HONG KONG: SFC and HKEX Keep Rights Issues and Open Offers Under Scrutiny

Monday December 12 2016

The Securities and Futures Commission (SFC) and The Stock Exchange of Hong Kong Limited (“the Exchange”) are closely monitoring rights issues and open offers that substantially dilute the interests of non-subscribing minority shareholders. Rights issues are offers to existing shareholders to subscribe for new shares proportionate to their shareholdings. Shareholders may sell their nil paid rights in the market if they do not intend to subscribe for the rights shares. Open offers are similar to rights issues but the subscription rights are non-renounceable. The dilution impact of a rights issue or open offer is measured based on the offer ratio and the discount of the offer price to the share price prior to the announcement of the offer.

The SFC and the Exchange are concerned that in some cases corporate actions have not been conducted in a manner that affords fair and equal treatment to all shareholders. Such corporate actions, absent any demonstrable commercial rationale, cast doubt on whether the directors of the listed companies have complied with the requirement to act in the best interests of shareholders. Rule 2.03 of the Listing Rules of the Exchange provides that the Listing Rules reflect current acceptable standards in the market place and are designed to ensure that investors have and can maintain confidence in the market. The rule requires, amongst others that, the issue and marketing of securities is conducted in a fair and orderly manner, all holders of listed securities are treated fairly and equally and the directors of a listed issuer should act in the interests of its shareholders as a whole.

The Exchange has adopted a rigorous approach to vetting the relevant draft announcements, including making enquiries where the terms of proposed offers or related transactions raised concerns about unfair dilution of non-subscribing minority shareholders’ interests. To enhance transparency and facilitate market understanding of how it interprets and applies the Listing Rule requirements in relation to highly dilutive offers and share consolidations/subdivisions, the Exchange has released two listing decisions where it published the rationale for its decisions in refusing to grant approval in two recent cases.

The SFC has made enquiries into cases where the terms of the proposed offers were highly dilutive and/or where the issuers conducted fundraisings repeatedly, over a relatively short period to ascertain whether there has been a contravention of the Securities and Futures Ordinance.

Click here for listing decisions HKEX-LD102-2016.

Click here for listing decisions HKEX-LD103-2016.

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