If the public subscription tranche of an initial public offering is over-subscribed, in what way should the issuing company allocate the shares between the public subscription and placing tranches?
Pursuant to the existing Listing Rules, a company's securities may be brought to listing on either the main board or the Growth Enterprise Market (GEM) of the Stock Exchange of Hong Kong (SEHK) by a number of methods, the most common of which being public subscription and placing. However, should the SEHK anticipate extremely heavy public demand for a particular security to be listed on the main board, the relevant security may not be allowed to be listed by way of placement.
The company is required to make full underwriting arrangements in respect of the public subscription tranche of its securities to be listed on the main board. If an initial public offering (IPO) includes both public subscription as well as placement tranches, the former should represent at least 10% of the shares offered in the IPO. In the event of over-subscription, the company must by virtue of the clawback feature increase the number of shares for subscription by transfers from the placing tranche. Likewise, if the demand for the subscription tranche falls below the initial allocation, the company may transfer the surplus shares to the placing tranche. In the case of over-subscription, the company is generally required to adopt the following clawback mechanism:
Over-subscription rate for the Public Subscription Tranche Ratio of Subscription Tranche to be increased to 15 times (but less than 50 times) 30% 50 times (but less than 100 times) 40% 100 times or above 50%
On the GEM, the issuing company may determine the allocation of shares between the public subscription and placement tranches at its own discretion. In some cases, the company may decide not to make any public offers. It may also exercise its discretion as to whether the offer is to be underwritten by an underwriter.
What is a "settlement instruction"?
A "settlement instruction" refers to the transfer of securities between two accounts in the Central Clearing And Settlement System (CCASS). The service is usually used in the following circumstances:
- An investor wants to transfer his shares from one brokerage to another for custody.
- Holder of an Investor Account in CCASS has to transfer his shares to/from his brokerage for settlement purpose when shares are traded.
When a share transfer is made by means of a settlement instruction (SI), the parties to the settlement each have to issue a SI to the CCASS, stating the amount of shares to be transferred and the identity of the parties to the settlement, etc. CCASS will carry out the instruction and transfer the shares to the account of the designated recipient only when the information provided by both parties is matched.
As a share transfer effected by way of SI is a strictly commercial service, it may not be available at every brokerage, depending on individual company's policy or other commercial considerations. Furthermore, before giving any SI, investors should find out from the CCASS and their brokerages about the fees charged for effecting a share transfer by this means.
The article "Account Maintenance" in the "Stock trading process - Fees and charges" series provides a numerical example of the calculation of the SI fee.
Is it illegal to transfer shares without going through a brokerage?
Under existing legislation, the shares of listed companies can be freely traded by their holders. Shareholders of listed companies can, therefore, dispose of the shares they have in hand in any way they like.
At present, investors usually have their listed shares traded through brokerages on the Stock Exchange of Hong Kong in search of a better price and to save the trouble of looking for a buyer themselves. In such cases, both the buyer and the seller have to pay commission to their broker, the transaction levy, the trading fee, the investor compensation levy and the ad valorem stamp duty for the transaction.
If an investor chooses to have his shares traded off the Stock Exchange, both the buyer and the seller will dispense with paying the brokerage. However, they will have to fill in a deed of transfer stating the identity of the transferor (seller) and the transferee (buyer), the name of the stock, the quantity of shares and the transaction value. Furthermore, both the buyer and the seller will have to sign a contract note and pay the ad valorem stamp duty to the Inland Revenue Department (IRD).
After the stamp duty is paid, the transferee can bring along the deed of transfer stamped by the IRD and the original share certificate to the share registrar to register the change of title. Investors should note that the registrar generally does not handle transfer applications for which no stamp duty has been paid. When the registrar has confirmed the identity and the signature of the transferor, and verified that all pieces of information are true and correct, the transferee will become the new registered shareholder and be issued with a new share certificate.
How to trade foreign stocks in Hong Kong?
At present, local investors who want to trade securities other than local stocks can generally place their trading orders in the conventional (i.e. telephone or fax) or the new (i.e. the Internet) way. Under the Securities and Futures Ordinance, a person who operates a securities business in Hong Kong has to apply for a licence from the SFC and be subject to the latter's ongoing regulation, regardless of which jurisdiction's securities are traded for their clients.
Investors who want to be protected by Hong Kong laws for their trades in foreign stocks have to make sure that they deal with a properly registered intermediary. Similar to the case of trading local securities, investors who intend to trade foreign stocks have to enter into a client's agreement with the intermediary whereby the rights and obligations of both trading parties are specified. Investors also have to ensure that they will be issued with a contract note after each transaction and an account statement so that they can have a clear understanding of the account movements.
