A New Era For The Hong Kong Listing Regime.

9 May, 2018

 

The Stock Exchange of Hong Kong Limited (the Stock Exchange) announced its new Listing Rules on 24 April 2018[1]  that usher in a landmark reform to the Hong Kong listing regime in decades. The new Listing Rules and corresponding guidance letters take effect today (30 April 2018). The Stock Exchange estimates that the first batch of listings made under the new regime will take place around June to July 2018. 

 

Three new chapters have been added to the Main Board Listing Rules, to:

 

(i)            permit listings of pre-revenue biotech issuers that do not satisfy any of the financial eligibility tests; 
(ii)           permit listings of innovative and high growth companies with weighted voting rights (WVR)  
                 structures; and 
(iii)          establish a new concessionary route for Greater China and international innovative companies that  
                 wish to secondary list in Hong Kong.

 

Set out below is a summary of the new regime.

 

Listings of biotech issuers

 

The new regime permits the listing of biotech companies that do not fulfil the usual financial eligibility tests set out in the Listing Rules. However, these listing applicants must satisfy at least the following requirements:

 

• Core Product(s) beyond the concept stage: applicants must have developed at least one core product beyond the concept stage at the time of the listing application. The Stock Exchange would consider a core product to have been developed beyond the concept stage if it has met the developmental milestones below:

• Research and development: an applicant must have been primarily engaged in research and development (R&D) for the purpose of developing its core product(s) and it must have been engaged with the R&D of its core product(s) for at least 12 months prior to listing. A biotech applicant's primary reason for listing must be the raising of finance for R&D to bring its core product(s) to commercialisation;
• Patents: an applicant must have registered patent(s), patent application(s) and/or intellectual property in relation to its core product(s);
• Meaningful investment from sophisticated investor: applicants must have obtained meaningful investment[4] from at least one sophisticated investor (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)[5] at least six months before the date of the proposed listing which must remain at the initial public offering (IPO), although this may not be required under certain circumstances in the case of spin-off applications;
• Market capitalisation: applicants must have at least HK$1.5 billion (approximately US$190 million) in market capitalisation at the time of listing;
• Track record: applicants must have operated their current business for at least two years under substantially the same management; 
• Working capital: applicants must ensure they have sufficient working capital to cover 125% of the group's costs for the next 12 months after taking into account proceeds from its IPO. The applicants' costs must substantially consist of: (a) general, administrative and operating costs; and (b) R&D costs. The applicants' use of IPO proceeds should also focus on covering these costs; and
• Restriction on cornerstone investments: subscriptions by cornerstone investors do not count towards the public float at the time of listing (i.e. the minimum public float requirement is HK$375 million based on the HK$1.5 billion market capitalisation requirement).

 

Shareholder protections: 

 

• biotech issuers are subject to enhanced disclosure requirements to include details of their R&D activities in their interim reports and annual reports; 
• if the Stock Exchange considers a biotech company listed under Chapter 18A of the Listing Rules fails to comply with the sufficient operations requirement under Rule13.24 of the Listing Rules, the Stock Exchange may suspend dealings or cancel the listing of its securities; 
• without the prior consent of the Stock Exchange, a biotech company listed under Chapter 18A of the Listing Rules cannot effect any transactions that would result in a fundamental change in its principal business; and 
• the stock name of a biotech company listed under Chapter 18A of the Listing Rules must end with the marker "B".

 

Listings of companies with WVR structures

 

The new rules permit the listing of companies with WVR structures (i.e. structures that do not follow the "one-share, one-vote" principle). However, the Stock Exchange has discretion to reject an applicant with a WVR structure even if it meets the relevant requirements, as the Stock Exchange has stated that it would only list such companies if they fit into the profile of companies targeted by the new regime.

 

Companies with WVR structures that wish to list in Hong Kong must satisfy the following requirements:

 

