As addressed in our previous newsletters, the Hong Kong Stock Exchange (the “HKEx”) has published a New Board Concept Paper (the “Concept Paper”) in response to the recent demands that the local stock market shall be refined in light of the rise of the innovative companies. In the Concept Paper, the HKEx has recognised the need to maintain the competitiveness of the local listing environment through regulatory reform and has put forward a number of proposals, including but not limited to the establishment of new boards specifically for the primary listing of companies with Weighted Voting Rights (“WVR”) structures.
In December 2017, the HKEx has published the Consultation Conclusions of the Concept Paper (the “Conclusion Paper”) summarising the market responses to the proposals provided in the Concept Paper. On that basis, the HKEx has also explained its plan regarding (i) the primary listing of pre-revenue issuers, (ii) the primary listing of companies with WVR structures and (iii) the waiver of secondary listings of the innovative companies.
Listing on Pre-revenue Basis
As pointed out by the HKEx in the Conclusion Paper, market responses acknowledge that the changing global business dynamic is driving companies to pursue market share before profit, and many business involved in research and development intensive sectors have legitimate capital markets needs ahead of having a revenue-generating commercial product of service. As a result, these innovative companies may not readily fit in with the current listing regime. Accordingly, the HKEx proposes to add a new chapter in the Main Board Listing Rules for creating a new listing route specifically for these companies to list on pre-revenue basis.
Without providing a straight and direct definition of the innovative companies, the HKEx proposes that these companies (“Innovative Company”) shall demonstrate the following features:
- 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 constitute a major activity and expense;
- the success is demonstrated to be attributable to unique features or intellectual property; and
- it has an outsized market capitalization / intangible asset value relative to its tangible asset value.
What is perhaps unexpected is that the HKEx intends to limit this new listing route to pre-revenue companies engaged in the research and development, application and commercialization of products, processes or technologies in the biotech sphere (the “Biotech Companies”) at this stage. The reason is that most of the pre-revenue companies do not have a traditional indicator of performance (e.g. revenue and profit) from which the investors can judge their values. Meanwhile, Biotech Companies tend to be strictly regulated under a regime that sets external milestones on development progress and investors can assess the value of these companies.
The HKEx suggests that Biotech Companies intending to list on a pre-revenue basis are expected to possess a list of features including:
- having been primarily engaged in research and development for the purposes of developing new or innovative products / processes / technologies;
- having unique features of innovation or intellectual property that could be reasonably expected to give rise to commercialisable patents, copyrights and/or trade secrets;
- having at least one product/process/technology which has proceeded beyond the concept stage and has received all the necessary regulatory approvals to proceed;
- having previously received investment from at least one sophisticated investor (including financial institutions); and
- being able to provide enhanced risk disclosure, disclosures on the phases of development for its product(s) and the potential market of its product(s), patents granted and applied for.
As suggested by the HKEx in the Conclusion Paper, we can expect that amendments of the Main Board Listing Rules (instead of the establishment of a new board) will be made for incorporating the said listing regime.
Primary Listing of Weighted Voting Right
As discussed in the previous newsletters, Weighted Voting Rights structures, also known as dual share class structures in some jurisdictions, means governance structures that give certain persons voting power or other related rights disproportionate to their shareholding, i.e. it is a structure that militates against the traditional One-Share-One-Vote (“OSOV”) rule.
In the Conclusion Paper, the HKEx suggested that while a large majority of feedbacks received in relation to the Concept Paper supports the permission of listing of companies with WVR structures, most of them also reckon the need of safeguards and restrictions so as to maintain a proper level of shareholder protection.
In relation to the requirements of listing a company with WVR structures, the HKEx has proposed in the Conclusion Paper that the initial limit which the applicants have to meet for listing a WVR structure shall be not less than HK$ 10 billion. If an applicant has an expected market capitals at the time of listing of less than HK$40 billion, the HKEx will also require the applicant to have at least HK$ 1 billion of revenue in its most recent audited financial year.
