Equity fundraising: IPOs, placings, rights issues and open offers
Equity fundraising: IPOs, placings, rights issues and open offers
This domain tests the mechanics and approval routes for raising equity after listing: which structures need shareholder approval, which can be done under a general mandate, and what price and disclosure constraints apply.
The mandate framework
- A general mandate, refreshed at each AGM, permits issues of up to 20% of the issued share capital, plus the number of shares repurchased under the 10% repurchase mandate.
- An issue within the mandate needs no shareholders' meeting, but Rule 13.36(5) prohibits a placing at a discount of 20% or more to the benchmarked price - the higher of the closing price on the date of the placing agreement and the average closing price over the five preceding trading days.
- Anything outside the mandate needs a specific mandate approved by shareholders in general meeting, supported by a circular.
The structures
- Rights issue: offered pro rata to existing shareholders in proportion to holdings; a pro rata rights issue does not require shareholders' approval. Entitlements are renounceable and excess applications are typically allowed.
- Open offer: an offer to existing shareholders that is not strictly pro rata and may permit disproportionate excess applications; it generally requires shareholders' approval unless made under a general mandate.
- Placing: securities sold to selected investors - the most common post-IPO route, usually done under the mandate.
- Placing to a connected person: requires independent shareholders' approval, an IFA opinion and a circular even if within the mandate.
- After any fundraising the public float must remain at or above 25% (15% for large-cap issuers), and the results must be announced.
Worked example
A Main Board issuer places new shares under its general mandate at HK$4.00. The closing price on the date of the placing agreement is HK$5.20; the five-day average is HK$5.00. The benchmarked price is therefore HK$5.20 and the maximum permitted discount price is HK$4.16 (80% of HK$5.20). At HK$4.00 the discount is 23.1%, which breaches Rule 13.36(5): the placing must be repriced or a specific mandate obtained.
Traps
- Confusing the 20% issue mandate with the 10% repurchase mandate.
- Measuring the discount against the previous day's close rather than the benchmarked price.
- Assuming a rights issue is always approval-free: a non-underwritten or disproportionate structure changes the analysis.
- Forgetting that a placing to a connected person needs independent shareholder approval regardless of size.
- Ignoring the public float test after a large placing to a small group of investors.