HKEx proposed to establish a New Board

Abstract:According to the statistics provided by HKEx (Hong Kong Exchanges and Clearing Limited), most companies listed in Hong Kong are from the financial and property sectors accounting for 44% of the total market capitalization of the market. In contrast, companies from New Economy industries that have listed on HKEx in the past ten years make up only 3% of total market capitalization, as compared with 59% and 44% from NASDAQ and NYSE respectively.It is thus clear that the existing listing framework of HKEx could not provide financing for rapid-growing new economy companies.

In order to meet the involving needs of investors and issuers and retain its leading position, on June 16, 2017, HKEX proposed to set up a New Board to allow companies with a dual-class share structures to list to attract new economy companies with growth potential but not qualified to be listed in stock markets in mainland China.The International Investment Division of Docvit Law Firm hereby sort out and make analysis about the “New Board” proposal in details.

On June 16, 2017, HKEX published two consultation papers seeking public feedback on major reform of listing rules, “New Board Concept Paper” and “Review of the Growth Enterprise Market (GEM) and Changes to the GEM and Main Board Listing Rules” and advanced various sets of proposals including allowing companies with a dual-class share structures to be listed on the “New Board” to broaden the capital market access in Hong Kong and strengthen the overall listing regime of Hong Kong. The establishment of New Board will accommodate three types of companies: a) Pre-profit companies; b) Companies with non-standard governance features; and c) Mainland Chinese companies that wish to secondarily list in Hong Kong. Below are some detailed interpretations:

A. Positioning of the Segments

a. Main Board: positioned as “premier board” with a proposed increase of minimum market capitalization from HK$ 200 million to HK$ 500 million , along with existing financial and track record of at least three years;

b. GEM (Growth Enterprise Market):serve the needs of established small and mid-sized issuers that meet the requisite financial and track record criteria, and which desire to attract retail as well as professional investors;

c. New Board:intended to accommodate needs of New Economy companies and start-up enterprises, fill identified gaps in Hong Kong’s listing framework, while maintaining appropriate regulatory standards and shareholder protection standards. The New Board is proposed to allow companies with unconventional governance structure (mainly referred to those with a dual class share structure), pre-profit companies, as well as mainland companies that have already listed elsewhere to list in Hong Kong.

(i) New Board PREMIUM, targeted at companies that meet the existing financial and track record requirements of the Main Board, but that are currently ineligible to list in Hong Kong because they have non-standard governance structures.

(ii) New Board Pro, targeted at earlier-stage companies that do not meet the financial or track record criteria for GEM or the main board.

B. Criterion of New Board PREMIUM and New Board Pro

a. New Board PREMIUM:

(i) Open to both retail and professional investors, equity securities must be held by at least 300 holders;

(ii) Quantitative entry requirements equivalent to those of the Main Board with a more stringent approach to initial listing requirements, including a requirement that applicants meet one of three current financial eligibility tests: (a) the Profit Test; (b) the Market Capitalization/ Revenue/ Cash Flow Test; and (c) the Market Capitalization/ Revenue Test;

(iii) Regulatory cooperation requirement under the 2013 JPS would continue to apply but listings by companies listed on Recognized US Exchanges  (NYSE and NASDAQ) will be exempted from having to provide equivalent shareholder protection standards;

(iv) VVR structures permitted;

(v) Listing to be cancelled if it has been suspended for a continuous period of 6 months.

b. New Board PRO:

(i) Open to professional investors only equity securities must be held by at least 100 holders;

(ii) No track record or minimum financial criteria, subject to a minimum market capitalization at the time of listing of HK$ 200 million;

(iii) Equivalent shareholder protection standards not required;

(iv) WVR structures permitted;

(v) Listing to be cancelled immediately if it has been suspended for a continuous period of 90 calendar days.

C. What is New Economy Company?

According to the Concept Paper that proposed to establish the New Board, the establishment of the New Board is targeted to attract innovative and high-growth companies, namely so-called New Economy Company. New Economy companies could be found in the industries of Biotechnology, Health Care Technology, Internet & Direct Marketing Retail, Internet Software & Services, IT Services, Software, and Hardware& Peripherals. Such fast-growing companies normally would not have a long track record of profitability and need to raise funds through IPOs or explore R&D and profit models through subsequent capital market financing.

