Mainland Chinese tech and other innovative companies with a primary listing on the New York Stock Exchange (NYSE), Nasdaq or the premium segment of the London Stock Exchange’s Main Market (each a Qualifying Exchange) can secondary list on the Hong Kong Stock Exchange (HKEx) under Chapter 19C of the Main Board Listing Rules.
Chapter 19C was added to HKEx’s Listing Rules as part of major reforms implemented on 30 April 2018 aimed at attracting China’s high growth tech companies to list in Hong Kong. Newly added Chapter 8A allows the listing of tech and other innovative companies with weighted voting rights (WVR) structures previously barred from listing by HKEx’s “one share one vote principle” which had previously listed on the NYSE or Nasdaq where companies with WVR structures were allowed to list. Chapter 18A allowed the listing of pre-revenue biotech companies unable to meet the Listing Rules’ financial tests and is aimed at allowing HKEx to overtake Nasdaq as the primary offshore listing venue for Chinese biotech companies.
Prior to the 2018 reforms, companies with their “centre of gravity” in Greater China were prevented from secondary listing on HKEx by the SFC/HKEx Joint Statement on the Listing of Overseas Companies. Allowing secondary listings of innovative Mainland Chinese companies primary listed in New York or London is aimed at luring some of China’s biggest tech companies which listed in New York to secondary list in Hong Kong. The 2014 listing of Alibaba Group on NYSE in the world’s largest ever IPO was the impetus for the reforms allowing WVR-structured companies to list in Hong Kong – HKEx had been Alibaba Group’s first choice listing venue but this was prevented by its WVR structure. Chapter 19C made Alibaba’s secondary listing in Hong Kong possible. The company’s secondary listing on HKEx debuted on 26 November 2019 and raised US$12.9 billion (HK$101.2 billion) in the world’s largest IPO of 2019. With the listing, HKEx has once again climbed to the top of the IPO fund-raising ranking. Alibaba’s rationale for its Hong Kong secondary listing is to enable Mainland Chinese investors to buy the stock.[1] China’s capital controls make it difficult for Chinese investors who do not already have money offshore to buy New York-listed shares. A Hong Kong secondary listing enables Mainland Chinese investors who cannot invest in Chinese companies listed in New York to buy their HKEx-listed shares through the “Stock Connect” channels linking HKEx with the Shanghai and Shenzhen exchanges. Chinese onshore funds and institutional investors are reported to have been some of the biggest investors in the secondary listing.[2]
The focus of this note is secondary listings of Mainland Chinese companies under Chapter 19C. It should be noted, however, that Chapter 19C applies to all overseas companies and Hong Kong companies with a primary listing on a Qualifying Exchange (Qualifying Issuers).
A Greater China Issuer is a Qualifying Issuer with its centre of gravity in Greater China. HKEx considers the following non-exhaustive factors in determining whether a Qualifying Issuer’s centre of gravity is in Greater China:
whether the issuer is listed in Greater China;
the issuer’s jurisdiction of incorporation;
the issuer’s history;
where the issuer is headquartered;
the issuer’s place of central management and control;
where the issuer’s main business operations and assets are located;
the location of the issuer’s corporate and tax registration; and
the nationality or country of residence of the issuer’s management and controlling shareholder.
Grandfathered/Non-Grandfathered Greater China Issuer
Grandfathered Greater China Issuers are companies which primary listed on a Qualifying Exchange on or before 15 December 2017 (the date the Chapter 19C proposals were finalised). Non-Grandfathered Greater China Issuers are Greater China Issuers that primary listed on a Qualifying Exchange after 15 December 2017.
The purpose of the distinction was to prevent companies from listing on a Qualifying Exchange followed by a secondary listing in Hong Kong as a means to circumvent Hong Kong’s primary listing requirements.
A Qualifying Issuer seeking a secondary listing must be eligible and suitable for listing.
Rules 8A.04 to 8A.06 (basic conditions for listing and qualifications for listing with a WVR Structure) do not apply to a Qualifying Issuer seeking a secondary listing under Chapter 19C.
According to HKEx Guidance Letter 94-18 “Suitability for Secondary Listing as a Qualifying Issuer under Chapter 19C” (the Secondary Listing Guidance Letter), the HKEx will normally regard a Qualifying Issuer as suitable for secondary listing where it is an “innovative company”. That is, a company with two or more of the following characteristics:
its success is attributable to the application of new technologies, innovations, and/or a new business model to its core business, which differentiates the applicant from existing players;
research and development (R&D) significantly contributes to its expected value and comprises a major activity and expense;
its success is attributable to its unique features or intellectual property; and/or
it has an outsized market capitalisation/intangible asset value relative to its tangible asset value.
