3 August, 2015
On 19 June 2015, the Hong Kong Stock Exchange published the Consultation Conclusions to its Concept Paper on weighted voting rights. It was concluded that there is support for a second stage consultation on proposed changes to the Listing Rules on the acceptability of governance structures that give certain persons voting power, or other related rights that are disproportionate to their shareholding ("WVR structures").
The Concept Paper, which was published on 29 August 2014, sought views on whether WVR structures should be permitted for companies that are listed, or are seeking to list, in Hong Kong. The Hong Kong Stock Exchange considered that there was sufficient merit in reviewing WVR structures and the topic warranted a comprehensive debate.
From the responses to the Concept Paper, it was clear that respondents who supported permitting WVR structures generally did not support the use of the same for all companies under all circumstances. The Consultation Conclusions also set out a number of issues raised in the Concept Paper, together with the Hong Kong Stock Exchange's preliminary thoughts, such as ring-fencing WVR structures to new or certain types of companies, market safeguards, impact on Hong Kong's competitiveness as a listing venue, and whether WVR structures should be permissible in secondary listings.
The key points and issues for further consultation are:
-
the types of companies with or without a WVR structure that could list in Hong Kong – WVR structures should not be available in all circumstances and it is not intended that these structures become common place in Hong Kong. In general, "one share, one vote" should prevail but WVR structures should be allowed for certain companies in certain circumstances with certain safeguards, with those parameters to be established in the second stage consultation;
-
the permissibility of WVR structures is an important factor for Hong Kong's competitiveness as a listing venue as against other markets, such as China and the United States;
-
safeguards and enhanced corporate governance measures will need to be put in place;
-
secondary listings of companies with WVR structures is an important issue and it gives rise to different considerations which will be focused on during the second stage consultation; and
-
whether the current restriction on companies in a Greater China "centre of gravity" seeking a secondary listing in Hong Kong should be relaxed for certain companies, with or without a WVR structure.
-
The Hong Kong Stock Exchange is finalising a draft proposal for the second stage consultation which it will refine through discussions with stakeholders before launching the further consultation in the third or early fourth quarter of 2015.
However, in a statement issued by the SFC on 25 June 2015, the board of the SFC had unanimously objected to the Hong Kong Stock Exchange's draft proposal for primary listings with WVR structures. The key reasons for the SFC's opposition were:
- Market capitalisation
Many of respondents to the consultation had stated that companies with WVR structures should have a large market capitalisation and a long clean track record of regulatory compliance, and one of the ring-fencing proposals suggested by the Hong Kong Stock Exchange was to have a very high expected market capitalisation test in addition to the existing eligibility criteria for listing. However, the SFC's view was that size offers no assurance that a company would treat its shareholders fairly. Any corporate misconduct by an issuer with a large market capitalisation will likely affect more investors and have a greater impact on the Hong Kong markets.
- Enhanced suitability criteria for listing
This was also a ring-fencing proposal suggested by the Hong Kong Stock Exchange whereby applicants would be expected to have certain features in respect of its business and the contribution of the founders in order to be eligible for listing. The SFC voiced significant concern on this as it requires regulators to assess an applicant's compliance with listing criteria, which could only be applied on a subjective basis and therefore would be inherently vague. Any regime relying on the subjective judgment of regulators to determine an applicant's suitability for listing would give rise to regulatory uncertainty, and could result in inconsistent and unfair decision making.
- WVR structures for new listing applicants only
It is insufficient to only look at controlling the number of weighted voting right issuers in Hong Kong. The SFC had concerns on whether the draft proposals justifiably restricted the extent to which WVR structures would be permitted in Hong Kong and if there were sufficient measures to prevent circumvention of those restrictions. The draft proposals also failed to explain how many proposed safeguards or conditions can be monitored on an on-going basis as well as the implications of non-compliance.
Commentary:
Interestingly, the SFC's commentary was specific to primary listings with no reference to secondary listings. This may mean that there is scope for WVR structures for secondary listings, although given the difference of opinion between the two regulators, it is uncertain whether the further consultation may now go ahead, let alone any discussion on the issue of secondary listings for applicants with a WVR structure already in place.
The SFC also pointed out that a focus of the discussion was competition from the United States for the listing of Mainland Chinese businesses. This was clearly a reference to the Hong Kong bourse's rejection of the listing of the Alibaba Group, which subsequently listed in New York and, in turn, prompted the review of the Listing Rules on WVR structures. The SFC had said that Hong Kong's competitive environment is affected by many factors and significant changes can happen quickly. It also pointed out that the SFC considers long and short term objectives and it seeks to uphold the core principles of fairness and transparency underpinning Hong Kong's reputation as an international financial centre.
Following the SFC's statement, the Hong Kong Stock Exchange has announced that it will engage with the SFC and that the Listing Committee will decide on the best way forward in the light of the views of the SFC. Given that any changes to the Listing Rules must be approved by the SFC, it remains to be seen if the Hong Kong Stock Exchange will still go ahead with the second stage consultation.
For further information, please contact:
Jamie Barr, Partner, Hogan Lovells
jamie.barr@hoganlovells.com
Tim Fletcher, Partner, Hogan Lovells
tim.fletcher@hoganlovells.com
Terence Lau, Partner, Hogan Lovells
terence.lau@hoganlovells.com
Mark Parsons, Partner, Hogan Lovells
mark.parsons@hoganlovells.com
Nelson Tang, Partner, Hogan Lovells
nelson.tang@hoganlovells.com
Thomas Tarala, Partner, Hogan Lovells
thomas.tarala@hoganlovells.com
Steven Tran, Partner, Hogan Lovells
steven.tran@hoganlovells.com
