This article was written by Wang Lixin, John Baptist Chan, Zhao Zhen (Crystal), Sun Haotian, and Alan Wong.
In 2020, China Merchants Securities Co., Ltd. (China Merchants Securities) completed its HK$16.35 billion A+H Shares Rights Issue (China Merchants Securities Rights Issue), the largest A+H Shares Rights Issue since 2014 in terms of funds raised. This is also the first PRC-listed securities firm to conduct A+H Shares Rights Issue, the first transaction of its type in the market.
This article draws on the experience of our Hong Kong and Guangzhou team to share key highlights from advising China Merchants Securities on this first to market transaction.
Complex structure involving repurchase of A Shares subsequently used for ESOP
China Merchants Securities is a full-service securities firm in the PRC and a member of China Merchants Group. It is a state-controlled listed securities joint stock company incorporated in the PRC with limited liability, the A Shares and H Shares of which are listed on the Shanghai Stock Exchange (stock code: 600999) and on the Main Board of the Hong Kong Stock Exchange (stock code: 6099), respectively.
In March 2019, China Merchants Securities announced its plan for the repurchase of its A Shares (A Share Repurchase) to set up an Employee Stock Ownership Scheme (ESOP) and the China Merchants Securities Rights Issue (collectively the Transaction). Prior to the implementation of the China Merchants Securities Rights Issue, China Merchants Securities conducted the A Share Repurchase from 8 November 2019 to 19 December 2019.
China Merchants Securities is the first securities firm which successfully conducted repurchase of shares for the purpose of setting up an ESOP since the China Securities Regulatory Commission, the Ministry of Finance, and the State-owned Assets Supervision and Administration Commission recently jointly issued the "Opinions on Supporting Listed Companies to Repurchase Shares" in 2018.
The A Shares were repurchased by China Merchants Securities using its own funds through the centralised bidding. The A Shares repurchased under the A Share Repurchase was then used for an ESOP which was adopted in January 2020.
The ESOP was formulated in accordance with the Company Law of the PRC, the Securities Law of the PRC, the Guiding Opinions on the Pilot Implementation of Employee Stock Ownership Scheme by Listed Companies, the Opinions on Supporting the Repurchase of Shares by Listed Companies, the Notice on Issuing the Guidelines of Shanghai Stock Exchange for Information Disclosure for Employee Stock Ownership Plans of Listed Companies, the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited, and other applicable laws and regulations and normative documents as well as the relevant provisions of the Articles of Association.
The KWM team liaised with multiple relevant authorities to obtain all relevant approvals, and ensure all above relevant rules and regulations are complied with.
A Share Rights Issue and H Share Rights Issue
After the completion of the A Share Repurchase and the setting up of the ESOP, China Merchants Securities conducted a simultaneous A Share Rights Issue and H Share Rights Issue. The A Share Rights Issue and H Share Rights Issue were inter-conditional.
The China Merchants Securities Rights Issue was conducted to raise funds to strengthen the capital base of China Merchants Securities and for its continuing development and business growth.
Public float and Takeovers Code implications
At the outset, given the plan of the Transaction was announced in March 2019 where the details of the Transaction were subject to changes, there may be circumstances where shareholdings of the existing shareholders of China Merchants Securities may increase, which may in turn affect the public float of China Merchants Securities.
Further, given that (i) the A Share Rights Issue proceeded on a best effort basis and the H Share Rights Issue was fully underwritten; and (ii) China Merchants Securities’ controlling shareholders and its parties acting in concert have undertaken to subscribe for Rights Shares to be issued by China Merchants Securities, the shareholding percentage of the controlling shareholders of China Merchants Securities may in certain circumstances increase by more than 2%. As a result, a mandatory offer may be triggered under the Takeovers Code. As the A Share Repurchase may constitute disqualifying transactions under the Takeovers Code, the timetable and offering structure have been tailormade to tackle the issue.
Pioneers for Mainland China-Hong Kong SAR Southbound Trading arrangement
China Merchants Securities is one of the pioneers listed issuers with Mainland China-Hong Kong Southbound Trading arrangement. Mainland Southbound Trading Investors of China Merchants Securities could also participate in the H Share Rights Issue through ChinaClear.
ChinaClear provided nominee services for Mainland Southbound Trading Investors to (i) sell (in full or in part) their Nil-paid H Rights on the Hong Kong Stock Exchange under the Shanghai-Hong Kong Stock Connect and the Shenzhen-Hong Kong Stock Connect; and/or (ii) subscribe (in full or in part) for their pro-rata entitlement in respect of Shares held on the H Share Record Date at the Subscription Price under the H Share Rights Issue in accordance with the relevant laws and regulations.
It should be noted that ChinaClear does not support applications by such Mainland Southbound Trading Investors for excess H Rights Shares under the Rights Issue through Shanghai- Hong Kong Stock Connect or Shenzhen-Hong Kong Stock Connect.
Mainland Southbound Trading Investors (or the relevant ChinaClear participants as the case maybe) whose stock accounts in the ChinaClear are credited with nil-paid H Rights Shares can only sell those nil-paid Rights Shares on the Hong Kong Stock Exchange via ChinaClear under Shanghai-Hong Kong Stock Connect and Shenzhen-Hong Kong Stock Connect and can neither purchase any Nil-paid H Rights nor transfer such Nil-paid H Rights to other Mainland Southbound Trading Investors.
Overseas investors in over 20 jurisdictions
With overseas investors in over 20 jurisdictions, China Merchant Securities was required to make enquiries regarding the legal restrictions under the laws of all these relevant jurisdictions and the requirements of the relevant regulatory body or stock exchange as to feasibility of extending the H Share Rights Issue to these overseas shareholders. China Merchant Securities could only exclude such overseas shareholders on the basis that, having made such enquiry, it would be necessary or expedient to do so.
In this regard, the firm assisted China Merchant Securities in obtaining legal advice from over 20 jurisdictions, including but not limited to Australia, Bermuda, British Virgin Islands, Canada, Germany, Japan, Liechtenstein, Luxembourg, Macau SAR, Mexico, the Netherlands, New Zealand, Norway, Portugal, the PRC, Singapore, South Africa, South Korea, Switzerland, the United Kingdom and the United States.
The China Merchants Securities A+H Share Rights Issue marks the first PRC-listed securities firm to conduct A+H Share Rights Issue.
Members of our Hong Kong and Guangzhou offices, worked seamlessly to offer one-stop-shop support and knowledge in respect of Hong Kong, the PRC and the US laws and our Perth office, London office, Frankfurt office, Tokyo office and Beijing office provided support on the overseas legal opinion on the legal restriction of conducting H Share Rights Issue across these overseas jurisdictions, including Australia, England, Germany, Japan, the PRC and the United States.
KWM Hong Kong also has a wealth of experience in advising various Hong Kong listed companies to conduct secondary offerings in Hong Kong.
Any reference to “Hong Kong” and “Macau” shall be construed as a reference to “Hong Kong Special Administrative Region of the People’s Republic of China” and “Macau Special Administrative Region of the People’s Republic of China”.