Response HKEX: Regarding the proposed amendments to the Listing Rules concerning treasury shares
Release Date: 2023-12-22
December 22, 2023
To: Hong Kong Stock Exchange Limited (hereinafter referred to as "the Exchange")
Response: Regarding the proposed amendments to the Listing Rules concerning treasury shares
1. Do you agree with the proposal to amend the Listing Rules toremove the requirement to cancel repurchased shares? Please provide reasons for your views.
Answer: Agree;
Reason: A significant number of issuers listed on the Hong Kong Stock Exchange are not incorporated in Hong Kong and therefore are not subject to the share repurchase regulations outlined in the Companies Ordinance. Notably, more than 90% of these issuers are registered in jurisdictions that permit the holding of treasury shares. By eliminating the provisions discussed in this consultation, issuers will have the autonomy to determine whether to retain repurchased shares as treasury shares in accordance with their jurisdiction's laws and their own articles of association. This change offers issuers enhanced flexibility and agility in adjusting their capital structure, potentially leading to a decrease in the overall cost of capital for the company.
2. Do you agree with the proposal to require a resale of treasury shares to be subject to the same requirements as an issue of new shares as described in Proposal (1)(a) to (c) above? Please provide reasons for your views.
Answer: Disagree;
Reason: The rationale behind imposing restrictions on the utilization of treasury shares remains ambiguous, particularly concerning their potential use as collateral or security. While treasury shares do not qualify as company assets, their application for such purposes is inadvisable. Furthermore, the question of whether issuers are required to cancel associated treasury shares after a designated period has not been sufficiently addressed. According to the revised sections 7.19A (1) and 7.27b, the resale or placement of treasury shares is excluded from the calculations of rights issues or public offerings. This implies that the resale of treasury shares is effectively akin to issuing new shares through a placement, necessitating their consolidation in financial calculations. Failing to do so could lead to significant dilution of minority shareholders' interests within a short timeframe. Therefore, it is imperative to consider regulating the volume of shares retained as treasury shares for resale, establishing specific percentages or other limits to safeguard shareholder interests.
3. Do you agree with the proposal to require a resale of treasury shares (whether on-market or off-market) to be subject to a moratorium period after a share repurchase? Please provide reasons for your views.
Answer: Agree;
Reason: To maintain a fair market environment for the company's shares and safeguard the interests of public shareholders and creditors, this system is designed to offer a potentially quicker and more adaptable approach to issuing and placing new shares. Its primary objective is to provide issuers with an additional tool for managing capital at prevailing market prices, rather than incentivizing them to engage in trading their own stocks.
4. Do you agree with the proposal to require an on-Exchange share repurchase to be subject to a moratorium period after an on-Exchange resale of treasury shares? Please provide reasons for your views.
Answer: Agree;
Reason: Regular investments by issuers in their own shares heighten operational risks, particularly when management is convinced that company resources ought to be allocated for these investments.
5. Do you consider that the moratorium periods (in either direction) should be shorter than 30 days? If so, please share with us your views on the appropriate duration of the moratorium periods and the reason for your suggestion including your views on how the considerations in paragraph 68 should be addressed.
Answer: Disagree;
Reason: It is commonly understood that an issuer dedicated to long-term growth should refrain from allocating its management's efforts and company resources to the frequent buying and selling of treasury shares. A cooling-off period of 30 days or less seems to motivate issuers to participate in trading activities and boost trading volume, resulting in decisions that extend beyond typical business operations. As noted earlier, if issuers regularly invest in their own shares, this could elevate operational risks, particularly if management perceives that company funds ought to be directed towards such investments.
6. Do you agree with the proposal that dealing restrictions described in paragraph 69 under Proposal (2)(b) above shall be imposed on a resale of treasury shares on the Exchange? Please provide reasons for your views.
Answer: Agree;
Reason: Announcing disclosures based on the principle of transparency aids investors in comprehending the rationale behind business decisions and assessing their advantages for shareholders.
7. Do you agree with the proposals for an on-market resale of treasury shares as described in paragraph 70 under Proposal (2)(b) above? Please provide reasons for your views.
Answer: Agree;
Reason: Transactions involving shares that surpass a specified percentage in price should be disclosed to investors via announcements, ensuring they are informed of the pertinent circumstances.
8. Do you agree with the proposal relating to new listing applicants as described in Proposal (3) above? Please provide reasons for your views.
Answer: Disagree;
Reason: Permitting the issuance of new shares six months post-listing, particularly concerning treasury shares, raises significant concerns about whether this brief period adequately safeguards the equity of public investors from potential dilution shortly after the listing. It also questions whether controlling shareholders are effectively meeting their responsibilities to investors. This policy could incentivize companies to accumulate treasury shares soon after their listing, potentially utilizing them as consideration shares or "poison pills." Additionally, it may create a false perception that investors have a vested interest in the issuer's stock, similar to the green shoe mechanism, where issuers exercise overallotment rights to generate additional capital and subsequently buy back treasury shares from the market for future resale within a limited timeframe. Moreover, with the recent amendments allowing for the waiving of dual participation, the absence of specific percentage limits or caps on the sale or repurchase of treasury shares within a designated period could undermine the original objectives of these amendments.
