H shares is the popular term for the listing of Chinese companies’ shares on the Hong Kong Stock Exchange (the “Exchange”). The first H shares were listed on the Exchange in 1993. As at 31 December 2013, 178 H share companies were listed on the Main Board and the Growth Enterprise Market (“GEM”) of the Exchange. All of these companies are joint stock limited companies incorporated in the PRC. Such companies are different from the so-called red chip companies incorporated in Hong Kong or in an offshore jurisdiction with major assets in the PRC which are controlled by PRC government entities or individuals.
The Main Board caters for established companies with a profitable operating track record or able to meet alternative financial standards to the profit requirement. The Main Board is designed to give these companies an opportunity to raise further funds from the market in order to finance future growth. Unlike GEM, which caters for growth companies and has lower admission criteria, the Main Board is considered to offer investors better security for their investments.
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 Main Board. This paper will focus on the listing of a PRC company (the “PRC issuer”) on the Main Board.
2. Benefits of Listing
There are many reasons for listing on the Exchange, but specifically in relation to Chinese companies, the following reasons should be borne in mind:
- access to international funds, as Hong Kong has no foreign exchange controls, is a regional and international financial centre, and is a base for some of the world’s most successful fund managers;
- active post-listing trading which facilitates subsequent fund-raising. This is attributable to an active interest in, and more in-depth understanding of the China market due to geographical and cultural proximity, a high concentration of analysts focused on China and the existence of a separate Hang Seng Chinese Enterprise Index;
- securing the interest and confidence of international investors who are familiar with the standards of regulation in Hong Kong;
- enhanced profile and reputation through participation in an international financial centre located in the financial hub of the Asia Pacific region; and
- positive pressure on the management of Chinese issuers to appreciate and follow international standards in terms of transparency and protection of minority shareholders.
3. 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 and as amended with effect from 1 January 2006, 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 and 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 19A of the Main Board Listing Rules specifically designed for Chinese issuers. H Shares can be subscribed for and traded in other currencies in addition to Hong Kong dollars.