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Listing Russian companies in Hong Kong

Listing Russian companies in Hong Kong

Shareholders’ approval of directors’ service contracts

Hong Kong Law (Listing Rules) Russian Law
Prior shareholder approval is required for directors’ service contracts which may last for more than 3 years or provide for more than 1 year’s notice of termination or a compensation payment equivalent to more than 1 year’s emoluments. As the Board must be re-elected each year, it would not be feasible for the shareholders to approve these matters. All directors’ service contracts must be reviewed and approved by the Remuneration Committee.
Approach of the Exchange under the Country Guide – Russia The annual re-election of the Board by shareholders provides sufficient shareholder protection safeguard over the employment of directors. The Exchange considers the Rule regarding shareholders’ approval of directors’ service contracts as inapplicable to Russian companies, and consequently would expect to be prepared to grant a waiver from strict compliance with the Listing Rules.

Notifiable Transactions

Hong Kong Law (Listing Rules) Russian Law
Shareholders’ approval is required for a transaction where the relevant percentage ratio is at least 25%, subject to certain exemptions.

Shareholders’ approval is required for a transaction with a value of at least 50% of the company’s book asset value, subject to certain exceptions.

Board approval is required for a transaction with a value of 25% to 50% of the company’s book asset value. Where requisite Board approval is not achieved, a 75% majority vote at a general shareholders’ meeting may approve the transaction.

These are the only circumstances in which a company is permitted to submit material transactions to shareholders for their approval.

Approach of the Exchange under the Country Guide – Russia

Differences in shareholder protection standards may be resolved through amendments to the issuer’s constitutional documents such as requirements that:

  • where shareholders’ approval is not required under Russian law, the directors of the issuer must obtain an independent shareholders’ opinion in the form of an “advisory vote” for any transaction which would require shareholders’ approval under the Listing Rules. Independence of a shareholder should be benchmarked against the Listing Rules’ standards; and
  • the directors may only approve a transaction where the majority of votes cast by the independent shareholders for the purpose of the advisory vote are in favour of the transaction.

Connected Transactions

Hong Kong Law (Listing Rules) Russian Law

Shareholders’ approval at a general meeting is required for a transaction between a connected person and the listed issuer, subject to certain exemptions.

A connected person includes a director, chief executive or substantial shareholder of the listed issuer or any of its subsidiaries, a person who was a director of the listed issuer or any of its subsidiaries in the last 12 months, a supervisor of a PRC issuer or any of its subsidiaries, an associate of any of the above-mentioned persons, a connected subsidiary, or a person deemed to be connected by the Exchange.

Shareholders’ approval is required for a transaction between an “interested person” and the company with a value of at least 2% of the company’s book asset value, subject to certain exceptions.

Interested persons may include a member of the Board, management board or the CEO/management company, any shareholder which alone or together with its affiliates holds 20% or more of the company’s voting shares, any person who can give mandatory instructions to the company, any other persons indicated in the company’s constitutional documents, or an associate of any of the above-mentioned persons.

These are the only circumstances in which a company is permitted to submit transactions with an “interested person” to shareholders for their approval.

Approach of the Exchange under the Country Guide – Russia

Differences in shareholder protection standards may be resolved through amendments to the issuer’s constitutional documents so that interested persons include each connected person as specified in the Listing Rules, and include the requirements that:

  • where shareholder approval is not required under Russian law, the directors of the issuer must obtain an independent shareholders’ opinion in the form of an “advisory vote” for any transaction which would require independent shareholders’ approval under the Listing Rules. Independence of a shareholder shall be benchmarked against the Listing Rules’ standards; and
  • the directors may only approve a transaction where the majority of votes cast by the independent shareholders for the purpose of the advisory vote are in favour of the transaction.

Depositary Receipt Programmes

Hong Kong Law (Joint Policy Statement) Russian Law

An overseas issuer must notify the Exchange if the laws and regulations of its home jurisdiction do not recognise a nominee company holding securities on behalf of third parties, for example the HKSCC Nominees that holds listed securities on behalf of Central Clearing and Settlement System (CCASS) participants.

An overseas issuer must notify the Exchange as to who will be recognised as the legal owners of the securities in the issuer’s place of incorporation.

A Russian issuer seeking an overseas listing in Hong Kong can only list in the form of depositary receipts on the Main Board.

