Chapter 7

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Question:

Six months ago, Listco conducted a rights issue of one rights share for every existing share (the "Previous Rights Issue"). It now proposes another rights issue of one rights share for every two existing shares.

Listco had obtained independent shareholders' approval for the Previous Rights Issue according to Rules 7.19A(1) and 7.27A. Does it need to seek independent shareholders' approval for the proposed rights issue?

Answer:

Yes. This is because the proposed rights issue would increase Listco's issued share capital by more than 50% when aggregated with the Previous Rights Issue.

FAQ Series 20, FAQ No. 27
LR reference: Main Board Rules 7.19A(1) / GEM Rules 10.29
Released on 28/2/2013 (Rule references updated in July 2018)

Question:

Company A has 100 shares in issue, trading at HK$1.0 for the past five trading days. It proposes to issue 50 new shares at HK$0.75 through a rights issue (i.e. a 1-for-2 rights issue issued at a 25% discount to market price).

(a)    What is the theoretical dilution effect of this rights issue?
 
(b)    If Company A decides to issue the offer shares at a premium over the market price, what is the theoretical dilution effect of this rights issue?
 

Answer:

(a)    Please see Attachment.
 
(b)    Where the offer price is at a premium over the market price, the theoretical dilution effect as computed under Rule 7.27B would produce a positive figure, i.e. there is no value dilution to non-participating shareholders.
 

FAQ Series N/A, FAQ No. 024-2018
LR reference: Main Board Rules 7.27B / GEM Rules 10.44A
Released on 04/05/2018 (Updated on 03/07/2018)

Question:

Company B proposes a placing of convertible bonds (or warrants) under specific mandate.

How should Company B compute the theoretical dilution effect of the proposed placing?

Answer:

The theoretical dilution effect of the placing of convertible bonds (or warrants) should be computed on an as-converted basis, i.e. applying the initial conversion price (or the sum of the initial placing price and the exercise price) and the corresponding number of conversion shares (or subscription shares) for the computation.

FAQ Series N/A, FAQ No. 025-2018
LR reference: Main Board Rules 7.27B / GEM Rules 10.44A
Released on 04/05/2018

Question:

Company C conducted an open offer under the authority of an existing general mandate 6 months ago. It further proposes to conduct a specific mandate placing with theoretical dilution effect of 24%.

(a)    Is Company C required to aggregate the previous open offer and the proposed specific mandate placing?
 
(b)    How should Company C compute the cumulative theoretical dilution effect?
 

Answer:

(a)    Yes. All open offers are subject to the aggregation requirements under Rule 7.27B. This is notwithstanding the authority upon which the offer shares are issued.
 
(b)    Please see Attachment.
 

The cumulative value dilution can be calculated by the following formula:

Sh = Number of issued shares immediately before the 1st offer or placing
C1 = Number of shares to be issued in the 1st offer or placing
C2 = Number of shares to be issued in the 2nd offer or placing
Cn = Number of shares to be issued in the nth offer or placing
Y1 = Price discount of the 1st offer or placing
Y2 = Price discount of the 2nd offer or placing
Yn = Price discount of the nth offer or placing

FAQ Series N/A, FAQ No. 026-2018
LR reference: Main Board Rules 7.27B / GEM Rules 10.44A
Released on 04/05/2018 (Updated on 03/07/2018)

Question:

Company D conducted a rights issue that is not underwritten and the rights issue was undersubscribed.

For the purpose of computing cumulative dilution effect for the next capital raising by Company D, should it use the maximum number of shares issuable or the actual number of shares issued under the previous rights issue?

Answer:

Company D should use the actual number of shares issued under the previous rights issue for the purpose of computing cumulative dilution effect.

FAQ Series N/A, FAQ No. 027-2018
LR reference: Main Board Rules 7.27B / GEM Rules 10.44A
Released on 04/05/2018

Question:

Will there be any change in what is meant in the Rules by "fully paid" and "partly paid" shares for Hong Kong-incorporated issuers after the New Companies Ordinance becomes effective?

Answer:

Yes. When the New Companies Ordinance becomes effective, "fully paid" will mean that the shareholder to whom shares are issued has paid the full consideration which was agreed to be paid for those shares, i.e., the issue price (and not that the shareholder has paid the full nominal value of those shares, as is the case under the existing Companies Ordinance). "Partly paid" will mean that the full issue price has not been paid.

FAQ Series 26, FAQ No. 7
LR reference: Main Board Rules 7.28, 8.11, 8.13, 10.06 (1)(a)(i); App 1A (paras 15(2)(d), 23(1) and 26); App 1B (paras 22(1) and 24); App 1C (para 34); App 1E (paras 23(1), 26 and 49(2)(d)); App 1F (paras 18(1) and 20); App 2A (para 4(3)); App 5 Forms / GEM Rules 10.45, 11.25, 11.27, 13.07(1); App 1A (paras 23(1) and 26); App 1B (paras 22(1) and 24); App 1C (para 34); App 2A (para 4(3)); App 5 Forms
Released on 21/2/2014 (Updated on 01/01/2022)

Question:

Are there new PRC requirements for Eligible SEHK Issuers and Other Connect Issuers to offer or distribute securities to Southbound Shareholders in the above corporate actions?

