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Policy Statement & Submission

2008/03/19

Pre-Consultation on the requirement to publish supplemental prospectus and the right to withdraw

Our ref: SN/04

19 March 2008

Mr Brian Ho
Executive Director, Corporate Finance
Securities and Futures Commission
8th Floor, Chater House
8 Connaught Road Central
Hong Kong



Dear Mr Ho

Re: Pre-Consultation on the requirement
      to publish supplemental prospectus and the right to withdraw


Thank you for your letter of 16th January 2008 inviting the Hong Kong General Chamber of Commerce comments on the captioned.

As an initial observation, on page 3 the explanation for granting Withdrawal Rights focuses on whether ? the new circumstance is not drastic enough to warrant termination of an IPO but is nonetheless material enough to be disclosed to prospective investors by way of a supplemental prospectus ?. Page 4 than goes on to refer to potential criminal or civil liability for ? (a) failing to comply with the Withdrawal Mechanism and/or (b) payment of compensation to those investors who acquired the shares on the basis of the prospectus and have suffered loss by reason of the Issuer contravention? Whilst the Commission quite correctly casts the issue as one of fairness to investors, it is not entirely clear whether the Commission analysis has fully reflected that if the rights are not granted and the circumstances of an offering become different from those that the investor was previously aware of, the investor could be entitled rescind on the grounds of misrepresentation. In other words, the purpose of Withdrawal Rights fundamentally is to provide legal certainty as to the validity of the allotments of shares. It is this legal consequence that underlies our analysis and views on a number of the questions posed by the Commission in its paper.

Secondly, we have a question whether the use of Withdrawal Rights is appropriate in circumstances where the prospectus is effectively ncomplete?in the sense that the relevant MAC was not explicitly envisaged in it. The issue is that there will undoubtedly be some investors who do not see the supplemental disclosure but whose applications will nevertheless be binding if not withdrawn. This contrasts with the situation in The Link REIT where the offering circular would always have been omplete??a judicial review (the sole trigger point for the Withdrawal Rights) was explicitly envisaged ?and the supplemental disclosure would merely have addressed the consequences of possible (and disclosed) circumstances becoming actual.

Thirdly, in the case of The Link REIT, intermediaries were put on notice at the outset of the need to ensure that their arrangements for the IPO (e.g. bank lending for margin financing) were made in light of the possibility of Withdrawal Rights being triggered. We have major concerns as to whether the market would wish to operate under those conditions for all IPOs, rather than making such arrangements in the case of specific IPOs where particular circumstances that might trigger withdrawal are envisaged from the outset and thus effectively giving all intermediaries the chance to choose whether or not to participate/offer certain services (such as margin financing) for the relevant IPO.

As a result of the above, our main concern is that whilst the use of Withdrawal Rights in offerings that envisage them at the outset for specific circumstances is appropriate ?such as was the case with The Link REIT ?we see much greater difficulties in allowing them upon the occurrence of MAC events which are not so envisaged.

We would also observe that it is a logical conclusion of our views that, if it is inappropriate for Withdrawal Rights to be made available other in the manner we have discussed above, it would also be inappropriate to introduce in to law a provision requiring generally the publication of supplementary prospectuses. Rather such requirement, if introduced, should only be applicable where Withdrawal Rights are offered. In all other cases the current regime should be maintained namely that any changes in circumstances must either be considered by the Issuer as non-material in which case no disclosure is merited, or if they are material the Issuer must terminate the offering must terminate the Offering.

Turning to the specific questions:

Q1 - we agree that the offer period should not be extended.

Q2 - it would be possible to reach an agreement on price before the results of the withdrawal rates of retail investors are known as pricing is primarily driven by demand in the international placing rather than the retail public offering.

Q3 - we believe that any Withdrawal Rights mechanism should not be permitted to impact on the time at which cheques for wholly/partially unsuccessful applications are refunded. Provided the timetable for dispatching these is met, it should not matter when, exactly, the deal is priced. In any event, in any IPO it is always the case that the pricing may in fact be determined at a point in time subsequent to that originally envisaged in the published timetable.

Q4 - whether an Issuer could (or would want) to adjust the offer price in the case of a MAC is wholly dependent on the particular circumstances. Technically it is not impossible as the mechanics would be no different from repricing an IPO when no Withdrawal Rights are being offered.

