Equity capital markets in Hong Kong: regulatory overview
A Q&A guide to equity capital markets law in Hong Kong. The Q&A gives an overview of main equity markets/exchanges, regulators and legislation, listing requirements, offering structures, advisers, prospectus/offer document, marketing, bookbuilding, underwriting, timetables, stabilisation, tax, continuing obligations and de-listing.
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This Q&A is part of the multi-jurisdictional guide to capital markets law. For a full list of jurisdictional Q&As visit www.practicallaw.com/capitalmarkets-mjg.
Main equity markets/exchanges
Main equity markets/exchanges
The main equity market/exchange in Hong Kong is The Stock Exchange of Hong Kong Limited (SEHK), which is a wholly-owned subsidiary of Hong Kong Exchanges and Clearing Limited (HKEx). The HKEx operates a securities market and a derivatives market in Hong Kong and the clearing houses for those markets, and was listed in Hong Kong in 2000.
The securities market consists of the:
Main Board (www.hkex.com.hk/eng/index.htm). Blue-chip companies are listed on the Main Board.
Growth Enterprise Market (GEM) (www.hkgem.com/root/e_default.asp). GEM is designed to accommodate small-cap companies wishing to access the capital markets, and is positioned as a stepping stone to the Main Board for smaller issuers.
Unless otherwise specified, the following relates to the Main Board, as it is the core equity securities market of Hong Kong.
As at the end of 2011, of the 1,496 issuers listed on the SEHK (Main Board and GEM combined), only a minority are incorporated in Hong Kong. Hong Kong has been a Mainland China offshore listing venue for a number of years. In 2011, HK$57.8 billion (as at 1 February 2012, US$1 was about HK$7.75) was raised by the initial public offers (IPOs) of equity securities from the listing of Mainland China enterprises.
At the end of 2011, there were 640 Mainland China enterprises listed on the Main Board and GEM, constituting 55% by market capitalisation and 66% by annual equity turnover value. In recent years, the HKEx has worked hard to expand its international listing base and aims to become a global listing venue as more overseas jurisdictions have been accepted by the HKEx as places of incorporation for issuers. A list specifying the overseas jurisdictions (other than Mainland China, Bermuda and Cayman Islands) that the HKEx has formally ruled to be acceptable as an issuer's place of incorporation is available at: www.hkex.com.hk/eng/rulesreg/listrules/listsptop/listoc/list_of_aoj.htm.
Market activity and deals
In 2011, total equity funds raised (including IPOs and subsequent fundraising exercises) on the HKEx were HK$490.4 billion, with 101 newly listed companies on the Main Board and GEM raising a total of HK$259.8 billion; ranking first globally for the third year in terms of funds raised by IPOs.
The total turnover of Main Board equities was HK$12,006 billion in 2011, a slight decrease of 2% from the total equity turnover in 2010. Equity turnover constituted 70% of the total turnover of all securities on the Main Board as a result of HKEx's initiatives to enhance HKEx's derivatives (futures and options) trading facilities and therefore increasing the turnover of derivatives trading. In 2011, The HKEx derivatives market continued its growth with the total trading volume reaching a new record high of 140 million contracts (up 21% from 2010).
The largest IPO funds raised by newly listed companies in 2011 were (SEHK):
Glencore International plc: HK$77.75 billion (this represented the total funds raised from simultaneous listings on the London Stock Exchange and the SEHK).
PRADA SpA: HK$19.23 billion.
Shanghai Pharmaceuticals Holding Co, Ltd (H shares): HK$16.01 billion.
Chow Tai Fook Jewellery Group Limited: HK$15.99 billion.
CITIC Securities Company Ltd (H shares): HK$14.25 billion.
Some companies postponed their IPOs for various reasons last year, including adverse market conditions and excessive market volatility. However, information about the exact number of IPOs postponed in 2011 is not available.
Broadly, listing applications and IPOs in Hong Kong are regulated under a two-tier structure:
The HKEx and SEHK are responsible for regulating all listing-related matters.
The Securities and Futures Commission (SFC) has a statutory duty to supervise and monitor the HKEx/SEHK's performance of its listing-related functions and responsibilities, and takes the lead role in market regulation.
All listing applications must be filed with the SEHK for vetting. Under a dual-filing system, the SFC also vets listing applications, but the SEHK is responsible for granting listing approvals. The SEHK is also responsible for regulating post-listing compliance of listed issuers with the Listing Rules, which specify listing requirements and ongoing obligations for listed issuers.
The SFC takes the lead role in market regulation, administering:
The Companies Ordinance (CO) (such as on issuance of securities and prospectus by companies).
The Securities and Futures Ordinance (SFO) (such as on market misconduct, for example, insider dealing and other securities-related offences).
The Codes on Takeovers and Mergers and Share Repurchases (Codes) (such as on fair dealing in takeovers).
The Listing Rules, CO, SFO and Codes are the major regulations in Hong Kong which regulate listing applications, disclosures in prospectus and post-listing securities market activities.