Apart from paying attention to the local regulatory rules, investors who trade foreign stocks should also understand the regulatory requirements of the relevant jurisdiction and exchange to see if any safeguards are in place to protect overseas investors. As local licensees may refer a client's trading instruction on foreign stocks to a member of an overseas exchange for execution, investors should have a good understanding of these "overseas execution brokers" and, if necessary, verify with appropriate regulatory body their legality and reliability. Investors can also check with the SFC the contact address of the overseas regulatory bodies or visit the "Other financial regulators" section on the SFC's website to contact some of the overseas regulators through the Internet.
Is there any difference between the legislation governing NASDAQ stocks and local shares listed on the Stock Exchange of Hong Kong?
Under the Pilot Programme for Trading US Securities between the Stock Exchange of Hong Kong (SEHK) and National Association of Securities Dealers (NASD), seven NASDAQ counters are admitted into the SEHK for trading only and not regulated as listings in Hong Kong. Hence, the existing Listing Rules of Hong Kong, as they stand, do not apply to these US stocks. Their trading is still subject to the relevant provisions in the Rules of the Exchange and the NASDAQ companies must abide by the legislation relating to market manipulation and insider dealing, etc. Moreover, as market-makers are introduced for the trading in NASDAQ shares in Hong Kong, the SEHK formulates a new set of rules by reference to the regulations for stock options market-makers in order to monitor the market-making activities in relation to NASDAQ shares.
Trading in NASDAQ shares in Hong Kong is conducted under the "buyers beware" principle. The SEHK has already distributed a fact sheet on the pilot programme to its exchange participants (formerly known as "exchange member"), who are charged with the duty to provide such information to their clients before the latter begin any trading in NASDAQ shares. The purpose is to help investors understand the potential risks involved before trading of such stocks.
Where can you find corporate information?
Many listed companies are dynamic and fast moving. As a shareholder, you have every right to know any relevant company developments as they happen, particularly those that can affect share prices. Reading corporate announcements and financial reports can help you appraise a company and keep up with its developments.
- Companies listed on the Main Board or Growth Enterprise Market (GEM) have to post their announcements on the Hong Kong Exchanges and Clearing Limited (HKEx) website and the GEM website. Some listed companies may post notices on their websites as well.
- Registered shareholders will also receive circulars from the listed company when it undertakes certain transactions.
- Registered shareholders receive annual reports after the financial year end. Interim reports of a listed company's activities, as well as un-audited financial statements covering the first six months of each financial year, are also sent to shareholders. GEM companies have to publish quarterly reports as well.
- If you are a non-registered shareholder (say your shares are held through your brokerage or bank in nominee names in CCASS), you can ask your intermediary for this information or arrange for the corporate documents to be sent to you directly from the relevant share registrar.
Common types of public announcements include profit and loss account, notices of annual / extraordinary general meetings, changes in business nature / directorships, book close date for stock transfers, a proposed rights issue, a share placing, discloseable / connected transactions, a possible takeover and merger, proposed capital re-organization or privatization by the controlling shareholder and reasons for unusual price or volume fluctuation, etc.
The SEHK or the SFC must first vet the company announcements to ensure full and clear disclosure. Company directors take full responsibility for the accuracy of the announcement contents.
Sometimes information contained in the announcements is little more than routine, but often it is vital. It may require shareholders' action or may be new information on the company that helps investors appraise their shareholdings.
- Annual reports contain a great deal of information, such as an outline of the company's activities during the year, an overview of the business climate, strategies for the future, and so on.
- The key financial figures are contained in the profit and loss account, balance sheet and consolidated cash flow statement. These financial statements tell us about the income and sales, turnover, costs and performance of different areas of the company's business.
- You need to read the auditor's report. Qualified accounts can be the first sign of trouble.
- Possible signs of trouble
high inventory to turnover ratio high bank interest expenses large bad debts substantial legal actions pledges of large slices of assets patent disputes unreasonable business reliance on related parties increase in trade debts to turnover ratio increase in amounts due from related companies frequent placements of shares involving a significant portion of the capital substantial changes in shareholdings exceptional lengthy depreciation policy for fixed assets or intangible assets over-reliance on one customer or supplier many purchases or sales of assets involving related parties
- Up to two financial years after the end of the financial year when the company was listed, GEM companies' annual and interim reports must include a comparison of actual business progress with the business objectives in the listing document.
If you want more up-to-date information, you can read companies' interim reports and financial statements. Interim reports of Main Board companies should be published within three months of the end of each financial period. For GEM companies, their interim and quarterly reports must be available within 45 days after the end of each relevant financial period.
Disclosure of Interest
- Under the Securities and Futures Ordinance, people holding 5% or more and a short position of 1% or more in the voting shares in a listed company must disclose their interest. Interests held by the person's spouse or child under the age of 18 should be included in calculating whether there is a disclosure duty.
- Directors and chief executives of listed companies also have to disclose if they have interests or short positions in the shares of and interests in debentures of the listed company or any of its associated companies.
