The webinar considers the progress made in implementing FATF’s revised recommendations (including Hong Kong’s progress). It then focuses on Hong Kong regulation of cryptocurrencies, looking firstly at the scope of the SFC’s regulatory remit and then at the SFC’s requirements for managers and distributors of crypto funds and at the latest HKMA/SFC requirements for intermediaries conducting virtual asset-related activities.
Hello, everyone. I’m delighted to be here today to talk about the Hong Kong Stock Exchange’s new listing regime for overseas issuers which took effect on the 1st of January, 2022. The revised Listing Rules simplified and streamlined the listing regime for overseas issuers which are defined as issuers that are neither Hong Kong issuers nor PRC issuers.
Hong Kong issuers are companies incorporated or established in Hong Kong, while PRC issuers are companies incorporated in the People’s Republic of China, and sometimes during this webinar, I’m just going to say China, as joint stock companies, which are A share issuers which list under Chapter 19 A of the Main Board Listing Rules or Chapter 25 of the GEM Listing Rules.
Overseas issuers are companies incorporated in any jurisdiction other than Hong Kong and China. The new regime also extended opportunities for Chinese so-called "homecoming" secondary listings on the Hong Kong Stock Exchange, in particular Chinese businesses with primary listings in Hong Kong or London, are now able to secondary list on the Main Board, including companies which are not classified by the Hong Kong Stock Exchange as quote, "innovative" unquote companies, increasing the number of Chinese companies eligible for secondary listing in Hong Kong.
While the rule changes relate principally to overseas companies, a set of 14 core shareholder protection standards are now are required for all companies, including companies incorporated in Hong Kong and China. The rule changes follow the Stock Exchange’s publication in November last year of its consultation conclusions on the listing regime for overseas issuers, which adopted the proposals to streamline the listing requirements for overseas companies set out in it’s March, 2021 consultation paper with some minor amendments.
In this webinar, I’ll describe the new listing regime in detail, starting with a high level summary of the key changes to the Listing Rules. First, the Stock Exchange introduced a core set of 14 shareholder protection standards, which I’m going to call the core standards, which is set out and revised appendix three to the Listing Rules.
All companies applying to list in Hong Kong are required to provide the core standards, including listing applicants incorporated in Hong Kong, Bermuda, the Cayman islands and China and applicants for secondary listing companies applying for listing are required to ensure that the laws, regulations and rules of the jurisdiction of incorporation together with their constitutional documents provide the core standards before they list on the Hong Kong Stock Exchange.
Listing existing issuers, that’s, companies already listed on the Stock Exchange on the 31st of December, 2021 have until their second AGM after the 1st of January, 2022, to make any necessary amendments to their constitutional documents, to conform to the core standards. For some core standards, listed companies will be deemed to comply if they comply with the requirements in force at the date of their listing, as I’ll talk about a bit more later on.
Secondly, the Stock Exchange has extended its secondary listing regime for overseas listed greater China issuers. Under the new regime, a greater China issuer without a weighted voting rights structure with a primary listing on one of three qualifying exchanges is allowed to secondary list on the Hong Kong Stock Exchange,
even if it’s not an "innovative" company, quote, unquote, subject to meeting one of two sets of quantitative eligibility requirements. These require either a market cap of 3 billion Hong Kong dollars and five financial years good regulatory compliance on a qualifying exchange, or a market cap of 10 billion Hong Kong dollars and two financial years good regulatory compliance on a qualifying exchange.
Previously greater China issuers could only secondary list in Hong Kong if they were innovative companies, which are essentially high growth, tech sector companies listed on a qualifying exchange. Thirdly, the Stock Exchange has introduced a dual prime listing option for grandfathered greater China issuers and non greater China issuers.
Grandfathered greater China issuer and non greater China issuers that are eligible for secondary listing with weighted voting rights and or variable interest entity structures that don’t comply with the Listing Rules on the Stock Exchange’s guidance are now allowed to dual primary list on the Stock Exchange.
They can also retain their noncompliant weighted voting rights and or VIE structures after delisting from the qualifying exchange of the primary listing. The Stock Exchange also amended the Listing Rules and introduce new guidance in relation to a change of company’s listing status from secondary listing to dual primary or primary listing on the Hong Kong Stock Exchange.
The revised Listing Rules also made non greater China issuers that are secondary listed in Hong Kong subject to the trading migration requirement that applies to secondary listed, grandfathered greater China issuers.
So if the majority of trading in the shares of a non-greater China issuer that is secondary listed in Hong Kong migrates to the Hong Kong market on a permanent basis, the non greater China issuer is regarded as dual primary listed in Hong Kong and has to comply with the Listing Rules in full.
The Exchange has also consolidated and codified waivers for dual primary and secondary listing applicants and listed companies. In addition, the Stock Exchange has made various housekeeping and other changes, which include updates to the Listing Rules, accounting related provisions to reflect the requirements of the Financial Reporting Council Ordinance Cap. 588, the requirement for the statutory securities regulation of an overseas company’s jurisdiction of incorporation and place of central management and control to be a full signatory of the IOSCO MMOU has also been extended to all listing applicants,
whereas it previously only applied to overseas companies incorporated in acceptable jurisdictions. That is jurisdictions, which the listing committee had determined provide the same standards of shareholder protection as Hong Kong. The Stock Exchange has issued new guidance materials which took effect on the 1st of January, 2022.
The first is new guidance letter GL 111-22, which provides guidance for overseas companies on matters, including listing applicant’s compliance with the core standards and the admission of their shares into CCAS. The Exchange’s new guidance letter G L 112-22 contains guidance for secondary listed companies on changing their Hong Kong listing status from secondary listing to dual primary or primary listing, either voluntarily or when they’re required to do so because the majority of trading in their shares has migrated to the Hong Kong Stock Exchange.
The Exchange also published FAQ series 25 covering various aspects of the new regime for listing overseas companies. The purpose of this webinar is to give you a detailed explanation of the new listing regime for overseas companies. The Listing Rule references will be to the Main Board Listing Rules.
Certain changes apply equally to the GEM Listing Rules, such as the new 14 core standards. However, as secondary listing is only possible on the Main Board, amendments relating to secondary listings don’t apply to the GEM Listing Rules. In the first part of this webinar, I’m going to talk about the revised shareholder protection standards required of companies applying to list on the Hong Kong Stock Exchange.
These standards apply to all listing applicants and not only overseas listing applicants. In particular, they apply to Hong Kong companies applying to list on the Exchange and applicants for secondary listing. The Stock Exchange has removed the previous Listing Rule requirement for overseas companies to provide shareholder protection standards equivalent to those provided in Hong Kong, which was previously set out in Listing Rule 19051 B.
It’s also repealed the Stock Exchange and SFC Joint Policy Statement regarding the listing of overseas companies, which was generally referred to as the Joint Policy Statement and set out the key shareholder protection standards required of overseas companies incorporated in jurisdictions other than Hong Kong, Bermuda, Cayman and China.
The shareholder protection standards required of Bermuda and Cayman companies were previously included in Appendix 13 to the Listing Rules. And those required of secondary listed companies were set out in Chapter 19 or 19 C in the case of tech sector companies, primary listed on a qualifying exchange under the revised Listing Rules.
All companies listed on the Exchange are required to provide the 14 core standards set out in the revised appendix three to the Listing Rules. Previously appendix three contained a list of provisions that had to be included in listed company’s articles of association or equivalent document. All companies listed on the Hong Kong Stock Exchange need to comply with the core standards, including companies incorporated in Hong Kong, China, Bermuda and Cayman.
The core standards are based on standards set out in the Hong Kong Companies Ordinance or were required under the previous version of the Listing Rules. Most of the core standards are the same as the key shareholder protection standards previously included in the Joint Policy Statement.
It should not therefore be difficult for companies that were already listed before the Listing Rule changes to comply with the core standards. Revised Appendix three requires companies to demonstrate how the laws, regulations and rules of their home jurisdiction and their constitutional documents together provide the core standards.