An application for listing must comply with the relevant Listing Rules, unless the SEHK has waived or modified a particular requirement in any individual case. The Listing Rules apply as much to overseas issuers and People's Republic of China (PRC)issuers as to Hong Kong issuers. Overseas issuers and PRC issuers are subject to certain additional requirements, modifications and/or exceptions. The SEHK may impose other additional conditions that it considers appropriate. The SEHK retains an absolute discretion to accept or reject applications. The following is a summary of the major admission criteria for a primary listing on the Main Board:
Due incorporation. The applicant must be duly incorporated or otherwise established under the laws of the place where it is incorporated or otherwise established. It must also conform with the laws of that jurisdiction and with its memorandum and articles of association, or equivalent documents.
Suitability for listing. Both the applicant and its business must, in the opinion of the SEHK, be suitable for listing. Difficulties may arise in the case of applicants whose business is heavily dependent on one product or on one customer, for instance.
Trading record, management and ownership continuity. A new applicant must generally have:
A trading record of at least three financial years.
Been under substantially the same management for at least the three preceding financial years.
Ownership continuity and control for at least the most recent audited financial year.
Profitability/financial standards/market capitalisation. A new applicant must fulfil one of the following three financial tests:
Profit test. The applicant must have both:
profits of HK$50 million in the last three years (with HK$20 million in the most recent year and an aggregate of HK$30 million in the two preceding years); and
all market capitalisation of at least HK$200 million at the time of listing.
Market capitalisation/revenue/cashflow test. The applicant must have all of the following:
a market capitalisation of at least HK$2,000 million at the time of listing,
revenue of at least HK$500 million for the most recent audited financial year; and
positive cashflow from operating activities carried out by the new applicant (or its group) of at least HK$100 million in aggregate, for the three preceding financial years.
Market capitalisation/revenue test. The applicant must have both of the following:
a market capitalisation of at least HK$4,000 million at the time of listing; and
revenue of at least HK$500 million for the most recent audited financial year.
Reporting standards for accounts. The reporting standards for accounts disclosed in listing documentation must be either:
Hong Kong Financial Reporting Standards.
International Financial Reporting Standards.
Other accounting standards acceptable to the SEHK.
From 15 December 2010, Mainland China companies applying for listing in Hong Kong can adopt China Accounting Standards for Business Enterprises to prepare their financial statements.
The latest financial period of a new applicant reported on by the reporting accountants must not have ended more than six months before the date of the listing document. In addition, the SEHK will not normally consider an application for listing from a new applicant which changed its financial year during the latest complete financial year; or intends to change the period of its financial year during the period of the profit forecast or the current financial year, whichever is the longer period, except where the change is to bring a subsidiary's financial year into line with that of the applicant.
Minimum size requirements at the time of listing. The SEHK must be satisfied that there will be sufficient public interest in the business of the applicant and in the securities for which listing is sought. These expected market capitalisation requirements are:
Minimum expected market capitalisation.
Total capitalisation of HK$200 million.
Capitalisation of securities held by the public of HK$50 million.
Shares in public hands. At least 25% of the applicant's total issued share capital must at all times be held by the public. For applicants with an expected market capitalisation of over HK$10 billion at the time of listing, the SEHK may consider accepting a lower percentage of public float of between 15% and 25%. The SEHK will not entertain an application to reduce the level of public float after the company is listed.
Adequate spread of holders. The number of holders of the securities to be listed will depend on the size and nature of the issue, but there must be a minimum of 300 shareholders. In addition, not more than 50% of the securities in public hands at the time of listing can be beneficially owned by the three largest public shareholders.
Securities for which listing is sought. The share capital of a new applicant must not include shares whose voting power does not bear a reasonable relationship to the equity interest of such shares when fully paid.
Shares issued must be freely transferable. All securities newly listed on the SEHK must be accepted as eligible by the Hong Kong Securities Clearing Company Limited (HKSCC) for deposit, clearance and settlement in the Central Clearing and Settlement System, established and operated by HKSCC, from the date on which dealings in the securities are to begin.
Sufficiency of working capital. Directors of the issuer are required to confirm in the prospectus that, in their opinion, the working capital available to the listing group is sufficient for the group's requirements (or, if the issuer is a mineral company, for 125% of the group's requirements) for at least 12 months from the date of the prospectus.
Generally, a Hong Kong IPO can be structured in the following major ways (a combination of methods can be used).
Offer for subscription
This is an offer to the public by or on behalf of an issuer of its own securities for subscription.
Offer for sale
This is an offer to the public by or on behalf of the holders or allottees of securities already issued or agreed to be subscribed.
Placing is obtaining of subscriptions for or the sale of securities by an issuer or intermediary, primarily from or to persons selected or approved by the issuer or intermediary.
The SEHK will only usually disallow an IPO to be structured by way of a placing if there is likely to be significant public demand for the securities. In practice, a typical Hong Kong IPO is usually structured in one of the following ways.
