Hong Kong - Exchange Will Tighten Its Grip On Highly Dilutive Capital Raising Structures

Key points

 

  • The Exchange has decided to introduce new rules to regulate highly dilutive capital raising structures as proposed in its consultation paper released in September 2017.
  • The new rules will take effect from 3 July 2018.

 

In September 2017, Hong Kong Exchanges and Clearing Limited published the Consultation Paper on Capital Raisings by Listed Issuers , revealing the long-anticipated tightening of regulations on highly dilutive capital raising structures in regard to which corporate governance advocates have been flagging concerns. 

 

The Exchange published the conclusions  to that consultation on 4 May 2018. The Exchange said its proposals received support from a majority of the respondents and as a result, it has decided to proceed as proposed, with some minor changes to the draft rules in response to market comments. 

 

In this update, we will note the final rules to be adopted, notable issues and, to the extent the final rules deviate from the draft rules, the differences.

 

Ban on capital raisings which are considered highly dilutive

 

Proposals

 

  • Ban pre-emptive offers and specific mandate placings (on a 12-month cumulative basis) that would result in a value dilution of 25% or more (“material value dilution issue”), calculated by reference to the size of the offer and the price discount (new rule 7.27B).
  • The Exchange may withhold approval for, or impose additional requirements on, a non-material value dilution issue if it considers the issue is inconsistent with any of the general principles contained in rule 2.03 (new rule 7.27C).

 

Final rules and notable issues

 

  • No deviation from the proposal.

 

Note:

 

a. The new rules catch bonus securities, warrants or other convertible securities granted or to be granted as part of any relevantoffers or placing.

b. The only exception to this ban is if an issuer can demonstrate to the Exchange’s satisfaction that there are exceptional circumstances, e.g. where the issuer is in financial difficulty.

 

Underwriting of rights issues and open offers

 

Proposals

 

  • Remove the requirement that all rights issues and open offers must be fully underwritten (rule 7.19(1) and rule 7.24).
  • If an offer is to be underwritten, only independent Type 1 licensed persons, or controlling or substantial shareholders of the issuer, may be appointed as underwriters (rule 7.19(1)(a) and (b) and rule 7.24).
  • To dispose of unsubscribed securities, all offers must include either (i) excess application arrangements or (ii) compensatory arrangements where any premium is paid to the non-subscribing members (rule 7.21(1) and rule 7.26A(1)).
  • If the controlling or substantial shareholders will be appointed as underwriters, the issuers must adopt compensatory arrangements (rule 7.21(2) and rule 7.26A(2)).
  • Remove the connected transaction exemption for underwriting and sub-underwriting of offers by connected persons (rule 14A.24(6)).
  • If an issuer adopts excess application arrangements, the directors must ignore any excess applications made by the controlling shareholders and their associates in excess of the offer size minus their pro-rata entitlements (rule 7.21(3)(b) and 7.26A(3)(b)).

 

Final rules and notable issues

 

No deviation from the proposal.

 

Use of the general mandate to conduct open offers, or issue warrants or convertible securities

 

Proposals

 

Unless the offer will be made under the authority of a general mandate, all open offers must be approved by independent minority shareholders at a general meeting (rule 7.24A(1) and note 3 to rule13.36(2)(a)).

 

Final rules and notable issues

 

No deviation from the proposal.

 

This means:

 

  • the controlling shareholders (or where there are no controlling shareholders, the directors and chief executive) cannot vote in favour of the resolution
  • the issuer needs to appoint an independent financial adviser to opine on the terms of the offer
  • the restriction of a maximum discount of 20% for the placing of securities of  cash consideration will apply to an open offer

 

Proposals  

 

Allow issuers to issue convertible securities under the general mandate only if the initial conversion price is at least, or higher than, the benchmark market price of the underlying shares at the time of placing (rule 13.36(6)).

 

Final rules and notable issues

 

No deviation from the proposal.

 

Proposals

 

Issuers may not issue warrants or options for cash consideration under the authority of the general mandate (rule 13.36(7)).

 

Final rules and notable issues

 

No deviation from the proposal. In addition to standalone warrant issues, this final rule appears to also prohibit a bond or loan offering that is combined with a placing of warrants or equivalent structures from relying on the general mandate. We note that the Exchange has been adopting this approach in practice for some time now.

 

Other changes

 

Proposals

 

The use of proceeds from all equity fundraisings must be disclosed in both the interim and annual reports (App. 16 paras 11(8) and 41A).

 

Final rules and notable issues

 

No deviation from the proposal.

 

Proposals

 

The theoretical share price (after adjustment) of the shares of an issuer who proposes a share subdivision or bonus issue of shares must be higher than a minimum price for a period of six months before the announcement of the subdivision or bonus issue (rule 13.64A).

 

 

Final rules and notable issues

 

No deviation from the proposal. 

The Exchange has decided the minimum price should be HK$1.

 

For more see Conventus Law.