The GEM was originally established as an alternative market to the Main Board in November 1999 to provide capital formation opportunities for growth companies. Accordingly, unlike the Main Board, the GEM currently does not have a profit record, revenue or other financial standards requirements.
On 2 May 2008, the Stock Exchange published its Consultation Conclusions on its July 2007 Consultation Paper on GEM. The Consultation Conclusions set out the amendments which will be made to the GEM Listing Rules with effect from 1 July 2008 and implement the Stock Exchange’s proposal to reposition GEM as a stepping stone to the Main Board. The most significant changes include the imposition of higher initial entry criteria, namely requirements for:
- Aggregate operating cash flow of at least HK$20 million over the preceding 2 years;
- A minimum market capitalisation of HK$100 million (rather than the current effective HK$46 million);
- Public float of at least HK$30 million and 25% (or 15% – 25% if the issuer has a market capitalisation of at least HK$10 billion; and
- The latest 2 financial years under substantially the same management
The Exchange will also delegate the power to approve new listings from the Listing Committee to the Listing Division.
Subject to the requirements of the Listing Rules, companies incorporated in Hong Kong, the PRC, the Cayman Islands and Bermuda may be listed on the GEM. This paper will focus on the listing of a PRC company on the GEM.
2. Legal and Regulatory System
The legal system in the PRC, unlike that in Hong Kong, is not based on a common law system. The Chinese Company Law, effective from 1st July 1994, is also different from the company law in Hong Kong. To resolve the differences, the Exchange and the SFC liaised with the Chinese authorities, and as a result, the Special Regulations on the Overseas Offering and Listing of Shares by Joint Stock Limited Companies (the “Special Regulations”) were promulgated on 4th August 1994, and the Mandatory Provisions for Companies Listing Overseas (the “Mandatory Provisions”) on 27th August 1994.
The Special Regulations and the Mandatory Provisions are applicable to Chinese companies seeking listings overseas. In particular, the latter enhance basic shareholder protection under a Chinese company’s Articles of Association, to a similar standard to that provided under Hong Kong Company Law. The Mandatory Provisions include provisions relating to the rights of shareholders, directors’ fiduciary duties, corporate governance matters, financial disclosures, situations requiring a separate vote by holders of overseas listed foreign shares, and a mechanism for resolving disputes by arbitration.
PRC companies issuing shares in Hong Kong are subject not only to relevant Chinese laws and regulations, but also to Hong Kong applicable laws and non-statutory codes. These include:
- The Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the “Listing Rules”);
- the Companies Ordinance, the Securities and Futures Ordinance; and
- the Code on Takeovers and Mergers, and the Code on Share Repurchases
The Listing Rules are as applicable to Chinese issuers as they are to Hong Kong and overseas incorporated issuers. However, in view of the existence of two separate markets (domestic and foreign) for the securities of Chinese issuers, and the differences between the Chinese and Hong Kong legal systems, some additional requirements, modifications and exceptions are set out in Chapter 25 of the GEM Listing Rules, specifically designed for Chinese issuers. H Shares can be subscribed for and traded in other currencies in addition to Hong Kong dollars.