Global offering. A global offering consists of both:
A Hong Kong public offer, under which new shares and existing shares (if there is an offer for sale) are issued and offered to the Hong Kong retail public for subscription (subject to conditions).
An international placing, under which new shares and existing shares (if there is an offer for sale) are placed (subject to conditions) for and on behalf of the issuer and selling shareholders (if there is an offer for sale) respectively, to professional and institutional investors in Hong Kong and elsewhere in the world.
Placing and public offer. A placing and public offer consists of both:
A conditional placing of new shares and existing shares (if there is an offer for sale) for and on behalf of the issuer and selling shareholders (if there is an offer for sale) respectively, to professional and institutional investors in Hong Kong.
A conditional offer of new shares and existing shares (if there is an offer for sale) for and on behalf of the issuer and selling shareholders (if there is an offer for sale) respectively, for subscription by the Hong Kong retail public.
Where an IPO includes both a placing tranche and a public subscription tranche, the initial minimum allocation of shares to the public subscription tranche is 10% of the shares offered in the IPO. Mechanisms would need to be put in place to increase this percentage to up to 50% in the case of over-subscription in the public subscription tranche.
An introduction is an application for listing of securities already in issue and for which no market arrangement is required, because the securities for which listing is sought are already of such an amount and so widely held that their adequate marketability when listed can be assumed. This method is typically used by companies which are already listed on another exchange and are seeking to achieve an additional listing on the SEHK to increase the liquidity of the trading of their securities and/or elicit interest from investors who are more familiar with the Hong Kong market.
Major listings by introduction on the SEHK in 2010 and 2011 were:
Prudential Group plc.
This is similar to an IPO placing (see Question 5). Placing of securities by listed issuers is only allowed if it:
Falls within a general mandate given to the directors of the issuer by the shareholders in a general meeting, according to the relevant Listing Rules.
Is specifically authorised by the shareholders of the issuer in a general meeting.
This is an offer by way of rights to existing holders of securities, which enables those holders to subscribe for securities in proportion to their existing holdings. If the proposed rights issue will increase the issued share capital or market capitalisation of the issuer by more than 50%, it must be made conditional on approval by shareholders in a general meeting.
This is an offer to existing holders of securities to subscribe for securities, whether or not in proportion to their existing holdings, which are not allotted to them on renounceable documents. An open offer can be combined with a placing to become an open offer with a clawback mechanism, in which a placement is made subject to the rights of existing holders of securities. If the proposed open offer will increase the issued share capital or market capitalisation of the issuer by more than 50%, it must be made conditional on approval by shareholders in a general meeting.
The application procedures to the SEHK for a primary Main Board listing are basically the same for local companies and non-Hong Kong companies. For the time being, most non-Hong Kong companies seek to list their shares in Hong Kong instead of listing in the form of depositary receipts (currently, there are only four Hong Kong Depositary Receipts listed on the SEHK). (Please note that the SEHK indicated that a listed company would be counted as a foreign company by the SEHK if it is incorporated overseas and has the core business outside Hong Kong and Mainland China.) The main steps are:
Preparation work, including pre-IPO reorganisation, pre-IPO investment, conducting due diligence and drafting the prospectus.
Submit the listing application (Form A1) together with the specified documents, and pay the initial listing fee to the SEHK at least 25 clear business days before the expected listing hearing date (LHD).
Submit the specified documents at least 15 clear business days before the expected LHD which include a profit forecast and cashflow forecast memorandum.
Submit the specified documents at least four clear business days before the expected LHD (four-day documents).
After submission of the four-day documents, the Listing Division determines whether to recommend hearing of the listing application by the Listing Committee. If it has decided not to recommend hearing, the listing applicant can appeal to the Listing Committee. If it has decided to recommend hearing, the application is heard by the Listing Committee on the LHD.
Hearing of the listing application by the Listing Committee on the LHD to determine whether to approve it. If the application is rejected, the listing applicant can appeal to the Listing (Review) Committee.
If the Listing Committee passes the hearing on the LHD (which can be subject to conditions including enhancement of disclosures in the prospectus), the next steps are investors' education (pre-marketing) and marketing. These may include publication of pre-deal research reports, conducting marketing activities such as a road show and issuing a red-herring prospectus. Posting of the web proof information pack on the HKEx's website is required once a red-herring prospectus is issued.
More specified documents are required to be submitted before bulk-printing and issue of the prospectus and formal notice.
The Hong Kong underwriting documents are signed and the prospectus is arranged to be issued, registered and posted on the HKEx's website.
Application lists of the Hong Kong public offer open and close.
The IPO price is fixed, the international underwriting documents are signed and the final offering circular is issued.
Announcement of the results of allocations in the Hong Kong public offer application is made.
More specified documents must be submitted to the SEHK before dealings commence. When all the relevant documents are duly submitted, dealing in shares can commence.
During the application process, the listing applicant and other relevant parties must address comments from the SEHK and SFC from time to time.
