Annual Reports
Securities and Futures Commission Annual Report 97/98 Home | Content | < Previous | Next >
 
Corporate Finance Division
 
 
Laura M Cha is Deputy Chairman and Executive Director responsible for the Corporate Finance Division. She is also responsible for the Human Resources, Corporate Communications, and Investor Education and Communications Departments.
 
 
HIGHLIGHTS
 
l Conducted public consultation on review of Takeovers and Mergers Code;
   
l Conducted public consultation on offering mechanisms for IPOs involving large-scale multi-jurisdictional offers;
   
l Issued Plain Language Guideliness for public announcements and prospectuses by listed issuers;
   
l Takeover Executive declined to process a draft announcement regarding a potential takeover, citing concern with professionalism of a financial advisor to the transaction. High Court judgement supports Takeover Executive's decision;
   
l Initiated joint action with SEHK on suspension of trading in shares of listed companies experiencing unexplained unusual price and volume movements;
   
l Handled 34 general offers, 12 whitewash applications and 254 other Code applications, representing increases over the previous year of 9.7%, 50% and 14.4% respectively and 269 applications for exemption under the Securities (Disclosure of Interests) Ordinance.
   
FUNCTIONS
 
1.1 The Corporate Finance Division consists of the Listing Policy Department and the Takeovers and Mergers Department.
   
1.2 Among other functions, the Corporate Finance Division:
  l administers the Takeovers and Mergers Code and Share Repurchases Code to ensure there is full and timely disclosure of relevant information affecting the value of securities of public companies;
  l ensures fair and equal treatment of public shareholders;
  l maintains and improves investor protection standards by developing fair and clear rules for listed companies, and promoting the development of good and sound business practices;
  l oversees the performance of the Stock Exchange of Hong Kong Ltd (SEHK) of its listing-related functions and responsibilities;
  l reviews and recommends changes to the Listing Rules;
  l facilitates the development of effective and efficient capital markets in both equity and debt issues; and
  l facilitates the development of Hong Kong as the preferred market for the listing and trading of securities of PRC enterprises.
     
Listing Policy
 
China Initiatives
1.3 During the year, 14 PRC state enterprises listed their H shares in Hong Kong and raised approximately HK$27.1 billion from the market. One of the PRC companies listed on the New York Stock Exchange decided to gain access to the Hong Kong market and listed its shares on the SEHK by way of introduction in January 1998. To date, the State Council has authorised 77 companies to apply for listing outside the Mainland; of the 43 which have already done so, 41 are listed in Hong Kong.
   
1.4 In June 1997, the China Securities Regulatory Commission (CSRC) issued a notice concerning the regulation of companies incorporated and listed outside the PRC that are controlled by PRC interests, i.e. Red Chip companies. The SFC and the SEHK were invited to comment on the notice prior to its issuance. The notice recognises that Red Chip companies are subject to regulation by the regulatory authorities of their place of listing. The notice sets out the obligations of the PRC entities holding controlling interests in Red Chip companies to seek approval from the relevant PRC authorities for overseas listings and asset injections into Red Chip companies.
   
1.5 Regular meetings were held every quarter with the CSRC, the two PRC exchanges and the SEHK to discuss issues of mutual concern.
   
1.6 During the year, the SFC organised jointly with the Hong Kong Trade Development Council and the SEHK a seminar in Chengdu to promote the securities market of Hong Kong. Another seminar was jointly organised by the SFC, SEHK and CSRC to promote Hong Kong as the preferred listing place for companies authorised by the State Council to list outside the Mainland. The SFC also took part in a number of other seminars in China to increase awareness and understanding of various aspects of the securities regulations of Hong Kong.
   
Derivative Warrants
1.7 As at 31 March 1998, there was a total of 256 (1997: 296) issues of derivative warrants outstanding on the SEHK, representing HK$5,448 million in market capitalisation (1997: HK$31,686 million), and approximately 0.17% of the total market capitalisation of all listed securities. The year saw the listing of derivative warrants using overseas stocks and indices as underlying instruments. The downfall in the market in the second half of the year prompted a notable increase in the number of put warrants; 21 put warrants were listed as at 31 March 1998 (1997: 6).
   
1.8 In April 1997, the SFC and SEHK established a working party that meets fortnightly to discuss issues relating to the derivative warrant market, including proposals for changes to the Listing Rules and guidelines in this regard.
   
1.9 Among other things, the SEHK recommended in January 1998 that:
  l the existing suitability criteria for issuers of derivative warrants be raised;
  l the settlement period on exercise of derivative warrants be reduced;
  l disclosure be made by the issuer of the number of warrants placed with the largest five placees; and
  l procedures be introduced to prevent undue concentration of the launch and termination of derivative warrants on the same underlying shares.
     
1.10 These recommendations are being considered by the SFC and changes to the Listing Rules are expected to be considered by the Commission in mid-1998.
   
Mechanism for Global Offering of Securities
1.11 Taking into account the responses to a consultation paper issued in June 1997, the SEHK and the SFC issued on 24 February 1998 a joint announcement setting out the policy decisions reached in relation to offer mechanisms in initial public offers involving large scale multi-jurisdictional offers which have both a subscription tranche and a placement tranche. The policy seeks to balance the interests of retail and institutional investors by introducing a formula for the minimum allocation of shares to the public subscription tranche, and by dividing the public subscription tranche into two equal pools, one for applications for up to $5 million of shares and one for larger applications.
   
