An overview of secondary listings
When the Hong Kong Exchange and Clearing Limited (HKEX) made a surprise bid to take over the London Stock Exchange Group in September 2019, HKEX made clear its ambition to build the world’s largest financial marketplace.
Consistently ranked among the top five stock exchange operators by market capitalisation, the HKEX made further headlines recently when it announced that Hong Kong Futures Market would replace the Singapore Stock Exchange as the market for MSCI derivatives product.
Now, in a move designed to lure more technology companies from the dominance of Nasdaq, HKEX is currently mooting plans to extend the use of dual-class stock structures, in a proposal that would allow the listings of a wider array of companies with a dual-class shares structure. Applicants that have corporate shareholders with weighted voting rights will probably be qualified for secondary listings in Hong Kong in the future. At the same time, the current rule limits the right to only founders and key staff.
Companies choose to secondary list in Hong Kong as they look to access new capital markets while being subject to the listing rules of the market of primary listing. The HKEX secondary listing guidelines give listing applicants some greater flexibility, taking into account the corporate governance requirements of the primary listing authority.
Secondary listings in Hong Kong are appealing for companies as they wish to leverage HKEX’s close relationship with Mainland China to diversify their shareholder base, which in the long run can enhance their valuations and corporate image. Secondary listings will also increase the trading volume and liquidity for company shares. Trading in different stock exchanges in the US/UK and Hong Kong and different time zones mean that there is easier trading of company shares.
The relaxation of the dual-class stock structure could not come at a more convenient time, amid the background of rising US-China geopolitical tensions. After the approval by the US Senate of the Holding Foreign Companies Accountable Act in May 2020, US-listed companies would have to certify that “they are not owned or controlled by a foreign government,” as well as face greater auditing measures. This new legislation is widely considered as a tool of the Trump administration to exert additional pressure on Chinese entities on the Nasdaq.
Alibaba and the drive for change
One share, one vote has long been the pillar of corporate governance in many common law jurisdictions, including the London Stock Exchange. However, for Nasdaq, dual-class share arrangements have long been the norm among technology companies, where different classes of shares have different voting rights.
One class allows founders and executives of the company to have more voting power, while the other class (class B) is issued to the public, with limited or no voting rights. The latter is referred to as Weighted Voting Right or WVR structure.
Before 2018, dual-class shares were not allowed in Hong Kong, other than in exceptional circumstances as agreed with HKEX.
When Alibaba was considering the jurisdiction of its IPO in 2014, Alibaba attempted to persuade HKEX to agree on the exceptional circumstances. Still, Hong Kong refused to compromise on its one shareholder, one vote principle for the company. At that time, 28 Alibaba partners, despite controlling just 10% of shares, controlled most of the board of directors. Following this decision, in September 2014 Alibaba chose to list in New York, where WVR structured companies are permitted to list. Other tech companies followed Alibaba and placed their primary listings in the Nasdaq. The US$25 billion Alibaba listing in 2014 was, at that time, the biggest IPO ever.
2018 listing rules
In 2018, however, the HKEX changed the Main Board Listing Rules (Listing Rules) to enable WVR structures for technology issuers.
A. Chapter 8A – listings of innovative companies with WVR structures
i. Qualifications for listing with a WVR structure
Under the 2018 Listing Rules, a new applicant seeking a listing with a WVR structure will need to satisfy the following criteria:
- The listing candidate must be a new applicant. Existing companies listed on HKEX are not allowed to change into a WVR structure.
- Market capitalisation of at least HK$40,000,000,000 at the time of listing; or a market capitalisation of at least HK$10,000,000,000 at the time of listing and revenue of at least HK$1,000,000,000 for the most recent audited financial year.
- Applicant must be an innovative company.
- Demonstration of high business growth.
- The listing candidate must have received significant investments from third parties.
ii. Restriction on WVR structures
Under the listing rules, the persons who hold the weighted voting rights must be individuals who are directors in the listing applicant at the time of, and following, the IPO.
There is an overall prohibition on the transfer of the voting shares after the IPO.
iii. Additional listing requirements and shareholder protection introduced with the 2018 listing rules
- Following the listing, the WVR shares are not tradable.
- The ratio of WVR share voting rights cannot be increased following the listing.
- Voting rights of WVR shares cannot provide to their beneficiary more than ten times the voting power of ordinary shares.
- Holders of ordinary shares should be entitled to cast at least 10% of the votes on resolutions at the issuer’s general meeting.
- WVR beneficiaries must own collectively at least 10% of the applicant’s underlying economic interest at the time of the initial listing.
B. Chapter 18A – listing for pre-revenue biotech companies
Chapter 18A aimed to facilitate biotech companies seeking to list on the mainboard but cannot meet the profit test or market capitalisation test. Following this introduction, Hong Kong became the second-largest biotech listing venue in the world in 2019.
C. Chapter 19C – secondary listing route for innovative companies listed abroad
Before the entry into force of Chapter 19C on 30 April 2018, HKEX accepted secondary listings from oversea listed entities whose centre of gravity was only outside Greater China. This arrangement prevented mainland entities from accessing Hong Kong via a secondary listing. However, Chapter 19C was added to attract fast-growing and innovative companies while facilitating secondary listings in Hong Kong of applicants from Greater China.
Chapter 19C introduced three categories of qualifying issuers:
- Grandfathered Greater China Issuer – An issuer with its centre of gravity in China and primary listed on the qualifying exchange on or before 15 December 2017.
- Non-Grandfathered Greater China Issuer – An issuer with its centre of gravity in Greater China which was primary listed on the qualifying exchange after 15 December 2017.
