|
Part B - Comments on specific consultation issues
Treasury Shares
In this part each of the questions contained in sections 5 and 6 of the Consultation Paper is set out (together with a number in parentheses indicating the paragraph of the Consultation Paper in which the questions appear), followed by a summary of answers received from consultees.
3.4 In the context of the treasury share proposal referred to in this Consultation Paper, and apart from the drafting changes required specifically to provide for repurchased shares to be held and resold, do you believe that change should also be made to other provisions of company law which may be relevant to a treasury share regime? (5.2)
All except one response either expressed no view or stated that they could not think of any specific areas which would need to change. The one response in question suggested that provisions of the Companies Ordinance dealing with voting rights, dividends and winding up may be affected and should be reviewed carefully.
3.5 Should shares proposed to be held in treasury only be repurchased on the Stock Exchange? Should there be other controls (in addition to those contained in the Listing Rules (as to which, see paragraphs 2.19 - 2.24 in section 2 above)) on the volume, pricing and timing of repurchases of shares specifically because some or all of such shares may in future be held in treasury? (5.3)
Six responses expressed a view on these issues. In relation to whether treasury shares could derive from off-market repurchases, five responses were in favour, one was against (but gave no explanation). All six responses stated that existing controls on repurchases were adequate notwithstanding that the shares in question may be held in treasury.
3.6 Should shareholders, when approving a repurchase, be asked to specify whether the shares are to be held in treasury for resale or are for cancellation? If it is not specified at the time of the shareholder approval, should a company be required to announce prior to or after a repurchase whether the shares are to be held in treasury for resale or for cancellation? (5.4)
Six responses expressed a view. All stated that shareholders should not be given the right to direct whether shares should be cancelled or held in treasury. The repurchase mandate should give the directors the choice to do as they think best at the time of repurchase. All six responses also believed an announcement of intention regarding the repurchased shares should be made post (rather than prior) repurchase.
3.7 Should shareholders be asked to approve the price at which treasury shares are resold? How should such price be determined? Should other forms of consideration be permitted? Should resales off-market be permitted? (5.5)
Seven responses expressed views. Most stated that shareholders should not be asked to approve the resale price. This should be left to directors acting bona fide and securing an agreement with a buyer on arm's-length terms. Two of the seven responses thought that non-cash consideration should be permitted - the others didn't address the point specifically, but the tenor of their comments suggests that directors should have discretion to decide such matters. All seven responses favoured off-market resales, but one suggested shareholders should be able to specify a range (e.g. not outside 10% of last 5 days average closing price), and one thought that any such sale should be at arm's-length.
3.8 Should transactions in, and holdings of, treasury shares be disclosed to the extent necessary to enable persons having disclosure obligations under the Securities (Disclosure of Interests) Ordinance to comply with such obligations? Should Note 1 to Rule 33 of the Takeovers Code be extended to cover the effect of resales of treasury shares? (5.7)
Six responses were received, all confirming that the disclosure regime should enable others to comply with the SDI Ordinance. One response stated that the company should not give prior notice of a transaction to substantial shareholders on the basis that if such shareholders were outside parties (e.g. Templeton, Fidelity or other funds) it would give them an advantage. Five of the six responses also confirmed that Note 1 to Rule 33 of the Takeovers Code should be extended to cover the effect of a resale of treasury shares (so as to exempt a substantial shareholder from the duty to notify a change in its shareholding).
3.9 Should a repurchase of shares which are held in treasury be treated differently from a repurchase of shares for cancellation in the context of Rule 32 of the Takeovers Code, such that a general offer may not necessarily be required by reason only of an acquisition or consolidation of control in such circumstances? If different treatment can be justified, should waivers to the requirement for a general offer under Rule 26 of the Code be on the same basis as those available for general offer and off-market repurchases? (5.8)
Six responses expressed views, but one appears to answer a different question. The remaining five responses were in favour of according the same treatment to shares repurchased for holding in treasury as applies to shares repurchased for cancellation (and accordingly giving rise to a duty to make a mandatory offer under Rule 26 in relevant circumstances). Three responses went on to state that waivers to the requirement to make an offer should be available to on-market repurchases on the same basis as those available for general offer and off-market repurchases. One of three responses qualified this by suggesting that waivers should be available if the company has entered into an underwritten agreement to place out the repurchased shares within a short period (say, one month) of the repurchase.
