The HKEx published its "Consultation Paper on Ex-entitlement Trading and Shareholder Approval" (Ex-entitlement Trading Consultation Paper) on 17 December 2010 to seek public views on proposed changes to the current market practice of ex-entitlement trading so to determine whether shares of a listed issuer should be traded ex-entitlement only after the relevant entitlement has been approved by shareholders.
Many entitlements are benefits (i.e. cash, securities or other benefits) distributed by a company to its shareholders. Some entitlements are announced and then distributed to registered shareholders directly (e.g. an interim dividend). On the other hand, some entitlements are “proposed” by the board of directors and still require shareholders' approval at general meeting in accordance with statutory or Listing Rules requirements (i.e. they are conditional entitlements). Examples of such conditional entitlements are a final dividend and any rights issue or open offer which will lead to an increase of issued share capital or market capitalisation by more than 50 percent on its own or when aggregated with any other rights issue or open offer announced within the 12-month period immediately before the corporate action.
CURRENT MARKET PRACTICES
At present, there is no restriction on the timing of the record date for a conditional entitlement in Hong Kong. A listed issuer has the discretion to set the record date before or after the date of the shareholders' approval. A record date is a date set by a listed issuer to determine who is entitled to receive the relevant entitlement. An ex-date is usually the business day before the record date (when there is no book closure) or the last registration date (when there is a book closure). Those who are registered shareholders on the record date will receive the entitlement.
This practice is quite inconsistent with the market practices of other leading overseas exchanges (including Shanghai and Shenzhen, New York, Australia and Singapore) which require that a share not go ex-entitlement until after the shareholders' approval.
For a conditional entitlement, how a listed issuer determines its record date for the entitlement will have an impact on the orderly trading of its stocks. If the record date (and thus the ex-date) is set before the date of the general meeting, sellers on the ex-date will be subject to a risk of uncertainty pursuant to which they may not receive the entitlement as expected if the distribution is blocked by shareholders at the general meeting. Similarly, if the distribution is blocked at the general meeting, buyers on or after the ex-date may receive a windfall gain. If the record date (and thus the ex-date) is set after the general meeting at which the entitlement is approved, sellers on the ex-date will not be exposed to such risk of uncertainty and the trading of stocks would be conducted in a fair manner to both buyers and sellers.
In this connection, the Ex-entitlement Trading Consultation Paper aims to gather comments from the public on whether the Listing Rules should be amended to prevent a share from trading ex-entitlement before the shareholders' approval.
Comments in response to the Ex-entitlement Trading Consultation Paper should be submitted no later than 28 February 2011.
Copies of the Ex-entitlement Trading Consultation Paper can be downloaded via the link below: http://www.hkex.com.hk/eng/newsconsul/mktconsul/Documents/cp2010123.pdf