- The disclosure must be filed with the SEHK within three business days of dealing.
- Substantial shareholders and directors can be prosecuted if they fail to make the reports.
- These disclosure reports are published on the Shareholding Disclosures of the HKExnews website.
How can I get financial accounts of a listed company whose shares I hold?
Main Board and GEM companies must publish annual reports within four and three months of their financial year end respectively. Annual reports must be sent to registered shareholders not less than 21 days before the Annual General Meeting. Interim reports are also sent to shareholders. GEM companies have to publish quarterly reports as well. A listed company usually employs a registrar to mail financial reports to its registered shareholders.
If you are a non-registered shareholder because your shares are kept in your intermediary's account at the Central Clearing and Settlement System(CCASS), you can ask your intermediary for the financial accounts or arrange for the corporate documents to be sent to you directly.
Why should you vote at shareholders' meetings?
As owners of a company, you, as a shareholder, have an important role in influencing the decision-making process of a listed company. By voting at a general meeting, you may influence how a company is run and that may have a direct impact on your investments. How you cast your vote reflects your views to the management of the company.
In Hong Kong, a significant number of listed companies are not governed by Hong Kong company law as they are incorporated outside Hong Kong. These companies must comply with the relevant company law of their country of incorporation in addition to the Listing Rules of the Stock Exchange of Hong Kong which all listed companies must comply with. Investors' rights as shareholders are also governed by the company's constitutional documents, commonly referred to as by-laws or articles of association.
Frequency of shareholders' meeting
All companies must hold an annual general meeting (AGM) every year to approve and adopt its audited annual accounts. At the AGM, the company will usually review its operations; and simultaneously seek shareholders' approval to adopt its audited annual accounts, declare dividends and appoint directors and auditors; and approval for a general mandate to increase its share capital by up to 20%.
Besides the annual meeting, every listed company must seek its shareholders' approval when it wishes to conduct certain corporate actions and enter into certain significant transactions, such as proposed rights issues, share split or consolidation, takeover or major changes of the listed company's business. In such cases, the company must convene a general meeting of shareholders to seek their approval on these matters.
There are no restrictions as to where companies can hold their general meetings.
Ways of Voting
There are two methods of voting: on a show of hands or by poll.
- On a show of hands, every shareholder who attends the meeting is entitled to one vote, irrespective of the number of shares held.
- If voting is held by poll, every share carries one vote. When voting is held on a poll, the number of votes a shareholder has depends on the number of shares he holds.
Voting is normally held by a show of hands, except for certain types of resolutions where voting must be by poll, or if shareholders demand a poll at the meeting.
The Stock Exchange has recently amended the Listing Rules to improve corporate governance. With effect from 31 March 2004, voting must be by poll for transactions where certain shareholders with conflicts of interests are not allowed to vote. These transactions include connected transactions, granting of options to substantial shareholders, independent non-executive directors or any of their associates, transactions where any shareholder with material interests must abstain from voting, and transactions requiring independent shareholders' approval.
Companies must announce the results of the poll showing the number of votes cast for and against the resolutions on the following business day.
Only shareholders whose names are on the register of members have a right to attend and vote at a general meeting. A registered shareholder may either vote in person or by proxy, meaning appointing another person to vote for him. The proxy need not be a shareholder of the listed company concerned.
The company will send you a proxy form together with the circular or other documents relating to the shareholders' meeting. You can choose your own proxy or appoint the chairman or director of the company to be your proxy when you complete the proxy form. If you fail to appoint a person to be your proxy when you submit your proxy form, the chairman of the company will be your proxy by default.
Depending on the company's constitutional documents, your proxy may or may not be able to vote if voting is held on a show of hands. If the vote is held on a poll, your proxy will vote according to your instructions. If you fail to indicate how you wish to vote on your proxy form, your proxy has the discretion whether to vote or not, and if he votes, how he votes.
If your shares are not held in your name, but held by brokerages or banks as nominees, you have to tell them you wish to vote and instruct them how you wish to vote for each resolution. If you wish to attend the meeting, you must ask your intermediary what you need to do to attend the meeting.
Most intermediaries deposit their clients' shares with the Central Clearing and Settlement System (CCASS) operated by the Hong Kong Securities Clearing Company Limited ("HKSCC"). The voting rights to these shares legally belong to HKSCC Nominees Limited, being the registered shareholder of these shares. A HKSCC representative will attend and vote at the general meeting. If voting is held on a show of hands, HKSCC cannot vote according to every beneficial shareholder's wishes as it only has one vote. Instead, it will collate the views of the beneficial shareholders whose shares it holds and vote according to the intention of the majority for each resolution at the general meeting.
You must make sure you instruct your intermediaries or HKSCC how to vote or that you wish to attend the meeting before the deadlines imposed by them. Deadlines for you to submit instructions to your intermediary or HKSCC with respect to corporate actions are usually earlier than the deadlines stated in the documents issued by the listed companies.
