The Stock Exchange of Hong Kong Limited (the “Stock Exchange”) recently introduced a new treasury shares regime (the “New Regime”) under the Rules Governing the Listing of Securities on the Stock Exchange (the “Listing Rules”). Under the New Regime, any shares repurchased by listed issuers are no longer required to be automatically cancelled and are allowed to be held in treasury. Listed issuers are therefore given a greater flexibility in managing their capital structure as they may use the treasury shares to raise funds, grant share awards or discharge their obligations under convertible securities without the need to issue new shares.

In light of the New Regime, the Securities and Futures Commission (the “SFC”) published a new Practice Note 26 (PN26) on 24 May 2024 to explain the implication of New Regime under the Codes on Takeovers and Mergers and Share Buy-backs (the “Codes”).

Background

Before the recent amendment to the Listing Rules, listed issuers, upon a repurchase of its own shares, must cancel and destroy the documents of title of the repurchased shares immediately following settlement of any such repurchase despite that over 90% of listed issuers are incorporated in jurisdictions where the use of treasury shares are not restricted. In other words, in the past no repurchased shares could be held in treasury for future resale.

Under the New Regime which came into effect on 11 June 2024, the above requirements are removed. A listed issuer may repurchase its own shares and hold them in treasury for future resale subject to the laws of its place of incorporation and its constitutional documents. The listing of the treasury shares shall be retained, but they are not part of the issuer’s outstanding share capital.

As a result of the introduction of New Regime, the SFC has published the PN26 for the purpose of providing some guidance to offerors, offeree companies, their shareholders and market practitioners on the treatment of treasury shares under the Codes.

Implications of treasury shares under the Codes

In general, the treasury shares are disregarded for the purpose of determining whether a mandatory general offer is required or whether a voting, approval or acceptance threshold is met. Thus, the New Regime does not result in material changes or impacts on the Codes.  The key provisions of the Codes which may be relevant to treasury shares include:

1.    Requirements on voting, offer and acceptance

Note to the definition of “voting rights” explicitly stipulates that the voting rights attached to treasury shares will not be treated as voting rights for the purpose of the definition of voting rights under the Codes. As a result, treasury shares are not counted when it comes to various voting rights or approval percentage calculation such as mandatory general offer provisions under Rule 26 (i.e. the 30% trigger, the 2% creeper or the acceptance threshold).

In addition, treasury shares are not regarded as “disinterested shares” as referred to in the voting or acceptance percentage requirements under Rules 2.2, 2.10 or 2.11 of the Code on Takeovers and Mergers (the “Takeovers Code”). In this connection, an issuer or its nominees holding the treasury shares is not considered as a “disinterested shareholder” under Rule 2 of the Code on Share Buy-backs (the “Share Buy-backs Code”).

2.    Disclosures on dealings in relevant securities

Where a person falls within the scope of class (6) “associate” meaning that he/she/it owns or controls 5% or more of any class of relevant securities of an issuer, he/she/it is required to disclose its dealings in accordance with Rule 22 of the Takeovers Code. In determining whether the 5% shareholding threshold is reached, it shall refer to the number of the issuer’s outstanding issued shares (excluding treasury shares).

If an associate has any dealings in the relevant securities, the offeree company is also required under Rule 3.8 of the Takeovers Code to announce details of all its relevant securities together with the number of such securities in issue. In case the issuer has any treasury shares, it is expected to include in the announcement (i) the issuer’s total number of issued shares excluding treasury shares; (ii) the number of treasury shares held by the issuer; and (iii) the issuer’s total number of issued shares. 

3.    Requirements on distribution and issue of shares

Resale of treasury shares or transfer of such shares out of treasury will be treated as an issue or distribution of new shares under the Codes. It follows that the disclosure requirements for the issue of new shares under paragraph 21 of Schedule I, paragraph 4 of Schedule II and paragraph 22 of Schedule III to the Codes as well as the requirements concerning issue or distribution of shares under Rule 4 of the Takeovers Code and Rule 7 of the Share Buy-backs Code are equally applicable to the resale of treasury shares or the transfer of such shares out of treasury.

As a result, before reselling any treasury shares or transferring any shares out of treasury, the board of an offeree company should always obtain the approval of the offeree company’s shareholders or the offeror’s consent. This is exactly the same in the case where new shares are to be issued, unless these actions are carried out pursuant to prior contractual obligations. 

4.    Disclosures on proposed buy-backs

A company proposing to buy back shares under the Share Buy-backs Code should specify in the relevant announcement and shareholders’ document whether it intends to hold the repurchased shares in treasury and whether any voting rights attached to the treasury shares will be suspended.

Takeaway

Listed issuers incorporated in Hong Kong will not be able to take advantage of the amendments for the time being since the requirement of automatic cancellation of shares repurchased is still embodied in the Companies Ordinance (Cap 622 of the Laws of Hong Kong) (the “Companies Ordinance”). To enable Hong Kong incorporated issuers to benefit from the New Regime as other overseas issuers, the Government has proposed amendments to the Companies Ordinance. It is therefore strongly recommended for listed issuers, whether Hong Kong or overseas incorporated, to ascertain if there are any provisions in their constitutional documents that impose restrictions on the holding and use of treasury shares and consider seeking shareholders’ approval to amend their constitutional documents should they wish to benefit from the New Regime. It is always advisable for any person to seek legal advice should he/she require any further information or assistance in relation to the above.