Bolstered by a solid fourth quarter, 2013 was a stronger year than 2012 for Hong Kong in terms of new listings. In 2013, the Stock Exchange of Hong Kong Limited (the HKEx) reported 110 new listings raising $21.5 billion, compared to 64 new listings raising $11.6 billion in 2012.
Despite the significant improvement, the flow of new listings remains sluggish compared to just a few years ago. This includes fewer listings by “overseas” companies (i.e., companies incorporated outside one of the four “recognized” jurisdictions of Hong Kong, China, the Cayman Islands and Bermuda), which the HKEx is eager to attract, particularly mature companies from developed markets such as Europe and North America.
Key Rule and Policy Changes Affecting Overseas Companies
A new set of rules altering the listing process came into effect on October 31, 2013 (the 2013 Rule Changes), which are likely to be of interest to overseas companies that are considering listing their equity in Hong Kong. While the principal focus of these rules was on the role of sponsors (i.e., investment banks that sponsor a company’s listing application), the rule changes significantly impact the listing process, including listings by overseas companies.1 In adopting these rules, the HKEx included two exceptions that seem intended to ensure that the rule changes do not drive away overseas companies that otherwise might list in Hong Kong. Moreover, on September 27, 2013, the HKEx and the Securities and Futures Commission of Hong Kong (the SFC) issued a joint policy statement on the listing of overseas companies (the 2013 Joint Policy Statement), which sets forth a number of changes to key rules affecting overseas companies that are intended to increase the appeal of listing in Hong Kong.2 These changes also appear to have been designed with a view to simplifying the process of obtaining a secondary listing in Hong Kong (i.e., a listing of the equity of a company that is listed on another acceptable stock exchange and where a majority of the trading continues to take place on the other stock exchange).
Relief From Publication of Application Proof. One of the major 2013 Rule Changes is that a draft of the listing document (with certain information about the offering omitted) will need to be published on the HKEx’s website when the listing application is filed. Unlike the other 2013 Rule Changes, this requirement will apply only to listing applications submitted on or after April 1, 2014. The application is required to be substantially complete, which the HKEx believes will result in more care being put into initial filings, and, coupled with reforms intended to streamline the vetting process, is expected to result in a quicker and less cumbersome HKEx application and vetting process.
The HKEx included two key exceptions to the requirement that an application be published at the time it is filed. First, applicants that have been listed on a recognized overseas stock exchange for at least five years and which meet a market capitalization test specified by the HKEx (currently $400 million) at the time of the application need not publish their application proof and may instead elect to file confidentially. Second, if requested, the HKEx or the SFC has the authority to waive or modify the publication requirements where the listed company is being spun off from a parent company listed on an overseas exchange.
Simplification of Shareholder Protection Requirements. Hong Kong’s listing rules require that, as a condition to listing, an applicant incorporated outside one of the four recognized jurisdictions must satisfy the HKEx and the SFC that the jurisdiction in which it is established has shareholder protections that are at least equivalent to those afforded to shareholders of a company incorporated in Hong Kong. Prior to the publication of the 2013 Joint Policy Statement, listing of such companies was governed by a 2007 joint policy statement.
Under the 2007 joint policy statement, companies not incorporated in one of the four recognized jurisdictions were required to prepare a detailed table of shareholder protection items, with submissions often running to 50 pages or more. Under the 2013 Joint Policy Statement, this table has been replaced with a much shorter list of 11 items.
The HKEx also has begun to publish “country guides” for approved jurisdictions to help companies incorporated in an acceptable jurisdiction satisfy shareholder protection requirements. The publication of country guides replaces the prior practice of publishing listing decisions relating to the approval of companies in particular jurisdictions.
Financial Statements. The 2013 Joint Policy Statement provides clarity to the use of financial statements prepared in accordance with standards other than International Financial Reporting Standards (IFRS) and Hong Kong Financial Reporting Standards (HKFRS). It lists the other financial reporting and auditing standards that previously have been accepted by the HKEx, as well as the additional disclosure that will be required where the financial reporting standards differ materially from HKFRS/IFRS. Generally, an accounting firm not qualified in Hong Kong may only be used if it (i) has an international name and reputation, (ii) is a member of a recognized body of accountants and (iii) is subject to independent oversight by a regulatory body of a jurisdiction that is a signatory to the International Organisation of Securities Commissions’ Multilateral Memorandum of Understanding Concerning Consultation and Cooperation and the Exchange of Information.
Waivers. It is customary for companies seeking a secondary listing on the HKEx to obtain from the HKEx waivers of listing rules needed to harmonize the company’s existing practices with the HKEx requirements. The negotiation of these waivers often has been a time-consuming and burdensome process. Following the 2013 Joint Policy Statement, a number of these waivers will be granted automatically to companies that meet specified criteria. These include waivers of certain corporate governance requirements, as well as waivers of Hong Kong’s requirements with respect to disclosure and disinterested shareholder approval of related-party transactions, listing of subsidiaries and share option schemes. To be eligible for these automatic waivers, a company must, among other things, have a market capitalization in excess of $400 million, be listed on one of certain recognized stock exchanges, and have an acceptable track record of legal and regulatory compliance. Companies listed on other exchanges may still obtain a secondary listing, but must first demonstrate that their primary exchange meets Hong Kong’s shareholder protection standards. The HKEx also has formally reiterated its long-standing policy that companies with a “center of gravity” in Greater China are not eligible for secondary listings.
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It is too soon to tell whether the various rule and policy changes adopted in 2013 will have an appreciable impact on overseas and secondary listings on the HKEx. However, it is clear that Hong Kong’s regulators recognize the importance of attracting these types of companies and are prepared to take meaningful steps to ensure that Hong Kong remains a competitive listing venue for companies whose businesses lie outside Greater China.
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1 For a detailed discussion, see the Skadden publication “Outline of the Hong Kong Stock Exchange Rule Changes to Complement New Sponsor Regulations” (July 25, 2013), available at https://www.skadden.com/insights/outline-hong-kong-stock-exchange-rule-changes-complement-new-sponsor-regulations.
2 For a detailed discussion, see the Skadden publication “HKEx and SFC Release New Joint Policy Statement on Listing of Overseas Companies in Hong Kong” (Oct. 17, 2013), available at https://www.skadden.com/insights/hong-kong-stock-exchange-and-sfc-release-new-joint-policy-statement.
This memorandum is provided by Skadden, Arps, Slate, Meagher & Flom LLP and its affiliates for educational and informational purposes only and is not intended and should not be construed as legal advice. This memorandum is considered advertising under applicable state laws.
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*This article appeared in the firm's sixth annual edition of Insights on January 16, 2014.