Agreeing the Agreements: A Standardized Approach to Agreements among IPO Underwriters

Hong Kong is one of the biggest global capital formation markets, attracting many Initial Public Offerings (IPOs) annually. The Hong Kong market’s vibrancy relies on the market working efficiently and in the best interests of investors and companies seeking capital.

In practice, this means ensuring healthy competition between underwriting banks, with providers differentiating themselves with respect to high-value-added activities within the underwriting lifecycle.  In other areas, however, the industry – including issuers and end investors – can benefit from efficiencies achieved through standardisation.

Hong Kong listings hit an eight-year high of HK$300 billion in 2018, with the special administrative region retaining its position as one of the world’s largest IPO markets.  With such large numbers at play, even small efficiency gains can be material across this significant market.

Unlike New York and London, there have until now been no standard forms for legal agreements among underwriting syndicates in Hong Kong.  Syndicates benefit the market when stock issues are too large to be managed by a single firm, enabling several firms to sell an offering quickly and completely; however, inefficiencies have traditionally arisen with the use of non-standard agreements between syndicate members. 

Non-standard agreements take longer to negotiate, potentially exposing underwriting banks to increased risks in the period between the bank’s pricing of a deal and the signing of syndicate agreements.

Further, in the absence of an industry standard, firms tend to prepare agreements on the basis of agreements they have used previously, which may or may not have been scrutinised recently.  This can result in superfluous and outdated conditions that may not be relevant to syndicates being formed today, adding legal complexity to documents and slowing negotiation of commercial terms.

The culmination of one of its longer-term projects, ASIFMA’s Equity Capital Markets (ECM) Committee has now issued a set of standardised agreements for use among underwriters.  They are free for any practitioner to use via ASIFMA’s website. Committee members identified this as a key area for efficiency gains and market improvement. 

Apart from taking a longer time to negotiate, non-standard agreements used by individual firms tended not to have been adequately reviewed for many years, with clauses and terms that were ambiguous or no longer appropriate.

The standard agreements govern the relationships among the various underwriters and between the different underwriting syndicates. 

Variants include templates for:

  • an Agreement Among Hong Kong Underwriters;
  • an Agreement Among International Underwriters; and
  • an Agreement between International and Hong Kong Underwriting Syndicates.

The agreements are structured so the commercial terms are set out in a schedule to the agreement.  In practice, combined with standard language in the agreement itself, this benefits the market because unresolved terms do not prohibit the agreement from being executed at the pricing stage, ensuring the rights and obligations are afforded to underwriters and syndicate members in a timely manner, so critical when there may be many other variables changing through the course of a typical IPO process.

Use of standardised language also promotes efficiency by reducing the need to prepare, execute and print bespoke agreements for each transaction, and by providing a baseline set of largely non-controversial terms that are likely to require little negotiation, and which will become familiar to practitioners over the long term as the standard becomes common practice.  This, in turn, should reduce the costs incurred by external counsel, as well as certain legal risks.

Executive Director - Head of Policy and Regulatory Affairs, ASIFMA