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On 4 May 2018, The Stock Exchange of Hong Kong Limited (Exchange) released its conclusions from responses to its Consultation Paper on Capital Raisings by Listed Issuers published in September 2017 proposing Listing Rule changes to address potential abuses related to large scale deeply discounted capital raising activities and specific issues concerning other capital raising and share issuance transactions.
The Exchange noted strong support for its proposals and decided to implement them with minor modifications. The Listing Rule amendments will become effective on 3 July 2018.
The table below summarises the key changes to the Listing Rules:
| Current regime | New regime – Effective from 3 July 2018 | ||
| Highly dilutive capital raisings | |||
| The current Listing Rules do not contain any specific provision that prohibits highly dilutive capital raisings.
For pre-emptive offers, in December 2016, the Securities and Futures Commission and the Exchange jointly issued a statement about their close monitoring of highly dilutive pre-emptive offers (see our earlier client alert “Highly dilutive rights issues under scrutiny”). In a few extreme cases, the Exchange withheld the listing approval for the dealing in the offer shares. For specific mandate placings, since 2015, the Exchange applied the cash company rules to reject extreme cases of large scale share subscriptions where the transaction resulted in the issuers’ assets comprising substantially of cash, and where the transaction appeared to be a circumvention of the new listing requirements.
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To disallow rights issues, open offers and specific mandate placings (individually or when aggregated within a rolling 12-month period) that would result in a theoretical dilution effect (i.e. the discount of the “theoretical diluted price”* to the “benchmarked price”** of shares) of 25% or more (25% threshold), unless there are exceptional circumstances e.g. the issuer is in financial difficulty.
* The “theoretical diluted price” means the sum of (i) the issuer’s total market capitalization (by reference to the “benchmarked price” and the number of issued shares immediately before the issue) and (ii) the total funds raised and to be raised from the issue, divided by the total number of shares as enlarged by the issue. Where aggregation of a series of rights issues, open offers and/or specific mandate placings is required, the total funds raised and to be raised from the issues would be calculated by reference to (i) the total number of new shares issued and to be issued and (ii) the weighted average of the price discounts of the issues (each price discount is measured by comparing the issue price against the benchmarked price at the time of that issue). ** The “benchmarked price” means the higher of: (i) the closing price on the date of the agreement involving the issue; and (ii) the average closing price in the 5 trading days immediately prior to the earlier of: (1) the date of announcement of the issue; (2) the date of the agreement involving the issue; and (3) the date on which the issue price is fixed. In simple terms, the theoretical dilution effect can be calculated by the following formula:
Sh = Number of issued shares immediately before the 1st offer or placing C1 = Number of shares issued in the 1st offer or placing C2 = Number of shares issued in the 2nd offer or placing Cn = Number of shares to be issued in the nth offer or placing Y1 = Price discount of the 1st offer or placing Y2 = Price discount of the 2nd offer or placing Yn = Price discount of the nth offer or placing |
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| Rights issues and open offers | |||
| The current Listing Rules require minority shareholders’ approvals for any pre-emptive offer that would increase the issuer’s number of issued shares or market capitalisation by more than 50% (on its own or when aggregated with any other rights issues and open offers in the previous 12 months). | To require minority shareholders’ approval* for all open offers, unless the new shares are to be issued under the authority of an existing general mandate.
* That means the open offer must be made conditional on approval by shareholders in general meeting by a resolution on which any controlling shareholders and their associates or, where there are no controlling shareholders, directors (excluding independent non-executive directors) and the chief executive of the issuer and their respective associates shall abstain from voting in favour. |
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| The current Main Board Listing Rules require all rights issues and open offers to be fully underwritten in normal circumstances. | To remove the mandatory underwriting requirements for all rights issues and open offers. | ||
| The current Listing Rules do not require underwriters for rights issues and open offers to be persons licensed under the Securities and Futures Ordinance.
