SFC issues guidance in light of new Mainland rules for overseas listings
The Securities and Futures Commission released two sets of guidance materials on 17 March 2023, following the changes announced by the CSRC, amongst others, that H share issuers will no longer be required to adopt the Mandatory Provisions in their articles of association (and hence repealing the PRC regulatory requirement that domestic shares and H shares need to have separate class meetings to approve various matters), effective from 31 March 2023.
The SFC recognises that H shares and domestic shares are one single class of shares under PRC company law, but the fact that they are not fungible with each other and they are traded in separate regulatory and market environments justify the continuation of adopting a different regulatory approach on H share issuers on the one hand, and other issuers on the other, that is, from the perspective of Hong Kong disclosure of interest requirements and the applications of certain requirements in the Codes on Takeovers and Mergers and Share Buy-backs (Codes).
In essence, the SFC will continue many of the current practices and regulatory requirements uniquely applicable to H share issuers. The key points made are as follows:
- First, the SFC has published an FAQ regarding the disclosure of interests in H share issuers (i.e. Part XV requirements). The SFC has indicated that, for Hong Kong disclosure of interest purposes, the current practice of reporting H shares and A shares / domestic shares separately remains unchanged. This means the percentage of the H shares which a person is interested should continue to be calculated as a proportion of the number of issued H shares taken separately from the domestic shares. The same applies vis-à-vis domestic shares. Access the FAQ here.
- Secondly, the Takeover Executive has released a new Practice Note 25 on the application of the Codes relating to offers for H share issuers. Many of the current application of the Codes to H share issuers will remain largely the same. Access PN 25 here. The key points addressed in PN 25 are as follows:
A. Class (6) associates
- For the purpose of determining whether a party is a class (6) associate under the Codes, H shares will be treated as a separate class of shares from domestic shares (whether unlisted or A shares). In other words, whether a holder of H shares is a class (6) associate would be determined by reference to the total issued H shares only, and not the issuer’s total issued shares. The rationale of this treatment is to ensure that material and relevant information from dealings by a person holding a substantial stake in H shares are captured and disclosed under Rule 22 of the Codes.
- For A shares or unlisted domestic shares, the Executive will treat these shares as the same class for the purposes of determining any such class (6) associates.
B. Delistings and privatisations
- The existing requirements for transactions that would result in a delisting of H shares, whether by way of a general offer by an offeror or a share buy-back by a H share issuer, the offeree company will need to hold a separate H shareholders class meeting to approve the transaction, and the approval threshold must meet the 75:10 requirement, will remain unchanged. The Executive is of the view that holders of H shares should continue to benefit from the heightened protection which is currently applied and this should not change under the new PRC regulatory regime. This means any approvals under Rule 2.2 and Rule 2.10 of the Takeover Code and Rule 3.3 of the Buy-Back Code should continue to be decided by holders of H shares only.
- It is noted that once a H share issuer amends its articles of association and repeals the provisions that differentiate holders of H shares from domestic shares to adhere to the new CSRC standard articles of association, the issuer may lose the legal basis to hold a class meeting where only holders of H shares will be entitled to cast a vote. It remains to be seen how H share issuers may comply with the guidance materials in a voluntary delisting situation.
C. Special deals and whitewash waivers
- The Executive confirms that the existing practices that approval by shareholders will not require separate class approval of holders of H shares relating to special deals under Rule 25 and PN 17, and whitewash waivers under Note 1 on dispensations from Rule 26 and Schedule VI, continue after the PRC rule amendment.
D. Off-market share buy-backs
- Off-market share buy-backs must be approved by (i) the Executive before a repurchasing company acquires any shares and (ii) ¾ of the votes cast on a poll by “disinterested shareholders” at a general meeting. The Executive usually considers “disinterested shareholders” to be those shareholders whose relevant securities will not be bought back under the buy-back proposal. These shareholders, irrespective of the “class” of shares they hold, so long as they are “disinterested shareholders”, are entitled to cast their votes at the general meeting. The Executive has indicated it remains to be the case that separate class meetings are not required for H share issuers for the approval of off-market share buy-backs.
It continues to be the case that, for H share issuers, a mandatory general offer will be triggered if a person acquires control of 30% or more of the total issued shares of the issuer, that is, the combined total issued A / domestic / H shares. The same applies vis-à-vis the creeper rule.
For further information regarding the new CSRC requirements and the consequential amendments to the Hong Kong Listing Rules, see our client bulletins on CSRC New Rules on Overseas Issuances and Listing Activities and Hong Kong Stock Exchange consequential Rule Amendments.