According to the Stock Exchanges’s FAQs the core standard should be set out in a company’s constitutional documents, unless the Exchange is satisfied that the laws, rules and regulations to which the company is subject provide the same protection. Once listed, companies need to monitor their ongoing compliance with the core standards and notify the Stock Exchange
if they become unable to comply with any of them. The Stock Exchange has repealed the Joint Policy Statement which previously set out guidance for overseas issuers incorporated in jurisdictions other than Hong Kong, China, Bermuda and Cayman. Guidance for overseas issuers noncompliance with the core standards and other matters is now set out in new consolidated guidance letter 111-22, which includes some of the guidance previously included in the Joint Policy Statement. In addition to the four jurisdictions, which the Listing Rules explicitly recognized as eligible jurisdictions of incorporation for listing applicants, that is Hong Kong, China, Cayman and Bermuda.
The Stock Exchange has also approved a further 28 jurisdictions which it considers acceptable as a company’s place of incorporation. These were previously referred to as acceptable jurisdictions in the Stock Exchange’s guidance materials, and the exchange has published a country guide for each acceptable jurisdiction.
The concept of acceptable jurisdiction has been removed and the Stock Exchange will not issue any new country guides. However, the Exchange said in the consultation conclusions that it will continue with its practice of issuing guidance on a case by case basis, if novel issues arise on the listing of overseas companies.
I will now go through the 14 core standards and briefly go through the Exchange’s rationale for their inclusion and how certain core standards apply to companies that are already listed.
The first core standard provides that any person appointed by the directors to fill a casual vacancy or as an addition to the board shall hold office only until the first AGM of the issuer after his appointment and shall then be eligible for release. According to a note to this standard in respect of grandfathered greater China issuer and non greater China issuer that are permitted to have a weighted voting rights structure that does not comply with Chapter 8A of the Exchange Listing Rules,
the Exchange will consider the applicability of this requirement on a case by case basis, based on the circumstances of each individual case. The Stock Exchange considers that this core standard should apply to all Hong Kong listed companies to preserve the ability of shareholders to elect directors after the casual vacancy arises. In the case of grandfathered greater China issuers and non greater China issuer that are allowed to have weighted voting rights structures that don’t comply with the Listing Rules requirements, the permitted weighted voting rights structure may allow the weighted voting rights beneficiaries to appoint directors.
The Stock Exchange will therefore review the application of this standard to those companies on a case by case basis. The Listing Rules defined a greater China issuer as a qualifying issuer with its quote "center of gravity", unquote in greater China and a non greater China issuer as a qualifying issuer that is not a greater China issuer.
A qualifying issuer is an overseas issuer primary listed on one of three qualifying exchanges, the New York Stock Exchange, NASDAQ or the Premium segment of the Main Market of the London Stock Exchange. China issuers which are incorporated in China as joint stock, limited companies, that’s H-Share issuers are not overseas issuers, while a greater China issuer is an overseas issuer.
Grandfathered greater China issuers are greater China issuers primary listed on a qualifying exchange on or before the 15th of December, 2017. And as I’ll mention later in the webinar, the definition has been expanded to include greater China issuers controlled by corporate weighted voting rights beneficiaries. The Stock Exchange has repealed the comply or explain provision on casual vacancy appointments previously set out in code provision A42 of the corporate governance code to avoid duplication.
The second core standard says that where not otherwise provided by law, numbers in general meeting shall have the power by ordinary resolution to remove any director, including a managing or other executive director, but without prejudice to any claim for damages under any contract before the expiration of their term of office.
The Stock Exchange considers shareholder’s ability to remove a director by ordinary resolution to be fundamental to shareholder protection and effective corporate governance.
The note in the first core standard in respect of grandfathered greater China issuers and non greater China issuers with non-compliant weighted voting rights structures is mirrored in a note to the second core standard. The Stock Exchange will assess the applicability of this removal of directors core standards to grandfathered greater China issuers and non greater China issuers allowed to have noncompliant weighted voting rights structures on a case by case basis.
This is because non weighted voting right shareholders’ right to remove directors might otherwise undermine the effectiveness of the permitted weighted voting rights structure. The third core standard provides that an issuer must hold a general meeting for each financial year as its annual general meeting. A note to this standard says that a listed company is required to hold its AGM within six months after the end of its financial year.
This core standard is based on the requirements of the Hong Kong Companies Ordinance and China’s mandatory provisions which require an AGM to be held within six months at the end of the accounting period and preceding financial year respectively.
The Chinese mandatory provisions refer to the mandatory provisions for companies listing overseas, set out in Zheng Wei Fa 1994, Number 21 issued on the 27th of August, 1994 by the State Council Securities Policy Committee and the State Commission for Restructuring the Economy.
The now repealed shareholder protection standards previously required for companies incorporated in Bermuda, Cayman and acceptable jurisdictions required relevant companies to hold an AGM each year, generally within 15 months of the previous AGM. The Stock Exchange’s consultation paper and consultation conclusions both said that the Stock Exchange will regard listed companies previously subject to that requirement as compliant with the new core standard, if they comply with the requirement that applied to them at listing.
The Stock Exchange’s consultation conclusions also noted that the requirement for companies already listed when the Listing Rule changes took effect to make necessary changes to their constitutional documents, to conform to the core standards is subject to the exceptions set out in the consultation paper.
The next core standard says that an issuer must give its members reasonable written notice of its general meetings. A note to the standard says that reasonable written notice normally means written notice of at least 21 days for AGMs and at least 14 days for other general meetings. However, this is unless it can be demonstrated that reasonable written notice could be given in a shorter time.
This core standard reflects the requirements for Hong Kong companies under the Hong Kong Companies Ordinance, and the previous requirements for companies incorporated in Bermuda and Cayman under appendix 13. As I’ll mention later, China issuers are allowed a 20 day notice period for AGMs and 15 days for other general meetings.
The stock exchange has repealed the comply or explain provision for 20 clear business days notice for an AGM in former code provision E 1 3 of the corporate governance code. The fifth core standard says that members must have the right to a speak at a general meeting and vote at a general meeting except where a member is required by the Listing Rules to abstain from voting to approve the matter under consideration.
A note to the standard sets out an example of such a circumstance as where a member has a material interest in the transaction or arrangement that is the subject of the vote. A second note to the standard provides that if a listed company is subject to a foreign law or regulation that prevents the restriction of a shareholder’s right to speak and or vote at general meetings, the company can provide an undertaking to the Stock Exchange to implement the measures that achieve the same outcome as this restriction.
For example, a requirement that any votes cast by or on behalf of a member in contravention of the restriction must not be counted towards the resolution. Shareholders’ rights to speak at general meetings were previously required for companies incorporated in acceptable jurisdictions under the Joint Policy Statement and to non greater China issuers and grandfathered greater China issuers under Chapter 19 C of the Listing Rules.
This requirement did not however extend explicitly to companies incorporated in Bermuda, Cayman, Hong Kong, or China, since the Corporate Governance Code requires listed companies to ensure that the chairman attends general meetings to answer shareholders questions, and that non-executive directors attend meetings to gain an understanding of shareholders views.
The Stock Exchange considered that there is an expectation in the Listing Rules that all listed companies should give shareholders the right to speak at general meetings. The next core standard specifies that where any shareholder is, under the Exchange’s Listing Rules required to abstain from voting on any particular resolution or restricted to voting only for, or only against any particular resolution, any votes cast by or on behalf of that shareholder in contravention of this requirement or restriction shall not be counted.
This core standard previously applied to companies incorporated in Bermuda, Cayman and acceptable jurisdictions, and to secondary listed non greater China issuers and grandfathered greater China issuers. Hong Kong companies are subject to a similar requirement under the Companies Ordinance. The Stock Exchange said in the consultation paper, that where a listed company can demonstrate that it can achieve the same effect as the core standard through alternative arrangements, such as a two tier voting arrangement, the exchange may considered it to be in compliance with this core standard.
