The Hong Kong Stock Exchange has launched a consultation paper to seek market feedback on proposals to extend the listing regime for innovative companies to permit corporates to hold shares with weighted voting rights.
In April 2018, the Hong Kong Stock Exchange introduced a new listing regime for companies from emerging and innovative sectors. As part of those reforms, a new Chapter 8A was added to the Listing Rules to permit the listing of innovative and high-growth companies with weighted voting right structures. The Stock Exchange also introduced a number of investor protection safeguards given the potentially higher risks associated with companies with weighted voting rights. These included placing limits on the beneficiaries of weighted voting rights, permitting only those who are (and remain) directors of the company to hold shares with weighted voting rights (either directly or through a limited partnership, trust, private company or other vehicle). The Stock Exchange indicated at the time that it would consult the market separately on the option of allowing corporate entities to benefit from weighted voting rights, given this would be an extension from its original reform proposals. The current consultation follows discussions between the Stock Exchange and relevant stakeholders on this issue.
The Stock Exchange is proposing to broaden the Listing Rules on weighted voting rights to permit corporate shareholders to benefit, rather than only individuals as currently. The conditions and safeguards that currently apply would continue, together with the additional conditions and safeguards set out below.
The corporate beneficiary of weighted voting rights must:
own and operate an “ecosystem” that benefits the listing applicant (see further below);
be either an innovative company itself or have business experience in one or more emerging and innovative sectors and a track record of investment in, and contributions to, innovative companies;
have an expected market capitalisation of not less than HK$200 billion both at the time of listing and based on an average market capitalisation over the previous three months;
be of relative size to the listing applicant, such that the listing applicant must not represent more than 30% of the corporate beneficiary in terms of market capitalisation at the time of listing;
to ensure regulatory oversight, be listed on the Stock Exchange or other qualifying exchange (NYSE, NASDAQ or the Main Market of the London Stock Exchange), and must maintain that listing;
for at least two financial years prior to the listing application (and any stub period up to the date on which it increases its stake to comply with the below), have had an underlying economic interest of 10% or more and a material involvement in the management or the business of the listing applicant; and
at and following listing, have an economic interest of at least 30% in the listing applicant.
To provide structuring flexibility, the corporate beneficiary must itself meet the above or be a wholly-owned subsidiary of an entity that does.
The corporate beneficiary must comply with the Stock Exchange’s guidance on pre-IPO investments and placings to existing shareholders when increasing its economic stake from the required 10% or more level during the prior two financial years up to the 30% level at listing.
The listing applicant and corporate shareholder will need to show that an ecosystem exists between them which:
is a community of companies including the listing applicant and other components that has developed around a technology, know-how platform or set of core products or services, which is owned or operated by the corporate shareholder (although it does not need to be its core business);
shares data, users and/or technology which the components of the ecosystem (including the listing applicant) benefit from and contribute to;
is of meaningful scale, normally by reference to indicators such as the number and technological sophistication of the components connected to it, the size of the user base or cross-interaction frequency between the users/customers of different components;
has the core components within it, and the listing applicant, in substance controlled by the corporate shareholder; and
has materially contributed to the growth and success of the listing applicant, by virtue of the listing applicant participating in and co-evolving with the ecosystem.
Voting right ratio
The weighted voting rights of shares held be corporates must not carry more than five times the voting power of the ordinary shares. By contrast, the limit on voting power conferred on shares with weighted voting rights held by individuals is capped at ten times the rights of ordinary shareholders.
Ongoing shareholding requirement
The corporate beneficiary of weighted voting rights must hold at least 30% of the economic interest in the listed company. An anti-dilution mechanism will be introduced to allow the corporate beneficiary to subscribe for ordinary shares to maintain the required percentage.
The corporate beneficiary must have at least one corporate representative on the board of the listed company, and the weighted voting rights will permanently lapse if this is not maintained.
Lapse of weighted voting rights and sunset clause
The weighted voting rights attached to the shares held by a corporate shareholder must permanently lapse if the corporate shareholder’s contribution to the listed company is substantially terminated or materially disrupted or suspended for a period of more than twelve months.
The weighted voting rights must not last for more than ten years, although they may be renewed with independent shareholders’ approval for successive periods of not more than five years.
The consultation paper contains a detailed discussion on the rationale for introducing corporate weighted voting rights beneficiaries and highlights the related risks.
The consultation is open for public comment until 1 May 2020.