3.10 Should announcements of intentions with respect to holding and resale of treasury shares be required? If so, how far in advance and how detailed should they be? What if the company changes its intention? (5.9)
Seven responses dealt with these issues. All were against prior disclosure of intention. If any statement of intention were required it would inevitably have to be vague. Disclosure following a transaction (e.g. on the Stock Exchange's return for share repurchases (Form G)) would be sufficient. Statements of general intention could be disclosed in the interim and annual reports.
3.11 Should the company be required to disclose particular information, for example in relation to its current trading position? (5.10)
Six responses were received. Two favoured some limited disclosure of financial information, such as a statement of no material change. Four responses drew a parallel between a resale of treasury shares and an issue of shares by way of placing and suggested disclosure requirements should be the same.
3.12 Should sales of treasury shares be reported at the time to the Companies Registrar and the Stock Exchange, and in the company's annual report? (5.11)
Six responses expressed a view on this issue, all agreeing with the disclosure regime suggested. Again, one response drew a parallel between resales of treasury shares and issues (or reissues) of shares, and thought the same regime should apply.
3.13 Should voting rights attaching to treasury shares be suspended whilst the shares are held in treasury? (5.12)
Again six responses were received, all of which favoured suspending voting rights whilst shares were in treasury.
3.14 Should treasury shares be entitled to receive dividends or any other payments, such as in a winding up? Should all other rights from time to time exercisable by shareholders be suspended whilst the shares are in treasury? (5.13)
Six responses were received, five of which agreed that rights to dividends and other payments should be suspended whilst shares are in treasury. Treasury shares should effectively be regarded as having been cancelled and therefore as having no rights whatsoever. One response disagreed, and suggested that suspending dividend rights would indirectly increase the dividend income of the shareholders and thereby benefit the substantial shareholder. Instead, the company should be entitled to receive the dividend income much as would occur if it invested in another company. The response suggested that they should also be entitled to participate in offers and rights issues.
3.15 Should treasury shares be included in the calculation of earnings per share and other performance data? (5.14)
Six responses were received, all of which stated that treasury shares should be disregarded (i.e. not included in the total issued capital) when calculating performance data. One response added that attempts to increase EPS or other performance data via repurchases and resales/reissues is not manipulation but exercising financial flexibility (unless other rules are breached).
3.16 Should there be restrictions on what a company may do with treasury shares? (5.15)
Five responses were received on this question. There was a consensus that as treasury shares would have no rights they should not have any value or be regarded as an asset (other than perhaps by the company). Certainly, they should not be capable of being pledged or used as security. One response suggested that treasury shares could be used to satisfy distributions of shares by the company upon the exercise of share options.
3.17 Should there be a percentage or other limit on the number of shares held in treasury and capable of resale? Should treasury shares be cancelled automatically if not resold after a specified period? Should a company be allowed to issue new shares only if any holding of treasury shares is used first? (5.16)
Seven responses were received on these issues, but views diverged on how best to deal with them. Three responses said treasury shares should be capped at 10% of issued capital. One qualified this by stating that the cap should be set at the number of shares authorised for repurchase at the last AGM. Two responses suggested that there should be no maximum number of treasury shares. One of these suggested that the control should instead be imposed on the aggregate number of shares being resold (from treasury) and/or reissued (following cancellation), at 10% of issued capital.
In relation to possible cancellation of treasury shares after a specified period of time, three responses said there should be a maximum validity period, but the suggested duration varied from one year or next AGM if sooner, to 24 months. Four responses suggested there should be no maximum validity period, as this would be arbitrary, would take no account of market conditions/cycles, and if treasury shares had no rights and were tantamount to cancelled shares anyway it was difficult to see what difference it would make.
In relation to the possible need to dispose of any holding of treasury shares first before an issue of new shares, four responses favoured this, whilst two were against.
3.18 Bearing in mind certain of the stated advantages of treasury shares outlined in section 3 above, should the method of resale or other disposal of treasury shares be controlled or regulated, such as pursuant to a shareholders mandate? Should there be restrictions on any category of person (such as connected persons) to whom treasury shares may be sold? Should any treasury shares held by a company be capable of being added to other shares at the disposal of the directors? (5.19)
Six responses were received on these questions. There was no general wish to see additional controls imposed on resales of treasury shares (other than those mentioned in earlier questions or already subject to restrictions under the Listing Rules). One response, however, suggested that the resale price should exceed the purchase price. There was also a general view that no specific restriction on sales to connected persons should be imposed provided the existing connected transaction rules applied.
