On 24 April 2018, The Stock Exchange of Hong Kong Limited (the “Exchange”) published the consultation conclusions and announced the new rules to:
(a) permit listings of companies with weighted voting right (“WVR”) structures;
(b) establish a new concessionary secondary listing route for Greater China and international companies that wish to secondary list in Hong Kong; and
(c) permit listings of biotech companies that do not meet any of the Main Board financial eligibility tests; and
The new rules broadly follow the proposals set out in the consultation paper published in February 2018 (see our client alert of 5 March 2018 here), with a few amendments to reflect comments from consultation respondents on certain details. The new rules have come into effect on 30 April 2018, from which date companies seeking to list under the new rules may submit formal listing applications to the Exchange.
This client alert gives you a quick summary of the key points of the new Chapter 8A of the Main Board Listing Rules (as supplemented by the Exchange’s Guidance Letter HKEX-GL93-18) which sets out additional requirements and modifications to existing rules applicable to companies with WVR structures seeking a primary listing in Hong Kong. For qualifying issuers with WVR structures seeking a secondary listing in Hong Kong, please refer to another client alert of 7 May 2018 here. For new rules on listing of biotech companies, please refer to our client alert of 4 May 2018 here).
Suitability criteria
| Innovative company | The applicant must be an innovative company.The Exchange considers an innovative company for the purpose of the Listing Rules would normally be expected to possess more than one of the following characteristics:its success is demonstrated to be attributable to the application, to the company’s core business, of (1) new technologies; (2) innovations; and/or (3) a new business model, which also serves to differentiate the company from existing players;research and development is a significant contributor of its expected value and constitutes a major activity and expense;its success is demonstrated to be attributable to its unique features or intellectual property; and/orit has an outsized market capitalisation / intangible asset value relative to its tangible asset value. |
| Track record of high business growth | An applicant must demonstrate a track record of high business growth, as can be objectively measured by operational metrics such as business operations, users, customers, unit sales, revenue, profits and/or market value (as appropriate) and its high growth trajectory is expected to continue. |
| WVR holders | Each WVR beneficiary must be:a director of the applicant; andan individual who has an active executive role within the business and has contributed to a material extent to the ongoing for growth of the business.P.S. The Exchange plans to launch a separate consultation by 31 July 2018 to explore the option of allowing corporate entities to benefit from WVRs. |
| Meaningful third party investment from at least one “Sophisticated Investor” | An applicant must have previously received meaningful third party investment (being more than just a token investment) from at least one Sophisticated Investor (i.e. an investor that the Exchange considers to be sophisticated by reference to factors such as net assets or assets under management, relevant investment experience, and the investor’s knowledge and expertise in the relevant field), which must remain at IPO. Such pre-IPO investors will be required to retain an aggregate 50% of their investmentat the time of listing for a period of at least six months post-IPO. |
Other conditions / qualifications for listing
| New applicants only | The Exchange will consider applications for listing with a WVR structure from new applicants only. |
| Market capitalisation at the time of listing | ≥ HK$40 billion; or≥ HK$10 billion + revenue of ≥ HK$1 billion for themost recent audited financial year |
| Permissible WVR structures | WVR structures will be limited to share-based structures only. |
| Restriction on voting power attached to WVR shares | The voting power attached to WVR shares must not be more than ten times the voting power of ordinary shares on any resolution tabled at the company’s general meetings. |
| Voting power of non-WVR shareholders | Non-WVR shareholders must be entitled to cast at least 10% of the votesthat are eligible to be cast on resolutions at the company’s general meetings. |
| Minimum economic interest of WVR beneficiaries at listing | WVR beneficiaries must beneficially own collectively at least 10% of the underlying economic interest in the applicant’s total issued share capital at the time of listing. |
| WVR shares ineligible for listing | An issuer must not seek a listing of WVR shares. |
| Constitutional backing and undertaking | Issuers with WVR structures must give force to the WVR safeguards under Chapter 8A by incorporating them into their constitutional documents.WVR beneficiaries must at listing give the issuer an undertaking that they will comply with relevant WVR safeguards. |
| Enhanced disclosures | An applicant must include a prominent warning statement and the following disclosures in the listing document:a description of the WVR structure;the applicant’s rationale for having the WVR structure;associated risks for shareholders;the identities of WVR beneficiaries;the impact of a potential conversion of WVR shares into ordinary shares on its share capital; andall circumstances in which the WVR attached to its shares will cease. |
| Stock marker “W” | The listed equity securities of an issuer with a WVR structure must have a stock name that ends with the marker “W”. |
Post-listing restrictions / requirements
| No increase in proportion of WVR shares after listing | Listed issuers with WVR structures must not increase the proportion of WVR shares above the proportion in issue at the time of listing. |
| No change of terms of WVR shares | Listed issuers with WVR structures must not change the terms of a class of WVR shares to increase the WVR attached to that class. |
