Hong Kong Securities And Futures Commission Publicly Censures CLSA Limited, CITIC Securities Brokerage (HK) Limited, Beijing Enterprises Holdings Limited And Their Representatives For Breaching The Code On Share Buy-Backs

In February and May 2016, CLSA on behalf of its institutional clients and CSB on behalf of Beijing Enterprises carried out trades which allowed Beijing Enterprises to buy back more than 18 million of its shares. CLSA and CSB executed these trades on The Stock Exchange of Hong Kong Limited as on-market trades but they were in fact pre-arranged and pre-agreed. The transaction price, size, timing and the manner in which the trades were executed were agreed and coordinated beforehand. These trades were in substance off-market share buy-backs which should have obtained approvals from the Executive (Note 5) and Beijing Enterprises’ independent shareholders under Rules 1 and 2 of the Code on Share Buy-backs (Note 6). 

In effecting the pre-arranged trades, the conduct of CLSA, CSB and their licensed persons fell short of the standards expected of them under the Codes on Takeovers and Mergers and Share Buy-backs, and shareholders of Beijing Enterprises were deprived of the opportunity to vote on an important corporate action.

Each of the parties accepted that they failed to comply with the Code on Share Buy-backs and consented to the disciplinary action taken against them.

The SFC wishes to take this opportunity to remind practitioners and parties who wish to take advantage of the securities markets in Hong Kong that they should conduct themselves in accordance with the Codes on Takeovers and Mergers and Share Buy-backs. If there is any doubt about their application, the Executive should be consulted at the earliest opportunity.

The Executive Statement can be found in the "Listings & takeovers – Takeovers & mergers – Decisions & statements – Executive decisions and statements" on the SFC website.

Notes:

1. Individuals are listed in alphabetical order below their respective employers at the relevant time.
2. CLSA is licensed to carry out Type 1 (dealing in securities), Type 4 (advising on securities) and Type 7 (providing automated trading services) regulated activities under the Securities and Futures Ordinance (SFO). Andrew James WALTERS was a licensed representative (Type 1) and Head of Block Trading, and Stuart Richard WILSON was a licensed representative (Types 1 and 4) and Managing Director - Head of Equity Syndicate, of CLSA at the relevant time.
3. CSB is licensed to carry out Type 1 (dealing in securities) and Type 4 (advising on securities) regulated activities under the SFO. Ka Yip Eddy LAU and King Yuen LAU were responsible officers (Type 1), and Stephanie LI was a licensed representative (Types 1 and 4) and Managing Director - High Networth Brokerage, of CSB at the relevant time.
4. The shares of Beijing Enterprises are listed on the Main Board of The Stock Exchange of Hong Kong Limited. Beijing Enterprises is principally engaged in the distribution and sale of piped natural gas. Woon Cheung Eric TUNG was the Assistant President and General Manager of the Finance Department of Beijing Enterprises at the relevant time.
5. The Executive Director of the SFC’s Corporate Finance Division or his delegate.
6. Rule 1 of the Code on Share Buy-backs provides that "a company may only engage in the following types of share buy-back:– (a) an on-market share buy-back; (b) an off-market share buy-back approved in accordance with Rule 2…". Rule 2 provides that "off-market share buy-backs must be approved by the Executive before a repurchasing company acquires any shares pursuant to such share buy-back. Such approval will normally be conditional upon the following:– (a) approval of the proposed off-market share buy-back by at least three-fourths of the votes cast on a poll by disinterested shareholders in attendance in person or by proxy at a general meeting of shareholders duly convened and held to consider the proposed transaction". Rule 2 of the Code on Share Buy-backs is derived from, amongst other things, General Principle 1 of the Codes on Takeovers and Mergers and Share Buy-backs and the fundamental requirement that "all shareholders are to be treated even-handedly and all shareholders of the same class are to be treated similarly".