2. Removal of the requirement to cancel repurchased shares

While currently over 90% of the issuers listed on the Stock Exchange are incorporated in jurisdictions that allow holding of treasury shares, the current Listing Rules require all repurchased shares to be cancelled. This requirement corresponds to a similar requirement under the Hong Kong Companies Ordinance (Chapter 622 of the Laws of Hong Kong), which mandates Hong Kong-incorporated companies to cancel their repurchased shares. The Amendments will allow issuers to hold repurchased shares in treasury, subject to the laws of the issuer’s place of incorporation and its constitutional documents. In light of this change, the Hong Kong government will be proposing amendments to the Companies Ordinance to enable issuers incorporated in Hong Kong to benefit from the treasury shares regime in the same manner as non-Hong Kong issuers.

3. Treating resale of treasury shares as issuing new shares

Under the Amendments, issuers will be able to resell treasury shares subject to the following conditions, which are similar for issuance of new shares:

• They must conduct any resale of treasury shares under a shareholders’ mandate or offer the treasury shares to shareholders on a pro rata basis.
  • The shareholders’ mandate must specifically authorise the resale of treasury shares.
  • Issuers may seek the shareholders’ mandate before 11 June 2024 (the day the Amendments will take effect), provided that it is specified that they may only use such general mandate after that day.
  • For issuers also listed on another stock exchange, shareholder’s approval is required to resell treasury shares on the other stock exchange.
• Share schemes that use treasury shares must comply with Chapter 17 of the Listing Rules (or Chapter 23 of the GEM Listing Rules) (please see Implications, section 1 below).
• There are restrictions on resale of treasury shares to connected persons.
• Appropriate disclosures shall be made in, for example, next day disclosure returns, announcements and annual reports after the re-sale of treasury shares.

4. Measures to mitigate risks

The new regime includes risk mitigation measures to prevent market manipulation and insider trading, including:

• A 30-day moratorium period to restrict a resale of treasury shares after a share repurchase and vice versa, subject to certain carve-out provisions.
• Prohibition against resale of treasury shares on the Stock Exchange (i) when there is undisclosed inside information or (ii) during the restricted period of 30 days preceding the results announcement.
• Prohibition against resale of treasury shares if it is knowingly made with a core connected person; however, on-market resale of treasury shares to a connected person without knowledge will be fully exempted.

5. New listing applicants

The Stock Exchange allows new listing applicants to retain their treasury shares after listing provided that details of treasury shares held are disclosed in the prospectus. Similar to issues of new shares, resale of treasury shares is prohibited within the first six months after listing.

6. Treatment of treasury shares

The following treatment of treasury shares as a result of the Amendments is worth noting:

• Voting rights attached to treasury shares: holders of treasury shares is required to abstain from voting on matters that require shareholders’ approval under the Listing Rules.
• Excluding treasury shares in the calculation of issued shares: treasury shares are excluded from the calculation of an issuer’s issued or voting shares under various provisions of the Listing Rules (please see Implications, section 2 below).
• Disclosure of issuers’ intention to hold treasury shares: Issuers are required to disclose in the explanatory statement for the share repurchase mandate its intention as to whether the repurchased shares will be (a) cancelled following settlement of any such repurchase or (b) kept as treasury shares.
  • The Stock Exchange indicated it will accept a disclosure that stated the issuer 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.

Implications 

1. Share schemes

The Stock Exchange aims to offer issuers an alternative means to fund their share schemes using treasury shares. Under the new regime, a share scheme funded by treasury shares to satisfy share grants would be treated as a share scheme funded by new shares under Chapter 17 of the Listing Rules (or Chapter 23 of the GEM Listing Rules).

In order to use treasury shares to satisfy share grants, listed issuers must amend the rules of the existing share scheme to specifically allow such use. The Stock Exchange would normally not regard this amendment of the rules as a material alteration to the scheme rules requiring shareholders’ approval under the Listing Rules.

Under the Amendments, similar to operating a share scheme funded by new shares, issuers are required to (i) issue an announcement if they grant share awards or options using treasury shares and (ii) file a next day disclosure return for any transfer of treasury shares to a director under a share scheme, and for any other transfer of treasury shares to grantees (other than directors) under its share scheme when the 5% disclosure threshold is reached.

After the Amendments, issuers may continue to use share schemes funded by existing shares purchased by trustees on the market. In other words, the Amendments would not affect the sale of shares by the trustees of a share scheme if those shares are not regarded as treasury shares under the laws of the issuer’s place of incorporation and its constitutional documents. We understand that further clarification may be issued by the Stock Exchange in this regard.

2. Excluding treasury shares in the calculation of issued shares

Under the existing regime, issuers have to cancel repurchased shares, which will result in a reduction of the issuer’s share capital by the nominal value of the shares cancelled. Since the new regime removes the requirement to cancel repurchased shares, and treasury shares are held by issuers themselves where the rights attached to them are normally suspended by laws, the Stock Exchange has made consequential amendments to the Listing Rules to disregard treasury shares when calculating an issuer’s shares or voting shares for the purposes of determining:

• the public float of the issuer;
• the market capitalisation of the issuer;
• the equity capital ratio for the size test calculation;
• the size limit for issuing or purchasing securities as a percentage of the issued shares (e.g., general mandate limit, repurchase mandate limit, scheme mandate limit and the size of rights issue requiring minority shareholders’ approval);
• a shareholder’s percentage of rights to vote at a general meeting of the issuer (e.g., to establish whether they are a controlling or substantial shareholder); and
• a shareholder’s percentage interest in the issuer (e.g., to assess the independence of independent non-executive directors).

Accordingly, the Stock Exchange requires issuers to ensure that treasury shares are appropriately identified and segregated.

Conclusion

While the vast majority of the issuers listed on the Stock Exchange are incorporated in jurisdictions that allow the holding of treasury shares, such as the PRC, Bermuda and the Cayman Islands, these issuers have had to cancel repurchased shares under the current regime. With the Amendments, the new framework governing the resale of treasury shares will align Hong Kong with international market practice supporting the growth and vitality of the Hong Kong market.

1. The new treasury shares regime will also be introduced to GEM operated by the Stock Exchange. Similar amendments will be made to the GEM Listing Rules which will come into effect on 11 June 2024.

Client Alert 2024-099