In relation to aggregating sales of treasury shares with other issues of shares (including pursuant to the general mandate), five responses expressed a view. Four saw no problem in aggregating, provided treasury shares were capped at 10%. It is unclear in some cases whether the responses appreciated that the general mandate could amount to approximately 30% of issued capital as at the date of the authorising resolution, since such responses referred to "the 20% mandate" . However, one response specifically recognised the mandate as potentially 30% and saw no problem in aggregating treasury shares to the mandate even in such circumstances. Only one response was against aggregating treasury shares with the general mandate.
3.19 Should companies be prohibited from reselling treasury shares at price sensitive times? (5.20)
Five responses commented on this and confirmed that sales at price sensitive times should be prohibited.
3.20 Should the prohibition on making or announcing a new issue of shares for a period of 30 days after any repurchase of shares apply also to resales of treasury shares? (5.21)
Six responses expressed a view. All were in favour of the prohibition applying, including one which suggested that the period should be longer (between three to six months).
3.21 Should companies be restricted from reselling treasury shares when subject to a takeover, delisting proposal or privatisation? (5.22)
Seven responses addressed this issue and were supportive of the restriction also applying to treasury shares. One went on to state that it was also important that an offeror should not be required to pay for any shares held in treasury. This may otherwise encourage companies to accumulate treasury shares as a potential defensive "poison pill".
3.22 Would you consider that changes to the financing aspects of the repurchase of shares regime should be considered if treasury shares are introduced? If so, do you have particular recommendations? (5.23)
Only three responses attempted to deal with this issue but none answered the questions raised.
3.23 Should treasury shares be presented in a consolidated balance sheet as a one-line adjustment of equity? (5.25)
Five responses addressed this issue, of which four were in support of the IASCs recommendations. The remaining response believed profits and losses on resales of treasury shares should be recognised in the profit and loss account provided there was sufficient disclosure and these results were distinguished from operating profits/losses.
3.24 Do you agree with this proposed treatment? (5.26)
Three responses dealt with this. Two agreed with the proposed treatment, whereas one referred to its alternative approach described in the answer to the question in paragraph 3.23 above.
3.25 Should subsidiaries be able to purchase, hold and resell shares in their parent companies? (5.27)
Six responses addressed this issue. Five stated that subsidiaries should not be able to hold shares in their parent (whether as treasury shares or otherwise). Some thought it would unnecessarily complicate matters. One consultee thought that to allow this would give companies a little more flexibility, but that any such subsidiary should be a special purpose vehicle and only one such subsidiary should be used.
3.26 As the focus of this Consultation Paper is on listed public companies, the SFC has not considered the position of unlisted or private companies. However, comments are also invited on whether the law should be changed to give unlisted or private companies the ability to hold treasury shares for resale. Would unlisted or private companies be disadvantaged if changes were made to allow treasury shares to be held by listed public companies only? (5.28)
Six responses addressed this issue. Four thought that private and unlisted public companies would not be disadvantaged if changes were made to allow treasury shares to be held by listed companies only. Two thought that it may be inappropriate to restrict a treasury share regime to listed companies notwithstanding the little practical value to private/unlisted companies in having them.
Block listing regime
3.27 Do you believe that a proposal along the lines described in paragraph 3.23 of section 3 above would be a workable alternative to treasury shares? (6.1)
Eleven responses expressed a view on this question, most of which were positive. Two suggested that as (i) the mechanism, interalia, does not give the company the opportunity to invest in its own shares, and (ii) treasury shares can be "carried forward" to future periods and resold whereas cancelled shares cannot be reissued after the relevant general mandates have expired, it does not constitute a workable alternative to treasury shares.
Two others suggested the proposed mechanism should be relaxed further such that companies should be allowed to repurchase and reissue, as freely as possible - and specifically free of the restrictions in Listing Rule 10.06(2)(a) (subject, however, to maintaining the minimum public float) and Takeovers Code Rule 32 and 33 - a pre-approved block of shares. Two further responses also suggested that it may be appropriate to consider pre-approval of listing for a block of unissued new shares (i.e without reference to previous repurchases).
