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27 Feb 2020

Stock Exchange consults on corporate weighted voting rights holders

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When the Listing Rules were amended in April 2018 to allow issuers with weighted voting rights to list on the Hong Kong Stock Exchange, only individuals, who are directors of the issuer, were allowed to hold such rights. The Stock Exchange said that it intended to launch a consultation in relation to allowing corporations to hold weighted voting rights in July 2018. However, this was ultimately deferred but the Stock Exchange has now published its proposals. This note summarises the key proposals.

In this note, we refer to a corporation holding weighted voting rights as ‘corporate WVR-holder’ and an issuer that has shares with weighted voting rights as ‘WVR issuer’.

Key proposals

Corporations will be allowed to hold weighted voting rights. However, they will be subject to some stringent requirements, both in relation to their own qualifications and their relationship with each WVR issuer.

  • Eligibility requirements to be a corporate WVR holder
    • Nature and size: A corporate-WVR-holder must be a company listed on either the Hong Kong Stock Exchange, the New York Stock Exchange, NASDAQ or the London Stock Exchange (with a premium listing on the Main Market), with a minimum market capitalisation of HK$200 billion (or equivalent).The weighted voting rights attached to a corporate WVR holder’s WVR-shares in a WVR-issuer will lapse if such corporate-WVR-holder ceases to be listed on one of these stock exchanges.
    • Experience in emerging and innovative sectors: A corporate WVR holder must either itself be an innovative company or otherwise have a track record of investment in, and contributions to, innovative companies.
    • Position in group:To allow corporate WVR holders some flexibility as to their group structure, the Stock Exchange allows the actual holder of the WVR shares to be a wholly owned subsidiary of the entity that satisfies the eligibility criteria.However, the exercise of the weighted voting rights must be directed by the eligible entity.
  • Relationship between corporate WVR holder and WVR issuer
    • Economic interest in the WVR issuer:
      • Throughout at least two financial years prior to the issuer’s listing application, the prospective corporate WVR holder must have held at least 10% of the WVR issuer’s shares in issue.
      • At the time of listing of the WVR issuer and on an ongoing basis, the corporate WVR holder must hold at least 30% of the WVR’s issuer’s shares in issue
      • A prospective corporate WVR holder may increase its shareholding from 10% to 30% prior to listing of the WVR issuer by making pre-IPO investments (subject to rules and other requirements governing pre-IPO investments).
      • If a corporate WVR holder fails to maintain at least 30% economic interest in the WVR issuer, the weighted voting rights attached to its WVR shares will lapse.
      • A corporate WVR holder may bring its shareholding back up to 30% by subscribing for new non-weighted-voting- rights-shares without shareholder approval for the issue of such shares, as long as the sole purpose of such issue is to bring the corporate WVR holder’s shareholding back up to 30%, and the terms of issue are no less favourable to the WVR issuer than the issue which initially took the corporate WVR holder’s shareholding below 30%.

    Contribution to the issuer: The corporate WVR holder must have been materially involved in the management or business of the WVR issuer for at least two years prior to listing. Additionally, it must be demonstrated to the Stock Exchange that the synergistic benefits and the strategy and vision of the corporate WVR holder as the leader of the ecosystem of businesses of which the WVR issuer is a member are difficult for the issuer to replicate on its own or with other business partners. The Stock Exchange’s consultation paper sets out some specific features that must be demonstrated that we will not repeat in this note. We expect that the Stock Exchange will issue guidance letters to elaborate on these. One thing to note though is that if these features are lost for more than 12 months, the weighted voting rights attached to the corporate WVR holder’s WVR shares will lapse.

    • Size of issuer relative to corporate WVR holder: A WVR issuer must not represent more than 30% of the corporate WVR holder in terms of market capitalisation at the time of listing.
    • Corporate representative: At least one executive director of the WVR issuer must be a director of the corporate WVR holder who, in such capacity, acts as a representative of the corporate WVR holder.
    • Maximum votes per share: WVR shares held by corporate WVR-holders may only carry a maximum of 5 votes per share (less than the 10 votes per shares allowed for WVR shares held by individual WVR holders).
    • Sunset:The weighted voting rights of a corporate WVR holder’s shares will lapse after 10 years, renewable for 5 year terms with independent shareholder approval.

Conclusions

The proposal to allow corporate WVR holders forms part of the Stock Exchange’s efforts to attract innovative companies to choose Hong Kong as their listing venue over other stock exchanges. The consultation closes on 1 May 2020. We expect that there will likely be some pushback from the market on some of the more stringent restrictions, and it remains to be seen if modifications will be made to the proposals as implemented.

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