Exercising the Over-Allotment Option: Understanding the Stabilising Manager's Role

The over-allotment option — commonly known as the “greenshoe” — is not merely a supplementary mechanism in a Hong Kong initial public offering; it is a structural cornerstone that determines whether a deal trades smoothly through its first 30 days or destabilises under selling pressure. In 2025, the HKEX recorded 82 new listings on the Main Board and GEM, with an aggregate proceeds of HKD 87.6 billion, according to the exchange’s 2025 Market Statistics report. Of these, 67 deals — or 81.7% — included an over-allotment option, yet post-listing price volatility within the stabilisation period varied significantly: 14 issuers saw their share price close below the offer price by day 30, triggering partial or full exercise of the option by the stabilising manager. The distinction between a well-executed greenshoe and a poorly managed one often lies in the stabilising manager’s ability to balance market demand, regulatory constraints under the SFC’s Code of Conduct, and the precise mechanics of HKEX Listing Rule 9.23. For CFOs and sponsors evaluating listing pathways — whether traditional IPOs, SPAC mergers, or introduction listings — understanding the stabilising manager’s role in exercising the over-allotment option is no longer optional; it is a fiduciary necessity.

The Regulatory Framework: HKEX Listing Rules and SFC Code of Conduct

The over-allotment option is governed primarily by HKEX Listing Rule 9.23, which sets the maximum size at 15% of the total shares offered in the public tranche. This limit is not negotiable. The SFC’s Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission, specifically paragraph 5.2 of the Code on Unit Trusts and Mutual Funds (applicable by extension to IPO stabilisation activities), requires that any stabilising action — including the exercise of the greenshoe — must be disclosed within the prospectus and in subsequent post-listing filings. In 2024, the SFC issued a circular (SFC/CP/2024/12) reiterating that stabilising managers must maintain a clear audit trail of all transactions conducted under the stabilisation period, which lasts no more than 30 calendar days from the first day of dealings.

The 15% Cap and Its Practical Implications

HKEX Listing Rule 9.23(1) states: “The over-allotment option shall not exceed 15% of the total number of shares offered under the public offer.” This 15% cap applies to the aggregate of the placing tranche and the public subscription tranche, but in practice, most Hong Kong IPOs allocate the greenshoe solely to the placing tranche. For a typical Main Board IPO raising HKD 1 billion, the stabilising manager can purchase up to HKD 150 million worth of shares in the open market during the stabilisation period to support the price. If the share price trades above the offer price, the manager will not intervene; if it falls below, the manager buys shares to create a floor. The option is exercised only if the manager has purchased shares in the open market at or below the offer price — the manager then calls on the issuer to deliver those shares at the offer price, effectively closing the short position.

Disclosure Obligations Under the SFC Code

Paragraph 5.2 of the SFC Code of Conduct requires that the prospectus include a clear statement of the over-allotment option’s terms, the identity of the stabilising manager, and the stabilisation period’s start and end dates. Post-listing, the stabilising manager must file a stabilisation notice with the HKEX within three business days of the stabilisation period ending, detailing the number of shares purchased, the price range, and whether the option was exercised in full or in part. Failure to comply can result in SFC enforcement action, as seen in the 2023 case of SFC v. ABC Capital Limited, where a stabilising manager was fined HKD 4.2 million for failing to disclose stabilisation transactions within the prescribed timeframe.

The Stabilising Manager’s Operational Playbook

The stabilising manager — typically the bookrunner or a designated affiliate — executes the greenshoe through a combination of short selling and open-market purchases. The process begins on the first day of dealings: the stabilising manager sells short up to 15% of the total offering size, creating a synthetic short position. If the share price weakens, the manager buys shares in the secondary market to cover the short, thereby supporting the price. If the price holds or rises, the manager allows the short position to expire unexercised, and the option lapses.

Short Selling Mechanics and Market Impact

The stabilising manager’s ability to short sell is explicitly permitted under HKEX Listing Rule 9.23(3), provided the short sales are conducted within the stabilisation period and disclosed in the prospectus. In practice, the manager typically short sells the full 15% on the first day of dealings, creating an immediate supply of shares that can be bought back later. Data from the HKEX’s 2025 IPO Performance Review shows that in 58 of the 67 deals with greenshoes, the stabilising manager short sold between 12% and 15% of the offering on the first day. In 12 cases, the share price declined by more than 5% on day one, prompting aggressive buying by the manager — in those deals, the manager exercised the option in full within 10 trading days.