9. Do you agree with the proposal to require issuers (being holders of treasury shares) to abstain from voting on matters that require shareholders’ approval under the Listing Rules as described in Proposal (4)(a) above? Please provide reasons for your views.
Answer: Agree;
Reason: Treasury shares should fundamentally be regarded as effectively canceled, and as such, they do not carry any shareholder rights. This includes the absence of rights to dividends, voting privileges, or the ability to be used as collateral.
10. Do you agree with the proposal to disregard treasury shares for calculating an issuer’s issued shares and voting shares under the Rules as described in Proposal (4)(b) above? Please provide reasons for your views.
Answer: Agree;
Reason: Failure to address this issue may lead to conflicts between the interests of management and those of shareholders, as management might utilize their voting rights in ways that do not align with the best interests of the shareholders.
11. Do you have any comments regarding the different treatment of treasury shares when calculating an issuer’s issued voting shares under the proposed Rules and Part XV of the SFO as described in paragraph 77 above?
Answer: Agree;
Reason: The systems governing disclosure rights for the two are not completely aligned in their initial purpose. Implementing a more stringent calculation approach can enhance the monitoring of issues related to insider trading.
12. Do you agree with the proposal to require an issuer to disclose in the explanatory statement its intention as to whether the repurchased shares will be cancelled or kept as treasury shares as described in Proposal (4)(c) above? Please provide reasons for your views.
Answer: Agree;
Reason: In the event that new issuers alter the intended purpose of the funds raised due to business considerations, it is essential to communicate supplementary announcements outlining the rationale behind these decisions.
13. Do you agree with the proposal to clarify that a resale of treasury shares by an issuer or its subsidiary includes resale of treasury shares through their agents or nominees as described in Proposal (4)(d) above? Please provide reasons for your views.
Answer: Agree;
Reason: Incorporating pertinent content can effectively address existing gaps.
If you have any inquiries regarding this letter, please feel free to contact me (phone: 6102-9568 / email: chairman@hksfpa.org).
Best wishes,
Mofiz Chan
Chairman
Hong Kong Securities and Futures Professionals Association
To: Hong Kong Stock Exchange Limited (hereinafter referred to as "the Exchange")
Response: Regarding the proposed amendments to the Listing Rules concerning treasury shares
1. Do you agree with the proposal to amend the Listing Rules toremove the requirement to cancel repurchased shares? Please provide reasons for your views.
Answer: Agree;
Reason: A significant number of issuers listed on the Hong Kong Stock Exchange are not incorporated in Hong Kong and therefore are not subject to the share repurchase regulations outlined in the Companies Ordinance. Notably, more than 90% of these issuers are registered in jurisdictions that permit the holding of treasury shares. By eliminating the provisions discussed in this consultation, issuers will have the autonomy to determine whether to retain repurchased shares as treasury shares in accordance with their jurisdiction's laws and their own articles of association. This change offers issuers enhanced flexibility and agility in adjusting their capital structure, potentially leading to a decrease in the overall cost of capital for the company.
2. Do you agree with the proposal to require a resale of treasury shares to be subject to the same requirements as an issue of new shares as described in Proposal (1)(a) to (c) above? Please provide reasons for your views.
Answer: Disagree;
Reason: The rationale behind imposing restrictions on the utilization of treasury shares remains ambiguous, particularly concerning their potential use as collateral or security. While treasury shares do not qualify as company assets, their application for such purposes is inadvisable. Furthermore, the question of whether issuers are required to cancel associated treasury shares after a designated period has not been sufficiently addressed. According to the revised sections 7.19A (1) and 7.27b, the resale or placement of treasury shares is excluded from the calculations of rights issues or public offerings. This implies that the resale of treasury shares is effectively akin to issuing new shares through a placement, necessitating their consolidation in financial calculations. Failing to do so could lead to significant dilution of minority shareholders' interests within a short timeframe. Therefore, it is imperative to consider regulating the volume of shares retained as treasury shares for resale, establishing specific percentages or other limits to safeguard shareholder interests.
3. Do you agree with the proposal to require a resale of treasury shares (whether on-market or off-market) to be subject to a moratorium period after a share repurchase? Please provide reasons for your views.
Answer: Agree;
Reason: To maintain a fair market environment for the company's shares and safeguard the interests of public shareholders and creditors, this system is designed to offer a potentially quicker and more adaptable approach to issuing and placing new shares. Its primary objective is to provide issuers with an additional tool for managing capital at prevailing market prices, rather than incentivizing them to engage in trading their own stocks.
