Overhaul of listing rules to facilitate the listing of innovative companies in Hong Kong

On 15 December 2017, The Stock Exchange of Hong Kong Limited (the “Exchange”) published its consultation conclusions to the New Board Concept Paper published six months ago.

The Exchange has determined to proceed to expand the existing listing regime by introducing two new chapters to the Main Board Listing Rules (instead of introducing a new board) to allow the listing of:

• pre-profit / pre-revenue biotech issuers; and
• issuers from emerging and innovative sectors that have weighted voting rights (“WVR”) structures, subject to additional disclosure and safeguards.

The Exchange also proposes to modify the existing Main Board Listing Rules in relation to overseas companies to create a new secondary listing route to attract innovative issuers that are primary listed on NYSE, NASDAQ or the “premium listing” segment of the London Stock Exchange’s Main Market (each a “Qualifying Exchange”).

The Exchange is in the process of finalising the proposals and has commenced the drafting of the proposed amendments to the Listing Rules to put the proposals into effect.  The Exchange expects to begin the discussions with stakeholders to further refine the proposals soon with a view to proceeding with the formal consultation on the proposed Rule amendments in the first quarter of 2018. 

This client alert summarises the proposed way forward as discussed in the consultation conclusions.

Definition of “New Economy” company

Acknowledging that it is hard to define “New Economy” companies and that the definition is also likely to evolve over time, the Exchange will publish a guidance letter on the characteristics of innovative companies to the market.

At present, the Exchange considers an innovative company would normally be expected to have more than one of the following characteristics:

• its success is demonstrated to be attributable to the application of new (1) technologies; (2) innovations; and/or (3) business model to the company’s core business, which also serves to differentiate the company from existing players;
• research and development is a significant contributor of expected value and constitutes a major activity and expense;
• its success is demonstrated to be attributable to unique features or intellectual property; and
• it has an outsized market capitalisation / intangible asset value relative to its tangible asset value.

A new chapter for listing of pre-revenue “New Economy” companies initially limited to biotech companies

The Exchange proposes to facilitate the listing of “New Economy” companies which are pre-revenue through a new chapter in the Main Board Listing Rules.  The biotech sector has been chosen as the initial focus in widening market access for early stage companies. The Exchange will review the regime in due course to determine if other types of “new economy” companies could also be permitted to list on a pre-revenue basis.

The Exchange will issue a guidance letter providing that an applicant applying for listing on a pre-revenue basis must demonstrate that it is a biotech company and the features that such applicants would normally be expected to have, e.g. applicants must have at least one product which has proceeded beyond the concept stage.

The Exchange proposes to permit biotech companies that have a minimum expected market capitalisation at the time of listing of at least HK$1.5 billion to list under the new chapter. These issuers would also be subject to the same regulatory standards as other applicants to the Main Board, save for the financial track record requirements.

A new chapter for listing of “New Economy” companies with WVR structures

The Exchange proposes to facilitate the listing of “New Economy” companies with WVR structures through a new chapter in the Main Board Listing Rules.

The Exchange will issue a guidance letter setting out the factors that will be taken into account when assessing whether such an applicant is eligible and suitable for listing with a WVR structure.   The applicant will be required to meet the “innovative company” definition and justify the rationale for founders and key executives of the company having WVR due to their previous contributions to the development of the company and their importance to its future growth. The Exchange will also reserve the right to reject an applicant on suitability grounds if its WVR structure is an extreme case of non-conformance with governance norms (for example, if the ordinary shares carry no voting rights at all).

Companies with WVR structures would be required to have a minimum expected market capitalisation of HK$10 billion and, if below HK$40 billion of market capitalisation, would need to meet a higher revenue test of HK$1 billion in the full financial year before listing. 

The Exchange will require issuers with WVR structures to put in place appropriate safeguards, such as:

• Ring-fencing – Only new applicants will be able to list with a WVR structure.
• Eligible persons only – Beneficiaries of WVRs will be restricted to those who are (and remain as) directors of the issuer.
• Limits on WVR powers – The voting power of shares with WVRs to be capped to not more than ten times than that of ordinary shares.  Non-WVR shareholders must hold at least 10% of the votes eligible to be cast at general meeting.
• Enhanced disclosure – Such issuers will need to be prominently identified through a unique stock code/marker and to include appropriate warnings in their ongoing corporate communications.
• Enhanced corporate governance – Such issuers will be required to have a mandatory corporate governance committee comprised of independent non-executive directors.
• Constitutional backing – The prescribed safeguards will be required to be incorporated in the issuers’ constitutional documents so as to allow private legal actions to be taken for breaches of safeguards.

A new secondary listing route to attract innovative issuers that are primary listed on a Qualifying Exchange

The Exchange proposes to modify the existing Main Board Listing Rules in relation to overseas companies to create a new secondary listing route to attract innovative issuers that are primary listed on a Qualifying Exchange.

The new secondary listing route will only be available to applicants with all of the following characteristics:

• being an innovative company;
• having a primary listing on a Qualifying Exchange;
• having a good record of compliance for at least two years on a Qualifying Exchange; and
• an expected minimum market capitalisation at listing of HK$10 billion.

The Exchange proposes the following measures to attract the targeted companies to secondary list in Hong Kong:

• eligible companies will not be subject to the “centre of gravity” test, which will permit eligible companies from the Greater China region to secondary list in Hong Kong;
• (i) eligible companies from the Greater China region and listed on a Qualifying Exchange prior to the publication of the Consultation Conclusions; and (ii) eligible international companies will be able to secondarily list in Hong Kong without having to change their existing governance structure and WVR structure (instead these companies will be required to comply with certain key shareholder protection measures as conditions of continued listing); and
• eligible companies will have the benefit of the automatic Listing Rule waivers currently available to established secondary listing applicants under the Joint Policy Statement Regarding the Listing of Overseas Companies jointly issued by the SFC and SEHK in September 2013 (“JPS”).

To mitigate the risk of regulatory arbitrage, Greater China companies listed on a Qualifying Exchange after the publication of the consultation conclusions will be required to comply with Hong Kong WVR requirements and demonstrate that they are subject to shareholder protection standards at least equivalent to those in Hong Kong by changing their constitutional documents as necessary.

If 55% or more of the total trading volume in the shares of a Greater China company with a secondary listing via the new concessionary route took place on the Hong Kong Stock Exchange in the company’s most recent fiscal year, such company would be treated as having a dual-primary listing and the codified automatic waivers granted under JPS would no longer apply.  The Exchange would, on a case by case basis, grant waivers that are commonly granted to dual-primary listed issuers.  Such companies would be given a 12 month grace period to comply with the applicable requirements following a migration of the bulk of trading in their securities to Hong Kong.