Submission to HKEx on Rights Issues and Open Offers
30 September 2009
I attach an article and the views of 207 respondents to an opinion poll on Webb-site.com regarding your consultation paper on Rights Issues and Open Offers, which form part of this submission. Any person could participate in the poll with a valid e-mail address and corresponding PIN code.
The poll shows that there is 87% support for setting a maximum discount on open offers, something your consultation did not even propose, but which I think is essential to bring Hong Kong into line with international best practice and prevent abuse of minority shareholders through dilution. 87% of respondents supported adopting 10% as the discount limit, which is the standard in the UK Listing Rules.
There is deep concern about your proposal to shorten the cum-entitlements trading period for open offers to as little as 2 days, given that after the shares go "ex-entitlements", there is no way for the holder to sell his entitlements. 90% of respondents supported requiring a minimum of 7 trading days cum-entitlements (i.e. 10 trading days' notice of book closure) for open offers, which would be equivalent to the existing 14 calendar days notice period for book closure but removes the problem of bank holidays.
75% of respondents supported imposing a requirement that listed companies must strive to protect inactive entitlement-holders by selling the unsubscribed shares in the market if a premium above issue price can be obtained for them, and remitting the proceeds to the holders (subject to a de minimis amount). This, again, would bring HK into line with international best practice, as seen in the UK. Under current HK rules, unsubscribed entitlements often just benefit underwriters or the active shareholders who apply for them in an "excess entitlements" system, but this takes value away from those who are entitled to it. The system should protect a person's property even when they are asleep, but the current system is "you snooze, you lose".
Finally, 84% of respondents called for an end to your current practice of allowing stocks to trade "ex-entitlements" even before shareholders have approved the distribution or other entitlement in general meeting. This will reduce the risk of a shareholder selling his house and later discovering that his furniture and car was included in the deal. This is particularly dangerous in the case of large entitlements such as special dividends or deep-discount rights issues, but it should apply in all circumstances.
David M. Webb
© Webb-site.com, 2009
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