HKEx acknowledges that what is considered “innovative” depends on the state of the relevant industry(ies) and market(s), which may change as technology, industries and markets develop and change. A new and “innovative” business model may cease to be “innovative” when adopted by numerous industry players over time, so that companies with the same business may not necessarily qualify for listing in the future. The superficial application of new technology to an otherwise conventional business will not satisfy the suitability criteria. For example, where a retail business merely develops an online sales platform, this would not be suitable for a secondary listing unless it demonstrates other distinctive features.
Track Record Requirement
A Qualifying Issuer must have a track record of good regulatory compliance of at least two full financial years on a Qualifying Exchange.
Market Capitalisation Requirement for Chinese Companies
Greater China Issuers must have:
a market capitalisationof HK$40 billion at the time of listing; or
a market capitalisationof HK$10 billion at the time of listing and at least HK$1 billion of revenue in its most recent audited financial year.
Equivalent Standardsof Shareholder Protection
Non-Grandfathered Greater China Issuers
A Non-Grandfathered Greater China Issuer seeking a secondary listing under Chapter 19C, must amend its constitutional documents to meet the key shareholder protection standards set out in LR 19C.07 (unless these standards are already provided for in their constitutional documents and/or the laws to which they are subject) as required under Appendices 3 and 13 of the Listing Rules.
Grandfathered Greater China Issuers
Appendix 3 and Appendix 13 do not apply to Grandfathered Greater China Issuers. They are not therefore obliged to amend their constitutional documents to meet Hong Kong’s key shareholder protection standards.
VIE Structures
Offshore-listed Chinese companies often use Contractual Arrangements (i.e. VIE structures) to indirectly own and control businesses operating in an industry sector that is subject to foreign investment restrictions under PRC law. HKEx’s approach to the listing of companies using Contractual Arrangements is set out in Listing Decision HKEx-LD43-3 which requires that the arrangements must be narrowly tailored to achieve the issuer’s business purpose and minimise the potential for conflict with applicable PRC laws and regulations. An issuer may also be required, on an individual case basis, to demonstrate that it is able to comply with the PRC Foreign Investment Law (which will come into effect on 1 January 2020). Issuers listed on Qualifying Exchanges which have Contractual Arrangements may not satisfy HKEx’s current guidance in all respects.
Under the Guidance Letter on Suitability for Secondary Listing as a Qualifying Issuer under Chapter 19C (Secondary Listing Guidance Letter), different requirements apply to Grandfathered Greater China Issuers and Non-Grandfathered Greater China Issuers.
Grandfathered Greater China Issuers
Chinese issuers listed on a Qualifying Exchange on or before 15 December 2017 can secondary list on HKEx with their existing Contractual Arrangements in place and will not be required to demonstrate that they are able to comply with the PRC Foreign Investment Law.
Non-Grandfathered Greater China Issuers
Issuers listed on a Qualifying Exchange after 15 December 2017 must comply with the disclosure requirements specified in HKEx-LD43-3 and provide HKEx with a PRC legal opinion that their Contractual Arrangements comply with PRC laws, rules and regulations.
Unusual Provisions in Qualifying Issuers’ Constitutional Documents
Prominent disclosure must be made in the listing document of any provisions in a Qualifying Issuer’s constitutional documents relating to its governance that are unusual compared with normal practices in Hong Kong and are specific to the issuer (rather than a consequence of the laws and regulations to which it is subject), and how such provisions affect its members’ rights. This would require disclosure of “poison pill” arrangements and provisions imposing restrictions on quorums for board meetings.
Qualifying issuers with a WVR structure seeking a Chapter 19C secondary listing must satisfy the Chapter 19C (rather than Chapter 8A) eligibility and suitability criteria.
The Chapter 8A provision which only allows new listing applicants to list with a WVR structure does not apply to secondary listing applicants under the concessionary route. However, the provisions regarding WVR structures are different for Grandfathered and Non-Grandfathered Greater China Issuers.
