On 30 April 2018, the Hong Kong Stock Exchange (Exchange) implemented new listing rules to permit individuals to benefit from shares with weighted voting rights (WVR). In light of feedback from a number of parties, in January 2020, the Exchange published a consultation paper to seek views on proposals to allow corporate entities to also benefit from WVR under primary listing. On 30 October 2020 the Exchange released its conclusions to the January 2020 consultations (Conclusions).
The Exchange has received 65 responses from a broad range of respondents that were representatives of the stakeholders in the Hong Kong capital market, including law firms, accounting firms, investment firms and listed issuers. However, among those supportive submissions, there was a wide range of views regarding the specific features and safeguards proposed for the regime. In light of the diverse views expressed by the respondents, the Exchange has decided not to implement the proposals set out in the consultation paper. It will give more time for the market to develop a better understanding of the regulatory approach towards regulating listed companies with WVR structures and their controllers.
However, the Exchange has decided to extend grandfathering arrangements to Greater China Issuers with a centre of gravity in Greater China which are: (a) controlled by corporate WVR beneficiaries as at the date of the Conclusions and (b) primary listed on a qualifying exchange (comprising of NYSE, NASDAQ or the Main Market of the LSE) on or before the date of the Conclusions in the same manner as the existing grandfathered Greater China Issuers for the purposes of Chapter 19C of the Listing Rules.
Under the current regime, the Greater China Issuers which are primary listed on a qualifying exchange on or before 15 December 2017 and meet the eligibility and suitability requirements under Chapter 19C of the Listing Rules are permitted to secondary list in Hong Kong without having to amend their existing WVR structures even if they have WVR structures that do not meet the listing rules requirements applicable to primary listing applicants.
It is expected that existing safeguards will apply to the Greater China Issuers applying for listing under the additional grandfathering arrangements, namely:
- to meet a minimum market capitalisation threshold of at least HKD 40 billion, or at least HKD 10 billion with at least HKD 1 billion of revenue for their most recent audited financial year;
- be an 'innovative company' as part of the demonstration of their suitability for listing; and
- to demonstrate that the domestic laws, rules and regulations to which they are subject to and their constitutional documents provide certain shareholders protection standards.
It appears that the Hong Kong stock market will not be seeing new listings with corporate WVR structures in the near future. However, the extension of the grandfathering arrangement is said to be paving ways for more Greater China companies to seek secondary listings in Hong Kong, especially technology companies currently facing closer scrutiny as Sino-US tension heightens. According to reports, about 10 Chinese technology companies that are already listed on US stock markets are owned by corporate shareholders with WVR structure and among them are Tencent Music Entertainment Group (NYSE:TME) and iQiyi (NYSE:IQ), which recorded USD1,027 million and USD4,164 million in revenue, respectively, in the financial year of 2019 and with market capitalisation of USD27.6 billion and USD16.3 billion. Both listing vehicles were incorporated in the Cayman Islands.
The requirement that Greater China companies seeking secondary listing under Chapter 19C of the Listing Rules be subject to e certain shareholders protection standards is significant. The majority of the existing Hong Kong listed issuers with WVR structures were incorporated in the Cayman Islands, where such shareholder protection standards are easily accommodated. The characteristics of the Cayman Islands help to explain the popularity of Cayman Islands companies as vehicles for listing purposes and for companies with WVR structures. Cayman Islands has a tax neutral environment with flexible regulations for overseas companies to incorporate in, and it is simpler and more cost efficient to carry out a restructuring exercise as a Cayman Islands incorporated company. The Cayman Islands remains a jurisdiction where reputable professional advisors continue to sustain its reputation and are able to provide comfort to the Exchange and international investors.
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