There is legal uncertainty as to who should be recognised as the legal owners of the securities under Russian law. Typically, depository banks may open “depo” accounts with the National Settlement Depositary which allow them to be treated as nominee holders of the shares in Russian companies and not as direct shareholders. However, under some applicable Russian securities markets laws, depository banks are regarded as shareholders of Russian companies and only they may practically exercise certain shareholders’ rights and perform relevant obligations.

Approach of the Exchange under the Country Guide – Russia

The Hong Kong depositary must be a suitably authorised and regulated financial institution acceptable to the Exchange to ensure, inter alia, that the relevant depositary receipts held under CCASS are eligible securities for deposit, clearance and settlement in CCASS. In evaluating suitability, the Exchange will take into account the jurisdiction of incorporation of the Hong Kong depositary. The governing law of the deposit agreement should be either that of Hong Kong or that of a jurisdiction that accords with international practice.

The listing document should include full details of:

  1. the rights and obligations of depositary receipt holders including how their rights may be enforced against the Russian issuer and/or the Hong Kong depositary in Hong Kong and Russia;
  2. the associated risks to the Russian issuer and its depositary receipt holders; and
  3. full details of the clearing and settlement arrangements including how Hong Kong investors (through HKSCC Nominees) will hold the depositary receipts and the roles and responsibilities of any domestic depositary, the Hong Kong depositary and CCASS, including with reference to any applicable Russian rules and regulations.

The deposit agreement is required to be in a form acceptable to the Exchange. Thus, a Russian issuer should early consult the Exchange on the terms of the deposit agreement.

Share Buy-backs

Russian Law Differences between Russian Law and the Hong Kong Share Buy-backs Code

Shareholders may request the company to buy-back their shares in certain circumstances, including reorganisation of the company, major transactions, amendments to constitutional documents which limit the shareholders’ rights or delisting of the company’s shares, provided that the requesting shareholder voted against or abstained from voting under such circumstances.

The company may not reject such buy-back as it is a statutory requirement (Russian Mandatory Share Buy-back).

Subject to the confirmation of the SFC, the Russian Mandatory Share Buy-back is an exempt share buyback for the purposes of the Hong Kong Share Buy-backs Code.

The requirement for SFC approval of off-market buy-backs may not be in compliance with Russian law, because it would be considered as limiting the rights of the shareholders and the company under Russian law.

The company would need to follow the share buy-back offer requirements under Russian law.

Russian law does not require independent shareholders’ approval.

Approach of the Exchange under the Country Guide – Russia

The jurisdictional differences between Russia and Hong Kong regarding share buy-back requirements can be resolved by obliging the Russian incorporated issuer to disclose in its listing document the requirements for share buy-back under both jurisdictions and requirements that it must:

  • not carry out voluntary off-market buy-back or share buy-back by general offer unless the Hong Kong share buy-back requirements are followed (i.e. seeking the SFC’s approval before obtaining an independent shareholders’ approval, as well as corporate approvals under Russian law); and
  • seek the SFC’s confirmation on an exempted transaction regarding any Russian Mandatory Share Buy-back when the circumstances arise.

Constitutional Documents

Russian rules and regulations do not include provisions equivalent to all of Hong Kong’s Listing Rules regarding the contents of constitutional documents. Some of the items that a Russian issuer should include in its constitutional documents so as to satisfy Hong Kong’s requirements are set out below:

Hong Kong Law (Listing Rules) Russian Laws, Regulations and Practice Approach of the Exchange under the Country Guide – Russia
Power taken to forfeit unclaimed dividends should not be exercised until at least six years after the date of declaration of the dividend. The exercise of a power to forfeit dividends is permitted five years after the date of declaration of the dividend. This period cannot be extended.

The difference between the jurisdictions is immaterial to shareholder protection. The requirement under Russian law must be disclosed in the listing document. The Exchange would expect to be prepared to grant a waiver for this item.

Under the Joint Policy Statement, an eligible secondary listing applicant is entitled to an “automatic waiver” for this item.

The minimum length of the period for shareholders to lodge their notice with the issuer to nominate a director and for the proposed director to notify the issuer of his willingness to be elected must be at least 7 days. This period cannot commence before the day after the dispatch of the notice of the meeting appointed for such election and must end no later than 7 days prior to the date of such meeting.

Notices proposing a person for election as a director are required to be lodged no later than 30 days after the end of the financial year (in the event of an AGM), and no later than 30 days prior to the date of the general meeting (for an EGM).

