HKSI Paper 11 common mistakes
HKSI Paper 11 · Understand the traps and how to avoid them.
Treating any transaction with a percentage ratio of 25% or more as automatically requiring shareholder approval, without first classifying the transaction as share transaction, discloseable transaction, major transaction or very substantial acquisition and then applying the correct circular and approval requirements for that class.
Candidates memorise the headline 25% major transaction threshold and skip the full five-ratio test (assets, profits, revenue, consideration, equity capital). They also forget that a share transaction needs notification and publication only, and that the circular content and accountants' report obligations scale with the classification.
What to do instead
Work every ratio question through a fixed sequence: compute all five ratios, take the highest, map to the class, then state the announcement, circular, shareholder approval and accountants' report consequences for that class. Practise with transactions where the profits ratio or equity capital ratio, not the assets ratio, drives the classification.
Applying the connected transaction rules only to the listed issuer's directors and substantial shareholders, while missing connected persons at the subsidiary level, the 30% family and controlled company look-through, and the deeming provisions for transactions with third parties that are connected only because of a director's interest in them.
The definition of connected person is layered and the deeming provisions are counter-intuitive. Candidates study the headline definition and never drill the look-through rules, so they misclassify transactions as independent when a director's controlled company or a 30%-held associate is on the other side.
What to do instead
Build a one-page connected person map: core connected persons, connected persons at subsidiary level, associates, and deemed connected persons. Then practise tracing a chain from a director to a counterparty through family interests and controlled entities until the connection is either established or excluded.
Assuming a mandatory general offer is triggered only when a holder crosses exactly 30%, and then failing to apply the creep-up rule, the creeper provision for holdings between 30% and 50%, and the consequences of a whitewash waiver being refused.
The 30% trigger is memorable and the 2% creep-up within 12 months is not. Candidates also confuse the trigger thresholds with the pricing rule and forget that a subscription for new shares can trigger an obligation just as a purchase can.
What to do instead
Memorise the three trigger routes separately: the 30% initial threshold, the creep-up from 30% to 50%, and the mandatory offer arising on a change of control. For each, practise identifying the offer price floor (highest price paid in the preceding six months and during the offer period) and the role of the Executive in granting a waiver.
Confusing the pricing and lock-up restrictions for placing new shares with the rules for existing-share placings, and applying the wrong benchmark or the wrong discount limit.
Both are placings under a general mandate, but the benchmark price, the maximum discount and the restriction on placing to connected persons differ, and the general mandate refresh timing is a separate rule again. Candidates collapse all of these into a single '20% discount' rule.
What to do instead
Tabulate the placing rules by type: new shares under general mandate, existing shares under general mandate, and specific mandate placings. For each, record the benchmark, the maximum discount, the lock-up and the connected person restriction, then test yourself on mixed scenarios where the counterparty is a connected person.
Treating a rights issue and an open offer as interchangeable, so the answer misses that a rights issue is offered to shareholders in proportion to holdings and is renounceable, while an open offer is not necessarily proportionate and may be non-renounceable, with different implications for minority shareholders and for underwriters.
Both raise cash from existing shareholders and both appear in the same chapter of study material. The differences that matter to the exam are procedural: renounceability, the ability to apply for excess shares, the underwriting arrangements and the treatment of unsubscribed shares.
What to do instead
Write a side-by-side comparison covering entitlement basis, renounceability, excess application, underwriting, and the announcement and circular requirements. Then apply it to a scenario where a controlling shareholder will take up its entitlement and the question turns on whether minorities are disadvantaged.
Calculating an IPO's suitability by checking only the profit test, without testing the market capitalisation threshold, the revenue test and the market cap/revenue/cash flow test as alternative routes, and without checking the trading record period and management continuity requirements.
The profit test is the most commonly quoted route and candidates stop there. They also overlook that the three tests have different trading record and management continuity conditions, and that a change of control during the track record period can disqualify the applicant.
What to do instead
Build a decision tree with the three eligibility tests as branches, each with its own profit, revenue, cash flow, market cap and trading record conditions. Then run a hypothetical applicant through all three branches to confirm which routes it satisfies and which it fails, and note the ownership continuity requirement.
Valuing a target using a single method and presenting the output as the answer, without reconciling to a market-based cross-check or explaining the sensitivity of the conclusion to the discount rate and terminal growth assumptions.
Exam questions often supply enough data for a discounted cash flow and candidates stop when they have a number. They forget that a valuation conclusion in a circular or fairness opinion must be supported by more than one methodology and that the assumptions must be disclosed and tested.
What to do instead
For every valuation question, produce at least two methods (for example DCF and comparable multiples), reconcile the difference, and state which assumptions drive the range. Practise sensitivity tables on WACC and terminal growth so the effect of each assumption is explicit rather than buried in a single figure.
Describing a scheme of arrangement as simply a shareholder vote, without distinguishing the court-sanctioned procedure from a takeover offer, the headcount and 75% by value majorities in each class, the role of the court hearing, and the treatment of dissenting shareholders.
Schemes and takeovers achieve similar outcomes and candidates conflate the mechanics. The distinctive features, namely class meetings, the dual majority test, court sanction and the binding effect on all shareholders, are exactly what the exam tests.
What to do instead
Map the scheme timeline stage by stage: application to the court, convening of class meetings, the dual majority test, the court hearing, and the filing. Contrast each stage with the equivalent step in a general offer, and note when a scheme is preferable, for example where a squeeze-out is impractical.
Ignoring conflicts of interest in an advisory engagement, such as acting for both the offeror and the target, or advising on a transaction in which the adviser or its affiliate holds a material position, and failing to identify the controls that should be put in place.
Candidates treat ethics as a separate topic rather than as an overlay on every transaction. They answer the technical question correctly and never mention independence, information barriers or the need to decline or restructure the mandate.
What to do instead
For every advisory scenario, add a conflict check step: identify the parties, the adviser's own interests and any affiliate relationships, then state whether the mandate can be accepted, declined or accepted with controls such as information barriers, separate teams and disclosure to the client and, where relevant, to the regulator.
Treating convertible bonds as plain debt for the purpose of the ratios and the proceeds analysis, and ignoring the conversion price adjustment provisions, the equity component and the dilution effect on control.
Convertibles sit between debt and equity and candidates default to the debt treatment they know. They miss that conversion can alter shareholding percentages, potentially triggering a mandatory offer or a change in connected person status, and that anti-dilution adjustments change the conversion price.
What to do instead
Analyse every convertible instrument on three axes: accounting treatment (liability and equity components), the effect of conversion on shareholding and control, and the adjustment mechanics on rights issues, capitalisation issues and other dilutive events. Then test a conversion scenario against the mandatory offer thresholds.