Rights issue and open offer in Hong Kong
Conceptual Differences between a Rights Issue and an Open Offer
- An offer by way of rights to existing holders of securities which enables those holders to subscribe securities in proportion to their existing holdings (MB Rule 7.18).
- Rights issues are normally required to be conveyed by renounceable provisional letters of allotment or other negotiable instrument (MB Rule 7.20).
- The rights offered to an existing shareholder are normally traded as separate temporary securities from the parent share, commonly referred to as nil paid rights (NPR).
- An offer to existing holders of securities to subscribe securities, whether or not in proportion to their existing holdings, which are not allotted to them on renounceable documents (MB Rule 7.23).
- The rights offered to an existing shareholder under an open offer cannot be traded on the open market.
- Shareholders can either take up and exercise the rights to purchase new shares at the offer price, or allow the rights to lapse upon expiration.
Practical Differences between a Rights Issue and an Open Offer
Example of a rights issue
- X owns 1,000 shares in Company A with each share trading at HK$2 on the stock exchange.
- Company A currently:
- has 1,000,000 shares in circulation (i.e. with market capitalisation of HK$2,000,000);
- needs to raise HK$375,000 (before expenses); and
- proposes to issue 250,000 new ordinary shares
- Existing shareholders are offered the right to purchase 1 new share in Company A for every 4 shares they currently hold (ie a 1:4 Rights Issue).
- The new shares are offered to the existing shareholders at a discounted price of HK$1.5 (HK$375,000 / 250,000).
- The share price adjusts proportionately:
- Price before the rights issue is HK$2 per share.
- Typically, when a company makes a rights issue one can expect the market value of the shares to fall as they are increasing the number of shares in circulation.
- Initial shares in circulation = 1,000,000 shares @ HK$2 = HK$2,000,000
- After rights issue = (1,000,000 x HK$2) + (250,000 x HK$1.5) = HK$2,375,000 / number of shares in issue.
- Theoretical ex-rights price per share = £2,375,000/1,250.000 = HK$1.9
Options for existing shareholders in a rights issue
Accept in full or in part
- By exercising in full all the rights entitlements offered under the rights issue, the shareholder can maintain his proportionate ownership in the company with the enlarged share capital without experiencing shareholding dilution.
- In the case of a discounted rights issue, the stock market will, on the Ex-Date, price into the share price the effect of shareholding dilution as a result of the new additional shares issued.
- Once the shares are traded on ex-rights basis, the share price will drop to the theoretical ex-rights price (i.e. HK$1.9 in the example).
- However, this loss as a result of a fall in market share price is offset by the gain made when Mr. X subscribed the new shares at HK$1.5, a 25% discount to the market price of HK$2 per share trading on cum-rights basis.
Decline the offer, allowing the NPR to lapse upon expiration
- By allowing the rights entitlements to lapse upon expiration, the shareholder’s stake in the company will be diluted together with a reduction in the value of his shareholdings following the conclusion of the rights issue.
Renounce and trade the NPR
- The shareholder’s stake in the company will be diluted.
- However, the shareholder can gain by selling his rights entitlements away in the open market to compensate for the fall in value of his shareholdings.
Estimated value of NPR
= Theoretical ex-rights price – new shares offer price
= HK$1.9 – HK$1.5
= HK$0.4 per rights entitlement
- From the company’s perspective, open offers may be cheaper as shares are usually offered at a finer discount than on a rights issue.
- From the shareholders’ perspective, open offers do not allow them to gain from the tradable NPR in case they do not wish to subscribe for the new shares.
- Where companies seek to raise a substantial amount through an equity issue, they are more likely to use a rights issue than an open offer due to greater investor familiarity with rights issues and the greater flexibility they offer shareholders.
Procedural Differences between a Rights Issue and an Open Offer in Hong Kong
|Hong Kong Rights Issue||Hong Kong Open Offer|
Publication of a prospectus which:
Same as rights issue (see Main Board Rules 11.09(2)).
Normally fully underwritten unless the prior consent of the HKEx to do otherwise has been obtained
Same as rights issue except that there is no additional disclosure requirement in case underwriting could be terminated on occurrence of force majeure events after dealings of rights in nil-paid form has commenced (see Main Board Rules 7.24(1), 7.24(2), 7.24(3) & 7.24(4)).
Where the issued share capital or market capitalisation will increase by more than 50% (taking into account rights issues & open offers announced (i) in the previous 12 months or (ii) earlier where dealing in shares issued commenced in the previous 12 months)
There are additional applicable Hong Kong Listing Rules requirements which include:
Same as rights issue (see Main Board Rules 7.24(5), 7.24(8))
Provisional letters of allotment
Renounceable provisional letters of allotment, letter of rights or other negotiable instrument for all shareholders:
By reason of the nature of open offers, this requirement is not applicable.
Shares in excess
An issuer can make arrangements to dispose of rights shares not taken up by present shareholders – this can be done either by:
An issuer can make arrangements to dispose of shares not applied for by allowing applications for excess shares (these must be available for subscription by all shareholders and allocated on a fair basis).
(see Main Board Rule 7.26(A)).
Offers of excess shares and the basis of allocation must be disclosed in the open offer announcement, listing document and any circular.
Hong Kong Listing Rules do not provide for issuers to sell the excess shares in the market for the benefit of the persons to whom the open offer was made.
Independent shareholders’ approval is required if no arrangements or arrangements other than those described above are made for disposal of shares not taken up if the open offer is underwritten or sub/underwritten by a director, chief executive or substantial shareholder (or their associates).
