Due Diligence Guidelines –
Overall Management of a Public Offer
2. Sufficient Arrangements and Resources
In discharging its obligations under Code of Conduct Paragraph 17.13(a), the sponsor should have regard to at least the following matters:
(i) whether there are sufficient arrangements to ensure that listing documents (in both electronic and printed form) and application forms (in printed form) are made readily available to the public during the public offer period …
(ii) whether sufficient measures have been put in place to ensure that:
(A) the distribution of prospectuses and application forms to the public;
(B) the collection of completed application forms from the public; and
(C) the despatch of unsuccessful applications, refund cheques and share certificates after the public offer period closes,
can be made in a timely and orderly fashion;
(iii) the need to avoid events of disorder or failure which may arise during the public offer period and before the trading of securities commences or otherwise in connection with the public offer, and ensure that appropriate contingency plans have been drawn up to deal with any such events; and
(iv) where balloting is required to determine the successful applications under a public offer, whether appropriate arrangements have been put in place to ensure that balloting would be conducted fairly and independently of the listing applicant and parties associated with it. [Paragraph 17.13(b)(i), (iii), (iv) and (v) of the Code of Conduct]
Publicity / offer awareness materials
2.2.1 See the Stock Exchange’s guidance on publicity materials and eIPO advertisements,4 the SFC’s Guidelines on Use of Offer Awareness and Summary Disclosure Materials in Offerings of Shares and Debentures under the Companies Ordinance5 and the SFC’s Guidelines for Electronic Public Offerings.6
Distribution of listing documents
2.2.2 The Companies (Winding Up and Miscellaneous Provisions) Ordinance provides that an application form must be accompanied by a prospectus (both in paper forms),7 unless the listing applicant opts for a mixed media offer pursuant to exemptions under the Companies (Winding Up and Miscellaneous Provisions) Ordinance and in accordance with the Listing Rules, whereby subject to certain conditions, the paper application forms need not be accompanied by a paper prospectus. The listing applicant should follow the Stock Exchange’s guidance on the disclosure requirements for the White and Yellow application forms and the section headed “How to Apply for Hong Kong Offer Shares” in the prospectus.8 See also Appendix I for further details and recommended steps in relation to a mixed media offer.
2.2.3 Unless otherwise exempted, the Companies (Winding Up and Miscellaneous Provisions) Ordinance further provides that every prospectus must either be in the English language and contain a Chinese translation or be in the Chinese language and contain an English translation.9 Nowadays, in reliance on the exemption provided by section 4 of the Companies (Exemption of Companies and Prospectuses from Compliance with Provisions) Notice,10 the English language and the Chinese language versions of the prospectus are usually published separately.
2.2.4 The Companies (Winding Up and Miscellaneous Provisions) Ordinance prohibits the allotment of shares pursuant to the prospectus until the third day after the day on which the prospectus is issued or such later time as specified in the prospectus. The beginning of the third day or such later time is the earliest time that the listing applicant may open its application lists.11 In practice, the total number of days for the public offer will usually be 3.5 business days – the public offer period normally ends at 12:00 noon on the third business day after the day on which the prospectus is issued.
2.2.5 Together with the underwriting syndicate members, the sponsor should assess the likely interest in, or the reception of, the offer by the public.
2.2.6 The sponsor should ensure that there are contingency plans to accommodate unexpectedly higher demand for printed copies of prospectuses and application forms and that, as referred to in paragraph 1.3.2 above, the agreements entered into between the listing applicant and the share registrar and receiving banks contain appropriate commitments both to handle the expected level of applications and to accommodate higher levels of applications which it might be reasonable to anticipate.
2.2.7 The sponsor should also ensure that the listing document sets out the contingency plans in the event of adverse weather conditions during the public offer period and before the commencement of the trading of the securities. The Stock Exchange has provided detailed guidance12 on the arrangements required in relation to dealings with the Stock Exchange in the event that a typhoon signal no. 8 or above is hoisted and/or a black rainstorm warning is issued on the day of the:
(a) issue of an authorisation letter for the registration of a prospectus;
(b) publication of the prospectus;
(c) opening or closing of application lists of the public offer;
(d) pre-vetting of the allocation announcement;
(e) issue of a listing approval letter; or
(f) commencement of dealings in shares.
