Two months ago the SEHK and SFC introduced standardised waivers of the GEM listing rules. Despite its denials of preferential treatment, the Exchange has still not levelled the playing field by tightening the waivers on share options and lock-ups granted to and Indeed, the wording on's option limit has been relaxed further. Now the Exchange proposes a similar amendment to the option limits on the main board. Dilution city here we come.

No Exceptions?
14 May 2000

Regular readers will recall our campaign against the raft of waivers which were being granted to early GEM listings, and how public pressure eventually led to the SEHK and SFC issuing a joint announcement on 11-Mar-00.

In that announcement, the regulators "acknowledged that the lack of transparency associated with such waivers has given cause for public concerns". They announced that they would accelerate the review of the GEM Listing Rules which was originally planned to take place 6 months after the launch of the market, to take place "as soon as possible before the end of the six months period". Well, guess what - the first GEM prospectus was published on 16-Nov-99, and the 6 months are up on Tuesday. Still no sign of that consultation paper!

Of course, the true purpose of that announcement was to even out the playing field and stop the GEM listing committee from ad hoc waiving of its rules any further. In return for GEM agreeing to tighten the waiver of the share option limit and some other minor restrictions, the SFC had to concede a shortening of the track record requirement from 2 years to 1 year.

It later became apparent why GEM needed this waiver - was lining up to float with a 1-year track record (the prospectus went out on 5-Apr-00). It takes several weeks to prepare a prospectus and the draft must normally be submitted to the SEHK five weeks prior to the listing hearing, so it is highly likely that the application for this deal was already being processed by the SEHK before the SEHK/SFC meeting. That deal was sponsored by BNP Prime Peregrine, as were and

In the announcement, a number of "relaxations" (we'll call them Standard Waivers) of the rules were announced pending that market consultation. We've already criticised these proposals in a previous article so we won't waste time here. The Standard Waivers were announced "with a view to ensuring a level playing field and transparency in the application of the GEM Rules".

What level playing field?

The waivers granted to and prior to the regulators' announcement were more relaxed than the new Standard Waivers in several ways:

Acting in the public interest, we wrote to both the SEHK and SFC on 14-Mar-00 asking them to confirm by announcement that the waivers granted to and would be amended to take into account the Standard Waivers and level out the playing field. Do you remember all those assurances from GEM officials, and the press release, that "the Exchange has given no preferential waivers to any company"?

A period of silence followed. Then on 7-Apr-00 came an announcement (in PDF format) from, in which they stated "at the request of the [Exchange]" that certain conditions applied to the waiver when it was granted at the time of the IPO. Strangely, these conditions had not been stated in the 18-Feb-00 prospectus and we are asked to believe in the pure coincidence that these pre-existing conditions just happen to be the same as those in the SEHK/SFC announcement, with one important on!

The announcement confirmed that they still had a waiver on share options up to 50% of the share capital. Not only that, but the limit applies to "all outstanding options granted and yet to be exercised". An important implication of this wording is that the limit will not include options which have already been exercised (or those that have expired).

By comparison, the limit under the existing Listing Rules and the Standard Waivers relate to "all outstanding share option schemes" not just to all outstanding options. So in that case it includes options which have already been exercised or expired.

These subtle words make a world of difference. Under the wording of the announcement, if the limit is reached, every time an option is exercised creates room for another option to be granted. Under GEM rules, options can be exercised after 3 years and within 10 years of the day of grant. So that means that theoretically 50% of the company could be put under option within 3 years, then another 50% within the next 3 years, and so on.

The only brake on this process is the requirement to get shareholders' approval for each successive chunk of 10% of the company. But since the major shareholders are allowed to vote on this, it will be a formality so long as there are major shareholders. It only takes 2 weeks to call a shareholders' meeting so that doesn't slow things down much.

Lock-up unaffected

What about that second bullet point above? No changes have been announced to the moratorium waivers for or If this situation remains, then the lock-ups for and will expire without conditions on 1-Sep-00 and 9-Sep-00.

So much for the level playing field

Here's an idiot's guide to the GEM waivers

The GEM uneven playing field and Everybody else (with Standard Waivers)
Limit on share options 50% 30%
Management shareholder lock-up in second 6 months 0% 35%

Perhaps the Exchange would argue that the and waivers were granted before the Standard Waivers and cannot be amended retrospectively. That's nonsense - the relevant options have not yet been granted, the lock-ups have not yet expired, and there's no reason why the and waivers can't be brought into line. Indeed, the Standard Waivers (unless further amended during the consultation process) will become listing rules, and the rules should apply to everybody.

We wrote again to the SEHK on 10-Apr-00 asking what they will do about this, but have not received any reply.

And the main Board is Next

The Exchange has recently issued a consultation document (in MS Word format) to amend Chapter 17 of the Listing Rules for the main board which relates to share option schemes. Some of these proposals are positive, and we'll comment in more detail in a future article, but one of the proposals that leaps out and strangles us is the proposal to allow companies to grant options with the following limit:

"the securities underlying all outstanding options should not exceed a certain percentage, say 30%, of the securities in issue from time to time"

Note those words - "outstanding options" not "option schemes". Again, this means that once an option has been exercised, it no longer counts towards the limit. Under these proposals, there is also no minimum period before options can be exercised. The rest of the limits are similar to the GEM proposals, including the formality of a shareholders' approval for each 10% block of options. So after 3 mandates have been exhausted, the 30% limit will be reached, but as soon as some of the options are exercised, this will make room for another mandate to be obtained, and more options to be granted, effectively scrapping even the 30% limit.

This will lead to cases of abuse and massive dilution of shareholders' interests, and is similar to the way in which their interests are diluted by abuse of the general mandate to repeatedly issue shares without offering them to existing shareholders (see our article The Placing Game).

©, 2000

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