The Stock Exchange of Hong Kong Limited (the Exchange) has issued conclusions to its concept paper on weighted voting rights (Concept Paper) on 19 June 2015. The Concept Paper was published following Alibaba's decision not to seek a listing in Hong Kong and relates to the question of weighted voting rights, which have been effectively banned for almost 25 years.
The Concept Paper
Currently, except in exceptional circumstances agreed with the Exchange, the share capital of a listing applicant must not include shares of which the proposed voting power does not bear a reasonable relationship to the equity interest of such shares when fully paid.1
The Concept Paper sought views on whether governance structures that give certain persons voting power or other related rights disproportionate to their shareholding (WVR structures) should be permissible for companies listed or seeking to list on the Exchange's markets.
The Exchange received 200 responses to the Concept Paper. Having considered all the responses, the Exchange concluded that there is support for a second stage consultation on proposed changes to the Listing Rules on the acceptability of WVR structures. On this basis, the Exchange considers proposing that "one share, one vote" should prevail in general, but that WVR structures should be allowed for certain companies in limited circumstances and with safeguards. The consultation conclusions and preliminary views of the Exchange regarding such circumstances and safeguards are summarized as follows:
- WVR structures should be restricted to new applicants only, and there should be an anti-avoidance provision to prevent circumvention of this restriction by existing listed companies.
- The use of WVR structures should not be restricted to particular industries or "innovative companies", nor should it be restricted to overseas companies only. Nevertheless, companies with WVR structures should have certain pre-determined characteristics and should meet higher eligibility standards.
- The Exchange should have flexibility in deciding which companies with WVR structures should be listed, and the "exceptional circumstances" concept in the Listing Rules should be extended to include the listing of certain companies with WVR structures provided that there exist enhanced investor protection safeguards.
- Restrictions should be imposed on companies with WVR structures to mitigate concerns that there is a heightened investor protection risk associated with these structures.
- Whilst it is not reasonable to allow one form of WVR structure and ban another if both have the same outcome, structures that confer weighted voting rights through multiple classes of shares can be more easily accommodated under the current legal and regulatory framework in Hong Kong, and should be the preferred method of introducing WVR structures in the absence of other compelling factors.
- Changes to the Listing Rules and the Takeovers Code may be necessary to allow companies with WVR structures to list. It is, however, believed that a class action regime is not a necessary pre-requisite for the acceptability of WVR structures.
- GEM, a separate board, or a professional board should not be used to list companies with WVR structures; instead, these companies should be differentiated using other methods, such as using a stock name with a marker.
Draft proposal and issues for second stage consultation
The Exchange is finalising a draft proposal that is intended to be refined through (a) first, discussions with stakeholders; and (b) then, a formal consultation process which is expected to commence in the third quarter of 2015 or early in the fourth quarter of 2015. It is currently envisaged that the draft proposal will include ring-fencing features, safeguards and corporate governance measures.
Competitiveness of Hong Kong for the listings of Mainland Chinese companies
In the Concept Paper, there was a detailed discussion of whether the Exchange's current restriction on WVR structures may be a factor in Mainland Chinese companies' decision in choosing a listing venue. In this regard, the Exchange noted that, amongst those Mainland Chinese companies with primary listings in the US at the time, 29% had a WVR structure, and they represented 70% of the market capitalization of all US listed Mainland Chinese companies. Nevertheless, it was also noted that there were Mainland Chinese companies which chose to list on foreign markets which restrict the use of WVR structures (such as Singapore and the UK), indicating that there were other reasons which influenced those companies to choose to list outside Hong Kong.
As part of the second stage consultation, the Exchange will ask market participants and others to identify the factors which they will consider when deciding on listing venue and the importance of the permissibility of WVR structures to this decision.
The second stage consultation will also consider the ability for companies with WVR structures that meet the requirements of the Joint Policy Statement regarding the Listing of Overseas Companies to undertake a secondary listing, even though their WVR structures do not meet the requirements for a primary listing for companies with such structures.
The Exchange will also consult on whether the current prohibition on secondary listing for companies with a Greater China "centre of gravity" should be relaxed to a limited extent.
A copy of the Consultation Conclusions can be downloaded via the link below: