Consultation Paper on the Proposed New Listing Regime for Companies from Emerging and Innovative Sectors

On 23 February 2018, the Hong Kong Stock Exchange published the Consultation Paper on the Proposed New Listing Regime for Companies from Emerging and Innovative Sectors. Closely followed the New Board Concept Paper Conclusions published by the Hong Kong Stock Exchange on 15 December 2017, the Consultation Paper includes the proposed new Listing Rules to:

• permit listings of biotech companies that do not meet any of the financial eligibility tests under the Listing Rules;
• permit listings of companies with weighted voting rights (WVR) structures; and
• establish a new concessionary secondary listing route for Greater China companies and international companies that wish to secondary list in Hong Kong.

The tables below provides a summary of the Consultation Paper.

Consultation Paper on the Proposed New Listing Regime for Companies from Emerging and Innovative Sectors

Amendments to the Listing Rules

A new Chapter 18A of the Listing Rules that sets out the requirements for biotech companies will be introduced.

Types of issuers and eligibility requirements

Only biotech companies that are not meeting any of the financial eligibility tests are eligible to list on a pre-revenue basis. “Biotech company” is a company primarily engaged in the R&D, application and commercialisation of biotech products, processes or technologies (collectively, the Biotech Product). A biotech company is expected to have the following features:

• Product: must have developed at least one Core Product (Note 1) beyond the concept stage (Note 2);
• R&D: primarily engaged in R&D for the purposes of developing its Core Product(s) for a minimum of 12 months before its listing;
• Reason for IPO: primary reason for IPO is to raise capital for R&D to bring its Core Product(s) to commercialisation;
• Patents: must have durable patent(s), registered patent(s), patent application(s) and/or intellectual property in relation to its Core Product(s); and
• Sophisticated investor (Note 3): must have received meaningful investment (that is more than just a token investment) from sophisticated investor(s) at least six months before the date of the proposed listing and the investor(s) must remain at IPO.

There is no definition or guideline as to the size of the investment which may be considered as “meaningful investment”. Pre-IPO consultation with the Hong Kong Stock Exchange is encouraged.

Note 1:

“Core Product” means a Biotech Product that forms the basis of the listing application by a biotech company and that is required by applicable laws, rules or regulations to be evaluated and approved by a competent authority (being the US FDA, the China FDA, the European Medicines Agency or other equivalent national or supranational authorities recognised by the Hong Kong Stock Exchange with the prior approval by the SFC on individual cases) based on data derived from clinical trials (that is on human subjects) before it can be marketed and sold in the market regulated by the competent authority.

Note 2:

The following factors demonstrate that a Core Product has developed beyond the concept stage:

(1) Pharmaceuticals (small molecule drugs)

- it has completed Phase I clinical trials (for new pharmaceuticals) or has successfully completed at least one clinical trial conducted on human subjects (for previously approved pharmaceuticals (eg US FDA’s 505(b)(2) application process)); and

- the relevant competent authority has no objection for it to commence Phase II (or later) clinical trials.

(2) Biologics

- it has completed Phase I clinical trials (for a new biologic product) or has successfully completed at least one clinical trial conducted on human subjects (for a biosimilar); and

- the relevant competent authority has no objection for it to commence Phase II (or later) clinical trials.

(3) Medical devices (including diagnostics)

- it has a medical device (or diagnostic device) categorised as Class II medical device under the classification criteria of the relevant competent authority;

- it has completed at least one clinical trial on human subjects (which will form a key part of the application required by the competent authority or authorised institution (being an institution or a committee authorised by the competent authority for conducting, assessing and supervising clinical trials in the relevant clinical fields); and

- either the relevant competent authority or the authorised institution has endorsed or not expressed objection for the applicant to proceed to further clinical trials, or the relevant competent authority has no objection for commencement of sales of the device.

