What Can A Fund Manager Do With Its Holdings In Problematic Listed Companies In Hong Kong?

 

25 March, 2020

 

 

Fund managers should stay vigilant against stocks of listed companies with red flags as they would not be able to cash out their investments if trading of such stocks is suspended.

 

Stocks of problematic listed companies may be suspended if the Hong Kong securities market regulators consider this to be necessary for the protection of investors or the maintenance of an orderly market. This may occur if the company is in severe financial difficulties, fails to maintain sufficient assets or operations, or has material issues such as irregularities, regulatory investigations and insufficient public float.

 

Investors holding suspended stocks will not be able to sell them on the market during the trading suspension. They will have no choice but just to wait for the management of the company to take appropriate actions to address all the regulatory concerns in order to resume the trading of the company’s stocks.

 

Some long suspended companies may end up going into liquidation. Any transfer of shares after the commencement of the compulsory winding-up of the company in Hong Kong is void unless the court orders otherwise.

 

Some companies in provisional liquidation may be able to find a white knight to inject new funding and/or viable business into them so that they can resume trading. Otherwise, investors will have to wait for the liquidation proceedings to determine how much money they will recover, if any.

 

Under the new delisting regime which took effect in August 2018, the Hong Kong Stock Exchange may delist the company after a continued trading suspension of 18 and 12 months for Main Board and GEM issuers respectively.

 

There is currently no statutory investor compensation scheme covering listed company failures, nor any alternative trading arrangement (such as a separate over-the-counter market) for minority shareholders to dispose of suspended or delisted shares. There is also no requirement for the delisted company to buy back the minority shareholders’ shares. Controlling shareholders may want to (but are not obliged to) squeeze out the minority shareholders such that the delisted company will no longer constitute a public company in Hong Kong, which means that future takeover/merger or share buy-back activities affecting the company will not be subject to the Hong Kong Codes on Takeovers and Mergers and Share Buy-backs. The squeeze-out price is however likely to be low in view of the lack of open market for the shares of an unlisted company.