This eUpdate is the second in a two part series examining the effect of the changes under the “Joint policy statement regarding the listing of overseas companies” on the Exchange (the New JPS) released in late September by the Stock Exchange of Hong Kong Limited (the Exchange) and the Securities and Futures Commission (the SFC). The first part covered important changes applicable to all overseas companies. This second part deals with changes applicable to applicants seeking a secondary listing.
What is a “secondary” listing?
The second half of Chapter 19 of the Listing Rules contains additional requirements, modifications and exceptions which apply only to an overseas issuer whose primary listing is on another stock exchange. Further there are several important rules which only apply to companies with a primary listing on the Exchange. Yet there is no definition in the Listing Rules of what amounts to a “primary” or a “secondary” listing. That designation has always simply been within the Exchange’s discretion. Rule 1.05 states that where it is necessary to determine the location of an issuer’s primary listing, “such determination is to be made by the Exchange”. More recently, the Exchange finally produced some informal guidelines for determining a secondary listing which basically mirrored the SFC’s “public company in Hong Kong” test (used for the purposes of Takeovers Code exemptions), but were applied in reverse to determine whether an issuer had “sufficient connections with a foreign market”. This informal test also contained the somewhat vague criteria that “the majority of their equity securities are not usually traded on the Exchange”. The ambiguity of this criterion is compounded by Rule 19.57 (the only Listing Rule that touches on the trading of an overseas issuer’s securities) which specifically deals with a situation where a secondary listed issuer has the majority of its trading in Hong Kong.
Finally, more certainty
Now the Exchange has issued much more extensive and certain guidance on whether a company would be suitable for secondary listing. It boils down to three main criteria: (1) the dominant market in the applicant’s securities is expected to be on an overseas exchange; (2) the applicant’s primary listing is on an exchange where the standards of shareholder protection are at least equivalent to Hong Kong (a list of “recognised stock exchanges” is set out in the New JPS ); (3) the applicant’s “centre of gravity” must be outside Greater China. For this, the Exchange will not only consider the predictable criteria regarding the location of the company’s central management, control, business operations, assets, corporate and tax registrations, but also new factors such as the company’s history, and the nationality of its management and controlling shareholders. The combined effect should be a lot more certainty for issuers when deciding whether to proceed with an application for a secondary listing in Hong Kong, especially given the new concessions granted to secondary listed companies.
The compliance burden of two listings
The greatest hurdle for many companies seeking a second listing is the thought of compliance with two complete sets of overlapping but distinct listing rules, especially when overlaid on the unavoidable backdrop of compliance with two sets of securities and corporate legislation. From a compliance perspective, there is nothing particularly burdensome or unexpected in the Hong Kong rules, but they can be quite prescriptive.
In the past, many of the listing rule waivers we applied for on behalf of secondary listed companies (either because they were at odds with the rules, practices and policies of the home jurisdiction, or simply burdensome in the context of two sets of listing rules) were originally rejected by the Exchange, which generally failed to consider any justification “sufficient or compelling enough” unless the laws of the primary listing meant it was legally impossible to comply with the relevant Listing Rule. Often we were able to successfully obtain case-by-case waivers, but the applications occupied hundreds of attorney hours, having been prepared, reviewed, and then argued by local and Hong Kong counsel for each of the company and their sponsor(s). Also, as the waiver negotiations were carried out in parallel to the listing application, the Exchange in many ways held all the cards, as in reality, there would be few “dealbreaker” waivers the loss of which would cause an applicant to pull its listing application. Sheer exhaustion with the listing process would cause many applicants to withdraw their waiver requests at the request of the Exchange.
Lots of waivers!
Now, under the New JPS, the Exchange has finally conceded it is reasonable to grant extensive waivers from the Listing Rules to a secondary listed issuer. Applicants seeking such waivers must fulfill the secondary listing criteria set out above and must also be a large, established company with a good compliance track record. Specifically the Exchange would expect to see a market capitalisation of USD 400 million and at least five years listing on its primary exchange, or a shorter track record if the company is nevertheless well established and has a significantly larger market capitalisation. If an applicant meets these criteria, the Exchange will automatically waive dozens of Listing Rules. This represents the biggest change in practice for the Exchange. Many of the waivers we have previously fought for and won, at substantial cost to our clients, are now automatic. Further, there is an extensive list of common waivers for overseas companies with primary, dual primary as well as secondary listings, for which the Exchange helpfully sets out its conditions.
A new era
The New JPS not only clearly maps out the expectations and provides some transparency regarding the Exchange’s approach, it lowers some of the hurdles faced by potential applicants, and also provides certainty to applicants about their post-listing obligations. We hope that it will also facilitate a more pragmatic and focused review by the listing teams, and in turn decrease the level of frustration applicants feel in dealing with in the Exchange throughout the listing process.