(4) Other Biotech Products

If the Biotech Product does not fall into the above criteria but has been developed beyond the concept stage by reference to the factors described above, and there are appropriate objective indicators for investors to make an informed investment decision regarding the applicant, the Hong Kong Stock Exchange (together with the SFC) may approve such an application on a case by case basis.

Note 3:

“Sophisticated investor” is an investor that the Hong Kong Stock Exchange considers to be sophisticated by reference to factors such as net assets or net assets under management, relevant investment experience, and the investor’s knowledge and expertise in the relevant field.

The above features are not contained in the proposed Chapter 18A itself and will be set out in formal guidance letter(s) to be published by the Hong Kong Stock Exchange.

Minimum market capitalisation at the time of listing

Not less than HK$1.5 billion.

Track record

The applicant has been in operation in its current line of business for at least two years before its listing under substantially the same management.

Working capital requirements

The applicant has sufficient working capital to cover at least 125% of the applicant’s costs over the next 12 months (after taking into account the IPO proceeds).

In addition, the costs must substantially consist of (a) general, administrative and operating costs (including any production costs), and (b) R&D costs. A substantial portion of the IPO proceeds will be used to cover such costs.

Public float

Shares held by cornerstone investors in a biotech company will not count towards public float at its initial listing and during any period in which the cornerstone investors are subject to a restriction on disposal of the shares.

Existing shareholders may subscribe for offer shares as cornerstone investors. However, such newly acquired shares will not count towards public float.  The existing shares already held by such existing shareholders will still count towards public float as long as the existing shareholders are not core connected persons of the issuer.

Special risk managing measures

(1)        Accelerated de-listing process

-        If the biotech company does not have a sufficient level of operations or tangible assets of sufficient value and/or intangible assets for which a sufficient potential value can be demonstrated to the Hong Kong Stock Exchange after listing (Rule 13.24), and has failed to re-comply with the requirement within 12 months, the Hong Kong Stock Exchange may cancel the listing of the company.

(2)        No change of principal business

-        No acquisition, disposal or other transaction which will result in a fundamental change in the principal business activities will be permitted without the prior consent of the Hong Kong Stock Exchange.

(3)        Stock marker

-           A stock marker “B” will be used at the end of the stock names of biotech companies.

Disclosures

The following additional information has to be disclosed in the prospectus of a biotech company:

(1)      its strategic objectives;

(2)      the details of each Core Product, including:

(a)     a description of the Core Product;

(b)     details of any relevant regulatory approval required and/or obtained for each Core Product;

(c)     summary of material communications with the relevant competent authority in relation to the its Core Product(s) (unless such disclosure is not permitted under applicable laws or regulations, or the directions of the competent authority);

(d)     the stage of research and development for each Core Product;

(e)     development details by key stages and its requirements for each Core Product to reach commercialisation, and a general indication of the likely timeframe, if the development is successful, for the product to reach commercialisation;

(f)      all material safety data relating to its Core Product(s), including any serious adverse events;

(g)     a description of the immediate market opportunity of each Core Product if it proceeds to commercialisation and any potential increased market opportunity in the future (including a general description of the competition in the potential market);

(h)     details of any patent(s) granted and applied for in relation to the Core Product(s) (unless the applicant is able to demonstrate to the satisfaction of the Hong Kong Stock Exchange that such disclosure would require the applicant to disclose highly sensitive commercial information), or an appropriate negative statement; and

(i)      to the extent that any Core Product is in-licensed, a clear statement of the issuer’s material rights and obligations under the applicable licensing agreement;

(3)      a statement that no material unexpected or adverse changes have occurred since the date of issue of the relevant regulatory approval for a Core Product (if any). Where there are material changes, these must be prominently disclosed;

(4)      a description of approved products (being a Biotech Product which has been approved for commercialization by the relevant competent authority) (if any) owned by the applicant and the length of unexpired patent protection period and details of current and expected market competitors;

(5)      details of the biotech company’s research and development experience, including:

(a)     details of its operations in laboratory research and development;

(b)     the collective expertise and experience of key management and technical staff; and

