Introduction

The current Listing Rules does not allow any listed issuer to repurchase its own shares and held in treasury (“Treasury Shares”). Upon a repurchase of its own shares by a listed issuer, the listing of the repurchased shares is automatically cancelled under the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the “Listing Rules”).

On 27 October 2023, the Stock Exchange of Hong Kong Limited (the “Stock Exchange”) published a consultation paper (the “Consultation Paper”) seeking public feedback on proposals to amend the Listing Rules relating to Treasury Shares. This article summarizes the key points of amendments proposed by the Stock Exchange.

Background to the proposals

Generally, a company may repurchase its own shares and hold them in treasury for future sale if the company laws of its place of incorporation and its constitutional document permit. That said, a listed issuer is also subject to the Listing Rules, which require listing of all shares to be automatically cancelled upon repurchase. The above restriction is in line with the requirement under the Companies Ordinance (Cap 622) which requires a Hong Kong incorporated company to cancel repurchased shares mandatorily. 

However, the majority of companies listed on the Stock Exchange are not incorporated in Hong Kong and 92% of them are incorporated in jurisdictions which allow holding of Treasury Shares. In the Consultation Paper, the Stock Exchange proposes giving these overseas issuers more flexibility in managing their capital structure and permitting them to use the Treasury Shares to satisfy any employees’ share schemes or upon conversion of convertible securities.

Proposals

1.    Removing the requirement to cancel repurchased shares

The Stock Exchange proposes to amend the Listing Rules to remove the requirement to cancel repurchased shares so that listed issuers may hold these shares in treasury and enjoy the flexibility of having Treasury Shares, subject to the laws of their places of incorporation and their constitutional documents. Where Treasury Shares remain issued shares by law, Treasury Shares also retain the listing status.

The Stock Exchange envisages the risk of market manipulation and/or insider dealing as an issuer may influence its share price through share repurchases and insiders may trade in the shares to benefit from non-public information. To reduce the risk, the Stock Exchange also proposes the following framework to govern the resale of Treasury Shares to ensure a fair and orderly market and fair and equal treatment of all shareholders on the resale of treasury share.

2.    Treating a resale of Treasury Shares as new shares

The Stock Exchange considers that given a resale of Treasury Shares impacts existing shareholders in a similar manner as an issuance of new shares, it is appropriate to apply the framework for an issuance of new shares to govern a resale of Treasury Shares.  To this effect, the Stock Exchange proposes the following amendments to the Listing Rules.

Resale conducted on a pre-emptive basis or with a shareholders’ mandate

A resale of Treasury Shares shall be subject to pre-emption similar to an issuance of new shares under Rule 13.36 of the Listing Rules and 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.

The number of shares repurchased in the year under a repurchase mandate (subject to a limit) is added to the general mandate limit. Both the general mandate limit and the repurchase mandate limit would be calculated based on the number of issued shares excluding Treasury Shares held by the listed issuer at the given time. An on-market resale of Treasury Shares under the general mandate shall be subject to a maximum price discount of 20% to the benchmark price (i.e. the higher of (i) the closing price on the trading day immediately prior to the resale; and (ii) the average closing price in the 5 trading days immediately prior to the resale). An off-market resale of Treasury Shares under the general mandate shall be subject to the same price discount limit as an issuance of new shares.

Share Scheme

It is proposed under the Consultation Paper that a share scheme using Treasury Shares to satisfy share grants would be treated as a share scheme funded by new shares under Chapter 17 of the Listing Rules. Accordingly, the grant of shares under the scheme would be subject to the scheme mandate limit approved by shareholders under Chapter 17 of the Listing Rules.

Other proposals relating to resale of Treasury Shares

The Stock Exchange proposes that any resale of Treasury Shares to a connected person would be subject to the same connected transaction requirements as an issue of new shares under Chapter 14A. This means a resale of Treasury Shares to a connected person would be subject to independent shareholders’ approval, unless exempted under Rule 14A.92.  This provides safeguards against connected persons taking advantage of their positions to confer benefits on themselves through the resale of Treasury Shares.