If you do not instruct HKSCC how you wish to vote, it will not vote for your shares.
Should you have any problems voting, you should consult a legal adviser or a market professional.
Listed companies must announce, and send details of the proposed transaction plus the proxy forms to all registered shareholders. Shareholders can access the announcement and circular containing details of the meeting at the websites of the HKEx and GEM.
You may refer to the pervious FAQ "Where can you find corporate information?" to learn more about reading corporate documents.
How important is a registrar to the shareholders?
A listed company usually employs a registrar, in most cases, a private company, to maintain a register of shareholders in Hong Kong. The services provided by a registrar to the shareholders include:
- distribution of cash and scrip dividends, bonus shares, etc. and handling claims of uncollected benefits;
- mailing of financial reports and shareholder circulars to registered shareholders;
- transfer of shares;
- issuance of replacement certificates;
- channelling of necessary investors' communications, particularly where the listed company operates overseas.
Any investor who wishes to contact the appointed registrar of a listed company, may refer to the websites of the Main Board and the Growth Enterprise Market of Hong Kong Exchanges and Clearing Limited where the lists of share registrars are available.
Any non-registered shareholder who wishes to receive shareholder information from a listed company can ask his brokerage or bank to forward his name and address to the Central Clearing And Settlement System (CCASS), which will then pass his personal particulars to the registrar for future dispatch of this information.
What is the role of a registrar in an Initial Public Offering (IPO)?
In an IPO, a registrar works closely with the company and its sponsor in screening all application forms for new shares, so that multiple or invalid applications are rejected. If the offering is oversubscribed, computer balloting will take place to determine allocation. Before trading commences, a registrar also helps to prepare a newspaper announcement confirming the basis and the result of allotment, distributes share certificates, and refunds application money to partially successful and unsuccessful applicants.
How are my IPO refund cheques secured from being stolen and encashed?
Commencing mid-August 2004, part of the identity card numbers (Hong Kong identity card number or passport number) of individual applicants in all initial public offerings (IPOs) are printed on their refund cheques. For joint applicants, the identity information of the first-named applicant is printed. This is an improved measure for security in IPOs.
Under this enhanced security measure, when a refund cheque is presented to a bank, the bank will cross-check both the name and the identity information of the payee shown on the cheque against the bank's own record on the information of the account holder. The bank may request other proof of identity or take other steps for verification if there is a discrepancy. Deposit of the refund cheque concerned might be rejected by the bank if it cannot be satisfied with the identity of the payee.
Therefore, you should ensure that your identify card number is accurately filled in on the IPO application form to avoid delay in cashing your refund cheque. Besides, it is in your best interest to read the timetable in the IPO prospectus to find out the date on which a refund cheque will be dispatched to applicatnts. If you do not receive the refund cheque within three working days after the relevant date, you should immediately contact the responsible share registrar to advise the delay.
How is share registration processed?
After withdrawing shares from the custodian, a broker may help its client to register the shares in the client's name, so that the client will become a registered shareholder. If the broker does not provide such a service, an investor may take the shares to the registrar at the address printed on the share certificate for registration in his own name. In doing this, the registrar will charge a fee, based on the higher of the number of certificates brought to it for registration, or those issued in the investor's name, usually at HK$2.5 per certificate. An investor who employs his broker to process this task may also have to pay the broker an additional handling fee. Investors considering this option should consult their brokers or the respective registrar on the charges, documents and processing time required for registration.
How to obtain a replacement if a shareholder has lost the share certificate(s)?
A shareholder should contact the registrar to report the loss and make an application for share replacement.
According to Sections 162-169 of the Companies Ordinance, the application for share replacement must be accompanied by a statutory declaration by the shareholder regarding the loss, and the registrar will handle the application in accordance with the ordinance including publishing notice. You may check the requirements of notice publication under the ordinance.
The listed company will issue a new share certificate if the related conditions have been satisfied, eg the notice has been published and the company has not received notice of any other claim in respect of the lost shares. Since share replacement is time consuming and costly, shareholders should take good care of their share certificates. Besides, in order to receive circulars and benefits distributed by a listed company, shareholders should update their personal records with the registrar, eg any change in correspondence address.
How does a listed company pay out dividend?
The share registrar of a listed company will issue a dividend warrant to all registered shareholders listed on the register of shareholders after the book close date. If scrip dividend is available for election, the dividend warrant will list out the details of the dividend payout, deadline for election and the measure to be adopted in the case of nil reply from shareholders, such as to pay out the dividend in cash or in shares. After collecting replies from shareholders, the share registrar will pay out cash or shares in accordance with the instructions of the shareholders on the dividend payout date.
