HKSI Paper 11 cheat sheet

SFC is the statutory regulator under the Securities and Futures Ordinance (SFO); HKEX is the exchange operator and front-line regulator of listed companies under the Listing Rules.

Type 6 regulated activity (advising on corporate finance) requires an SFC licence; dealing in securities (Type 1) and advising on securities (Type 4) are separate regulated activities.

SFO Part XV prohibits market misconduct including false trading, price rigging, disclosure of false or misleading information inducing transactions, and insider dealing (Part XIII).

Corporate finance advisers must manage conflicts of interest under SFC Code of Conduct paragraph 17 and the Corporate Finance Adviser Code of Conduct: independence, disclosure, and Chinese walls.

Sponsors under the Listing Rules must be appointed at least two months before filing the listing application (Main Board Rule 3A.02) and must conduct reasonable due diligence (Practice Note 21).

The Takeovers Code and Share Buy-backs Code are issued by the SFC (not HKEX) and apply to public companies in Hong Kong; the Listing Rules also contain related provisions.

Inside information must be disclosed as soon as reasonably practicable under SFO Part XIVA; a listed corporation must have internal controls and a designated person for disclosure.

The SFC may take disciplinary action including revocation of licence, fines up to HK$10 million or three times profit gained or loss avoided, and public censure.

Main Board financial eligibility: profit test (HK$35 million aggregate, HK$4.5 million in most recent year, HK$8 million in each of two preceding years), market cap test (HK$500 million at listing), or revenue/cash flow test (revenue HK$500 million, cash flow HK$100 million).

Minimum market capitalisation at listing: HK$500 million for Main Board; HK$150 million for GEM (with higher profit/revenue requirements for GEM).

Public float: at least 25% of total issued shares must be in public hands (or 15-25% if market cap exceeds HK$10 billion at listing, subject to HK$1 billion minimum).

Main Board requires at least three financial years of trading record; GEM requires two financial years.

A listing applicant must have management continuity for at least three years and ownership continuity for at least one year (Main Board).

Connected persons include directors, chief executive, substantial shareholders (10% or more of voting power), and their associates; transactions with them are connected transactions.

The Listing Rules are amended by the Exchange; rule changes require SFC approval and consultation; guidance letters and listing decisions are published on the HKEX website.

Dual primary listing and secondary listing regimes exist for overseas issuers; weighted voting rights (WVR) issuers permitted under Chapter 8A subject to safeguards (e.g., market cap HK$40 billion, or HK$10 billion with revenue HK$1 billion).

IPO pricing: offer price determined after bookbuilding; retail tranche initially 10% subject to clawback to 30% if oversubscribed 15x-50x, 40% if 50x-100x, 50% if 100x or more (Main Board).

Placing: issue of new shares to selected investors; general mandate allows issuance up to 20% of issued share capital (refreshable); placing under general mandate does not require shareholder approval but pricing restrictions apply (maximum discount 20% to benchmarked price).

Rights issue: offer to existing shareholders on a pro-rata basis; if not fully subscribed, underwritten; requires shareholder approval unless within general mandate or made to existing shareholders pro rata.

Open offer: offer to existing shareholders but not pro-rata; often used to raise capital from all shareholders; requires shareholder approval and is subject to connected transaction rules if connected persons subscribe.

Consideration issue of securities for acquisitions requires independent shareholder approval if it would result in a change of control or is a major transaction; Listing Rules Chapter 14 and 14A apply.

Placing of existing shares (top-up placing) involves selling shares then subscribing for new shares under general mandate; subject to lock-up and disclosure requirements.

Share issuance price must not be at a discount of 20% or more to the benchmarked price (higher of closing price on date of agreement and average closing price in previous 5 trading days) unless exceptional circumstances.

Rights issue and open offer timetables: minimum offer period for rights issue is 10 business days; open offer is 10 business days; results announced promptly.

Transaction classification under Chapter 14 uses percentage ratios: assets ratio, profits ratio, revenue ratio, consideration ratio, equity capital ratio; each compares the transaction to the listed issuer's figures.

Classification thresholds: share transaction (all ratios <5%), discloseable transaction (any ratio ≥5% but <25%), major transaction (any ratio ≥25% but <100%), very substantial acquisition (any ratio ≥100%).

Major transaction requires shareholder approval, circular to shareholders, and accountants' report on the acquired business; very substantial acquisition also requires sponsor due diligence.

Connected transaction: transaction between listed issuer and connected person; requires independent shareholders' approval if not de minimis; de minimis exemption: consideration <0.1% of market cap or <HK$1 million (whichever higher) for connected person transaction.

Continuing connected transactions require annual caps, independent shareholders' approval, and annual review; exemption for transactions on normal commercial terms and below de minimis threshold.

Circulars for notifiable transactions must include details of the transaction, financial information on the target, pro forma financial information, and directors' recommendation.

Aggregation rules: transactions with the same counterparty or related parties within 12 months may be aggregated for classification.

Very substantial disposal requires shareholder approval and circular; disposal of entire business may trigger delisting or cash company rules (Rule 14.82).

Mandatory general offer triggered when a person acquires 30% or more of voting rights, or when a person holding 30-50% acquires more than 2% in 12 months; offer must be for all shares at highest price paid in preceding 6 months.

