Towards a New Era: Hong Kong Stock Exchange Published New Rules on Listing of Companies from Emerging and Innovative Sectors

The Stock Exchange of Hong Kong Limited (the “Exchange”) published the Consultation Conclusions regarding the Consultation Paper on a Listing Regime for Companies from Emerging and Innovative Sectors on April 24, 2018 (the “Consultation Conclusions”). The Consultation Conclusion allows the implementation of three major initiatives, namely, (1) allowing the listing of pre-revenue/pre-profit biotech companies on the Main Board of the Exchange (the “Main Board”), (2) allowing the listing of companies with a Weighted Voting Rights (WVR) structures, and (3) relaxing the rules on secondary listing on the Exchange.

1) Listing of Pre-Revenue/Pre-Profit Biotech Companies

The Exchange introduced a new chapter (“Chapter 18A”) to the Main Board Listing Rules (the “Listing Rules”) to implement the proposal of allowing the listing of pre-revenue/pre-profit biotech companies on the Main Board of the Exchange.

I. Eligibility and Suitability Test

Chapter 18A provides that Biotech Companies that do not meet any financial eligibility tests under the current Listing Rules are considered to be eligible and suitable to list pursuant to Chapter 18A, provided applicant can demonstrate the following features:

a) Have developed at least one Core Product beyond the concept stage;

b) Primary engagement in research and development (“R&D”) for the purposes of developing its Core Product;

c) Engagement in R&D of its Core Product(s) for at least 12 months prior to listing;

d) Raising of finance for R&D to bring its Core Product(s) to commercialization as its primary reason;

e) have registered patent(s), patent application(s) and/or intellectual property in relation to its Core Product(s);

f) if the applicant is engaged in the R&D of pharmaceutical (small molecule drug) products or biologic products, it must demonstrate it has a pipeline of those potential products; and

g) Have previously received meaningful third party investment (being more than just a token investment) from at least one Sophisticated Investor at least six months before the proposed listing date which must remain at IPO. Whether a third party investment is a meaningful investment is assessed on a case-by-case basis by reference to the nature of the investment, the amount invested, the size of the stake taken up and the timing of the investment.

II. Disclosure Requirements

Chapter 18A also provides the specific disclosure requirements of the listing documents for a listing applicant, including:

a) its strategic objectives;

b) the details of each Core Product;

c) a statement that no material unexpected or adverse changes have occurred since the date of issue of the relevant regulatory approval for a Core Product;

d) a description of Approved Products (if any) owned by the applicant and the length of unexpired patent protection period and details of current and expected market competitors;

e) details of the Biotech Company’s R&D experience;

f) details of the relevant experience of the Biotech Company’s directors and senior management in R&D, manufacturing and commercialization of Biotech Products;

g) the salient terms of any service agreements between the applicant and its key management and technical staff;

h) measures that the applicant has in place to retain key management or technical staff and the safeguards and arrangements that the applicant has in place, in the event of the departure of any of its key management or technical staff;

i) a statement of any legal claims or proceedings that may have an influence on its R&D for any Core Product;

j) disclosure of specific risks, general risks and dependencies; and the extent to which its business is dependent on key individuals and the impact of the departure of key management or technical staff on the applicant’s business and operations;

k) information relevant and material to the Biotech Company’s business operations

l) an estimate of cash operating costs ; and

m) if the applicant has obtained an expert technical assessment and where relevant and appropriate, include such assessment in its listing document.

III. Other Regulations and Requirements

A listing applicant under Chapter 18A must have a minimum expected market capitalization at the time of listing of HK$1.5 billion. An available working capital to cover at least 125% of the group’s costs for the next 12 months (after taking into account the proceeds of the applicant’s IPO) is also required. A substantive portion of the IPO proceeds is expected to be used to cover these costs, including R&D costs.

Applicant must have been in operation in its current line of business for at least two financial years prior to listing under substantially the same management. The requirements of no substantial changes to the management over the past three financial years prior to listing and no change of the controlling shareholders over the last financial year prior to listing are not applicable.

2) Listing of Companies with a WVR Structure

I. Eligibility and Suitability Test

The Exchange expands its listing regime to allow the listing of companies with a WVR structure under the new Chapter 8A (“Chapter 8A”) to the Main Board Listing Rules. Accordingly, only application for listing with a WVR structure from new applicants will be considered. Applicant seeking to list under Chapter 8A must demonstrate:

a) a market capitalisation of at least HK$40 billion at the time of listing; or

b) a market capitalisation of at least HK$10 billion at the time of listing and revenue of at least HK$1 billion for the most recent audited financial year.

II. Restrictions on Share Class Based WVR Structures and Voting Power

WVR must only be attached to a class of an issuer’s equity securities and conferred on a beneficiary enhanced voting power on resolutions tabled at the issuer’s general meetings only. This restriction is subject to the fact that any WVR attached to any class of shares in a listed issuer must be disregarded and must not entitle the beneficiary to more than one vote per share on any resolution to approve the following matters:

a) changes to the listed issuer’s constitutional documents, however framed;

b) variation of rights attached to any class of shares;

c) the appointment or removal of an independent non-executive director;

d) the appointment or removal of auditors; and

e) the voluntary winding-up of the listed issuer.