If your shares are kept in the broker firm's custody account in the Central Clearing and Settlement System ("CCASS") (the settlement and clearing system operated by the Hong Kong Securities Clearing Company Limited), shares would be registered in the name of the Hong Kong Securities Clearing Company Nominees Limited ("HKSCC Nominees"). Therefore, if scrip dividend option is available, you will have to communicate your preference to the share registrar via your broker firm.
The share registrar will pay out dividend to HKSCC Nominees which will then deposit the appropriate amount of dividend into individual accounts of broker firms in the CCASS according to the number of shares of the relevant listed company held in each account. Your broker firm will then deposit the dividend into your share trading account. Usually, a broker firm will charge you administration fees for collecting and dispatching dividends for you.
When to buy shares in order to be eligible for receiving dividend?
Many listed companies will recommend whether a final dividend will be paid when they announce their annual results. The dividend recommendation is then subject to voting by the shareholders at the Annual General Meeting before a listed company officially declares a dividend, meaning that it is possible for the proposed amount of dividend to be changed. Investors buying a stock based on the amount of final dividend recommended but not declared should bear this risk in mind.
Information about the dividend recommended or declared can be found at the share registrars of listed companies or on the website of the Hong Kong Exchanges and Clearing Limited. However, you must note that even if the shares with dividend declared are acquired before the dividend payout date, it does not necessarily mean that you will definitely receive the dividend payments.
Whether you can get the announced dividend depends on the date on which you acquire the relevant shares. Followings are the important dates you must note:
- "Book Close Date" refers to the date when a listed company suspends the updating of the Register of Shareholders. If a shareholder is holding physical scrip, the transfer of title procedure must be completed before the book close date so that the shares are registered in the name of the shareholder, otherwise dividend will not be paid to that shareholder.
- "Ex-Dividend Date" refers to two trading days prior to the first day of the book close date. Investors must acquire the shares before the ex-dividend date in order to be eligible for receiving the dividend payout. The share price will also be adjusted downwards on the ex-dividend date to reflect the impact on the share price as a result of the dividend payout.
- "Dividend Payout Date" refers to the date when dividend is paid out by a listed company.
Take for an example, a listed company announced to pay dividend on 2nd December 2002 to the shareholders whose names were on the register of shareholders on 10th October 2002. Share registration procedure for shares will be suspended from 11th October 2002 (Friday) to 15th October (Tuesday) (both days inclusive).
The first day of the "Book Close Period" is 11th October and the ex-dividend date is 9th October. If you intend to receive dividends, you must acquire the shares before 9th October. In other words, the latest date to acquire the shares will be on 8th October in order to be eligible for receiving the dividend. If you acquire the shares on 10th October, i.e. after the ex-dividend date, you will not be eligible for the dividends.
Will I receive the dividend if I have not re-registered my shares after withdrawal?
The share registrar of a listed company will pay out the dividend to registered shareholders listed on the register of shareholders on the specified date of the announcement. If the registration of transfer procedure has not yet been completed before the book close date, the share registrar will not have access to your information. Since share certificates collected by investors from the Central Clearing and Settlement System ("CCASS") are registered in the name of the Hong Kong Securities Clearing Company Nominees Limited ("HKSCC Nominees"), the share registrar will still pay out the dividend to HKSCC Nominees.
To claim back the dividend, first, you have to register the transfer of your shares at the share registrar. Then, you have to submit a written application via your broker firm to HKSCC Nominees, together with documents including copies of the share certificates, stock withdrawal receipts, purchase contract notes, transfer deeds, registrar's transfer receipts certified by your broker firm, and a letter of indemnity from your broker firm.
To avoid the complicated procedure involved and the administration fees incurred in claiming back dividends, remember to register shares in your name as soon as possible after collecting the physical share certificates.
For dividend information details of listed companies, such as the amount of dividends payout, ex-dividend dates and the book close dates, etc., you may refer to the section of "Company / Securities Profile" in the website of the Hong Kong Exchanges and Clearing Limited.
How can a shareholder claim uncollected cash dividends?
Unclaimed benefits can arise when investors withdraw shares which are registered in the name of HKSCC Nominees Limited from CCASS Depository, then fail to re-register the shares in their own names before the book close date for determination of entitlements. Since the registrar is not aware of the change in the registered owner, benefit entitlements will still be distributed to HKSCC Nominees Limited.
Any investor who wishes to claim his unclaimed benefits should apply in writing to HKSCC Nominees Limited via his selected broker, supporting his claim with documents such as certified copies of the stock withdrawal receipt, purchase contract note, share certificate(s), and a letter of indemnity issued by the broker.
To avoid going through cumbersome procedures of making claims for uncollected benefits and the occurrence of handling charges, investors are advised to register shares in their own names upon receipt of share certificate(s) withdrawn from CCASS.