• New applicants: only new listing applicants are permitted to list with WVR structures and any application which has the effect of avoiding this requirement may be rejected; 
• Market capitalisation: the applicant's market capitalisation at the time of listing must be at least either (i) HK$40 billion (approximately US$5.12 billion) or (ii) HK$10 billion (approximately US$1.28 billion) with a revenue of HK$1 billion for the most recent audited financial year;
• Innovative and high growth companies: an applicant must be an "innovative" company and the Stock Exchange has set out in its guidance letter a list of characteristics[6]  of such companies. In addition, applicants must demonstrate a track record of high business growth, which is expected to continue and that can be objectively measured by operational metrics; 
• Contribution of WVR holders: each WVR beneficiary must have been materially responsible for the growth of the business, by way of skills, knowledge and/or strategic direction;
• Role of WVR holders: each WVR beneficiary must be an individual who has an active executive rolewithin the business, and has contributed to a material extent to the ongoing growth of the business; and each WVR beneficiary must be a director of the issuer at the time of listing; and
• Meaningful investment from sophisticated investor: applicants are expected to have received meaningful investment from at least one sophisticated investor, although this is not normally required in the case of spin-off applications. Such investors will be required to retain an aggregate 50% of their investment at the time of listing for a period of at least six months post-IPO. The Stock Exchange will look to the investment experience of the senior management or management team of the investor for the purpose of assessing whether an investor is a sophisticated investor. The Stock Exchange will also examine the nature of the investment, the amount invested, the size of the stake taken up and the timing of the investment to determine whether an investment is meaningful on a case by case basis.

 

The new rules also set out the types of WVR structures that are acceptable:

 

• Class rights: the rights attached to the issuer's ordinary shares and WVR shares must be identical other than the enhanced voting rights attached to the WVR shares on resolutions tabled at shareholder meetings. WVR shares must not entitle the beneficiary to more than ten times the voting power of ordinary shares, and ordinary shareholders must be entitled to cast at least 10% of votes on resolutions in general meetings. After the issuer is listed, the terms of the WVR shares cannot be changed to increase the WVR attached to those shares (although it can be decreased with the Stock Exchange's prior approval). In addition, the WVR shares cannot be listed. 
• WVR beneficiaries: each WVR beneficiary must be an individual[7] who has been materially responsible for the growth of the company, takes an active executive role in the company, and must be a director of the issuer at the time of listing. The beneficiary's WVR in the issuer would cease in certain circumstances, for example, if the beneficiary is deceased or is no longer a director of the issuer. It is acceptable to hold WVR shares through a partnership, a trust, a private company or other vehicle, provided that such arrangement does not result in a circumvention of Rule 8A.18(1) of the Listing Rules, which requires that the 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. The Stock Exchange does not propose to deem a WVR beneficiary as a controlling shareholder or deem WVR beneficiaries as a group of controlling shareholders.
• Minimum shareholding of WVR beneficiaries: the WVR beneficiaries must collectively own at least 10% of the underlying economic interest in the applicant's total issued share capital at the time of listing;
• Transfers prohibited: the WVR rights will lapse if a WVR beneficiary transferred his/her beneficial interest in those shares to another person; and
• No increase in proportion of WVR shares after listing: the issuer is not permitted to increase the proportion of shares that carry WVR above the proportion in issue at the time of listing.

 

In terms of other shareholder protections, issuers with WVR structures are subject to enhanced disclosure requirements and enhanced corporate governance requirements (for example, the corporate governance committee is required to be comprised entirely of independent non-executive directors). Fundamental matters are required to be voted on a "one-share, one-vote" basis (such as the appointment/removal of independent non-executive director or auditors, voluntary winding-up of the issuer, and changes to the issuer's constitutional documents), and its stock name must end with the marker "W". 

 

Separately, as the Ministry of Commerce of the PRC published a draft Foreign Investment Law in January 2015, which allows foreign companies with de facto control by a Chinese citizen to enter certain restricted sectors, applicants that seek to use WVR structure to demonstrate de facto control shall disclose the risk that when the draft Foreign Investment Law is implemented, it may not be able to continually benefit from the draft Foreign Investment Law if its WVRs fall away.

 

Facilitating secondary listings

 

This new concessionary route is designed to attract innovative issuers that have been primary listed on a qualifying exchange with a good compliance record. However, the Stock Exchange has discretion to reject an applicant even if it meets all the relevant requirements, as the Stock Exchange has stated that it would only list such companies if they fit into the profile of companies targeted by the new regime. 