The seventh core standard requires that members holding a minority stake in the total number of issued shares must be able to convene an EGM and add resolutions to a meeting agenda. The minimum state required to do so must not be higher than 10% of the voting rights on a one vote per share basis in the share capital of the listed issuer. This core standard was previously required of companies incorporated in acceptable jurisdictions and secondary listed non greater China issuers and grandfathered greater China issuers.
It was not previously a requirement for companies incorporated in Bermuda, Cayman or China, although the company laws of Bermuda and the mandatory provisions applicable to Chinese issuers have equivalent provisions. Cayman islands company law has no equivalent provision. Although listed Cayman island companies have incorporated this provision in their constitutional documents. Under the Hong Kong Companies Ordinance shareholders representing at least 5% of the total voting rights of all members can request the directors to call a general meeting.
The next core standard says that a super majority vote of the issuers members of the class to which the rights are attached, shall be required to approve a change to those rights. A super majority vote is defined in a note to this standard as at least three fourths of the voting rights of the members holding shares in that class present in voting in or by proxy at a separate general meeting of members of the class where the quorum for such meeting shall be holders of at least one third of the class.
This is unless it can be demonstrated that shareholder protection will not be compromised by a lower voting threshold, for example, a simple majority votes in favor of the relevant resolutions, with a higher quorum requirement. And in such case, a super majority vote is deemed to be achieved. However, for China issuers as provided in a second note to this standard, the Stock Exchange will regard a resolution passed by members representing at least two thirds of the voting rights of the members present at the class members meeting, having voting rights to amend class rights as meeting the "super majority" quote unquote threshold.
This core standard applies to all listed companies except for China issuers, where the standards set out in the mandatory provisions apply. That is a two thirds, majority vote of the members who are present and have voting rights to amend class rights. The Stock Exchange said in the consultation conclusions that companies already listed when the revised Listing Rules took effect that were previously subject to the Joint Policy Statement’s definition of super majority vote as a two thirds, majority, the Exchange will regard them as compliant with this core standard if they comply with the requirement that applied to them on listing.
The ninth core standard provides that a super majority vote of the issuers members in a general meeting shall be required to approve changes to an issuer’s constitutional documents however framed.
A note to this standard defines a super majority vote as at least three-fourths of the total voting rights of the members present and voting in person or by proxy at the general meeting. This is unless it can be demonstrated that shareholder protection will not be compromised by a lower voting threshold.
For example, a simple majority votes in favor of the relevant resolutions with a higher quorum requirement. And in such case, a super majority vote is deemed to be achieved. This is similar to the definition of a super majority vote that applies to the previous eighth core standard on variation of class rights.
But the ninth core standard applies to members generally rather than members of a share class. And there’s no explicit quorum requirement. There’s also a second note to this standard, which says that for China issuers, the Exchange will regard a resolution passed by members representing at least two thirds of the total voting rights of the members present and voting in person or by proxy at the meeting, as meeting the super majority threshold. The definition of super majority vote, which previously applied to companies incorporated in acceptable jurisdictions and secondary listed non greater China issuers and grandfathered greater China issuers was a two thirds majority vote.
China issuers are also required by the mandatory provisions to obtain the approval of a two thirds, majority of shareholders present for changes in their constitutional documents. Companies incorporated in Bermuda and Cayman were required by appendix thirteen to require a three-fourths majority vote for changes to their constitutional documents.
The Hong Kong Companies Ordinance has similar requirements and requires changes to a Hong Kong company’s articles to be approved by 75% of shareholders. The 75% shelter approval requirement applies to all listed companies with the exception of China issuers to which the mandatory provisions two-thirds majority requirement continues to apply.
Similar to the variation of class rights, core standard. The stock exchange provided in this consultation conclusions that companies incorporated in acceptable jurisdictions that were previously subject to the two thirds, majority definition of super majority vote will be considered to be compliant with the new core standard if they comply with the requirements that apply to them at listing.
The next core standard provides that the appointment, removal and remuneration of auditors has to be approved by majority of the listed company’s shareholders, or other body that is independent of the board of directors. A note to this standard gives the supervisory board in systems that have a two-tiered board structure as an example of an independent body.
Equivalent protections to this core standard previously applied to companies incorporated in acceptable jurisdictions and secondary listed companies under Chapter 19 C. Hong Kong companies are subject to a similar requirement under the Hong Kong Companies Ordinance while China issuers are subject to a similar provision under the mandatory provisions. Bermuda company laws have similar provisions, except that two thirds of the votes cast at a general meeting are required for removal of an auditor.
However, Cayman company law doesn’t have equivalent protections. The Stock Exchange considers that this core standard should apply to all listed companies, as these shareholders powers are important for effective corporate governance and ensuring auditor independence and listed companies incorporated in Cayman may need to amend their constitutional documents to ensure compliance.
The 11th core standard provides that every member shall be entitled to appoint a proxy who needs not necessarily to be a member of the shareholder of the company. And that every shareholder being a company shall be entitled to appoint a representative to attend and vote at any general meeting of the listed company and where a corporation is so represented it shall be treated as being present at any meeting in person. A company can execute a form of proxy, under the hand of a duly authorized officer.
Previously only Cayman and China incorporated companies were subject to this requirement under the Listing Rules while the company laws of Bermuda have an equivalent provision. This core standard is also consistent with the Hong Kong Companies Ordinance, which provides that a member of a company is entitled to appoint a proxy. Listed companies incorporated in acceptable jurisdictions, secondary listed grandfathered greater China issuers and non greater China issuers may need to amend their constitutional documents to ensure compliance with this core standard.
The next core standard says that HKSCC, that is Hong Kong Securities Clearing Company Limited must be entitled to appoint proxies or corporate representatives to attend the listed company’s general meetings and creditors meetings. And those proxies or corporate representatives must enjoy rights equivalent to the rights of other shareholders, including the right to speak and vote.
A note to the standard says that for the situation where an overseas jurisdiction’s laws prohibit HKS CC from appointing proxies or corporate representatives enjoying the rights set out in this standard. In these circumstances, the listed company must make the necessary arrangements with HKSCC to ensure that Hong Kong investors holding shares through HKSCC do have the rights to vote, attend in person or by proxy and speak at general meetings.
This standard previously applied to companies incorporated in Bermuda and Cayman and to companies incorporated in acceptable jurisdictions and non greater China issuers and grandfathered greater China issuers secondary listed under Chapter 19 C of the Listing Rules. Although the Listing Rules did not previously require companies incorporated in Hong Kong or the, or China to comply with this standard, in practice listed companies incorporated in these jurisdictions did comply with this standard.
The 13th core standard says that the branch register of shareholders in Hong Kong shall be open for inspection by shareholders, but the listed company may be permitted to close the register on terms equivalent to section 6, 3, 2 of the Companies Ordinance.
This standard is again, consistent with the Hong Kong Companies Ordinance. Companies incorporated in Cayman were previously subject to this requirement under the Listing Rules and the company law of Bermuda has equivalent provisions. For China issuers the mandatory provisions also provide for shareholders rights to inspect the branch register.
Listed companies incorporated in acceptable jurisdictions and secondary listed non greater China issuers and grandfathered greater China issuers may need to amend their constitutional documents to ensure compliance with this core standard.
The final core standard provides that a super majority vote of the listed company’s shareholders in a general meeting shall be required to approve a voluntary winding up of the listed company. This core standard has two notes relating to super majority vote and China issuers which mirror the two notes to the ninth core standard on amendments to constitutional documents.
There was previously a misalignment between the requirements for the different types of listed companies. A two thirds, majority was required to approve a voluntary winding up for companies incorporated in acceptable jurisdictions, non-greater China issuers and grandfathered, greater China issuers secondary listed under Chapter 19 C and China issuers.
Hong Kong companies, the CWUMPO requires a voluntary, winding up resolution of a Hong Kong company to be passed by at least 75% of the voting rights of members voting on the resolution in person or by proxy. Companies incorporated in Bermuda, and the Cayman islands were not previously required to comply with this standard.
