Keywords: cornerstone investors, Hong Kong IPOs, shares

Introduction

It is not uncommon for Hong Kong IPOs, especially in difficult market conditions, to invite cornerstone investors such as well-known institutions, sovereign wealth funds and celebrities to subscribe for shares under the placing tranche so as to enhance popularity and investors' confidence. The major benefit available to cornerstone investors is preferential placings - a guarantee that such investors will receive an allocation of shares regardless of the final offer price.

Guidance

Although sometimes the existence of cornerstone investors can make an IPO very successful, or can be material to the success of an IPO, Hong Kong Exchanges and Clearing Limited (HKEx) does not agree that additional benefits besides preferential placings should be granted to such investors in view of the "fair and equal" principle under the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited. To clarify its position, HKEx published Guidance Letter "HKEx-GL51-13" on 22 February 2013 to remind listing applicants that:

Cornerstone investors

Preferential placings at the final IPO price to cornerstone investors are acceptable, but granting other direct or indirect benefits (by side letters or otherwise) - such as waiving brokerage commissions, granting put options, investing the IPO proceeds in funds managed by the cornerstone investors, or entering into any other agreements not on arm's length commercial terms - in relation to the shares acquisition will result in such cornerstone investors being recategorised as pre-IPO investors and subject to the corresponding requirements. Please refer to our previous Legal Updates, " Hong Kong Stock Exchange Issues Guidance on Pre-IPO Investments", and " Pre-IPO Investments: The Dos and Don'ts" for details of pre-IPO investment requirements.

Strategic investors

Entering into arm's length commercial arrangements to provide benefits to strategic investors, such as major customers and suppliers, is acceptable, but details of such arrangements require full disclosure in the listing documents.

Originally published 7 March 2013

Learn more about our Hong Kong office and Corporate & Securities practice.

Visit us at www.mayerbrownjsm.com

Mayer Brown is a global legal services organization comprising legal practices that are separate entities (the Mayer Brown Practices). The Mayer Brown Practices are: Mayer Brown LLP, a limited liability partnership established in the United States; Mayer Brown International LLP, a limited liability partnership incorporated in England and Wales; Mayer Brown JSM, a Hong Kong partnership, and its associated entities in Asia; and Tauil & Chequer Advogados, a Brazilian law partnership with which Mayer Brown is associated. "Mayer Brown" and the Mayer Brown logo are the trademarks of the Mayer Brown Practices in their respective jurisdictions.

© Copyright 2013. The Mayer Brown Practices. All rights reserved.

This article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein. Please also read the JSM legal publications Disclaimer.