HONG KONG: Consultation on changes to Hong Kong major shareholdings regime

Tuesday November 27 2012

The Securities and Futures Commission has published a consultation on proposals to enhance the regulatory regime for non-corporate listed entities on Hong Kong major shareholdings regime.

Extension of rules to non-corporate listed entities

As part of this consultation, the SFC has proposed extending the disclosure of interests rules currently contained in Part XV of the Securities and Futures Ordinance to expressly cover listed entities that are not in corporate form.

The move follows a 2010 SFC consultation which proposed amendment of Part XV of the SFO so that the rules would apply to all listed CIS (with an exemption for listed open-ended CIS). The 2012 consultation highlights that apart from corporations and CIS, other types of organisations or vehicles (such as business trusts and partnerships) may be listed on the SEHK. The SFC argues that in addition to listed CIS, Part XV of the SFO should also be extended to cover all listed entities that are not in corporate form.

The amendments proposed to implement this include:

• adding a new definition of “entity” in Schedule 1 to include a trust, a partnership, and such other arrangement, or class of arrangements, which the Financial Secretary may by notice published in the Gazette prescribe as being regarded as an entity in accordance with the terms of the notice;
• amending the definitions of “corporation” and “company” in Schedule 1 to include any entity;
• amending the definition of “share” in Schedule 1 to the SFO, in relation to an entity, to include a unit in the listed entity;
• adding a new definition of “unit” in Schedule 1 to the SFO, in relation to an entity, to mean the units, shares or some other unit of measurement of interest in the entity;
• amending the definition of “associate” in Parts XIII and XIV of the SFO to include reference to a person that is an entity and include the manager, trustee, custodian or partner of the entity and each officer or employee of any such manager, trustee, custodian or partner, and making similar amendments to the definitions of “controller”, “persons connected with a corporation”, “relevant information”, “subsidiary”, “related corporation”, etc.;
• adding a new definition of “voting shares” in section 308 of the SFO in place of shares comprised in the “relevant share capital” of a listed corporation to provide that “voting shares, in relation to a listed corporation – (i) means the listed corporation`s issued shares of a class the shares in which carry rights to vote in all circumstances at general meetings of the corporation; and (ii) includes unissued shares in the listed corporation`s share capital of a class which, if issued, would carry rights to vote in all circumstances at general meetings of the corporation”;
• changing the definition of “issued equity share capital” to “issued equity voting shares” which, in relation to a listed corporation, means the listed corporation’s issued shares of a class the shares in which carry rights to vote in all circumstances at general meetings of the corporation;
• amending the definition of “underlying shares” to remove the references to “relevant share capital” and add reference to “voting shares”; and
• other consequential and further amendments to make Part XV of the SFO applicable to listed entities that may be structured in other forms (such as in the form of a trust or a partnership) in the same manner as it applies to listed corporations.

Clarification on depositary receipts

The SFC is proposing to amend section 7 of Schedule 1 to the SFO to clarify that the overseas issuer, whose shares/units are the underlying shares/ units, is the issuer of the DRs so that the overseas issuer becomes a listed corporation when DRs in respect of its shares/units are issued. As the SFC is proposing to (a) amend the definitions of “corporation” and “company” to include any entity; and (b) amend the definition of “share” to include a unit in the listed entity, thr proposal will also cover DRs in respect of interests in overseas entities. This means that an overseas entity whose equity interests underly a DR will be the issuer in respect of the DR and not the relevant bank.

Exemptions – debentures

The SFC has proposed to exclude from the disclosure of interests regime under Part XV of the SFO any listed debenture issuer (ie, an entity that is listed only by virtue of its debentures being listed on the SEHK) where:

• the listed debentures are not convertible; or
• the listed debentures are convertible in whole or in part, directly or indirectly, into shares/units of an entity related to the listed debenture issuer and such related entity is itself a listed entity where persons interested in shares/units of the related entity are subject to the disclosure of interests obligations; or
• the listed debentures are convertible in whole or in part, directly or indirectly, into shares/units of an unrelated entity.

The exclusion will not apply where:

• the listed debentures are convertible in whole or in part, directly or indirectly, into shares/units of the listed debenture issuer itself; or
• the listed debentures are convertible in whole or in part, directly or indirectly, into shares/units of an entity related to the listed debenture issuer and such related entity is not itself a listed entity where persons interested in shares/units of the related entity are subject to the disclosure of interests obligations.

Where the listed debentures are convertible into shares/units in an entity that is itself a listed entity, the disclosure obligations of persons interested in that listed entity will not be changed by the exclusion of the issuer of the convertible listed debentures from the disclosure of interests regime under Part XV of the SFO.

Companies Ordinance amendments

Divisions 2 to 4 of Part XV of the SFO presently require a person who is interested in 5% or more of the shares in the “relevant share capital” of a listed corporation to make a disclosure. These divisions rely on a shareholder expressing the aggregate “nominal value” of all the shares of a listed corporation in which he is interested, immediately before (or immediately after) the relevant time, as a percentage of the “nominal value” of the issued equity share capital of that listed corporation to determine whether he comes under a duty of disclosure.

Pursuant to the new Companies Ordinance, enacted in July 2012 and expected to take effect in 2014, shares are to have no nominal value and corporations have no issued share capital, hence there will be no means of calculating whether or not a person must make a disclosure under Divisions 2 to 4 of Part XV of the SFO. Accordingly, an alternative means of computation must be designed for disclosures required under Divisions 2 to 4 of Part XV of the SFO.

The SFC has proposed to amend Part XV of the SFO so that the disclosure mechanism under Divisions 2 to 4 of Part XV of the SFO is based upon the number of voting shares of a listed entity (expressed as a percentage of the number of shares of the same class which have been issued by the listed entity) held by the substantial shareholder rather than the nominal value of those shares. The amended disclosure mechanism will also work for those listed entities that do not have share capital and whose units have no nominal value (eg, REITs).

The SFC also proposes that the provisions in Parts XIII and XIV of the SFO which similarly treat a person as a substantial shareholder by virtue of a shareholding of 5% of the nominal value of the relevant share capital of the corporation (see sections 247(3) and 287(3) of the SFO) will also be changed to refer to the same percentage but calculated by reference to the number of shares held expressed as a percentage of the number of shares of the same class which have been issued by the listed entity.

The SFC welcomes any comments from the public and the industry on the proposals made in the consultation paper. Comments can be submitted to the SFC in writing until 24 December 2012.

Click on the above link for more details.