The Listing Rules now apply this core standard to all listed companies and define super majority vote as at least a three-fourths majority, the standard applicable to Hong Kong companies under the CWUMPO. There’s an exception for China issuers the requirement for a two thirds majority under the mandatory provisions has again, been retained.
The stock exchange said in its consultation conclusions that companies incorporated in acceptable jurisdictions already listed when the revised Listing Rules took effect that were previously subject to the requirement for approval of winding up by two thirds majority will be regarded as complying with the core standard,
if they comply with the requirement that applied to them at listing. The requirements of part D of Appendix 13, relating to China listed companies known as H-share issuers mainly, still remain. These set out the specific requirements for China issuers, which the mandatory provisions require to be included in a China company’s articles.
While PRC listed companies are required to comply with the Stock Exchange’s core standards, certain exceptions are provided for them due to the requirements of the PRC company law. These include a 20 day notice period for AGMs and 15 days for other general meetings as compared with 21 days and 14 days under the core standards and a two thirds, majority definition of a super majority vote for approving a variation of class rights, amendments of constitutional documents and voluntary winding up as compared with a three quarters majority under the core standards.
As set out in the guidance letter for overseas issuers GL 111, an overseas issuer applying to list in Hong Kong is required at the time of submitting its listing application to the Stock Exchange, to confirm that it conforms with the core standards and the requirements of guidance letter GL 111 with an appropriate legal opinion.
If an overseas issuer is from a jurisdiction where securities have not previously been admitted into CCASS that is the HKSCC Central Clearing and Settlement System for trading on the Stock Exchange or the overseas issuer’s legal advisors, identify any shortfalls in compliance with the core standards, the issuer is required to complete and submit the information required from overseas issuer’s checklist available on the Stock Exchange’s website. If the checklist is required to be completed, the overseas issuer may only submit its listing application after the Stock Exchange and the SFC have confirmed that they have no comment on the level of shareholder protection standards in the overseas issuer’s jurisdiction of incorporation.
Overseas issuers are also required by the new guidance letter to disclose in their listing documents, the major differences between on the one hand, the shareholder protection standards that apply to it under the laws and regulations of that jurisdiction of incorporation and constitutional documents and on the other hand,
the core standards together with details of the measures that have been or will be taken to address the differences. They must further disclose the risk that the extent to which Hong Kong courts may be used as an avenue for aggrieved shareholders of non Hong Kong issuers, is subject to certain limitations concerning for example, the enforcement of a Hong Kong judgment against the overseas assets, operations and or directors of a non Hong Kong company listed on the Hong Kong Stock Exchange and enforcement of an overseas judgment in the Hong Kong courts.
Companies already listed on the Stock Exchange on the 31st of December, 2021 are required to ascertain that they are in full compliance with the core standards and must at the earliest opportunity inform the Stock Exchange of any material changes in the overseas laws, rules, and market practices set up in applicable Stock Exchange guidance that would affect their compliance with the core standards and other Listing Rules.
These listed companies need to compare their constitutional documents against the core standards and make appropriate amendments, unless they can demonstrate that the laws, regulations, and rules of their jurisdiction of incorporation provide the same level of protection.
As a transitional arrangement, companies already listed on the Exchange on the 31st of December, 2021 have until their second AGM as I mentioned, following the 1st of January, 2022, that is the effective date of the reforms to make any necessary amendments to the constitutional documents, to conform to the new core standards.
A new applicant, which had submitted a listing application before the Listing Rule changes took effect was not required to resubmit the relevant checklists forms or templates, but needed to confirm compliance with the core standards,
based on existing provisions in their constitutional documents, domestic laws, regulations, and rules, or make appropriate amendments to their constitutional documents. The introduction of the core standards does not normally affect waivers already granted to existing listed companies.
So turning now to the second part of the webinar, I’m now going to cover the expansion of the Stock Exchanges secondary listing regime. In Hong Kong, companies can secondary list on the Stock Exchange’s Main Board, but as I’ve previously mentioned, not on GEM. Previously, the Exchange offered two routes to secondary listing under the Joint Policy Statement and Chapter 19 C of the Listing Rules. Each route had different eligibility and suitability requirements.
Importantly, greater China issuers that’s companies with their center of gravity in greater China, were prohibited from secondary listing under the Joint Policy Statement, while Chapter 19 C allowed the secondary listed companies, including greater China issuers in innovative sectors with a primary listing on a qualifying exchange, the additional requirements applicable to other overseas issuers seeking a secondary listing on the Main Board were previously set out in the second half of chapter 19 of the Listing Rules.
The Stock exchange has consolidated and codified the requirements for secondary listings in Chapter 19 C of the Listing Rules. Chapter 19 now applies only to primary listings of overseas issuers. The Stock Exchange’s January, 2022, Listing Rule changes, consolidated, and codified the secondary listing eligibility requirements for overseas issuers.
An overseas issuer without a weighted voting rights structure, including an issuer with a center of gravity in greater China, now has the option of meeting one of two sets of quantitative eligibility requirements under new Listing Rule 19 C 05 A. The first set of quantitative eligibility requirements criteria A require a market cap at the time of secondary listing of at least 3 billion Hong Kong dollars and a track record of good regulatory compliance of at least full five financial years,
on a qualifying exchange or on any recognized stock exchange. The recognized stock exchange route is only for overseas issuers without a center of gravity in greater China. Applications from listing applicants with a center of gravity in greater China that are primary listed on a recognized stock exchange
other than a qualifying exchange will only be considered in exceptional circumstances. A recognized stock exchange is defined in the Listing Rules as the main market of a stock exchange that is included in the list of recognized stock exchanges published on the Stock Exchange’s website as updated from time to time.
The qualifying exchanges are also recognized stock exchanges. The Stock Exchange has published a list of 15 recognized stock exchanges on its website. Alternatively, secondary listing applicants can satisfy criteria B the second set of quantitative eligibility requirements. Under these, overseas issuers must have a track record of good regulatory compliance of at least two full financial years on a qualifying exchange and a market cap at the time of secondary listing of at least 10 billion Hong Kong dollars.
These requirements are designed to consolidate the previous two secondary listing routes, by codifiying the former Joint Policy Statements requirements for listed companies without weighted voting rights structures, which is now criteria A and the former chapter 19 C requirements, which are now criteria B.
The revised secondary listing requirements relax the listing eligibility requirements for companies with a center of gravity in greater China, which previously could only secondary list under the Chapter 19 C route, if they were innovative companies. Innovative companies are basically high growth tech sector companies. To qualify as a quote, "innovative company", unquote, a listing applicant needs to demonstrate that it has the characteristics set out in paragraphs 3.2 to 3.4 of the Exchange’s guidance letter GL 94 18. Under the revised Listing Rules, issuers with a center of gravity in greater China, not having a weighted voting rights structure, can list under either criteria A or criteria B.
The innovative company requirement has been removed for all non weighted voting rights secondary listings, enabling greater China companies in traditional industries to secondary list in Hong Kong. Overseas issuers with a weighted voting rights structure, remain subject to the same quantitative eligibility requirements under Listing Rules, 19 C 04 and 19 C 05.
In particular, they must have a track record of good regulatory compliance of at least two full financial years on a qualifying exchange and either a market cap of at least 40 billion Hong Kong dollars at the time of secondary listing or a market cap of at least 10 billion Hong Kong dollars at the time of secondary listing and revenue of at least one 1 billion Hong Kong dollars for the most recent audited financial year.
