On 11 December 2020, Julia Charlton presented Part 1 of a 3-Part webinar series on Listing WVR, pre-revenue biotech and mineral companies, focusing on listing companies with WVR structures under Chapter 8A of the HKEX Listing Rules.

Part I – HKEX: Listing WVR structured companies

Listing Rules

Ch.8A  Tech companies with WVRs
Ch.19C Secondary listing innovative companies
Ch.18A Pre-revenue biotech companies
Ch.18 Mineral companies

IPO Market Stats 2018 & 2019

Global IPO Market Q3 2020

44% of HKEx market cap. attributed to financial and property sector companies in May 2017
2007 – 2019 new economy companies (as a % of market cap)
HKEx – 3%
NASDAQ – 60%
NYSE – 47%
LSE – 14%

Tech Cos and Main Board of HKEx
33.2% of HKEx Main Board market cap (as at 30 June 2020) attributed to tech cos
163 tech cos listed on the Main Board (as at 30 June 2020)
27.6%  (by value) of shares traded on the HKEx in  the first half of 2020 were tech stocks

Chinese Tech Cos

Jul 2018 HK$42.6bn IPO
Aug 2018 HK$58.8bn IPO
Nov 2018 HK$101.2bn secondary listing under Ch.19C

Ch.18A Listings

Listings of pre-revenue biotech companies under Ch.18A

Listings Cos with WVR Structures (Ch.8A)

Why did the rules change?

  • advantages of WVR structures e.g. allowing founders to fend off hostile takeovers and protecting the company from the short-term focus of institutional investors
  • loss of Alibaba US$21.8 bn IPO in 2014 to the NYSE
  • Chinese tech companies increasingly preferring Hong Kong listings over US listings

China’s Pipeline of Unicorns

Corporate WVR Beneficiaries

Greater China issuers that are:

  • controlled by corporate WVR beneficiaries as at 30 Oct 2020; and
  • are primary listed on a qualifying exchange on or before 30 Oct 2020

will be treated in the same manner as Grandfathered Greater China Issuers for the purposes of Ch.19C.

WVR Structures Eligible for Primary Listing

  • definition of WVRs – the voting power attached to a share of a particular class that is greater than the voting power attached to an ordinary share, or another governance right or arrangement which is disproportionate to the beneficiary’s economic interest in a listco’s shares (LR8A.02)
  • only companies with share-based WVR structures are allowed to list in Hong Kong

Listing Criteria (HKEx-GL93-18)

(01) must be an innovative company i.e it has 1+ of the following characteristics: 

  1. success attributable to application of new tech/innovations and/or new business model to its core business, which differentiates it from existing players
  2. R&D significantly contributes to expected value and comprises major activity and expense
  3. success attributable to unique features / IP
  4. has an outsized market cap/intangible asset value relative to tangible asset value

(02) must have a track record of high business growth

(03) WVR beneficiaries have been materially responsible for the business’ growth

(04) individuals who are directors at listing have materially contributed to business’ ongoing growth

(05) must have previously received meaningful 3rd party investment from sophisticated investor(s)

sophisticated investors are investors the HKEx considers to be sophisticated by reference to factors including net assets or AUM, investment experience, knowledge and expertise in the relevant field

sophisticated investors must retain 50% of their investment at listing for at least 6 months after listing

Market Cap. Requirements

  • at least HK$40 bn at listing; or
  • market cap of at least HK$10 bn at listing and at least HK$1 bn of revenue in the most recent financial year

Ring fencing & anti-avoidance

  • only new listing applications may list with a WVR structure
  • cannot increase the proportion of WVR shares from the proportion in issue at the date of listing (LR8A.13)
  • restrictions on further issues of shares with WVRs
  • prohibited from changing the terms of a class of shares carrying WVRs to increase the WVRs carried by that share class

WVR Beneficiaries

  • must be natural persons who must be directors at the time the company lists on the HKEx
  • must be individuals with an active executive role within the business who have materially contributed to the growth of the business
  • WVRs cease on death or when the WVR beneficiary ceases to be a director
  • must collectively beneficially own at least 10% of the underlying economic interest in the total issued share capital
  • WVR beneficiaries (and any vehicle through which the beneficiary holds shares carrying WVRs) are deemed to be connected persons and core connected persons (if not already)

Ownership Continuity and Control

listing applicant may be able to rebut presumption of a change in ownership continuity and control by demonstrating that there was no material change in influence on management