Q5A - we believe that technically Withdrawal Rights can and should be allowed up to the time the offering becomes unconditional (similar to the mechanism adopted by The Link REIT).


Q5B - the contents requirements of any announcement should be dictated by what is necessary from a legal perspective to achieve the purpose of granting Withdrawal Rights (namely a valid allotment). Any announcement will also need to be prepared in light of the extent to which relevant provisions are (a) part of a statutory framework and (b) envisaged by the relevant prospectus. Accordingly it is difficult to really answer the questions posed.

Q6 - we do not believe requiring the dispatch of withdrawal forms (as opposed to providing for them to be collected) is practical because, as indicated in our answer to Q5A, we believe that Withdrawal Rights should be able to be triggered up to the time the offering becomes unconditional (i.e. in normal practice the day after share certificates are dispatched to successful applicants). We would also observe that the use of allocation letters for yellow form applicants is not current practice ?the use of such letters in The Link REIT was envisaged in order to implement the Withdrawal Rights mechanism envisaged in that offer. If such letters were to need to be issued for every IPO in Hong Kong in case Withdrawal Rights are triggered, it would result in additional costs for the market. This issue would need to be explores in detail with parties responsible for settlement, including HKSCC. Also the practicalities for registrars of white form eIPO need now to be considered (such application mechanism did not exist at the time of The Link REIT).

Q7 - if there was to be a statutory long-stop date for dispatching refund cheques this would have implications for all IPO timetables, not merely situations involving Withdrawal Rights. We are not in favour of imposing additional requirements on offering structures in Hong Kong and feel this is best left for the market.

Q8 - the question of whether cheques for withdrawn applications should have to be dispatched by the time dealings commence is a practical one as it depends, in large part, on the time allowed between the withdrawal period ending and dealings commencing. Given the difficulty of predicting such a mechanic it does not seem appropriate to make specific provision ?similar to there being no legal requirement currently that refund cheques for wholly/partially unsuccessful applications must be dispatched before dealings commence. We also note that in the case of The Link REIT it was provided only that refunds were xpected?to be made within 3 business days of dealings commencing.

Q9 - we agree partial withdrawals should not be permitted as this would be wholly impractical.

Q10 - our answers would not differ irrespective of the time the MAC occurs.

Q11 - as indicated in regard to question 5A, we believe that the Withdrawal Rights mechanism should be permitted up to the time the offering becomes unconditional. We do not believe that the uncertainty that would exist if it continued post-dealings commencing would be a healthy step for development of the Hong Kong market.


Q12 - our answers would be no different in the case of multiple MAC.

Q13A - as a technical point, we do not believe that there should be withdrawn allotments (see our answers to Q5A and Q11 re timing) ?rather there should only be withdrawals from allocations.

Q13B - it is impractical to offer withdrawn allocations through the public offering because, as noted in footnote 12 of the Commission paper (citing The Link REIT offering circular), once cheques for wholly/partially unsuccessful applications have been dispatched there would be no money available to settle such re-allocations.

Q14A
and 14B - the most suitable way of dealing with brokerage is as adopted by The Link REIT, namely withdrawing applicants would receive back their application monies in full (including brokerage and levies), brokers/HKEx (depending on whether applications forms are chopped or not) would keep the brokerage (and hence not be disadvantaged) and the underwriters would settle the brokerage from brokerage charged to placees who take-up the withdrawn allocations.

Q15 - we believe these are real concerns, as indicated in our opening comments and hence why the adoption of a procedure allowing Withdrawal Rights to be triggered on all IPOs (as opposed to those which specifically envisage them for particular identified circumstances) may be difficult.

Q16 - the possibility of a listing hearing being necessary would be difficult to accommodate as this would potentially cause significant delay in Withdrawal Rights being announced, or cause uncertainty if Withdrawal Rights were granted but the continuation of the offer was still subject to review. Again, this argues that Withdrawal Rights should only be permitted for circumstances envisaged from the outset in the relevant prospectus.

Q17A
and 17B - similar to our answer to Q11, we do not believe it is practical for Withdrawal Rights to be exercisable once trading (in this case, in nil-paid rights) has started. Given that this commences with the issue of the prospectus, we do not see any practical use for Withdrawal Rights in the case of rights issues.

Q18 - our answers would not differ for debentures.

I hope you will find our input to be useful and wish to thank you for bearing with us for the time taken in replying to you.


Yours sincerely




David O'Rear
Chief Economist

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