Non-WVR shareholders must be entitled to cast at least 10% of the votes that are eligible to be cast on resolutions at the listed issuer’s general meetings. A class of shares conferring WVR in a listed issuer must not entitle the beneficiary to more than ten times the voting power of ordinary shares, on any resolution tabled at the issuer’s general meetings.

The Exchange also requires WVR beneficiaries to be members of the applicant’s board of directors at the time of listing, and must beneficially own collectively at least 10% of the underlying economic interest in the applicant’s total issued share capital at the time of initial listing.

III. Restrictions on Purchase and Subscription

A listed issuer is not allowed to increase the proportion of shares that carry WVR above the proportion in issue at the time of listing. Listed issuer may only allot, issue or grant shares carrying WVR with the prior approval of the Exchange. If the number of its shares in issue is reduced, the WVR beneficiaries must reduce their WVR in the issuer proportionately. The terms of a class of its shares carrying WVR must not be changed to increase the WVR attached to that class after listing.

IV. Restriction on Transfer of Shares with WVR

WVR attached to a beneficiary’s shares must cease upon transfer to another person of the beneficial ownership of, or economic interest in, those shares or the control over the voting rights attached to them.

V. Disclosure Requirements

The issue is required to disclose in its listing documents and interim and annual reports the WVR beneficiaries, the impact of a potential conversion of WVR shares into ordinary shares on its share capital, and all the circumstances in which the WVR attached to its shares will cease.

3) Secondary Listing

I. Eligibility and Suitability Test

Chapter 19C to the Main Board Listing Rules is introduced to implement the proposal of relaxing the rules on secondary listing. A Qualifying Issuer under Chapter 19C must have a track record of good regulatory compliance of at least two full financial years on a Qualifying Exchange. A Non-Greater China Issuer without a WVR structure must have an expected market capitalisation at the time of its secondary listing of at least HK$10 billion. All other Qualifying Issuers must satisfy one of the following:

a) a market capitalisation of at least HK$40 billion at the time of listing; or

b) a market capitalisation of at least HK$10 billion at the time of listing and revenue of at least HK$1 billion for the most recent audited financial year.

The Exchange will consider a Non-Greater China Issuer or a Grandfathered Greater China Issuer seeking a secondary listing provided the following shareholder protection standards are satisfied. They must be complied with as an ongoing condition of their listing.

a) a super-majority vote of the Qualifying Issuer’s members in general meeting is required to approve changes to the rights attached to any class of shares of the Qualifying Issuer; changes to the Qualifying Issuer’s constitutional documents, however framed; and a voluntary winding-up of the Qualifying Issuer;

b) any alteration to the Qualifying Issuer’s constitutional document to increase an existing member’s liability to the company must be agreed by such a member in writing;

c) the appointment, removal and remuneration of auditors must be approved by a majority of the Qualifying Issuer’s members or other body that is independent of the issuer’s board of directors;

d) the Qualifying Issuer must hold a general meeting each year as its annual general meeting;

e) the Qualifying Issuer must give its members reasonable written notice of its general meetings;

f) members must have the right to (1) speak at a general meeting; and (2) vote at a general meeting except where a member is required, by these rules, to abstain from voting to approve the matter under consideration;

g) members holding a minority stake in the Qualifying Issuer’s total number of issued shares must be able to convene an extraordinary general meeting and add resolutions to a meeting agenda. The minimum stake required to do so must not be higher than 10% of the voting rights, on a one vote per share basis, in the share capital of the of the Qualifying Issuer; and

h) HKSCC must be entitled to appoint proxies or corporate representatives to attend the Qualifying Issuer’s general meetings and creditors meetings and those proxies/ corporate representatives must enjoy rights comparable to the rights of other shareholders, including the right to speak and vote.

II. Disclosure Requirements

A Qualifying Issuer must prominently disclose in its listing documents provisions in its constitutional documents concerning the issuer’s governance that are unusual compared with normal practices in Hong Kong and are specific to the issuer rather than a consequence of the laws and regulations to which the issuer is subject, and how such provisions affect its members’ rights.

Conclusions

The new chapters for the expansion of the listing regime took effect on April 30, 2018.

The expansions of the listing regimes for companies from emerging and innovative sectors listing on the Main Board is a breakthrough from a regulatory perspective and an important step fostering development of the capital markets. These measures will undoubtedly strengthen Hong Kong’s stronghold as a world-leading fundraising venue and a leading international financial centre. 

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Partner, Jones Day

Charles Chau advises on M&A, capital markets (including listings and public offerings), securities regulatory compliance, joint ventures, and other commercial transactions across Hong Kong, mainland China, and the Asia-Pacific region. Over the past 19 years, he has obtained extensive experience in a wide variety of industry sectors, including banking and financial services, health care, biotech, retail, real estate, and manufacturing. He has also represented Chinese companies on their outbound acquisitions in the United States and Europe.

Prior to joining Jones Day in 2017, Charles acted for China CNR Corporation Limited in its US$26 billion merger with CSR Corporation Limited, which was the first merger of two companies listed in both Hong Kong and Shanghai. In addition, he worked on many IPOs and securities placement transactions, including the IPOs of Sinopharm Group, China CNR Corporation, GenScript Biotech Corporation, Guodian Technology & Environment Group, China South City, BBI Life Sciences, and the A+H rights issue of China CITIC Bank.

He is currently working a number of capital markets transactions involving “new economy companies”.