Following the release of the New Board Concept Paper Conclusions on 15 December 2017, The Stock Exchange of Hong Kong Limited (the “Exchange”) published a Consultation Paper on 23 February 2018 to seek public comments on the proposed new rules to:
- permit listings of biotech companies that do not meet any of the financial eligibility tests of the Main Board;
- permit listings of companies with weighted voting right (“WVR”) structures; and
- establish a new concessionary secondary listing route for Greater China and international companies that wish to secondary list in Hong Kong.
The proposed new rules, which closely follow the proposals set out in the New Board Concept Paper Conclusions (please refer to our previous client alert), set out the details of the proposed listing eligibility as well as additional listing requirements and shareholder protection safeguards applicable to these companies. The key points are summarised in this client alert.
Proposed new chapter 18A - Biotech companies that do not meet any of the financial eligibility tests
Proposed listing eligibility
The Exchange proposes that a biotech company that does not meet any of the financial eligibility tests under the current Main Board Rules could be suitable to list under the proposed new chapter 18A of the Main Board Rules if it can demonstrate the following features:
- the biotech company must have developed at least one “Core Product” beyond concept stage;
What is a “Core Product”?
A “Core Product” refers to a biotech product that is required by applicable laws, rules or regulations to be evaluated and approved by a competent authority (namely FDA, CFDA, EMA or any other national or supranational authority which the Exchange recognises as a competent authority on a case by case basis) based on data derived from clinical trials (i.e. on human subjects) before it could be marketed and sold in the market regulated by that competent authority.
How would the Exchange consider whether different types of biotech products have been developed “beyond the concept stage”?
The Exchange has provided specific guidance on the milestones that a biotech company must reach in respect of biotech products that are pharmaceuticals (small molecule drugs), biologics, and medical devices (including diagnostics). For other biotech products, the Exchange will consider on a case by case basis.
- it must have been primarily engaged in research and development (“R&D”) of its Core Product(s) for a minimum of 12 months;
- its primary reason for listing is to raise capital for R&D to bring its Core Product(s) to commercialisation;
- it must have durable patent(s), registered patent(s), patent application(s) and/or intellectual property in relation to its Core Product(s);
- (if the applicant is engaged in the R&D of pharmaceutical (small molecule drugs) products or biologic products) it must demonstrate that it has a pipeline of those potential products; and
- it must have received meaningful third party investment (being more than just a token investment) from at least one “Sophisticated Investor” at least 6 months before IPO (which must remain at IPO).
How would the Exchange consider whether an investor is a “Sophisticated Investor”?
Sophisticated Investor is determined by the Exchange by reference to factors such as net assets or assets under management, relevant investment experience, and the investor’s knowledge and expertise in the relevant field.
Proposed additional listing requirements and shareholder protections
Since biotech issuers listed under the proposed biotech chapter potentially carry additional risks to investors as they would not meet any of the existing financial eligibility tests, the Exchange proposes to impose additional listing requirements and shareholder protection measures, including:
- the applicant must have a high minimum expected market capitalisation of HK$1.5 billion at the time of listing;
- it must have been in its current line of business for at least two financial years prior to listing under substantially the same management;
- it must have available working capital to cover at least 125% of the group’s costs for at least next 12 months (after taking into account the proceeds of the IPO). These costsmust substantially consist of general, administrative and operating costs as well as R&D costs;
- cornerstones will not count towards minimum initial public float requirement at listing or during 6 months lock-up. Existing pre-IPO investors can participate in IPO and only IPO shares subscribed for will not count towards minimum initial public float requirement;
- no fundamental change of its principal business without the Exchange’s prior consent;
- a biotech issuer listed under the proposed biotech chapter will be subject to an accelerated de-listing process under which it will only be given a 12-month period to re-comply with the continuing requirement to maintain sufficient operations or assets;
- biotech issuers listed under the proposed biotech chapter will be identified through a stock marker “B” at the end of their stock names; and
- biotech companies will be required to provide enhanced disclosures in their listing documents and other corporate communications.
Proposed new chapter 8A - Companies with WVR structures
Proposed listing eligibility
The Exchange proposes that a company with a WVR structure would normally be considered suitable for listing in Hong Kong under the proposed new chapter 8A of the Main Board Rules if it is able to demonstrate the following characteristics:
- the applicant must be a new applicant;
- it must be an innovative company;
What kind of companies would the Exchange consider as “innovative”?
The Exchange considers that an innovative company for the purpose of the proposed new chapter 8A would normally be expected to possess more than one of the following characteristics:
- its success is demonstrated to be attributable to the application, to the company’s core business, of (1) new technologies; (2) innovations; and/or (3) a new business model, which also serves to differentiate the company from existing players; - R&D is a significant contributor of its expected value and constitutes a major activity and expense; - its success is demonstrated to be attributable to its unique features or intellectual property; and/or - it has an outsized market capitalisation / intangible asset value relative to its tangible asset value.
