Large scale bonus issues likely to be rejected by the Hong Kong Stock Exchange

The Stock Exchange of Hong Kong Limited (the “Exchange”) recently noted increases in listed companies conducting bonus issues with a large distribution ratio, and significant price and volume fluctuations in the trading of their shares during the time interval between the ex-entitlement date for a bonus issue and the date of allotment of the bonus shares (the “ex-entitlement period”). In view of this, on 27 April 2016, the Exchange published a new guidance letter (HKEX-GL-88-16) providing guidance on its approach in handling bonus issues of shares by listed companies.

According to the guidance letter, the Exchange may not grant listing approval for large-scale bonus issues where there is a reasonable likelihood of disorderly trading during the ex-entitlement period. Generally, the Exchange is likely to raise concerns about the operation of an orderly market when a company proposes a bonus issue of 200% or more of its existing issued shares.  It should also be noted that the Exchange may raise the same concern after considering the relevant facts and circumstances of a proposed bonus issue of a smaller scale.

Listed companies should take note of the following key points when planning their bonus issues:

• Size – Bonus issues with a ratio of two new shares for each existing share (or higher) are likely to be rejected by the Exchange, unless the company can demonstrate that the proposed issue is not likely to give rise to disorderly trading during the ex-entitlement period.
• Reason – Be sure to provide a proper reason for the proposed bonus issue.  As highlighted in the Securities and Futures Commission’s Corporate Regulation Newsletter published in March 2016, it could be misleading or inaccurate if a company discloses its bonus issue of shares as “a reward” to shareholders or a means to widen its capital base.
• Other alternatives – If the reason for proposing a bonus issue is to increase the liquidity of shares in the market, the company may consider other alternatives which would not cause disorderly trading, such as effecting a share subdivision.
• Timetable – Follow the guidance set out in the “Guide on distribution of dividend and other entitlements” when planning bonus issues. In particular, the ex-entitlement period should be as short as practicable.  Where a bonus issue is subject to condition(s), the company must clearly disclose the condition(s) in the bonus issue announcement.
• Trading limit – Do not propose a bonus issue (or share subdivision) that violates the principle of Main Board Listing Rule 13.64, under which the Exchange has the right to require a company to change the trading method or to proceed with a consolidation of its securities when the market price of its securities approaches the extremity of HK$0.01, which the Exchange considers to be any trading price less than HK$0.1.