(c)     its collaborative development and research agreements;

(6)      details of the relevant experience of the biotech company’s directors and senior management in the research and development, manufacturing and commercialisation of Biotech Products;

(7)      the salient terms of any service agreements between the applicant and its key management and technical staff;

(8)      the safeguards and arrangements that the applicant has in place, in the event of the departure of any of its key management or technical staff;

(9)      a statement of any legal claims or proceedings that may have an influence on its research and development for any Core Product;

(10)    disclosure of specific risks, general risks and dependencies, including:

(a)     potential risks in clinical trials;

(b)     risks associated with the approval process for its Core Product(s); and

(c)     the extent to which its business is dependent on key individuals and the impact of the departure of key management or technical staff on the applicant’s business and operations;

(11)    if relevant and material to the biotech company’s business operations, information on the following:

(a)     project risks arising from environmental, social, and health and safety issues;

(b)     compliance with host country laws, regulations and permits, and payments made to host country governments in respect of tax, royalties and other significant payments on a country by country basis;

(c)     its historical experience of dealing with host country laws and practices, including management of differences between national and local practice; and

(d)     its historical experience of dealing with the concerns of local governments and communities on the sites of its research and trials, and relevant management arrangements;

(12)    an estimate of cash operating costs, including costs relating to research and development and clinical trials incurred in the development of the Core Product and costs associated with:

(a)     workforce employment;

(b)     direct production costs, including materials (if it has commenced production);

(c)     research and development;

(d)     product marketing (if any);

(e)     non-income taxes, royalties and other governmental charges (if any);

(f)      contingency allowances; and

(g)     any other significant costs; and

Note:A biotech company must:

• set out the components of cash operating costs separately by category;
• explain the reason for any departure from the list of items to be included under cash operating costs; and
• discuss any material cost items that should be highlighted to investors.

(13)      if the applicant has obtained an expert technical assessment and where relevant and appropriate, include such assessment in its listing document.

Consultation Paper on the Proposed New Listing Regime for Companies from Emerging and Innovative Sectors

Amendments to the Listing Rules

A new Chapter 8A of the Listing Rules that sets out the requirements for companies with WVR structures will be introduced.

Types of issuers and eligibility requirements

New applicants only may be listed with WVR structures that confer disproportionate voting rights at the companies’ general meetings only (that is, share-based structures). In other words, if the companies have non-share based structures (eg board control mechanism), the companies are not eligible to seek for primary listings on the Hong Kong Stock Exchange.

The Hong Kong 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 (1) new 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 its 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 beneficiaries: Each WVR beneficiary 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.
• Role of WVR beneficiaries:
  • Each WVR beneficiary has an active executive role within the business, and contributes to a material extent to the ongoing growth of the business.
  • Each WVR beneficiary must be a 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. Such 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 (subject to exceptions for de minimis investments by specific investors provided that the main investors are in compliance). This characteristic does not apply if the applicant is a spin-off from a parent company and in other exceptional circumstances. “Financial institutions” is deleted because financial institutions may not necessarily have the relevant investment experience.

The above features are not contained in the proposed Chapter 8A itself and will be set out in formal guidance letter(s) to be published by the Hong Kong Stock Exchange.

Minimum market capitalisation at the time of listing

• Not less than HK$40 billion; or
• If the market capitalisation is more than HK$10 billion but 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.

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 the prior approval by the Hong Kong Stock Exchange of a limited right of pre-emption such as (1) a pro rata offering to all shareholders (eg a rights issue or open offer), or (2) a pro rata issue of securities by way of scrip dividends or stock split).
• Issuers with WVR structures will be prohibited from changing the terms of the WVR shares resulting in an increase in the WVR and, subject to the approval of the Hong Kong Stock Exchange, will be allowed to reduce the WVR.
• Issuers with WVR structures will be allowed to reduce the number of non-WVR shares if the number of the WVR shares is reduced proportionately.

