On 24 April 2018, The Stock Exchange of Hong Kong Limited (the “Exchange”) published the consultation conclusions and announced the new rules to: (a) permit listings of companies with weighted voting right (“WVR”) structures; (b) establish a new concessionary secondary listing route for Greater China and international companies that wish to secondary list in Hong Kong; and (c) permit listings of biotech companies that do not meet any of the Main Board financial eligibility tests; and
The new rules broadly follow the proposals set out in the consultation paper published in February 2018 (see our client alert of 5 March 2018), with a few amendments to reflect comments from consultation respondents on certain details. The new rules have come into effect on 30 April 2018, from which date companies seeking to list under the new rules may submit formal listing applications to the Exchange.
This client alert gives you a quick summary of the key points of the new Chapter 8A of the Main Board Listing Rules (as supplemented by the Exchange’s Guidance Letter HKEX-GL93-18) which sets out additional requirements and modifications to existing rules applicable to companies with WVR structures seeking a primary listing in Hong Kong. For qualifying issuers with WVR structures seeking a secondary listing in Hong Kong, please refer to another client alert of 7 May 2018. For new rules on listing of biotech companies, please refer to our client alert of 4 May 2018).
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Implications of the Draft PRC Foreign Investment Law
For listing applicants in industries subject to foreign investment restrictions in the PRC, the Exchange’s prevailing approach is to require such companies to demonstrate that they are able to comply with the requirements of the draft PRC Foreign Investment Law in the event that the legislation is promulgated.
If the draft PRC Foreign Investment Law were to come into effect, an issuer with a WVR structure in an industry subject to foreign investment restrictions in the PRC could potentially use WVR to demonstrate compliance with the draft PRC Foreign Investment Law in that they had de facto control of the issuer, if the WVR holders are PRC citizens. In such a case, the applicant must clearly disclose the risk that its WVR may fall away as a result of the required safeguards in Chapter 8A and it may then not be able to comply with the PRC Foreign Investment Law.
Takeovers Code implications
There is a question as to whether an obligation to make a mandatory general offer under the Takeovers Code would arise if a shareholder’s voting rights in an issuer (a) increases above 30%; or (b) increases by more than 2% in the case of a shareholder holding 30% or more but less than 50% of the voting rights, in each case solely due to the WVR falling away (for example as a result of the death of a WVR beneficiary). The Exchange has clarified with the Securities and Futures Commission (the “SFC”) that a mandatory general offer would not normally be required if the relevant person is independent of the event which has led to the WVR falling away. In all relevant cases, the SFC should be consulted.
The Exchange acknowledges that some of the rules under the new Chapter 8A will necessarily involve a degree of subjective judgement on the part of the Exchange and the Listing Committee. It is expected that the Exchange will provide further guidance and clarity to the market as it gains more experience on the listing of companies from emerging and innovative sectors.
Companies seeking to list with a WVR structure should also note that although the Exchange has provided guidance in Guidance Letter HKEX-GL93-18 on the factors that it will take into account when considering the suitability for an applicant to list with a WVR structure, the Exchange retains the discretion to find a company not suitable for listing even if it satisfies all those factors. In case of any doubt, potential applicants may wish to make enquiries with the Exchange prior to submitting their listing applications.