| Event-defined sunset of WVR | The beneficiary’s WVR in a listed issuer must cease if, at any time after listing, the beneficiary is deceased, no longer a member of the issuer’s board of directors, or deemed by the Exchange to be incapacitated for the purpose of performing his or her duties as a director or to no longer meet the requirements of a director. |
| No transfer of WVR shares | WVR attached to a beneficiary’s shares must cease upon transfer to another person of the beneficial ownership of, or economic interest in, those shares or the control over the voting rights attached to them.WVR shares could be held by a limited partnership, trust, private company or other vehicle on behalf of beneficiaries for facilitating tax and/or estate planning provided that this arrangement would not result in a circumvention of this transfer restriction. |
| Right of non-WVR shareholders to convene an extraordinary general meeting | Non-WVR shareholders must be able to convene an extraordinary general meeting and add resolutions to the meeting agenda. The minimum stake required to do so must not be higher than 10% of the voting rights on a one vote per share basis in the share capital of the listed issuer. |
| Resolutions requiring voting on a one vote per share basis | Any WVR shares must be disregarded and must not entitle the beneficiary to more than one vote per share on any resolution to approve the following matters:changes to the listed issuer’s constitutional documents, however framed;variation of rights attached to any class of shares;the appointment or removal of an independent non-executive director;the appointment or removal of auditors; andthe voluntary winding-up of the listed issuer.This requirement is not to enable non-WVR shareholders to remove or modify an issuer’s WVR structure through changing the issuer’s constitutional documents. |
| Nomination committee | Issuers with a WVR structure must establish a nomination committee chaired by an independent non-executive director (“INED”). |
| Retirement of rotation of INEDs | The INEDs of an issuer with a WVR structure must be subject to retirement by rotation at least once every three years. INEDs are eligible for re-appointment at the end of the three year term. |
| Corporate Governance Committee | An issuer with a WVR structure must establish a Corporate Governance Committee comprised entirely of INEDs (one of whom must act as the chairman) to review, monitor and report on compliance with WVR safeguards.The Corporate Governance Report must include a summary of the work of the Corporate Governance Committee for the accounting period covered by both the half-yearly and annual reports and disclose any significant subsequent events for the period up to the date of publication of the half-yearly and annual reports, to the extent possible. |
| Compliance adviser | An issuer with a WVR structure must appoint a compliance adviser on a permanent basis commencing on the date of the issuer’s initial listing and it must consult with such an adviser on any matters related to the WVR structure. |
| Enhanced disclosures | An issuer with a WVR structure must include a prominent warning statement in all periodic financial reports, circulars, notifications and announcements.Its interim and annual reports should also disclose:a description of the WVR structure;the issuer’s rationale for having the WVR structure;associated risks for shareholders;the identities of WVR beneficiaries;the impact of a potential conversion of WVR shares into ordinary shares on its share capital; andall circumstances in which the WVR attached to its shares will cease. |
Implications of the Draft PRC Foreign Investment Law
For listing applicants in industries subject to foreign investment restrictions in the PRC, the Exchange’s prevailing approach is to require such companies to demonstrate that they are able to comply with the requirements of the draft PRC Foreign Investment Law in the event that the legislation is promulgated.
If the draft PRC Foreign Investment Law were to come into effect, an issuer with a WVR structure in an industry subject to foreign investment restrictions in the PRC could potentially use WVR to demonstrate compliance with the draft PRC Foreign Investment Law in that they had de factocontrol of the issuer, if the WVR holders are PRC citizens. In such a case, the applicant must clearly disclose the risk that its WVR may fall away as a result of the required safeguards in Chapter 8A and it may then not be able to comply with the PRC Foreign Investment Law.
Takeovers Code implications
There is a question as to whether an obligation to make a mandatory general offer under the Takeovers Code would arise if a shareholder’s voting rights in an issuer (a) increases above 30%; or (b) increases by more than 2% in the case of a shareholder holding 30% or more but less than 50% of the voting rights, in each case solely due to the WVR falling away (for example as a result of the death of a WVR beneficiary). The Exchange has clarified with the Securities and Futures Commission (the “SFC”) that a mandatory general offer would not normally be required if the relevant person is independent of the event which has led to the WVR falling away. In all relevant cases, the SFC should be consulted.
Remarks
The Exchange acknowledges that some of the rules under the new Chapter 8A will necessarily involve a degree of subjective judgement on the part of the Exchange and the Listing Committee. It is expected that the Exchange will provide further guidance and clarity to the market as it gains more experience on the listing of companies from emerging and innovative sectors.
Companies seeking to list with a WVR structure should also note that although the Exchange has provided guidance in Guidance Letter HKEX-GL93-18 on the factors that it will take into account when considering the suitability for an applicant to list with a WVR structure, the Exchange retains the discretion to find a company not suitable for listing even if it satisfies all those factors. In case of any doubt, potential applicants may wish to make enquiries with the Exchange prior to submitting their listing applications.
For more see Conventus Law.