Hong Kong Stock Exchange Amendments Aim to Attract More Biotechnology and Technology Listings

December 22, 2017

Certain pre-revenue biotech companies will be eligible to list on the Main Board, as will companies with weighted voting rights and overseas listings


The Hong Kong Stock Exchange (HKEx) recently published its consultation conclusions on the New Board Concept Paper on 15 December 2017 (Consultation Conclusion) after a two-month public consultation that began in June 2017.  The HKEx aims to strengthen and expand its listing regime so as to provide access to a more diverse range of companies, especially in the biotechnology, internet, and technology sectors (the “New Economy companies”[1]).

Instead of creating a new board as proposed in the New Board Concept Paper, the HKEx decided to amend the Main Board Listing Rules (Listing Rules) to allow the following types of New Economy companies to list on the Main Board:

(i) pre-revenue biotech companies;

(ii) companies with weighted voting rights (WVR) structures; and

(iii) overseas listed companies from emerging and innovative sectors that seek a secondary listing on the Main Board.

This is all promising news for a host of companies contemplating raising capital in Hong Kong.  This alert discusses these developments in more detail.

Pre-revenue Biotech Companies May List on the Main Board

A new chapter in the Listing Rules will be introduced to allow pre-revenue biotech companies to list on the Main Board. The HKEx initially proposed creating a new board for certain pre-revenue and pre-profit New Economy companies, but ultimately decided to preserve one premium Main Board rather than segment into two.

However, the HKEx will only allow biotech companies to list on a pre-revenue basis.  The rationale is that the biotech industry tends to be strictly regulated and such companies pose less risks to investors compared with other types of pre-revenue companies.  The HKEx notes that as it gains experience in listing companies from emerging and innovative sectors, it may update its guidance at a later date, as appropriate.

A biotech company wishing to apply for listing on the Main Board under this new chapter does not need to satisfy the financial eligibility test under Listing Rule 8.05, but will need to attain a minimum expected market capitalisation of HK$1.5 billion at the time of listing[2]. In addition, it must meet the following requirements:

  • engages primarily in research and development (R&D) in new or innovative products/processes/technologies;
  • has unique innovative features or intellectual property that could give rise to patents, copyrights, and/or trade secrets;
  • its main purpose for listing is to finance R&D for identified products/processes/technologies;
  • has at least one product/process/technology which has advanced beyond the “concept stage” (for example, having passed Phase I stage in relation to a clinical trial of a drug regulated by relevant drug and safety authorities such as the US FDA, China FDA, or European Medicines Agency [Europe] and has received all the necessary regulatory approvals to proceed to Phase II);
  • has a portfolio of durable patents, registered patents, and/or patent applications showing its rights to new technologies or innovations;
  • has received investment from at least one sophisticated investor, including financial institutions (note that, in order to ensure post-listing liquidity, shares held by cornerstone investors in the biotech company at the time of listing will not count towards the calculation of minimum public float);
  • is able to meet the enhanced capital requirements (125% of the issuer’s current requirements over the next 12 months) and has been in operation in its current line of businesses for at least two years prior to listing; and
  • is able to provide additional disclosures on risks, phases of development of its products, the potential market of its products, details of spending on R&D, patents granted and applied, and R&D experience of management.

Weighted Voting Rights

Weighted voting rights (WVR) are designed to give certain shareholders more rights than the others.  However, one of the main principles of the Listing Rules is that all shareholders shall be treated equally and fairly, and therefore, WVR structures were not permitted by the HKEx.  This issue came to a head when Hong Kong missed out on Alibaba’s listing in 2014.  Alibaba was subsequently listed on the NYSE in what was the largest IPO in history. 

Following the loss of the Alibaba IPO, the HKEx issued a WVR Concept Paper in 2014 and incorporated some of the feedback it received in the 2014 consultation into the New Board Concept Paper.  In the Consultation Conclusion, the HKEx decided to add a new chapter to the Listing Rules to facilitate the listing of “New Economy” companies with WVR structures.  To be eligible for listing under this new chapter, companies must meet the following criteria:

(a) Nature of the company: HKEx considers that a “New Economy” company is an innovative company which possesses two or more of the following characteristics:

  1. its success is attributable to the application of new technologies, innovations, and/or business model to the company’s core business, which also serves to differentiate the company from existing players;
  2. R&D is a significant contributor of expected value, and constitutes a major activity and expense;
  3. its success is demonstrated to be attributable to unique features or intellectual property; and
  4. it has an outsized market capitalisation/intangible asset value relative to its tangible asset value.

Note that this definition of New Economy company is also applicable to companies seeking a secondary listing in Hong Kong as further elaborated below.

(b) Company success: a track record of high business growth which can be objectively measured, such as by business operations, users, customers, unit sales, revenue, profits, and/or market value, and its high growth trajectory is expected to continue.

(c) Contribution of WVR holders: Each WVR holder has been materially responsible for the growth of the business, by way of their skills, knowledge, and/or strategic direction where the value of the company is largely attributable or attached to their contributions.

(d) Responsibility of WVR holders:

  1. Each WVR holder has an active executive role within the business and contributes to a material extent to the ongoing growth of the business.
  2. Each WVR holder is or would assume the role of director of the issuer at the time of listing.

(e) External validation: the applicant has received meaningful (being more than just a token investment) third party funding from sophisticated investors (including financial institutions), who will retain an aggregate of 50% of their investment at the time of listing for a period of at least six months after listing (subject to exceptions, such as a spin-off applicant).

