Structured Securities

April 2003

Public offers of notes in Hong Kong: Programme issues

New SFC Guidelines

To facilitate the public offering of shares and debentures in Hong Kong, the Securities and Futures Commission (SFC) issued the following guidelines on 21 February 2003 regarding: s a dual prospectus structure to conduct programme offers of shares or debentures requiring a prospectus under the Companies Ordinance (Cap. 32) (the Ordinance). s offer awareness and summary disclosure materials in offerings of shares and debentures under the Ordinance. s applying for a relaxation from procedural formalities on registration of a prospectus under the Ordinance. The guidelines represent the SFCs position on these matters: they are not legislative changes and do not have the force of law.

involve issuing a programme prospectus and an issue prospectus. The programme prospectus would contain information about the issuer and the programme and the issue prospectus would contain offerspecific information. This is likely to follow the base and supplemental form of documents used for derivative warrants and equity linked instruments in Hong Kong. Each prospectus would be separately authorised for registration and registered as a prospectus in its own right in accordance with the requirements of the Ordinance. The Ordinance, as drafted, does not expressly provide for repeat or programme offering structures and consequently, an issuer of shares or debentures intending to issue a prospectus for separate series of notes, for example, must re-register the programme prospectus every time an issue prospectus is issued for an offering. However, the guidelines provide that with the dual prospectus structure, the programme prospectus would not have to be re-registered each time and would allow the issue prospectus to update the programme prospectus in respect of any current offer.

The Dual Prospectus Structure

The guidelines on the dual prospectus structure are intended for issuers who wish to offer shares or debentures on a repeat or programme basis. This would
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prospectus structure, the SFC may impose whatever conditions it thinks fit in the certificate of exemption including that: s each issue prospectus must draw attention to the existence of the programme prospectus; s adequate arrangements are in place for the programme prospectus to be made readily available or accessible to a potential investor free of charge, and as soon as practicable following a request and that such arrangements continue for the duration of the relevant offer period; and s application or purchase instructions in relation to the shares or debentures being offered in any issue prospectus should not be accepted without investors confirmation that they have read or had access to the programme prospectuses.

Other principal characteristics of the dual prospectus structure include: s the programme prospectus and issue prospectus will be read together and treated collectively in assessing the adequacy of disclosure generally and compliance with contents requirements; s the programme prospectus should not normally have a validity period of more than 12 months; and s a statement should be included on the face of the issue prospectus that the offering is made on the basis of information contained in both the issue prospectus and the programme prospectus. In addition, the issuer will need to obtain a certificate of exemption in respect of each issue prospectus from the SFC for exemption from the prescribed content requirements set out in the Third Schedule of the Ordinance which do not appear in the relevant issue prospectus but which appear in the programme prospectus. To ensure investors are not prejudiced by the use of the dual

guidelines such publicity materials (offer awareness materials) should be limited to communicating procedural and administrative information regarding the offer and nothing in the content and manner of publication of the material promotes the issuer or the offer. In addition, the SFC has stated in the guidelines that it believes that publication of certain summary disclosure materials concerning a public offer should be encouraged. Although, such materials are to be extracted from the offer prospectus they do not themselves require registration as a prospectus. Such materials must not, however, contain any substantive information that is not contained in the prospectus and must be expressly authorised by the SFC prior to issue.

Offer Awareness and Summary Disclosure Materials

The guidelines clarify that certain publicity materials issued by the issuer of a prospectus and intended to raise investor awareness of an offer will not be considered by the SFC to be a prospectus or an extract from or abridged version of a prospectus under the Ordinance or a prohibited advertisement under the Protection of Investors Ordinance. To fall within the new

Relaxation from Procedural Formalities upon Registration

The guidelines also provide for the relaxation of certain requirements relating to the timing of delivery of the definitive prospectus and any experts consent letter for prospectuses which are to be registered as set out in the Requirements for Documents Guidelines 2001. Such requirements will be relaxed if the issuer satisfies the SFC that administrative difficulties will otherwise unjustifiably result.

