The Stock Exchange Outlines Changes To Hong Kong¹s Listing Regime In Its Consultation Conclusions On The New Board Concept Paper.

 

22 December, 2017

 

 

In June 2017, the Stock Exchange launched a concept paper and a related consultation paper to seek views on reforms to Hong Kong’s listing regime. The concept paper proposed establishing a new board aimed at attracting a broader range of applicants to list in Hong Kong. The other consultation paper proposed reforms to the Growth Enterprise Market (GEM) with knock-on amendments to the Main Board (see our 30 June 2017 briefing for further details on the consultation papers).

On 15 December 2017, the Stock Exchange issued its consultation conclusions on both the concept paper and the GEM consultation paper. In this bulletin we focus on the outcome of the concept paper. Following market feedback, the Stock Exchange has decided to expand Hong Kong’s listing regime but has decided against a new board. Instead, two new chapters will be added to the Main Board listing rules to enable the listing of: (i) pre-revenue biotech companies; and (ii) companies with weighted voting rights structures that are innovative and high growth. The regime for secondary listings is also to be revised to attract companies from emerging and innovative sectors with an existing listing on certain qualifying exchanges. The current restrictions on secondary listings for companies with weighted voting rights or a centre of gravity in Greater China will also be relaxed.
 
In relation to GEM, the Stock Exchange is moving forward with substantially all of the proposals in its consultation paper. As a result, GEM will be repositioned as a stand-alone board for small and mid-sized companies. Please refer to our ebulletin for a detailed analysis of the GEM reforms.

 

KEY PROPOSALS ARISING FROM THE CONSULTATION CONCLUSIONS

 

Pre-revenue biotech companies to be allowed to list

 

The Stock Exchange is proposing to introduce a new chapter into the Main Board listing rules to regulate the listing of new economy companies that are pre-revenue. The new chapter will only initially apply to issuers in the biotech sector, although the Stock Exchange may expand the qualification criteria to include other sectors as it builds its experience with emerging and innovative companies. To qualify for listing, the biotech company will need to:

 

• be primarily engaged in R&D;
• have unique features of innovation or intellectual property;
• have at least one product which has progressed beyond the concept stage and a portfolio of patents or patent applications showing its right to the new technology or innovations;
• have a minimum market capitalisation at the time of listing of not less than HK$1.5 billion;
• meet enhanced working capital requirement (ie 125% of the current requirements over the next 12 months);
• have previously received investment by at least one sophisticated investor; and
• include enhanced disclosures in the listing document explaining to investors the business and R&D risks involved.

 

For such companies, cornerstone investors will be permitted, but any cornerstone investors will not count towards the initial public float in an effort to ensure liquidity in the post listing period.

 

The Stock Exchange will issue a further consultation paper on the detailed drafting of the new chapter of the listing rules.

High growth and innovative companies with weighted voting rights to be allowed to list

 

The Stock Exchange is proposing a second new chapter to the Main Board listing rules to permit high growth and innovative companies with weighted voting rights to list. To qualify, listing applicants will be required to:

 

• be well-established;
• have a minimum expected market capitalisation at the time of listing of at least HK$10 billion;
• have revenue of at least HK$1 billion for the most recent audited financial year if the expected market capitalisation is less than HK$40 billion;
• be an innovative company measured against characteristics to be set out in a Stock Exchange guidance letter. In this regard, the Stock Exchange has indicated that it will expect a company to have one or more of the following characteristics: (i) a differentiating factor contributing to its success being new technologies, innovations or business model; (ii) R&D being a significant contributor to expected value and a major activity and expense; (iii) unique features or intellectual property demonstrated as leading to its success; and (iv) an outsized market capitalisation/intangible asset value relative to its tangible asset value;
• be eligible and suitable for listing with a weighted voting rights structure, based on factors to be set out in a Stock Exchange guidance note. For example, the listing applicant will need to demonstrate a track record of high business growth which is expected to continue and that it has received meaningful external funding from sophisticated investors. In addition, the listing applicant will need to justify why the company and proposed holders have weighted voting rights;
• not otherwise be unsuitable, for example where the weighted voting rights are extreme, precluding ordinary shareholders from having any voting rights, the company may be regarded as unsuitable;
• put in place investor protection safeguards as required by the Stock Exchange, as summarised below; and
• include warning language and enhanced disclosure in the listing document on the weighted voting rights structure, rationale and associated risks.