(f) Minimum Financial Requirements: applicants are expected to have a market capitalization of no less than HK$10 billion.  For applicants with an expected market capitalization of less than HK$40 billion, it must also have at least HK$1 billion revenue for its most recent audited financial year.

(g) Eligible Persons: weighted shares may only be offered to company directors, so as to ensure that only persons who have been and will continue to be responsible for the company’s ongoing growth and success are eligible.  WVR attached to a share will lapse automatically if the weighted share is transferred to another person or the shareholder ceases to be a director of the company.

(h) Voting Power Limitation: the WVR of any share cannot exceed ten times those of an ordinary shares (i.e. one weighted share may not get more than ten votes).

There are some explicit protections for ordinary (non-WVR) shareholders, including representation at general meetings and ability to convene general meetings.  Also, key matters such as material changes to the company’s constitutional documents will be voted on a one-share-one-vote basis.

The HKEx will also implement enhanced disclosure and enhanced corporate governance measures, including appointment of a permanent compliance adviser.

Secondary listings

Currently, an issuer seeking a secondary listing on the HKEx must satisfy the following criteria:

  1. it is already listed on another stock exchange;
  2. the protections available to investors on that exchange are at least equivalent to those provided in Hong Kong;
  3. the majority of its equity securities will not be trading on the HKEx; and
  4. it satisfies the “centre of gravity” test[3] with respect to a foreign market.

HKEx proposes to create a new secondary listing route for a New Economy company that meets all of the above conditions and: 

  1. is primarily listed on a Qualifying Exchange[4];
  2. has a good record of compliance for at least two years on a Qualifying Exchange; and
  3. has an expected market capitalisation at the time of secondary listing in Hong Kong of at least HK$10 billion.

This new chapter will also remove the current prohibition on secondary listings in Hong Kong by companies listed in China.

To qualify for a secondary listing, a China-based issuer must have “centre of gravity” in Greater China (Greater China Companies) and have at least HK$1 billion of revenue in its most recent audited financial year if it has an expected market capitalisation at the time of secondary listing in Hong Kong of less than HK$40 billion.

The HKEx has classified companies seeking secondary listings in Hong Kong into:

(i) Grandfathered Greater China Companies (i.e. Greater China Companies that are listed on a Qualifying Exchange on or before the publication of the Consultation Conclusion);

(ii) non-Grandfathered Greater China Companies; and

(iii) non-Greater China Companies, for implementation of different measures, including:  

  • a Non-Grandfathered Greater China Company must amend its constitutional documents (as necessary) to meet equivalent shareholder protection standards to those of Hong Kong while non-Greater China Companies and Grandfathered Greater China Companies only need to comply with the Key Shareholder Protection Standards[5] under the Listing Rules.
  • All three types of company with a secondary listing in Hong Kong are automatically waived from compliance with certain Listing Rules.
  • The Takeovers Code would not apply to secondary listings of Greater China Companies.

The above measures are only applicable to companies seeking secondary listings in Hong Kong.  Where the bulk of trading in the shares of an issuer migrates to Hong Kong on a permanent basis, these companies would be treated as having a dual-primary listing in Hong Kong and granted only waivers that are commonly granted to dual-primary listed issuers.

Conclusion and Open Questions

HKEx is determined to open its market to New Economy companies so to capture market opportunities and respond to the needs of market participants.  While the Consultation Conclusion sets out a framework of the changes, many finer details remain open for discussion.

For instance, HKEx has explicitly left open the possibility of imposing quantitative performance measures on listed companies with WVR structures in the future.  It has also highlighted that some passive index funds are no longer including weighted shares companies with WVR structures into the index.  The new measures set out in the Consultation Conclusion still impose a number of restrictions.  A more unique structure such as the “Alibaba Partnership” may continue to fall outside the HKEx’s modernized regime.

HKEx intends to conduct further consultation on the proposed rule amendments in the first quarter of 2018.  It will also conduct a review of the existing rules and guidance in various respects (such as delineation of business, reliance, and competition) and will publish further guidance to facilitate the listing of “new economy” issuers within the existing regulatory framework.  The O’Melveny Asia capital markets team will continue to monitor these developments.

[1] “New Economy company” industries are defined by the HKEx as including Biotechnology, Health Care Technology, Internet & Direct Marketing Retail, Internet Software & Services, IT Services, Software, Technology Hardware, Storage & Peripherals

[2] This minimum expected market capitalization threshold is a proposal only and the Exchange may explore this proposed requirement with market participants to ensure that it is set at the appropriate level.

[3] The “centre of gravity” test refers to sufficient connection to a foreign market with reference to: (1) the issuer’s place of incorporation, location of head office and central management, (2) location of business and assets with reference to its corporate and tax registration, (3) number of HK shareholders, and (4) extent of trading on the Hong Kong Stock Exchange.

[4] New York Stock Exchange, NASDAQ, or the Main Market of the London Stock Exchange

[5] The key shareholder protection standards are set out in section 1 of the Joint Policy Statement Regarding the Listing of Overseas Companies jointly issued by the SFC and HKEx in September 2013. These standards include, amongst others, super-majority member voting requirements to approve fundamental matters; an alteration cannot be made to the constitutional documents to increase an existing member’s liability unless such amendment is approved by such member, etc.

This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. Edwin Kwok, an O'Melveny partner admitted to practice law in Hong Kong and qualified in England & Wales (non-practicing), contributed to the content of this newsletter. Other Asia capital markets partners in O’Melveny who practice Hong Kong IPOs include Geng Ke (Beijing), Portia Ku (Silicon Valley) and Kurt J. Berney (San Francisco, Shanghai). The views expressed in this newsletter are the views of the authors except as otherwise noted.

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