Overseas issuers with a weighted voting rights structure are also required to be innovative companies in order to secondary list under Chapter 19 C. The Stock Exchange has introduced an exemption under which it will not require a listing compliance record for either criteria A or criteria B for secondary listing applicants without a weighted voting rights structure,
if the listing applicant is well-established and has a market cap at listing that is significantly larger than 10 billion Hong Kong dollars. 10 billion is the minimum market cap required to secondary list under criteria B. The exemption is applied on a case by case basis. New Listing Rule 19 C 02 A 1 D gives the Stock Exchange the right and its absolute discretion to refuse an overseas issuer’s listing if, in it’s opinion,
the application constitutes an attempt to avoid rules that apply to a primary listing on the Stock Exchange. For these purposes, the Stock Exchange may apply the test for a reverse takeover under Listing Rule 1406 B, to determine whether the company conducted an RTO on its primary listing exchange. If a material part of the applicant’s business was listed on its primary exchange by way of an RTO, the Stock Exchange will normally consider its application for secondary listing to be an attempt to avoid rules that apply to primary listing. New Listing Rule 19 C 02 A 1 C gives the Exchange the right to refuse an overseas issuer’s secondary listing application,
if the overseas issuer has received waivers from, or is exempt from regulatory requirements that result in it being subject to regulatory requirements that are materially less stringent than those that generally apply to entities of a nature, similar listed on its primary market. The Stock Exchange has amended the Listing Rules and introduced new guidance relating to a change in a listed company’s listing status from secondary listed to dual primary or primary listed. The Listing Rule revisions provide for a change in a company’s secondary listing status
when the majority of trading in the company’s listed shares migrates permanently to the Hong Kong Stock Exchange, and also cover the situation where a secondary listed company is delisted from the exchange of its primary listing. The exchange has defined dual primary listing in Listing Rule 1 0 1 as where a hong Kong listed company also has a primary listing on one or more overseas exchanges or where a company applies to list on both the Hong Kong Stock Exchange and one or more overseas stock exchanges.
Listing Rule 19 C 13 previously provided for the situation where the majority of trading in a greater China issuer’s secondary listed shares migrates permanently to the Hong Kong Stock Exchange.
This is deemed to occur when 55% or more of the total worldwide trading volume by dollar value of the issuer’s shares over the issuer’s most recent financial year, takes place on the Hong Kong Stock Exchanges markets. In these circumstances, the Stock Exchange will regard the issuer as having a dual primary listing on the Hong Kong Stock Exchange.
And the automatic waivers previously granted to the issuer will cease to have effect. This is referred to in the consultation paper and conclusions as the Stock Exchange trading migration requirement. Under note two to Listing Rule 19 C 13 issuers have a grace period of 12 months to re-comply with the applicable Listing Rules, which is known as the migration grace period.
This ends at midnight on the anniversary of the date of the Stock Exchange’s written notice of its decision that the majority of trading in the issuers listed shares has migrated permanently to the Stock Exchange’s markets. To reduce the complexity of the Hong Kong Exchange’s requirements and to ensure consistency of the principles on which automatic waivers are granted, the Exchange revised Listing Rule 19 C 13, to extend the Stock Exchange trading migration requirements, all overseas issuers with a secondary listing on the Stock Exchange and not just greater China issuers.
This includes overseas issuers that secondary listed before the introduction of Chapter 19 C of the Listing Rules. The Stock Exchange has also extended the Stock Exchange trading migration requirement so that when an issuer is regarded as having a dual primary listing, common waivers and waivers based on its secondary listing as well as automatic waivers, cease to apply to the issuer.
New Listing Rule 19 C 13 A provides that if an overseas issue of shares or depository receipts issued on its shares cease to be listed on the recognized stock exchange of its primary listing, the Hong Kong Stock Exchange will regard the issuer as having a primary listing in Hong Kong. As a result, the Chapter 19 C Listing Rules and automatic waivers, common waivers and waivers based on its secondary listing will no longer apply to the issuer.
A note to new Listing Rule 19 C 13 A provides that if an overseas issuer is expected to be involuntarily delisted from the recognized stock exchange on which its primary listed, the Hong Kong Stock Exchange is prepared to allow an exemption for any continuing transaction that will continue after the effective date of the involuntary delisting.
If the transaction is entered into before the issuer’s notification to the stock exchange about the expected involuntary delisting, the transaction will continue to be exempt for a period of three years from the date of the notification. However, if the transaction is subsequently amended or renewed before the expiry of the three year period, the overseas issuer must comply with the relevant requirements under the Listing Rules, at that time.
As I will talk about later, when I talk about auditing and financial reporting standards for overseas issuers, the Hong Kong Exchange has codified in the Listing Rules, the requirement of the Joint Policy Statement that a listed company which has adopted one of the accepted alternative financial reporting standards must adopt Hong Kong, financial reporting standards or international reporting standards if it delists from the jurisdiction of the alternative financial reporting standards adopted.
The Exchange has also introduced an automatic grace period, the adoption of HK FRS or IFRS which will end on the first anniversary of the company’s delisting. The Exchange has issued new guidance letter 1, 1, 2 22 on change of listing status from secondary listing to dual primary or primary listing on the Main Board.
The guidance letter on change of listing status provides further details and guidance on overseas delisting, migration and primary conversion. Overseas delisting refers to the voluntary or involuntary delisting of an overseas issuer’s shares or depository receipts issued over their shares from the recognized stock exchange on which they are primary listed.
Migration refers to the migration of the majority of trading in overseas issuers listed shares to the Hong Kong Stock Exchanges market under Listing Rule 19 C 13. Primary conversion refers to the voluntary conversion to dual primary listing on the Stock Exchange. Relevant overseas issuers are referred to as delisting issuers, migration issuers or conversion issuers.
A delisting issuer is defined in the guidance letter as an overseas issuer, that starts to plan a voluntary delisting or that reasonably expects that it will be delisted involuntarily from its recognized stock exchange of primary listing. A migration issuer is an issuer falling within Listing Rule 19 C 13, and a conversion issuer
Is an issuer seeking a primary conversion. The guidance letter on change of listing status clarifies that an overseas company will be regarded as having a primary listing on the Hong Kong Stock Exchange on the effective date of its delisting from the overseas exchange of its primary listing.
A company with secondary listing on the Hong Kong Stock Exchange will be regarded as having a dual primary listing in Hong Kong on the expiry of the grace period for compliance with the Listing Rules for dual primary listed companies following the migration of trading in a majority of its listed shares to the Hong Kong market.
A secondary listed company can also choose to change its listing status to a primary listing. These changes to primary or dual listing are collectively referred to as a change of listing status. Upon a change of listing status, all exceptions, waivers, and exemptions available to the overseas issuer, which were granted on the basis of, or conditional on its secondary listing status will cease to apply except as provided under the applicability of Listing Rules to transactions entered into before the change of listing status. In the appendix to the new guidance letter, if an issuer wishes to retain a waiver or apply for a new waiver, it should make a waiver application with reasons at the earliest opportunity.
Upon a change of listing status, the overseas issuer should ensure that all changes to its corporate and constitutional structure have been implemented so that it’s fully compliant with the relevant corporate governance requirements under the Listing Rules, and that it has put in place all necessary internal control systems to monitor its ongoing compliance with the other relevant Listing Rules. Compliance with which are generally event driven and or time-based in nature.
Normally the Stock Exchange marker S will be required under the change of listing status. If any grace period, as a time relief waiver is granted to a conversion issuer or a delisting issuer, the Stock Exchange may require the issuer to have a short stock name that ends with the stock marker TP, while the issuer is under transitional arrangements, to enable it to fully comply with all applicable Listing Rules. All secondary listed overseas issuers will be required to monitor their compliance with Listing Rule 19 C 13.
That is the Stock Exchange trading migration requirement from the start of their first full financial year after secondary listing and to notify the Stock Exchange of their trading volume in accordance with the guidance letter on change of listing status. The Stock Exchange provides detailed guidance on what happens when a company is delisted from its primary listing exchange in guidance letter 112-22.
An overseas company that plans to voluntarily delist or reasonably expect to be delisted involuntarily from its primary listing exchange is required to notify the Hong Kong Stock Exchange of this possibility in writing as soon as practicable. It’s notification should confirm whether the delisting is voluntary or involuntary. Overseas companies planning to delist or expecting to be delisted are required to announce the upcoming delisting from the overseas exchange under Listing Rule 13 09’s general disclosure obligation.