Advisers: equity offering
The major advisers are:
Sponsors. A new applicant must appoint at least one independent sponsor to assist it with its IPO. A sponsor must perform its duties with impartiality, being responsible for:
preparing the new applicant for listing;
being closely involved in the preparation of the listing documents;
conducting reasonable due diligence enquiries to make the declaration to the SEHK that the new applicant meets the listing criteria, the prospectus contains sufficient particulars and information, the new applicant has established adequate internal controls and procedures, and directors of the new applicant have the experience, qualifications and competence to act as directors of a company listed on the SEHK;
lodging the formal application for listing and all supporting documents with the SEHK;
dealing with the SEHK in all matters arising in connection with the application.
Underwriters. Responsible for the underwriting part of the offering.
Legal advisers to the issuer. Providing legal advice to the issuer and preparing or assisting in the preparation of documents, in accordance with the relevant legal and regulatory requirements.
Legal advisers to the sponsors and the underwriters. Providing legal advice to the sponsors and underwriters and preparing or assisting in the preparation of documents, in accordance with the relevant legal and regulatory requirements.
Auditor and reporting accountants. Preparing or assisting in the preparation of financial information and reports.
Property valuer. Preparing real property valuation reports.
Competent person. Preparing competent person reports for inclusion in mineral companies' prospectus.
The main documents are the prospectus, offering circulars, underwriting agreements, responses to queries from the SEHK and the SFC and (if applicable) waiver applications.
The major advisers are the:
Placing agent. Procures the placees to purchase or subscribe for shares of the issuer.
Legal advisers. Provides legal advice to the issuer and other relevant parties and preparing or assisting in the preparation of documents, in accordance with the relevant legal and regulatory requirements.
The main documents are the placing agreement and subscription agreement (for top-up placing transactions).
Rights issue and open offer
A sponsor is required for an IPO but not for a rights issue or open offer. The major advisers normally used in a rights issue or an open offer are:
Financial adviser. Provide corporate finance advice, assisting in the preparation of offering or other relevant documents and co-ordinating the work of the issuer's other professional advisers.
Underwriters. Responsible for the underwriting part of the offering.
Legal advisers to the issuer. Provide legal advice to the issuer and preparing or assisting in the preparation of documents, in accordance with the legal and regulatory requirements of the relevant jurisdictions.
Legal advisers to the underwriters. Provide legal advice to the underwriters and preparing or assisting in the preparation of documents, in accordance with the legal and regulatory requirements of the relevant jurisdictions.
Auditor and reporting accountants. Prepare or assist in the preparation of financial information and reports.
The main documents are the prospectus and underwriting agreements.
Equity prospectus/main offering document
Generally, subject to certain exceptions, a prospectus is required where there is either (CO):
An offering of any shares in or debentures of a company (including a company incorporated outside Hong Kong, whether or not it has established a place of business in Hong Kong) to the public of Hong Kong, for subscription or purchase for cash or other consideration.
Calculation to invite offers by the public to subscribe for or purchase for cash or other consideration any shares in or debentures of a company (including a company incorporated outside Hong Kong, whether or not it has established a place of business in Hong Kong).
For a prospectus to be issued/delivered, both the following major conditions must be satisfied:
Its registration must have been authorised by the SEHK or SFC (as the case may be).
A copy of it must have been registered by the Registrar of Companies.
Every prospectus must be in English and Chinese, unless a specified exemption applies.
The main exemptions from the requirements for publication/delivery of a prospectus contained in the CO include:
An offer to professional investors, within the meaning of the SFO.
An offer to no more than 50 persons.
An offer where the total consideration payable for the shares must not exceed HK$5 million (Total Consideration Exemption).
An offer where the minimum denomination of, or the minimum consideration payable by any person for, the shares is no less than HK$500,000 (Minimum Denomination Exemption).
An offer in connection with an invitation made in good faith to enter into an underwriting agreement.
An offer in connection with a takeover or merger or a share repurchase which is in compliance with the Codes.
An offer to qualifying persons (including directors, employees, officers, consultants, former directors, former employees, former officers or former consultants) in relation to the company or its group company, provided that the only persons who can acquire the shares are the qualifying persons.
The above exemptions can be used in combination with each other, except for the Total Consideration Exemption and Minimum Denomination Exemption. For certain exemptions set out above, a specified warning statement must be included in the prospectus.
The main principle is that the prospectus should provide sufficient information in relation to an issuer, such as its business and activities, assets and liabilities, financial performance and position, and management and prospects, to allow an investor to make an informed assessment.
Broadly, an IPO prospectus contains the following major categories of information, among others (Listing Rules, CO):
Information about the listing group's activities, business and assets.
Securities to be listed and the terms and conditions of the issue and distribution.
Information about the prospectus and offering (including the offering structure, expected timetable and underwriting and lock-up arrangements).
Information on the issuer's capital.
Information about the issuer's substantial/controlling shareholders.
The history and details of any reorganisation of the listing group.
Financial information about the listing group (including an accountants' report).
Information about the issuer's management including its directors and senior management.
