HKEX: Changes to Treasury Share Listing Rules Effective 11 June 2024

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. 

Removal of Requirement to Cancel Repurchased Shares

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.

Treating Resales of Treasury Shares as New Shares

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:

• subject to preemption similar to an issuance of new shares under the Listing Rules and be offered to all shareholders on a pro rata basis; or
• approved by shareholders under a specific mandate or a general mandate approved in advance by shareholders.

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:

• A resale of treasury shares to a connected person subject to the same connected transaction requirements as an issue of new shares under the Listing Rules
• Issuers must disclose their resale of treasury shares and any movement in the number of treasury shares under different parts of the Listing Rules in relation to announcement, listing document, next-day disclosure return, monthly return, and annual report
• Requiring issuers to comply with the documentary requirements under the Listing Rules for their resale of treasury shares

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:

• include additional information of on-market resales of treasury shares in the next day disclosure return, including the highest and lowest selling price, amount of funds raised, and details of the general mandate used;
• disclose their on-market resales of treasury shares by way of announcements if these on-market resales—individually or together with previous on-market resales of treasury shares in a 12-month period—amount to 5% or more of issuers’ issued shares, including the reasons for these transactions, the use of proceeds, and other information (if applicable) required under the Listing Rules; and
• disclose in their annual reports: a monthly breakdown of on-market resales of treasury shares during the year, total funds raised, and use of proceeds; and any treasury shares held by issuers as at the year-end date and their intended use.

Risk Mitigation Proposals

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

• any resale of treasury shares (whether on or off market) after a share repurchase, with modifications to exclude capitalization issues, share grants under a share scheme that complies with Chapter 17 of the Listing Rules, and any new issue of shares or transfer of treasury shares upon the vesting or exercise of share awards or options under the share scheme; and
• an on-exchange share repurchase after an on-exchange resale of treasury shares.

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

• when there is undisclosed inside information;
• during a restricted period preceding a results announcement (with a modification to adjust the restricted period for on-exchange share repurchases and on-exchange resales of treasury shares from one month to 30 days preceding the results announcement); or
• if the resale is knowingly made with a core connected person; however, HKEX adopted the proposal that an on-market resale of treasury shares to a connected person without knowledge would be fully exempt from the Listing Rules relating to connected transactions.

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:

• issuers will not be required to publish announcements for their on-market resale of treasury shares (but issuers must disclose their on-market resale of treasury shares through the next day disclosure return); and
• issuers will not be required to submit placee information to the exchange.

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

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.

Amendments in Other Parts of the Listing Rules

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:

• the issuer’s public float;
• the issuer’s market capitalization;
• the equity capital ratio for size test calculation;
• the size limit for issuing or purchasing securities as a percentage of the issued shares;
• a person’s percentage of voting rights at a general meeting of the issuer; and
• a person’s percentage interest in the issuer.

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:

• in the next day disclosure return after each share repurchase whether repurchased shares are to be cancelled or held in treasury, and where applicable, the reasons for any deviation from the intention statement previously disclosed by the issuer in the explanatory statement; and
• in their annual report the number of treasury shares held as at the year-end date and their intended use.

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.

MOVING FORWARD

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.

CONCLUSION

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.