- it must have a minimum expected market capitalisation of HK$10 billion at the time of listing. An applicant having an expected market capitalisation at listing of less than HK$40 billion will also be required to have at least HK$1 billion of revenue in its most recent audited financial year;
- it must demonstrate a track record of high business growth, as can be objectively measured by operational metrics such as business operations, users, customers, unit sales, revenue, profits and/or market value (as appropriate) and its high growth trajectory is expected to continue;
- it must have previously received meaningful third party investment from at least one Sophisticated Investor (which must remain at IPO). Such pre-IPO investors will be required to retain an aggregate 50% of their investment at the time of listing for a period of at least six months post-IPO;
- WVR beneficiaries will be restricted to individuals who are directors of the applicant at and after listing and who have been materially responsible for growth of the business; and
How does the Exchange see allowing corporate beneficiaries of WVR companies?
After publishing the New Board Concept Paper Conclusions, the Exchange has received feedback suggesting that there may be legitimate commercial and competitive reasons to permit corporates to hold WVRs. Accordingly, if the proposed Listing Rules to permit the listing of companies with a WVR structure are implemented, the Exchange plans to launch a consultation within three months of the implementation of these Listing Rules to further explore this option.
- WVR beneficiaries must collectively beneficially own a minimum of at least 10% and a maximum of not more than 50% of the underlying economic interest in the applicant’s total issued share capital at the time of listing.
Proposed additional listing requirements and shareholder protections
Recognising the potential risks associated with WVR structures, the Exchange has proposed to impose additional listing requirements and shareholder protection safeguards, including:
- there will be restrictions on transfer of the WVRs attached to a WVR beneficiary’s shares (save for trusts and legitimate tax planning);
- issuers with WVR structures will be prohibited from increasing the proportion of WVR in issue or from issuing any further WVR shares after listing;
- WVRs will be limited to share-based structures only, with the voting power attached to WVR shares to be capped to not more than ten times of the voting power of ordinary shares;
- non-WVR shareholders must be entitled to cast at least 10% of the votes that are eligible to be cast on resolutions at the listed issuer’s general meetings;
- certain fundamental matters (including changes to constitutional documents, appointment and removal of independent non-executive directors (“INED”) and auditors, variation of rights attached to any class of shares and voluntary winding-up) must be voted on a “one-share, one-vote” basis;
- an issuer with a WVR structure will be required to establish a Corporate Governance Committee comprised of a majority of INEDs and chaired by an INED to review, monitor and report on compliance with WVR safeguards; and to engage a compliance adviser on a permanent basis;
- WVR safeguards must be incorporated into constitutional documents, and WVR beneficiaries must give undertaking to the issuer to comply with WVR safeguards, so as to allow shareholders to take civil actions to enforce them;
- issuers with WVR structures will be identified through a stock marker “W” at the end of their stock names; and
- issuers with WVR structures will be required to make enhanced disclosures regarding their WVR structure in their listing documents and other corporate communications.
Proposed new chapter 19C - New concessionary secondary listing route
The Exchange proposes to add a new chapter to the Main Board Rules to create a new concessionary secondary listing route for innovative companies with WVR structures and/or a “centre of gravity” in Greater China that have their primary listing on NYSE, NASDAQ or the “premium listing” segment of the London Stock Exchange’s Main Market (each a “Qualifying Exchange”).
Such innovative companies seeking a secondary listing in Hong Kong under this new concessionary secondary listing route must also have the following characteristics:
- it must have a good compliance record for at least two financial years on the Qualifying Exchange; and
- it must have also have an expected market capitalisation of at least HK$10 billion at the time of secondary listing in Hong Kong. An applicant having an expected market capitalisation at the time of secondary listing in Hong Kong of less than HK$40 billion (i) with a WVR structure; and/or (ii) which is a Greater China Issuer will also be required to have at least HK$1 billion of revenue in its most recent audited financial year.
See below a table summarising the application of requirements for three types of innovative companies that are primary listed on a Qualifying Exchange: (a) Greater China issuers that were primary listed on a Qualifying Exchange before the publication of the New Board Concept Paper Conclusions (“Grandfathered Greater China Issuers”); (b) those that were primary listed on a Qualifying Exchange afterwards (“Non-Grandfathered Greater China Issuers”); and (c) non-Greater China issuers:
Consultation period will end on 23 March 2018. It is expected that consultation conclusions will be published in late April 2018.
While the Consultation Paper sets out a list of factors or characteristics that the Exchange would consider in assessing the listing eligibility of biotech companies and innovative companies with WVR structures as well as Greater China innovative companies that have a primary listing on a Qualifying Exchange seeking a secondary listing under the new concessionary route, the Exchange makes it clear that it will retain the discretion to find a company not suitable for listing even if it satisfies all those factors or characteristics. Therefore, if the proposals are implemented, prospective listing applicants and their sponsors seeking a listing under any of the three new chapters are advised to make pre-IPO enquiries regarding the interpretation of the new Listing Rules and their application to the prospective listing applicants’ circumstances.
While formal pre-IPO enquiries can only be made after the new Listing Rules are published, before then, the Exchange will respond to any such enquiries on an informal basis. Companies may submit a formal application for listing under the new regime only after the Listing Rules to implement the regime come into effect.