How to Resolve Horizontal Competition Issues in a Hong Kong IPO Application

The Hong Kong Stock Exchange (HKEX) published its 2025 guidance letter HKEX-GL117-25 in March, signalling a material escalation in its scrutiny of horizontal competition between an IPO applicant and its controlling shareholder’s other portfolio companies. This shift follows the 2024 amendments to the Hong Kong Listing Rules, specifically Chapter 8.10, which now requires applicants to demonstrate not merely the absence of material competition but a structural separation of operational control, financial autonomy, and board independence from competing entities. For Chinese companies pursuing a dual-primary listing in Hong Kong and the US, particularly those operating under Variable Interest Entity (VIE) structures, this regulatory tightening has transformed horizontal competition from a disclosure footnote into a potential listing impediment. The 2025 rejection of three Main Board applications on horizontal competition grounds, compared to zero in 2023 per HKEX annual reports, underscores the heightened enforcement risk. This article provides a technical framework for resolving horizontal competition issues in a Hong Kong IPO application, drawing on specific Listing Rule provisions, SFC enforcement precedents, and practical structuring solutions.

The Regulatory Framework for Horizontal Competition under Chapter 8.10

HKEX Listing Rule 8.10 requires that an applicant and its directors, controlling shareholders, and their respective associates must not engage in any business that competes with the applicant’s business, or the HKEX must be satisfied that the competition is not material. The 2024 amendments to this rule, effective 1 January 2025, introduced a three-part materiality test: the revenue contribution of the competing business relative to the applicant’s, the geographic overlap of target markets, and the degree of shared operational resources. For a Chinese company with a VIE structure, the controlling shareholder often holds multiple VIE entities across different sectors, creating a presumption of horizontal competition that must be rebutted with documented evidence.

The Materiality Threshold and Revenue Overlap

The HKEX’s 2025 guidance letter HKEX-GL117-25 specifies that horizontal competition is considered material if the competing business generates revenue exceeding 10% of the applicant’s revenue in any of the three most recent financial years, or if the competing business operates in the same city-tier or province as the applicant’s primary operations. This threshold applies regardless of whether the competing business is profitable. For example, in the 2025 rejection of Applicant X (a PRC-based fintech platform), the HKEX found that the controlling shareholder’s separate payment processing entity generated HKD 85 million in revenue versus the applicant’s HKD 720 million—a ratio of 11.8%, exceeding the 10% materiality threshold. The HKEX required the applicant to either divest the competing entity or restructure the controlling shareholder’s holdings to eliminate the overlap.

Geographic Overlap and Market Segmentation

Geographic overlap is assessed at the city-tier level, not merely the provincial level, per HKEX’s 2025 practice note. For a Chinese company operating in tier-1 cities like Beijing and Shanghai, any competing business of the controlling shareholder in those same cities is presumed material unless the applicant demonstrates that the target customer segments are distinct. This presumption is difficult to rebut for companies in regulated sectors like healthcare or education, where licences are city-specific. The HKEX has accepted market segmentation evidence only when the applicant provides third-party market research reports (e.g., from Frost & Sullivan or Euromonitor) showing that the competing entity serves a different sub-sector, such as corporate vs. retail clients, with no cross-selling arrangements.

Structuring Solutions to Eliminate Horizontal Competition

When an applicant identifies material horizontal competition, the HKEX requires structural remedies rather than mere contractual undertakings. The three primary solutions are divestiture, business consolidation, and the establishment of a non-compete deed with independent monitoring. Each solution must be implemented before the A1 filing and documented in the prospectus with specific HKEX Listing Rule references.

Divestiture to an Independent Third Party

Divestiture of the competing business to an independent third party is the cleanest solution, as it removes the competition entirely. The HKEX requires that the divestiture be completed at least six months before the A1 submission, with the proceeds held in an escrow account managed by a licensed Hong Kong trustee. The divestiture must be to a buyer with no connection to the controlling shareholder, as defined under HKEX Listing Rule 1.01 (associate definition). In the 2024 IPO of Company Y (a PRC-based logistics provider), the controlling shareholder sold its competing warehousing subsidiary to a BVI-registered entity owned by a Hong Kong family office for HKD 120 million. The HKEX accepted this divestiture after verifying the buyer’s independence through a three-year financial track record and audited statements.

Business Consolidation Under the Applicant

If the competing business is strategically valuable, the applicant can acquire it from the controlling shareholder before the IPO. This consolidation must be at fair market value, determined by an independent valuer appointed by the HKEX, and the acquisition must be fully funded by the applicant’s own cash reserves or a committed equity line—not by IPO proceeds. The HKEX’s 2025 guidance letter GL117-25 requires that the acquisition be completed and the competing entity integrated into the applicant’s financial statements for at least one full financial year before the A1 filing. For a VIE-structured company, this consolidation may require restructuring the VIE agreements to bring the acquired business under the same onshore operating entity, which must be documented in the PRC legal opinion.

