In public hands: shareholdings in managed accounts

The Main Board Listing Rules of the Hong Kong Stock Exchange (HKEx) normally require at least 25% of a listed company's issued shares to be held "in public hands". Shares held by a "connected person" of the listed company are not regarded as being in public hands. Connected persons include any "substantial shareholder", which (for the purposes of the Listing Rules) is a person entitled to control the exercise of 10% or more of a company's voting power.

In a listing decision published on 30 December 2011, the HKEx considered the powers of a fund manager with respect to voting rights attached to shares held in certain "segregated investment accounts and closed-end funds (collectively, the 'Segregated Funds')". Under the client mandate for each Segregated Fund, the manager was authorised to vote on behalf of the client according to the client's instruction. In the absence of any specific voting instruction, the manager was empowered to vote in accordance with its proxy voting policy endorsed by the client. The policy sought to assure that proxies were voted in the best interest of each client. Such an arrangement, whereby the client retains power to give specific voting instructions, is common for segregated investment accounts (managed accounts), but not for funds, where voting discretion would usually be delegated to the fund's manager.

Although the manager in this case could exercise voting rights even in the absence of specific instructions, the HKEx implicitly took the view that the manager was not "entitled to control the exercise of the voting rights", as it could not vote in its own interest. HKEx also noted that the clients, not the manager, were the beneficial owners of the shares. Further, the clients controlled the purchase and sale of the shares. Usually this function would be delegated to the manager, even if the client retains ultimate control. Though unclear from the listing decision, it may be that the manager of the Segregated Funds did not have full discretionary investment authority. The decision seems to have been made on the basis that the clients in practice retained more day-to-day control of their investments than is usually the case.

The HKEx decided that the shares held in the Segregated Funds would be discounted from a calculation as to whether the manager was a substantial shareholder.

The listing decision is available here:
http://www.hkex.com.hk/eng/rulesreg/listrules/listdec/Documents/ld22-2011.pdf.

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Alexander Que (Alex)

Partner | Corporate Finance

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