During the decline of the market, buybacks become the preferred strategy for mainstream companies.

Since the beginning of this year, the performance of the Hong Kong stock market has been low, the valuation has been in a continuous downward cycle, and the position has dropped to a relatively low level, which for many listed companies can neither reflect the value of the enterprise itself, nor is it conducive to the opening of corporate refinancing behavior. for listed companies, share buybacks to maintain market capitalization began to enter the agenda.

At a time when the company's valuation is low, or even its market capitalization is significantly lower than its net assets, as of April 8, 2022, 116 Hong Kong listed companies have launched buybacks to optimize their financial statements, stabilize stock prices and enhance investor confidence. It is expected that a large number of companies will carry out share buybacks at the end of the quiet period.

II. Two mainstream ways for listed companies to buy shares from the secondary market

1. Listed companies buy back shares from the secondary market in their own name

Stock buyback refers to the behavior that listed companies use their own funds to buy back a certain amount of shares issued by the company from the stock market. Lawyer Luo Weide, partner of King & Wood Law firm and Securities Department, pointed out that according to Rule 10.06 (1) and (2) of the rules governing the listing of Securities on the Stock Exchange of Hong Kong Limited (the "listing rules"), the share capital of the shares to be repurchased by the listed company must be fully paid up, and the shareholders of the listed company shall, by ordinary resolution, give special approval or general authorization to the board of directors to carry out share repurchases. The number of shares repurchased shall not exceed 10% of the number of shares issued on the day on which the resolution on the general authorization of the listed company is passed, and the purchase price must also comply with the provisions of the listing rules. And according to Rule 10.06 (5) of the listing rules, all shares repurchased by a listed company will automatically lose its listing status at the time of repurchase, and the listed company shall ensure that after the settlement of the repurchase of the shares, cancel and destroy the ownership documents of the repurchased shares as soon as possible.

Picture: the company buys back shares directly.

two。 Listed companies set up ESOP trusts, instructing them to buy shares from the secondary market.

Listed companies can also set up ESOP trusts, in which independent third-party trust companies buy shares from the secondary market. According to Lin Weibin, CEO of Futu Trust, the trust secondary market purchase means that the listed company acts as the trustee, appointing the trust company as the trustee to establish the ESOP Trust, and the listed company instructs the trustee to buy the company's shares in the secondary market in the form of instructions, and the purchased shares can be used as long-term incentive inventory stocks to encourage qualified persons (beneficiaries).

Figure: take Futu Trust as an example, an ESOP trust bracket that buys shares from the secondary market through a trust company.构

The stock market is unpredictable, suitable for fleeting opportunities, which of the above is more suitable for listed companies?

Picture: the time for buyback is fleeting

Third, for listed companies, buying in the trust secondary market is more conducive to the development of their business.

In addition to the above-mentioned review process of shareholders and the board of directors and the need to cancel the repurchased shares, in the listing rules 10.06, Hong Kong Exchanges and Clearing's provisions on direct share repurchases by listed companies include, but are not limited to, the following:

(1) the repurchase price cannot be higher than 5% or more of the average closing price of the past 5 trading days.

(2) after learning the inside information, the listed company shall not carry out share repurchase until the relevant information has been made public. In particular, a listed company shall not repurchase within one month before the date of the board meeting held by the board of directors for the adoption of any annual, semi-annual, quarterly or any other interim results or the publication of any annual, semi-annual, quarterly or any other interim results.

(3) No new shares shall be issued for financing or announcement of new shares within 30 days after each share repurchase.

(4) before the next trading day after the repurchase of Hong Kong shares, the listed company must disclose the price and quantity of the shares repurchased in the previous trading day.

To sum up, there are some restrictions on the direct repurchase of listed companies, such as examination procedure, repurchase price, operation time limit, follow-up financing plan, repurchase disclosure and so on, and the repurchased shares will automatically lose their listing status at the time of repurchase. Listed companies shall cancel the ownership documents of the repurchased shares as soon as possible.

In response to the purchase of shares in the trust secondary market, lawyer Locke pointed out:

Buying the shares of a listed company through the trust in the secondary market and then using the shares purchased by the trust as a long-term incentive do not need to convene a general meeting in accordance with rule 10.06 (1) of the listing rules to obtain special approval or general authorization of the board of directors, the shares purchased will not be cancelled, but the listed company shall, in accordance with its organizational documents And the legislation of the jurisdiction where the listed company is registered or established approves the establishment of an incentive scheme. Under the existing listing rules, if the share incentive scheme does not constitute a share option scheme within the meaning of Chapter 17 of the listing rules, the general meeting and disclosure requirements under Chapter 17 of the listing rules will not apply to the share incentive scheme.