A connected person taking up any securities in a rights issue or open offer in his/her/its capacity as an underwriter or sub-underwriter is fully exempt from the connected transaction requirements if the issuer has adopted either one of the following arrangements: (a) to allow shareholders to apply for the unsubscribed shares in excess of their pro rata entitlement (excess application arrangements (b) to sell the unsubscribed shares in the market and return any premium to the non-subscribing shareholders (compensatory arrangements). |
To require underwriters (if any) for rights issues and open offers to be persons licensed under the Securities and Futures Ordinance for Type 1 regulated activity who are not connected persons of the issuers concerned, with the exception that controlling or substantial shareholders may act as underwriters if (i) compensatory arrangements are made available for the unsubscribed offer shares and (ii) the connected transaction requirements (i.e. independent shareholders’ approval and appointment of independent financial advisers to opine on the terms of the underwriting arrangements) are complied with. | ||
| To remove the connected transaction exemption currently available to connected persons acting as underwriters of rights issues or open offers. | |||
| Under the current Listing Rules, it is not mandatory for issuers to adopt excess application arrangements or compensatory arrangements for the disposal of unsubscribed shares in rights issues or open offers. | To require issuers to adopt either excess application arrangements or compensatory arrangements for the disposal of unsubscribed shares in rights issues or open offers. | ||
| Under the current Listing Rules, there is no restriction on excess applications made by issuer’scontrolling shareholders and their associates. | To require issuers to take steps to identify the excess applications made by any controlling shareholder and its associates, whether in their own names or through nominees, and disregard their excess applications to the extent the total number of excess securities they have applied for exceeds a maximum number equivalent to the total number of securities offered under the rights issue minus the number of securities taken up by them under their assured entitlements. | ||
| Placing of warrants | |||
| Under the current Listing Rules, an issuer may issue new securities under general mandate up to 20% of the number of issued shares as at the date of the shareholders’ approval of the mandate and within a 20% discount limit on the issue price for the placing of securities for cash consideration, benchmarked against the higher of (i) the closing price on the date of the agreement, and (ii) the average closing price in the 5 previous trading days.
In May 2015, the Exchange published a listing decision in which it considered that a placing of warrants may be conducted under general mandate only if the issuer could demonstrate that the warrants are issued at, or approximate their fair value. Since May 2015, all placings of warrants were effected under specific mandates. |
To disallow the use of general mandate for placing of warrants. | ||
| Placing of convertible securities under general mandate | |||
| Under the current Listing Rules, an issuer may issue new securities under general mandate up to 20% of the number of issued shares as at the date of the shareholders’ approval of the mandate and within a 20% discount limit on the issue price for the placing of securities for cash consideration, benchmarked against the higher of (i) the closing price on the date of the agreement, and (ii) the average closing price in the 5 previous trading days. | To disallow any price discount* of the initial conversion price of convertible securities to be placed under general mandate.
* That means the initial conversion price is not lower than the higher of (i) the closing price on the date of the agreement, and (ii) the average closing price in the 5 previous trading days of the shares at the time of the placing. |
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| Disclosure of the use of proceeds from capital raisings | |||
| The current Listing Rules require issuers to disclose in their annual reports information relating to equity issues, including the use of proceeds. | To enhance the disclosure of the use of proceeds from equity fundraisings in interim and annual reports.
Details to be disclosed should include:
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| Share subdivision and bonus issue of shares | |||
| The current Listing Rules do not impose a minimum price requirement on subdivision or bonus issue of shares. | To disallow subdivisions or bonus issues of shares if the share price adjusted for the subdivision or bonus issue is less than HK$1 based on the lowest daily closing price of the shares during the six-month period before the announcement of the subdivision or bonus issue. |
Remarks
Upon the Listing Rules amendments becoming effective on 3 July 2018, listed issuers should carefully structure their capital raising activities, and in particular, they should bear in mind the 25% threshold when determining the price discount and offer ratio.
Issuers should consult the Exchange before they announce rights issues, open offers or specific mandate placings that may trigger the 25% threshold. Issuers should also note that the Exchange may exercise its discretion to withhold approval for, or impose additional requirements on, any rights issue, open offer or specific mandate placing that does not trigger the 25% threshold if in the opinion of the Exchange, such issue is, having regard to its terms, inconsistent with the general principles of the listing.
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