3.28 Do you believe there are matters unrelated to the granting of listing which may make this proposal unattractive or unworkable? (6.2)
Eight responses dealt with this matter. Two reiterated the preference for treasury shares, believing that it would simply be more cumbersome to conduct new issues of shares on market unless done in block. Two responses more specifically suggested the physical process of issuing the shares, issuing certificates and/or depositing them in CCASS (all within the T+2 settlement period) may in practice restrict the speed of reissue. Two responses suggested that the requirements under the Takeovers Code and SDI Ordinance should also be reviewed in the light of the proposals.
3.29 Do you believe that the restriction contained in Rule 10.06(3) should be modified, and if so, to what extent? (6.3)
Eleven responses were received, of which nine proposed no change to Rule 10.06(3) (except for one which suggested exempting issues of scrip dividends, in line with the Note to Rule 9 of Share Repurchase Code). Two suggested the period should be shortened from 30 to 14 days.
3.30 Do you believe that such arrangements are appropriate and/or adequate? (6.4)
Eleven responses address this question, eight of which consider that the measures are appropriate and adequate for Hong Kong. The remaining three are generally in support, but express a desire for treasury shares as well, or consider the proposal has merit but should be examined further. One response suggests providing for (i) automatic, deemed approval for "reissued shares", such approval to be in effect until the next AGM (with similar notice/reporting requirements) and (ii) withdrawal of listing approval for unissued shares in the event of abuse of relevant rules. Another suggestion is to permit the rapid issue of new shares, including those which have not previously been repurchased (for, say, 5-10% of the directors' general mandate).
3.31 The SFC does not see any need for any additional authority from shareholders before the directors issue shares within the block listing approval, but would welcome the public's views in this respect. (6.6)
Eleven responses were received on this issue, all of which agreed that no additional shareholder approval should be required. One consultee suggested that the Explanatory Statement to shareholders for renewal of a repurchase mandate should specify whether the company proposed to apply to the Hong Kong Stock Exchange for the block listing approval.
3.32 Should Note 1 to Rule 33 apply so as to remove any need for disclosure of any disposal of voting rights resulting from an issue of shares by the company? Do you consider that the disclosure arrangements described in this paragraph are suitable? Assuming that the connected transaction provisions of the Listing Rules will continue to apply to as at present, should there nevertheless be any restriction on the persons to whom shares are issued? (6.7)
Eleven responses were received on this issue, all of which accepted the logic of extending Note 1 to cover issues of shares. However, although those responses favoured simply exempting a disclosure by shareholders in such circumstances, two believed disclosure should still be required and that the company should notify its substantial shareholders of any repurchase/issue of shares and even possibly make any necessary filing on their behalf. However, it was acknowledged that this would not help shareholders who rise across the 10% threshold as a result of a repurchase of shares. One response noted that the SDI forms are deficient in only accommodating a reference to number of shares held, since that detail would commonly remain unchanged during a repurchase or reissue of shares by the company while affecting the percentage that such shares represent of the total issued capital. Two responses suggest substantial shareholders should be given an extra day to comply with the disclosure requirements under Rule 33.
Eight responses dealt with the question of possible restrictions on the identity of persons to whom shares could be issued. While one suggested that issues to connected persons should be prohibited, the other seven thought that they should be permitted provided the connected transactions rules were complied with.
3.33 Should a listing document be required when shares are issued pursuant to the block listing approval? If so, what minimum information should it contain? How and when should any such information be disseminated to the potential allottees of new shares and to the public? (6.8)
Again eleven responses dealt with this matter. All believed that requiring publication of a listing document would defeat the advantages of the proposal. A similarity was drawn with placings where no document is currently required (two responses expressed this as maintaining the present documentary requirements relating to new issues, which are driven primarily by whether such issues constitute a private placing or an issue to the public).
3.34 Do you agree that the matters discussed in paragraphs 5.20 and 5.21 are relevant also in the context of the expedited reissue of shares? Do you believe any other areas (whether or not discussed in relation to treasury shares) may be of concern? (6.9)
Eleven responses dealt with this. All accepted that the matters raised in paragraphs 5.20 ( restrictions on issues at price sensitive times ) and 5.21 ( restriction on announcing new issue for 30 days after repurchase ) should also apply to reissues of shares. Three responses went further. Two suggested that the issue of any shares (rather than just "reissued" shares) during the specified periods should be restricted. One of these responses suggested that all issues of shares to connected persons should be prohibited from the fiscal year end to the date of the preliminary announcement. Again, a reference was made to considering relaxing these requirements on any issue of shares pursuant to a scrip dividend proposal. |