Minimum and maximum economic interest at listing

All the beneficiaries of WVR shares must collectively own a minimum of 10% and a maximum of 50% of the underlying economic interest in the applicant’s total issued share capital at the time of listing. This requirement ceases to apply after listing.

Beneficiaries 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; (3) is deemed by the Hong Kong Stock Exchange to be incapacitated; (4) is deemed by the Hong Kong Stock Exchange to no longer meet the requirements of a director set out in the Listing Rules; or (5) transfer his beneficial interest or economic interest in those WVR shares, or the voting rights attached to them, to another person. Holding of WVR shares through a limited partnership, trust or private company for tax planning purposes is permitted.
• A WVR beneficiary will be deemed to no longer meet the requirements of a director if:
  • the beneficiary is or has been convicted of an offence involving a finding that the beneficiary acted fraudulently or dishonestly;
  • a disqualification order is made by the court or tribunal of a competent jurisdiction against the beneficiary; or
  • the beneficiary is found to have failed to comply with the requirement that certain corporate actions (e.g. a material change to the articles of association of the listed issuer) are conducted on a one-share one-vote basis.

Limits on WVR powers

• The WVR structure is attached to a specific class (or classes) of shares which are unlisted. The rights attached to WVR shares and ordinary shares must be the same in all respects other than voting rights.
• The voting power attached to WVR shares is capped to not more than ten times of the voting power of ordinary shares.
• Protecting non-WVR shareholders’ rights to vote
• Non-WVR shareholders must be entitled to cast at least 10% of the votes that are eligible to be cast on resolutions at general meetings.
• 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:
  • 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 voluntary winding-up of the issuer.

Conversion of WVR shares into ordinary shares

• Conversion of WVR shares into ordinary shares must occur on a one-to-one ratio.
• Prior approval by the Hong Kong Stock Exchange is required for the listing of the conversion shares.

Corporate governance

• A corporate governance committee comprising a majority of INEDs and chaired by an INED 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 confirm that the beneficiaries of WVR shares have complied with the requirements under the Listing Rules. A summary of the work of the corporate governance committee must be included in the periodic financial reports.
• A compliance adviser has to be appointed on a permanent basis and consulted with in relation to matters on the WVR structure, transactions in which the beneficiaries of WVR shares have an interest, and potential conflict of interest between non-WVR shareholders and beneficiaries of WVR shares.
• A nomination committee comprising a majority of INEDs and chaired by an INED is required to be established.
• The INEDs must be subject to retirement by rotation at least once every three years and are eligible for re-appointment after the end of the three-year term.
• Directors and senior management have to undergo appropriate training on WVR and its associated risks.

Constitutional backing

The prescribed safeguards are required to be incorporated in the issuer’s constitutional documents.

The beneficiaries of WVR shares have to undertake to the issuer that they will comply with the relevant WVR safeguards.

Disclosures

• A stock marker “W” will be used at the end of the stock names of issuers with WVR structures.
• A warning statement “a company controlled through weighted voting rights”, the description of the WVR structure, the rationale for having the WVR and the associated risks must be disclosed on the front page of all listing documents, periodic financial reports, circulars, and announcements required by the Listing Rules. The warning statement must be disclosed on the share certificates as well.
• The identity of the beneficiaries of the WVR shares and the potential dilutive impact of the conversion of WVR shares into ordinary shares must be disclosed in the listing documents and periodic financial reports.

Consultation Paper on the Proposed New Listing Regime for Companies from Emerging and Innovative Sectors

Types of issuers and eligibility requirements

This new secondary listing route will be available to companies (Qualifying Issuers) with all of the following characteristics:

• an innovative company by reference to the characteristics applicable to high growth and innovative issuers with WVR structures (see paragraph 106(a) of the Consultation Paper or the “nature of the company” under the table for “Listings of Companies 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 full financial years on a qualifying stock exchange; and
• the market capitalisation requirements are met (see below).

