16 March, 2018
The Stock Exchange of Hong Kong Limited (the “Stock Exchange”) is conducting further public consultation on the listing of companies from emerging and innovative sectors. The consultation paper published on 23 February 2018 (the “Consultation Paper”) sets out details of the Stock Exchange’s conclusions from December 2017 in respect of the New Board Concept Paper,[1]including proposed amendments to the Rules Governing the Listing of Securities on the Stock Exchange (the “Listing Rules”). The Stock Exchange is aiming to issue conclusions to the Consultation Paper and have the new rules come into operation in late April this year.
Pre-profit biotech companies
As proposed in the Consultation Paper, there will be a new Chapter 18A in the Listing Rules to allow the listing of biotech[2] companies that do not meet the financial eligibility tests of the Main Board, including companies with no revenue or profits.
Suitability to list
A biotech applicant must be suitable to list under the new chapter by demonstrating to the Stock Exchange the following:
- developed at least one core product[3] beyond the concept stage;
- primarily engaged in R&D for the purposes of developing its core product(s);
- engaged with the R&D of its core product(s) for a minimum of 12 months prior to listing;
- its primary reason for listing is the raising of finance for R&D to bring its core product(s) to commercialisation;
- possesses durable patent(s), registered patent(s), patent application(s) and/or intellectual property in relation to its core product(s);
- if the applicant is engaged in the R&D of pharmaceutical products or biologic products, demonstration that it has a pipeline of those potential products; and
- previously received meaningful third party investment (being more than just a token investment) from at least one sophisticated investor[4] at least six months before the date of the listing (which must remain at IPO).
Financial requirements
The minimum market capitalisation expected of a biotech company is HK$1.5 billion. It should also have sufficient working capital to cover at least 125% of the group’s costs for at least the next 12 months, and such costs must substantially consist of general, administrative and operating costs, and R&D costs. Further, the company must have been in operation in its current line of business for at least two financial years under substantially the same management.
Measures to manage risks
There are certain measures the Stock Exchange is imposing to mitigate risks associated with these pre-profit companies, such as the obligation to provide prominent warning statements and enhanced risk disclosures on the phases of development for the core products and R&D spending.
Once listed, these companies will not be permitted to make a fundamental change to their principal business unless the Stock Exchange has provided consent. In relation to de-listing, the existing rules will normally apply unless the company does not have sufficient operations or assets, in which case, the company will have up to 12 months to re-comply with the requirement, failing which it will be de-listed. Biotech companies listed under the new chapter will be identified by a stock marker “B” at the end of their stock name.
Cornerstones investors
The shares subscribed by cornerstone investors will not count towards the minimum initial public float requirement at listing and within the six-month lock-up period in relation to shares subscribed by cornerstone investors in the IPO.
Existing pre-IPO investors can participate in the IPO however only the shares held by existing shareholders prior to the IPO will count towards the minimum initial public float requirement, provided that the existing shareholder is not a core connected person or a member of the public in accordance with the Listing Rules.
Innovative companies with WVR structures
A weighted voting rights (“WVR”) structure such as a dual-class share structure is a common feature of innovative companies. The new Chapter 8A to be introduced into the Listing Rules will create a new path for companies with specific WVR structures to primary list in Hong Kong.
Innovative companies
A company applying under the new Chapter 8A must be a new applicant and an “innovative company” which possesses more than one of the below characteristics:
- its success is attributable to the application to the company’s core business of new technologies, innovations and/or a new business model;
- R&D 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.
Financial requirements
The market capitalisation of the company at the time of listing needs to be at least HK$10 billion. If an applicant has an market capitalisation of less than HK$40 billion, there is an additional requirement of at least HK$1 billion of revenue in its most recent audited financial year. A track record of high business growth is also necessary and this is expected to continue.
Further, the company must have previously received meaningful third party investment from at least one sophisticated investor, which must remain at IPO and such investor(s) must retain an aggregate 50% of their investment at listing and within the six month lock-up period.
WVR structure and beneficiaries
Despite having a WVR structure in place, a company must make any necessary adjustments to the structure in accordance with the new rules. The WVR structure must enable non-WVR shareholders to cast at least 10% of the votes that are eligible to be cast at general meetings, and those holding at least 10% of the voting rights must be able to convene a general meeting. The voting power attached to WVR shares, which must be attached to an unlisted specific class, must be capped at not more than 10 times of the voting power of ordinary shares. Moreover, a company which is listed under this chapter will be restricted from transferring WVR shares, increasing the proportion of WVR in issue or issuing further WVR shares after listing.