Rule 26.1: mandatory offer must be made to all shareholders; consideration must be cash or cash alternative at least equal to highest price paid by offeror or concert parties in the 6 months before the offer period.

Voluntary general offer: offeror may make offer for all shares; if offer becomes unconditional, acceptances must exceed 50% of disinterested shares; if not, offer lapses.

Share buy-backs: on-market buy-back limited to 10% of issued shares under general mandate; off-market buy-back requires shareholder approval and Takeovers Code compliance if it increases a shareholder's stake.

Whitewash waiver: SFC may grant waiver from mandatory offer obligation for a transaction that would otherwise trigger it, subject to independent shareholders' approval.

Offer period: from announcement of offer or possible offer until offer closes; during offer period, offeror and offeree company must not deal in shares without SFC consent.

Partial offer: offer for less than 100% of shares; requires SFC consent and independent shareholders' approval if it would result in offeror holding 30% or more.

Takeovers Code does not apply to companies incorporated in Hong Kong if they are not public in Hong Kong; but applies to public companies listed in Hong Kong.

DCF valuation: PV = Σ (FCF_t / (1+r)^t) + terminal value / (1+r)^n; terminal value often using Gordon growth: TV = FCF_{n+1} / (r - g).

Comparable company analysis: use EV/EBITDA, P/E, P/B multiples; adjust for differences in growth, risk, and capital structure.

Precedent transactions analysis: use transaction multiples; control premium typically 20-40%.

NAV valuation: appropriate for property companies; revalue assets to market and deduct liabilities.

WACC = (E/V) × Re + (D/V) × Rd × (1 - tax rate); Re from CAPM: Re = Rf + β × (Rm - Rf).

Dividend discount model: P0 = D1 / (r - g); Gordon growth model assumes constant growth.

SOTP (sum of the parts): value each business segment separately using appropriate methods and sum; deduct net debt to get equity value.

Earnings quality adjustments: normalise for non-recurring items, related-party transactions, and accounting policies; consider free float and liquidity discount for private companies.

Bond pricing: price = Σ (C / (1+y)^t) + F / (1+y)^n; yield and price move inversely.

Convertible bond: bond plus embedded call option on issuer's shares; conversion ratio = face value / conversion price; conversion premium = (conversion price - share price) / share price.

Convertible bonds are accretive if earnings yield (EPS increase) exceeds after-tax cost of debt; dilution if converted.

Bond covenants: negative pledge, cross-default, change of control put, limitation on indebtedness; breach can lead to acceleration.

Credit rating agencies (S&P, Moody's, Fitch) assign ratings; investment grade BBB-/Baa3/BBB- or above; high yield below.

Structured finance: securitisation involves pooling assets and issuing tranched securities; SPV isolates risk; credit enhancement via subordination, overcollateralisation, guarantees.

Perpetual bonds have no maturity but may have call dates and coupon step-ups; treated as equity under accounting if no obligation to repay.

Exchangeable bonds are convertible into shares of a third party (not issuer); valuation depends on underlying shares and credit risk.

Scheme of arrangement under Companies Ordinance (Cap. 622) Part 13: requires court approval and approval by majority in number representing 75% in value of creditors/members present and voting.

Scheme used for privatisation, debt restructuring, and group reorganisation; must be fair and reasonable; court sanctions after shareholder/creditor approval.

Delisting: HKEX may delist after trading suspension for 18 months (Main Board) if no resumption; delisting can be voluntary by shareholder approval under Rule 6.12.

Privatisation by scheme: offeror and concert parties cannot vote; requires 75% of disinterested shares and no more than 10% dissenting votes.

Whitewash waiver for privatisation: SFC may waive mandatory offer obligation if independent shareholders approve; typically required for privatisation by scheme.

Restructuring may involve debt-for-equity swaps, rights issues, open offers, and asset disposals; connected transactions and notifiable transaction rules apply.

Cash company rules (Rule 14.82): if a listed issuer becomes a cash company (assets substantially cash), it may be delisted unless it meets listing criteria; reverse takeover rules (Rule 14.06) apply.

Delisting appeals: issuer can appeal to Listing Review Committee; SFC may object to listing decisions.

SFC Code of Conduct paragraph 17: licensed persons must avoid conflicts of interest and ensure fair treatment of clients; disclose conflicts and manage with Chinese walls.

Corporate finance advisers must be independent from the issuer; independence assessed by SFC and disclosed in circulars.

Insider dealing: prohibited under SFO Part XIII; penalties include fines up to HK$10 million and imprisonment up to 10 years.

Market misconduct: SFO Part XV; includes false trading, price rigging, disclosure of false or misleading information; SFC may impose civil sanctions.

Sponsors must conduct due diligence and ensure prospectus accuracy; failure can lead to SFC disciplinary action and liability under SFO section 213.

Confidentiality: client information must be kept confidential; Chinese walls prevent flow of inside information within firms.

Gifts and entertainment: licensed persons must not accept gifts that could compromise independence; SFC guidelines require disclosure and approval.

Whistleblowing: firms should have procedures; SFC encourages reporting of misconduct; retaliation prohibited.