- Non-Greater China Issuer – An issuer with its centre of gravity outside of Greater China and primary listed on the qualifying exchange.
Grandfathered Grand China Issuers have significantly fewer listing requirements to meet. They are not obliged to amend their constitutional documents to meet Hong Kong’s key shareholder protection standards and can secondary list with their existing VIE in place.
The applicant needs to be an innovative company. To fulfil this criterion, a company is expected to have two or more of the following characteristics:
- Its success is attributed to the application of new technologies, innovations and/or a new business model to its core business, which differentiates the applicant from existing players
- R&D significantly contributes to its expected value and comprises a major expense
- The company has unique features and/or intellectually property
- The company has an outsized market capitalisation/intangible asset value relative to its tangible asset value
There are extensive waivers that are available for companies looking to secondary list in Hong Kong if:
- Market capitalisation in excess of US$400 million
- Primary listed on one of the recognised exchanges for at least five years
- Demonstrate a good compliance record
US GAAP accounting standards can be used without reconciliation to HKFRS/IFRS standards. There are also automatic waivers to Chapter 14A requirements for connected transactions and Chapter 14A requirements for notifiable transactions, with companies only needing to comply with the regulations on their primary exchange. Other typical financial waivers include companies not needing to submit a balance sheet on a company level or an ageing analysis of ARAP.
The timeframe for secondary listing in Hong Kong will vary depending on the information submitted and the background of the proposed issuers, such as industry, track record, primary listing location etc. For some well-prepared applicants, it may only take three months for the entire secondary listing process.
Hang Seng Index admits secondary listings
Another momentous change is that the 50-year-old Hang Seng Index has been revamped to allow technology giants such as Xiaomi, with its WVR structure, and Alibaba, with its secondary listing, to be included in the index. Until now, the index has excluded WVR and secondary-listing companies even though they are the largest and most traded shares in Hong Kong. It marks the most important revamp of the 50-year-old Hang Seng Index since the inclusion of H-shares in 2006.
The new Hang Seng Tech Index, which debuted on 27 July, tracks the 30 largest technology companies listed in the HKEX by market capitalisation. The new index trades at about 45 times earnings, as compared to Hang Seng Index’s PE ratio of 12.
The new index will provide greater access to new economy and tech companies, making it easier for investors to tap into the growth of Chinese tech giants and providing huge incentive for US-listed Chinese firms to “come home” via secondary listing.
NetEase and JD.com secondary listing results set a new trend
Technological companies seem to welcome HKEX’s change in policies with an increasing trend in secondary listing in Hong Kong. Following the momentum brought about by the successful listing of Alibaba and Meituan Dianping on HKEX, NetEase, China’s second-largest video game developer, debuted in the Hong Kong markets on 11 June 2020.
Trading initially at an IPO price of HK$123, NetEase closed at HK$130, up by more than 5% in their first day. NetEase’s listing was oversubscribed by about 360 times by retail investors and 14 times by institutional investors. The secondary offering was the second-highest traded company on HKEX, helping NetEase raise HK$21.09 billion. NetEase hopes to use the funds to finance innovation and international expansions, including studios in Tokyo and Montreal.
JD.com, China’s second-largest e-commerce platform, followed the success of NetEase’s secondary listing in Hong Kong and debuted in the Hong Kong markets on 18 June 2020. Opening to great interest from Hong Kong investors, the JD.com shares opened at HK$239 and closed at HK$234, 3.5% higher after a day of trading and raising HK$30.05 billion. JD.com aims to use the money to invest in supply chain technology incentives to improve on customer engagement and improving operating efficiency. The funds raised by secondary listing in Hong Kong will help JD.com capitalise on the surge in demand in online shopping following COVID-19 and the lockdown protocols.
Looking into the second half of 2020, there remains a huge interest in secondary listings in Hong Kong. The overwhelming success of companies undertaking secondary listings, as seen in NetEase and JD.com, is paving the way for an increased migration to the HKEX. The market expects that there will be five to eight secondary listings in the coming months, with Chinese search giant. Baidu and catering group, Yum China, developing plans to pursue secondary listing in Hong Kong. They believe that pursuing secondary listing in Hong Kong can diversify its shareholder base and allow the companies to develop policies closer to the consumer trends in Asia.
Secondary listings will also increase southbound capital flows, as it enables Chinese investors who were unable to invest in US-listing Chinese companies to purchase secondary listed shares through the stock connect mechanism. Investors should also see an increase in the overall quality and diversity of Chinese stocks in HKEX as most high quality stocks belong to high technology and new economy companies. The new Hang Seng Tech Index will also have a positive impact on the index’s price-earnings ratio.
Acclime is a significant player in the market, providing corporate secretarial services to 17 companies listed on the HKEX. Our partners/directors also act as the named company secretary for some of these listing companies. We have dedicated team to provide the following advisory services to companies considering IPO in Hong Kong:
- IPO readiness assessment
- Advising on the appointment of other professionals involved in the IPO
- Performing due diligence with the relevant professionals on the business and financial affairs of the clients
- Advising clients on their capital structure, invitation structure, marketing theme, and timing of the IPO, etc., to maximise investor acceptance and shareholder value
- Post-listing compliance and corporate governance services
For more information, please contact Gary Wong (firstname.lastname@example.org) or your usual Acclime client manager.
Bonus: Acclime webinar on secondary listings in Hong Kong
Are you interested in learning more about secondary listings in Hong Kong? Indulge in an hour-long discussion with our four speakers who provided not just in-depth insights on secondary listings in Hong Kong, but also market updates on IPO.