General rule under Main Board Rule 13.36 is that a pro rata rights issue does not require shareholders’ approval.
Main Board Rule 13.36(2)(a) allows issuers to exclude shareholders resident outside Hong Kong from the rights issue where:
Usually, a legal opinion from overseas counsel in relevant jurisdictions is required for the directors to form such a view and pass resolutions accordingly approving the exclusion of certain overseas shareholders.
If overseas shareholders are excluded under MB Rule 13.36(2)(a), an explanation for the exclusion must be included in the relevant circular or document containing the offer. Issuers should also deliver the circular or offer document to excluded shareholders for information, subject to compliance with local laws and regulations.
If an issuer has shareholders in a large number of overseas jurisdictions, it may not be practical to obtain legal opinions from all relevant jurisdictions. Shareholders’ approval will be required if the issuer will exclude overseas shareholders without obtaining legal opinions for all relevant jurisdictions.
|Same as rights issue.|
The offer period during which the rights shares may be accepted must be at least 10 business days.
Where an issuer proposes an offer period of more than 15 business days, e.g. where there are a large number of overseas shareholders, the Exchange must be consulted.
(Main Board Rule 7.20)
|Same as rights issue (see Main Board Rule 7.25).|
|Closure of books||
An issuer must announce any closure of its transfer books or register of members in respect of securities listed in Hong Kong at least 6 business days before the closure of books.
(Main Board Rule 13.66(1))
|An issuer must announce any closure of its transfer books or register of members in respect of securities listed in Hong Kong at least 10 business days before the closure of books. (Main Board Rule 13.66(1))|
Last day for trading in the securities with entitlements
An issuer must ensure that the last day for trading in the securities with entitlements falls at least 1 business day after the general meeting, if the entitlements require the approval of shareholders in the general meeting or are contingent on a transaction that is subject to the approval of shareholders in the general meeting.
In addition, for a rights issue, the issuer must provide at least 2 trading days for trading in the securities with entitlements (i.e. before the ex-date) after publication of the book closure.
|Same as rights issue save that there is no requirement for 2 trading days for trading in the securities with entitlements after publication of the book closure (see Main Board Rule 13.66).|
General rule under Main Board Rule 13.36 is that a pro rata rights issue does not require shareholders’ approval.
As stated above, shareholders’ approval will be required if:
Same as rights issue.
However, where an open offer is made to existing shareholders not in proportion to their existing shareholdings, shareholders’ approval in general meeting will be required unless the issuer will issue the offer shares under a general mandate in accordance with Main Board rule 13.36(2).
The general mandate cannot exceed 20% of the issued share capital of the issuer at the date of the general mandate.
The shareholders can also separately authorise the issuer to issue shares equivalent to the number of shares repurchased since the date of the general mandate (up to a maximum number equivalent to 10% of the existing issued share capital)
- The Hong Kong Listing Rules generally require shareholders’ prior approval in general meeting for any allotment, issue or grant by an issuer of shares, securities convertible into shares or options, warrants or similar rights to subscribe for shares or such convertible securities (MB Rule 13.36(1)(a))
- Shareholders’ approval is not generally required where the offer is made to all shareholders pro rata to their existing shareholdings (MB Rule 13.36(2)(a))
- Shareholders’ approval is not required where the issuer’s shareholders have by ordinary resolution in general meeting given a general mandate to the issuer’s directors to allot or issue such securities (or grant options or warrants to subscribe for such securities) (MB Rule 13.36(2)(b))
- A general mandate is normally approved at the AGM and remains valid until the next AGM unless varied or revoked by ordinary resolution in general meeting.
- Shares cannot be issued to connected persons under a general mandate unless the connected transaction requirements under Chapter 14A are complied with.
- In the case of rights issues and open offers made pro rata to existing shareholders (which would not require reliance on a general mandate), securities issued to connected persons pro rata in their capacity as shareholders are exempt from the connected transaction requirements (MB Rule 14A.31(3)(a)).
Hong Kong Rights Issue Timetable (assuming no general meeting for shareholders’ approval)
|Publication of the rights issue announcement (including timetable) on Exchange news website||At least six business days (i.e. five clear business days) before the book closure||Day 1 (Monday)|
|Last day of dealings in securities on cum-rights basis||The business day immediately before the ex-date.||Day 4 (Thursday)|
|Ex-date (the first day of dealings in securities on ex-rights basis)||There must be at least 2 uninterrupted trading days for trading cum-rights between the announcement of book closure and the ex-date.||Day 5 (Friday)|
|Days 6 & 7 (Saturday and Sunday) are not “business days”|
|Latest time for lodging transfers of shares to qualify for the rights issue||4:30pm on Day 8 (Mon)|
|Register of members closes||Timetable assumes the register closes for 3 days||Days 9-11 (Tues- Thurs)|
|Record date for rights issue||Any day during the closure of the register of members period||Day 11 (Thurs)|
|Despatch of PALs||Day 12 (Fri)|
|Days 13 & 14 (Saturday and Sunday) are not “business days”|
|First day of dealing in NPR||Two business days after the despatch of PAL||Day 16 (Tues)|
|Latest time for splitting of PAL||At least three working days before the last dealing day||Day 18 (Thurs)|
|Days 20 & 21 (Saturday and Sunday) are not “business days”|
|Last day of dealings in NPR||Day 23 (Tues)|
|Latest time for acceptance and payment for rights shares and application for excess rights shares||