Background
On 17 February 2023, the State Council issued “Decision of the State Council to Repeal Certain Administrative Regulations and Documents” (《国务院关于废止部分行政法规和文件的决定》), and the China Securities Regulatory Commission issued the “Trial Administrative Measures of Overseas Securities Offering and Listing by Domestic Companies” (《境内企业境外发行证券和上市管理试行办法》) and related guidelines (all such new regulations are referred to as New PRC Regulations below). Pursuant to the New PRC Regulations which took effect from 31 March 2023, the “Special Regulations on the Overseas Offering and Listing of Shares by Joint Stock Limited Companies” (《国务院关于股份有限公司境外募集股份及上市的特别规定》) (Special Regulations) and the “Mandatory Provisions for Companies Listing Overseas” (《到境外上市公司章程必备条款》) (Mandatory Provisions) were repealed with effect from 31 March 2023.
Following the repeal of the Special Regulations and the Mandatory Provisions, holders of domestic shares and H shares (both being ordinary shares) of issuers incorporated in Mainland China as joint stock limited companies (PRC issuers) are no longer deemed as different classes of shareholders, and the class meeting requirement applicable to holders of domestic and H shares are no longer necessary.
Consequential amendments to the Listing Rules
Against the above background, on 24 February 2023, The Stock Exchange of Hong Kong Limited (Exchange) published a consultation paper on the consequential amendments to the Rules Governing the Listing of Securities on the Exchange (Listing Rules) in light of the New PRC Regulations, as well as other proposed Listing Rule amendments relating to PRC issuers. The proposals were summarised in our earlier client alert.
On 21 July 2023, the Exchange published conclusions to this consultation paper. All the Listing Rule amendments outlined in the consultation paper will be adopted, with minor modifications, with effect from 1 August 2023.
Among the various Listing Rule amendments, the Listing Rules relating to the “separate classes” of domestic shares and H shares will be amended as follows:
It should be noted that some of the Listing Rule provisions which govern H shares trading on the Exchange only will be retained, including, among others:
- the rules requiring that shares issued under a general mandate for cash are limited to a price discount of not more than 20% of the prevailing market price of H shares, and the exercise price of share options must not be lower than the prevailing market price of H shares;
(Note: Where appropriate, the Exchange will consider, on a case by case basis, a request for the issue of A shares under a general mandate to be benchmarked to the market price of A shares.) - the H shareholders’ approval requirement for a withdrawal of listing of H shares from the Exchange;
- the rule allowing an A+H issuer to calculate its market capitalisation for the purpose of the percentage ratios under Chapters 14 and 14A of the Listing Rules based on the prevailing market prices of A and H shares in issue; and
- the rule allowing an A+H issuer to calculate its public float with reference to both A and H shares held by the public.
Implications under the Codes on Takeovers and Mergers and Share Buy-backs (Codes)
On 17 March 2023, the Securities and Futures Commission of Hong Kong (SFC) published Practice Note 25 to provide guidance on the application of the SFC’s approach towards a number of relevant Codes provisions in light of the New PRC Regulations with effect from 31 March 2023.
The SFC noted that domestic shares (in particular, A shares) and H shares are traded in separate markets with different regulatory and market environments, and therefore, although H shares and domestic shares are one single class of shares under Mainland Chinese law, the fact that H shares and domestic shares are not directly fungible with each other warrants a different approach when applying certain provisions of the Codes to PRC issuers. As such, the SFC’s application of the Codes to PRC issuers remains largely the same as in the past, with certain modifications.
The SFC’s approach towards some of the relevant Codes provisions as described in Practice Note 25 is briefly summarised below:
Implications under Part XV of the Securities and Futures Ordinance (Part XV of the SFO)
On 17 March 2023, the SFC also issued a frequently asked question providing guidance on the disclosure of interests in a PRC issuer under Part XV of the SFO following implementation of the New PRC Regulations with effect from 31 March 2023.
The SFC explained that since H shares and domestic shares of a PRC issuer trade on separate exchanges and they cannot be transferred between exchanges, interests in H shares of a PRC issuer should continue to be calculated as a proportion of the number of issued H shares separately from the number of issued domestic shares. The practice of reporting H shares and domestic shares separately remains unchanged.
For a further discussion of disclosure of interests in a PRC issuer under Part XV of the SFO, please refer to the April episode of our “Corporate Finance Updates” video series.
