Corporate Action Guidelines

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Corporate Action Guidelines Presentation for
Listing Rules Seminar 2009
Iris Leung Listing Operations Hong Kong
Exchanges Clearing Limited
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Agenda

• Background
• Guide on Book Closure
• Guide on Trading Arrangement

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Background

• What are corporate actions?
• Corporate actions (CA) are events initiated by a
  listed company that affects the rights attaching
  to the companys issued shares.
• Some events are simple, mandatory and no action
  is required from shareholders (e.g. cash
  dividend) while others are more complex, optional
  and a response from shareholders is required
  (e.g. rights issue, privatisation).

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Background

• What are corporate actions?
• Purpose of a corporate action can be
• Distribute income (e.g. cash or stock dividend,
  bonus issue)
• Raise capital (e.g. rights issue, open offer)
• Restructure issued capital (e.g. share
  subdivision/consolidation, warrant exercise)
• Reorganise the company (e.g. spin-off, takeover
  and privatisation)

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Background

• Why CA disclosure so important?
• A corporate action may affect how the securities
  are traded in the secondary market and may
  trigger operational tasks to
• the stock exchange (e.g. adjusting previous day
  closing price on ex-date or setting up temporary
  trading counter for NPR)
• the clearing house / stock depository (e.g.
  setting calendar for entitlements, adjusting
  stock master file, collecting and distributing
  entitlements to account holders)
• the brokerage firms / custodian banks / nominee
  companies (e.g. adjusting internal systems and
  taking appropriate actions to protect the
  interest of its customers stock portfolio and
  ensure funds flows in good order)
• To protect shareholder interests and to ensure
  the orderly trading of the companys shares in
  the secondary market, it is important for issuers
  to schedule the corporate actions properly and to
  disclose timely, accurate and adequate
  information about their corporate actions.

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Background

• Consequences of inappropriate CA disclosure
• Incomplete, unclear or delayed information about
  a corporate action will expose shareholders and
  the market to risks of market confusions,
  affecting the fair and orderly trading of the
  respective securities.
• It may expose shareholders and market
  participants to a risk of financial loss due to
  their failures to take appropriate actions in the
  corporate event.
• It will also reduce efficiency of market
  intermediaries (e.g. brokerage firms, custodian
  banks, institutional investors) in processing
  corporate actions and managing their investment
  portfolio.

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Background

• Listing Rules and Corporate Actions
• Listing Rules have high-level guidance on issuer
  disclosure and scheduling of corporate actions.
• General obligation to inform the Exchange and
  announce to the market any changes in the rights
  attaching to any class of listed securities (MB
  Rule 13.51 (3) and GEM Rule 17.32 )
• A few requirements governing the timing or
  technical arrangements of corporate actions (e.g.
  MB Rule 13.66/GEM Rule 17.78 about 14-day notice
  period for book closure)
• Letter to issuers (11 May 2007) on purpose of
  book closure and other deadlines for shareholder
  actions

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Background

• HKExs action
• To improve issuer disclosure and scheduling of
  corporate actions, Listing Division and relevant
  Departments of HKEx formed a working group last
  year to review and develop best practices on
  corporate actions.
• The working group released its first two
  deliverables in November 2008, including-
• Guide on Disclosure of Record Date, Book Closure
  and Latest Time for Lodging Transfers of Shares
  (Guide on Book Closure)
• Guide on Trading Arrangement for Selected Types
  of Corporate Actions (Guide on Trading
  Arrangement)
• In 2009, the working group focuses on the
  development of another new issuer guide on
  entitlements.

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Background

• The Issuer Guides on CA Disclosure
• Do not form part of the Listing Rules
• Do not in any way amend or vary an issuers
  obligations under the Listing Rules
• Do not remove the need for issuers and their
  directors to make own judgement on their
  disclosure
• In case of doubt, issuer should contact their
  Listing Officers

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Guide on Book Closure
Guide On Disclosure Of Record Date, Book Closure
And Latest Time For Lodging Transfers Of Shares

• Available at HKEx website (http//www.hkex.com.hk/
  listing/epp/E_bk_close.doc)

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Guide on Book Closure

• Highlights
• Purpose
• Offer guidance about closure of member register
  to identify shareholders who are entitled to a
  corporate action (e.g. attendance and voting at
  AGM or collection of dividends).
• General principles
• Shareholders should be given sufficient time of
  notification to take part in the corporate action
• There should be timely disclosure of all relevant
  information relating to the book closure to
  enable shareholders to easily interpret the
  implications of the corporate action on their
  holdings

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Guide on Book Closure

• Highlights (continued)
• What information the issuer should disclose?
• Purposes, record date/book closure period/latest
  time for lodging transfers of securities
• What if the book closure timing information is
  not ready for disclosure in the initial
  announcement?
• Provide best estimates on the time such
  information will be available
• e.g. The proposed distribution is subject
  to the consideration and approval at the
  Companys 2008 Annual General Meeting. The
  period of closure of register of members for H
  shares would be set out in the separately
  published notice of AGM by the Company.
• Make supplementary disclosure when such
  information is ready and make reference to the
  initial announcement

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Guide on Book Closure

• Highlights (continued)
• What if the book closure timing information is
  altered after the initial announcement?
• Inform the market as soon as possible and at
  least 6 calendar days before the closure by a
  distinct announcement (MB Rule 13.66 / GEM Rule
  17.78)
• Clearly state the old and new book closure timing
• Refer to the initial announcement and the
  publication date
• Ensure the new book closure timing still offer
  sufficient notification time to shareholders

