3 Aug 2022

HKEX INFORMATION PAPER – RULE AMENDMENTS ON BOOKBUILDING AND PLACING ACTIVITIES IN EQUITY CAPITAL MARKET TRANSACTIONS AND SPONSOR COUPLING

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Background

We note that the Stock Exchange of Hong Kong (the “Exchange”) published an information paper (the “Information Paper”) back in April 2022 outlining the amendments to the Rules Governing the Listing of Securities on the Exchange (the “Rule Amendments”) to complement the Securities and Futures Commission’s (the “SFC”) new Code of Conduct1 provisions on the conduct of issuers and intermediaries involved in book building and placing activities. As such, this article serves as an apt refresher of the rule amendments involved. The capitalised terms used herein shall have the same meaning as defined in the Information Paper.

The Rule Amendments apply to:

(a) a placing of Equity Interests2 to be listed on the Exchange, including:

  • (i) a placing in connection with a New Listing3 (whether by way of a primary listing or secondary listing); and
  • (ii) a placing of Equity Interests of a class new to listing or new Equity Interests of a class already listed under a general or specific mandate; and

(b) a placing of listed Equity Interests by an existing holder of Equity Interests if it is accompanied by a top-up subscription by the existing holder of Equity Interests for new Equity Interests in the issuer.

Key Rule Amendments

Requirements to enter into a written agreement for the appointment of any capital market intermediary (“CMI”)4 , including an overall coordinator Rule Amendments
Appointment by written agreement

  • Appointment of a capital market intermediary (or an overall coordinator) must be made under a written agreement before it conducts any specified activities.
  • The written engagement should at least specify:-
    • the roles and responsibilities of the CMI or overall coordinator;
    • the fee arrangements;
    • the time schedule for payment of their fees;
    • (for a sponsor-overall coordinator only) the obligation of the new applicant and its directors to provide the information in Rule 9.11(23a) (or GEM Rule 12.23AA) to the sponsor-overall coordinator for its submission to the Exchange within the required timeframe; and
    • (for placing in connection with a new listing) the obligations of the new applicant and its directors to provide assistance to the syndicate CMI / overall coordinator.
 Rules 3A.33, 3A.34, 3A.35 and 3A.36 (GEM Rules 6A.40, 6A.41, 6A.42 and 6A.43)

Appointment of overall coordinator(s) in a placing that involves bookbuilding activities Rule Amendments
For IPO

  • An overall coordinator should be appointed at an early stage in an IPO that involves a placing.
  • For an IPO, an appointment must be made no later than two weeks following the submission (or re-filing) of the listing application and before an overall coordinator conducts any specified activities.

For other types of placing involving bookbuilding activities

  • For other types of placing involving bookbuilding activities that take place subsequent to an IPO, a listed issuer shall appoint any overall coordinator(s) under a written agreement before it conducts any specified activities.
 Rule 3A.37 (GEM Rule 6A.44)
Overall coordinator’s declaration

  • The overall coordinator(s) must provide a declaration in respect of the issuer’s compliance with Listing Rules relating to placing and allocations.
  • In the same declaration, the overall coordinator(s) must confirm that bookbuilding was carried out to assess demand and that the placing was conducted in compliance with the Placing Guidelines5 .
 Rules 3A.40, 9.11(36) and Appendix 5E to the Listing Rules (GEM Rule 12.26(8) and Appendix 7I)

Appointment of at least one sponsor-overall coordinator in Main Board IPOs Rule Amendments
Sponsor-coupling

  • At least one overall coordinator must be the same legal entity as, or a member within its group of companies of, the independent sponsor.
  • The Main Board applicant must ensure that the appointment of both (overall coordinator and sponsor) is made at the same time and at least two months before the submission (or re-filing) of the listing application.
 Rules 3A.02 (Note) and 3A.43 (Not applicable to GEM new applicants)
  • At least one “sponsor-overall coordinator” must remain appointed throughout the listing process. In the case of termination of the engagement of the sole sponsor-overall coordinator, the new applicant must file a new listing application not less than two months from the date of formal appointment of a replacement “sponsor-overall coordinator”.
 Rule 3A.45 (Not applicable to GEM new applicants).