Limits on WVR Power

  • WVRs can only attach to a class of shares and that class is not eligible for listing
  • HKEx expects only one share class to carry WVRs
  • WVRs can only confer enhanced voting power on resolutions tabled at general meetings but cannot confer enhanced voting power on matters the Listing Rules require to be decided on a one vote per share basis
  • other rights attached to WVR shares must be the same as the rights attached to the company’s ordinary shares
  • WVR beneficiaries must not be entitled to more than 10% of the voting power of ordinary shares
  • non-WVR shareholders must be entitled to cast at least 10% of votes that are eligible to be cast on resolutions at the company’s general meetings

Non-WVR Shareholders’ Rights

non-WVR shareholders holding 10%+ of voting rights on a one vote per share basis must be able to convene an EGM and to add resolutions to the meeting agenda

WVR Shareholders’ Rights

  • cannot remove or modify WVR structures
  • WVRs attached to a share class can only be varied with the consent of the holders of that share class

Restrictions on Transfer of WVR Shares

WVRs attached to WVR beneficiary’s shares cease if the WVR beneficiary transfers his/her beneficial ownership of or economic interest in the WVR shares to another person or transfers control over the voting rights attached to his/her shares to a third party

Conversion of WVR shares to ordinary shares

  • conversion must be on a one-to-one basis
  • HKEx approval is required for listing shares issuable on conversion of the shares carrying WVRs

Disclosure Requirements for WVR Companies

  1. prominent warning (“a company controlled through WVRs)
  2. disclosure of structure, rationale & risks of WVR structure
  3. disclosure of WVR beneficiaries, circumstances where WVRs will cease and impact of WVR conversion

Corporate Governance Requirements

  1. must establish a corporate governance committee made up of INEDs and chaired by an INED
  2. annual confirmations must state company’s compliance with WVR restrictions and report on committee’s work
  3. must review and monitor management of conflicts of interest and make recommendations to the board where there is a potential conflict
  4. must review and monitor WVR structure-related risks
  5. must maintain an on-going dialogue with shareholders
  6. must report on its work on half-yearly and annual basis (must comply with Appendix 14 of the Listing Rules)
  7. must set up a nomination committee
  8. must appoint a compliance adviser on a permanent basis
  9. directors, senior management and company secretary must undergo training on WVR Listing Rules and associated risks of WVR structure
  10. must give effect to safeguards under Ch.8A by including them in articles of association

Corporate WVR Beneficiaries

  • January 2020 – Consultation Paper on proposals to allow corporate WVR beneficiaries
  • October 2020 – Consultation Conclusions released:
    • HKEx decided not to proceed with the proposal at this time
    • Greater China Issuers that are “innovative companies” with corporate WVR beneficiaries and primary listed on a Qualifying Exchange as at 30 October 2020 will be treated in the same manner as Grandfathered Greater China Issuers for the purposes of Ch.19C

To be eligible for listing:

  • market capitalisation of at least HK$40 bn or of at least HK$10 bn if it has HK$1 bn of revenue for its most recent audited financial year; and
  • must be controlled by a single corporate WVR beneficiary (or group of corporate WVR beneficiaries acting in concert) which is the company’s largest shareholder in terms of voting power and controlling at least 30% of voting power.

Corporate WVR Beneficiaries

42% of Mainland companies with WVR structures that listed in the US had corporate WVR beneficiaries

42 of the Mainland’s 50 largest unlisted unicorns have well-established corporate shareholders

$540bn combined market value of these 42 unicorns

Suitability Requirements for Corporate WVR Beneficiaries

  1. should be an innovative company or have a track record of investments in / contributions to innovative companies
  2. 10% economic interest in and been materially involved in the listing applicant’s business for 2 FYs prior to listing application ,increasing to 30% at listing date
  3. contribution to listing applicant must be of a type that is not easily replicated or substituted
  4. must own and operate an ecosystem that benefits the listing applicant

Eligibility Requirements

  • must be primary listed on HKEx or Qualifying Exchange
  • minimum market cap. of HK$200 bn
  • market cap. must not be more than 30% of that of the corporate WVR beneficiary
  • capped at 5x the voting power of the company’s ordinary shares

Continuing Requirements

  • should have at least 1 corporate representative on the board and must remain listed on HKEx or a Qualifying Exchange
  • must continue to own at least a 30% economic interest in the listco

Cessation of WVRs held by corporate WVR beneficiaries

  • lapse after a time defined sunset period of no more than 10 years
  • can be renewed for successive periods of no more than 5 years
  • lapse permanently if contribution to WVR issuer is substantially terminated or materially disrupted or suspended for 12 months +