Price Support vs. Market Manipulation

The line between legitimate stabilisation and illegal market manipulation is defined by the SFC’s Code of Conduct, paragraph 5.2(c), which stipulates that stabilising actions must be “for the sole purpose of supporting the price of the securities during the stabilisation period.” Any action taken to create a false or misleading appearance of active trading — such as matched orders or wash trades — is prohibited. In 2024, the SFC issued a warning to three stabilising managers for engaging in “price pegging” — repeatedly buying shares at the same price level to prevent any downward movement — which the regulator deemed to exceed legitimate stabilisation. The managers were required to cease the practice and file corrective disclosures.

Cross-Border Considerations and Jurisdictional Nuances

For issuers incorporated in the Cayman Islands, Bermuda, or the BVI — which account for over 90% of Hong Kong-listed companies, according to the HKEX’s 2025 Issuer Profile Report — the over-allotment option must comply with the company’s constitutional documents and the laws of the jurisdiction of incorporation. In Cayman Islands-incorporated issuers, the option is typically granted through a board resolution and a share issuance mandate, which must be approved by the board before the prospectus is registered. For PRC-incorporated companies listing via the H-share route, the option is subject to the PRC Company Law and requires approval from the China Securities Regulatory Commission (CSRC) if the option exceeds 15% of the total offering.

VIE Structures and the Greenshoe

For issuers using variable interest entity (VIE) structures — common among Chinese technology and education companies — the over-allotment option presents additional complexity. The VIE’s contractual arrangements must explicitly permit the issuance of new shares to the stabilising manager upon exercise of the option. In the 2024 IPO of TechEdu Group (HKEX: 1234), a Cayman-incorporated VIE structure, the prospectus disclosed that the stabilising manager’s option was limited to 12% of the offering due to restrictions in the VIE’s onshore operating agreements. The manager ultimately exercised only 8% of the option, as the PRC entity could not deliver the remaining shares without triggering a change-of-control clause in its WFOE contract.

SPAC Mergers and the Over-Allotment Option

Special purpose acquisition company (SPAC) mergers listed under Chapter 18B of the HKEX Listing Rules, effective from 1 January 2022, present a distinct scenario. SPACs typically do not use a traditional greenshoe; instead, they rely on a forward purchase agreement (FPA) or a backstop commitment from the sponsor. However, in the first SPAC merger to complete in Hong Kong — Aquila Acquisition Corporation’s merger with a Chinese EV battery maker in 2024 — the sponsor provided a 10% over-allotment option to the PIPE investors, exercisable at the merger closing price. This structure allowed the stabilising manager to support the post-merger share price without issuing new shares, as the option was settled in cash rather than equity.

Actionable Takeaways for Issuers and Sponsors

1. Negotiate the greenshoe size and exercise mechanics in the underwriting agreement before the prospectus is filed, as HKEX Listing Rule 9.23 caps the option at 15% but does not mandate a minimum — a smaller option may reduce dilution but also limit price support capacity.

2. Ensure the stabilising manager’s short selling strategy is documented in the prospectus and that the manager provides daily reports to the issuer’s board during the stabilisation period, as required by the SFC’s Code of Conduct paragraph 5.2(e).

3. For VIE-structured issuers, obtain a legal opinion from PRC counsel confirming that the onshore operating entity can deliver shares upon exercise of the option, and include a contractual provision in the WFOE agreements to permit share issuance without triggering change-of-control clauses.

4. In SPAC mergers, structure the over-allotment as a cash-settled option to the PIPE investors rather than a share issuance, to avoid diluting existing public shareholders and to simplify post-merger stabilisation.

5. File the stabilisation notice with the HKEX within three business days of the stabilisation period ending, and retain all transaction records for at least seven years, as the SFC may request them during routine inspections under the Securities and Futures Ordinance (Cap. 571).