Pitfalls in Calculating the Public Float: Which Shares Do Not Count Towards Public Hands

The Hong Kong Stock Exchange (HKEX) published a revised “Guidance on the Sufficiency of Public Float” (HKEX-GL85-16) in March 2025, codifying a decade of Listing Division decisions into a single, enforceable framework. This update, effective for all listing applications submitted after 1 April 2025, directly addresses the most common source of pre-listing rejections and post-listing enforcement actions: the miscalculation of the public float. For sponsors, company secretaries, and CFOs navigating a Main Board or GEM listing, the stakes are absolute. A failure to meet the 25% public float threshold for issuers with a market capitalisation under HKD 10 billion (Main Board Rule 8.08(1)(a)) is not a curable footnote; it is a mandatory ground for suspending dealings under the Listing Rules. The 2025 guidance clarifies that the issue is not merely the percentage of shares in public hands, but the precise identity of every holder within that calculation. Shares held by directors, connected persons, or parties who have accepted a “placee’s indemnity” or “top-up” arrangement are automatically excluded, regardless of the number of shares they hold. This article dissects the specific categories of excluded shares, the mechanics of the “90-day lookback” for determining connected person status, and the practical implications of the new guidance for deal structuring.

The Core Definition: What the Listing Rules Require

The foundational rule is Main Board Rule 8.08(1)(a), which mandates that at least 25% of an issuer’s total issued shares must be held by the public. For issuers with an expected market capitalisation at listing exceeding HKD 10 billion, the HKEX may accept a lower percentage, typically 15% (HKEX-GL85-16, paragraph 4.2). This concession is not automatic; it requires a specific application and demonstration of sufficient liquidity.

The “Public” is Defined by Exclusion

The Listing Rules do not define “the public” directly. Instead, they define who is not part of the public. Main Board Rule 8.24 states that shares held by the following persons do not count towards the public float:

• Directors and chief executives of the issuer, and their respective associates.
• Connected persons of the issuer, as defined in Chapter 1 of the Main Board Rules.
• Any person who is “accustomed to act” on the instructions of the persons listed above.

The critical nuance in the 2025 guidance is the expansion of the “accustomed to act” category. The HKEX now presumes that any shareholder who has entered into a “lock-up,” “top-up,” or “right of first refusal” arrangement with a director or connected person is deemed to be acting in concert, and their shares are therefore excluded from the public float. This presumption is rebuttable, but the burden of proof lies entirely with the sponsor.

The 90-Day Lookback Rule

HKEX-GL85-16 introduced a formalised 90-day lookback period for determining connected person status at the time of listing. Any person who was a connected person of the issuer within the 90 days immediately preceding the date of the listing document is treated as a connected person for the purposes of the public float calculation. This captures situations where a pre-IPO investor resigns from the board or terminates a consulting agreement shortly before listing, a tactic previously used to inflate the public float count. The HKEX’s Listing Division will now request a full register of all shareholders as of 90 days before the listing date, cross-referenced against all board and committee membership records.

Category One: Directors, Chief Executives, and Their Associates

This is the most straightforward exclusion, yet it generates the most frequent errors in prospectus drafting. The definition of “associate” under Main Board Rule 1.01 is broad, encompassing:

• Spouses and children under 18.
• Trustees of any trust of which the director or chief executive is a beneficiary.
• Companies controlled by the director or chief executive (where control is defined as holding more than 50% of the voting power).

The Trust Problem

A common pitfall arises with family trusts. If a director establishes a discretionary trust for the benefit of their children, and that trust holds shares in the listing applicant, those shares are excluded. The HKEX does not look through to the beneficiaries; the legal ownership by the trust vehicle is sufficient to trigger the exclusion. In Listing Decision LD41-2019, the HKEX rejected a listing application where 8.3% of the issued shares were held by a BVI trust whose sole beneficiary was the minor child of a director. The sponsor had argued that the trust was a separate legal entity not controlled by the director. The HKEX held that the definition of “associate” under Rule 1.01 explicitly includes trust vehicles where the director is a beneficiary, and a parent is presumed to benefit from assets held for a minor child.

The Corporate Associate Trap

A director’s shareholding through a corporate vehicle is also excluded. If Director A holds 100% of BVI Company B, and BVI Company B holds 5% of the issuer, those shares are excluded. The error occurs when the sponsor treats the corporate vehicle as a “public” shareholder because it is a separate legal entity. The HKEX requires a “beneficial ownership” analysis, not a legal ownership analysis, for the public float calculation. The sponsor must obtain a declaration from each material shareholder confirming whether they are acting for and on behalf of any director, chief executive, or connected person.

Category Two: Connected Persons and the “Accustomed to Act” Presumption

The definition of a “connected person” under Chapter 14A of the Main Board Rules is extensive, but for public float purposes, the focus is on persons connected at the time of listing. The 2025 guidance sharpens this focus.

