Hong Kong – Stock Exchange Proposes Tightened Rules On Capital Raising Activities.

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. 

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 cumulative material value dilution# (proposed to be 25% or more), unless there are exceptional circumstances e.g. the issuer is in financial difficulty. 

# The cumulative value dilution is calculated by reference to (i) the aggregate number of shares issued during the 12-month period, compared to the number of issued shares immediately prior to the first offer or placing; and (ii) the weighted average of the price discounts (each price discount is measured against the market price of shares at the time of the offer).

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.

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 rules if the issuer has adopted either one of the following arrangements: 

• to allow shareholders to apply for the unsubscribed shares in excess of their pro rata entitlement (“excess application arrangements”); or 
• 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 and independent from the issuers and their connected persons, with the exception that controlling or substantial shareholders may act as underwriters if compensatory arrangements are made available for the unsubscribed offer shares and the connected transaction rules are complied with.

To remove the connected transaction exemptioncurrently 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 disregard any excess applications made by the controlling shareholders and their associates in excess of the offer size minus their pro-rata entitlements. 

Placing of warrants or 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. 

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 issuers conducted placings of warrants under specific mandates. 

To disallow the use of general mandate for 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. 

To restrict the use of general mandate to the placing of convertible securities with an initial conversion price that is no less than the market price of the shares at the time of placing. 

If this proposal is not implemented, the Exchange would nevertheless amend the general mandate rules to clarify that the 20% price discount limit also applies to the initial conversion price of convertible securities at the time of placing.

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 proceedsfrom equity fundraisings in interim and annual reports.

Details would include:

• a detailed breakdown and description of the use of proceeds for different purposes during the financial year or period;
• if there is unutilized amount, a detailed breakdown (by different purposes) and description of the intended use of the proceeds and the expected timeline; and
• whether the proceeds were used, or are proposed to be used, according to the intentions previously disclosed by the issuer, and the reason for any material change or delay in the use of proceeds. 

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 sharesif the theoretical share price after the adjustment for the subdivision or bonus issue is less than a minimum amount (proposed to be HK$1 or HK$0.50).  

The proposal would require a demonstration period of six months to ensure that a high share trading price is not temporary and a proposed share subdivision is justified. 

For the avoidance of doubt, the above proposal would only restrict share subdivisions and bonus issues.  The Exchange does not propose to introduce any minimum share price as a continuing listing requirement.