 

The main features of the new regime are set out below:

 

• Targeted companies: innovative issuers that have been primary listed on the New York Stock Exchange, the Nasdaq Stock Market, or the "premium listing" segment of the London Stock Exchange's Main Market (collectively, the Qualifying Exchange) with a good record of compliance of at least two years;
• Expected market capitalisation: 
  • issuers that do not have their centre of gravity in Greater China (Non-Greater China companies) and are without a WVR structure must have an expected market capitalisation at the time of listing of at least HK$10 billion; 
  • issuers with their centre of gravity in Greater China (Greater China companies) and/or issuers with WVR structures are expected to have, at the time of listing, (i) a market capitalisation of at least HK$40 billion or (ii) a market capitalisation of at least HK$10 billion and revenue of at least HK$1 billion for the most recent audited financial year;
• Restriction removed: Greater China companies are no longer subject to the "centre of gravity" restriction and would be allowed to secondary list in Hong Kong; 
• Automatic waivers: issuers under the new regime will benefit from automatic waivers from certain Listing Rules; 
• Migration of trading: in the case of Greater China companies, if the majority in the trading of their shares migrates to Hong Kong on a permanent basis (if 55% or more of the total worldwide trading volume of the shares over the issuer's most recent fiscal year takes place on the Stock Exchange), the Stock Exchange will treat the issuer as having a dual primary listing, and consequently, these companies will no longer be entitled to any automatic waivers; 
• Confidential filings: applicants under this regime are entitled to make a confidential filing of their listing application; and 
• Prevention of regulatory arbitrage: in order to deter Greater China companies from listing on a Qualifying Exchange and then seeking a secondary listing in Hong Kong to avoid Hong Kong's primary listing requirements, only Greater China companies that were primary listed on or before 15 December 2017 (i.e. the date of publication of the Stock Exchange's conclusions to its New Board Concept Paper) benefit from certain concessions. This means that:
  • in the case of Non-Greater China companies and Greater China companies listed on or before 15 December 2017, these companies must demonstrate compliance with key shareholder protection standards in Hong Kong, although they will not be required to change their articles unless requested by the Stock Exchange to do so. If these companies have WVR structures, they are eligible to secondary list without changing their existing WVR structures, and they would not have to comply with certain WVR safeguards except for those that are disclosure requirements (for example, these companies are not subject to the restriction to not  increase the number or proportion of WVR shares after listing, and they do not need to comply with the "one-share, one-vote" requirement for resolutions relating to fundamental matters); and
  • in the case of Greater China companies listed after 15 December 2017, these companies will not benefit from the above concessions relating to shareholder protection equivalence standards and WVR structures. They will need to change their articles to adopt key shareholder protection standards in Hong Kong. They will also need to comply with the WVR safeguards if they have adopted WVR structures.

 

The above landmark changes to the listing regime were implemented to make Hong Kong a more competitive listing venue and to diversity the market, and it remains to be seen whether Hong Kong is able to successfully capture listings from other leading financial centres. 

 

[1] A copy of the Stock Exchange's consultation conclusions including the new rules and guidance letters can be 
      found here.

[2] Competent Authority refers to US Food and Drug Administration (FDA), China Food and Drug Administration 
      (CFDA), European Medicines Agency (EMA) and any other national or supernational authority which the Stock 
      Exchange recognises as a Competent Authority on a case-by-case basis.

[3] Authorised Institution refers to an institution, body or committee duly authorised or recognised by, or registered 
       with, a Competent Authority or the European Commission.

[4] The Stock Exchange would normally consider the following benchmark investment amount as a “meaningful 
       investment(s)”: 

for an applicant with a market capitalisation between HK$1.5 billion to HK$3 billion, investment(s) of not less than 5% of the issued share capital of the applicant at the time of listing; 
for an applicant with a market capitalisation between HK$3 billion to HK$8 billion, investment(s) of not less than 3% of the issued share capital of the applicant at the time of listing; and 

iii. for an applicant with a market capitalisation of more than HK$8 billion, investment(s) of not less than 1% of the 
     issued share capital of the applicant at the time of listing.

[5] The Stock Exchange would generally consider the following as examples, for illustrative purposes only, of types of 
      sophisticated investor: 

• a dedicated healthcare or biotech fund or an established fund with a division/department that specialises or focuses on investments in the bio-pharmaceutical sector; 
• a major pharmaceutical/healthcare company; 
• a venture capital fund of a major pharmaceutical/healthcare company; and
• an investor, investment fund or financial institution with minimum assets under management of HK$1 billion.

[6] The Stock Exchange considers an innovative company 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/or
• It has an outsized market capitalisation/intangible asset value relative to its tangible asset value.

[7] The Stock Exchange will launch a separate consultation later this year on whether corporate entities should be 
      permitted to benefit from WVR.

 

For further information, please contact:

 

Frank Bi, Partner, Ashurst

frank.bi@ashurst.com