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Further on Weighted Voting Rights – Taking Reference from Other Jurisdictions

2017-10-01

Introduction

On 16 June 2017, the Stock Exchange of Hong Kong Limited (“SEHK”) issued a new board concept paper on 16 June 2017 (“Concept Paper”) focusing on the proposal for establishing a new board independent from the Main Board and GEM on which the listings of securities with Weighted Voting Rights (“WVR”) is permitted. Apart from Hong Kong, there are different exchanges and jurisdictions debating on the issue of whether the listings of WVR rights should be allowed and some of these exchanges have put forward their own proposals.

Weighted Voting Rights

WVR structure, which is commonly referred to as dual share class structures in some jurisdictions, means a governance structure that confers certain persons voting power or other related rights disproportionate to their shareholdings. In particular, the WVR structures can take different forms including non – voting shares, preferred voting shares and shares with the enhanced or exclusive director election rights. In short, WVR structure is a governance structure deviating from the traditional idea of “One – Share – One – Vote” (“OSOV”) and as a result may allow the entrepreneurial company founders to retain control of the issuer company  after raising equity capital through venture capital funding rounds.

WVR in Hong Kong

Currently, as explained in the Concept Paper, while the Listing Rules do not require each of a company’s shares to carry one vote, other than in exceptional circumstances agreed with the Hong Kong Stock Exchange (“HKEx”), a company is not permitted to list with shares containing voting power that does not bear a reasonable relationship to the equity interest of those shares when fully paid. While in principle it is possible to list WVR structures with the consent of the HKEx, in practice the HKEx has not listed any company using this exception.

As addressed in our newsletter in August, the SEHK has in the Concept Paper put forward a Straw Man proposal for a new board on which the listing of WVR structure is allowed. In short, the new board comprises with two distinct segments, namely, the New Board PRO and New Board PREMIUM with more lenient listing requirements imposed on the earlier since it only opens to professional investors while the latter opens to both retail and professional investors.

WVR in the United Kingdom

 Existing Rules

Currently, the UK listing regime is divided in the two main segments in the Main Market, namely the “Premium Listing” and the “Standard Listing”. A Premium Listing is only available to equity shares issued by trading companies, closed-ended investment entities and open-ended investment entities. Issuers with a Premium Listing are required to meet the UK’s super-equivalent rules which are more stringent than the European Union minimum requirements (“EU minimum requirements”). The examples of the super – equivalent rules include the ability to demonstrate that the applicant carries on an independent business, a three-year revenue earning track record, sufficient working capital, and unqualified financial statements. Given the high standard of listing requirements, investors generally welcome the investment in the shares listed on the Premium segment given the greater transparency and investor confidence.

Standard Listing, on the other hand, covers issuance of shares, Global Depositary Receipts, debt and securitised derivatives that are required to comply with EU minimum requirements rather than the UK ‘super-equivalent’ requirements. The examples of the EU minimum requirements include the minimum market capitalisation of £700,000 (approximately HKD 7,300,000) and that a prospectus relating to the shares must be approved by the Financial Services Authority (“FSA”). Prior to the amendments implemented by the Financial Conduct Authority (“FCA”) in October 2009, only companies incorporated outside the UK were eligible for a Standard Listing. Now Standard Listings are open to all companies regardless of domicile.

Further, following the amendments of UK Listing Rules (“UKLR”) in May 2014, the listing of WVR structures, which were originally allowed in both segments, has been confined to the Standard Listing segment since, under the aforementioned amendments, the Premium segment only allows listing of shares with full voting rights. In short, under the current listing regime, Standard Listing is the only segment where WVR structure can be listed. The rationale for removing shares of incomplete voting rights from the Premium Listing segment is to provide more clarity to issuers and investors. Before such amendment, incomplete voting shares were allowed to be listed together with the equity voting shares (i.e. shares with full voting rights) on Premium Listing. The problem is that where the equity voting shares are capable of satisfying all the super – equivalent requirements, the incomplete voting shares are not. For example, UKLR 10.5.1 requires shareholder approval for significant transaction (also known as “Notifiable Transaction” in Hong Kong) but the rule does not expressly address the following issues in relation to the WVR structure:

  • in the event that the majority of voting shares are in the hands of the related party (also known as “Connected Person” in Hong Kong), in what circumstances would the approval of transaction be considered as unfair given that the determining vote for approving such transaction is always vested in the hand of the related party; and
  • whether (and if so how) the transaction at issue can be approved by shareholder resolution if the voting shares are in the hand of the interested parties, who therefore have to abstain from voting, while the holders of non – voting shares are not entitled to vote.

Popularity of Investment in WVR

While it is possible to list WVR structure in principle, its popularity as an investment option and a listing subject is not as good as expected. In the Concept Paper on Weighted Voting Rights issued in August 2014, the HKEx could find no examples of UK listed companies with multiple voting shares and suggested that most companies that had non – voting shares issued had cancelled them in the 1990s. The reason behind this situation can be found in the historical development of WVR structure in the UK. While the investment in and issuance of WVR structure in the UK nowadays are rare, it was fairly prevalent in the mid – 1960s and institutional investors made a dramatic increase of their holdings in the equity voting shares in companies. As a result of such increase in the shareholdings, the institutional investors started to encourage good governance and shareholder – friendly rules in the securities market. Principles such as OSOV were therefore generally welcomed by the institutional investors, which led to the declination of investment in and issuance of WVR structures in the UK.

Discussion Paper – New International Segment

In February 2017, FCA published the discussion paper for reviewing the effectiveness of Main Markets (“Discussion Paper”). The Discussion Paper focuses on the discussion as to whether the existing listing regime – namely, the Premium Listing and Standard Listing, is still effective to maintain the UK as an attractive investment spot for international stakeholders. For the purpose of maintaining the competitiveness as an international investment centre and in particular, to cater for the increasingly popular situations where large international companies plan to access UK Premium Listing but may wish to retain control rights (and therefore incompatible with traditional Premium Listing), FCA raised the idea for establishing a new international segment for large overseas companies.

The international segment proposed by the FCA aims at establishing an international listing standard attracting mature and successful companies. In the Discussion Paper, the FCA has not gone into details on the design of such segment but the following features were considered by FCA as necessary for establishing a segment which favors investor protection and is able to foster investor confidence:

  • the requirement to appoint a sponsor when listing to support appropriate standards of due diligence;
  • substantive eligibility conditions, such as a unqualified working capital statement, minimum market capitalization, and financial information which has been audited without qualification and supports a three – year revenue earning track record; and
  • application of the related – party rules, with other features of the premium listing regime applying on a “comply or explain” basis.

Comparing the UK and HK Proposal

While both the SEHK and FCA have not mentioned in details for their proposed establishment of new board, based on the information provided in the Concept Paper and Discussion Paper, it is observed that both proposals target to establish a new listing segment independent from the existing listing regime rather than amending the rules of the existing listing regime. Further, the proposed rules governing the New Board and New International Segment are generated with heavy reference to the rules governing the Main Board and Premium Listings respectively.


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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.

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