Hong Kong Redeemable Preferred Shares Issuance
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Hong Kong Redeemable Preferred Shares Issuance
Issuing redeemable preferred shares in Hong Kong is a process governed by the Hong Kong Companies Ordinance (Cap. 622) and, for listed companies, the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the "Listing Rules").
Here is a summary of the key considerations for the issuance of redeemable preferred shares in Hong Kong:
1. Legal and Regulatory Framework
Companies Ordinance: The Companies Ordinance (Cap. 622) is the primary legislation. It allows a limited company to issue redeemable shares, but with specific conditions.
A company must have at least one non-redeemable share in issue. This ensures that the company cannot consist solely of redeemable shares.
The terms of the redemption, including the time, price, and conditions, must be clearly stated in the company's articles of association or the terms of the shares themselves.
A company cannot amend the terms of an existing class of non-redeemable shares to make them redeemable. The shares must be issued as redeemable from the outset.
Listing Rules (for listed companies): If a company is listed on the Hong Kong Stock Exchange (HKEX), the issuance of any new shares, including redeemable preferred shares, must comply with the Listing Rules. This typically involves seeking a general mandate from shareholders and making public announcements.
2. Characteristics of Redeemable Preferred Shares
Redeemable preferred shares, a type of preference share, are a hybrid security with both equity and debt-like features. Key characteristics include:
Redeemable: The company or the shareholder has the right to buy back the shares at a predetermined price and time. The redemption terms are a crucial part of the share's conditions.
Preferential Rights: They typically carry a preferential right to:
Dividends: Holders receive dividends before ordinary shareholders. These dividends can be cumulative (unpaid dividends carry forward) or non-cumulative.
Return of Capital: In the event of a winding-up or liquidation, preference shareholders have a claim on the company's assets that ranks ahead of ordinary shareholders but below creditors.
Voting Rights: Preference shares often have limited or no voting rights, except in specific circumstances, such as when a resolution directly affects the rights of the preference shares or when dividends are in arrears.
3. Key Steps in the Issuance Process
The process of issuing redeemable preferred shares generally involves these steps:
Review of Articles of Association: The company's Articles of Association must permit the issuance of different classes of shares and contain provisions for redeemable shares. If not, the Articles must be amended.
Board and Shareholder Approval: The board of directors must pass a resolution to approve the issuance. Unless the directors have a general mandate, the issuance of new shares that are not pro-rata to existing shareholders may require a special resolution from the shareholders.
Terms of Issue: The terms of the shares must be clearly defined. This includes:
The redemption date or period (e.g., at a specific date, after a certain period, or at the company's or holder's option).
The redemption price (e.g., at par value, at a premium, or based on a formula).
Dividend rates and payment terms (e.g., fixed or variable, cumulative or non-cumulative).
Any other rights and restrictions.
Filing and Documentation:
A "Return of Allotment" (Form NSC1) must be filed with the Hong Kong Companies Registry within one month of the shares being allotted.
The company's statutory records, including the Register of Members, must be updated to reflect the new shareholdings.
For listed companies, a public announcement must be made and relevant documents (such as a circular to shareholders) must be published.
4. Funding the Redemption
The Companies Ordinance imposes restrictions on how a company can finance the redemption of its shares to protect creditors. A company can redeem shares using:
Distributable profits: The most common method.
A fresh issue of shares: Proceeds from a new share issuance specifically for the purpose of the redemption.
Out of capital: This is a more complex process and is subject to the company satisfying a "solvency test." This requires a solvency statement from all directors and a special resolution from shareholders.
It's important to note that the failure to redeem shares on time does not automatically make the company liable for damages, but a court may order specific performance if the company can demonstrate it has sufficient distributable profits.
A company considering issuing redeemable preferred shares should seek professional advice from legal and financial experts in Hong Kong to ensure full compliance with all applicable laws and regulations.
Fees
The fees associated with issuing redeemable preferred shares in Hong Kong vary widely depending on whether the company is a private company or a publicly listed one. The total cost is a combination of statutory government fees, professional fees, and, for listed companies, fees related to the stock exchange.
For Private Companies
The fees for issuing shares in a private company are generally straightforward and include:
Professional Services Fees: A company will often engage Bestar to handle the legal and administrative aspects of the share allotment. Our fees can vary but a typical fee for a simple share allotment for a private company may be around HKD 3,200 for up to two shareholders, with an additional charge for more. Our fee covers services such as:
Reviewing the company's Articles of Association.
Preparing board minutes or resolutions.
Filing the necessary forms with the Companies Registry.
Updating the company's statutory records, like the Register of Members.
Issuing new share certificates.
Government Filing Fees: The Hong Kong Companies Registry charges a nominal fee for the registration of an allotment of shares. While some filings, like the "Return of Allotment" (Form NSC1), do not have a specific fee, other related filings (e.g., for changes to a company's name or articles) do. The primary government fee is the annual return fee, which must be filed by all companies.
Stamp Duty: In Hong Kong, stamp duty is levied on the transfer of shares, not the initial issuance. However, if the shares are being issued at a value higher than the par value and a formal sale and purchase agreement is executed, stamp duty may be payable on that agreement.
For Publicly Listed Companies (on the HKEX)
The process is far more complex and costly for a public company. The fees can be substantial and include:
Initial Listing Fees: While the initial listing fees are for the company's initial IPO, any subsequent issuance of shares will be subject to ongoing listing fees. These fees are determined by the nominal value of the listed securities.