The Stock Exchange also proposes to apply the following new Listing Rules to a resale of Treasury Shares by a listed issuer, in addition to their current applications to an issuance of new shares:

1.       a listed issuer shall disclose its resale of Treasury Shares and any movement in the number of Treasury Shares under Rule 13.28 (announcement), Rule 11.04 (listing document), Rule 13.25A (next day disclosure return), Rule 13.25B (monthly return) and Paragraphs 11 and 11A of Appendix 16 (annual report) to the Listing Rules; and

2.       while a listed issuer is not required to submit a listing application for the resale of Treasury Shares, it shall comply with the documentary requirements under Rules 9.18 to 9.23 for its resale of Treasury Shares, as if it were an application for the listing of the newly issued shares.

3.    Mitigation of risks of market manipulation and insider dealing

The prohibition on stock market manipulation and insider dealing under the Securities and Futures Ordinance (Cap. 571) apply to dealings in Treasury Shares. To ensure a fair and orderly market is maintained after the proposed relaxation, the Stock Exchange proposes additional requirements below.

Proposed moratorium periods for share repurchases and resales of Treasury Shares

The proposed amended Rule 10.06(3) of the Listing Rules restricts the issuance of new shares by a listed issuer for a 30-day period (moratorium period) after any share repurchase. This is to ensure the issue of new shares does not take place at a price that has been affected by the issuer’s previous share repurchase. As the price for a resale of Treasury Shares may be similarly affected, the Stock Exchange proposes to extend this moratorium period to any resale of Treasury Shares, whether on or off-market.

Where a listed issuer resells its Treasury Shares on the Exchange, the Stock Exchange proposes that a moratorium period also applies to a subsequent on-Exchange share repurchase. As the intention of allowing Treasury Shares is to provide listed issuers with more flexibility to manage their share capital structure, the Stock Exchange does not envisage issuers to repeatedly repurchase and resell their shares on market. This proposal will deter issuers from repeatedly repurchasing and reselling their own shares on market for the motives of making a trading profit or to manipulate the share price.

Dealing restrictions for resale of Treasury Shares on the Exchange

The Stock Exchange proposes to extend the application of the following dealing restrictions to on-Exchange resale of treasury shares to provide additional safeguards to further mitigate the risk of market manipulation and insider dealing:

1.       Rule 10.06(2)(e) of the Listing Rules currently prohibits share repurchases on the Exchange during the one-month period preceding results announcement or when there is undisclosed inside information (the Restricted Period) to deter potential insider dealing. The Stock Exchange proposes to extend this restriction to a resale of Treasury Shares such that issuers are also prohibited to resell Treasury Shares on the Exchange during the Restricted Period;

2.       Rule 10.06(2)(c) of the Listing Rules prohibits an issuer from knowingly purchasing its shares from a core connected person and a core connected person shall not knowingly sell shares to the issuer on the Exchange. The Stock Exchange proposes to extend this restriction to a resale by the issuer of Treasury Shares on the Exchange to prevent a listed issuer from manipulating the market by knowingly reselling the Treasury Shares to a core connected person on the market.

However, the Stock Exchange proposes that an on-market resale of Treasury Shares to a connected person without knowledge would be fully exempt from the connected transaction Rules. This is consistent with the current exemption available for on-market share repurchases under Rule 14A.94(1) of the Listing Rules; and

3.       Rule 10.06(2)(d) of the Listing Rules requires an issuer to procure its broker appointed to repurchase its shares to disclose to the Stock Exchange information in respect of the purchases if so requested. The Stock Exchange proposes to extend this requirement to on-market resale of Treasury Shares such that an issuer shall procure its broker to disclose to the Stock Exchange information concerning its resale of Treasury Shares on the Exchange.

Conclusion

The proposed amendments aim to give foreign issuers listed on the Stock Exchange more flexibility in managing their capital structure. They can react promptly to market conditions and resell Treasury Shares in small lots on the market at market prices, which offers an alternative means to raise fund compared to a placing of new shares which typically involves discount to market prices. The two-month consultation period will conclude on 27 December 2023.