In addition, the HKEx recognises that WVR structure carries with it additional risks to the investors and therefore requires the applicants to put in place appropriate safeguards for shareholders’ protection. For examples, the HKEx requires (1) appropriate warnings to be included in the issuer’s ongoing corporate communications and (2) a mandatory corporate governance committee comprised of Independent Non-Executive Directors (“INEDs”) to ensure that the issuer is operated and managed for the benefit of all shareholders and to help ensure the issuer’s compliance with Hong Kong rules.
On top of the requirements above, the followings are some other examples provided in the Conclusion Paper as requirements for listing a company with WVR structure:
- the applicant must be an Innovative Company by reference to the characteristics. For example, 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;
- the applicant must demonstrate a track record of high business growth, as can be objectively measured by operational metrics; and
- each of the WVR holders 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.
Facilitating Secondary Listing of Innovative Company
As a general rule, secondary listing applicants are currently required to be subject to shareholder protection standards that are at least equivalent to those of Hong Kong. The examples of measures required for shareholder protection include the holding of annual general meetings at least every 15 months and that certain matters such as material changes to the issuer’s constitutional documents are subject to a ‘super-majority’ vote of shareholders.
As mentioned before, the HKEx intends to modify the current listing regime to facilitate the listing of the Innovative Companies and it is recognised that a number of these companies have already been primary listed on a recognised US exchange or the Main Market of the London Stock Exchange (“Qualifying Exchange”).
In this regard, feedback recorded in the Conclusion Paper generally supports the waivers from strict compliance with Hong Kong equivalent shareholder protection standards for the Innovative Companies already listed on a Qualifying Exchange. As a result, the HKEx proposes that a new concessionary route should be created for the secondary listing of the Innovative Companies.
It should be noted that such new concessionary route for secondary listing will only be available to the companies with all the following features:
- be a company possessing the features of Innovative Company;
- be primary listed on a Qualifying Exchange;
- have a good record of compliance for at least two years on a Qualifying Exchange; and
- have an expected market capitalisation at the time of secondary listing in Hong Kong of at least HK$10 billion.
Specifically, in relation to the Innovative Companies whose “centre of gravity” (as assessed in accordance with guidelines set out in the Joint Policy Statement published by the HKEx and the Securities and Futures Commission on 27 September 2013 (the “2013 JPS”) locates in the Greater China (the “Greater China Companies”), the new concessionary route of listing will not be available to them and they are subject to shareholder protection standards equivalent to those of Hong Kong law.
For the Grandfathered Greater China Companies (i.e. the Greater China Company which has been listed on Qualifying Exchange before the publication of these consultation conclusions) and the Non-Greater China Companies, the HKEx proposes not to require these companies to amend their constitutional documents to meet the equivalence requirement, but will instead incorporate the Key Shareholder Protection Standards (e.g. appointment of auditors and the proceedings at general meeting, as further specified in the 2013 JPS) in the Listing Rules requirements.
The Concept Paper and Conclusion Paper demonstrate the HKEx’s determination to reform the stock market and listing rules for attracting the Innovative Companies while ensuring that an appropriate degree of shareholder protection is not compromised as a result of this reformation. Specifically, as suggested by the HKEx in the Conclusion Paper, we can expect that a guidance letter will be published for further clarifying the characteristics that an Innovative Company should possess. This list will serve as the basis on which the HKEx determines the issuer’s eligibility to list with a WVR structure and or the new concessionary route for secondary listing of the Innovative Companies.
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This article does not constitute legal advice or a legal opinion on any matter discussed and, accordingly, it should not be relied upon. It should not be regarded as a comprehensive statement of the law and practice in this area. If you require any advice or information, please speak to practicing lawyer in your jurisdiction. No individual who is a member, partner, shareholder or consultant of, in or to any constituent part of Interstellar Group Pte. Ltd. accepts or assumes responsibility, or has any liability, to any person in respect of this article.