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Hong Kong Stock Exchange new regime on treasury shares

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The Stock Exchange of Hong Kong Limited (Stock Exchange) recently amended the Rules Governing the Listing of Securities on the Stock Exchange (Listing Rules) to adopt a new framework for treasury shares.[1] The amended Listing Rules remove the requirement for listed companies to cancel repurchased shares and listed companies will be allowed to hold the repurchased shares in treasury for future resale if permitted under the laws of their places of incorporation and their constitutional documents. The new rules came into effect on 11 June 2024 (Effective Date).

Background

Generally, a company may repurchase its own shares and hold them in treasury for future resale if the company laws of its place of incorporation and its constitutional document permit. Before the amendments, the Listing Rules however required automatic cancellation of shares repurchased by a listed company. This requirement corresponds to the requirement under the Companies Ordinance (Chapter 622 of the Laws of Hong Kong) (Hong Kong Companies Ordinance).

The amended Listing Rules remove such requirement to allow overseas incorporated listed companies more flexibility in managing their capital structure.

Key amendments and implications

Stock Exchange, Consultation paper- Proposed Amendments to Listing Rules Relating to Treasury Shares, October 2023 https://www.hkex.com.hk/-/media/HKEX-Market/News/Market-Consultations/2016-Present/October-2023-Treasury-Shares/Consultation-Paper/cp202310.pdf; Stock Exchange, Consultation Conclusions Proposed Amendments to Listing Rules Relating to Treasury Shares, April 2024 https://www.hkex.com.hk/-/media/HKEX-Market/News/Market-Consultations/2016-Present/October-2023-Treasury-Shares/Conclusions-Apr-2024/cp202310cc.pdf

The Stock Exchange has issued a new set of frequently asked questions relating to treasury shares[2] to provide further guidance regarding the amendments.

Other Implications

1.   Part XV of the SFO- Disclosure of Interests

Treasury shares remain part of a listed company’s issued voting shares for the purpose of Part XV of the Securities and Futures Ordinance (Cap.571) (SFO) (notwithstanding voting rights attached to treasury shares are temporarily suspended). Accordingly, the percentage figures of interests of shareholders are not affected by the number of treasury shares held by the listed company. The Securities and Futures Commission of Hong Kong (SFC) has updated the relevant guidance[3] in this regard.

2.   Implications pursuant to the Takeovers Code and Share Buy-Back Codes

The new treasury share regime is not expected to result in significant changes to the existing practices for takeovers and share buy-backs. Neither will there be any overall practical effect on the operation of the Takeovers Code and Share Buy-Back Codes (Codes).

The definition of “voting rights” under the Codes specifically carves out the voting rights attached to treasury shares. If a company has treasury shares, such shares will not be treated as disinterested shares or counted towards the various thresholds under the Codes (such as the 30% trigger, the 2% creeper or an acceptance threshold). In addition, an offer is not required to be made for treasury shares during a general offer or partial offer.

The SFC has issued a new practice note clarifying the treatment and implications of treasury shares in the context of a Codes-related transaction[4].

3.   Treasury Shares can be held in CCASS

For the purpose of the Listing Rules, repurchased shares held in CCASS should continue to be treated in the same way as treasury shares registered in the listed company’s own name as they are both beneficially owned by the listed company. The Stock Exchange published a new guidance letter[5] on the arrangements for listed companies to hold or deposit treasury shares in CCASS.

4.   Resale of treasury shares will be subject to Hong Kong stamp duty

A resale of treasury shares constitutes a disposal of shares for valuable consideration and triggers stamping of contract notes under the Stamp Duty Ordinance (Chapter 117 of the Laws of Hong Kong) (SDO), and hence, is subject to ad valorem stamp duty under the SDO.

What should you do to take advantage of the amendments?

1.   Amend constitutional documents

Prior to the Effective Date, the Stock Exchange granted waivers from the share cancellation requirements to permit certain overseas incorporated listed companies to hold treasury shares on a case by case basis. Under the new Listing Rules, a listed company shall seek shareholders’ approval to amend its constitutional documents to allow the listed company to hold and use treasury shares to the extent permitted under all applicable laws, rules and regulations in its place of incorporation.

Listed companies have until the second annual general meeting after the Effective Date to comply with new Listing Rules requirements.

For Hong Kong incorporated listed companies, the Hong Kong Government is proposing amendments to the Hong Kong Companies Ordinance to enable Hong Kong companies to benefit from the treasury share regime, and such amendments are still pending legislative process.

2.   Reflect Treasury Share regime in General Mandates

Under the amended Listing Rules, a listed company may use a general mandate approved by its shareholders to issue new shares or resell treasury shares.  However, listed companies shall specifically authorise this in the general mandates.

3.   Explanatory Statement in Share Repurchase Mandate

A listed company will be required to disclose in the explanatory statement for share repurchase mandate whether it intends to hold the repurchased shares as treasury shares. It is acceptable for a listed company to disclose that it may cancel any shares it repurchased and/or hold them as treasury shares subject to, for example, market conditions and its capital management needs at the relevant time of the repurchases.[6]

4.   Amend Rule of Share Schemes

A listed company may amend its share scheme rules to allow the use of treasury shares to satisfy share grants. The Stock Exchange would normally not regard such amendments as a material alteration to the scheme rules and shareholders’ approval will not be required for this purpose. [7]

Listed companies may seek shareholders’ approval to amend its constitutional documents and obtain relevant general mandates to take advantage of the new regime.  

Please reach out to any partner of our team should you require further information in relation to any of the above.

Any reference to “Hong Kong” or “Hong Kong SAR” in this article shall be construed as a reference to “Hong Kong Special Administrative Region of the People’s Republic of China”.

Reference

[1]  Stock Exchange, Consultation paper- Proposed Amendments to Listing Rules Relating to Treasury Shares, October 2023; 

Stock Exchange, Consultation Conclusions Proposed Amendments to Listing Rules Relating to Treasury Shares, April 2024 

[2] Frequently Asked Questions on Rule Amendments relating to Treasury Shares FAQ 9.2- No.1-9 (FAQ)

[3] SFC, Outline of Part XV of the SFO – Disclosure of Interests

[4] Practice Note 26- Guidance Note on the application of the Codes on Takeovers and Mergers and Share Buy-backs relating to treasury shares.

[5] Guidance on arrangements for listed issuers to hold or deposit treasury shares in CCASS, HKEX- GL 119-24.

[6] See FAQ 9.2 No.4.

[7] See FAQ 9.2 No.7.

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