Listing of innovative companies with weighted voting rights (WVR) has been the subject of much controversy since the Hong Kong Stock Exchange ("Exchange") put forward the WVR Concept Paper in August 2014. After two separate rounds of consultation, the Exchange announced its decision to expand the Main Board regime, rather than creating a new board, to allow:
- listing of WVR companies from emerging and innovative sectors, subject to additional disclosure and safeguards;
- listing of pre-profit/pre-revenue companies from biotech industry; and
- secondary listing of overseas companies with “centre of gravity” in Greater China.
To put the proposals into effect, the Exchange is in the process of drafting the proposed amendments to the Main Board Listing Rules ("Listing Rules") with a view to proceed with the formal consultation on the proposed Rule amendments in the first quarter of 2018.
In this article, we will discuss the Exchange’s various proposals as set out in the Consultation Conclusions to the New Board Concept Paper.
Listing of WVR Companies
The Exchange proposes to facilitate the listing of innovative companies with a WVR structure through a new chapter in the Listing Rules.
PROPOSED LISTING CRITERIA
1. New applicants only;
2. Minimum expected market capitalisation of HK$10 billion at the time of listing;
3. Minimum revenue of HK$1 billion in its most recent audited financial year (such requirement will be waived if its expected market capitalisation reaches HK$40 billion or above).
4. Having more than one of the characteristics of an “innovative company”. Instead of a fixed definition, the Exchange proposes to publish a guidance letter on the characteristics of an innovative company, which include:
a. its success is demonstrated to be attributable to the application of new technologies/innovations and/or new business model to the company’s core business;
b. research and development (R&D) is a significant contributor of expected value and constitutes a major activity and expense;
c. its success is demonstrated to be attributable to unique features or intellectual property; and
d. it has an outsized market capitalisation/ intangible asset value relative to its tangible asset value.
5. Eligible and suitable for listing with a WVR structure. The Exchange proposes to publish a guidance letter with factors that will be taken into account when assessing the eligibility and suitability of an applicant a WVR structure, amongst which include:
a. Contribution of WVR holders: each WVR holder has been materially responsible for the growth of the business, by way of their skills, knowledge and/or strategic direction where the value of the company is largely attributable or attached to intangible human capital.
b. Responsibility of WVR holders: each WVR holder (i) has an active executive role within the business, and contributes to a material extent to the ongoing growth of the business; and (ii) is or would assume the role of director of the issuer at the time of listing.
c. External validation: the applicant has received meaningful (being more than just a token investment) third-party funding from sophisticated investors (including financial institutions). Such investors will be required to retain an aggregate 50 per cent of their investment at the time of listing for a period of at least six months post-IPO (subject to exceptions for de-minimis investments by specific investors).
PROPOSED MANDATORY INVESTOR PROTECTION SAFEGUARDS
To address the concerns on investor protection raised in the consultations, the Exchange proposes that applicant with WVR structures must put in place appropriate investor protection safeguards:
1. The WVR structure restrictions
a. WVR shares:
• WVR structure must be attached to a specific class (or classes) of shares, and that the rights attached to the WVR shares and ordinary shares must be the same in all respects other than voting rights.
• The voting power attached to WVR shares must be capped at not more than 10 times of the voting power of ordinary shares.
• The proportion of WVR in issue cannot be increased after listing nor can there be further issue of WVR shares (save for pro rata offering to all shareholders).
b. WVR beneficiaries:
• Must be restricted to those who are (and remain as) directors of the company and the WVR attached to such shares will lapse permanently (i) if the beneficiary ceases to be a director; (ii) dies or is incapacitated; or (iii) if the shares are transferred to another person.
• Must hold a minimum equity threshold at IPO to help ensure that their interests are commercially aligned with other shareholders.
c. Non-WVR shareholders:
• must hold at least 10% of the votes eligible to be cast at general meeting; and
• those holding at least 10% of the voting rights on a one-share one-vote basis must be able to convene a general meeting.
d. Matters to be decided on a one-share onevote basis:
• material changes to the issuer’s constitutional documents, variation of rights attached to any class of shares, the appointment and removal of independent non-executive directors (INEDs) , the appointment and removal of auditors and the winding-up of the company.
2. Enhanced corporate governance
Establishment of a mandatory corporate governance committee comprised of INEDs; and the engagement of a compliance adviser on a permanent basis.
3. Constitutional backing The Exchange will require the prescribed safeguards to be incorporated in the applicant’s constitutional documents.
4. Enhanced disclosure
Issuer with WVR structures will be prominently identified through a unique stock code/marker and appropriate warning to be included in its ongoing corporate communications; appropriate warning language and a full description of the issuer’s WVR structure, rationale and associated risks to be disclosed in its listing documents.
Listing of Pre-revenue Biotech Companies
The Exchange proposes to facilitate the listing of pre-revenue biotech companies (including, for instance, companies in pharmaceuticals, biotechnology and life sciences; healthcare equipment and supplies; and healthcare technology) through a new chapter in the Listing Rules. The proposed requirements include:
1. minimum expected market capitalisation of HK$1.5 billion at the time of listing,
2. having the features of “biotech company” to be set out in the Exchange’s guidance letter, amongst which include:
a. has at least one product/process/technology which has proceeded beyond the concept stage (for example, having passed Phase I stage in relation to the clinical trial of a drug regulated by relevant drug and safety authorities such as the US Food and Drug Administration, CFDA (China) or EMA (Europe) and has received all the necessary regulatory approvals to proceed to Phase II);
b. has a portfolio of durable patents, registered patents and/or patent applications that demonstrates its rights to the new technologies or innovations that form the basis of its listing application; and
c. has previously received investment from at least one sophisticated investor (including financial institutions).
3. enhanced working capital of up to 125% of the issuer’s current requirement over the next 12 months and has been in operation for at least two years prior to listing.
4. enhanced disclosures on (a) the phases of development for its product(s); (b) the potential market of its product(s); (c) details of spending on R&D, patents granted and applied for; and (d) the R&D experience of management, to ensure that investors are fully informed of the business and R&D risks involved.
The New Concessionary Secondary Listing Regime
1. Target companies
The Exchange proposes to modify the existing Listing Rules to create a new route to secondary listing for companies with all of the following characteristics:
a. be an innovative company (by reference to the characteristics set out above);
b. be primary listed on the New York Stock Exchange, NASDAQ or the Main Market of the London Stock Exchange (and belonging to the UK FCA’s “Premium Listing” segment), each a “Qualifying Exchange”;
c. have a good record of compliance for at least two years on a Qualifying Exchange; and
d. have an expected market capitalisation at the time of secondary listing in Hong Kong of at least HK$10 billion. A secondary listing applicant (i) with a WVR structure; and/or (ii) with a “centre of gravity” in Greater China will also be required to have a minimum revenue of HK$1 billion in its most recent audited financial if it has an expected market capitalisation at the time of secondary listing in Hong Kong of less than HK$40 billion.
2. Summary of requirements under the new secondary listing route
3. Takeovers Code implication
It is stated in the Exchange’s papers that the current thinking of Securities and Futures Commission (SFC) is that the Takeovers Code would not apply to secondary listings of companies which centre of gravity is in Greater China. However, if the bulk of trading moves to Hong Kong and therefore a company is treated as having a dual primary listing in Hong Kong, the Takeovers Code would apply at that point.
Details of the above proposals are set out in the consultation conclusions released on 15 December 2017, which is available on the HKEX website along with Frequently Asked Questions about the consultation conclusions.