New Board Concept Paper

Publication | December 2017

Two New Chapters for the Hong Kong ECM Market?

On 16 June 2017, the Stock Exchange published its New Board Concept Paper which stated that the Stock Exchange intended to attract more high growth companies from innovative sectors (or so-called new economy companies). New economy companies include companies in the biotechnology, health care technology, internet & direct marketing retail, internet software & services, IT services, software, technology hardware, storage & peripherals industries.

The consultation conclusions published on 15 December 2017 stated that the Stock Exchange will introduce two new chapters to the Main Board Listing Rules which allow (1) biotech issuers that are pre-revenue; and (2) innovative and high growth issuers that have WVR (weighted voting rights) structures, to list on the Main Board, subject to appropriate disclosure and safeguards.

In addition, the Main Board Listing Rules will be amended to create a new secondary listing route to attract innovative issuers that are primary listed on a qualifying stock exchange (being the New York Stock Exchange, NASDAQ and the “premium listing” segment of the London Stock Exchange’s Main Market).

Details of the proposals and rule amendments are subject to further market consultation. Hence, the initial pointers set out below may be subject to further changes after the further market consultation:

Biotech issuers High growth and innovative issuers with WVR structures New route secondary listing
Types of issuers and eligibility requirements Initially, among the new economy companies, only biotech issuers are eligible to list on a pre-revenue basis (that is, not meeting the profit test, the market capitalisation/revenue test, or the market capitalisation/revenue/cash flow test under the Main Board Listing Rules). Guidance letter will be published by the Stock Exchange on factors that the Stock Exchange will take into account when determining an applicant’s eligibility to list on a pre-revenue basis. A biotech company is expected to have the following features:
  • primarily engaged in R&D for the purposes of developing new or innovative products/processes/ technologies;
  • have unique features of innovation or intellectual property that could be reasonably expected to give rise to commercialisable patents, copyrights and/or trade secrets;
  • have at least one product/process/ technology which has proceeded beyond the concept stage;
  • have 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
  • have previously received investment from at least one sophisticated investor (including financial institutions).
It is hard to define what a “high growth and innovative” issuer means, and the definition is bound to evolve over time. Guidance letter will be published by the Stock Exchange on the characteristics of an innovative company. The Stock Exchange would normally consider a company suitable for listing in Hong Kong with WVR structures if they are able to demonstrate the following characteristics:
  • Nature of the company: The applicant is an innovative company by reference to 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.
  • Success of the company: The applicant demonstrates 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 that its high growth trajectory is expected to continue.
  • 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.
  • Responsibility of WVR holders:
    • Each WVR holder has an active executive role within the business, and contributes to a material extent to the ongoing growth of the business.
    • Each WVR holder is or will assume the role of, director of the issuer at the time of listing.
  • 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% percent 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). This characteristic does not apply if the applicant is a spin-off from a parent company and in other exceptional circumstances.
Need to justify the rationale for the company and the proposed holders to have WVR structure. Ordinary shares carry no voting rights at all will not be considered suitable for listing due to non-conformance with governance norms. Only new applicants will be able to list with a WVR structure. Hence, existing listed issuers cannot adopt WVR structures.
This new secondary listing route will be available to companies with all of the following characteristics:
  • an innovative company by reference to the characteristics applicable to high growth and innovative issuers with WVR structures;
  • the secondary listing applicant must be primary listed on a qualifying stock exchange (being the New York Stock Exchange, NASDAQ and the “premium listing” segment of the London Stock Exchange’s Main Market);
  • the secondary listing applicant has a good record of compliance for at least two years on a qualifying stock exchange; and
  • the market capitalisation requirements are met (see below).
If Greater China Companies meet the above requirements, they will be able to apply for secondary listings in Hong Kong notwithstanding that they have their “centre of gravity” in the Greater China region. If the secondary listing applicant has a WVR structure, it has to meet all the eligibility and suitability criteria applicable to a primary listing set out opposite to this column.
Minimum market capitalisation at the time of listing Not less than HK$1.5 billion.
  • Not less than HK$10 billion.
  • If the market capitalisation is less than HK$40 billion, the applicant is required to have revenue of not less than HK$1 billion in the most recent audited financial year.
    • Not less than HK$10 billion.
    • If the secondary listing applicant with (1) a WVR structure and/or (2) with a “centre of gravity” in the Greater China Region (note 1) and the market capitalisation is less than HK$40 billion, the secondary listing applicant is required to have revenue of not less than HK$1 billion in the most recent audited financial year.
    Working capital requirements
    • 125% of the issuer’s current requirement over the next 12 months.
    • The applicant has been in operation in its current line of business for at least two years before its listing.
    Public float Shares held by cornerstone investors in biotech issuers will not count towards public float.
    Automatic waivers
    • Waivers from compliance with certain requirements from the Main Board Listing Rules (as set out in the Joint Policy Statement 2013) will be given automatically to:
      (1) Grandfathered Greater China Companies (note 2);
      (2) Non-Grandfathered Greater China Companies (note 3); and
      (3) Non-Greater China Companies (note 4).
    • For Greater China Companies (Grandfathered or Non-Grandfathered), if 55% or more of the total trading volumes in the shares takes place on the Hong Kong Stock Exchange in the most recent fiscal year, it is considered that the issuer has the bulk of trading in the shares migrated to Hong Kong on a permanent basis and, in such circumstances, the automatic waivers will no longer apply.