Future plans and prospects of the listing group and the use of the offering proceeds.
The details of any connected transactions.
The corporate, statutory and general information of the issuer.
The risk factors in relation to the listing and the offering.
An industry and regulatory overview of the business of the listing group.
The particulars of any waivers and exemptions in relation to the listing.
Property valuation information about the listing group's real properties.
Information on mineral reserves and resources for a mineral company (including a competent person report).
A summary of the constitutional documents.
Material contracts and documents delivered to the Registrar of Companies and available for inspection (for overseas companies, relevant company legislation should also be made available for inspection).
Information about the parties involved in the offering, for example, global co-ordinator, sponsor and lawyers.
Broadly, the prospectus is prepared by the issuer and its directors with the assistance of its advisers (including drafting), such as the sponsor, legal advisers, reporting accountants and property valuer.
Generally, the issuer and its directors are primarily responsible for the contents of the prospectus.
They can be subject to civil and/or criminal liability and/or disciplinary action under the common law, Listing Rules, CO, SFO and other legislation in relation to the issue of prospectuses, especially for:
Making untrue statements.
Giving false, misleading or deceptive information.
Making fraudulent, reckless or negligent misrepresentations.
An expert who has given his consent to the issue of the prospectus is liable to the extent that an untrue statement, made by him as an expert, appears in the prospectus.
Marketing equity offerings
For an international placing which targets professional, institutional and corporate investors, marketing is conducted through bookbuilding on the back of an offering circular (see Question 16).
For a Hong Kong public offer which targets the Hong Kong retail public, marketing is conducted through a public offering on the back of a prospectus (see Question 16).
The issue of investment research reports published before a first listing of equity securities on the SEHK by connected analysts (connected with the sponsors, managers or underwriters) has been a feature of the Hong Kong securities market for many years.
There are two main areas of concern in connection with the issue of research reports:
An analyst can face a conflict of interest as his analysis and views may affect the decisions of investors and therefore the IPO offer price.
How to reduce or eliminate dissemination to the public of non-prospectus information before and during the offer period.
If the above issues are not properly dealt with, a person may be subject to adverse consequences such as disciplinary action and delays to the listing timetable.
The current market practice adopted by sponsors is implementing detailed internal controls and other measures to safeguard analyst independence, and to address potential conflicts of interest from analysts' functions in IPOs. These internal procedures are usually coupled with measures to restrict distribution of research reports to professional investors and to prevent leakage of information in research reports, to minimise the risk that research reports may technically be prospectuses (the SFO and CO contain provisions restricting the issue of prospectuses, extracts of prospectuses, advertisements, and so on).
To enhance the regulatory framework of research analysts' conduct relating to the preparation of research reports, in June 2011, the SFC amended the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (Code of Conduct) and the Corporate Finance Adviser Code of Conduct (CFA Code) to:
Extend the scope of the SFC requirements governing analysts responsible for investment research to research about companies about to be listed.
Prevent research analysts from asking for projections or forecasts unless they will be included in the prospectus.
Require sponsors in IPOs to take steps to ensure that research analysts are not provided with (and should not seek) any material information or forward-looking information including projections and forecasts (whether qualitative or quantitative) concerning the listing applicant that is not reasonably expected to be included in the prospectus, listing document, offering circular or other similar document, or publicly available. The test that should be applied is whether the information (whether forward-looking or not) is material to an investor in forming a valid and justifiable opinion of the listing applicant and its financial condition and profitability. Information would be material if it is likely to significantly influence a reasonable person's opinion of the listing applicant and its financial condition and profitability. The restriction covers any information provided to research analysts directly or indirectly, formally or informally, in writing or verbally. It covers all communications in a meeting, during a presentation, site visit or interview, or in any other context.
The bookbuilding process begins after pre-marketing. Potential institutional investors are approached to obtain non-binding expressions of interest to purchase shares in the offering, at various prices.
Bookbuilding is usually conducted at the same time as a management road show, and normally begins about two to three weeks before the public offer period starts. A red-herring prospectus is distributed to assist in the bookbuilding and management road show.
The Hong Kong public offer (to retail investors) launches after an offering prospectus is registered with the Registrar of Companies. Usually, the Hong Kong public offer lasts for three and a half days, and ends approximately with the bookbuilding process. An indicative price range is set for the Hong Kong public offer, subject to price determination. A Hong Kong underwriting agreement is also signed at this stage (see Question 17).
The offer price is fixed between the issuer and global co-ordinator, based on the level of interest expressed by prospective institutional investors during the bookbuilding process, and is normally within the indicative price range set for the Hong Kong public offering. Once a price is determined, the international offering circular is finalised and the international underwriting agreement is signed.
Usually, around 10% of all IPO shares are initially allocated to the Hong Kong public offer tranche. If there are over-applications, shares allocated to the international offering tranche are clawed back according to a scale prescribed by the Listing Rules, or as otherwise permitted by the SEHK. The Hong Kong public offer tranche increases to:
30%, if over-application is 15 to fewer than 50 times.
