Hong Kong Exchanges and Clearing Limited (HKEX) concluded its consultation on proposed rule amendments to introduce a new treasury share regime. All changes were approved with minor modifications based on market comments. This update will give issuers greater flexibility in managing their capital structure through resales of treasury shares and provide a framework in the Listing of Securities on the Stock Exchange of Hong Kong Limited (the Listing Rules) to ensure a fair and orderly market and fair and equal treatment of all shareholders in resales of treasury shares.
We discuss below the key features of HKEX’s conclusions to its consultation paper titled Proposed Amendments to Listing Rules Relating to Treasury Shares. HKEX’s proposals apply equally to the Rules Governing the Listing of Securities on GEM (the GEM Rules). The amendments to the Listing Rules and the GEM Rules will go into effect on 11 June 2024.
HKEX adopted the proposal to remove the requirement to cancel repurchased shares. By doing so, issuers will be able to hold repurchased shares in treasury, subject to the laws of their places of incorporation and their articles of association or equivalent constitutional document.
It is also worth noting that HKEX will modify the definition of treasury shares in its proposed rule amendment. Such modification indicates that whether treasury shares may be held by an issuer’s subsidiary or an agent or nominee on behalf of the issuer or its subsidiary will be subject to the laws of the issuer’s place of incorporation and its constitutional documents. Furthermore, the modified definition addresses the situation where issuers re-deposit treasury shares into the Central Clearing and Settlement System (CCASS) for resale on the exchange. As the shares' legal titles are transferred to HKSCC Nominees Limited, this will lead to the shares ceasing to be classified as treasury shares under the laws of Bermuda or the Cayman Islands (where the listing vehicle of many Hong Kong listed companies are incorporated). Thus, HKEX will modify the definition so that these repurchased shares held in CCASS will continue to be treated in the same way as treasury shares registered in the issuers' own names.
Since resales of treasury shares impact existing shareholders in a similar manner as the issuance of new shares, HKEX has adopted the proposal to apply the current requirements for the issuance of new shares to resales of treasury shares by issuers. Also, HKEX made modifications that will require additional disclosure for on-market resales of treasury shares.
Resales to be Conducted on Preemptive Basis or with Shareholders’ Mandate
HKEX adopts the proposal that a resale of treasury shares shall be:
Share Scheme
A share scheme using treasury shares to satisfy share grants would be treated as a share scheme funded by new shares under the Listing Rules.
Additional Requirements on Resale of Treasury Shares
HKEX adopted the proposal of the following additional requirements on resale of treasury sales to ensure the protection of shareholders:
Additional Disclosure for On-Market Resale of Treasury Shares
To address the respondents’ concerns that HKEX’s proposal would enable issuers to resell treasury shares conveniently on the market, HKEX will revise its proposal to ensure greater transparency of the resale transactions by requiring issuers to:
Currently, the Securities and Futures Ordinance (SFO) restricts all activities—including any dealings by a listed issuer in its treasury shares—that amount to stock market manipulation and insider dealing. In addition to the SFO’s restriction, HKEX adopted the additional requirements to ensure that a fair and orderly market is maintained after the relaxation.
30-Day Moratorium Period for Share Repurchases, Resales of Treasury Shares
HKEX adopted the proposal to impose a 30-day moratorium period on
The restriction on resale ensures that resales do not take place at a price that has been affected by the issuer’s previous share repurchase. Further, the constraint on on-exchange share repurchases deters issuers from repeatedly repurchasing and reselling their own shares on market to make a trading profit or manipulate the share price.
Dealing Restrictions for Resale of Treasury Shares on the Exchange
HKEX adopted the proposal to prohibit a resale of treasury shares on the exchange
Other Requirements Relating to On-Market Resale of Treasury Shares
HKEX adopted the proposal to apply the disclosure and documentary requirements for the resale of treasury shares (which treat resales of treasury shares as the issuance of new shares) to the on-market resale of treasury shares, with the exception that:
HKEX adopted this proposal with a modification to add a new headline category for disclosure of on-market resales of treasury shares in next-day disclosure returns to facilitate investors in locating these documents on HKEX’s website.
New listing applicants will be able to retain their treasury shares upon listing but must disclose details of their treasury shares in their prospectuses.
HKEX also adopted a lock-up requirement to restrict new listing applicants from reselling their treasury shares or entering into any agreement for resale within six months after listing. However, HKEX made a modification so that the six-month restriction does not apply to a resale of treasury shares by an issuer that has transferred its listing from GEM to the Main Board.
Voting Rights Attached to Treasury Shares
Despite voting rights attached to treasury shares normally being suspended by laws, HKEX adopted the proposals to make it clear under the Listing Rules that issuers, being holders of treasury shares, should abstain from voting on matters that require shareholders’ approval under the Listing Rules. This would also prevent controlling or substantial shareholders from using treasury shares as a means to consolidate their control of the issuer.
Excluding Treasury Shares in Calculation of Issued Shares
Because treasury shares are held by issuers themselves and the rights attached to them are normally suspended by laws, HKEX adopted the proposal to exclude treasury shares when calculating an issuer’s issued shares and voting shares for the purposes of determining:
Disclosure of Issuers’ Intention to Hold Treasury Shares
HKEX adopted the proposal to require an issuer to disclose in the explanatory statement its intention as to whether the repurchased shares will be canceled or kept as treasury shares.
Meanwhile, it is important to note that the proposal has been adopted with modifications that will require issuers to disclose:
Resale of Treasury Shares Through Agents or Nominees
HKEX adopted the proposal to clarify that a resale of treasury shares by an issuer or its subsidiary includes any resales of treasury shares through their agents or nominees.
HKEX will make housekeeping amendments to the Listing Rules as set out in the consultation conclusions.
For overseas issuers that were granted waivers from the requirement to cancel repurchased shares, transitional arrangements will be provided for these issuers to comply with the amended Listing Rules by their second annual general meeting after the effective date of the proposed rule amendments.
While affording more flexibility for issuers to hold treasury shares, HKEX’s consultation conclusions also include several important regulatory safeguards for preventing market manipulation and ensuring fair shareholder treatment. The introduction of the treasury share regime is therefore a positive development in supporting the ongoing growth and vitality of Hong Kong’s vibrant market.
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