The New Market Value-Based Thresholds

Under the New Public Float Requirements, issuers are required to comply with one of the ongoing public float thresholds below at all times.

Bespoke Rules for PRC Issuers with Other Listed Shares 

Under Main Board Rule 19A.28B (GEM Rules 25.21B), PRC issuers with shares listed on another exchange (such as A+H issuers) are subject to a bespoke requirement. Their H-share public float must satisfy one of the following:

(a)  constitute at least 5% of the total number of issued shares in the class to which H shares belong; or

(b)   have a market value of at least HK$1 billion.

Additional Reporting & Disclosure

All issuers now face increased disclosure duties under Main Board Rules 13.32D and 19A.28D (GEM Rules 17.37D and 25.21D) which are summarised below.

Disclosures concerning public float must be founded upon information that is publicly accessible or, alternatively, within the knowledge of the issuer’s directors or supervisors (in the case of a PRC issuer).  For this purpose, the Exchange does not expect issuers to exhaust all possible means to ascertain the underlying shareholders, for example, an issuer is not expected to conduct an investigation under section 329 of the Securities and Futures Ordinance (“SFO”) (see paragraph 10 of Guidance Letter (HKEX-GL121-26) (“Guidance Letter”)). 

However, an issuer must make reasonable efforts to determine its public float for the purpose of the disclosure. For example, an issuer is expected to: 

(a)  incorporate the information reported in filings made under Part XV of the SFO; and

(b) put in place necessary internal control procedures to ensure that its core connected persons (and other persons who are not considered “the public”) are aware of the requirement, and will promptly inform the issuer of their initial shareholdings and any subsequent changes in their shareholdings.

The issuer should incorporate information received under such procedures with any other non-public shareholding that has not been disclosed in public filings (e.g. in situations where the relationship of the shareholder with the issuer does not trigger filing requirement) but is known to directors or supervisors (in the case of a PRC issuer).  This may include, for example, connected persons at subsidiary level holding less than 5% of the shares of the listed issuer.

Annual Reports

Main Board Rules 13.32D(2)(c)(iii)(1) and 19A.28D(2)(c)(iii)(1) (GEM Rules 17.37D(2)(c)(iii)(1) and 25.21D(2)(c)(iii)(1)) require an issuer to set out, in each of its annual reports, a statement showing the composition of ownership of the relevant class of shares listed on the Exchange as at the end of the relevant financial year.

Share Ownership Composition

Summarised below, as a minimum, is a breakdown categorising shareholders as “public” or “non-public”.

Note: The disclosure should indicate the name of each shareholder and the nature of its relationship with the issuer.

Share Capital Structure

Main Board Rules 13.32D(2)(c)(iii)(2) and 19A.28D(2)(c)(iii)(2) (GEM Rules 17.37D(2)(c)(iii)(2) and 25.21D(2)(c)(iii)(2)) require an issuer to set out, in each of its annual reports, a statement showing its share capital structure as at the end of the relevant financial year. This statement must detail all types/classes of securities, including their percentage of total shares, ranking, and any special voting rights.

Identification and Consequences of Significant Public Float Shortfall

A public float shortfall is considered as a “Significant Public Float Shortfall” under the Listing Rules unless a portion of the issuer’s class of shares listed on the Exchange and held by the public: 

(a)  represents at least 15% of the issuer’s total number of issued shares in the class of shares listed (excluding treasury shares) (or for an issuer subject to a minimum public float percentage lower than 25% at the time of its initial listing, represents at least 50% of the issuer’s Initial Prescribed Threshold); or 

(b)  has a market value of at least HK$500 million and represents at least 5% of the issuer’s total number of issued shares in the class of shares listed (excluding treasury shares).

In the case of a PRC issuer with other listed shares, a public float shortfall is considered as a Significant Public Float Shortfall under the Listing Rules unless its H shares listed on the Exchange and held by the public: 

(a)   have a market value of at least HK$500 million; or 

(b)  represent at least 5% of the PRC issuer’s total number of issued shares in the class to which H shares belong (excluding treasury shares).

An issuer must, upon becoming aware of a Significant Public Float Shortfall: (a) issue an initial announcement; and (b) until it has restored its public float, include a warning statement in all announcements and documents required to be published by the Listing Rules.

The Exchange will identify issuers with a Significant Public Float Shortfall based on the market capitalization and percentage of their public float. Trading in such shares will not be suspended immediately, but a marker “-PF” will be added after the stock name. If the issuer fails to restore its public float within a remedial period of 18 months (12 months for GEM), the Exchange will cancel the listing of the shares of such issuer.

Issuers should therefore conduct proactive modeling and scenario planning and take at least the following actions:

(a)  continuously monitor the company’s position against the Significant Public Float Shortfall safety nets (e.g., 15% or HK$500 million + 5%) to avoid accidentally triggering the severe “-PF” regime; and

(b)  before any share buyback, placement, or takeover, rigorously model the impact on both main threshold and the Significant Public Float Shortfall safe harbour levels.

Mandatory Actions Upon a Public Float Shortfall

Under Main Board Rules 13.32E(1)(b) and 19A.28E(1)(b) (GEM Rules 17.37E(1)(b) and 25.21E(1)(b)), an issuer must publish an announcement to inform the public within one business day after it becomes aware that it has a public float shortfall.

Main Board Rules 13.32E(2)(b), 13.32E(3), 19A.28E(2)(b) and 19A.28E(3) (GEM Rules 17.37E(2)(b),17.37E(3), 25.21E(2)(b) and 25.21E(3)) set out that for as long as a public float shortfall exists, the issuer itself, its directors, supervisors (for PRC issuers), and their close associates must not take any action that will further lower the issuer’s public float percentage, unless in exceptional circumstances. 

This ordinarily means that directors should not, and should procure that their close associates should not, further increase their shareholding in the issuer.  The Exchange has the power to impose sanctions on any director or other person if they are found to have caused by action or omission, or knowingly participated in, a contravention of the Listing Rules, e.g. a breach of the public float requirements.

Paragraph 26 of the Guidance Letter explains some of the “exceptional circumstances” to include the following:

(a) the issuer subsequently seeking privatisation (e.g. by repurchasing shares through the making of a general offer);  

(b)   compliance with court orders or regulatory enforcement actions; and

(c)  the temporary holding of shares pursuant to a pre-existing arrangement, followed immediately by disposal as part of a transaction to restore a public float shortfall. 

Conclusion

The New Public Float Requirements are introduced to address the increasingly different circumstances of existing and new issuers listed on the Exchange and allow flexibility for issuers to comply with the public float requirements as the Exchange welcomes more new listings.

For further information, please feel free to contact the authors of this newsletter or your usual contact at CFN Lawyers LLP for assistance.

Authors