      Grandfathered Greater China Companies will need to comply with the Hong Kong WVR safeguards applicable to primary listings only to the extent that the safeguards are not inconsistent with their existing governance structure and which do not require a change to their constitutional documents. For Non-Grandfathered Greater China Companies, such a relaxed treatment applicable to Grandfathered Greater China Companies does not apply.

      These companies would be given a 12-month grace period to comply with the applicable requirements.
    • For Non-Greater China Companies, even if 55% or more of the total trading volumes in the shares takes place on the Hong Kong Stock Exchange, automatic waivers will continue to apply.
    Holders of WVR shares
    • Beneficiaries of WVR will be restricted to those who are (and remain as) directors of the issuer. The WVR attached to a beneficiary’s shares will lapse permanently if the beneficiary (1) ceases to be a director; (2) dies or is incapacitated; or (3) if the shares are transferred to another person. This is to ensure that only persons who are responsible for the issuer’s performance and who owe fiduciary duties to the issuer are able to benefit from WVR.
    • The Stock Exchange would require beneficiaries of WVR to meet a minimum equity threshold at IPO to help ensure that their interests are commercially aligned with the shareholders of the issuer.
    • A WVR holder will not be considered suitable to hold WVR shares if:
      • the holder is found to have failed to comply with the requirement for certain corporate actions (e.g. a material change to the articles of association of the listed issuer) to be conducted on a one-share one-vote basis;
      • the holder is convicted of an offence involving a finding that the holder acted fraudulently or dishonestly; or
      • a disqualification order is made by the court against the holder.
    For Grandfathered Greater China Companies and Non-Greater China Companies, they are not required to meet WVR safeguards nor change WVR structure to meet primary listing requirements, except for the WVR safeguards that are disclosure requirements.

    For Non-Grandfathered Greater China Companies, they must meet WVR standards and WVR structure must conform with primary listing requirements.
    Limits on WVR powers
    • The WVR structure is attached to a specific class (or classes) of shares. The rights attached to WVR shares and ordinary shares must be the same in all respects other than voting rights.
    • Where prescribed majorities are set for shareholders’ resolutions (e.g. special or ordinary thresholds), any votes cast by holders of WVR shares must not be counted in calculating the requisite majorities.
    • The voting power attached to WVR shares is capped to not more than ten times of the voting power of ordinary shares.
    • Non-WVR shareholders must hold at least 10% of the votes eligible to be cast at general meeting.
    • Non-WVR shareholders holding at least 10% of the voting rights on a one-share one-vote basis must be able to convene a general meeting.
    • The following key matters have to be decided on a one-share one-vote 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;
      • the appointment and removal of auditors; and
      • the winding-up of the issuer.
    For Grandfathered Greater China Companies and Non-Greater China Companies, they are not required to meet WVR safeguards nor change WVR structure to meet primary listing requirements, except for the WVR safeguards that are disclosure requirements.

    For Non-Grandfathered Greater China Companies, they must meet WVR standards and WVR structure must conform with primary listing requirements.
    Ring-fencing After listing, issuers with WVR structures will be prohibited from increasing the proportion of weighted voting rights in issue or issue any further WVR shares (subject to a limited right of pre-emption in the case of a pro rata offering to all shareholders - that is, a rights issue or open offer). For Grandfathered Greater China Companies and Non-Greater China Companies, they are not required to meet WVR safeguards nor change WVR structure to meet primary listing requirements, except for the WVR safeguards that are disclosure requirements.

    For Non-Grandfathered Greater China Companies, they must meet WVR standards and WVR structure must conform with primary listing requirements.
    • Mandatory corporate governance committee comprising INEDs is required to be established. The role of the committee is 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 (including the safeguards).
    • A compliance adviser has to be appointed on a permanent basis.
    • Directors and senior management have to undergo appropriate training on WVR and its associated risks.
    For Grandfathered Greater China Companies and Non-Greater China Companies, they are not required to meet WVR safeguards nor change WVR structure to meet primary listing requirements, except for the WVR safeguards that are disclosure requirements.

