In 2013, the proposed HKD100 billion IPO of the mainland internet giant Alibaba sparks debate on whether Hong Kong should allow non-standard shareholding structure such as dual class shares. In the same year, The Stock Exchange of Hong Kong Limited (the “HKEx”) published a concept paper seeking views from the public on whether weighted voting rights (“WVR”) structures should be permissible for companies currently listed or seeking to list in Hong Kong and there were strong and divided views on this subject as disclosed in the consultation conclusions released this month.
Current Hong Kong Regime
Permissibility of WVR structures
HKEx concluded that the “exceptional circumstances” provision should not be retained as it has effectively banned WVR structures for a long time and there would be too much uncertainty for companies planning a listing even with more guidance. Removing this restriction can improve the clarity and certainty of the Listing Rules. Furthermore, flexibility can be given to HKEx to list companies that fall below certain eligibility criteria of WVR structure as HKEx would retain its ability to waive eligibility criteria under the Main Board Listing Rules 2.04 depending on the company’s circumstances in the normal manner.
Scope of the permission
Investor protection risk and corresponding safeguards
Supporters of WVR structures believe that sufficient enhanced safeguards can balance and mitigate these risks so the permission of WVR structures would be a competitive advantage for the Hong Kong market. The safeguards receiving most support from respondents include restriction on transfers, minimum equity threshold held by founders or others, sunset clause, shareholder vote, continued active involvement of the founder in the management of the company and cap on votes per share. HKEx would make a number of the above restrictions and possibly others mandatory restrictions for companies with WVR structures.
Changes to corporate governance and regulatory framework
Other than investor protection risks mentioned above, WVR structures also have implications on takeovers. For instance, minority shareholders with superior voting rights under WVR structure may be able to vote down takeover proposals at general meetings. Therefore, WVR structures may necessitate changes to other Rules and possibly The Codes on Takeovers and Mergers and Share Buy-backs of the SFC (the “Takeovers Code”).
Second Stage Consultation
As to the scope, any second stage proposal will limit WVR structures to new companies only. Appropriate “anti-avoidance” measure will be developed to cope with the potential problem of circumvention. Further, precise parameters of ring-fencing to a “type of company” (with some specific pre-determined characteristics) will be established since there is no support for permitting all new companies to list with WVR structures and there is no intention to limit the availability to companies in any particular industries. It should be noted that there will unlikely be a completely “bright line” test in this regard.
As to the safeguards, HKEx will discuss with the Takeovers Panel through or jointly with Securities and Futures Commission (the “SFC”) in the second consultation because greater issues will be imposed on the Takeovers Code if WVR is conferred only through a company’s constitutional documents. HKEx will also explore other safeguards, for example, a restriction on transfer and minimum equity threshold shareholding requirement.
It is noteworthy that the SFC published a statement in relation to the Consultation Conclusions. In gist, the Board of the SFC has unanimously concluded that it does not support the draft proposal for primary listings with WVR structures. It has concerns on the fair treatment of shareholders and potential impact of acquisitions of existing listed assets by WVR issuers. It has particular concerns about the proposals which require regulators to assess compliance with the “enhanced suitability” criteria for companies to be eligible for WVR because such criteria are inherently vague.
With the SFC’s disagreement to the draft proposal on WVR, it is anticipated that the extensive public debate on and widespread coverage of the WVR issue will continue to last for the next few months.
The law and procedure on this subject are very specialized and complicated. This article is just a very general outline for reference and cannot be relied upon as legal advice in any individual case. If any advice or assistance is needed, please contact our solicitors.
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Published by ONC Lawyers © 2015