1.12 As a result of public comments, the SFC and the SEHK have invited market practitioners to provide detailed proposals in respect of introducing flexibility to adjust the price, size and timing of an offer during the subscription period. The SFC will also consider the merits of enacting rules under Section 137 of the Securities Ordinance concerning stabilisation activities.
   
Securities (Disclosure of Interest) Ordinance (SDIO)
1.13 Preparation of the SDIO Amendment Bill has been delayed due to continued work on the draft Composite Securities and Futures Bill. The Division is mindful of the need to revise the SDIO in the light of recent developments of the Hong Kong market and international markets. It has therefore re-commenced work with the Legal Services Division on the draft SDIO Bill during the last quarter of this year and intends to consult the public on the proposed amendments in mid-1998.
   
Suspension of Trading
1.14 In May 1997, the SFC and the SEHK noted increases in unusual price and volume movements in the shares of some listed companies which appeared to have no relation to the assets, profitability or prospects of the companies concerned. The SFC and the SEHK were concerned that a false, unfair and disorderly market might have been created in the trading of some of these shares. On 21 May 1997, a joint announcement was issued by the SFC and the SEHK stating that the authorities would take all necessary actions against the creation of a false or unfair market and against insider trading. Where unusual trading activities persist, the SFC and SEHK would direct suspension in the trading of shares and institute investigation into companies, brokers and investors involved in such share trading. Investors were warned that suspension of trading might be prolonged as it might take time for the SFC and the SEHK to conduct enquiries. As a result of this policy, the SFC directed the SEHK to suspend dealings in specified securities in six instances.
   
1.15 On 25 February 1998, the SEHK announced that as long as adequate and appropriate disclosure on the latest financial position is made by a company whose shares were suspended from trading and there is no price-sensitive information that has not been disclosed, trading in the issuer's securities may resume. Where an issuer fails to make any announcement despite repeated requests from the SEHK, the SEHK may make its own announcement informing the market of the issuer's lack of cooperation. This resumption policy does not change the suspension policy discussed above.
   
Plain Language project
1.16 In March 1997, the SFC formed a working group with market practitioners and the SEHK to promote the use of plain language in public documents issued by listed companies.
   
1.17 The first phase of the project was completed in July 1997 with the release of proposals to promote the use of plain language in public announcements of listed companies. The working group reviewed five common types of public announcements and prepared plain language samples for each type. Guidelines on "How to Create Clear Announcements" were also released. The plain language initiative was welcomed by the market. By December 1997, about one-third of the public announcements were in plain language and in formats proposed by the working group. By March 1998, all public announcements were required to adopt the plain language layout, format and style suggested by the working group.
   
1.18 The second phase of the plain language project was completed in January 1998 with proposals to improve the format, language and content of prospectuses. The working group identified areas in prospectuses which could be improved, and created a plain language sample prospectus to assist the market in incorporating these improvements. A sample application form for share subscription was also created. As announced in a joint announcement of the SFC and the SEHK in March 1998, all new prospectuses to be published after 31 July 1998 would be required to adopt the new format.
   
Takeovers and Mergers
   
Review of the Hong Kong Code on Takeovers and Mergers
1.19 The Takeovers Code was introduced in 1975 and revised in 1992. Since then the only major amendment was the introduction in 1993 of a new Rule 2.10 regarding privatisations by way of scheme of arrangement.
   
1.20 The Division undertook a review of the Code with the assistance of the Special Advisor to the SFC, Mr Christopher de Boer, a former Chairman of the Takeovers Panel. A total of eight Takeovers Panel meetings were conducted between October and December 1997 to discuss areas of review. The review aimed to refine the Takeovers Code and to provide additional interpretative guidance based primarily on the relevant experience in Hong Kong gained over the last five years. With the endorsement of the Takeovers and Mergers Panel, a consultation paper was released in February 1998.
   
1.21 The principal areas reviewed and changes recommended include:
  l Suitability of financial advisers in takeover matters;
  l Privatisations by way of scheme of arrangement;
  l Guidance note for waiver of general offer obligation under whitewash transactions; and
  l Change of leadership within a concert group.
     
1.22 The consultation period was extended to 27 March 1998 and it is anticipated that the revised Code will be issued by mid-1998.
     
Professionalism required of financial advisers on takeover matters
1.23 In processing a potential takeover matter in May 1997, the Division, in its capacity as the Takeovers Executive under the Takeovers Code, declined to review a draft announcement of the offer until the financial adviser, Goldwyn Capital Ltd, had satisfied the Executive of its integrity, competence and expertise to act as the financial adviser of the offeror. Goldwyn Capital Ltd petitioned the High Court to review the Executive's decision and argued that, since it was already a registered investment adviser under the Securities Ordinance, the Executive did not have the power to question its ability to act. The High Court upheld the Executive's decision and ruled that where the SFC had doubts about the suitability of a registered investment adviser to act as the financial adviser in a takeover matter, the SFC was entitled to be satisfied that the adviser concerned had the integrity, competence and expertise to act under the Code. The Executive welcomes this judgement as it supports the principle that high standards are expected of financial advisers who act in takeover matters. The judgement also confirms that these higher standards are additional to normal licensing requirements.
   
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