Minimum market capitalisation at the time of listing

• For Non-Greater China Issuers (Note 2) without a WVR structure, the expected market capitalisation in Hong Kong is at least HK$10 billion.
• For the other Qualifying Issuers (that is, Qualifying Issuers with (1) a WVR structure; and/or (2) with a “centre of gravity” in the Greater China Region (Note 1)), the expected market capitalisation is at least HK$40 billion, or are required to have revenue of at least HK$1 billion in the most recent audited financial year if the expected market capitalisation in Hong Kong is less than HK$40 billion.

Note 1:

The following are some of the factors that will be considered in determining whether a Qualifying Issuer has its “centre of gravity” in Greater China (that is a Greater China Issuer):

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 Hong Kong 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:

Non-Greater China Issuers means Qualifying Issuers that are not Greater China Issuers.

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 Qualifying Issuers.
• For Greater China Issuers (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.
• For Non-Greater China Issuers, 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.

Key shareholder protection standards

Grandfathered Greater China Issuers (Note 3) and Non-Greater China Issuers must demonstrate, to the satisfaction o the Hong Kong Stock Exchange, how the domestic laws and regulations and their constitutional documents provide the Key Shareholder Protection Standards (Note 4) and (if necessary), the Hong Kong Stock Exchange may require amendments to the constitutional documents  to incorporate those standards.

Non-Grandfathered Greater China Issuers (Note 5) are required to change their constitutional documents (as necessary) to meet the shareholder protection standards.

Note 3:

Grandfathered Greater China Issuers means Greater China Issuers that are primary listed on a qualifying stock exchange on or before 15 December 2017

Note 4:

The key shareholder protection standards are:

1. super-majority vote of members is required to approve fundamental matters (changes to the rights attached to any class of shares, changes to constitutional documents, and voluntary winding-up);
2. no alteration to the constitutional documents to increase an existing member’s liability unless approved by such member in writing;
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. Qualifying Issuer must hold an AGM each year and generally not more than 15 months should elapse between one AGM and the next;
5. Qualifying Issuer must give its members reasonable notice of its meetings;
6. Members have the right to speak and vote at a general meeting;
7. 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
8. HKSCC must be entitled to appoint proxies or corporate representatives.

Note 5:

Non-Grandfathered Greater China Issuers means Greater China Issuers that are primary listed on a qualifying stock exchange after 15 December 2017.

WVR and VIE structures

For Grandfathered Greater China Issuers and Non-Greater China Issuers, they can secondary list their WVR and VIE structures (if any) without requiring to meet WVR safeguards nor change structures to meet primary listing requirements, except for the WVR safeguards that are disclosure requirements.

For Non-Grandfathered Greater China Issuers, their WVR and VIE structures must conform with primary listing requirements.

If the bulk of trading in the shares migrates to Hong Kong on a permanent basis, for Grandfathered Greater China Issuers with WVR structures and Non-Greater China Issuers with WVR structures, they will not need to comply with the WVR safeguards (except for the WVR safeguards that are disclosure requirements).

Disclosures

• Qualifying Issuers must disclose in their listing documents any provisions in their constitutional documents that are unusual compared with normal practices in Hong Kong and how such provisions (eg a poison pill provision) affect the rights of the members.
• If the Qualifying Issuer is a Foreign Private Issuer (Note 6), it has to disclose in its listing document the exemptions from U.S. obligations that it enjoys.

Note 6:

Foreign Private Issuers has the meaning defined under Rule 405 of Regulation C of the U.S. Securities Act of 1933 and Rule 3b-4 of the U.S. Securities Exchange Act of 1934 to mean issuers incorporated under the laws of a non-U.S. country, except an issuer meeting both of the following conditions:

(1)     more than 50 per cent. of the outstanding voting securities of the issuer are directly or indirectly held of record by residents of the United States; and

(2)     any one of the following:

(1)     the majority of the executive officers or directors of the issuer are United States citizens or residents;

(b)     more than 50 per cent. of the assets of the issuer are located in the United States; or

(c)        the business of the issuer is administered principally in the United States.