The Stock Exchange of Hong Kong (SEHK) has published a consultation paper on proposed amendments to listing rules that will introduce a new treasury share regime and optimise share buy-back programmes. A two-month consultation will conclude on 27 December 2023.
The key proposals are:
- Introduce a new treasury share regime by removing the requirement to cancel repurchased shares. This will allow issuers to hold repurchased shares in treasury, subject to the laws of their places of incorporation and their constitutional documents; and
- Provide safeguards by governing an issuer’s resale of treasury shares in the same manner as the listing rules that currently apply to issuing new shares. These measures aim to prevent market manipulation by listed companies through repetitive buying and reselling of their shares. They also aim to curb insider trading, wherein individuals profit from non-public information about share buybacks and treasury share resales.
According to the current rules, all shares that are repurchased by an issuer must be automatically cancelled upon purchase. The issuer must ensure that the documents of title of purchased shares are cancelled and destroyed as soon as reasonably practicable following the purchase settlement.
The treasury share regime allows most listed companies in Hong Kong an opportunity to maintain a favourable market value and enhance investor returns through share buybacks and resale of treasury shares. It gives them increased flexibility and convenience to swiftly adjust their capital structures in response to market conditions.
For instance, under the treasury share regime, a listed company has the option to sell treasury shares in smaller quantities at prevailing market prices. This approach presents an alternative means for the company to raise funds.
Share buybacks can be used for reducing capital, facilitating employee stock ownership schemes or equity incentives, swapping for debt or equity, as well as maintaining company value and shareholders’ equity.
Under the listing rules, repurchased H shares of A+H-share companies do not have the option to be utilised for employee stock ownership schemes or equity incentives. Additionally, listed companies are required to reduce their capital by cancelling repurchased shares.
The exchange has also published a guidance letter setting out the framework for granting a waiver to allow an issuer to conduct an automatic share buyback programme on the exchange, and to continue the programme throughout the restricted period.
The letter highlights the criteria that the exchange will apply when assessing an issuer’s share buyback programme and waiver application, including the issuer’s size and liquidity of its shares, and the mechanisms guarding against trading with undisclosed inside information and potential price.
It has become a prevalent practice among local listed companies to engage in share buybacks in the stock market, evident from the escalating scale of such activities in the past three years.
A listed company in Hong Kong may buy back shares for a number of reasons, such as returning cash to shareholders, adjusting the gearing ratio, or increasing earnings per share.
Business Law Digest is compiled with the assistance of Baker McKenzie. Readers should not act on this information without seeking professional legal advice. You can contact Baker McKenzie by e-mailing Howard Wu (Shanghai) at howard.wu@bakermckenzie.com