Multiple / suspected multiple applications
2.2.8 The Listing Rules13 provide that “issuers, their directors, sponsors and underwriters must take reasonable steps to ensure that multiple or suspected multiple applications are identified and rejected.” The Listing Rules define “multiple applications” as “circumstances where more than one application is made by the same person; where a person applies for more than 100% of the securities on offer or where a person applies for more than 100% of the shares available in any pool into which the securities on offer are divided in accordance with Practice Note 18 [to the Listing Rules]. For the purpose of [the Listing Rules] the shares available in any pool is the initial allocation of shares into the pool prior to the operation of any clawback mechanism required by Practice Note 18.”14
2.2.9 The Stock Exchange further requires that where circumstances of the listing applicant’s case warrant other considerations to be taken, directors of the listing applicant and the sponsor are expected to negotiate with the share registrar for appropriate criteria for rejecting multiple or suspected multiple applications, instead of relying solely on the share registrar’s standard practices. Such reliance would not exonerate directors of the listing applicant or the sponsor from their responsibilities under the Listing Rules.15
2.3 Recommended Steps
Distribution of listing documents
2.3.1 The sponsor and the financial printer should set clear printing deadlines having regard to the number of copies and distribution points involved. The sponsor should communicate with the receiving banks on the likely level of interest in relation to the public offer and seek their recommendation as to the number of printed copies of the listing document (both the English language and the Chinese language versions) and the application forms to be made available for distribution throughout the public offer period.
2.3.2 The sponsor and the listing applicant should confirm in advance with the financial printer the number of printed copies of the listing document and application forms required to be distributed at the designated distribution points. The sponsor should require the financial printer to deliver the printed copies to each distribution point in time and to ensure that a sufficient number of copies remain available throughout the public offer period. At each distribution point, the receiving banks should brief their staff members to ensure that potential investors are allowed to take both language versions of the listing document during the public offer period.16
2.3.3 The financial printer should also prepare the listing document and the application forms17 in an electronic format to be submitted to the designated websites of the listing applicant and the Stock Exchange for viewing and downloading by the public.
2.3.4 Once the public offer has commenced, in order to ensure prompt and efficient response to demand for the listing document and application forms, the receiving banks and the share registrar should update the sponsor and the listing applicant on the demand for printed copies on a frequent and regular basis through effective channels of communication, e.g., by e-mail or telephone. If necessary, the sponsor should instruct the financial printer to print additional copies of the listing document and/or application forms during the public offer period. There should be a designated contact person of the sponsor who will be able to respond to reports and queries made by receiving banks and the share registrar, and then report to the wider working parties.
2.3.5 If the demand for the public offer is so overwhelming that the number of applicants trying to lodge their application forms at any one or more of the branches of the receiving banks becomes unmanageable, the sponsor should discuss the situation with the listing applicant, and consider the necessity to inform the Stock Exchange to request that: (i) the public offer period and/or the opening hours of any branches of any receiving bank be extended; and/or (ii) the number of branches used as collecting branches be increased, in each case subject to terms and conditions as may be agreed among the sponsor, the listing applicant and the receiving banks.
2.3.6 In addition, the receiving banks are expected to monitor and control order at their respective branches, including the distribution of the listing document and application forms, collection of application forms as well as crowd control during the public offer period.
2.3.7 The responsibilities delegated to the share registrar will typically include:
(a) collection of application forms from all application channels, including from receiving banks;
(b) balancing and reconciliation of the number of shares applied for and application monies received on the basis of information supplied by the receiving banks;
(c) checking of application forms for multiple or suspected multiple applications;
(d) issuance of share certificates and refund cheques; and
(e) keeping of an image record of all application forms.
2.3.8 The share registrar should circulate reports on a daily basis during the public offer period. The daily reports should include the number of valid applications and rejected applications arranged by board lots and the amount of funds involved.