The notice period for lodgement of notices in the Listing Rules could potentially expire before shareholders receive their notice of meeting.

A Russian issuer’s constitutional documents should be amended so as to increase the minimum meeting notice period so that the notice period for lodgement of notices in the Listing Rules will not expire before shareholders receive their notice of meeting.

Under the Joint Policy Statement, an eligible secondary listing applicant is entitled to an “automatic waiver” for this item.

If the Listing Rules require a shareholder to abstain from voting on any particular resolution or restrict the shareholder to voting only for or only against any particular resolution, any votes cast by or on behalf of such shareholder in breach of such requirement or restriction must not be counted.

A shareholder’s vote should be counted, except where the shareholder must abstain under Russian law. Where there are differences between Russian law and the Listing Rules, it is not possible to adopt the position under the Listing Rules.

In relation to interested party transactions under Russian law, a Russian company may amend its constitutional documents so that parties regarded as interested in a certain transaction under the Listing Rules will not be permitted to vote, and, if they vote, their vote would not be counted.

A Russian issuer should amend its constitutional documents so that parties regarded as interested in a certain transaction under the Listing Rules will not be permitted to vote, and, if they vote, their vote would not be counted.

An alternative to a constitutional document amendment accepted by the Exchange is the adoption of internal procedures which satisfy the Exchange that the issuer will not carry out any transaction which is the subject matter of the approved resolution, except where the resolution would have still passed if the votes of the interested shareholders under the Listing Rules had not been counted. These procedures must be disclosed in the listing document.

Under the Joint Policy Statement, no “automatic waiver” is available to a secondary listing applicant for this item.

Accounting and Auditing Related Requirements

Hong Kong Law (Listing Rules and Joint Policy Statement) Approach of the Exchange under the Country Guide – Russia
Accountants’ reports and financial statements of overseas issuers seeking a primary or secondary listing must conform to: (i) the Hong Kong Financial Reporting Standards; or (ii) the International Financial Reporting Standards; or (iii) the general accepted accounting principles of the United States (in the case of secondary listings). The accounting and auditing related requirements are specified in section 3 of the Joint Policy Statement. There has been no examination of the acceptability of Russian generally accepted accounting practices or Russian auditing standards. In order to use Russian generally accepted accounting practices and auditing standards, a Russian issuer must demonstrate to the Exchange that the Russian standards are comparable to those required in Hong Kong.

Taxation

Russian Law Approach of the Exchange under the Country Guide – Russia

As a general rule, Russian income tax of 15% would be withheld in relation to the dividends payable to overseas shareholders, subject to any applicable double taxation treaties.

Capital gain from sales of securities is taxable at the general corporate income tax rate of 20%, which is subject to a number of exemptions and applicable double taxation treaties.

The Exchange expects a Russian issuer to prominently and fully disclose the following in its listing document:

  • details of any Russian taxes (including capital gains tax and withholding tax on dividends), including the applicable rates, investors in its securities will have to pay;
  • details of any treaty between Russia and Hong Kong that may affect the taxes payable;
  • the effect of holding depositary receipts through CCASS or outside CCASS on any tax payable (where applicable); and
  • the procedures for paying capital gains tax and for claiming any tax relief or exemptions

Appropriate disclosure of taxation should be made in at least the “Summary” and “Risk Factors” sections of the issuer’s listing document and any sections summarising Russian laws and regulations.

March 2016

This note is provided for information purposes only and does not constitute legal advice. Specific advice should be sought in relation to any particular situation. This note has been prepared based on the laws and regulations in force at the date of this note which may be subsequently amended, modified, re-enacted, restated or replaced.

Listing Russian companies on the Hong Kong Stock Exchange

IOSCO MMoU

Shanghai-Hong Kong Stock Connect

Benefits of a Hong Kong listing

HKEx and SFC Joint Policy Statement Regarding the Listing of Overseas Companies

Country Guide for an Acceptable Jurisdiction by the Hong Kong Stock Exchange

Hong Kong Depositary Receipts (HDRs)

Qualifications for a Hong Kong listing

IRC Limited

United Company Rusal PLC

Hong Kong listing process
Secondary listing by way of introduction in Hong Kong
Hang Seng Stock Exchange
Hong Kong Share Prices

 

Skills

Posted on

2015-03-13