Grandfathered Greater China Issuers
Grandfathered Greater China Issuers are able to secondary list on HKEx with their existing WVR structures in place and do not need to comply with the ongoing-WVR investor protection requirements under Listing Rules 8A.07 to 8A.36, 8A.43 and 8A.44 which: require non-WVR shareholders to be entitled to cast at least 10% of the votes at general meetings (LR 8A.09) restrict the ratio of voting rights attached to WVR shares compared to non-WVR shares to 10 to 1 and require WVR to cease on a transfer of the beneficial ownership of the shares carrying WVR (LR 8A.10), on the death of the beneficial owner or the beneficial owner ceasing to be a director of the issuer (LR 8A.17).
Non-Grandfathered Greater China Issuers
Non-Grandfathered Greater China Issuers will not benefit from the concessions from the equivalence requirement, or the provisions applicable to Contractual Arrangements and WVR-structured companies. A Non-Grandfathered Greater China Issuer seeking secondary listing under Chapter 19C must therefore:
vary its constitutional documents to satisfy the key shareholder protection standards (as applicable);
ensure that its WVR structure complies with the primary listing requirements under Chapter 8A, including ongoing WVR safeguards and disclosure requirements; and
comply with Listing Decision HKEx-LD43-3 in relation to any VIE structure.
All Qualifying Issuers secondary listed on HKEx will benefit from the disapplication of a number of Listing Rules including those related to connected transactions, notifiable transactions and the Corporate Governance Code (Listing Rule 19C.11).
However, if the majority of trading in a Greater China Issuer’s shares migrates to the HKEx on a permanent basis, the issuer will be regarded as having a dual-primary listing, and will no longer enjoy the benefit of the exceptions in rules 19C.11. A majority of trading moves to Hong Kong on a permanent basis if at least 55% of the total worldwide trading volume in dollars, of those shares (including the volume of trading in depositary receipts issues on those shares) over the issuer’s most recent financial year, takes place on HKEx. Issuers will then have a 12-month grace period to comply with the relevant Listing Rules. This grace period will end at midnight on the anniversary of the date of HKEx’s written notice of its decision that the majority of trading has migrated permanently to the HKEx.
Any continuing transactions in place at the date of the notice referred to above will not have to comply with the Listing Rules for three years from the date of the HKEx notice, but if the transaction is subsequently amended or renewed before the end of the three year period, the Greater China Issuer must comply with all applicable requirements under the Listing Rules at that time.
Failure to comply within the grace period allowed may result in disciplinary action on by the HKEx, including a de-listing of the issuer’s listed shares.
Grandfathered Greater China Issuers with WVR Structures
If the majority of trading in the shares of a Grandfathered Greater China Issuer with a WVR structure migrates to Hong Kong, the issuer will not be required to comply with the ongoing WVR safeguards, except for the disclosure requirements.
There is no requirement on Grandfathered Greater China Issuers to amend their Contractual Arrangements if the majority of trading in their shares moves to Hong Kong.
A Qualifying Issuer that is classified in the United States as a Foreign Private Issuer under the US Securities Act of 1933 and the US Securities Exchange Act of 1934 must prominently disclose in its Hong Kong listing document the exemptions from US obligations that it enjoys resulting from its status as a Foreign Private Issuer, and that, for this reason, investors should exercise care when investing in the listed shares of the issuer.
Practice Note 22 requires new listing applicants to submit the Application Proof of their listing document to the HKEx for publication on the HKEx website. However, a new applicant which has been listed on a recognised overseas exchange for at least five years and has a significantly large market capitalisation at the time of filing its listing application, may make a confidential filing of its Application Proof. The applicant is not subject to the publication requirements unless requested to comply with them by the HKEx or the SFC. All other requirements under the HKEx Listing Rules apply unless a waiver is granted.
HKEx or the SFC may waive or modify the publication requirements for an Application Proof in a spin-off from an overseas listed parent upon application by a new applicant. A new applicant should consult HKEx or the SFC at least two months before the filing of its Application Proof if it foresees any challenges in complying with the publication requirements.
NOVEMBER 2019
This note is correct as of the date specified above and is provided for information purposes only. It does not constitute legal advice and should not be relied upon as such. Specific advice should be sought in relation to any particular case.
[1] Nikkei Asian Review. “Why is Alibaba listing in Hong Kong if it doesn’t need money?” 11 November 2019.
[2] SCMP. “China’s onshore funds emerge as ‘buying force in Alibaba’s Hong Kong IPO, existing shareholders increase their stakes”. 26 November 2019.