A registered shareholder can also fail to collect his benefits as a result of moving, dying or simply forgetting to update personal records with the registrar and hence, has not responded to notices about dividend payments or received his entitlements. Each listed company determines its own claim procedures for benefits that have not been paid to shareholders, investors should therefore contact the registrar for details.
What is capital re-organization?
In general, capital re-organization may include a reduction of share capital followed by a share consolidation.
Share capital reduction
Often, reducing a listed company's issued share capital is effected by reducing the par value of each share.
Don't mix up issued share capital with authorised share capital which refers to the total nominal value (or par value) of shares that can be issued. On the other hand, issued share capital is the nominal value of the actual number of shares issued. If the shares are issued for consideration at a premium to the nominal value, the excess consideration will be recorded as share premium.
The share capital and reserves of a company tell the net worth of a company. If a company has been operating at losses for sometime, it may have accumulated significant deficits such that the actual value of its assets may be far lower than the value of its issued share capital, therefore, the company may want to reduce its issued share capital so as to give a more realistic picture of its creditworthiness.
From a shareholder's perspective, a reduction in a company's issued share capital will necessarily result in the total par value of his holdings falling. However, the number of shares held by the respective shareholder will remain unchanged.
Take an example of a company with an authorized share capital of $1.5 million divided into 1.5 million shares of $1 each. If only 1 million shares are issued (500,000 shares remain unissued) and the company wishes to reduce its issued share capital by $600,000:
- before the reduction, the company's issued share capital is $1 million (i.e. 1 million issued shares x $1 per share);
- after the reduction, the company's issued share capital becomes $400,000 (i.e. $1 million - $600,000);
- because the number of issued shares remains unchanged (i.e. 1 million), the par value of each share must be reduced to $0.4 (i.e. $400,000/1 million issued shares);
- as for the 500,000 unissued shares, their par value will be similarly reduced to $0.4 (because a change in par value affects all shares of the same class), but the number of unissued shares may or may not change depending on what the company determines its total number of authorized shares and authorized share capital should be after the capital reduction.
- if the company decides to leave its authorized share capital unchanged at $1.5 million, then dividing $1.5 million by $0.4 (the new par value) gives 3.75 million which is the new number of authorized shares. The number of unissued shares would become 2.75 million (3.75 million minus 1 million).
A listed company may conduct a share consolidation following the reduction in share capital to raise the par value of each share. A share consolidation means consolidating a number of shares into a single new share. Sometimes, a company may also change its board lot size for trading on the Stock Exchange. Consolidation of shares decreases the number of authorised shares but proportionally increases the par value of each share. However, it does not affect either the authorized or issued share capital.
Many investors believe that a share consolidation would result in a reduction of their shareholdings. It is, however, not true. As the relative proportion of shareholdings amongst all the shareholders would remain the same before and after the share consolidation, there would be no change in the effective interests of individual shareholders.
Taking the previous example forward, suppose the company wishes to effect a 5 to 1 consolidation:
- the total number of authorized shares would fall from 3.75 million to 750,000 (i.e. 3.75 million divided by 5);
- the total number of issued shares would fall from 1 million to 200,000 (i.e. 1 million divided by 5);
- the total number of unissued shares would fall from 2.75 million to 550,000 (i.e. 2.75 million divided by 5);
- the par value of each share would increase from $0.4 to $2 (i.e. $0.4 x 5);
- the authorized share capital would however remain unchanged at $1.5 million (i.e. 750,000 x $2);
- the issued share capital would also remain unchanged at $400,000 (i.e. 200,000 x 2).
Since the par value of each share increases proportionally in a share consolidation, there is actually no change in the total par value of the holding of each shareholder.
Par value vs market value
It is important to note that the par value and market value of shares are not correlated. The par value is a fixed value predetermined by the company concerned, whereas the market value is a constantly changing value determined by market forces of demand and supply. Practically speaking, it is not possible for the two values to correspond with each other (except when the company has an initial public offering and it can fix the initial offer price), or to change simultaneously.
When a listed company proposes a capital re-organization, it must publish an announcement giving details about the proposal, such as reasons for it, any conditions attached, timetable, etc. There are usually certain conditions that need to be fulfilled before a capital re-organization can be carried out, i.e. shareholders' approval, compliance with the relevant legal procedures and requirements under the laws in the jurisdiction where the company is incorporated, and approval of the Stock Exchange. Once the conditions are fulfilled and the requirements of the laws are met, the company may proceed with the capital restructuring.
Capital re-organizations are commercial decisions of listed companies. The regulators' role is to ensure that all such actions are carried out with proper disclosure to the public and there is no breach of the relevant rules and regulations. Shareholders should stay informed of the company's latest developments and appropriately exercise their rights in such proposals.
How is trading of shares affected in a capital re-organization?
A capital restructuring will take effect once it is approved by shareholders and all legal procedures and requirements are fulfilled. When there is a share consolidation, dealings in the company's shares will take place in the adjusted number of shares, which will be traded at a price and board lot size bearing reference to the adjustment made.
