The Stock Exchange of Hong Kong Limited (“HKSE”) recently released the “Consultation Conclusions on Capital Raisings by Listed Issuers” and announced corresponding changes to Listing Rules. The changes, which will become effective on 3 July 2018, include:

• prohibition of capital raisings that would result in “value dilution” of 25% or more;

• removal of underwriting requirement for rights issues and open offers;

• imposition of mandatory minority shareholders’ approval for open offers;

• restriction on placing of warrants or convertible securities under general mandate; and

• prohibition of subdivision or bonus issue of shares if the share price after adjustment is less than HK$1.

The consultation paper was released last September (see our Legal Update on 26 September 2017). Below are highlights of the Listing Rules requirements on capital raisings after the changes.

Note (1) Placing

Under the new Listing Rules, placings of securities will be allowed only in the following circumstances:

a. where the placing falls within any general mandate given to the directors of the listed issuer by the shareholders; or

b. where the placing is specifically authorised by the shareholders of the listed issuer in general meeting (“Specific Mandate Placing”).

However, placings of warrants or convertible securities under general mandate are restricted:

c. no issue of convertible securities for cash consideration pursuant to a general mandate is allowed unless the initial conversion price is not lower than the market price of the shares at the time of the placing; and

d. no issue of warrants, options or similar rights to subscribe for (i) any new shares of the issuer or (ii) any securities convertible into new shares, for cash consideration pursuant to a general mandate, will be allowed.

Note (2) Minority Shareholders’ approval

Minority shareholders’ approval means approval by shareholders in general meeting by resolution on which any controlling shareholders and their associates (or where there are no controlling shareholders, directors (excluding independent non-executive directors) and the chief executive and their respective associates) shall abstain from voting in favour.

Note (3) Cumulative Value Dilution

Value dilution is referred to as “Theoretical Dilution Effect” under the new Listing Rules, which takes into account of both the price discount and offer ratio. The cumulative value dilution can be calculated by the following formula (see HKSE - Frequently asked questions on calculation of value dilution FAQ No.026-2018):

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

For placing of convertible bonds (or warrants), the theoretical dilution effect 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.