This announcement must be published no later than when the information is announced on the recognized stock exchange of primary listing and must include specified information, including the company’s intended delisting or reasons for it being delisted. The announcement must also give the expected or estimated date of delisting, which for companies delisting voluntarily will be the date on which they will comply with all Listing Rules applicable to a primary listed issuer
unless waived or exempted. A company being delisted involuntarily should give the date on which the overseas regulator will cancel their listing status and they will become primary listed on the Hong Kong Stock Exchange. Delisting announcements are also required to include a statement of the company’s obligation to make necessary arrangements, to enable it to comply with all applicable Hong Kong Stock Exchange Listing Rules after delisting from the overseas exchange and the potential consequences of failing to comply with those obligations.
A company delisting from its primary listing exchange should also disclose in its announcement the potential consequences of the withdrawal of any specific waiver from strict compliance with any Hong Kong Listing Rules, granted by the Hong Kong Stock Exchange on an individual basis, when it’s delisting from the overseas exchange takes effect. Companies whose primary listing status changes to a primary listing in Hong Kong
must also disclose in the announcement of their delisting from the overseas exchange any applications made to the Hong Kong Stock Exchange for waivers and exemptions from strict compliance with the Hong Kong Listing Rules after it’s delisted from the overseas exchange. It’s also required to disclose that those waivers and exemptions may or may not be granted by the Hong Kong Stock Exchange.
Finally, the announcement of delisting must disclose the potential impact on shareholders and potential investors of any transitional measures to be put in place before the delisting from its primary listing exchange takes effect. Following its delisting from its primary listing exchange, the overseas company must comply with the Listing Rules applicable to other primary listed overseas companies.
The Stock Exchange may granted a grace period for compliance in exceptional circumstances on a case by case basis where a company that’s voluntarily delisting from its primary listing exchange cannot fully comply with the Hong Kong Listing Rules. Before the delisting, the Hong Kong Stock Exchange may request the company to delay its delisting from its primary listing exchange, if it’s not willing to grant a waiver of the Listing Rules, which the company will not comply with.
If a company which has being forcibly delisted from its primary listing exchange, can’t comply fully with the Listing Rules applicable to it on its overseas delisting or the end of any grace period granted under any time relief waiver,
the Stock Exchange may on a case by case basis extend the grace period, suspend trading in the company, shares or impose such other measures as it considers necessarily. In the guidance letter on change of listing status, the Stock Exchange also provides detailed guidance on the consequences of trading in secondary listed company shares migrating to the Hong Kong market.
Overseas companies that are secondary listed on the Hong Kong Stock Exchange are required to notify the Exchange in writing within five business days of the end of the third quarter of that financial year as to whether or not the trading volume of their shares by dollar value in Hong Kong has exceeded 50% of the total worldwide trading volume by dollar value, including the trading volume and depository receipts issued over those shares based on the trading volume over the nine month period. They are then required to make another written notification to the Hong Kong Exchange within five business days of the end of their financial year as to whether the trading volume of their shares in Hong Kong has exceeded 55% of the total worldwide trading volume over that financial year.
Where trading in a majority of a secondary listed company shares has migrated to the Hong Kong market, the company has a 12 month grace period to comply with the Hong Kong Listing Rules that apply to dual primary listed companies. During the grace period, the company should provide the Stock Exchange with monthly update reports on its progress towards compliance with the Hong Kong Listing Rules that will apply to them when the grace period ends.
The Hong Kong Stock Exchange will issue a migration exchange notice to a secondary listed overseas company if it determines that the majority of trading in its listed shares has migrated permanently to the Hong Kong market under Listing Rule 19 C 13. The company will then be regarded as having a dual primary rather than secondary listing status on the Hong Kong Exchange.
When the grace period ends, the migration exchange notice will also inform the company that the stock marker S, which signifies a secondary listing, in its stock short name will be dis-applied only when the company can fully dual with all Listing Rules applicable to a do primary listed company.
The company is also required to publish an announcement as soon as practicable, after receiving a migration exchange notice containing details of the consequences of the migration exchange notice and details of the grace period. A further announcement is required on the expiration of the grace period, where an overseas company cannot fully compliant with an applicable Listing Rule
when the grace period ends, the Stock Exchange may extend the grace period, suspend trading in the company, shares or impose other measures as it considers necessary. Guidance letter 112-22 also provides guidance for secondary listed companies that choose to change their listing status, to a dual primary listing.
These companies should apply to the Hong Kong Stock Exchange in writing regarding their plans to convert to a dual primary listing at the earliest opportunity. Generally, the application should be submitted only when the company believes that it would be in a position to fully comply with the applicable Listing Rules upon its dual primary listing becoming effective. The Stock Exchange will consider applications for a grace period on a case by case basis and will not usually grant a grace period unless it’s justified by a compelling reason.
Where a grace period is granted and the company can’t fully comply with an applicable Listing Rule on the expiry of the grace period, the Stock Exchange may on a case by case basis, extend the grace period, suspend the trading in the company’s shares and or impose other measures as it considers necessary.
The Stock Exchange will issue an acknowledgement of the application for conversion to a dual primary listing. And the company is then required to publish an announcement, setting out the information required by paragraph 3.29 of guidance letter 112-22. A further announcement is also required on or before the dual primary listing of the company takes effect.
Where a company is unable to fully comply within the applicable Listing Rule and no waiver has been granted on its conversion to a dual primary listed company, the Stock Exchange may request the company to delay the effective date of its conversion to dual primary listing status.
I’m now going to talk about the Listing Rule changes relating to grandfathered greater China issuers, and non-greater China issuers with weighted voting rights and or VIE structures that don’t comply with the Hong Kong Exchange’s Listing Rules and guidance, which I’m going to talk about as non-compliant weighted voting rights and VIE structures. VIE structures are also commonly referred to as structured contracts or contractual arrangements.
Previously grandfathered greater China issuers and non greater China issuers listed on qualifying exchanges with non-compliant weighted voting rights structures and or non-compliant VIE structures were able to secondary list, but not dual primary list on the Hong Kong Stock Exchange.
A noncompliant weighted voting rights structure is a vote weighted voting rights structure that does not comply with the requirements for weighted voting rights structures under Chapter 8A of the Listing Rules whilst a non-compliant VIE structure is a VIE structure that doesn’t comply with the relevant requirements under the Stock Exchange’s listing decision LD 43 3.
The revised Listing Rules and stock exchange guidance allow grandfathered greater China issuers and non-greater China issuer to dual primary list directly on the Hong Kong Exchange while retaining their noncompliant weighted voting rights and, or VIE structures. And I’ll talk about these together as non-compliant structures, provided that certain requirements are satisfied.
The Hong Kong Exchange does not consider that this reduces the level of shareholder protection provided as these companies could already become primary listed through a two step route. Essentially companies could secondary list with non-compliant structures and subsequently become dual primary listed with the noncompliant structures in place.
Instead, the Stock Exchange considers that the Listing Rule change will encourage these companies to directly dual primary list in Hong Kong. In order to dual primary list with noncompliant rated voting rights structures, companies have to satisfy the suitability and eligibility requirements of Chapter 19 C of the Listing Rules for qualifying issuers seeking a secondary listing with a weighted voting rights structure, that’s to say they have to satisfy the track record on a qualifying exchange, market cap and innovative company requirements that I talked about earlier.
The ability to dual primary list and secondary list with non-compliant weighted voting rights structures has been codified in new Listing Rule, 8 A 46.
A note to Listing Rule 8 A 46 also gives the Stock Exchange the right at its absolute discretion to refuse a listing of securities of an overseas company. For example, if its weighted voting rights structure represents an extreme case of nonconformity with corporate governance norms. A second note provides that the exemption under Listing Rule 8 A 46 is only applicable to the weighted voting rights structure in effect at the time of the company’s dual primary listing or secondary listing on the Hong Kong Stock Exchange.