2.3.9 When reviewing the application forms, the share registrar should have regard to the Listing Rules and the Best Practice Note on Treatment of Multiple/Suspected Multiple Applications. In particular, paragraph (3) of the Best Practice Note provides for the modification of the rejection criteria by agreement with the listing applicant and the sponsor. The listing applicant and the sponsor should consult the share registrar for further particulars of the Best Practice Note. The share registrar should also follow the preventive measures against multiple applications announced in 2007.18
2.3.10 The share registrar should consult the sponsor and the listing applicant if it is in doubt when checking the application forms against multiple / suspected multiple applications.
2.3.11 It is common for listing applicants to accept applications through eIPO. The share registrar is usually the eIPO service provider, who will accept applications from the public through a designated website provided by the eIPO service provider.
2.3.12 The eIPO service provider should take steps to ensure that the designated website is operational during the public offer period. The sponsor should require the eIPO service provider to complete and submit the designated application form (i.e., the green application form).
2.3.13 Listing applicants may advertise electronic methods to subscribe for shares either by themselves or through their eIPO service providers. The Stock Exchange normally considers these eIPO advertisements to be typical offer awareness materials which need not be submitted to the Stock Exchange for clearance. However, listing applicants and sponsors should look out for the following when determining whether eIPO advertisements require the Stock Exchange’s consent before release:
(a) whether they fully meet the criteria for offer awareness materials under the SFC’s Guidelines on Use of Offer Awareness and Summary Disclosure Materials in Offerings of Shares and Debentures under the Companies Ordinance;19
(b) whether the SFC’s Guidelines for Electronic Public Offerings are followed;20 and
(c) if there are images, photos or pictures in the eIPO advertisement, whether the Stock Exchange’s guidance on prospectus covers is followed.21 Normally, the Stock Exchange will not object to eIPO advertisements using the same design used on prospectus front covers.22
2.3.14 The listing applicant is required to make an announcement of the results of the offer and the basis of allotment of securities as soon as possible but in any event not later than the time that is 30 minutes before the earlier of the commencement of the morning trading session or any pre-opening session on the business day next after the share certificates are posted.23
2.3.15 The sponsor should coordinate with the share registrar which should provide the relevant information after closing of the public offer period to be inserted into the allocation results announcement. The share registrar should confirm with the sponsor, the listing applicant and the receiving banks the highlights of the public offer including:
(a) the total number of successful applicants;
(b) the number of shares re-allocated to or clawed back from the placing tranche (if any) pursuant to Practice Note 18 to the Listing Rules;
(c) the level of over-subscription in the public offer tranche;
(d) the number of valid applications under “pool A” (from applicants who have applied for securities in the value of HK$5 million or less);
(e) the number of valid applications under “pool B” (from applicants who have applied for securities in the value of more than HK$5 million and up to the value of “pool B”);
(f) the number of invalid applications which are not completed according to the instructions printed on the application forms;
(g) the number of multiple / suspected multiple applications;
(h) the number of bounced cheques; and
(i) the number of applications applying for more than 50% of the shares offered under the public offer.
2.3.16 To ensure efficient administration and publication of allocation results, the share registrar should produce an electronic file of allocation results for publication on the Stock Exchange’s website in accordance with the specifications set out in the e-submission system user manual issued by the Stock Exchange.24
2.3.17 For public offers raising HK$1.5 billion or more, there should be a “Search by Identity Card” function to facilitate searching of the public offer allocation results on the listing applicant’s own website.25
2.3.18 The balloting should be a random process to select the successful applicants.
17. , Attachment IM, paragraph 21. The electronic version of the application forms to be published on the Stock Exchange’s website should be a sample application form with “SAMPLE” watermark (i.e., ghost text) or text to like effect printed on each page of the sample application form. This is to avoid applicants from using a downloaded electronic form for application purpose which may contain reproduction errors. . See also for guidance on logistical arrangements for publication of application proofs, post hearing information packs and related materials on the Stock Exchange’s website for listing applicants.
HKCFEF Limited and the contributing law firms, accountants and sponsors are not offering these due diligence guidelines as legal, financial or professional advice or services and they should not be relied upon as such. These due diligence guidelines should not be used as a sole basis for any decision, action or inaction and are not meant to serve as a substitute for the advice of qualified professionals. See here for the full terms and conditions.