40%, if over-application is 50 to fewer than 100 times.
50%, if over-application is 100 times or more.
Underwriting: equity offering
For a typical Hong Kong Main Board IPO, there are two tranches, the Hong Kong public offer and the international placing (see Question 5). The public offer must be fully underwritten (Listing Rules). The placing is also fully underwritten in most cases in practice.
The following major agreements are usually entered into for the underwriting of a typical Hong Kong IPO.
Hong Kong underwriting agreement. In relation to the Hong Kong public offer, the issuer enters into a Hong Kong underwriting agreement with, among others, the Hong Kong public offer underwriters. In the underwriting agreement:
The issuer agrees to offer shares for subscription by the Hong Kong public, subject to certain conditions.
The underwriters severally agree to subscribe or procure subscription for their respective proportions of the offer shares not taken up in the public offer, subject to certain conditions, in consideration for an underwriting commission.
A typical underwriting agreement also contains the following key terms, among others:
The public offer mechanism, such as allotment of the offer shares under the public offer.
Clawback and reallocation provisions.
Delivery of shares arrangements.
Payment of listing proceeds and deduction of commissions and other expenses.
Representations, warranties and indemnities.
Lock up provisions.
Termination provisions, including the force majeure clauses.
Agreement among Hong Kong underwriters. The public offer underwriters enter into an agreement among themselves to agree on their respective rights and obligations. Major terms include:
Underwriting commission allocation.
Actions to take when an underwriter cannot fulfil its obligations.
Authorising the global co-ordinator to act on their behalf.
International underwriting agreement. In relation to the international placing, the issuer enters into an international underwriting agreement with, among others, the international underwriters. Under the international underwriting agreement, subject to certain conditions, the international underwriters agree to severally subscribe for or buy, or procure subscribers to subscribe for or purchasers to buy, the international placing shares being offered.
Usually, the international underwriting agreement can be terminated on similar grounds to the Hong Kong underwriting agreement. Generally, the issuer also grants an over-allotment option to the international underwriters which is exercisable by the global co-ordinator (on behalf of the international underwriters), to allot up to the amount of additional placing shares representing 15% of the initial offer shares to cover, among others, over-allocations (if any) in the international placing.
Agreement among international underwriters. This agreement is entered into among international underwriters to set out their respective rights and obligations in relation to the international placing. It is similar in effect to the agreement among Hong Kong underwriters.
Inter-syndicate agreement. This agreement is entered into among the underwriters of the Hong Kong offering and underwriters of the international placing, and sets out the terms in relation to, among others:
Reallocation between the offerings.
Commission and expenses.
The underwriting fee/commission is subject to negotiation among the relevant parties, and usually ranges from 1.5% to 3% of the aggregate offer price.
Timetable: equity offerings
The following is a summary timetable for a typical IPO by way of a global offering:
T. Submission of the listing application.
T plus 20 (days). Receive and address first batch of comments from the SFC/SEHK (and continue to receive and address comments from the SFC/SEHK up to the SEHK Listing Committee hearing).
T plus 60. Submission of profit forecast and cashflow forecast memorandum to the SEHK.
T plus 80. SEHK Listing Committee hearing.
T plus 81. Distribution of pre-deal research reports.
T plus 96. Posting of web proof information pack on the HKEx's website and distribution of red-herring prospectus.
T plus 106. Registration of prospectus in Hong Kong and signing of Hong Kong underwriting agreement.
T plus 107. Distribution of prospectus in Hong Kong and the Hong Kong public offer opens.
T plus 110. Close of application for Hong Kong public offer.
T plus 112. Pricing and signing of international underwriting agreement.
T plus 120. Listing of and dealing in shares begin on the SEHK.
The timetable for a subsequent equity offering is usually much shorter than for an IPO, as fewer procedures and documents are involved. The following is a summary of a typical rights issue timetable (assuming no shareholder approval is required and the timetable may vary case-by-case).
T. Last day of dealing in shares on a cum-entitlement basis.
T plus 1. First day of dealing in shares on an ex-entitlement basis.
T plus 2. Latest time for lodging transfer of shares to qualify for the rights issue.
T plus 3 to T plus 6. Register of members closes (usually one to three business days).
T plus 6. Record date.
T plus 7. Register of members reopens.
T plus 7. Despatch of prospectus.
T plus 9. First day of dealing in nil-paid rights shares.
T plus 11. Latest day for splitting nil-paid rights shares.
T plus 14. Last day of dealing in nil-paid rights shares.
T plus 17. Latest day for acceptance of and payment for rights shares.
T plus 21. The rights issue expected to become unconditional.
T plus 23. Announcement of the results of the rights issue.
T plus 27. Refund cheques to be sent in respect of the unsuccessful applications.
T plus 27. Share certificates for the rights shares to be despatched.
T plus 29. Dealings in fully-paid rights shares commence.