The Stock Exchange also updated guidance letter GL 94 18, which has been given a new name suitability for grandfathered greater China issuers that meet the conditions of Listing Rule 8 A 46 to list with weighted voting rights structures and the contractual arrangements that grandfathered greater China issuers and non greater China issuers.
The updated guidance letter provides guidance on the ability to dual primary list and secondary list with non-compliant structures. So guidance letter GL 94 18 says that grandfathered greater China issuers with VIE structures applying for a dual primary or secondary listing in Hong Kong are required to provide the Exchange with a legal opinion that their contractual arrangements comply with PRC laws, regulations, and rules.
Generally in assessing suitability, the Exchange will consider the contractual arrangements of each grandfathered greater China issuer on an individual case-by-case basis, taking various factors into account. These includes the extent to which the company’s existing contractual arrangements depart from the standard contractual arrangements contemplated under listing decision LD, 43, 3 materiality of the operations conducted through the contractual arrangements to the company’s financial position and prospects and thirdly, the reasons for the adoption of contractual arrangements.
Companies allowed to adopt non-compliant VIE structures are still required to comply with the disclosure requirements set out in listing decision LD, 43, 3. Under the revised overseas issuers listing regime, the Stock Exchange will allow grandfathered greater China issuers and non greater China issuers with dual primary or secondary listings on the Hong Kong Stock Exchange to retain their noncompliant structures. As in effect, at the time of their listing in Hong Kong, if they are subsequently delisted from the qualifying exchange of their primary listing, these companies are subject to the same disclosure requirements under Chapter 8A of the Listing Rules and listing decision LD, 43, 3 as other listed companies.
The Stock Exchange has also expanded the definition of grandfathered greater China issuers in the Listing Rules to codify the special concession for greater China issuers controlled by corporate weighted voting rights beneficiaries as set out in the Stock Exchange’s October 2020 consultation conclusions on corporate weighted voting rights beneficiaries. A grandfathered greater China issuer is now defined in the Listing Rules as a greater China issuer that was primary listed on a qualifying exchange on or before the 15th of December, 2017 or primary listed on a qualifying exchange after the 15th of December, 2017,
but on or before 30th of October 2020 and controlled by corporate weighted voting rights beneficiaries as at 30th of October, 2020. The term, controlled by corporate weighting right beneficiaries means a single corporate weighted voting right beneficiary or a group of corporate weighted voting right beneficiaries acting in concert, holds the largest share of the voting power in the listed issuer which must amount to at least 30% of shareholders’ votes carried by the issuer’s share capital.
I’ll now talk about the consolidation and codification of waivers, and related principles for dual primary and secondary listing applicants and listed companies. Previously companies with, or which were seeking a secondary listing enjoyed automatic waivers from compliance with certain Listing Rules. These were previously set out in the Joint Policy Statement for companies listing under the Joint Policy Statement route and in Chapter 19 C for companies listing under the Chapter 19 C route.
The Stock Exchange has consolidated and codified into Chapter 19 C the automatic waivers for all companies which are applying for a secondary listing. The Exchange has codified the common waivers under relevant conditions, which the Exchange considers when granting these waivers for companies with, or which are applying for dual primary or a secondary listing. Relevant waiver conditions are now set out directly in the applicable Listing Rules as compared to automatic waivers companies have to apply for common waivers and the Stock Exchange considers these applications on individual merit based on relevant facts and circumstances, including compliance with the prescribed conditions as set out in the relevant Listing Rules.
The Exchange considers codification will improve the transparency of its listing regime and allow overseas companies to better assess the regulatory compliance requirements to achieve a Hong Kong listing.
A new note to Listing Rule 2 0 4 says that listing applicants and listed companies have to fully disclose details of any waivers or modifications to the Listing Rules granted by the Stock Exchange in their listing documents or in other announcements or circulars which the Stock Exchange considers as appropriate.
The new note also says that the Stock Exchange reserves the right to revoke or modify in any way the modifications granted, if there are any material changes in the information provided or circumstances.
The Stock Exchange has set out the underlying principles based on which it may exercise its power under Listing Rule 2 0 4 to waive, modify, or not require compliance with the Listing Rules for overseas issuers that have, or applying for a secondary listing on a case by case basis. The underlying principles are stipulated in new Listing Rule, 19 C 11 A.
The first of these is that the overseas company has primary listed on a recognized stock exchange. And so reliance can be placed on the standards of shareholder protection of the regulatory regime, to which overseas companies listed on that exchange are subject and the enforcement of those standards by the regulatory authorities of that regime.
The second requirement is that a regulatory cooperation agreement must be in place between the statutory securities regulator in the relevant jurisdiction and the SFC as required by Chapter Eight of the Listing Rules, which I’ll talk about in a bit. The third requirement is that the majority of trading in the overseas companies listed shares is not expected to migrate or has not yet migrated to the Hong Kong Stock Exchange’s markets on a permanent basis.
The final requirement for granting a waiver or allowing noncompliance with the Listing Rules is that the overseas company can demonstrate that strict compliance with both the relevant Listing Rules and the overseas regulations would be unduly, burdensome or unnecessary. And that the Hong Kong Stock Exchange’s granting of these waivers will not prejudice
the interests of the investing public. The Hong Kong Exchange has made various amendments to its Listing Rules and guidance, also relating to accounting and auditing requirements. The Listing Rules have been revised to reflect amendments to the Financial Reporting Council Ordinance, which established the Financial Reporting Council as Hong Kong’s independent regulator of listed company auditors.
The changes to the FRCO included the adoption of a system of registration or recognition for audit firms, which prepare auditors’ reports or accountants reports for a listing document, a listed company’s annual financial statements or very substantial acquisition or a reverse takeover conducted by a Hong Kong listed company.
The Listing Rules now provide that where the preparation of an accountant’s report constitutes a PIE engagement under the FRC, that is where an accountant’s report is required to be included in a listing document or any circular for an RTO or a VSA. The listed company must normally appoint a firm of practicing accountants that is qualified under the Professional Accountants Ordinance and is a registered PIE auditor under the FRCO.
For a PIE engagement that is an RTO or a VSA circular issued by a listed company incorporated outside Hong Kong, relating to the acquisition of an overseas company, the Stock Exchange may be prepared to accept the appointment of an overseas firm of practicing accountants that is not qualified under the PAO but is a recognized PIE auditor of that company under the FRCO.
In relation to an application for the recognition of an overseas firm of practicing accountants under the FRCO on a request made by a company incorporated outside Hong Kong, the Stock Exchange may provide a statement of
no objection to that company appointing an overseas firm of practicing accountants to carry out a PIE engagement for that listed company. The Stock Exchange has codified in the Listing Rules, the previous Joint Policy Statement provision, which requires overseas audit firms to meet certain characteristics
when preparing accountants reports in relation to PIE engagements and notifiable transactions, the characteristics are that the audit firm must have an international name and reputation, be a member of a recognized body of accountants and be subject to independent oversight by a regulatory body of a jurisdiction that is a full signatory to the IOSCO MMOU.
The Listing Rules also provide that it would be acceptable if the relevant audit oversight body is not a signatory to the IOSCO MMOU, but the securities regulator in the same jurisdiction is a full signatory to the IOSCO MMOU. The Listing Rules also say that annual accounts must be audited by a person, firm or company.
Who must be qualified under the Professional Accountants Ordinance for appointment as an auditor of a company and a registered PIE auditor under the FRCO or an overseas firm of practicing accountants that is a recognized PIE auditor of that company under the FRCO. The Exchange has retained as guidance, a list of auditing standards that can be used to audit the financial statements of overseas issuers.
The alternative auditing standards, those of Australia, Canada, France, Italy, Singapore, and the UK’s international standards on auditing and the US, the US Public Company Accounting Oversight Board auditing standards.
Under Listing Rule 19.12 an accountant’s report will not normally be regarded as acceptable unless the accounts have been ordered to a standard comparable to that required by the Hong Kong Institute of Certified Public Accountants, or by the International Auditing and Assurance Standards Board of the International Federation of Accountants.