Although a share consolidation may not necessarily have an impact on the percentage interest of a shareholder, you should note the changes in your shareholding.
The number of shares you are holding will change as the number of outstanding shares in issue will be different. If you are a registered shareholder, you need to submit the share certificates to the share registrar to replace for new ones. The share registrar usually allows a certain time period for free exchange of share certificates. After that time period, you might need to pay a fee for the replacement.
- If you hold shares through a bank or brokerage, check your stock holdings with the intermediary before trading in the shares.
- Please note that the par value of the shares may also be changed after a capital restructuring. But this does not mean that the share price will change in the same proportion to the ratio applied in the share consolidation. How the share price varies depends on the current market sentiment and prevailing supply and demand of the shares in the market.
What should you do in a takeover?
A takeover is when a company or person (bidder) makes an offer to acquire the voting shares of a company (target) with a view to controlling it. In Hong Kong, takeovers of public companies are governed by the Hong Kong Codes on Takeovers and Mergers (Takeovers Code).
One of the key rules of the Takeovers Code is that a person or group of persons acting together must make a general offer to buy the remaining shares in a company if: (i) it buys 30% or more of voting shares in the company; or (ii) it already holds between 30% and 50% of the voting shares and increases that holding by more than 2% in any 12-month period. This is known as a mandatory general offer.
A takeover may also be made by making a voluntary general offer (this happens when there is no obligation to make an offer under the Takeovers Code).
Takeovers can be conditional
Normally offers depend on the bidder receiving sufficient acceptances for it to obtain 50% or more of the target's voting shares. If the bidder doesn't get the minimum 50%, the offer will lapse. This is the only condition that may be attached to a mandatory offer.
If a bidder already holds more than 50% of the voting rights before the offer is made, the offer will normally be unconditional from the outset.
With voluntary offers, there may be other conditions, for instance relating to material adverse changes in the target or to obtaining regulatory approval.
All material conditions must be clearly set out in the offer announcement and in the offer document sent to shareholders.
The takeover process
In a takeover, the general rule is that the target should announce an offer as soon as the bidder has told it of its intention to take the company over. In some cases, such as where there has been a leak of price sensitive information about the bid, a potential bidder may have to make an announcement before this stage. Trading in the company's shares may be temporarily suspended until an announcement is made.
Normally, the bidder should send an offer document to all the target company's registered shareholders within 21 days of announcing the offer terms. The document gives a detailed description of the offer including its terms and conditions and the shareholdings held by the bidder.
Usually within 14 days of the offer document being posted, the target company will send shareholders a document in response. This is known as the offeree circular, and contains the views of the target company's independent board and an opinion on the offer from an independent financial adviser.
The bidder and target may issue both documents together as one document. If you are a non-registered shareholder, you may obtain these documents through your brokerage or bank. Read the offer document and circular before deciding whether or not to accept the offer. Consult your financial adviser if in doubt.
Actions of shareholders
If you are a registered shareholder and want to accept the offer, you must complete the acceptance form and return it, together with your share certificates, to the share registrar within the specified offer period. Details of the steps you should take are in the offer document and the acceptance form.
If you are a non-registered shareholder, i.e. your shares are kept in custody by your brokerage or bank, you should advise your intermediary if you want to accept the offer.
If the relevant circular and the offer document are issued jointly, the offer must remain open for at least 21 days after the document is posted. If the circular is issued after the offer document, then the offer must be kept open for at least 28 days after the offer document is posted. The offer document will include a timetable giving the latest time for shareholders to send in their acceptance.
An offer must remain open for at least 14 days after it has been declared unconditional. Normally if the offer has not been declared unconditional after 21 days of the first date on which it can close, you can withdraw your acceptance. This entitlement continues until the offer either becomes unconditional or closes. Normally an offer that has not become unconditional must close at midnight of the 60th day of the offer.
The bidder will not take up shares until the offer becomes unconditional. Shares taken up must be paid for within 10 days of the later of when the offer becomes unconditional or when the acceptance form is received.
If the offer is unconditional from the beginning, the offeror must pay the accepting shareholders within 10 days of receiving their acceptance forms. If the offer lapses, the shares received during the offer should be returned to shareholders within 10 days from the date the offer lapses.
SFC regulations on takeovers
The Takeovers Code's principle is to ensure that all shareholders affected by a takeover transaction are treated fairly and equally, and that they are given enough information, advice and time to make an informed decision on an offer. For instance, a bidder or target company has to make timely announcements and issue an offer document and a circular to shareholders.
Under the Takeovers Code, a general offer should be made at a price that is not less than the highest price for which the bidder or persons acting together bought the target's shares within the six-month period immediately before the offer. The offer may be for cash, or for securities with a cash alternative.
