Hong Kong Stock Exchange – new regime for treasury shares

Executive Summary

Over 90% of Hong Kong listed companies are incorporated in jurisdictions which permit the holding of treasury shares. However, the current Hong Kong Listing Rules require listed issuers to cancel any repurchased shares so these shares cannot be held as treasury shares.

The Hong Kong Stock Exchange will abolish the requirement to cancel repurchased shares, and will adopt a framework to govern the resale of treasury shares. The new regime will commence on 11 June 2024.

Background

Over 90% of Hong Kong listed companies are incorporated in jurisdictions which permit the holding of treasury shares. However, the current Hong Kong Listing Rules (Listing Rules) require listed issuers to cancel any repurchased shares so these shares cannot be held as treasury shares. The Hong Kong Companies Ordinance contains the same requirement (applicable to both listed and unlisted companies).

In jurisdictions where treasury shares are permitted, in general, shareholders' rights attached to treasury shares (including dividend, distribution and voting rights) are normally suspended by laws. These rights will resume when the treasury shares are resold or transferred out of treasury.

Revised Listing Rules

The Hong Kong Stock Exchange (Exchange) published its consultation conclusions on treasury shares, together with new Guidance Letter GL119-24 and new FAQs in April 2024.

The Exchange will abolish the requirement to cancel repurchased shares, and will adopt a framework to govern the resale of treasury shares. Treasury shares which remain issued by law will retain their listing status.

Under the revised Listing Rules, issuers will be allowed to hold treasury shares for resale. This means that they will have greater flexibility to manage their share capital, such as by selling treasury shares in small lots at market price (instead of issuing a larger block at a discount).

The revised Listing Rules do not restrict the use of treasury shares. How treasury shares may be used depends on the law of the issuer's place of incorporation and the issuer's constitution. Depending on the jurisdiction, treasury shares may be used as consideration shares, or for satisfying employee share schemes or the conversion of convertible securities.

How treasury shares may be held

Some jurisdictions require treasury shares to be held in the issuer's own name (e.g. Bermuda, Cayman Islands) and others permit treasury shares to be held by nominees on behalf of issuers (e.g. PRC). Consequently, CCASS arrangements will differ, and further details can be found in Guidance Letter GL119-24. Regardless of the different arrangements, issuers are expected to hold or deposit its treasury shares in a segregated account in CCASS. It should also instruct the relevant broker to maintain a proper record of such treasury shares.

Guidance Letter GL119-24 also provides guidance regarding additional disclosure requirements in poll results announcements and in announcements relating to the declaration of dividends or distributions.

Key changes to the Listing Rules

The key changes:

1. treat a resale of treasury shares as new shares;
2. impose requirements to mitigate the risk of market manipulation and insider dealing;
3. include requirements relating to new listing applicants; and
4. include consequential amendments to address the treatment of treasury shares.

1. Treat a resale of treasury shares as new shares

• A resale of treasury shares will be subject to pre-emption similar to an issuance of new shares under Listing Rule 13.36 and be offered to all shareholders on a pro-rata basis, or alternatively, approved by shareholders under a specific mandate or a general mandate. The general mandate must specifically authorise the resale of treasury shares in order for the issuer to resell its treasury shares under the general mandate.
• A share scheme using treasury shares to satisfy share grants would be treated as a share scheme funded by new shares under Chapter 17 of the Listing Rules (Chapter 17). The rules of the issuer’s share scheme should specifically allow the use of treasury shares to satisfy share grants. If the scheme rules are amended to allow the use of treasury shares to satisfy share grants, the Exchange would normally not regard these amendments as a material alteration to the scheme rules which would require shareholders’ approval under Chapter 17.
• Resales of treasury shares to a connected person will be subject to the same connected transaction requirements as an issue of new shares under Chapter 14A of the Listing Rules.
• Issuers will need to disclose the resale of, and movement in the number of, any treasury shares in announcements, listing documents, next day disclosure returns, monthly returns and annual reports. In particular, on-market resales of treasury shares need to be announced if it, individually or together with previous on-market resales of treasury shares in a 12-month period that have not yet been announced, amount to 5% or more of the issuer’s issued shares (excluding treasury shares), including the reasons for these transactions, the use of proceeds and other information.

2. Requirements to mitigate the risk of market manipulation and insider dealing

Moratorium periods for share repurchases and resales of treasury shares

• Under the current Listing Rules, an issuer may not issue new shares for 30 days after any share repurchase. Under the revised Listing Rules, the issuer also may not sell any treasury shares (whether on or off-market) for 30 days after any share repurchase.
• If an issuer resells its treasury shares on-market, it may not repurchase its shares on-market for 30 days after such a resale. However, the revised Listing Rules does not contain a similar restriction for resales of treasury shares off-market.
• The revised Listing Rules include carve-outs from the moratorium requirement:
• capitalisation issues (e.g. bonus issues and scrip dividends);
• 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; and
• the carve-out in the current Listing Rules will also apply to issuance of new shares and transfer of treasury shares by an issuer upon conversion of convertible securities, which were issued with subscription monies fully settled prior to the share repurchase.

Dealing restrictions for resales of treasury shares on the Exchange

• Listing Rule 10.06(2)(e) currently prohibits on-market share repurchases from one-month prior to certain events, and ending on the date of the results announcement. Under the revised Listing Rules, the one-month period will be changed to 30 days. This prohibition (including the revised period) will apply to both on-Exchange share repurchases and on-Exchange resales of treasury shares.
• Issuers are prohibited from knowingly reselling treasury shares to a core connected person on-market. However, on-market resales of treasury shares to a connected person without knowledge would be fully exempt from the connected transaction rules.

