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New Listing Decisions clarify what kind of companies could list with a WVR structure

2022-10-31

Introduction

In September 2022, the Stock Exchange of Hong Kong Limited (the “Stock Exchange”) issued a listing decision concerning proposed listing applicants’ suitability to list with a weighted voting rights (“WVR”) structure (the “Listing Decision”). The Listing Decision supplemented the guidance letters GL93-18 and GL94-18 (the “Guidance Letters”), which set out the factors that the Stock Exchange takes into account when considering whether a proposed listing applicant is suitable for listing with a WVR structure.

The Listing Rules and the Guidance Letters

A company with WVR structure means that the Company issues at least two classes of shares with different per-share voting rights. While the founders and management usually own one class of shares with multiple votes per share, another class of shares with one vote per share are issued to general investors. Under Rule 8A.04 of the Rules Governing the Listing of Securities on the Stock Exchange (the “Listing Rules”) states that a new applicant seeking to list with WVR structure must demonstrate that it is eligible and suitable for listing with a WVR structure.

The Guidance Letters provide guidance to factors that the Stock Exchange may take into account when considering (i) whether an applicant is suitable for listing with a WVR structure that is required to comply with the safeguards of Chapter 8A of the Listing Rules; and (ii) whether a Grandfathered Greater China Issuer or a Non-Greater China Issuer with a WVR structure that meets the conditions under Rule 8A.46 of the Listing Rules is suitable for a dual listing under Chapter 19 of the Listing Rules.

Listing Decisions HKEX-LD138-2022

The Stock Exchange lists out the following characteristics of applicants that are unable to demonstrate WVR suitability:

1.       an inability to demonstrate that its success is attributable to the application, to its core business, of new technologies, innovations, and/or a new business model;

 

2.       research and development not being a significant contributor of its expected value or constitute a major activity and expense;

 

3.       the absence of an outsized market capitalisation relative to its tangible asset value; and

 

4.       the absence of innovative technologies in its intellectual properties or a lack of relevance of such intellectual properties to its core business.

 

The Stock Exchange also provides details of applicants that are determined not to have demonstrated their suitability to list with a WVR structure, which are summarised as follows:

Company A

Company A is a retailer based in China which sells lifestyle products and operates its physical retail network under a franchise and distributorship model. The franchisees would purchase Company A’s products and on-sell them to consumers at the retail store under the franchise model. Company A mainly assists the franchisees in customising merchandise mix and monitoring store operations. Under the distributorship model, Company A sells the products to the distributors without any involvement in store and merchandise mix management.

In addition, Company A also failed to demonstrate that (i) research and development is a significant contributor of its expected value and constitutes a major activity and expense; and (ii) it had implemented new technologies.

It is in the Stock Exchange’s opinion that (i) Company A failed to demonstrate that its franchise and distributorship model was a new and innovative business model given that many businesses in China adopt similar approach for expansion; (ii) Company A’s expenses on research and development represented an insignificant portion of its total operating expenses during the proposed track record period; and (iii) the management systems and tools used by Company A are already well-established in the retail sector and commonly used among large-scale retailers.

Company B

Company B operates an automotive-related business in China and introduced an online platform as an ancillary service to enable users to search for and compare products online. The majority of Company B’s sales transactions were generated from its offline network. In addition, Company B’s financial performance was on a decreasing trend where there was a significant decrease in both revenue and gross profit margin by nearly half in the last two years of the proposed track record period.

It is in the Stock Exchange’s opinion that Company B failed to demonstrate (i) the reason that the ancillary online platform was a new technology or innovation given that complementing the brick-and-mortar business with an online channel is common in China; and (ii) it has a track record of high business growth and high growth trajectory.

Company C

Company C is a vocational education and training service provider in China which offers examination preparation courses through online and offline channels. It is in the Stock Exchange’s opinion that Company C had failed to demonstrate that (i) its success is attributable to the implementation of innovative technologies and business model as the technologies adopted in its business are less advanced and are commonly used by other players in the same sector in China; and (ii) the expenses on research and development is a significant contributor of its expected value and constitutes a major activity and expense. Despite the fact that Company C’s revenue increased over the proposed track record period, a significant majority of the revenue was generated from offline tutoring and its gross profit decreased.

Company D

Company D, an electric vehicle manufacturer in China, recorded a decent growth in sales of electric vehicles during the proposed track record period. Although the electric vehicle industry is considered to be an emerging sector, Company D still failed to demonstrate that it has a new business model or technologies that could differentiate itself from other existing players and able to sustain growth with updated car models.

Company E

Company E initially engaged in the provision of third-party payment services and general trading. Mr. E is Company E’s founder and the proposed WVR holder. During the proposed track record period, Company E acquired a number of businesses involved in the provision of cloud-based e-commerce solution services using data analytics and AI technologies to merchants, which subsequently became Company E’s core business.

It is in the Stock Exchange’s opinion that Company E had failed to demonstrate that Mr. E has been materially responsible for the growth of Company/the core business given the fact that the core business was not established by or primarily developed under Mr. E’s management, which is one of the key requirements for qualifying as a WVR holder under Guidance Letter HKEX-GL93-18.

Conclusion

The listing decision serve as important guidelines for potential applicants with a WVR structure in the sense that the Stock Exchange is minded to take a more stringent approach in assessing whether an applicant has demonstrated its suitability to list with a WVR structure. Hence, potential applicants are advised to critically assess whether its business model meets with the WVR suitability factors with reference to the newly issued Listing Decisions HKEX-LD138-2022.

 


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Important: The law and procedure on this subject are very specialised 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.

Published by ONC Lawyers © 2022


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