In June 2017, Hong Kong Exchanges and Clearing Limited and its subsidiary The Stock Exchange of Hong Kong Limited (the “HKEx”)¹ launched a consultation to seek public feedback on a set of proposals contained in two separate papers: (i) the New Board Concept Paper² and (ii) the Consultation Paper on Review of the Growth Enterprise Market (GEM) and Changes to the GEM and Main Board Listing Rules³ (the “GEM Review Consultation Paper”). The proposals are aimed at allowing access to capital markets in Hong Kong to a more diverse range of issuers, improving quality of the HKEx’s markets and enhancing Hong Kong’s competitiveness as a global financial center. In this eUpdate, we focus on the key proposals contained in the New Board Concept Paper, which include permission to list companies with disproportionate voting rights share structures (also known as the “weighted voting rights” (WVR) structures in Hong Kong). We analyze the key proposals contained in the GEM Review Consultation Paper in our separate eUpdate here. While the proposals are in the separate papers, they are interlinked and should be viewed holistically.

In Part 1 of this eUpdate series, we discussed the reasons why Hong Kong regulators did not allow WVR structures in Hong Kong despite attempts of Alibaba Group Holding Limited to convince them to do so. In Part 2 of this eUpdate series, we discussed the consultation paper published by the HKEx in June 2015 regarding the permissibility of WVR structures in Hong Kong. In Part 3 of this eUpdate series, we discussed the announcement of the HKEx of October 5, 2015 that, after considering the views of the Securities and Futures Commission (the "SFC”), it would not be proceeding with its draft proposal permitting WVR structures in Hong Kong.

Rationale behind the New Board Concept Paper

As noted by the HKEx⁴, “while Hong Kong has been the number one market globally for initial public offerings (IPOs) funds raised in five of the past eight years, there remain gaps in the Hong Kong market, prompting a number of Mainland and other high growth companies from New Economy sectors to choose listing on venues other than the HKEx”. “Hong Kong has been a world leader in IPO fundraising over the past decade, but we cannot be complacent and assume our success will continue,” said Charles Li, the HKEx’s Chief Executive. “The world economy is changing fast. We must stay competitive, stay relevant, and continue to enhance market quality. Our consultation today focuses on all of these objectives. We encourage everyone to submit their views to shape the future of Hong Kong,” he added. In an exclusive interview with the South China Morning Post, Chow Chung-kong, the HKEx’s Chairman, also said that the HKEx has been very successful over the past 20 years in promoting IPOs but conceded that it is not diversified enough.⁵

In fact, at present, there is a high concentration of listings in the financial and property sectors in Hong Kong, which together account for 44% of its total market capitalization. In contrast, listings from New Economy industries in the past 10 years account for only 3% of the HKEx’s total market capitalization, compared with 60%, 47% and 14% for NASDAQ, the New York Stock Exchange and the London Stock Exchange, respectively.⁶ In addition, some of the fastest growing industries (such as pharmaceuticals, biotech and life sciences; healthcare equipment and services; and software and services) are notably underrepresented in Hong Kong’s securities market. One of the major barriers for New Economy companies is that the current listing framework in Hong Kong bars pre-profit companies and companies with WVR structures from listing in Hong Kong.⁷

Secondary listings from overseas-listed Mainland enterprises are also currently prohibited in Hong Kong. Therefore, there is a significant opportunity for Hong Kong to capture a greater share of international and Mainland companies seeking to raise capital, giving investors exposure to a more diverse range of issuers. Chow believes that this role of Hong Kong will continue under the New Silk Road initiative, in which China wants to work with 65 neighboring countries to establish roads, railways, power plants and other infrastructure in coming years.⁸ In the New Board Concept Paper, the HKEx proposes establishment of a New Board, separate from the existing Main Board and GEM, to allow access to capital markets in Hong Kong to a more diverse range of issuers.

Proposals in the New Board Concept Paper

The New Board Concept Paper proposals are designed to enhance Hong Kong’s ability to attract companies from New Economy sectors with one or more of the following characteristics that currently prohibit them from listing on the HKEx:

• pre-profit companies;
• companies with non-standard governance features (including WVR structures); and
• overseas-listed Mainland Chinese companies that wish to list on the HKEx as a secondary listing venue.

The HKEx aims to develop a set of guidelines for the definition of what constitutes “New Economy” for the purposes of listing on the New Board. No fixed definition is expected to be proposed, and the Listing Committee⁹ would retain the ultimate discretion to determine the listing eligibility for the New Board on a principle-based approach. The key principle would be to identify companies whose businesses are in sectors where innovation, technology, intellectual property, and new ways of commerce in totality are the primary drivers for its growth and business successes.

