Hong Kong Stock Exchange Proposes Treasury Shares Regime
The Hong Kong Stock Exchange (HKEX or the “Exchange”) recently issued a Consultation Paper on “Proposed Amendments to Listing Rules Relating to Treasury Shares” – which proposes to remove the current requirement to cancel repurchased shares, and introduce a framework to govern the resale of treasury shares (the "Proposal").
The Consultation Paper was issued at the same time as HKEX’s new guidance letter on automatic share buyback programs (see our recent Update on the new advisory) as an effort to facilitate share repurchase by issuers and enhance liquidity of the Hong Kong stock market.
In this update we discuss details of the Proposal and its implications.
According to HKEX, approximately 92% of issuers whose primary listing is on the Exchange (the "Issuers") are incorporated in jurisdictions which allow holding of treasury shares. However, due to the restriction under the Hong Kong Listing Rules (the "Rules") to automatically cancel listing of the repurchased share, these overseas Issuers remain unable to hold treasury shares.
Under the Proposal, issuers may, and subject to the company laws of their places of incorporation and their constitutional documents, hold repurchased shares “in treasury” for “resale” at a later date.
HKEX believes the Proposal would provide eligible Issuers greater flexibility to adjust its share capital more quickly, which may in turn lead to a reduction in its cost of capital.
Scope of Application
The Proposal applies only to Issuers incorporated in jurisdictions that allow holding of treasury shares – such as Bermuda, the BVI, Canada (BC), the Cayman Islands, Italy, Japan, Jersey, Luxembourg, the PRC, Singapore, the UK and the US – and which constitutional documents contain no related restrictive provisions.
As it is currently a requirement under the Hong Kong Companies Ordinance (Chapter 622 of Laws of Hong Kong) to cancel repurchased shares, a Hong Kong incorporated Issuer could not benefit from the proposed treasury share regime.
HKEX will work with the relevant parties to consider the necessary amendments to the Hong Kong Companies Ordinance should the Proposal proceed.
Rights Attached to Treasury Shares
Shareholders’ rights attached to treasury shares (including dividend, distribution and voting rights) are governed by the laws of Issuers’ places of incorporation; which normally suspend the operation of such rights until the treasury shares are resold or transferred out of treasury.
HKEX proposes new Rules provisions to clarify the rights attached to treasury shares:
- The listing of all shares which are held as treasury shares will be retained.
- Issuers (being holders of treasury shares) are required to abstain from voting on matters that require shareholders’ approval under the Rules.
- Though there will not be a limit on the number of the treasury shares that Issuers may hold, treasury shares will be disregarded when calculating an Issuer’s issued shares or voting shares for the purposes of determining: (i) public float; (ii) market capitalisation of the issuer; (iii) equity capital ratio for size test calculation; (iv) the size limit for issuing or purchasing securities as a percentage of the issued shares; (v) a person’s percentage of rights to vote at a general meeting; and (vi) a person’s percentage interest in the Issuer.
Resale of Treasury Shares Treated as Issue of New Shares
Company laws of Issuers’ places of incorporation may have provisions governing the resale of treasury shares. For example in the UK and the PRC, treasury shares may not be used as consideration shares.
The Proposal does not attempt to impose restriction on the permitted uses of the treasury shares but will, for the purpose of the Rules, treat a resale of treasury shares as an issue of new shares:
- Subject to pre-emption - A resale of treasury shares should be offered to all shareholders on a pro-rata basis; or alternatively approved by shareholders under a specific mandate or a general mandate approved in advance by shareholders.
As mentioned in the above section headed “Rights attached to treasury shares”, both the general mandate limit and the repurchase mandate limit will be calculated based on the number of issued shares, excluding treasury shares held by the listed issuer at the given time.
In other words, the Rules only govern the total number of shares available for issue or resale under a general mandate – but not the number of treasury shares that an Issuer holds. HKEX believes this would manage any potential market overhang resulting from a disproportionately large holding of treasury shares.
- Price discount limit for resale under general mandate - An on-market resale will be subject to a maximum price discount of 20% of the higher of (i) the closing price on the trading day immediately prior to the resale; and (ii) the average closing price in the five trading days immediately prior to the resale. An off-market resale will be subject to the same price discount limit as an issuance of new shares.
- Share scheme - Using treasury shares to satisfy share grants will be treated as a share scheme funded by new shares and will accordingly be subject to the scheme mandate limit approved by shareholders under Chapter 17 of the Rules.
- Resale of treasury shares to connected persons – Such resale will be subject to independent shareholders’ approval, unless exempted under Chapter 14A of the Rules.
- Disclosure – Any resale of treasury shares and movement in the number of treasury shares should be disclosed in the same manner as an issue of new shares (except for on-market resale, for which an announcement or placee information is not required).
- Listing application – Formal application is not required, but the related documentary requirements apply.
To ensure a fair and orderly market is maintained, HKEX proposes the following additional requirements:
- 30-day moratorium - An Issuer may not, without prior approval of the HKEX (i) make a resale of treasury shares (whether on or off-market) for a period of 30 days after any share repurchase, save in pursuance to the exercise of any outstanding warrants, share options or similar instruments; or (ii) repurchase any of its own shares on the Exchange for a period of 30 days after any sale or transfer of treasury shares on the Exchange.
- Restrictions on resale of treasury shares on the Exchange - Issuers are prohibited to resell treasury shares on the Exchange (a) during the one-month period preceding results announcement or when there is undisclosed inside information; (b) if it knowingly sells the shares to a core connected person, and a core connected knowingly purchases the shares. An Issuer is further required to procure its broker appointed to effect the resale to disclose to the HKEX information concerning the resale.
To better prepare for this proposed change in the Rules, it would be advisable for Issuers to check their constituent documents to ensure there are no provisions restricting the holding and/or re-sale of treasury shares.
Otherwise, such Issuers will need to amend their constituent documents (which will take time and costs, and require shareholders’ approval) and remove such restrictions before they could enjoy the proposed new benefit of treasury shares.