On the face of it, stabilisation could be considered as market misconduct under the SFO, as being false trading and market manipulation. However, the Securities and Futures (Price Stabilising) Rules (Rules) provide a safe harbour from such market misconduct provisions. The stabilising activities permitted under the Rules include:
Primary stabilisation, including purchasing issuer shares to prevent or minimise any reductions in the market price of the shares.
Ancillary stabilisation in connection with any primary stabilising actions, including:
over-allocation to prevent or minimise any reduction in the market price of the shares;
selling or agreeing to sell the shares to establish a short position in them to prevent or minimise any reduction in their market price;
purchasing or subscribing for the shares under the over-allotment option, to close out any positions mentioned above; and
selling or agreeing to sell the shares to liquidate a long position held as a result of those purchases or subscriptions.
The Rules also specify the following:
Only a stabilising manager or its agents can take any one or more of the above stabilising actions.
Primary stabilising actions are subject to pricing restrictions (for example, only upward stabilisation is allowed), and can only be carried out for a limited period (from the start of trading of the shares to the 30th day after the closing date of the public offer application list).
Imposing prior, interim and post-stabilisation disclosure obligations.
Imposing record keeping requirements.
Tax: equity issues
Several tax issues may arise in an IPO and professional tax advice is always recommended. The major Hong Kong tax/fee issues include:
Those that may arise in connection with the reorganisation process, which may involve different jurisdictions depending on where the listing group has business interests and their respective places of incorporation. In Hong Kong, relevant tax implications may include stamp duty for transfer of shares or properties and profits tax. For Mainland China issuers, there may be withholding tax issues on dividends.
No stamp duty is payable on the issue of shares in Hong Kong, but a capital fee is payable for every whole or part of HK$1,000 of the nominal share capital (subject to a maximum fee of HK$30,000 in each case). Stamp duty is payable on the sale of existing shares by a selling shareholder in the offering (if any). The selling shareholder will usually bear both the seller's and purchaser's portions of the stamp duty.
Investors must pay brokerage of 1%, the SFC transaction levy of 0.003% and the stock exchange trading fee of 0.005% on the total offer price, when subscribing for shares in an IPO.
There may be stamp duty implications on stock borrowing and lending (which is usually undertaken to facilitate stabilising actions).
Periodic financial reporting
A listed issuer must publish preliminary announcements of (Listing Rules):
Its full year financial results no later than three months after the end of the financial year.
Its half-year results for the first six months of the financial year no later than two months after the end of that period of six months.
Listed issuers must also distribute to holders of its securities both:
Its annual report or summary financial report, no later than 21 days before the date of its annual general meeting, and within four months after the end of the financial year (the annual accounts must be made up to a date falling no more than six months before the date of the annual general meeting).
Its interim report or summary interim report for the first six months of each financial year, no later than three months after the end of that period.
Other disclosure obligations
The other major disclosure obligations under the Listing Rules include:
Price sensitive information.
Advances and financial assistance to entities.
Issue of securities.
Changes in issued share capital.
Closure of register of members and notice of meetings.
Voting at shareholders' meetings.
Director's biographical details.
Repurchase of own shares.
Notifiable transactions and connected transactions (see below).
Significant transactions and related party transactions
Notifiable transactions. The Listing Rules deal with certain transactions conducted by any member of an issuer and its subsidiaries (listed group), including acquisitions and disposals.
The classifications of the various notifiable transactions are determined according to the size (that is, percentage ratios calculated with reference to the assets, profits, revenue, consideration, market capitalisation, equity issued and issued share capital of the issuer, target, and the relevant transaction as appropriate).
Connected transactions. The Listing Rules also deal with connected transactions. Broadly, a connected transaction means a transaction between a member of the listed group and a connected person or its associates (as defined). Connected transactions can be any kind of transaction.
Significant shareholder voting restrictions
Major significant shareholder voting restrictions under the Listing Rules relate to, among others:
Rights issues and open offers.
In the amendments to the Listing Rules (primarily with effect from 1 January 2012) and the Corporate Governance Code (primarily with effect from 1 April 2012), the requirements and disclosure of the issuer's corporate governance have been enhanced.
Generally, the continuing obligations apply equally to listed non-Hong Kong companies and depositary receipts, subject to certain additional requirements, modifications or exceptions. Listed non-Hong Kong companies and issuers of depositary receipts can apply to the SEHK or SFC (as the case may be) for waivers from certain Listing Rules or other regulatory requirements. In practice, the regulators are more willing to grant waivers to secondary listed issuers, though each wavier is considered on its own merit on a case-by-case basis.
The overriding principle is to balance the legitimate expectations of investors who trade through the SEHK against the burden to issuers having to comply with two sets of rules, where trading in the related securities is mainly overseas and listing is primarily on a non-Hong Kong stock exchange that has acceptable shareholder protection standards.
The following penalties can be imposed by the SEHK for breaching the Listing Rules (including continuing obligations) by an issuer and/or its directors:
A private reprimand, a public statement that involves criticism, or a public censure.
