Hong Kong - Not so close to listing companies with weighted voting rights structures on the SEHK?

A week is a long time in Hong Kong.

Yesterday, the Securities and Futures Commission published an objection statement to the Hong Kong Stock Exchange’s draft proposal on disproportionate voting rights (“WVR structure”), making the SFC’s objection to the proposals public. In response, the Exchange said it will further engage with the SFC and the Listing Committee to decide the best way forward. It is clear that there is a difference in opinion between the two regulators regarding WVR structures and that it may take longer than anticipated to come to any landing on this issue.

The SFC had not yet commented on the Exchange’s conclusions to the concept paper, but the SFC’s pointed and public objection to the Exchange’s proposals came as a surprise to everyone.

The SFC said it upholds the core principles of fairness and transparency and considers long and short term objectives in carrying out its regulatory functions, hinting that the Exchange’s focus on maintaining Hong Kong’s competitive position with other markets, in particular the United States, for the listing of certain targeted businesses, is a short term view.

The SFC highlighted its major concerns over the draft proposal as follows:

  • A company with a very large market capitalisation offers no assurance that it would treat its shareholders fairly. To make matters worse, any corporate misconduct by a company with a large market capitalisation will likely affect more investors and have a greater impact on the markets.

  • A proposal that requires the regulators to exercise subjective judgement to assess compliance with eligibility for listing criteria would give rise to uncertainty and could lead to inconsistent and unfair decision-making. This relates to the proposal that eligible WVR applicants should have unique features relating to their businesses in order to be eligible for listing.

  • Limiting WVR structures to new listing applicants as the principal measure to ensure WVR structures will not become commonplace in the Hong Kong market is insufficient. There must be effective measures to prevent circumvention of the rules through corporate restructuring or other corporate activities such as spin-offs, takeovers and assets transfers.

    The SFC’s response focuses on applications for primary listing by WVR applicants, leaving ambiguity as to whether it may become available for applications for secondary listing by WVR applicants. Even if it did, it remains to be seen whether this will offer a meaningful route to listing in Hong Kong by WVR applicants since very few foreign exchanges allow the primary listing of WVR applicants and the Exchange’s rules for secondary listing in Hong Kong, although recently streamlined, remain stringent.

    It is to be hoped that the two front line regulators of listings in Hong Kong can come to a common view on how to balance the competing demands of maintaining the Exchange’s competitive positon and protecting the interests of investors soon.