Associated obligations of issuers and their directors Rule Amendments
Investor assessment

  • For the purpose of an IPO, the overall coordinator should advise the applicant to provide all syndicate capital market intermediaries with a list of the directors and existing shareholders of the new applicant, their respective close associates and any nominees engaged by any of the foregoing persons for the subscription or purchase of Equity Interests.
  • • This should be provided in the new applicant’s written engagement with each syndicate member, and as soon as practicable (in any event, at least four clear business days before the date of the new applicant’s Listing Committee hearing).
 Rule 3A.46 (GEM Rule 6A.48)
Placing and allocation

  • Notwithstanding that an issuer is ultimately responsible for making pricing and allocation decisions, the overall coordinator is responsible for explaining to the issuer any potential concerns if, in the case of a share offering, the issuer’s decision may potentially lead to a lack of open market, an inadequate spread of shareholders or may negatively affect the orderly and fair trading of such Equity Interests in the secondary market.
  • In general, an issuer (whether a new applicant or not) is expected to make such decisions in line with the advice, recommendations and guidance provided by the overall coordinator(s). An issuer should document the rationale behind its decision on pricing and allocation, in particular, where the decision is contrary to the advice, recommendations and guidance provided by the overall coordinator(s).
  • The overall coordinator should inform the SFC and the Exchange if any decision made by the issuer amounts to non-compliance with the Listing Rules.
 Paragraph 19 of Appendix 6 (GEM Rule 10.16B)
Bar on investor rebate

  • Each new applicant must confirm that the consideration payable by each placee for the Equity Interests subscribed in an IPO equals the final offer price determined by the issuer (plus any brokerage, FRC transaction levy, SFC transaction levy and trading fee payable).
  • It also should confirm that no rebate has been provided by it, its controlling shareholder(s) and directors and the syndicate members to any placees or the public (as the case may be), in the announcement of the final offer price and the allotment results of the IPO.
 Note 2 to Rule 12.08 (Note 3 to GEM Rule 16.13)
  • All overall coordinators, any other syndicate members and any other distributors involved in the IPO must certify in writing to the Exchange that the consideration payable by each placee for the Equity Interests subscribed in an IPO equals the final offer price determined by the issuer (plus any brokerage, FRC transaction levy, SFC transaction levy and trading fee payable).
 Form D in Appendix 5 to the Listing Rules (Form D in Appendix 5 to the GEM Listing Rules)

Transitional arrangements and effective date

The Rule Amendments will apply to listed issuers and new applicants which submit (or re-file) their listing applications on or after 5 August 2022 in respect of their proposed offerings. Main Board new applicants are reminded to observe the transitional arrangements to avoid any delay in their listing timetable.

New applicants who have submitted a listing application prior to 5 August 2022 will not be required to comply with the new requirements in the Rule Amendments before such application lapses, is withdrawn or is otherwise terminated, even if their bookbuilding, placing or allocation activities conducted in connection with their proposed offerings take place on or after 5 August 2022.

Analysis and Takeaways

As hinted in our previous news update on the relevant SFC’s new Code of Conduct proposal, the implementation of the proposal for bookbuilding code and sponsor coupling may possibly lead to a change in the executory structure of IPO deals and bring the interest of the sponsor and overall coordinator into better alignment.

The complementary and consequential Rule Amendments proposed by the Stock Exchange will allow advisers to comply with this change in structure in a more holistic manner and a clearer fashion by providing the Listing Rules based instructions to all parties involved.

Please contact our Partner Mr. Rodney Teoh and Associate Ms. Angela Lau for any enquiries or further information.

This news update is for information purposes only. Its content does not constitute legal advice and should not be treated as such. Stevenson, Wong & Co. will not be liable to you in respect of any special, indirect or consequential loss or damage arising from or in connection with any decision made, action or inaction taken in reliance on the information set out herein.

1 The Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission.
2 equity securities, interests in a REIT, stapled securities and securities of an investment company (as defined in Rule 21.01)
3 has the meaning in Rule 1.01 (GEM Rule 1.01) in the Rule Amendments, that is, a new listing of Equity Interests issued by a new applicant, irrespective of whether there is an offering of Equity Interests. For the avoidance of doubt, “New Listing” includes a reverse takeover of a listed issuer which is a deemed new listing under Rule 14.54 (GEM Rule 19.54) and a transfer of listing of Equity Interests from GEM to Main Board under Chapter 9A of the Listing Rules, but does not include any other new listing of Equity Interests issued by an issuer whose Equity Interests are already listed on a stock market operated by the Exchange.
4 has the meaning in Rule 1.01 (GEM Rule 1.01) in the Rule Amendments, that is, any corporation or authorised financial institution, licensed or registered under the SFO that engages in specified activities under paragraph 21.1.1 of the Code of Conduct, including, without limitation, a capital market intermediary appointed pursuant to Rule 3A.33 (GEM Rule 6A.40) in the Rule Amendments. An overall coordinator is also a capital market intermediary.
5 Appendix 6 to the Listing Rules (GEM Rules 10.12 to 10.16B).

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