The Placee’s Indemnity

A specific area of enforcement is the “placee’s indemnity” or “top-up” arrangement. In a typical placing, a cornerstone investor agrees to subscribe for shares at the IPO price. If the sponsor or placing agent provides an indemnity to that investor against a fall in the share price post-listing, the investor is deemed to be acting on the instructions of the sponsor (which is itself a connected person under Chapter 14A). The HKEX confirmed in a 2024 consultation response (incorporated into HKEX-GL85-16) that any shareholder receiving a “price protection” or “loss guarantee” from a connected person is excluded from the public float. This applies even if the indemnity is provided by a third party, such as a pre-IPO investor, who is not a director but is a connected person.

The “Accustomed to Act” Test in Practice

The HKEX applies a two-part test to determine if a shareholder is “accustomed to act” on the instructions of a connected person:

1. Does the connected person have the contractual or de facto ability to direct the shareholder’s voting?
2. Has the shareholder historically followed such instructions?

A shareholder who has entered into a voting agreement, a shareholders’ agreement, or a “right of first refusal” over shares with a connected person is presumed to satisfy this test. The burden of proof to rebut this presumption is very high. The sponsor must provide documentary evidence that the shareholder has voted independently in every instance where the connected person expressed a preference, and that the shareholder has the financial capacity and independence to resist any future instruction.

Category Three: The “90-Day” and “12-Month” Disqualification Periods

Beyond the immediate pre-listing period, the HKEX imposes longer disqualification periods for certain categories of shareholders.

The 12-Month Rule for Pre-IPO Investors

Main Board Rule 10.07 imposes a 12-month lock-up on controlling shareholders. However, the public float calculation is not directly affected by the lock-up; a controlling shareholder’s shares are excluded from the public float regardless of the lock-up period. The 12-month period is relevant for other pre-IPO investors who are not connected persons but who received shares within 12 months of listing. Under the 2025 guidance, any person who acquired shares from a connected person (including a director or controlling shareholder) within 12 months of listing is presumed to be a “placee” of that connected person, and their shares are excluded from the public float. This is designed to prevent “stock-parking” – where a connected person transfers shares to a friendly party shortly before listing to artificially inflate the public float.

The 90-Day Lookback for Connected Person Status

As noted above, HKEX-GL85-16 formalised a 90-day lookback. This means that a person who was a director or connected person of the issuer within 90 days of the listing date will have their shares excluded from the public float, even if they have resigned or terminated their relationship before listing. The practical implication is that any board or committee resignation within three months of the intended listing date must be scrutinised by the sponsor. The HKEX will request a full register of directors and committee members for the 90-day period, and any resignation that appears to be “window-dressing” will trigger a request for additional information.

Practical Implications for Deal Structuring

The 2025 guidance has direct, quantifiable consequences for the size and composition of the placing tranche.

The Minimum Placing Tranche

For a Main Board listing with a market capitalisation of HKD 5 billion, the minimum public float is 25%, or HKD 1.25 billion in shares. If the sponsor identifies that 10% of the shares (HKD 500 million) are held by excluded persons (directors, connected persons, and their associates), the placing tranche must be increased to cover the shortfall. The sponsor cannot simply rely on the “public” shareholders in the pre-IPO structure to satisfy the 25% threshold. They must calculate the net public float after subtracting all excluded shares.

The “Top-Up” Placing

If the public float is insufficient, the issuer has two options:

1. Increase the placing size: Sell more new shares to the public.
2. Secondary sale by existing shareholders: Existing shareholders who are not excluded can sell their shares to the public.

Option 2 is often more efficient, but it carries the risk that the selling shareholder might be deemed a “connected person” under the 90-day lookback if they have had any recent relationship with the issuer. The 2025 guidance makes it clear that a secondary sale by a pre-IPO investor who resigned from the board within 90 days of listing will not be treated as a sale by a public shareholder.

The GEM Listing Distinction

For GEM listings, the public float requirement is 25% (GEM Rule 11.23(1)), but the definition of “public” is identical to the Main Board. The key difference is that GEM issuers must also have a minimum of 100 public shareholders at listing (GEM Rule 11.23(2)). The 2025 guidance does not alter this, but the HKEX has indicated that it will scrutinise the “genuine” nature of public shareholders in GEM listings more closely, particularly where a small number of shareholders hold large blocks.

Actionable Takeaways for Sponsors and Issuers

1. Conduct a 90-day shareholder mapping exercise at the start of the listing process, identifying every shareholder and cross-referencing them against the register of directors, chief executives, and connected persons for the preceding 90 days, to pre-identify all excluded shares.
2. Obtain a signed declaration from every pre-IPO shareholder holding more than 1% of the issued shares, confirming that they are not acting on the instructions of a director, chief executive, or connected person, and that they have not received any indemnity or price protection.
3. Structure the placing tranche to cover the net public float requirement, calculated as 25% (or 15% for large-cap issuers) of total issued shares after subtracting all shares held by excluded persons, not before.
4. Review all shareholder agreements, voting agreements, and right-of-first-refusal clauses for any language that could be interpreted as giving a connected person control or influence over a shareholder’s voting decisions, and remove such clauses before the listing application.
5. Document the independence of any shareholder who is rebutting the “accustomed to act” presumption, including a historical record of voting decisions that diverged from the connected person’s expressed preferences, supported by board minutes and correspondence.