Tech innovators may be swayed by Hong Kong weighted voting rights reform

The proposals to update listing with 'weighted voting rights' structure (WVR) and grant certain concessions on current secondary listings regime seek to build on reforms delivered two years ago which have already had a positive impact on listings in Hong Kong in the face of stiff international competition.

WVR refers to the voting power attached to a share of a particular class that is greater or superior to the voting power attached to an ordinary share or other governance right or arrangement disproportionate to the beneficiary’s economic interest in the equity securities of the issuer.

Previous barriers to listing and future reform

In 2014, Hong Kong lost Alibaba Group's record breaking initial public offering (IPO) to New York as the Rules governing the listing of securities on The Stock Exchange of Hong Kong Limited (listing rules) used to prohibit companies with WVR from listing. After a long debate, a new regime was introduced on 30 April 2018 to attract innovative companies to list in Hong Kong.

Chapter 8A of the listing rules allows companies with WVR structures to list in Hong Kong. Chapter 19C of those rules allow secondary listings of innovative companies from 'Greater China' and other innovative companies with a primary listing on overseas exchanges such as Nasdaq Stock Market (NASDAQ).

Since those changes were implemented, a number of businesses have been encouraged to list in Hong Kong. This includes Xiaomi, Meituan and Alibaba Group, with the total valuation of those businesses more than HK$175 billion (£23bn). The decision by Alibaba Group to list on the Hong Kong Stock Exchange (SEHK) in November 2019 was a further important marker in the development of the SEHK, with further Hong Kong listings by other innovative companies from China and the rest of the world tipped.

Two years on since the launch of the ground-breaking listing rules revamp, the SEHK has carried out a consultation to seek the market's view on proposals (including those to allow corporate entities to benefit from WVR) that would widen the WVR in a bid to stay competitive and to diversify the market.

Primary listings of WVR companies

Suitability criteria

Under Chapter 8A of the listing rules and in accordance with guidance published by the SEHK, WVR applicants must demonstrate to the SEHK that they are suitable for listing with a WVR structure. Though the SEHK has a high degree of discretion when assessing suitability, applicants must broadly satisfy the following suitability criteria:

• The SEHK will only consider applications for listing with WVR structure from new applicants.
• A WVR applicant must be an "innovative" company. There are four potential measures of 'innovative', and a WVR applicant must satisfy at least one of them. First, their success must be attributable to the application, to the company’s core business, of new technologies, innovations and/or a new business model, which also serves to differentiate the company from existing players. Second, research and development is a significant contributor of its expected value and constitutes a major activity and expense. Third, its success is attributable to its unique features or intellectual property. Lastly, the applicant has an outsized market capitalisation or intangible asset value relative to its tangible asset value.
• The market capitalisation of the company at the time of listing must be at least HK$40bn ($5.2bn), or at least HK$10bn ($1.3bn) in cases where its revenue was equal to or more than HK$1bn ($130m) for the most recent audited financial year.
• The WVR applicant must also demonstrate a track record of high business growth which is expected to continue.
• Each WVR beneficiary must have been materially responsible for the growth of the business.
• Each WVR beneficiary must be an individual who: has an active executive role within the business; has contributed materially to the ongoing growth of the business; and will be a director of the issuer at the time of listing.
• WVR beneficiaries must beneficially own collectively at least 10% of the underlying economic interest in the applicant’s total issued share capital at the time of listing.
• The WVR applicant must have previously received meaningful third party investment from at least one sophisticated investor which must remain at the time of listing and will be subject to a six month lock-up of 50% of its investment.

How non-WVR shareholders are protected

A number of protections are built into the listing rules to protect the rights of non-WVR shareholders:

• WVR must be attached to a class of shares which must be unlisted.
• Voting power of WVR shares cannot be greater than 10 times the voting power of non-WVR shares.
• Non-WVR holders must hold at least 10% of votes.
• Some resolutions require voting on a 'one vote per share' basis. This includes resolutions on changes to constitutional documents, variation of rights attached to any class of shares, the appointment or removal of an independent non-executive director (INED), the appointment or removal of auditors, and voluntary winding-up.
• The WVR issuer must not increase the proportion of WVR shares after listing.
• The WVR issuer must not change the terms of a class of WVR shares to increase WVR attached to that class.
• Non-WVR shareholders must be able to convene an extraordinary general meeting and add resolutions to the meeting agenda. The minimum stake required to do so must not be greater than 10% of the voting rights on a one vote per share basis in the share capital of the listed issuer.
• A beneficiary’s WVR in a listed issuer must cease if, at any time after listing, the beneficiary dies; is no longer a member of the issuer’s board of directors; or deemed by the SEHK to be incapacitated for the purpose of performing his or her duties as a director or to no longer meet the requirements of a director.
• The 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.

Enhanced disclosure and corporate governance requirements

A series of enhanced disclosure and corporate governance requirements apply in relation to primary listings of WVR companies:

• The stock name must end with the marker 'W' as an indicator of issuers with WVR structures.
• The WVR issuer must establish a nomination committee chaired by an INED.
• The WVR issuer must establish a corporate governance committee comprised entirely of INEDs.
• The WVR issuer must appoint a compliance adviser on a permanent basis.
• The WVR applicant must include a prominent warning statement on the front page of all listing documents, periodic financial reports, circulars, notifications and announcements. The interim and annual reports should also disclose all the required information related to the WVR structure and WVR beneficiaries.

Secondary listings of qualifying issuers

Basic requirements and automatic waivers

Overseas issuers with a "centre of gravity" in China used to be prevented from applying for secondary listing on the SEHK. The introduction of a new Chapter 19C to the listing rules made major changes, creating a new concessionary route to secondary listing on the SEHK for companies from emerging and innovative sectors primarily listed on a 'qualifying exchange'. The changes have allowed those companies to secondary list in Hong Kong without having to change their existing WVR structures.

Qualifying issuers seeking a secondary listing under Chapter 19C are automatically granted waivers for certain listing rules requirements, which include requirements regarding connected transactions, notifiable transactions and the Corporate Governance Code. However, a number of basic requirements for secondary listing still apply:

• The issuer must be "innovative". This is determined by using the same measures as listed above for primary listings of WVR companies.
• The issuer must be primarily listed on a 'qualifying exchange', that being either the NASDAQ, The New York Stock Exchange, or the Main Market of the London Stock Exchange plc – and belong to the 'Premium Listing' segment on that market.
• For WVR issuers and/or Greater China issuers, market capitalisation at secondary listing must be at least HK$40bn ($5.2bn) or, at least HK$10bn ($1.3bn) in cases where their revenue was at least HK$1bn ($130m) for the most recent audited financial year. For non-Greater China issuers without WVR structure, market capitalisation at secondary listing must be at least HK$10bn ($1.3bn). A 'Greater China' issuer is defined as a qualifying issuer with a “centre of gravity” in Greater China.
• The issuer must have a track record of good regulatory compliance for at least two financial years.

The concessions applied to SEHK secondary listings

Different concessions apply to secondary listings depending on the type of issuer - whether it is a Greater China issuer and, if so, whether it is a 'grandfathered' or 'non-grandfathered' Greater China issuer.