Close-out netting and the Corporate Restructuring Promotion Law

Recent Developments in Korean Derivatives
Recently, the Korean Ministry of Finance and Economy (MOFE) has issued a letter which gives guidance on the enforceability of the closeout netting provisions under the ISDA Master Agreement in respect of the Corporate Restructuring Promotion Law (CRPL). Article 14 of the CRPL prohibits financial institutions in Korea from exercising creditors rights against a Korean corporation the subject of CRPL proceedings during the period following the first meeting of the council of creditor banks appointed in respect of the affected Korean corporation (the

First Meeting). The CRPL does not specify what constitutes creditors rights it merely provides that creditors rights would include enforcing any security interest. The CRPL does not expressly exclude rights of set-off from those creditors rights which may be suspended under the CRPL. Therefore, it has remained uncertain whether the close-out netting provisions contemplated by the ISDA Master Agreement are enforceable after the First Meeting where a resolution is passed to suspend creditors rights. Non-Korean parties (usually through their Korean branch offices) entering into ISDA Master Agreements with Korean corporations have included as an Additional Termination Event the serving of a notice to convene the First Meeting thereby triggering early termination under the ISDA Master Agreement in order to ensure their ability to effect closeout netting before the suspension of creditors rights under the CRPL. In response to ISDAs efforts to clarify the uncertainty regarding the enforceability of close-out netting following the suspension of creditors rights under the CRPL, the MOFE has issued a letter dated 27 January 2003 which gives guidance on this point. The MOFE letter states that the close-out

netting provisions of the ISDA Master Agreement would not constitute creditors right for the purposes of the CRPL, and therefore, would not be subject to suspension under CRPL. This would be in line with the treatment of rights of set-off under other Korean insolvency statutes. Under the Corporate Reorganisation Law, although all creditors rights are stayed at the commencement of corporate reorganisation proceeding, creditors are permitted to continue to exercise their right of set-off until the expiry of the claim-filing period. Under the Bankruptcy Law, creditors rights of set-off may be exercised without any time limitation.

Savings directive
Latest developments
At its meeting on 21 January 2003, the ECOFIN Committee of the EU reached political compromise on the adoption of the Savings Directive. In essence, the agreement allows Austria, Luxembourg and Belgium to apply a withholding tax, rather than exchanging information, until such time as other non-EU jurisdictions agree to exchange information. In addition, an agreement with Switzerland on the basis of an equivalent withholding tax was

backed without any commitment to move to exchange, protecting Swiss banking secrecy rules. When implemented, the Directive will affect, broadly, payments of interest on post-February 2001 securities from one EU member state to an individual in another member state. It will apply to payments made by a paying agent within the EU from 1 January 2004. Twelve member states have agreed to implement automatic exchange of information concerning interest payments covered by the Directive. Austria, Luxembourg and Belgium will apply withholding taxes at the rate of: 15% until 2007, 25% until 2010 and 35% thereafter. The agreement with Switzerland involves the Swiss matching the withholding tax obligations of Austria, Luxembourg and Belgium on payments from a Swiss paying agent to an EU individual, unless that individual declares the income to his domestic state. The Swiss will exchange information on request in the case of all criminal or civil cases of fraud. This is to be implemented by bilateral agreements, though the

Swiss perception of criminal/civil fraud may be somewhat narrower than in the EU. There will be ongoing dialogue as to the possibility of moving to a full exchange of information basis. Tax withheld will be shared between the withholding state and the state of residence of the recipient in the ratio 25:75. It still remains the case that equivalent agreements must also be reached with Liechtenstein, Monaco, San Marino and Andorra and that the UK and the Netherlands must ensure that dependent territories (Channel Islands, Isle of Man etc) also implement the Directive by 1 January 2004. As regards the US, the EU has adopted the view that current voluntary exchange of information rules in place in the US meet the requirements of the Directive. Should the EU manage to persuade the important third countries, to adopt exchange of information on request in full, it is envisaged that Austria, Luxembourg and Belgium will follow suit. However, since such a move would require a separate unanimous agreement by EU Member States, Austria, Luxembourg and Belgium effectively retain a veto to block a move to full information exchange. albeit a veto that might be politically difficult to use.

To find out more...

please contact Sean Bulmer Tel: +852 2583 8336 EMay She Tel: +852 2583 8275 E-mail: may.she@simmonssimmons.com Andrew Kim Tel: +852 2583 8307 E-mail: andrew.kim@simmonssimmons.com Vivian Loke Tel: +852 2583 8328 E-mail: vivian.loke@simmonssimmons.com

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This Newsletter is for general guidance only. It does not contain definitive advice. SIMMONS & SIMMONS 2003. SIMMONS & SIMMONS and S&S are registered trade marks of Simmons & Simmons.