The New Board would be divided into two distinct segments:

• New Board PREMIUM¹⁰, targeted at the companies that meet the existing financial and track record requirements of the Main Board, but are currently ineligible to list in Hong Kong because they have non-standard governance structures. New Board PREMIUM will have the following characteristics:
  • Open to both retail and professional investors;
  • Quantitative entry requirements equivalent to those of the Main Board¹¹ in force from time to time;
  • Requirement that the equity securities of an applicant must be held by at least 300 holders with a public float requirement of 25% of the total number of issued shares;
  • Regulatory cooperation requirement under the Joint Policy Statement Regarding the Listing of Overseas Companies jointly issued by the SFC and the HKEx in September 2013 (the “2013 JPS”) would continue to apply, but listings by companies listed on Recognized U.S. Exchanges (NYSE and NASDAQ) will be exempted from having to provide equivalent shareholder protection standards;
  • No restriction on secondary listings by Mainland Chinese companies;
  • WVR structures permitted;
  • A more stringent approach to initial listing requirements;
  • The existing sponsor regime would apply;
  • The prospectus requirements would apply; and
  • Listing applications would be presented to the Listing Committee for approval following vetting by the HKEx's Listing Department.
• New Board PRO¹², targeted at the earlier stage companies that do not meet the financial or track record criteria for GEM or the Main Board and/or have non-standard governance structures and companies that are unable or unwilling to meet the equivalent shareholder protection requirements under the 2013 JPS. New Board PRO will have the following characteristics:
  • Open to professional investors¹³ only;
  • No track record or minimum financial criteria, subject to a minimum market capitalization at the time of listing of HK$200 million¹⁴ (equivalent to approximately US$26 million)¹⁵;
  • Requirement that a listing applicant has a minimum of 100 investors at the time of listing and a minimum public float at listing of 25%;
  • Regulatory cooperation requirement under the 2013 JPS would continue to apply, but issuers will not be required to provide equivalent shareholder protection standards;
  • No restriction on secondary listings by Mainland Chinese companies;
  • WVR structures permitted;
  • A “lighter touch” approach to initial listing requirements;
  • Instead of the requirement to appoint a sponsor, applicants would be required to appoint a Financial Adviser¹⁶;
  • The prospectus requirements would not apply and, instead, an applicant would only be required to produce a Listing Document that provides accurate information sufficient to enable professional investors to make an informed investment decision; and
  • Listing applications would be vetted and approved by the HKEx's Listing Department under delegated authority from the Listing Committee (similar to the current GEM applications approval arrangement).

Companies listed on the New Board would be expected to comply with the continuous listing obligations applicable to the Main Board-listed companies (including in respect of timely disclosure of material information; publication of financial statements; notifiable and connected party transactions; director suitability and independent non-executive director representation; general meetings and others). The Listing Committee would make decisions on the cancellation of listings, disciplinary matters and be responsible for hearing appeals for both New Board segments. To help ensure the quality of the market, the New Board would have an accelerated delisting mechanism for companies that failed to meet its continuous listing requirements.

The SFC would continue to play a leading role in market regulation for the New Board, in the same way as it currently does for the Main Board and GEM, and have statutory powers of investigation and enforcement in cases involving corporate or market misconduct.

Hierarchy of the HKEx’s boards if the proposals are adopted

The Main Board would be positioned as a “premier board” with an increased minimum market capitalization requirement of HK$500 million (equivalent to approximately US$64 million) (raised from HK$200 million¹⁷ (equivalent to approximately US$26 million)), along with existing financial and track record criteria. GEM would serve the needs of small and mid-sized issuers that meet its financial and track record criteria and desire to attract retail as well as professional investors. The New Board would fill the gaps in Hong Kong’s current listing framework, so that the needs of New Economy and early-stage companies could be accommodated while maintaining appropriate regulatory and shareholder protection standards.

There would be no fast-track migration mechanism between the New Board and the Main Board or GEM, or from New Board PRO to New Board PREMIUM. For a company listed on New Board PRO wishing to list on the other platforms to attract retail investors, it would have to meet all the admission criteria and other listing requirements of the relevant board (including issuance of a “prospectus standard” listing document). A requirement to raise additional capital through a public offer may also be imposed.

