A New Board For The New Economy And Re-Positioning The Platforms For Listing In Hong Kong.

 

26 June, 2017

 

 

The Hong Kong Stock Exchange has released two papers: a concept paper proposing the introduction of a New Board, and a consultation paper on a review of the GEM market (proposing certain changes to the GEM and Main Board listing rules). These raise important questions for the future of the regulation of listing in Hong Kong. We summarise below some key points from the papers.

 

New Board

 

The Exchange is making a second attempt to facilitate the listing of companies that have shares with disproportionate voting rights (“WVR structures”) and an attempt to facilitate the listing of “new economy” companies generally, announcing that it proposes to introduce a new board (“New Board”) as a listing platform, in addition to the current Main Board and GEM. The New Board is apparently aimed at start-ups and new-economy companies with or without WVR structures.

 

The New Board will comprise two segments:

 

• A Premium segment which will target companies that meet all the requirements for a Main Board listing but which have WVR structures. Both professional and retail investors will be able to trade on the Premium segment.
• A PRO segment which will target start-up companies operating in the new economy with or without WVR structures which do not meet either the Main Board or GEM eligibility for listing requirements. Only professional investors will be able to trade on the PRO segment.

 

“New economy” is defined in the concept paper as industries including biotechnology, health care technology, internet and direct marketing retail, internet software and services, IT services, software, technology hardware and storage and peripherals.

We highlight below several key points relating to the proposed introduction of the New Board, and set out at the end of this bulletin a summary of the proposed key listing requirements for the two segments of the New Board.

 

Key points

 

1 Which companies are eligible for the New Board?

 

Although it appears that access to the New Board PRO segment will be restricted to companies in the new economy, it is not clear from the concept paper whether access to the New Board Premium segment will be similarly restricted. Much of the text suggests that the Premium segment will be available to any company with a WVR structure (or other non- standard governance structure) regardless of the industry in which it operates, although there are indications to the contrary. It is essential that this point be clarified. In addition, it is (as the concept paper recognises) very difficult to define a new economy company. Any new listing regime which disapplies any of the normal listing requirements for certain companies should clearly specify which companies are and are not eligible for the concession – otherwise potential applicants for the concession (and their advisers) will not know where they stand. If access to the New Board (or either of its segments) depends on satisfying a vague test this will inevitably result in (i) inappropriate companies being allowed access to the relevant segment and (ii) many companies being disappointed to discover they do not qualify for the relevant segment after incurring the expense of a consultation before filing a listing application or, worse, after filing a listing application.

 

2  How does the new proposal to allow companies with WVR structures to list in Hong Kong differ from the Exchange’s previous proposal?

 

The answer to this question is “not a lot”. The concept paper suggests that concerns over WVR structures are addressed because WVR companies will list on the New Board Premium segment, rather than on the Main Board. But given that retail investors will be able to trade stocks listed on the New Board Premium segment, there is in reality little difference between the New Board Premium segment and the Main Board. The New Board Premium segment is simply the Main Board by another name. We welcome the Exchange’s attempts to accommodate companies with WVR structures. However, we are concerned that, until something substantive is introduced to address the concerns previously expressed by the SFC and others (namely, that allowing companies with WVR structures to list will open the floodgates to undesirable listing applicants which are seeking to entrench the control of their founders) the proposal is unlikely to become airborne. The concept paper does suggest that concerns could be addressed by either disclosure or some structural restrictions such as a potential sunset date on any WVR structures, though it goes without saying that the shorter any sunset period, the less the benefit of any such structure to would be listing applicants.

 

3  A “lighter touch” due diligence for New Board PRO segment listings?

 

The Exchange proposes a New Board PRO segment listing applicant would not need a sponsor, but instead, will appoint a financial adviser with a Type 6 licence. This appears to be a favourable proposal – a concession from the requirement to appoint a sponsor because the PRO segment is available to professional investors only and they should be better placed to carry out their own analysis of companies seeking a listing on this segment. The Exchange expects financial advisers will exercise their professional judgement (i) to determine the diligence required for the applicant and (ii) to ensure that the listing document provides sufficient information to enable professional investors to make an informed investment decision. The work required of financial advisers in this context is potentially unclear, and financial advisers may ultimately decide to carry out sponsor-style diligence in any event to mitigate potential risk of regulators finding that their due diligence was not “reasonable” with the benefit of hindsight, should any problems arise.

 

4  Application of the current Main Board investor protection regime to issuers with WVR structures

 

The Exchange has indicated that issuers listed on either segment of the New Board are expected to comply with the post-listing continuing obligations applicable to Main Board issuers, including the connected party transaction rules and super-majority voting by shareholders on fundamental matters. There may be challenges in designing a compliance framework to cater for issuers with WVR structures which may carry a range of atypical control structures. For example, it is not clear how the definitions for a “connected person” and an “associate” in the Listing Rules, or the “control” and “associate” tests in the Takeovers Code would clearly apply to such structures. It is also not clear how the rules requiring shareholders to abstain from voting on certain matters in Listing Rule 2.15 and Chapter 14A of the Listing Rules will apply.

 

Re-positioning the GEM and Main Board

 

The Exchange also released a consultation paper to seek public comments on proposed changes to tighten several listing requirements for the GEM and Main Board. The proposed changes aim to:

 

• re-position the GEM Board as a stand-alone board for small to medium size issuers
• demarcate clearly the market position of each Board and its segments, and the types of company to be listed on each of them
• address recent concerns on the quality of GEM issuers, and the exploitation of the current GEM listing regime by some market participants

 

The Exchange aims to transform the GEM Board from being the “stepping stone” to the Main Board to being a listing platform for small to medium-size companies. Part of the proposal is to remove the streamlined process for a GEM issuer to transfer its listing to the Main Board. Under the proposals, an applicant which wishes to transfer its listing to the Main Board must appoint a sponsor and issue a prospectus-standard listing document for the transfer.

 

The admission criteria for GEM applicants and Main Board applicants will be adjusted correspondingly to demarcate the market position of each Board and the New Board PRO. 

 

Please click on the table to enlarge.

 

The Exchange mentioned in the consultation paper that it will unwind the authority to approve or reject a GEM listing currently delegated to the Listing Department and return the power to the Listing Committee.

 

Private Market

 

The Exchange is exploring the possibility of allowing private companies with a market value below HK$150 million to register on a new platform, the Private Market, to enable these companies to manage their shareholder registers, investor communications and corporate actions. If implemented, this will be a registration-only service with no trading or matching functions, and the Private Market will not be regulated under the Securities and Futures Ordinance.

 

Conclusion

 

If the market and the SFC support the creation of the New Board and the proposed changes to the listing rules of the existing Boards, Hong Kong will have three listing platforms with four distinct markets. Below is a diagram extracted from the New Board concept paper containing the proposed listing framework. 

 

Please click on the image to enlarge.

 

 

For further information, please contact:

 

Jian Fang, Partner, Linklaters

jian.fang@linklaters.com