Jiayuan Plunge Highlights the Loophole in Share Pledge Disclosure
Jiayuan International is a property developer based out of Jiangsu of Mainland China. It was founded in 2003 and listed on the Main Board of Hong Kong in 2016. Before its recent share price plunge, it has a market cap of more than HK$30 billion. On 17 January this year, Jiayuan’s share price plunged by a whopping 80% in a single day, which shocked the local share market. Even the CEO of HKEx expressed concerns over Jiayuan.
The investors initially suspected that the dramatic fall was triggered by Jiayuan’s default in repaying its US$350 million senior note which matured on the same date, but a later announcement released by the company had confirmed that the company had fully settled the debt due under the senior note and that it was financially sound.
However, 6 days later, the company went into trading halt again and published another announcement informing the market that on 17 January when Jiayuan’s shares plunged by 80%, about 3% of the controlling shareholder’s shares were under forced sale by securities brokers. This implies the existence of security interest over the controlling shareholder’s shares, but the announcement was shy of further details about the possible share pledge, only promising to provide further details upon being informed by the controlling shareholder. After issuing this announcement, Jiayuan was anxious to lift the trading halt, which however seemed to be blocked by the HKEx. Its trading halt remains up till now.
In Hong Kong, when a controlling shareholder (which means shareholder owning 30% or more of shares) of a listed company pledges its shares to secure the indebtedness or obligations of the listed company, the listed company has to disclose details of the share pledge. So, obviously, this disclosure obligation only arises where the share pledge is to secure the indebtedness or obligations of the listed company, but not, for example, the controlling shareholder’s own debts or obligations.
Another law which governs this issue is the Securities and Futures Ordinance, which essentially provides that any person holding 5% of long or short positions in voting shares of listed companies in Hong Kong has to disclose. However, an important carve-out, or from potential investors’ perspective, loophole, is s.323 of that Ordinance, which provides that “qualified lenders”, such as financial institutions, banks, insurance companies and securities brokers, are exempted from disclosure, which also means the pledgor is likewise exempted. This exemption from disclosure lasts until the pledged shares are under forced sale, which however may be too late, and of little value, for investors, who are unlikely to be able to respond to the price fluctuation caused by the forced sale.
Hong Kong’s Securities & Futures Commission has previously conducted a public consultation on whether this exemption should be available to qualified lenders. The consultation unfortunately did not result in the abolition of the exemption available to the qualified lenders, on such dubious grounds as privacy and possible inconvenience caused to the businesses and operations of the qualified lenders. These reasons, however, are far outweighed by public interest considerations of protecting investors and maintaining a healthy securities market.