In 2005, the Hong Kong Stock Exchange (“Exchange”) issued a listing decision analyzing whether a listing applicant using the variable interest entity structure (“VIE Structure”) through multiple contractual arrangements (“Control Contracts”) in the conduct of its business in the People’s Republic of China (“PRC”) was suitable for listing in Hong Kong. In its decision, the Exchange held that if the applicant successfully demonstrates the legality of the Control Contracts and the ability to ensure the proper operation of the VIE Structure based on the Control Contracts, the Exchange would approve the listing application.
In November 2011, the Exchange reaffirmed its 2005 decision and confirmed that it would allow applicants using the VIE Structure to list in Hong Kong on a caseby- case basis. However, the Exchange indicated that if the VIE Structure is used in sectors where foreign investment is “not restricted” under PRC law, the Listing Division of the Exchange would immediately refer the application to the Listing Committee before processing it further.
In addition, the Exchange now requires any applicant using the VIE Structure to:
- provide reasons for the use of the VIE Structure in its business operation;
- unwind the VIE Structure and terminate the Control Contracts as soon as PRC law allows the business of the applicant to be operated without such a structure;
ensure that the Control Contracts:
- include a power of attorney from the shareholders of the PRC operating companies (“OPCO”) granting the applicant’s directors the power to exercise all rights of OPCO’s shareholders;
- provide that the liquidator, acting on the Control Contracts, can seize OPCO’s assets in a winding-up situation for the benefit of the applicant’s shareholders or creditors; and
- contain an arbitration clause which allows the arbitrators to award remedies over the shares or land assets of OPCO, injunctive relief or winding-up of OPCO.
We understand that the Exchange has imposed these additional requirements due to the recent internal report of the China Securities Regulatory Commission (“CSRC”) on VIE Structures. The CSRC report purportedly urged the State Council to review the use of the VIE Structure and suggested that international stock exchanges (including the Exchange) review companies using such structures in more detail.
Despite these additional requirements, it is comforting to know that companies using VIE Structures are still eligible for listing in Hong Kong. The Exchange should provide clarity on some of the additional requirements, such as the rationale for referring the application to the Listing Committee if the applicant is in a “non-restricted” sector and still uses a VIE Structure.