    For Non-Grandfathered Greater China Companies, they must meet WVR standards and WVR structure must conform with primary listing requirements.
    Key shareholder protection standards Grandfathered Greater China Companies and Non-Greater China Companies, are required to comply with the Key Shareholder Protection Standards (note 5) set out in the Main Board Listing Rules. Hence, they do not have to amend their constitutional documents to incorporate those standards.

    Non-Grandfathered Greater China Companies are required to change their constitutional documents (as necessary) to meet equivalent shareholder protection standards to those of Hong Kong.
    Constitutional backing The prescribed safeguards are required to be incorporated in the issuer’s constitutional documents. Grandfathered Greater China Companies and Non-Greater China Companies are not required to meet WVR safeguards nor change WVR structure to meet primary listing requirements, except for the WVR safeguards that are disclosure requirements.

    Non-Grandfathered Greater China Companies must meet WVR standards and WVR structure must conform with primary listing requirements.
    Disclosures Enhanced disclosures on the business and R&D risks involved (eg phases of development for its product(s), potential market for its product(s), details of spending on R&D, patents granted and applied for, and R&D experience in management).
    • A unique stock code/marker will be assigned to issuers with WVR structures so that they are prominently identified. Appropriate warnings are to be included in the issuer’s ongoing corporate communications.
    • Appropriate warning language and a full description of the issuer’s WVR structure, rationale and associated risks will be required to be disclosed in its listing documents.
    • If the secondary listing applicant is a non-US issuer that is primary listed on the New York Stock Exchange or NASDAQ (that is, foreign private issuer), it is subject to less stringent corporate governance requirements that apply to US incorporated issuers. Hence, the listing document for the purpose of its secondary listing in Hong Kong has to contain a summary of the provisions of the laws and regulations in its home jurisdiction and primary market that are different to those required by Hong Kong law regarding:
      • the rights of its holders of its securities and how they can exercise their rights;
      • directors’ powers and investor protection; and
      • the circumstances under which its minority shareholders may be bought out or may be required to be bought out after a successful takeover or share repurchase.
    In addition, any unusual features in its governance structure that are specific to the issuer (eg a poison pill provision) have to be disclosed.

    Grandfathered Greater China Companies and Non-Greater China Companies are not required to meet WVR safeguards nor change WVR structure to meet primary listing requirements, except for the WVR safeguards that are disclosure requirements.

    Non-Grandfathered Greater China Companies must meet WVR standards and WVR structure must conform with primary listing requirements.

    Note (1): The following are some of the factors that will be considered in determining whether an overseas company has its “centre of gravity” in Greater China:

    1. whether the company has a listing in Greater China;
    2. where the company is incorporated;
    3. the company’s history;
    4. where the company is headquartered;
    5. the location of the company’s central management and control;
    6. the location of the company’s main business operations and assets;
    7. the location of its corporate and tax registration; and
    8. the nationality of its management and controlling shareholders or their country of residence.

    These factors are not exhaustive. The Stock Exchange and SFC may take other factors into consideration in determining whether a listing applicant has its “centre of gravity” in Greater China.

    http://www.hkex.com.hk/-/media/HKEX-Market/Listing/Rules-and-Guidance/Other-Resources/Listing-of-Overseas-Companies/new_jps_0927.pdf?la=en

    Note (2): Grandfathered Greater China Companies means Greater China Companies that are primary listed on a qualifying stock exchange on or before 15 December 2017.

    Note (3): Non-Grandfathered Greater China Companies means Greater China Companies that are primary listed on a qualifying stock exchange after 15 December 2017.

    Note (4): Non-Greater China Companies means companies that are not Greater China Companies.

    Note (5): The key shareholder protection standards set out in section 1 of the Joint Policy Statement 2013 comprise:

    1. super-majority vote of members is required to approve fundamental matters (material changes to constitutional documents, variation of rights attached to any class of shares and voluntary winding-up);
    2. no alteration to the constitutional documents to increase an existing member’s liability unless approved by such member;
    3. appointment, removal and the remuneration of auditors require the approval of a majority of shareholders or other body independent of the board of directors;
    4. issuer must hold an AGM at least every 15 months, give reasonable notice of meetings and members to have the right to speak and vote at the shareholders’ meeting;
    5. minority shareholders must be allowed to convene an extraordinary general meeting (the level of members’ support required to convene a meeting must not be higher than 10%); and
    6. HKSCC must be able to appoint proxies.

    Contacts

    Terence Lau

    Terence Lau

    Hong Kong