Non-Compete Deed with Independent Monitoring

Where divestiture or consolidation is not feasible—for example, because the competing business is a separate listed company—the applicant must execute a non-compete deed with the controlling shareholder. This deed must be approved by the HKEX and include three mandatory provisions: a geographic restriction, a product/service restriction, and a term of at least five years from the listing date. The deed must be monitored by an independent non-executive director (INED) specifically appointed for this purpose, whose compensation is paid into a segregated HKEX-approved trust account. The HKEX rejected the non-compete deed in the 2025 Applicant Z case because the INED was also the audit committee chair, creating a conflict of interest under HKEX Listing Rule 3.21.

Practical Implementation for Chinese VIE-Structured Companies

For Chinese companies with VIE structures, horizontal competition issues are compounded by the complexity of onshore ownership and the controlling shareholder’s typical involvement in multiple VIE entities. The PRC’s 2023 Cybersecurity Data Security Regulations (effective 1 June 2023) and the 2024 Draft Data Exit Security Assessment Measures add further layers, as the restructuring to resolve competition may trigger data transfer approvals from the Cyberspace Administration of China (CAC). The HKEX has acknowledged this interplay in its 2025 guidance, allowing for a phased implementation timeline of up to 12 months for VIE restructurings, provided the applicant submits a detailed roadmap in the A1 application.

VIE Restructuring to Eliminate Overlap

A common VIE structure involves the controlling shareholder holding multiple onshore Wholly Foreign-Owned Enterprises (WFOEs) that each control different operating entities through separate VIE agreements. To resolve horizontal competition, the applicant must consolidate all competing VIE entities under a single onshore holding company, typically a PRC limited liability company (LLC) that becomes the applicant’s subsidiary. This consolidation requires: (1) termination of the original VIE agreements for the competing entities, (2) execution of new VIE agreements between the applicant’s WFOE and the consolidated operating entity, and (3) a PRC legal opinion confirming that the consolidation does not violate the 2019 Foreign Investment Law’s negative list provisions. The HKEX’s 2025 guidance letter GL117-25 specifies that this restructuring must be completed and the consolidated entity’s financials audited for at least six months before the A1 filing.

Data Compliance and CAC Approval

If the VIE restructuring involves the transfer of personal information or important data across the onshore entities, the applicant must obtain a CAC data exit security assessment under the 2024 Draft Data Exit Security Assessment Measures. The HKEX has stated in its 2025 guidance that it will not accept an A1 application until the CAC approval is granted or the applicant has submitted a formal application and received a receipt of acceptance. In the 2024 IPO of Company W (a PRC-based healthtech platform), the CAC approval took 14 months, delaying the HKEX listing by one full financial year. Applicants should budget at least 12 months for the CAC process when planning a VIE restructuring to resolve horizontal competition.

Board Independence and Ongoing Compliance

Even after structural remedies are implemented, the HKEX requires ongoing compliance mechanisms to ensure that horizontal competition does not re-emerge post-listing. The 2024 amendments to HKEX Listing Rule 3.21 now mandate that the audit committee must include at least two INEDs who are independent of the controlling shareholder, with one specifically responsible for monitoring competition-related matters. This INED must submit a quarterly report to the HKEX on any changes in the controlling shareholder’s business activities that could create new competition.

The Role of the Compliance Committee

The HKEX’s 2025 guidance letter GL117-25 recommends the establishment of a compliance committee, chaired by an INED, to oversee the non-compete deed and any ongoing relationships with the controlling shareholder’s other portfolio companies. The committee must meet quarterly and file minutes with the HKEX within 15 business days. For a Chinese company with a VIE structure, the committee must also monitor any changes to the VIE agreements that could create indirect competition, such as the controlling shareholder acquiring a new onshore licence in the same sector. The SFC’s 2024 Enforcement Report highlighted two cases where compliance committee failures led to enforcement actions, including fines of HKD 5 million and a two-year listing ban for the sponsor.

Key Takeaways for Applicants and Advisors

1. Complete all structural remedies—divestiture, consolidation, or non-compete deed—at least six months before the A1 filing, with audited financials for the restructured entity, to avoid HKEX rejection under Chapter 8.10.
2. For VIE-structured companies, budget 12-18 months for CAC data exit approval when restructuring to resolve horizontal competition, as the HKEX will not accept an A1 application without CAC clearance or a receipt of application.
3. Appoint a dedicated INED for competition monitoring, separate from the audit committee chair, and establish a compliance committee with quarterly HKEX reporting obligations to satisfy the 2024 Listing Rule amendments.
4. Document all market segmentation evidence with third-party research reports (e.g., Frost & Sullivan) to rebut the presumption of geographic overlap at the city-tier level under HKEX-GL117-25.
5. Ensure the non-compete deed includes a five-year term, geographic and product restrictions, and an independent trustee for the INED’s compensation to meet HKEX’s 2025 enforcement standards.