New Listing Decisions clarify what kind of companies could list with a WVR structure
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. |
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Published by ONC Lawyers © 2022 |
