HKEx rules for placements to cornerstone investors

Pursuant to Guidance Letter HKEx-GL51-13 issued by Hong Kong Exchanges in February 2013, the subject of the guidance is “Cornerstone Investment –No Direct or Indirect Benefits to Cornerstone Investors other than Guaranteed Allocation at IPO price”. The objective of these regulations is to restrict issuers from offering direct or indirect benefits to cornerstone investors by side letter or otherwise to participate in the placing tranche of a share offering.

In the regulations, HKEx expressly states that an issuer is required to follow the following principles when making a placement to cornerstone investors: (a) the placing must be at the IPO price; (b) the IPO shares placed are subject to a lock-up period generally for at least six months following the listing date; (c) each investor will not have any board representation in the listing applicant, and is independent of the listing applicant, its connected persons and their respective associates; (d) details of the placing arrangement, including the identity and background of the investors, are disclosed in the listing document; and (e) notwithstanding the minimum six-month lock-up period, the shares will be part of the public float under Main Board Rule 8.08 (GEM Rule 11.23) provided the investor is a member of the public for the purpose of Main Board Rule 8.24 (Notes 2 and 3 to GEM Rule 11.23).

The “public float” in item (e) is based on Main Board Rule 8.08(a) which states that, “at least 25% of the issuer’s total number of issued shares must at all times be held by the public”. The shares held by the cornerstone investors will be counted as part of the shares held by the public, meaning that when counting whether the shares held by the public reaches the 25% threshold, the shares held by the cornerstone investors are counted as a part thereof, which will affect whether the issuer satisfies the listing conditions.

The foregoing provision expressly clarifies that the shares held by the cornerstone investors constitute shares held by the public provided that the conditions set forth in the Guidance Letter are satisfied. Combined with HKEx Main Board Rule 8.08(3) which states that, “not more than 50% of the securities in public hands at the time of listing can be beneficially owned by the three largest public shareholders, save where: (a) the securities to be listed are options, warrants or similar rights to subscribe or purchase shares; (b) such securities are offered to existing holders of a listed issuer’s shares by way of bonus issue; and (c) in the 5 years preceding the date of the announcement on the proposed bonus issue, there are no circumstances to indicate that the shares of the issuer may be concentrated in the hands of a few shareholders.”