 

In order to protect the interests of investors given the potentially higher risks associated with companies with weighted voting rights, the Stock Exchange is proposing a number of safeguards, to be embedded in the company’s constitutional documents to the extent possible, including:

 

• ring fencing provisions – to only permit weighted voting rights for new listing applicants and to prevent such companies increasing the shareholding proportion with weighted voting rights;
• limits on the beneficiaries of weighted voting rights – only those who are (and remain) directors of the company will be able to hold shares with weighted voting rights and the Stock Exchange will set minimum equity thresholds. Weighted voting rights will automatically lapse on the holder ceasing to be a director (including by death or incapacity) or transferring the shares;
• limits on weighted voting right powers – these include both limits on the voting power (to be capped at ten times the rights of ordinary shareholders) and number (ie holders of other shares must account for at least 10% of the eligible votes at general meetings). Certain matters will need to be determined on a one-share-one-vote basis, including matters such as appointment and removal of independent non-executive directors, material changes to the constitution and winding up;
• requirements for unique stock code markers and warnings in corporate communications; and
• enhanced corporate governance – including the requirement for a mandatory corporate governance committee made up of independent non-executive directors to ensure the company is being managed for the benefit of all shareholders, the appointment of a permanent compliance adviser and requirements for compulsory director and senior management training on weighted voting rights and their risks.

 

Revamp of secondary listings regime

 

The Stock Exchange is proposing to amend the existing regime for secondary listings to attract applicants from emerging or innovative sectors. Applicants with weighted voting rights or with a centre of gravity in Greater China will also be permitted. Under the proposed revised regime, applicants will need to:

 

• be an innovative company (applying the same criteria set out above as for companies with weighted voting rights);
• have a primary listing on a qualifying stock exchange, being the New York Stock Exchange, NASDAQ Stock Exchange or the Main Market of the London Stock Exchange;
• be established with a good compliance record for at least two years on the qualifying stock exchange;
• have a market capitalisation at the time of secondary listing in Hong Kong of at least HK$10 billion;
• for companies with weighted voting rights or with a centre of gravity in Greater China, have revenue of at least HK$1 billion for the most recent audited financial year if the expected market capitalisation is less than HK$40 billion; and
• demonstrate equivalent shareholder protection standards to those in Hong Kong. Companies already listed on a qualifying stock exchange at the date of the consultation conclusions (ie 15 December 2017) will not be required to amend their constitutional documents to demonstrate equivalent shareholder protection standards as these will be imposed on such applicants by the listing rules as a condition for listing. Similarly, where such companies have weighted voting rights, they will be able to list on a “disclosure only" basis without having to modify their existing structure, provided that the company otherwise satisfies the other suitability requirements.

 

Under this concessionary regime, applicants will be entitled to automatic waivers which will be codified in the Listing Rules, simplifying the secondary listing process.

 

For secondary listed companies with a centre of gravity in Greater China, if the bulk of the trading volume of shares takes place in Hong Kong (for these purposes the Stock Exchange is proposing 55% or more of the trading), the waivers granted will fall away after the expiry of a grace period of 12 months, save for those waivers commonly granted to dual primary listed companies.

 

NEXT STEPS

 

The consultation conclusions report broad market support for the measures in the concept paper to expand and diversify Hong Kong'’s listing regime. Whilst the new board concept has not been pursued following market concerns raised about added complexity and potential difficulties attracting issuers to a third board, the general intent behind the new board proposals is now being implemented through amendments to the Main Board listing regime. Through these proposals, the Stock Exchange hopes to attract new categories of companies to listing with a view to maintaining Hong Kong's position as a competitive and attractive listing venue.

 

The detailed listing rule amendments necessary to implement these proposals are still being finalised and the Stock Exchange is to consult the market further on these in the first quarter of 2018.

 

In addition to these developments, the Stock Exchange has also indicated that it will carry out a review of the existing listing rules and guidance with a view to identifying areas within the existing regulatory framework where greater flexibility can be applied to facilitate the listing of new economy companies. Areas identified where greater flexibility would be welcome in the context of new economy companies include the requirements for delineation of business, restrictions on reliance and competition.

 

 

For further information, please contact:

 

Matt Emsley, Partner, Herbert Smith Freehills

matt.emsley@hsf.com