With respect to WVR beneficiaries, only individuals can hold WVR shares. Each of them must have been materially responsible for the growth of the business, possess an active executive role within the business, and assume the role of director at the time of listing. A beneficiary’s WVRs fall away if he/she ceases to be a director, no longer meets the requirements of a director, dies or becomes incapacitated.
All WVR beneficiaries must collectively own a minimum of at least 10% and a maximum of not more than 50% of the underlying economic interest in the applicant’s total issued share capital at listing.
They also have an obligation to give undertakings to the company to comply with WVR safeguards as required by the Stock Exchange.
Other measures to protect minority shareholders
With minority shareholders’ interests in mind, certain key matters of the company must be decided on a one-share one vote basis such as changes to the company’s constitutional documents and variation of rights attached to shares. Enhanced disclosure warnings on listing documents and other communications about the WVR structure and risks must be provided as well as enhanced corporate governance including setting up a Corporate Governance Committee comprising a majority of independent non-executive directors and engaging a compliance adviser to review and monitor compliance with WVR safeguards and rules. In addition, where there is a breach of the Listing Rules by a WVR beneficiary, this may result in disciplinary proceedings by the Stock Exchange. Finally, a stock marker “W” will need to be attached at the end of the company’s stock name for identification purposes.
Secondary listings
Under the proposed Chapter 19C, innovative companies with a primary listing on a “Qualifying Exchange” i.e., NYSE, NASDAQ or the LSE’s Main Market (Premium Listing) will be able to list in Hong Kong via a concessionary secondary listing route. The general requirements are that the company must be an innovative company,[5] has a good record of compliance for at least two fully financial years on a Qualifying Exchange and an expected market capitalisation at the time of secondary listing in Hong Kong of at least HK$10 billion.
For a secondary listing applicant with a WVR structure and/or a company with a centre of gravity[6]in Greater China, they will need to meet a higher market capitalisation threshold as for WVR primary listing applicants[7]. For those Greater China companies that primary listed on a Qualifying Exchange after 15 December 2017,[8] their constitutional documents must adopt the key shareholder protection standards contained in the Joint Policy Statement on the Listing of Overseas Companies,[9] and conform with the primary listing requirements for WVR companies as well as meeting the WVR safeguards and structure requirements discussed above. On the contrary, Greater China companies listed on a Qualifying Exchange on or before 15 December 2017 (the “Grandfathered Greater China Companies”) together with all other non-Greater China companies merely need to demonstrate compliance with the key shareholder protection standards[10] and are not required to comply with WVR safeguards (other than disclosure) nor change its WVR structure to comply with the primary listing requirements, if they have such a structure. Similarly, it is proposed that Grandfathered Greater China Companies with Variable Interest Entity (“VIE”) structures can also secondary list with their existing VIE structure in place so long as that they provide a PRC legal opinion regarding compliance with PRC laws and regulations and follow the Stock Exchange’s guidance on VIE disclosure.
Despite the number of requirements that need to be satisfied, it is anticipated that there will be an influx of applications via this route for certain types of companies such as those with a centre of gravity in Greater China which are currently not allowed to secondary list in Hong Kong at all.
What’s next?
Following market feedback, the new Listing Rules will likely come into effect in late April and applicants will be able to start submitting listing applications under the new regime. We will stay abreast of the latest updates and be in close contact with the Stock Exchange for any new development on the topic.
[1] Published in June 2017.
[2] Defined in the new Chapter 18A as “the application of science and technology to produce commercial products with a medical or other biological application”.
[3] A biotech product needs to be one that is regulated and approved by a competent authority which currently includes the US Food and Drug Administration, the China Food and Drug Administration and the European Medicines Agency.
[4] The Stock Exchange will make reference to net assets or assets under management, relevant investment experience, and the investor’s knowledge and expertise in the relevant field.
[5] Please refer to the criteria for “innovative companies” under the WVR section.
[6] Factors to determine this include the location of the company’s central management and control, main business operations and assets, and the nationality of the company’s management and controlling shareholders.
[7] i.e., a market capitalisation of at least HK$10 billion and if it is less than HK$40 billion, an additional HK$1billion of revenue.
[8] These are referred to as “Non-Grandfathered Greater China Companies”.
[9] Issued by the Stock Exchange and the Securities and Futures Commission in 2013. The standards include holding annual general meetings at least every 15 months, certain matters are subject to a “super-majority” vote of shareholders, etc.
[10] Changes to their constitutional documents may or may not be necessary.
Norman Hui, Partner, Eversheds Sutherland
normanhui@eversheds-sutherland.com
