In late September the Stock Exchange of Hong Kong Limited (the Exchange) and the Securities and Futures Commission (the SFC) released their long awaited “Joint policy statement regarding the listing of overseas companies” on the Exchange (the New JPS). In the past, the inflexible and fastidious approach of the Exchange to the applications of overseas companies left many applicants feeling less than welcome, especially in comparison to the approach of other international exchanges. Indeed, it caused more than one frustrated company to simply give up their hopes of a Hong Kong listing. The aim of the New JPS is to “reduce unnecessary regulatory burden” to ensure Hong Kong remains an attractive listing venue for overseas companies, while not relaxing Hong Kong’s “high standards of regulation, enforcement and corporate governance”.
The New JPS eases the burden on overseas applicants seeking a listing on the Exchange, with a revised, and shorter set of “shareholder protection standards” for applicants to meet, and the promise of published “country guides” stating the expectations for applicants from approved jurisdictions. However, the real advantage will be felt by that subset of overseas companies that are already listed on international exchanges and are seeking a “secondary listing” on the Exchange, with more detailed guidelines about their eligibility for secondary status, and increased certainty about their post-listing compliance obligations because of automatic waivers granted by the Exchange in deference to the applicant’s primary listing authority.
This eUpdate is the first in a two part series examining the effect of the changes under the New JPS, and will cover important changes applicable to all overseas companies. The next eUpdate will deal with changes applicable to applicants seeking a secondary listing.
Getting approval for a new jurisdiction under the old regime
Under the Rules Governing the Listing of Securities on the Stock Exchange of Hong Kong Limited (the Listing Rules), the Exchange must be satisfied that each overseas issuer applying for a listing is incorporated in a jurisdiction where “standards of shareholder protection are at least equivalent” to those in Hong Kong. The Exchange does not conduct its own due diligence. Rather, it falls on the first applicant from a new jurisdiction (the First Comer) to prove the adequacy of shareholder protection standards in that jurisdiction.
The predecessor of the New JPS, released in 2007 (the 2007 JPS), was introduced by the Exchange and the SFC to formalise the previously ad hoc approach of the Exchange to approving foreign jurisdictions. The aim of the 2007 JPS was to bring consistency and reduce the amount of work needed to file an application in Hong Kong by “allowing companies to focus attention on fewer more relevant issues.” However it still contained a long list of 25 matters for which the Exchange expected the applicant to demonstrate “substantial comparability”. Any shortfalls were generally expected to be made up by amendment to the applicant’s articles.
There was no shortage of applicants under the 2007 JPS; the number of approved jurisdictions rose from just four to 21 and now extends beyond Australia, the United Kingdom and two Canadian provinces (the original four), to jurisdictions as diverse as Brazil, Cyprus, Korea and the US states of Delaware and California. The full list of acceptable overseas jurisdictions can be found here. However because of the nature of the analysis, this was not an easy process for either the applicants or the Exchange’s listing teams assessing those applications.
A shorter, more reasonable list of standards
The New JPS contains a new, refined list of key shareholder protection standards that is less than half the size of the list in the 2007 JPS, and drafted in line with the general concepts behind, rather than the literal wording of, the Hong Kong shareholder protections. The new JPS does not carry over any of the corporate governance matters regarding powers of directors, or the very Hong Kong-centric matters regarding capital maintenance that were enshrined in the 2007 JPS. This shorter, and more reasonable list of standards should make it easier for applicants from new jurisdictions, especially those from jurisdictions whose companies laws are very different to those in Hong Kong, to prove that they have broadly comparable shareholder protections, and in turn really open up Hong Kong as a listing destination for international companies.
The existing system for Second Comers
Under the existing system, once the Exchange approves a new jurisdiction for the First Comer, it publishes a listing decision outlining its analysis and decision. To accommodate a subsequent applicant from that jurisdiction (a Second Comer), the Exchange introduced “Streamlined procedures for listing overseas companies” (HKEx-GL12-09). Under that regime, a Second Comer from an approved jurisdiction did “not need to complete a line-by-line comparison of the shareholder protection matters in the JPS” but was expected to simply adopt the same arrangements (such as amendments to its articles) adopted by the First Comer.
However this system had many shortcomings. Firstly, the older listing decisions approving the First Comers were in some cases very vague concerning the arrangements made by the First Comer. For example, the decision for British Columbia, Canada, contained only headings for areas of shortcomings, which included topics the Exchange did not even consider important enough to include in the 2007 JPS. If that first applicant did not go on to list in Hong Kong (because they had received a long list of areas they needed to “fix” before listing!) there was no prospectus which might contain a detailed description of arrangements they had adopted. Secondly, if the Second Comer didn’t share the view of the Exchange, it would then have to work harder to disprove the previous conclusion of the Exchange. Thirdly, while the Exchange claimed that the Second Comer did not need to complete a detailed line-by-line comparison, it seems that it really meant that it did not want to see this comparison as part of the vetting process. In some cases the Exchange would still request a confirmation from the sponsor that it had considered and reviewed all material shareholder protection areas in its due diligence and was independently satisfied that the shareholder protection was at least equivalent to that in Hong Kong.
Country Guides could potentially streamline the process
The Exchange plans to publish Country Guides for each approved jurisdiction that will replace the old listing decisions for those jurisdictions. The new Country Guides will contain “comprehensive and user friendly guidance” on how applicants from that jurisdiction could meet the requirement for equivalent shareholder protection. The Exchange has also said they will be updated, if applicable, to reflect the Exchange’s experience with applicants. If the Country Guides do what the Exchange has promised, they will hopefully contain a sensible, relevant list of matters which are actionable by an applicant, rather than place another obstacle in their path. In any case the dramatically shorter list of shareholder protection standards makes a line-by-line comparison less of a chore than in the past.
The requirement for regulatory cooperation has expanded slightly. The Exchange now requires that the securities regulator in an overseas company’s jurisdiction of incorporation and place of central management and control (if these are different) must be a full signatory to the IOSCO Multilateral Memorandum of Understanding Concerning Consultation and Cooperation and the Exchange of Information or have entered a bi-lateral agreement with the SFC. The previous requirements only applied to the securities regulator in the overseas company’s home jurisdiction.
Additional guidance for overseas companies in other areas
The Exchange has also taken the opportunity to clarify a number of their current practices relating to overseas issuers. They have clarified their approach regarding acceptable accounting and auditing standards and operational matters, and set out clearly the prospectus and ongoing disclosure requirements for overseas and secondary listed companies. Other parts of the New JPS cover practical and operational matters that other overseas companies have encountered and include issues the Exchange expects to be made aware of, and measures it expects new applicants to take.