The principle of defining new economy is that the profiting and expansion of a company is through unconventional technology, business model or other factors. In the new economy, the key drive of growth is non-monetary factor. Considering that such companies normally do not have earnings, profit or cash flow, HKEx planned to adopt other listing criterion for the New Board instead of current financial indicators.

The Exchange aims to develop a set of guidelines for the definition of what constitutes New Economy for the purposes of listing on the New Board. In light of the evolving nature of technology and the interactive relationship between the traditional and new economic sectors, no fixed definition is proposed and the Listing Committee will retain the ultimate discretion to determine the listing eligibility for the New Board on a “principle-based” approach. The key principle is 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.

D. Key Characteristic of Hong Kong’s New Board is allowing the Dual Class Share Structure

After venture capital funding rounds during start-up phase, the equities of founders of hi-tech enterprises are continuously diluted. To avoid the loss of control of the enterprises that affects the influential power of the founders on the business capacities and sustainable earnings, the standard practice in the US capital market is to apply WVR (Weighed Voting Rights) structures to enable the founders to set varied voting right, meaning that each share held by the founder may be equivalent to N shares held by the investors.Thus, despite that the investors have voting rights disproportionate to their economic interests in the company, they may accept such arrangements with confidence in the long-term development of the enterprises.

In view of the high valuation that several Chinese internet enterprises received in the US stock markets, HKEx explicitly stated that the establishment of the New Board was intended to “attract mainland companies that have already listed elsewhere to be listed in Hong Kong”, which means Chinese internet companies that choose to get listed in the US due to Hong Kong’s de facto ban on listings of companies with unconventional governance features etc. could reconsider to be listed in Hong Kong for more diverse investor structure.

E. Legal Services Provided by Docvit Law Firm

As Chinese lawyers of pre-IPO companies, we could provide full package of legal services throughout difference phases:

a. Phase 1

(i) Strategy Design:

After the “Provisions on Mergers and Acquisitions of a Domestic Enterprise by Foreign Investors” (Decree No. 10) took effect on Sept. 8, 2006, rules on overseas listing of domestic enterprises (including IPO and back-door listing) have changed significantly. We will plan domestic and overseas reorganization strategies pursuant to the conditions of the pre-IPO companies, handle a series of legal issues and design and establish lawful corporate structure as preparation prior to IPO.

b. Phase 2

(i) Domestic Reorganization

Implement the reorganization of pre-IPO domestic enterprises in accordance with its actual conditions, divest non-operational businesses and assets, reorganize core businesses and assets, solve existing legal issues of the companies, such as taxation, corporate governance, land, labor, environment etc. Reorganize the organizational structure of domestic companies to fit for overseas listing.

(ii) Overseas Reorganization

In conformity with the requirements of the “Notice on Relevant issues of Foreign Exchange Management on Financing and Round-trip Capital Investment that Domestic Residents Made via SPVs” and “Provisions on Mergers and Acquisitions of a Domestic Enterprise by Foreign Investors” (Decree No. 10) etc.，lawfully implement overseas reorganization, including assisting the establishment of overseas SPVs (Special Purpose Vehicles), implement the reorganization process of exercising control over domestic companies via overseas SPVS to build the domestic company entity that complies with the takeover criterion.

c. Phase 3

(i) IPO

After the completion of domestic and overseas reorganization, schedule the listing on HKEx as per the arrangement of financial consultant and investment bank. We could assist the drafting and reviewing of relevant legal documents, issue the Legal Opinion Letter and finally assist the pre-IPO companies to complete the listing in overseas stock markets.

(ii) Post-IPO Services

After successful completion of IPO, we could provide day-to-day legal services according to the needs of the companies. We could also provide legal services on re-financing and domestic takeover etc.

F. Conclusion

The proposal on listing rules reform will help the investors better distinguish the positioning of Main Board, GEM, New Board PREMIUM and New Board Pro and assist the investors to understand the risks and corporate operation encountered at the early stage of investment.

往期文章

review past issues