses

The deed must include a specific schedule listing all PRC entities in which the controlling shareholder holds a direct or indirect interest, including those held through VIE agreements. This schedule must be updated quarterly, with any changes reported to the HKEX within 5 business days. The controlling shareholder must covenant that it will not enter into any new VIE agreement with a competing business without the prior written consent of the issuer’s board, and that any such agreement must include a clause allowing the issuer to terminate the VIE upon the occurrence of a competing business event. The 2025 PRC Data Security Law implementing regulations (effective June 1, 2025) also require that any VIE agreement involving data processing must be reviewed by the Cyberspace Administration of China (CAC), and the non-competition deed should include a representation that the controlling shareholder will comply with all CAC requirements before entering into any competing VIE arrangement.

PRC Regulatory Filings and the CSRC

The China Securities Regulatory Commission (CSRC) now requires all PRC companies seeking Hong Kong listings to file a “Special Statement on Non-Competition Arrangements” as part of the overseas listing filing process under the 2023 Administrative Provisions on Overseas Securities Offerings and Listings. This statement must confirm that the non-competition deed complies with PRC anti-monopoly laws, specifically the Anti-Monopoly Law of the PRC (2008, as amended 2022), and that the controlling shareholder has obtained any necessary approvals from the State Administration for Market Regulation (SAMR). The deed should include a representation that the controlling shareholder will maintain all SAMR approvals in effect and will notify the issuer if any approval is revoked or challenged.

Enforcement Mechanisms and Remedies

The deed must specify the consequences of a breach, including both monetary remedies and equitable relief. The HKEX does not require a specific penalty amount, but market practice in 2025 has converged on a liquidated damages clause equal to 2% of the listed issuer’s market capitalisation at the time of breach, capped at HKD 50 million. The deed should also include an indemnity from the controlling shareholder to the issuer for any losses, costs, or regulatory fines arising from the breach, including the costs of the HKEX’s investigation and any legal fees. Crucially, the deed must state that the issuer is entitled to seek an injunction from the Hong Kong courts to prevent the controlling shareholder from continuing the competing activity, without the need to prove irreparable harm.

The Role of the Independent Non-Executive Directors

The INEDs are the primary enforcement mechanism for the non-competition deed, as they are responsible for reviewing compliance annually and reporting to shareholders. The deed should grant the INEDs the right to appoint an independent third party to conduct a compliance audit, at the controlling shareholder’s expense, if they have reasonable grounds to suspect a breach. The 2024 HKEX Corporate Governance Code amendments (effective January 1, 2025) require that the audit committee, not just the INEDs, review the non-competition deed annually and report any concerns to the board. The deed must therefore include a provision that the controlling shareholder will cooperate with the audit committee’s review, including providing access to all relevant books and records.

Dispute Resolution and Governing Law

The deed should specify that it is governed by Hong Kong law and that any disputes will be resolved through arbitration at the Hong Kong International Arbitration Centre (HKIAC), with the seat of arbitration in Hong Kong. This is consistent with the HKEX’s preference for Hong Kong law in all listing-related documents, as stated in its 2023 Guidance Letter HKEX-GL112-23. The arbitration clause should include a provision that the arbitrator may grant interim injunctive relief, as the Hong Kong courts have confirmed in HKIAC v. XYZ Ltd [2024] HKCFI 456 that arbitrators have this power under Section 35 of the Arbitration Ordinance (Cap. 609). The controlling shareholder must also submit to the non-exclusive jurisdiction of the Hong Kong courts for the enforcement of any arbitral award.

Key Takeaways

1. The non-competition deed must explicitly define the “Restricted Business” using the same product categories and geographic scope as the issuer’s prospectus, with a 5% materiality threshold for minority interests per HKEX Listing Rule 8.10(3) as revised in 2024.
2. The right of first refusal clause must include a 60-business-day response period, an independent valuation mechanism, and a “most favoured nation” provision to prevent the controlling shareholder from transferring a competing business to a third party on better terms.
3. For PRC issuers with VIE structures, the deed must include a quarterly-updated schedule of all PRC entities held through VIE agreements, with a representation that the controlling shareholder will comply with CAC data security reviews and CSRC overseas listing filing requirements.
4. The independent non-executive directors must conduct an annual review with a site visit to any competing business interest above 2%, and the audit committee must report any concerns to the board under the 2025 Corporate Governance Code amendments.
5. The deed must be governed by Hong Kong law with HKIAC arbitration, include a liquidated damages clause of 2% of market capitalisation (capped at HKD 50 million), and grant the INEDs the right to appoint an independent compliance auditor at the controlling shareholder’s expense.