Professional Fees:
Legal Fees: Issuing new shares, especially redeemable preferred shares with complex terms, requires extensive legal work. Lawyers draft the share terms, prepare the prospectus or circular, ensure compliance with the Listing Rules, and handle all legal aspects of the transaction. These fees are highly dependent on the complexity and size of the transaction.
Financial Advisory Fees: Investment banks and financial advisors are often engaged to advise on the pricing and structure of the share issuance. Their fees can be a percentage of the funds raised or a fixed fee.
Underwriting Fees: If the issuance is underwritten, the underwriter will charge a fee for their services, typically a percentage of the gross proceeds of the offering.
Auditor and Accountant Fees: The company's auditors will be involved in preparing the financial information required for the prospectus or circular.
Hong Kong Exchanges and Clearing (HKEX) Fees: When new shares are listed, the company must pay:
Listing Fee: This is a one-time fee for the new shares, calculated based on the value of the shares being issued.
Trading Fee: The HKEX charges a trading fee on transactions of listed securities. While this is primarily a cost for investors, it is a component of the overall trading ecosystem.
Transaction Levy: A levy is charged by the Securities and Futures Commission (SFC) on transactions.
Other Costs:
Printing and Distribution Costs: For circulars, prospectuses, and other shareholder documents.
Public Relations and Investor Relations Fees: For managing communication with the market.
This is a general overview of potential fees. Actual costs can vary significantly based on the specific circumstances of the issuance, and the prevailing market conditions. It is crucial for a company to consult with Bestar in Hong Kong to get a precise estimate of the costs for their specific situation.
How Bestar can Help
Issuing redeemable preferred shares in Hong Kong, particularly for a publicly listed company, is a complex process that requires expertise across legal, financial, and corporate governance domains. Bestar plays a critical role in ensuring the issuance is compliant, efficient, and aligned with the company's strategic goals.
Here's how Bestar can help:
1. Legal
Bestar navigates the legal and regulatory landscape of a share issuance. Our role includes:
Advising on the Legal Framework: We provide guidance on the Hong Kong Companies Ordinance (Cap. 622) and the Listing Rules of the Hong Kong Stock Exchange. We ensure the company's articles of association permit the issuance of redeemable preferred shares and advise on any necessary amendments.
Drafting Legal Documents: We are responsible for drafting or reviewing all legal documents, including the terms of the redeemable preferred shares, the shareholders' resolutions, and any subscription or underwriting agreements. For a listed company, they would also draft the prospectus or circular to shareholders.
Ensuring Compliance: Bestar ensures that the entire issuance process complies with all statutory requirements, including filing deadlines with the Companies Registry and making the necessary announcements to the HKEX. We advise on the strict rules concerning the funding of the redemption, such as the use of distributable profits or proceeds from a new share issue.
Structuring the Redemption: We help structure the redemption mechanism to meet the company's financial and strategic objectives while adhering to legal constraints. This includes advising on the redemption price, redemption date, and who has the right to redeem the shares (the company, the holder, or both).
2. Financial
Bestar structures the crucial deal and manages the financial aspects of the issuance. Our services include:
Valuation and Pricing: We assist the company in determining the appropriate value and pricing for the redeemable preferred shares. This involves market analysis, comparable company analysis, and modeling different scenarios to attract investors while maximizing the capital raised for the company.
Structuring the Issuance: We advise on the most suitable structure for the issuance. This includes determining the dividend rate, redemption premium, and other terms to make the shares attractive to a specific type of investor. We may also explore different structures, such as convertible redeemable preferred shares.
Financial Due Diligence: Bestar conducts due diligence on the company's financial health, business plan, and market position to present a compelling investment case to potential investors.
3. Corporate Secretarial
Bestar plays a vital role in the administrative and compliance aspects of the share issuance. We ensure that all procedural requirements are met, allowing the company to focus on its core business. Our functions include:
Board and Shareholder Meeting Management: We organize and prepare for board and shareholder meetings, draft meeting agendas, and record minutes of resolutions to formally approve the share issuance. This is crucial for maintaining proper corporate governance and creating an audit trail.
Statutory Filings: We are responsible for all mandatory filings with the Hong Kong Companies Registry. This includes preparing and submitting the "Return of Allotment" (Form NSC1) within the required timeframe to officially register the new shares.
Maintaining Statutory Records: We update the company's statutory records, such as the Register of Members, to reflect the new shareholdings.
Liaison with Authorities: We act as a central point of contact with the Companies Registry and, for listed companies, the HKEX, to ensure all administrative and compliance tasks are handled efficiently.
4. Audits and Accounts
Bestar provides essential financial and accounting support. Our roles include:
Financial Reporting and Disclosure: We ensure the financial information presented in the circular or prospectus is accurate and complies with relevant accounting standards, such as IFRS or Hong Kong Financial Reporting Standards. We may also be involved in preparing pro-forma financial statements to show the impact of the issuance.
Assessing Redemption Funding: In cases where a company plans to redeem shares out of capital, Bestar will be involved in the preparation of a solvency statement to satisfy the legal requirements.
Tax Advisory: We advise on the tax implications of the share issuance for both the company and the investors. This includes the tax treatment of dividends and any capital gains or losses on the redemption.
By engaging Bestar, a company can navigate the complexities of issuing redeemable preferred shares with confidence, ensuring a smooth, compliant, and successful transaction.
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