Reporting the offender's conduct to the SFC or another regulatory authority (for example the Financial Secretary, the Commissioner of Banking or any professional body) or to an overseas regulatory authority.
Requiring a breach to be rectified or other remedial action to be taken within a stipulated period.
In the case of wilful or persistent failure by an issuer to discharge its responsibilities under the Listing Rules, ordering that the facilities of the market be denied for a specified period to that issuer, and prohibiting dealers and financial advisers from acting or continuing to act for that issuer.
Suspending or cancelling the listing.
Other action as it thinks fit.
Market abuse and insider dealing
Issuer with primary listing on the SEHK and alternative listing on another exchange. The following conditions apply:
The de-listing must be approved in advance by the shareholders by ordinary resolution (more than 50% of the shareholders who attended and voted have voted for the resolution), passed at a duly convened shareholders' meeting.
The de-listing must be approved in advance by holders of any other class of listed securities (Securities Holders) (if applicable).
The shareholders and Securities Holders (if applicable) must be given at least three months' notice of the proposed de-listing.
Issuer only listed on the SEHK with no alternative listing. The permission of the SEHK must be obtained unless:
The issuer has obtained the prior approval of its shareholders and Securities Holders (if applicable) at a duly convened shareholders' meeting and Securities Holders' meeting (if applicable). Various voting rules apply.
The shareholders and Securities Holders (if applicable), other than the directors (excluding the independent non-executive directors), chief executive and controlling shareholders, are offered a reasonable cash alternative or other reasonable alternative.
Any issuer voluntarily withdrawing its listing on the SEHK. Any issuer can voluntarily withdraw its listing on the SEHK if either:
After a general offer, a right to compulsory acquisition is exercised under the applicable laws and regulations, resulting in the acquisition of all the listed securities of the issuer.
The issuer is privatised by a scheme of arrangement or capital reorganisation governed by the Code on Takeovers and Mergers, and all the relevant requirements, including the shareholders' approval requirements, have been complied with.
In either case, the issuer must publish an announcement and despatch a circular to notify its shareholders of the proposed de-listing.
Listing is always granted subject to the condition that if the SEHK considers it necessary to protect investors or maintain an orderly market, it can at any time cancel the listing of any securities, in such circumstances and subject to such conditions as it thinks fit. The SEHK can cancel the listing status of an issuer if, for example:
The issuer has committed a material breach of the Listing Rules.
There are insufficient securities in the hands of the public.
The issuer does not have a sufficient level of operations or sufficient assets to warrant its continued listing (following a four stage de-listing procedure).
The issuer or its business is no longer suitable for listing.
The major consultation papers published recently include the following areas:
Proposals to amend the property valuation requirements, to remove unnecessary burdens on listing applicants and listed issuers. The SEHK and the SFC adopted the proposals and they were implemented through amendments to the Listing Rules that took effect on 1 January 2012.
To seek market views on whether shares of an issuer should be traded ex-entitlement only after the entitlement has been approved by shareholders. The SEHK has now decided to prevent trading ex-entitlement before shareholder approval. In addition, it will require the record date to be set at least three business days after the date of shareholder approval and there be a minimum of one last cum-trading day after the general meeting. The relevant Listing Rules amendments took effect on 20 June 2011.
Proposals to change the Code on Corporate Governance Practices and Listing Rules, to promote a higher level of corporate governance among issuers. The SEHK has adopted the proposals and made amendments to the Code on Corporate Governance Practices (renamed the Corporate Governance Code) and Listing Rules, which have been approved by the SFC. Most of the Listing Rules amendments took effect on 1 January 2012 while the remaining will be effective on 1 April 2012.
Proposals to amend the Listing Rules for listing debt securities for professional investors only, to bring the SEHK more in line with the requirements of other stock exchanges, and allow the SEHK to offer processing times that are comparable to those exchanges. The SEHK adopted the proposals with modifications to the definition of "professional investors" and the documentary requirements for listing application. The Listing Rules were amended accordingly and became effective on 11 November 2011.
Proposed introduction of after-hours futures trading (AHFT) and the relevant operational arrangements. The SEHK has concluded that AHFT will tentatively take place in the second half of 2012, subject to the approval of the necessary rule amendments by the SFC and market readiness.
In addition, the SEHK conducted the following consultations, the outcomes of which remain to be seen. It is anticipated that different interested parties/sectors may express different views on the proposals. The regulators have not given any timetables as to when these consultation reports will be published, nor when the proposals will come into force:
Proposals to bring the risk management requirements of the three clearing houses of the SEHK, namely Hong Kong Securities Clearing Company Limited (HKSCC), HKFE Clearing Corporation Limited (HKCC) and The SEHK Options Clearing House Limited (SEOCH), in line with or to exceed the standards set by the Committee on Payment and Settlement Systems and the Technical Committee of the International Organisation of Securities Commissions.
Proposed introduction of a general disclosure regime and recommended best practices in respect of listed issuers' workplace quality, environmental production, operating practices and community involvement.