4. Do you agree with the proposal to require an on-Exchange share repurchase to be subject to a moratorium period after an on-Exchange resale of treasury shares? Please provide reasons for your views.
Answer: Agree;
Reason: Regular investments by issuers in their own shares heighten operational risks, particularly when management is convinced that company resources ought to be allocated for these investments.
5. Do you consider that the moratorium periods (in either direction) should be shorter than 30 days? If so, please share with us your views on the appropriate duration of the moratorium periods and the reason for your suggestion including your views on how the considerations in paragraph 68 should be addressed.
Answer: Disagree;
Reason: It is commonly understood that an issuer dedicated to long-term growth should refrain from allocating its management's efforts and company resources to the frequent buying and selling of treasury shares. A cooling-off period of 30 days or less seems to motivate issuers to participate in trading activities and boost trading volume, resulting in decisions that extend beyond typical business operations. As noted earlier, if issuers regularly invest in their own shares, this could elevate operational risks, particularly if management perceives that company funds ought to be directed towards such investments.
6. Do you agree with the proposal that dealing restrictions described in paragraph 69 under Proposal (2)(b) above shall be imposed on a resale of treasury shares on the Exchange? Please provide reasons for your views.
Answer: Agree;
Reason: Announcing disclosures based on the principle of transparency aids investors in comprehending the rationale behind business decisions and assessing their advantages for shareholders.
7. Do you agree with the proposals for an on-market resale of treasury shares as described in paragraph 70 under Proposal (2)(b) above? Please provide reasons for your views.
Answer: Agree;
Reason: Transactions involving shares that surpass a specified percentage in price should be disclosed to investors via announcements, ensuring they are informed of the pertinent circumstances.
8. Do you agree with the proposal relating to new listing applicants as described in Proposal (3) above? Please provide reasons for your views.
Answer: Disagree;
Reason: Permitting the issuance of new shares six months post-listing, particularly concerning treasury shares, raises significant concerns about whether this brief period adequately safeguards the equity of public investors from potential dilution shortly after the listing. It also questions whether controlling shareholders are effectively meeting their responsibilities to investors. This policy could incentivize companies to accumulate treasury shares soon after their listing, potentially utilizing them as consideration shares or "poison pills." Additionally, it may create a false perception that investors have a vested interest in the issuer's stock, similar to the green shoe mechanism, where issuers exercise overallotment rights to generate additional capital and subsequently buy back treasury shares from the market for future resale within a limited timeframe. Moreover, with the recent amendments allowing for the waiving of dual participation, the absence of specific percentage limits or caps on the sale or repurchase of treasury shares within a designated period could undermine the original objectives of these amendments.
9. Do you agree with the proposal to require issuers (being holders of treasury shares) to abstain from voting on matters that require shareholders’ approval under the Listing Rules as described in Proposal (4)(a) above? Please provide reasons for your views.
Answer: Agree;
Reason: Treasury shares should fundamentally be regarded as effectively canceled, and as such, they do not carry any shareholder rights. This includes the absence of rights to dividends, voting privileges, or the ability to be used as collateral.
10. Do you agree with the proposal to disregard treasury shares for calculating an issuer’s issued shares and voting shares under the Rules as described in Proposal (4)(b) above? Please provide reasons for your views.
Answer: Agree;
Reason: Failure to address this issue may lead to conflicts between the interests of management and those of shareholders, as management might utilize their voting rights in ways that do not align with the best interests of the shareholders.
11. Do you have any comments regarding the different treatment of treasury shares when calculating an issuer’s issued voting shares under the proposed Rules and Part XV of the SFO as described in paragraph 77 above?
Answer: Agree;
Reason: The systems governing disclosure rights for the two are not completely aligned in their initial purpose. Implementing a more stringent calculation approach can enhance the monitoring of issues related to insider trading.
12. Do you agree with the proposal to require an issuer to disclose in the explanatory statement its intention as to whether the repurchased shares will be cancelled or kept as treasury shares as described in Proposal (4)(c) above? Please provide reasons for your views.
Answer: Agree;
Reason: In the event that new issuers alter the intended purpose of the funds raised due to business considerations, it is essential to communicate supplementary announcements outlining the rationale behind these decisions.
13. Do you agree with the proposal to clarify that a resale of treasury shares by an issuer or its subsidiary includes resale of treasury shares through their agents or nominees as described in Proposal (4)(d) above? Please provide reasons for your views.
Answer: Agree;
Reason: Incorporating pertinent content can effectively address existing gaps.
If you have any inquiries regarding this letter, please feel free to contact me (phone: 6102-9568 / email: chairman@hksfpa.org).
Best wishes,
Mofiz Chan
Chairman
Hong Kong Securities and Futures Professionals Association