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International arbitration report
In this edition, we focused on the Shanghai International Economic and Trade Arbitration Commission’s (SHIAC) new arbitration rules, which take effect January 1, 2024.
Enhancing capital management: treasury shares regime modernized under listing rules
Hong Kong SAR | Publication | 5月 2024
From 11 June 2024, the Rules Governing the Listing of Securities (the Listing Rules) on the Stock Exchange of Hong Kong Limited (the Exchange) will be amended to empower issuers to retain repurchased shares as treasury shares (subject to the laws of their places of incorporation and constitutional documents (collectively, the Applicable Laws)).
This is expected to improve flexibility for the issuers to adjust their capital structures and to react promptly to the ever-changing market conditions. This article serves as a quick guide to the changes.
Content
Drivers Behind the Change
Under the current Listing Rules, all shares listed on the Exchange that are repurchased by an issuer have to be cancelled, and the relevant share certificates have to be destroyed and cancelled after settlement (Share Cancellation). Subsequent issuance of new shares will be subject to listing applications to be granted by the Exchange.1
In practice, new shares are often issued by issuers to support various corporate actions (e.g. issuance for fund raising purposes, as consideration shares, grants under share schemes or pursuant to obligations under convertible securities).
If issuers can hold the repurchased shares in treasury for future use, not only can the corporate actions be executed efficiently and administrative steps be dispensed with, issuers can deploy the treasury shares strategically and with flexibility (such as to resell in small lots on-market at full market price, as opposed to other fund raising means such as placings of new shares, which are often at a discounted value).
Key Changes
The Exchange aims to enhance flexibility for issuers’ capital management without compromising shareholders protection and market order. Highlights in the below key rule amendments (the Changes):
|
Items |
Item categorisation |
Changes |
| 1. Share Cancellation Requirement Removed | ||
|
Share Cancellation no longer required |
-- |
Issuers may hold any repurchased shares as treasury shares, subject to issuers’ Applicable Laws, and treasury shares may be used for purposes permitted under such Applicable Laws. The listing status of treasury shares will be retained.2 |
| 2. Treat Resale of Treasury Shares3 (the Resale) as New Issuance: requirements for issuance of new shares will apply to a Resale | ||
| Resale on Pre-emptive basis or with shareholders’ mandate | -- | Any Resale shall be offered to all shareholders on a pro rata basis, or conducted with shareholders’ approvals by way of a specific mandate or general mandate.4 A general mandate must specifically authorise the resale of treasury shares. |
|
For Resale conducted under a general mandate |
General mandate limit |
A general mandate limit will be for the issuance of new shares and the resale of treasury shares. The number of shares repurchased during the year on-market under the repurchase mandate can be added to the general mandate limit.5 Issuers may hold shares repurchased in other circumstances (e.g. off-market) in treasury and may resell such repurchased shares under a general mandate, although these repurchased shares must not be added to the general mandate limit. |
| Price for Resale made under general mandate |
The on-market resale price will be subject to a maximum discount of 20% of the higher of the:6 (a) closing price on the trading day immediately prior to the resale; or (b) average closing price in the 5 trading days immediately prior to the resale. |
|
|
Similarly, an off-market resale will be subject to a maximum discount of 20% of the higher of the:7 (a) closing price on the date of placing agreement; or (b) average closing price in the 5 trading days immediately prior to the date of: (i) the transaction announcement, (ii) the placing agreement; (iii) when the placing price is determined, whichever is earlier. |
||
| Share schemes | Mandate limits |
Treasury shares can be used to satisfy grants under a share scheme (where the scheme rules specifically allow) but such share scheme will be treated as funded by new shares under Chapter 17 of the Listing Rules. Grants should be made for benefits of specified participants and will be subject to the mandate limits approved by shareholders.8 Rules of share schemes should be reviewed and where necessary, amended to allow the use of treasury shares to satisfy share grants. Such amendments will not be regarded as a material alteration by the Exchange. |
| Disclosure & documentation requirements | -- |
Disclosure of transaction details in next day return, announcements and annual reports for on-market Resale will be required.9 On-market Resale will not be required to be announced10 and placee information will not be required to be submitted to the Exchange.11 |
| 3. Maintaining a fair market: dealing restrictions, mitigation of risks of market manipulation and insider dealing |
||
|
Moratorium periods |
Share Repurchase |
No on-market repurchases for 30 days after on-market resale or transfer of treasury shares.12 |
| Resale |
No on-market or off-market resale of treasury shares for 30 days after any share repurchase, except for capitalization issue, grants under share schemes, any issue of new shares or transfer of treasury shares upon vesting or exercise of share awards or options under share schemes complying with Chapter 17 of the Listing Rules and the issue of new shares or transfer of treasury shares upon exercise of warrants or other similar instruments outstanding prior to the repurchase and conversion of convertible securities.13 |
