CSj looks at a new consultation issued by Hong Kong Exchanges and Clearing Ltd (HKEX) seeking public feedback on proposals to enhance and streamline the listing regime for overseas issuers.

In a new public consultation, published on 31 March 2021, Hong Kong Exchanges and Clearing Ltd (HKEX) is seeking views on proposals relating to the listing regime for overseas issuers. The key proposals in the consultation are to:

1. streamline existing requirements for overseas issuers
2. amend the existing secondary listing requirements for Greater China issuers, and
3. allow eligible issuers to dual-primary list while keeping their existing weighted voting right structures and variable interest entity structures.

1. Streamlining requirements

‘As our overseas issuer regime has developed over the years,’ the consultation states, ‘the requirements that apply to these issuers have become scattered in various places in the Listing Rules, the Joint Policy Statement Regarding the Listing of Overseas Companies and Country Guides, resulting in market feedback that they have become fragmented, complex and difficult to navigate. The complexity of these requirements may not be conducive to compliance. The current Rules could also be seen as unduly burdensome and unappealing to prospective applicants unfamiliar with the Hong Kong listing regime.’

The new consultation paper sets out proposed amendments to the Listing Rules to streamline the existing listing regime for overseas issuers (including those with a centre of gravity in Greater China), and also make consequential amendments to the requirements for all issuers (including Hong Kong and Mainland issuers).

HKEX proposes to streamline existing requirements with a single set of shareholder protection standards to ensure consistent protection is provided to all investors. All issuers (including secondary listed issuers) would be required to demonstrate how they comply with one common set of core shareholder protection standards. These core standards include requirements that the issuer must:

• hold an ordinary general meeting annually and provide shareholders with the right to convene an extraordinary general meeting
• enable shareholders to remove directors with a simple majority vote, and
• obtain a super-majority shareholder vote to approve:
  • a change to class rights
  • a change to its constitutional documents, and
  • its winding-up.

HKEX says that these core standards are intended to ensure that all Hong Kong shareholders are afforded the same consistent protection irrespective of the place of incorporation of a listed issuer or the nature (primary or secondary) of the issuer’s listing.

2. Expanding the secondary listing regime

HKEX also proposes to amend the secondary listing requirements for Greater China issuers without weighted voting rights. ‘Greater China issuers’ refers to overseas issuers with a centre of gravity in Greater China primary listed on a qualifying exchange. The qualifying exchanges are:

• The New York Stock Exchange LLC
• Nasdaq Stock Market, and
• the Main Market of the London Stock Exchange plc (and belonging to the UK Financial Conduct Authority’s Premium Listing segment).

Under the proposals, Greater China issuers without a weighted voting right structure could secondary list on The Stock Exchange of Hong Kong Ltd (the Exchange):

• without demonstrating that they are an ‘innovative company’ – this would be required only of issuers with weighted voting right structures, and
• by demonstrating a lower minimum market capitalisation at listing than currently required (but still higher than that required for primary listing).

Currently, Greater China issuers without a weighted voting right structure applying for secondary listing on the Exchange must have a minimum market capitalisation at the time of listing of at least either HK$40 billion or HK$10 billion, and revenue of at least HK$1 billion for their most recent audited financial year. In addition, these applicants must demonstrate a track record of good regulatory compliance of at least two full financial years on a qualifying exchange.

Under the proposals, these issuers would be required, instead, to have a minimum market capitalisation at the time of listing of at least HK$3 billion if they can demonstrate a track record of good regulatory compliance of at least five full financial years on a qualifying exchange, or HK$10 billion if they can demonstrate a track record of good regulatory compliance of at least two full financial years on a qualifying exchange.

HKEX would have the power to find such applicants unsuitable for listing in Hong Kong if it believes that their application is an attempt to circumvent the Listing Rules applicable to a primary listing, by applying, for example, the test set out in the Listing Rules on whether a transaction or a series of transactions constitute a reverse takeover of the applicant.

3. Expanding the dual-primary listing regime

HKEX also proposes to give greater flexibility for issuers to dual-primary list with existing weighted voting right structures and variable interest entity structures. Grandfathered Greater China issuers and non–Greater China issuers that seek to dual-primary list on the Exchange would be able to retain their existing weighted voting right, and variable interest entity, structures without changing them to meet the full requirements of the Exchange’s Listing Rules and guidance.

Grandfathered Greater China issuers are issuers with a centre of gravity in Greater China primary listed on a qualifying exchange on or before either 15 December 2017 (if they have individual weighted voting right structures), or 30 October 2020 (if they have corporate weighted voting right structures). Non–Greater China issuers are issuers with a centre of gravity outside Greater China primary listed on a qualifying exchange. These issuers would need to have a track record of good regulatory compliance of at least two full financial years on a qualifying exchange.

These issuers would also need to meet the higher minimum market capitalisation requirements applicable to an applicant with weighted voting rights (see above). They would also be required to meet all other initial and ongoing requirements applicable to a primary listing (for example, Listing Rule requirements regarding notifiable and connected transactions), as well as complying with the requirements that they are already subject to under the laws and rules of their overseas primary listing jurisdiction.

Currently, if Grandfathered Greater China issuers secondary list in Hong Kong, and later see the majority of trading of their securities migrates to the Exchange’s markets on a permanent basis, they will be regarded as dual-primary listed in Hong Kong and have to fully comply with the Listing Rules, but are allowed to retain their existing weighted voting right or variable interest entity structures. Non–Greater China issuers are not subject to this trading migration requirement.

Other proposals

The consultation paper also contains several other proposals to enhance, codify and streamline existing requirements for overseas issuers, including:

• the consolidation of requirements for overseas issuers into Chapter 19 (for primary listing) and Chapter 19C (for secondary listing) with one guidance letter
• the codification of some conditional common waivers for dual-primary listings and secondary listings, and
• guidance on the application of waivers following a delisting from an overseas exchange of primary listing.

‘One of the initiatives in HKEX’s strategic plan is to continue to develop Hong Kong as a listing and capital raising hub for major global and regional companies looking to fund their growth through either a primary or secondary basis,’ says HKEX Head of Listing, Bonnie Chan.

‘Our listing reforms in 2018 have already achieved tremendous success in adding vibrancy and diversity to Hong Kong’s listed company ecosystem. We believe our latest proposals to streamline requirements and enhance our listing regime will attract more international and Mainland companies looking to benefit from Hong Kong’s liquid financial markets, whilst ensuring that Hong Kong maintains the quality of the market and that the high standards of shareholder protection that Hong Kong is known for are maintained,’ says Ms Chan.

Source: Hong Kong Exchanges and Clearing Ltd

The Consultation Paper is available on the HKEX website: www.hkex.com.hk. The deadline for responses is 31 May 2021. More information on corporate weighted voting right (WVR) structures is available in the conclusions to the HKEX Consultation Paper on Corporate WVR Beneficiaries. More information on the requirements regarding variable interest entity structures are set out in Guidance Letter HKEX-GL77-14 and Listing Decision HKEX-LD43-3.