The main differences between direct repurchase of listed companies and the purchase of shares in the trust secondary market are as follows:

Listed companies have more flexibility and fewer operational restrictions to buy shares in the secondary market through trusts, and the repurchased shares can be used as a share source to further motivate talents. Lawyer Locke said: "the establishment of a share incentive scheme can commend and encourage certain qualified persons to contribute to the business development and growth of listed companies, so as to retain their services for the continuous operation and development of listed companies." And can attract suitable personnel for the growth and future development of listed companies.

The way of buying shares in the trust secondary market has gradually become the preferred choice of listed companies.

According to data collected by Futu Trust from the open market, from 2021 to April 8 this year, a total of 96 companies announced that they would buy shares from the secondary market through trusts, of which 35 companies have already bought listed shares through trust landing in the secondary market. Another 56 companies have announced that they will buy shares from the secondary market through trustees in the newly adopted share incentive scheme.

Take Xintong Healthcare-B, Hong Kong-China Smart Energy, and China Software International as examples.

Fourth, Futu Trust one-stop secondary market purchase services, synergy to achieve cost reduction and efficiency

Through trust companies to buy shares of listed companies from the secondary market and use the repurchased shares as long-term incentives, the whole process involves the interaction of multiple service providers. In the traditional solution, trust companies, securities firms, ESOP service providers and other services are provided separately, and the efficiency of communication, the efficiency and quality of services are greatly reduced.

For example, when traditional trust institutions implement share purchase, trust companies are only responsible for building the structure and issuing trading orders, while securities firms passively accept trading orders and have no communication with the management of the company, so they may not be able to fully implement the will of the management. For example, traditional trust service providers often have some pain points, such as long time to set up trust and open account, high transaction cost, low service efficiency, need to set up holding BVI under trust and so on. The buying process is redundant and complex, and the best opportunity has been missed when the trust is completed and bought from the secondary market. Under this background, the urgent demand of the market for one-stop trust service is highlighted again.

In view of the pain points of traditional trust companies, Futu Trust one-stop service arises at the historic moment. Based on the strong securities trading system and trading team of Futu Group, as well as the support of professional and efficient ESOP services, Futu Trust can meet the needs of listed companies more efficiently. Not only the trust structure is built quickly, the trading system and trading team are professional and efficient, but the shares purchased from the secondary market can be directly managed through the Futu ESOP system and allocated to qualified motivators when they expire. The solution of Futu Trust has more advantages in the connection of the overall business and the interconnection of the system, thus greatly reducing the enterprise cost and improving the efficiency of the stock purchase business in the whole secondary market. In order to achieve the win-win situation of the company, the secondary market investors and the motivated employees.

Forto Trust is a licensed trust or corporate service provider (licence number: TC006475) registered under the Hong Kong Anti-money laundering and counter-Terrorism financing Ordinance (Cap. 615) and a trust company registered under the Hong Kong Trustee Ordinance (Cap. 29). The Futu Trust team brings together outstanding employees from bank trust departments, multinational trust service providers and family offices, with rich experience in equity incentive trust and family trust services. Up to now, Futu Trust has provided trust consulting services for more than 100 enterprises, which has responded quickly and has been recognized by enterprises in various industries.

Interview with experts:

Lawyer Luo Weide, partner of King & Wood Company and Securities Department

Lawyer Luo Weide focuses on a wide range of transactions, including mergers and acquisitions, corporate financing and structural development, as well as capital markets. Locke's experience extends to private and public acquisitions, initial public offerings, corporate restructuring and privatization, and securities regulation in Hong Kong and China. Mr. Locke has advised foreign and Chinese companies and banks on a number of major Hong Kong-China transactions. Over the years, Mr. Locke has been rated as an outstanding lawyer by a number of legal guides and rating agencies. In 2014, Fortune 500 Asia Pacific Law quoted sources as saying that "lawyer Locke has' very keen business contacts'." Since 2012, Mr. Locke has been recommended as a prominent M & A lawyer in Hong Kong by the International Financial Law Review.

Lin Weibin, Chief Executive Officer of Futu Trust

Master of Business Administration and Bachelor of laws, TEP, Honorary member of the Global Association of Trust and Heritage Practitioners (STEP), CFP, International Financial planner, engaged in cross-border wealth management and trust services for nearly 30 years, has served as Deputy Director of Trust Business of multinational Banking Group, General Manager of Retail Business Department and General Manager of Product Planning Department. Ben has rich experience in equity incentives, family trusts, charitable funds, private equity funds and family offices, and has provided equity incentive services to a number of listed companies in Hong Kong and the United States, as well as family trusts and funds for high net worth clients.