If the offer lapses, unless the SFC consents, the offeror cannot make another offer for the same company within the next 12 months.
How should you deal with a rights issue?
When a company proposes a rights issue, it will have to publish an announcement to explain the reasons for raising funds and set out the terms and conditions. The company will issue a prospectus setting out the details and a timetable of the important steps in the issue, and provide the necessary forms for rights shares subscription and application for excess rights shares.
Actions of shareholders
Certain rights issues and fundraising activities require the approval of the minority shareholders. For example, if the proposed rights issue will increase the company’s issued share capital or market capitalisation by more than 50% (on its own or in aggregate with any other rights issues or open offers made in the previous 12 months), approval from minority shareholders is necessary. The minority shareholders can exercise the voting rights to approve or veto the fundraising proposal.
You will usually be given no fewer than 10 business days to decide whether or not to exercise your rights. If you decide to go ahead, complete the provisional allotment letter, settle the payment within the specified period, and return the documents to the share registrar. If your shares are entrusted to your bank or brokerage for safe custody, let the intermediary know your decision early so that it has sufficient time to act before the deadline. If you would like to apply for "excess rights shares", you will have to complete the application form. The company's directors will allocate the excess rights to shareholders at their discretion on a fair basis. Shareholders with odd lots may be given priority to top up their shares to whole board lots.
If you decide not to exercise your rights, you do not have to take any action. However, remember that your existing holdings will be diluted as more shares will be issued. Seek professional advice if you are unclear about any part of the rights issue proposal.
As part of your decision on whether or not to take up the shares, consider your financial ability and the company's prospects. Find out the reasons for the fundraising from the announcement and prospectus. And remember that it is possible the rights issue may not happen.
Will a shareholder holding physical share certificates which are not registered in his name# (i.e. in street name) receive any corporate action documents, e.g. the prospectus and the provisional allotment letter in a rights issue offering, of the listed company concerned?
If the physical share certificates are not registered in the shareholder's name, he will not receive any corporate action documents, e.g. the prospectus and the provisional allotment letter in a rights issue, from the listed company.
In order to qualify for any corporate event and receive the relevant documents, a shareholder holding physical share certificates in street names must contact the respective share registrar for a name transfer before the entitlement deadline set by the listed company. It usually takes 3 to 10 business days for share registrar to process the name transfer.
(# For example, the share certificates are registered in the name of Hong Kong Securities Clearing Company Nominees Limited.)
What will be the implications for shareholders/investors if listed companies repurchase their own shares
Under the Listing Rules, companies listed on the Main Board or Growth Enterprise Market (GEM) must first obtain the specific approval or general mandate given by shareholders (usually at a General Meeting) to the board of directors before they can repurchase their own shares. The Rules also provide for the number of shares, timing and disclosure of repurchases by companies. Shareholders can exercise their voting rights to vote for or against a share repurchase proposal or mandate.
Nothing could have affected non-shareholder investors more than the decrease in liquidity of the relevant shares in the market after a share repurchase. According to the supply and demand theory, a fall in supply may stimulate the share price to some extent. However, investors must not overlook other factors, such as the overall sentiment of the stock market, fundamentals of the company itself, which may also affect the performance of the share price.
How are share repurchases of listed companies on the SEHK regulated?
Listed companies intend to repurchase their shares on the SEHK must act in compliance with the Listing Rules. Accordingly, no share repurchase can be made by a company -
- after a price sensitive development has occurred, or if the company has made a decision on matters which may be price sensitive and the price sensitive information has not been made public;
- during the one month period immediately preceding either the preliminary announcement of the company's annual results or the publication of the company's interim report;
- if the repurchase would result in the number of shares which are in the hands of the public falling below the required public float.
The SEHK also stipulates that the total number of shares which a listed company on the Main Board or GEM is authorized to repurchase during a specific period must not exceed 10% of its issued share capital. Main Board companies are subject to an additional requirement in that the number of shares repurchased in any one calendar month must not be more than 25% of the total number of shares which were traded on the SEHK in the preceding calendar month.
To give market participants a clear picture of share repurchases, the SEHK also requires a listed company to report to it by not later than 30 minutes before the earlier of the commencement of the morning trading session (i.e. 9:00 a.m.) or any pre-opening session on the business day following any day on which the listed company makes a share repurchase. Information required to be reported includes the total number of shares repurchased by the listed company on the previous day, as well as the purchase price per share or the highest and lowest prices paid for such repurchases. The relevant information will be disseminated through the teletext, and posted on the websites of the HKEx or GEM. The listed company must also include in its annual report a monthly breakdown of repurchases of shares made during the financial year under review, and set out in the directors' report reference to the repurchases made during the year and the reasons for making such repurchases.
The SEHK may prohibit a listed company from making repurchases of shares or impose other sanctions if the listed company has breached the Listing Rules.