Introduction

On 31 March 2021, the Stock Exchange of Hong Kong Limited (the “Stock Exchange”) issued a consultation paper on the proposed changes to the listing regime for overseas issuers (the “Consultation Paper”) and invited public comments on the proposals. The consultation will remain open until 31 May 2021.

Under the Consultation Paper, the Stock Exchange made the following proposals:

1.    streamline shareholder protection standards into one set of core standards;

2.    afford greater flexibility for Grandfathered Greater China Issuers and Non-greater China Issuers to dual-primary list with their existing weighted voting rights (“WVR”) structures and variable interest entity (“VIE”) structures; and

3.    amend the requirements of secondary listing for Greater China Issuers without WVR.

Streamlining core shareholder protection standards

Complexity and inconsistency in shareholder protection requirements

In the Consultation Paper, the Stock Exchange identified various issues in relation to the existing requirements for overseas issuers, including (i) the complexity and difficulty in navigating the relevant rules under the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the “Listing Rules”), and (ii) the inconsistency in shareholder protection requirements for overseas issuers incorporated in Bermuda and the Cayman Islands, and those applicable to the acceptable jurisdictions (the “Acceptable Jurisdictions”) in the Joint Policy Statement Regarding the Listing of Overseas Companies dated 27 September 2013 and amended on 30 April 2018 (“JPS”).

Proposal

In light of the issues highlighted above, the Stock Exchange proposes to introduce 14 core standards for shareholder protection (the “Core Standards”) applicable to issuers incorporated in all jurisdictions. The single set of Core Standards will cover fundamental rights of shareholders, ranging from notice and conduct of shareholders’ meetings, approval of important matters, members’ right to requisition a meeting, removal of directors, the right to vote, speak and appoint proxies/corporate representatives, auditors, appointment of directors to fill casual vacancies and inspection of shareholders’ register, etc.

The Core Standards will also apply to existing listed issuers, which would be required to make necessary amendments to their constitutional documents in compliance with the Core Standards upon their second annual general meeting following the implementation of the Stock Exchange’s proposal. The introduction of the Core Standards is expected to unify the standards of shareholders’ rights and protection under the Listing Rules and help safeguard the rights of the shareholders regardless of the place of incorporation of the listed issuer.

Dual-primary listing with existing WVR and VIE structures

In the Consultation Paper, the Stock Exchange identified two major issues with the current dual-primary listing regime as highlighted below.

Guidance on common waivers

An issuer seeking for a dual-primary listing would be subject to full listing requirements of both the Stock Exchange and that of the overseas exchange(s) on which its securities are, or will be, listed. Therefore, dual-primary listed issuers are often subject to duplication of regulation on listing matters. In light of the aforesaid, the Stock Exchange may grant waivers to such issuers (the “Common Waivers”) on the basis that the issuers (i) conform to the special conditions of the Common Waivers, and (ii) had proved that their jurisdictions of incorporation have in place shareholder protections that met the equivalence requirement as set out in Listing Rule 19.05(1)(b).  Nevertheless, the Stock Exchange considers it has yet to provide substantial guidance on which Common Waivers are granted.

The Stock Exchange proposes to codify the Common Waivers for dual-primary listed issuers and the underlying principle for applications for Common Waivers, which requires issuers to demonstrate that “strict compliance with both the relevant Listing Rules and the overseas regulations would be unduly burdensome or unnecessary”. This proposal, if materialised, would provide additional clarity so as to enable issuers to better assess the regulatory compliance requirements for listing in Hong Kong.

Dual primary listing with non-compliant WVR and VIE structures

Background

Pursuant to Listing Rule 19C.12 and Guidance Letter HKEX-GL94-18, Grandfathered Greater China Issuers and Non-Greater China Issuers which are pursuing a secondary listing under Chapter 19C of the Listing Rules are exempted from the relevant requirements on WVR structures under Chapter 8A of the Listing Rules and on VIE structures under Listing Decision LD43-3, respectively. Thus, Grandfathered Greater China Issuers and Non-Greater China Issuers are eligible for secondary listing although they may not conform to the WVR and/or VIE structures required under the Listing Rules or the relevant guidance letter or listing decision.

Listing Rule 19C.13 stipulates that where the majority of trading in a Greater China Issuer’s listed shares migrates to the Stock Exchange’s market on a permanent basis, it will be regarded as having a dual-primary listing. The Greater China Issuers would then be required to comply with all the requirements applicable to a primary listing. Nevertheless, Greater China Issuers are permitted to retain their non-compliant WVR and/or VIE structures even after they have become dual-primary listed in Hong Kong.