In addition, for companies with a market value below HK$150 million (equivalent to approximately US$20 million), the HKEx is exploring the creation of a Private Market, a platform on which unlisted, or pre-listing companies could be registered. Registration on the Private Market would enable private companies to manage their shareholder registers, investor communications and corporate actions, and would help prepare companies for an eventual transition to a listed status. As this would be a registration-only service with no trading or matching functions, the Private Market would not be regulated under the Securities and Futures Ordinance (Cap. 571).

Regulation of listings and applicants with WVR structures

The HKEx proposes two alternative approaches to regulation of the listings and applicants with WVR structures:

• One approach requires such companies to prominently disclose that they have a WVR structure and the risks associated with the structure. In addition, they could be required to disclose other matters, such as the identities of WVR holders, their voting activities and the details of any transfers of WVRs;
• The other approach is to impose mandatory safeguards for companies with WVR structures in addition to the disclosure requirements. The safeguards could vary depending on whether the company was listed on New Board PREMIUM or New Board PRO. For example, WVRs could be subject to a “sunset clause” and expire after a certain period of time.

In addition, the HKEx proposes that the companies with non-standard governance features (including companies with WVR structures) could list on the New Board if they are also listed on a Recognized U.S. Exchange and demonstrate, to the HKEx’s satisfaction, a strong compliance record during that time. This proposal is based on the U.S.’s robust regulatory environment and strict private enforcement mechanisms. Companies seeking a primary or secondary listing in this way would be allowed to maintain their WVR structures and would be exempt from any safeguards imposed on companies with WVR structures generally. The HKEx would reserve the right not to approve the listing of a company, on suitability grounds, if its departure from Hong Kong governance norms was extreme.

Next steps

The HKEx invited public feedback on its proposals set out in the New Board Concept Paper to be submitted by August 18, 2017. If there is a market support for the New Board Concept Paper proposals, the HKEx aims to finalize detailed New Board listing rules in early 2018.

¹ In this eUpdate, we refer generally to “Hong Kong Exchanges and Clearing Limited”, its subsidiary “The Stock Exchange of Hong Kong Limited” and other members of its group as “HKEx”, for convenience, without distinguishing between them unless strictly necessary.
² HKEx’s Concept Paper “New Board”, June 2017, available at: https://www.hkex.com.hk/eng/newsconsul/mktconsul/Documents/cp2017061.pdf.
³ HKEx’s Consultation Paper “Review of the Growth Enterprise Market (GEM) and Changes to the GEM and Main Board Listing Rules”, June 2017, available at: https://www.hkex.com.hk/eng/newsconsul/mktconsul/Documents/cp2017062.pdf.
⁴ HKEx’s News Release “HKEx seeks views on a proposed New Board and a review of the Growth Enterprise Market”, June 16, 2017.
⁵ “HKEx targets wealthy investors and mega IPOs amid bid to diversify”, E. Yiu, South China Morning Post, June 21, 2017.
⁶ The New Board Concept Paper and HKEx’s “Q&A on Proposed New Board and GEM Review”, June 16, 2017.
⁷ See footnote 6.
⁸ See footnote 5.
⁹ The Listing Committee is composed of 28 members. These include market professionals drawn from asset management, legal and accounting circles with the relevant experience to oversee the listing functions of the HKEx. The Chief Executive of the HKEx is also an ex officio member of the Listing Committee.
¹⁰ This term is used for the purposes of the proposal only. If the proposal is pursued, then an appropriate brand for the board will be determined.
¹¹ Including a requirement that applicants meet one of three current financial eligibility tests: (i) the Profit Test; (ii) the Market Capitalization / Revenue / Cash Flow Test; or (iii) the Market Capitalization / Revenue Test. Note that the HKEx proposes changes to the certain eligibility requirements of GEM and the Main Board in the GEM Review Consultation Paper.
¹² This term is used for the purposes of the proposal only. If the proposal is pursued, then an appropriate brand for the board will be determined.
¹³ “Professional investors” include corporate and financial institutions and private individuals with more than HK$8 million (equivalent to approximately US$1 million) in their asset portfolio. For the exact definition, refer to Section 1 of Part 1 of Schedule 1 of the Securities and Futures Ordinance (Cap. 571).
¹⁴ This is the currently prevailing minimum market capitalization for the Main Board.
¹⁵ In this eUpdate, we used the exchange rate as of July 5, 2017 which was US$1 to HK$7.81.
¹⁶ It is proposed that the Financial Adviser would be a corporation licensed for Type 6 regulated activity (advising on corporate finance). As a licensed entity, the Financial Adviser will be subject to the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission.
¹⁷ Main Board Listing Rule 8.03 (2).