3. Requirements relating to new listing applicants

• Currently, listing applicants must cancel all their treasury shares prior to listing on the Exchange. Under the revised Listing Rules, new applicants may retain their treasury shares after listing, although details should be disclosed in its prospectus.
• The current restriction in Listing Rule 10.08 will be extended, so that a new listing applicant shall not issue any new shares or resell any treasury shares, or enter into any agreement for such new issue or resale, within six months after listing.
• If a new listing applicant obtains a shareholders’ mandate for repurchase of shares after listing, it must disclose in the prospectus whether it intends to cancel the repurchased shares or hold them as treasury shares. If a new listing applicant plans / intends to repurchase a material part of its shares shortly after listing, this must be adequately explained and disclosed in the applicant’s prospectus and its cashflow forecasts submitted to the Exchange.

4. Consequential amendments to address the treatment of treasury shares

• Voting rights: Under the revised Listing Rules, issuers (being holders of treasury shares) will be required to abstain from voting on matters that require shareholders’ approval under the Listing Rules.
• Calculation of issued shares: Treasury shares will be disregarded when calculating an issuer’s issued shares or voting shares for the purposes of determining:
  • the public float / market capitalization of the issuer;
  • calculations for size tests;
  • limits for the issue / purchase of securities as a percentage of the issued shares (e.g. general / repurchase / scheme mandate limits); and
  • a person's percentage of voting rights (e.g. definition of controlling / substantial shareholder) or interest in the issuer (e.g. when assessing the independence of non-executive directors).
• Disclosure of intention to hold treasury shares: The issuer will need to disclose (in the explanatory statement for the share repurchase mandate) whether it intends to cancel any repurchased shares or hold them as treasury shares. The Exchange acknowledges that an issuer’s intention regarding the treatment of repurchased shares may change due to evolving circumstances. To ensure transparency, amongst other matters, when reporting any share repurchases in a next day disclosure return, the issuer is required to identify the number of repurchased shares that are to be held in treasury or cancelled, and if applicable, disclose the reasons for any deviation from the intention previously disclosed by the issuer in the explanatory statement.
• Resale through agents or nominees: A resale of treasury shares by an issuer or its subsidiary includes resales of treasury shares through an agent or nominee.

Housekeeping amendments relating to share schemes

• Listing Rule 17.05 currently prohibits the granting of any options / awards from one month prior to certain events, and ending on the date of the results announcement. This one month period will be changed to 30 days, to mirror the duration of the restricted period for on-Exchange share repurchases and on-Exchange resales of treasury shares.
• Reporting requirements for issues of securities for cash consideration under Appendix D2 (disclosure of financial information) do not apply to new shares issued or treasury shares resold under share schemes (as there are separate reporting requirements relating to share schemes under Chapter 17).
• Issuers will be required to file a next day disclosure return for the new shares issued or treasury shares transferred to grantees (other than directors) under its share scheme when the threshold under Listing Rule 13.25A(3) is reached (instead of filing a return for each such issue of new shares or transfer of treasury shares upon vesting of share awards). This would align the filing requirement for share awards with those applicable to new shares issued upon exercise of options under share schemes.

Implications of the Exchange's proposals on other Hong Kong laws / regulations

Takeovers Code and Share Buy-backs Code (Codes)

The amended Listing Rules will not cause major implications. This is because the Codes are mainly concerned with voting rights. As the voting rights of treasury shares are normally suspended by law (and the definition of "voting rights" in the Codes expressly excludes treasury shares), they are disregarded in the determination of various thresholds under the Codes. Treasury shares would not be treated as disinterested shares, nor is an offer required to be made in respect of the treasury shares in a general offer or partial offer. The SFC will issue a practice note relating to this topic in due course.

Disclosure of interests under Part XV of the Securities and Futures Ordinance (SFO)

The amended Listing Rules will not cause major implications. However, the SFO's approach is different to the Codes and the Exchange's proposed regime for treasury shares. For the purposes of Part XV, treasury shares remain part of an issuer’s issued voting shares and voting shares (both as defined in the SFO) when calculating the percentage figures of interests of shareholders. The SFC will issue further guidance relating to this topic in due course.

Stamp Duty Ordinance

A resale of treasury shares triggers the stamping of contract notes and is subject to stamp duty.

Implementation timeframe

The amended Listing Rules, together with the corresponding FAQs and Guidance Letter GL119-24, take effect on 11 June 2024 (Effective Date).

Issuers should consider if their constitutional documents contain any restriction on the holding and use of treasury shares and amend their constitutional documents if needed.

If the listed issuer wishes to, it may seek shareholders’ approval to amend its constitutional documents before the Effective Date to allow the issuer to hold and use treasury shares. It may also seek a general mandate before the Effective Date from its shareholders to resell treasury shares, provided that it specifies that it may only use such general mandate for the resale of treasury shares on or after the Effective Date.

For overseas issuers that have previously obtained Exchange waivers to hold treasury shares, these issuers will be required to comply with the revised Listing Rules by their second annual general meeting after the Effective Date.

Hong Kong incorporated issuers will not be able to benefit from the new treasury share regime on the Effective Date. The Government is proposing changes to the Companies Ordinance, and Hong Kong incorporated issuers will need to wait for the revised Companies Ordinance to take effect before they can benefit from the new regime.