HKEX Overhauls Treasury Share Regime

Background

Historically, the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (Listing Rules) have not permitted listed companies to hold treasury shares, and have required repurchased shares to be cancelled. Such requirement was originally imposed to safeguard against potential market manipulation by listed issuers repeatedly repurchasing and reselling their own shares on the market, and by insiders who may benefit from non-public information about share repurchases and resales of treasury shares.

On 12 April 2024, The Stock Exchange of Hong Kong Limited (Exchange) published its conclusions (Consultation Conclusions) on its consultation to introduce a new treasury share regime under the Listing Rules. The proposed Listing Rules amendments include the removal of the requirement to cancel repurchased shares, and the adoption of a framework in the Listing Rules that governs the resale of treasury shares.

The Exchange received 56 non-duplicate responses from the public, of which approximately 82% were submitted by institutional respondents, and the rest were made by individual respondents. All of the proposals received broad support from over 90% of the respondents. The Exchange has decided to adopt all of the proposals with minor modifications in response to market comments.

Key changes to be adopted

The key changes to the Listing Rules include:

• Removal of the requirement to cancel repurchased shares under the Listing Rules:

  • Listed companies may repurchase shares and hold them in treasury for future resale, subject to the laws of their places of incorporation and their constitutional documents.
  • If a listed issuer’s existing articles of association does not permit it to hold treasury shares, it will need to obtain shareholders’ approval to amend its articles before it can take advantage of the new treasury share regime.
  • Treasury shares can retain listing status granted at the time of their issuance.

• Resale of treasury shares by an issuer will be governed by the same rules currently applicable to an issue of new shares:

  • Resale of treasury shares must be conducted on a pre-emptive basis (i.e. offered to all shareholders on a pro rata basis) or with a shareholders’ mandate, which may be either a general mandate or a specific mandate.
  • A share scheme using treasury shares to satisfy share grants will be subject to the same requirements as a share scheme funded by new shares under Chapter 17 of the Listing Rules, and new rules will be added in Chapter 19A for PRC issuers.
  • Other requirements currently applicable to an issuance of new shares, such as connected transaction requirements, disclosure requirements and documentary requirements under Chapters 14A, 13 and 9 of the Listing Rules respectively will be extended to apply to a resale of treasury shares.

• Imposition of a 30-day moratorium period restricting:

  (i) a resale of treasury shares after a share repurchase (whether on-market or off-market); and
  (ii) an on-Exchange share repurchase after an on-Exchange resale of treasury shares.

  Note, however, that in relation to (i) above, the rules provide a carve-out for (a) capitalisation issues and (b) grants of share awards or options under a share scheme that complies with Chapter 17 or a new issue of shares or a transfer of treasury shares upon vesting or exercise of share awards or options under the share scheme.

• Restrictions for resale of treasury shares on the Exchange:

  (i) when there is undisclosed inside information;
  (ii) during the 30-day period preceding the results announcement; or
  (iii) if it is knowingly made with a core connected person (as defined under the Listing Rules).

• Consequential amendments, which include:
  • requiring new listing applicants to disclose in the prospectus details of treasury shares held;
  • allowing new listing applicants to retain their treasury shares upon listing, with any resale of these shares subject to the same lock-up requirement as an issue of new shares;
  • requiring issuers (being holders of treasury shares) to abstain from voting on matters that require shareholders' approval under the Listing Rules;
  • excluding treasury shares from an issuer’s issued or voting shares under various parts of the Listing Rules (e.g. public float and size test calculations);
  • requiring an issuer to disclose in the explanatory statement its intention as to whether any shares to be repurchased will be cancelled or kept as treasury shares; and
  • clarifying that a resale of treasury shares by an issuer or its subsidiary includes resale of treasury shares through their agents or nominees.

Arrangements to hold or transfer treasury shares

A listed issuer that wishes to resell treasury shares on the Exchange may hold or deposit such shares with the Central Clearing and Settlement System (CCASS). In order to ensure the identification of treasury shares when they are held with CCASS, the issuer is expected to hold or deposit its treasury shares in a segregated account in CCASS.

Where the laws of an issuer’s place of incorporation (such as Bermuda and the Cayman Islands) require repurchased shares to be held in the issuer’s own name in order to be classified as treasury shares, the issuer should, upon completion of the share repurchase, withdraw the repurchased shares from CCASS and register the repurchased shares as treasury shares in its own name on its register of members.

Effective date

The amendments to the Listing Rules will come into effect on 11 June 2024. Overseas issuers who have been granted waivers from the requirement to cancel repurchased shares will be able to benefit from transitional arrangements, so that they may comply with the amended Listing Rules by their second annual general meeting after the effective date.

Additional guidance

The Consultation Conclusions are accompanied by a new guidance letter (HKEX-GL119-24) on arrangements for listed issuers to hold or deposit treasury shares in CCASS, and Frequently Asked Questions on Rule Amendments relating to Treasury Shares effective on 11 June 2024.

Conclusion

Following the removal of the requirement to cancel repurchased shares, listed issuers will enjoy greater flexibility in managing their capital structure.

The consequential amendments to the Listing Rules provide welcome clarity on the implications of the proposals on other regulatory requirements for listed issuers.

At the moment, over 90% of issuers listed on the Exchange are incorporated in jurisdictions that allow the holding of treasury shares. As for Hong Kong-incorporated issuers, the Companies Ordinance (Chapter 622 of the Laws of Hong Kong) will still require a Hong Kong-incorporated company to cancel repurchased shares. In this regard, the Exchange notes that the Hong Kong Government will propose legislative amendments to allow Hong Kong companies to hold treasury shares.

While the Exchange seeks to provide greater flexibility to issuers, it has also introduced a number of safeguards to mitigate the risk of market manipulation and insider dealing. We expect the new treasury share regime to support the Exchange’s ongoing efforts to ensure the competitiveness of Hong Kong’s listing framework, and the continued development of Hong Kong’s vibrant markets.