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Guide on Book Closure

• Highlights (continued)
• How to properly schedule book closure
  arrangement?
• Comply with the general principle of sufficient
  time of notification
• Liaise with share registrar to ensure its
  readiness to cope with the expected volume of
  share transfers, If necessary
• Special attention to scheduling if the issuer has
  already announced one or more yet-to-be-expired
  book closures for other purpose(s).
• If there are still sufficient time of
  notification, pick the same book closure period
  of the previous corporate action
• In all cases, the latest time for lodging share
  transfer of the new corporate action must not be
  within the book closure period of the previous
  corporate action
• If new book closure period will effectively alter
  the book closure period of the previous corporate
  action (e.g. extension), it must issue a distinct
  announcement of altered book closure, make
  reference to the previous corporate action and
  clearly state the latest time for lodging
  transfers of securities for all these corporate
  actions

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Guide on Book Closure

• Book closure period and stock trading
• Under T2 settlement system, stocks will trade
  ex-entitlement on the business day immediately
  before the last registration date. The date is
  so called ex-date.
• The ex-date is the date on or after which the
  stock will be traded without the specific
  entitlement (e.g. dividend).
• Ex-date is an important reference date to
  investors and all market players. Stock exchange,
  clearing house, stockbrokers, information vendors
  and custodian banks all have ex-dates maintained
  in their market systems. Any error of ex-dates
  will affect orderly trading of the stock.

Book closure
period
. . . . .
Day 1
Day 2
Day 3
Day 4
Ex-date
Last registration date
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Guide on Book Closure

• Example 1 Change of book closure dates

Company A announced alteration of its declared
book closure period less than 24 hours before
the ex-date, leaving no time for stock exchange,
clearing house and market intermediaries to
adjust their systems.
Consequence To ensure an orderly market, the
securities of Company A was suspended for trading
on 13 July 20x1 to allow sufficient time for
market operators to adjust their systems to
reflect the new ex-date.
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Guide on Book Closure

• Example 2 Clarity of book closure dates

Company B announced a dividend payment and a
bonus issue of shares. However its announcement
about book closure dates was as below In order
to establish entitlements to the proposed final
dividend, all transfers accompanied by the
relevant share certificates must be lodged with
the Companys Hong Kong branch share registrar
and transfer office not later than 430pm on 25
May 2009.
Consequence The market is not certain whether
the book closure period will also apply to bonus
issue of shares declared in the same
announcement. The Company and its agent (share
registrar) received queries from the Listing
Division, HKSCC and others such as custodian
banks. All these troubles can be saved if the
announcement specified clearly that the book
closure period applied to both final dividend and
bonus shares.
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Guide on Book Closure

• Example 3 Overlapped book closure dates

Company C announced a book closure period to
establish entitlements to its final dividend. A
few days later, it announced another book closure
period to qualify attendance and voting at a EGM.
The two book closure period, unfortunately,
overlapped partially with each other.
20 April announcement
26 April announcement
Book closure for EGM
Consequence Shareholders who are not aware of
the EGM book closure may mistakenly set the
latest time for lodging share transfers for AGM
and final dividend as two days before the book
closure period mentioned in 20 April
announcement. However, in fact the register of
members was closed on that date due to the book
closure period for EGM. As a result, investors
fail to register their rights for the entitlement
to AGM and final dividend.
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Guide on Book Closure

• Other issues

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Guide on Trading Arrangement

• Guide On Trading Arrangements For Selected Types
  Of Corporate Actions
• Available at HKEx website (http//www.hkex.com.h
  k/listing/epp/D_TA.doc )

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Guide on Trading Arrangement

• Highlights
• Purpose
• Outlines key issues and best practices in
  relation to schedule setting, provision of
  information and trading arrangements for five
  selected type of corporate actions
• Rights issue
• Open offer
• Share consolidation / subdivision
• Change of board lot
• Change of company name or addition of Chinese
  name

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Guide on Trading Arrangement

• Highlights (continued)
• For each type of corporate action, the Guide
  outlines
• Information to be disclosed
• Any requirements to be conformed to in scheduling
  the corporate action timetable
• e.g. 14-day offer period, trading period of
  Nil-paid rights should not be less than 5
  business days.
• Trading arrangements/logistics in relation to the
  securities under the corporate action
• Detailed arrangements/logistics of the corporate
  actions the shareholders (either holding shares
  directly or via nominee) should know in order to
  exercise their rights

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Guide on Trading Arrangement

• The Guide also provides a sample timetable and a
  checklist for technical and operational matters
  for each type of corporate action

Reference checklist
Sample timetable
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Guide on Trading Arrangement

• Issues
• Public holiday errors in scheduling the
  timetable
• Rights issues/open offers
• Not provide the calculation method for rights
  issue/open offer entitlement.
• Not mention whether nominee company (i.e. HKSCC
  Nominee) will be treated as a single shareholder
  in the allocation of excess application for
  rights issues / open offer
• Wrong commencement date of dealing of nil paid
  rights shares
• Wrong number of days between last day for
  splitting and last day for acceptance of and
  payment for the rights/offer shares
• Share consolidations / subdivisions
• Wrong board lot size of temporary counter for
  trading of old shares
• Wrong date for the re-opening of the original
  counter for trading of new shares / start of
  parallel trading
• Longer / shorter period for the parallel trading

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