A new note to Listing Rule 19.12 provides a list of overseas alternative auditing standards that are considered comparable to the standard set out in Listing Rule 19.12 is published on the Stock Exchange’s website. The Stock Exchange has codified certain provisions of the Joint Policy Statement with respect to the suitability of alternative financial reporting standards.
The Joint Policy Statement previously provided that the suitability of alternative financial reporting standards depended on whether there is any significant difference between the foreign financial reporting standards and IFRS. And whether there’s any concrete proposal to converge or substantially converge the foreign financial reporting standards with IFRS.
On this basis, the Stock Exchange has accepted financial statements and accountants’ reports prepared in accordance with various foreign financial reporting standards and subject to certain limitations, as previously set up in the Joint Policy Statement. The Stock Exchange has codified in the Listing Rules, the basis for determining the suitability of alternative financial reporting standards as previously provided in the Joint Policy Statement, the list of acceptable alternative financial reporting standards has been retained as guidance as set out in and guidance letter 111-22.
The Stock Exchange has accepted IFRS as adopted by the European Union for companies incorporated in an EU member state. The generally accepted accounting principles in the US, US GAAP for companies which have, or a seeking a secondary listing or a dual primary listing in the US and on the Hong Kong Exchange. The Hong Kong Exchange has also accepted five foreign financial reporting standards for companies with, or seeking a primary listing in the same jurisdiction as the standard setter that have, or a seeking a dual primary listing or secondary listing on the Hong Kong Exchange.
The five financial reporting standards are the generally accepted accounting principles of Australia, Australian GAAP, Canadian GAAP, Japanese Generally Accepted Accounting Principles. That’s JGAAP, the Singapore Financial Reporting Standards and the UK GAAP. The Stock Exchange is also codified the requirement of the Joint Policy Statement that a listed company which has adopted one of the accepted alternative financial reporting standards must adopt HKFRS or IFRS if it delists from the jurisdiction of the alternative financial reporting standard. This requirement does not apply to listed companies incorporated in an EU member state, which have adopted EU IFRS.
An automatic grace period applies for the adoption of HKFRS or IFRS which ends on the first anniversary of the company’s delisting. An automatic grace period means that companies are granted a waiver from compliance without being required to make an application to the Stock Exchange.
Hong Kong Stock Exchange listed companies which have, or are applying to secondary list can choose to adopt US GAAP for the preparation of their financial statements. Previously, there was no Listing Rule requirement for companies with secondary listings to demonstrate their need to adopt US GAAP or to include a reconciliation statement in their financial statements.
Under the revised overseas listing regime, the Stock Exchange requires companies which adopt US GAAP for the preparation of their financial statements, including annual financial statements and the financial statements included in their accountants’ reports to demonstrate a reason for adopting this standard.
Specifically, they should have a primary listing on a US exchange. Companies are also now required under the Listing Rules to adopt IFRS or HKFRS if the circumstances for the reasons change. That is if the company delists from the relevant US exchange. In addition, the Listing Rules now require a company which adopts US GAAP for the preparation of its annual financial statements, to include a reconciliation statement, setting out the financial effect, if any material differences between its financial statements and financial statements prepared using HKFRS or IFRS as set out in the guidance letter 111-22, the reconciliation statement should at a minimum, include a line by line reconciliation of the company’s financial information, showing the material differences between its accounting policies under US GAAP and HKFRS, IFRS as well as explanations of the differences together with comparative information.
This reconciliation requirement will also continue to apply to listed companies which have adopted financial reporting standards other than HKFRS IFRS and CASBE.
The Listing Rules provide that in respect of US listed companies with a secondary listing on the Hong Kong Stock Exchange that have adopted US GAAP, the reconciliation statement requirement applies to the first annual financial statements for the financial year commencing on or after the 1st of January, 2022 and subsequent interim annual financial statements.
For example, for a company already listed on the 31st, December, 2021 with a December year end, that is, it’s financial year begins on the 1st of January, 2022, the first financial reports in respect of which a reconciliation statement will be required on the annual report for the year ended 31st, December, 2022.
And the interim report for the six months ended 30th of June, 2023. The Stock Exchange stated in its consultation conclusions that it may consider a grace period on a case specific basis, if the company encounters difficulty in complying with the requirement in time.
I’ll now talk briefly about some other miscellaneous changes, which have been introduced under the revised regime. New Listing Rule 8.02A codified the requirement previously included in the Joint Policy Statement that the statutory securities regulator, in both an overseas company’s jurisdiction, incorporation, and place of central management and control, if these are different, must be a full signature to the IOSCO MMOU.
And the ability to meet this regulatory cooperation requirement through the existence of a bilateral agreement with the SFC under the Joint Policy Statement has not been codified in the Listing Rules since it had not previously been relied on. The regulatory cooperation requirement has also been extended to apply to all listing applicants.
The requirement previously did not apply to companies incorporated in Hong Kong, China, Bermuda or Cayman Islands. Under new Listing Rule 8.02B the Stock Exchange may grant a waiver from this requirement on an individual case-by-case basis with the SFC’s explicit consent. In doing so will have regard to whether adequate arrangements exist to enable the SFC to access financial and operational information such as books and records on a company’s business and the relevant place of incorporation and place of central management and control for its investigation and enforcement purposes.
Under the amendments to the FRCO, the Stock Exchange is responsible for collecting two new FRC levies on behalf of the FRC. A FRC transaction levy on qualifying securities transactions and an annual PIE levy. The amended Listing Rules include new definitions of "SFC Transaction Levy" and "FRC Transaction Levy" to distinguish the two transaction levies to be collected and clarify their arrangements for the Stock Exchange’s collection of the FRC levies.
The Joint Policy Statement previously required certain overseas companies listed on the Hong Kong Exchange to make additional disclosures in company information sheets, which the Stock Exchange posts on its website. These requirements have been codified in the Listing Rules, which provides that company information sheets are required to be published by three categories of overseas companies.
These are overseas companies which are secondary listed on the Hong Kong Stock Exchange, overseas companies with a dual primary listing or a primary listing if any of the criteria set up in Listing Rule 19.60 applies, or the Stock Exchange is of the view that publication of a company information sheet would be informative to investors.
The circumstances under Listing Rule 19.60 requiring publication of a company information sheet include when novel waivers have been granted to the company, where the laws of the company’s home jurisdiction and primary listing market differ materially on three specified shareholder protection issues from those of Hong Kong and where the company is subject to withholding tax on distributions or any other tax on shareholders.
The reforms and changes to the Listing Rules and the Stock Exchange’s new guidance letters came into effect in January, 2022. The Exchange also amended various checklists forms and templates, including M105, M106, M108, G105, G106 and G108. These are all available on the website of the Hong Kong Stock Exchange.
The Exchange also mandated various guidance letters, including some of those which are listed on this slide. GL 102-19, accounting policies and stock taking procedures, GL 94-18, GL 93-18, GL 86-16, GL 57-13, 56-13, GL 55-13. So the listing decisions which are referred to on this slide were also revised.
LD 114-1 that’s acceptibility of a Luxembourg auditing firm, LD 99-3, special rights available only to one investor under convertible bonds contravened the general principle of fair and equal treatment of shareholders, listing decision 85-1 listing decision was withdrawn and superseded by guidance letter 111-22, LD 74-1, grant for waiver from the requirements for the accountants’ report for an acquisition where alternative disclosures is proposed, LD 43-3, whether the use of VIE structures may make a listing applicant, unsuitable for listing. And LD 28-2012, grant of a waiver from the requirements for the accountant’s report for an acquisition of a company listed on the Toronto stock exchange.
So that brings me more or less to the conclusion of the webinar. If you do have any questions, please send them in by email to juliacharlton@charltonslaw.com
and I’ll do my best to get back to you. Thank you again for joining me today. I do hope that you enjoyed this webinar, I’m sorry, it was a very technical webinar. I do look forward to seeing you again, and I wish you all a great evening and a wonderful weekend. Bye.