On the other hand, under the current regime, issuers with non-compliant WVR and/or VIE structures are required to amend their structures in compliance with Chapter 8A of the Listing Rules and Listing Decision LD43-3 if they apply for a primary or dual-primary listing in Hong Kong.

Proposal

In light of the above, the Stock Exchange has proposed to allow both Grandfathered Greater China Issuers and Non-Greater China Issuers to dual-primary list directly on the Stock Exchange whilst retaining their non-complaint WVR and/or VIE structures, subject to the suitability and eligibility requirements for qualifying issuers with a WVR structure as set out under Chapter 19C of the Listing Rules even after they delist from their overseas exchange(s) of primary listing, subject to the Stock Exchange’s assessment on the their non-compliant WVR and/or VIE structures.

Secondary listing for Greater China issuers without WVR

Currently, there are two routes to secondary listing in Hong Kong, namely (i) the JPS route through which overseas issuers with a centre of gravity outside Greater China can secondary list if the eligibility requirements under section 5 of the JPS are satisfied, and (ii) the Chapter 19C of the Listing Rules route through which qualifying issuers, regardless of whether they have a centre of gravity in Greater China, can secondary list if the eligibility requirements under Chapter 19C of the Listing Rules are satisfied. Some of the relevant eligibility requirements are summarised in the table below.

Table: Extracted from the Consultation Paper

Issuers seeking to secondary list through the Chapter 19C route are also required to establish that they are innovative companies, which has barred many quality Greater China issuers in traditional sectors from secondary listing in Hong Kong.

In order to attract more applications from applicants who carry their centre of gravity in Greater China for secondary listing in the Stock Exchange, the Stock Exchange made various proposals, including but not limited to:

Codification of requirements in respect of secondary listings

In order to clarify the listing requirements to potential listing applicants, the Stock Exchange proposed to codify section 5 of the JPS on entities suitable for secondary listing into Chapter 19C of the Listing Rules and relocate the provisions on secondary listings currently under Chapter 19 of the Listing Rules to Chapter 19C of the Listing Rules. As such, the listing requirements for secondary listing and primary listing for overseas issuers would be set out under Chapter 19C and Chapter 19 of the Listing Rules respectively.

Quantitative eligibility requirements for overseas issuers without WVR

In order to consolidate the two routes to secondary listing, the Stock Exchange proposed that overseas issuers without WVR structures will be eligible for secondary listing if they meet either one of the two sets of quantitative requirements:

1.    Criteria A

a.    a track record of good regulatory compliance of at least five full financial years on a Qualifying Exchange (for overseas issuers without WVR structure) or on any Recognised Stock Exchange (for overseas issuers without WVR structure and a centre of gravity outside of Greater China); and

b.   an expected market capitalisation at the time of secondary listing of at least HK$3 billion; or

2. Criteria B

a.    a track record of good regulatory compliance of at least two full financial years on a Qualifying Exchange; and

b.   an expected market capitalisation at the time of secondary listing of at least HK$10 billion.

This proposal, if materialised, sets a lower minimum market capitalisation requirement for secondary-listing applicants with a centre of gravity in Greater China. The Stock Exchange proposed that secondary listing applicants without a WVR structure, regardless of whether the applicant having a centre of gravity in Greater China, would not be required to show that they are innovative companies. These proposals would allow more potential issuers with a centre of gravity in Greater China to secondary list in Hong Kong and is expected to enhance the attractiveness of Hong Kong as a destination for secondary listing of issuers with a centre of gravity in Greater China.

Other proposals

Other proposals include but are not limited to (i) codifying the principles for the Stock Exchange to grant waivers to secondary listed issuers to enhance transparency; and (ii) allowing Grandfathered Greater China Issuers and Non-Exchange China issuers to retain their non-compliant WVR and/or VIE structures which are pre-existing at the time of the secondary listing in Hong Kong even if they are de-listed from the Qualifying Exchange etc.

Conclusion

The Stock Exchange’s proposals, if materialised, will be a major development in Hong Kong as the place for secondary listing of overseas issuers. In particular, it provides greater flexibility for applicants seeking dual-primary listings whilst allowing them to maintain their WVR and/or VIE structures, as well as expanding the secondary listing regime for overseas-listed Greater China companies from traditional industries without WVR structures. The consultation will close on 31 May 2021 and interested parties can submit their response to the Stock Exchange.

[1] As defined under paragraph 96 of the Joint Policy Statement Regarding The Listing Of Overseas Companies dated 27 September 2013 and amended on 30 April 2018 

[2] As defined under the Consultation Paper as the New York Stock Exchange LLC, NASDAQ Stock Market or the Main Market of the London Stock Exchange plc (and belonging to the UK Financial Conduct Authority’s “Premium Listing” segment)