The Stock Exchange of Hong Kong (HKEx) officially released in April 2018 the Consultation Summary of the Listing Regime for Companies from Emerging and Innovative Sectors. The amendments to the listing rules on the acceptance of listing of companies with weighted-voting-right (WVR) structures included in the Consultation Summary have been in effect since April 30. The move meets the urgent need of innovative companies to gain control through such structures. With the implementation of the Consultation Summary, Xiaomi Corporation and Meituan Dianping, all of which have WVR structures, have gained HKEx listings. This article provides a brief analysis of the HKEx’s listing requirements for entities with WVR structures.
Required qualifications. The HKEx stated in the Consultation Summary that a company hoping to list in Hong Kong under a WVR structure must be able to demonstrate a number of characteristics, including its nature, success of its business, contribution of the structure’s beneficiaries and their roles, and external validation.
Expected market capitalization. The specified minimum market capitalization of a company, with a WVR structure, is HK$10 billion. If a company’s market capitalization is less than HK$40 billion, it is required to have post revenue of not less than HK$1 billion in the last audited financial year before listing. There are no further requirements for a company with a market capitalization of more than HK$40 billion.
Minimum and maximum economic interest at time of listing. According to HKEx recommendations, all WVR beneficiaries must collectively own a minimum of 10% and a maximum of 50% of the underlying economic interest in a company’s total issued share capital at the time of listing. This requirement no longer applies when a company is listed.
Identity restrictions for beneficiaries of WVR shares. The HKEx recommends that beneficiaries of WVR shares be restricted to directors of a company at listing and remain so after that. The restrictions on the identities of beneficiaries of WVR shares are shown in the table on the next page.
Formally, regardless of a limited liability partnership, a trust, a private company, or any other structure, the HKEx’s standards for holding WVR shares without lapse is simple, namely “full authority”, as well as “management and control”. This also shows that the HKEx focuses on whether beneficiaries can guarantee that the shares are not shared or under the control of others. This is consistent with the HKEx’s original intention to restrict the identities of beneficiaries of WVR shares.
SPECIFIC RESTRICTIONS OR SPECIAL CIRCUMSTANCES
RESULTS OF RESTRICTIONS OR SPECIAL CIRCUMSTANCES
The beneficiary (1) dies; (2) ceases to be a director; (3) is deemed by the HKEx to be incapacitated;
The WVR attached to a beneficiary’s shares will lapse permanently.
Factors of character and morals
(1) The beneficiary is or has been convicted of an offence involving a finding that the beneficiary acted fraudulently or dishonestly;
(2) A disqualification order is made by the court or tribunal of a competent jurisdiction against the beneficiary;
(3) The beneficiary is found by HKEx to have failed to comply with the requirement that certain corporate actions are conducted on a one-share one-vote basis.
The beneficiary transfers his/her beneficial interest or economic interest in those WVR shares, or the voting rights attached to them, to another person.
Limits on WVR powers and protection for shareholders under one-share-one-vote standard. The HKEx’s restrictions on WVR are mainly achieved by the multiple of voting rights of related shares and the provision that important matters of a company must be decided on a one-share-one-vote basis. The ratio of voting rights for ordinary shares and WVR shares is generally not more than 1:10. Among the important matters required to be determined on a one-share-one-vote basis are changes to the issuer’s constitutional documents (regardless of the wording and phrasing), variation of rights attached to any class of shares, appointment and removal of independent non-executive directors, appointment and removal of auditors, as well as voluntary winding-up of the issuer.
WVR shares can be converted into ordinary shares. The HKEx also recommends relevant provisions for conversion of WVR shares into ordinary shares. The beneficiaries of WVR shares may convert these shares into ordinary shares voluntarily or according to the provisions of the Listing Rules (for example, when transferring to others) on a one-to-one ratio, that is, each WVR share is converted into one ordinary share.
At the same time, HKEx recommends that, as part of the initial listing application, whenever new WVR shares are to be issued on a pro-rata basis, the issuer, with a WVR structure, should obtain HKEx approval to issue WVR shares and acquire prior approval for the listing of shares to be issued after conversion of WVR shares. In addition, such an issuer should disclose the dilutive effects of conversion of WVR shares into ordinary shares in the listing documents, interim reports and annual reports.
Strengthen disclosure requirements and corporate governance. In the Consultation Summary, the HKEx recommends a strengthening of disclosure requirements, including requirements on the use of stock markers, warning statements and identity disclosure, and enhancement of corporate governance, including adoption of measures in the areas of corporate governance committee, work summary, non-executive directors, compliance adviser/s and risk training.
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Fan Xingcheng is leader of China capital market practice and a senior partner at Dentons