Answer:

(a) Rights issues and open offers

Yes. The China Securities and Regulatory Commission (CSRC) has issued the Announcement [2016] No. 21 "Filing Requirements for Hong Kong Listed Issuers Making Rights Issues to Mainland Shareholders through Mainland-Hong Kong Stock Connect". The document sets out the requirements for Eligible SEHK Issuers and Other Connect Issuers offering securities to their Southbound Shareholders in rights issues / open offers (see also question 3 below).

Issuers should also note that under Shanghai and Shenzhen Connect, China Securities Depository and Clearing Corporation Limited (ChinaClear) will provide nominee services for Southbound Shareholders to (i) sell their nil-paid rights on SEHK; and/or (ii) subscribe for their entitlement securities under the rights issues / open offers in accordance with relevant laws and regulations. However, it will not support excess applications by Southbound Shareholders through Shanghai and Shenzhen Connect1.

Note 1: See Article 23 of ChinaClear's Implementing Rules for Registration, Depository and Clearing Services under Mainland-Hong Kong Stock Connect (ChinaClear Stock Connect Implementing Rules) 中國證券登記結算有限責任公司《內地與香港股票市場交易互聯互通機制登記、存管、結算業務實施細則》
(b) Bonus issues, scrip dividend schemes and distributions in specie

No rules or guidance has been published by the CSRC.

FAQ Series 29, FAQ No. 2
LR reference: Main Board Rules Chapter 7, 13.36(2)(a) Note 1
Released on 14/11/2014 (Updated on 13/07/2018)

Attachment

The cumulative value dilution is calculated by reference to (i) the aggregate number of shares issued during the 12-month period, compared to the number of issued shares immediately prior to the first offer or placing; and (ii) the weighted average of the price discounts (each price discount is measured against the market price of shares at the time of the offer).

Company A conducted the following capital raisings:

(i)    a 1-for-2 rights issue with offer price at a price discount of 25%;
 
(ii)    a 1-for-1 rights issue with offer price at a price discount of 40%; and
 
(iii)    a specific mandate placing of 50% of existing issued shares at a price discount of 70%.
 
  Rights issue
August 2018
Rights issue
November 2018
Placing
March
2019
Theoretical value dilution of each pre-emptive offer / placing
No. of issued shares before capital raising A 100 150 300
Issue size B 50% 100% 50%
Number of offer/placing shares to be issued
(= A x B)
C 50 150 150
         
Benchmarked price X HK$1.0 HK$0.92 HK$0.73
Price discount Y 25% 40% 70%
Offer / placing price (= X x (1- Y)) Z HK$0.75 HK$0.55 HK$0.22
         
Shareholding value before rights issue / placing
= A x X
J HK$100.00 HK$137.50 HK$220.00
Subscription amount
= C x Z
K HK$37.50 HK$82.50 HK$33.00
No. of enlarged issued shares
= A + C
L 150 300 450
         
Theoretical ex-price
= (J + K) / L
TEP HK$0.92 HK$0.73 HK$0.56
Theoretical value dilution (TD)
= (TEP - X) / X
TD -8.3% -20.0% -23.3%

 

 

  Rights issue
August 2018
Rights issue
November 2018
Placing
March
2019
Cumulative theoretical value dilution
Share in issue immediately before 12-month period Sh 100 100 100
Benchmarked price immediately before 12-month period Pr HK$1.00 HK$1.00 HK$1.00
         
Number of offer/placing shares to be issued C 50 150 150
Aggregated number of offer/placing shares (i.e. Sum of C) D 50 200 350
         
Price discount Y 25% 40% 70%
Average price discount (i.e. weighted average of Y by reference to C) R 25% 36% 51%
         
Shareholding value before 1st rights issue
= Sh x Pr
M HK$100.00 HK$100.00 HK$100.00
Cumulative subscription amount
= D x [Pr x (1 - R)]
N HK$37.50 HK$128.00 HK$171.50
No. of enlarged issued shares L 150 300 450
         
Cumulative theoretical ex-price
= (M + N) / L
CTEP HK$0.92 HK$0.76 HK$0.60
Cumulative theoretical value dilution
= (CTEP - Pr) / Pr
CTD -8.3% -24.3% -39.7%

 

 

 

The cumulative value dilution can also be calculated by the following formula:

 

Sh = Number of issued shares immediately before the 1st offer or placing
C1 = Number of shares to be issued in the 1st offer or placing
C2 = Number of shares to be issued in the 2nd offer or placing
Cn = Number of shares to be issued in the nth offer or placing
Y1 = Price discount of the 1st offer or placing
Y2 = Price discount of the 2nd offer or placing
Yn = Price discount of the nth offer or placing