The Hong Kong Stock Exchange (HKSE) has issued its latest proposal to weaken corporate governance standards in order to attract Chinese listings that have gone to the US. The US has won most of the listings of China's privately held companies, including bellwethers Alibaba, Baidu and Sina.
There are several reasons for that, including the fact that the US permits weaker governance than Hong Kong or China, and that fees for investment bankers are considerably higher with US listings. The weaker governance rules led to the NYSE winning the Alibaba (NYSE:BABA) listing over the HKSE. Hong Kong faced the possibility it would not win another major IPO from China because most Chinese founders want a controlling vote, even when they no longer hold a majority of the shares.
Much to the consternation of corporate governance advocates, Hong Kong proposes allowing control structures (called weighted voting rights - WVR). Shareholder advocates in the US have opposed the proliferation of these structures in technology companies. Hong Kong is also proposing to relax other listing standards related to profitability.
The proposed rules essentially allow unicorns to list in Hong Kong with control structures. More flexible rules are proposed for biotech issuers.
In addition, the path is being cleared to allow overseas listed companies to seek secondary or main listings in Hong Kong after two years of compliance on a foreign exchange. Restrictions apply to prevent regulatory arbitrage, where a company lists overseas first in an attempt to circumvent tougher Hong Kong listing standards.
Here is an excellent summary of the proposal prepared by PwC:
HKEX proposed to:
1.a) permit listings of biotech issuers that do not meet any of the financial eligibility tests of the Main Board;
2.b) permit listings of companies with weighted voting right (WVR) structures; and
3.c) establish a new concessionary secondary listing route for Greater China and international companies that wish to secondary list in Hong Kong.
Key listing requirements for biotech issuers:
- At least one core product beyond the concept stage
- Primarily engaged in research and development of its core product(s) for a minimum of 12 months
- Have received meaningful investment from at least one sophisticated investor at least 6 months before listing
- Minimum expected market capitalisation of HK$1.5 billion
- In its current line of business for at least 2 years under substantially the same management
- Meet enhanced working capital requirements (125% of the issuer's costs for at least next 12 months)
Key listing requirements for WVR issuers:
- Innovative companies with high business growth
- WVR beneficiaries have been materially responsible for the growth of the business and are directors of the issuer
- Have received meaningful investment from at least one sophisticated investor, and such investor has to retain at least 50% of the investment at the time of listing for a period of at least 6 months post- IPO
- Minimum expected market capitalisation of HK$40 billion, OR minimum expected market capitalisation of HK$10 billion and minimum revenue of HK$1 billion in the most recent audited financial year
- Voting powers of WVR shares are no more than 10 times of the voting power of ordinary shares
- Beneficiaries of WVR collectively own a minimum of at least 10% and a maximum of not more than 50% of the underlying economic interest in the applicant's total issued share capital at the time of listing
- Non-WVR shareholders have at least 10% of voting power
- Have appropriate WVR safeguards (e.g. the WVRs will cease upon cessation of directorship, death, incapacity or no longer meeting the requirements of a director, or transfer of the shares, and key matters are decided on a one-share one-vote basis)
Qualifying criteria for new concessionary secondary listing route:
- Innovative companies
- Listed on NYSE, NASDAQ or premium listing segment of LSE's Main Market ("Qualifying Exchange")
- At least 2 years' good compliance record on Qualifying Exchange
- Minimum expected market capitalisation of HK$10 billion (and minimum revenue of HK$1 billion in the most recent audited financial year for WVR companies/ Greater China companies with minimum expected market capitalisation below HK$40 billion)
The HKSE requires companies to prepare financial statements using Hong Kong Financial Reporting Standards (HKFRS), which are essentially equivalent to International Financial Reporting Standards. I presume that any company seeking a direct listing in Hong Kong will be required to prepare financial statements under HKFRS. It is not clear to me from the document whether US listed companies seeking secondary Hong Kong listings will be required to restate their financial statements from US GAAP to HKFRS. While I believe that there is little difference between HKFRS and US GAAP for most of these companies, it will still be a considerable effort to restate these financial statements.