|
| Dealing restrictions |
Inside information |
No on-market Resale until inside information is being made public.14 |
| Board meeting/ Results announcements |
No on-market Resale for a period of 30 days preceding the earlier of the date of the board meeting approving the financial results of the issuer and the results announcement.15 |
|
| 4. IPOs |
||
| Listing and Lock up | -- | Listing applicants will be able to retain treasury shares upon listing but no Resale is permitted during a period of 6 months from the day of listing.16 |
| 5. Consequential Changes: compliance obligations clarified |
||
| Voting rights | Abstention |
Holders of treasury shares are required to abstain from voting at matters requiring shareholders’ resolutions under the Listing Rules.17 |
| Calculations under Listing Rules based on issued shares |
-- | Treasury shares will be disregarded in the calculation of issuers’ issued share capital for purposes of determining various thresholds under Listing Rules e.g. public float, market capitalisation, size tests, percentage voting rights and mandate limits.18 |
| Disclosure and Documentation |
General meetings |
A poll results announcement must disclose details including the number of treasury shares held by the issuer and confirm no voting rights have been exercised.19 |
| Distributions |
A dividend and distribution announcement must state the number of treasury shares held by the issuer, which will not be entitled to a dividend.20 |
|
| Explanatory Statements |
Issuers’ intentions as to whether shares repurchased under repurchase mandates will be retained as treasury or cancelled must be disclosed in explanatory statements.21 |
|
| Administration and logistics |
Holding arrangements |
Treasury shares shall be held in segregated accounts and properly identified as such, whether they are being registered in issuers’ name or under CCASS.22 |
| Resale arrangements |
If issuers are required under the Applicable Laws to hold treasury shares in their own names in order for the repurchased shares to be classified as treasury shares (e.g. Bermuda and Cayman Islands), then the shares can only be re-deposited into CCASS if there is an imminent Resale plan, which shall be completed as soon as possible.23 |
|
| 6. Transitional Arrangements |
||
| Waivers previously granted to issuers |
Grace period |
Some overseas issuers who have previously obtained waivers on the Share Cancellation requirement from the Exchange will be required to comply with the rule amendments by their second AGM following 11 June 2024. |
Conclusion: Navigating the Changes
As the new treasury share regime is set in motion, issuers will be able to manage their share capital with flexibility, execute transactions at an enhanced efficiency, and benefit from lower costs of capital. The logistics in holding repurchased shares will also vary, depending on the Applicable Laws24.
Issuers should also bear in mind implications, if any, which the Changes may have on other regulatory requirements, including the disclosure of interests regime under Part XV of the Securities and Futures Ordinance (treasury shares will remain part of the issuer’s voting shares despite that the voting rights will be suspended and the Securities and Futures Commission is expected to provide further guidance for computing percentage interests to be disclosed under Part XV) and stamp duty obligations (a resale of treasury shares at the secondary market will be subject to ad valorem stamp duty) under the Stamp Duty Ordinance. On the other hand, with respect to the Takeovers Code and the Share Buy-backs Code (the Codes), the definition of “voting rights” under the Codes specifically carves out voting rights attached to treasury shares. Treasury shares, if any, will not be treated as disinterested shares or counted towards the various thresholds under the Codes (such as the 30% trigger, the 2% creeper or an acceptance threshold). In addition, an offer is not required to be made for treasury shares during a general offer or partial offer.
Lastly, while the Listing Rules have been modernized, Hong Kong law currently does not permit issuers incorporated in Hong Kong to hold treasury shares. There is therefore a market expectation that the relevant legislative revisions will be undertaken to extend the benefits under the Changes to Hong Kong-incorporated listed issuers.
Footnotes
1
Current Listing Rules for Main Board of the Exchange (the MBLR) 10.06(5)
2
New MBLR 10.06(5)
3
When the treasury shares will be transferred out from treasury and to be used as if the issuers are issuing new shares, it will be referred to as the resale of treasury shares.
4
Amended MBLR 2.03, 13.36(1A)
5
MBLR13.36
6
New MBLR 13.36(5A)
7
New MBLR 13.36(5)
8
New MBLR 17.01(4) and 19A.39D
9
New MBLR 10.06B
10
Unless the on-market resale is of material size as required under MBLR10.06B(2) where separate announcement is required.
11
Amended MBLR 9.23(2) and 13.27A
12
New MBLR10.06(3)(b)
13
Amended MBLR10.06(3)(a)
14
New MBLR10.06A(3)
15
New MBLR10.06A(3)
16
Amended MBLR 10.08
17
Amended MBLR 1.01
18
e.g. amended MBLR 8.08, 8.09(2), 14.07(5), 10.06(1)(c), 14.44, 14A.37 etc.
19
GL119-24 paragraph 15
20
GL119-24 paragraphs16-17
21
Amended MBLR 10.06(1)(b)
22
Amended MBLR 10.06(5)
23
GL119-24 paragraph 10
24
GL119-24 section III(A)(1)
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