HKEX: Exchange Publishes Consultation Paper On Corporate WVR Beneficiaries

Proposal builds on recent reforms to enhance global competitiveness and encourage the development of innovative businesses
Several additional safeguards are proposed to ensure appropriate level of shareholder protection
Market feedback sought during three-month consultation period

The Stock Exchange of Hong Kong Limited (the Exchange), a wholly-owned subsidiary of Hong Kong Exchanges and Clearing Limited (HKEX), today (Friday) published a consultation paper seeking public feedback on a proposal to allow corporate entities to benefit from weighted voting rights (WVR), subject to additional conditions and investor safeguards (Corporate WVR Consultation).

The Corporate WVR Consultation builds on reforms to the Hong Kong listing regime that were implemented in April 2018 through the publication of the Exchange’s “Consultation Conclusions Paper on a Listing Regime for Companies from Emerging and Innovative Sectors” (Rule Chapters Conclusions Paper). It fulfils the Exchange’s commitment in the Rule Chapters Conclusions Paper to separately consult on a proposal to allow corporate entities to benefit from WVR.

On 25 July 2018, the Exchange announced that it had decided to defer the Corporate WVR Consultation. At the time, as the WVR regime had only recently been put in place, the Exchange believed it should engage further with relevant stakeholders in order to develop a broader consensus on corporate WVR. Having done so, the Exchange is now in a position to launch the consultation.

“Evaluating whether corporate entities can benefit from WVR is an important part of the overall WVR debate and one which we believe should be put to the market for consultation. As part of the consultation proposals we have sought to put forward various viewpoints, reflecting the complex nature of the subject and the need for a robust regulatory regime to fairly reflect the benefits and risks of such a regime,” said Bonnie Y Chan, HKEX’s Head of Listing.

The Exchange’s proposed safeguards seek to address risks that are particular to corporate WVR, such as the risk of an “evergreen” WVR structure, in order to maintain an appropriate level of investor protection.

A summary of the key requirements of the corporate WVR regime proposal is set out below.

The Exchange invites broad market feedback on the substance of its proposals. The public comment period ends on Friday, 1 May 2020.

The Corporate WVR Consultation is available to view on the HKEX website.

Proposed Key Requirements of Corporate WVR Regime

-	An issuer can grant WVR to both individual and corporate beneficiaries provided that each is able to meet the suitability and eligibility requirements applicable to it.
	Suitability requirements
	-	A corporate WVR beneficiary must either be an innovative company itself or have business experience in one or more emerging and innovative sectors as well as a track record of investments in, and contributions to, innovative companies.
	-	A corporate WVR beneficiary must have held an economic interest of at least 10 per cent and must have had a material involvement in the management or the business of the listing applicant for at least two financial years prior to its listing application. At listing, and thereafter, the corporate WVR beneficiary must hold an economic interest of at least 30 per cent in the listing applicant1.
	Ecosystem
	-	The contribution of the corporate WVR beneficiary to the listing applicant must be of a nature that cannot be easily replicated or substituted by other means. Accordingly, a financial investment or an ordinary non-financial contribution (eg know-how or strategic advice) will not constitute sufficient basis for a corporate shareholder to be entitled to WVR.
	-	To benefit from WVR a corporate must demonstrate that it owns and operates an “ecosystem” at listing (and on an ongoing basis) that benefits the listing applicant. The “ecosystem” must have the following characteristics:
		There is a community of companies (which includes the listing applicant) and other components (which may be non-legal entities such as business units of the corporate shareholder, user or customer bases, applications, programs or other technological applications) that has grown and co-evolved around a technology or know-how platform or a set of core products or services, owned or operated by the prospective corporate WVR beneficiary (for the avoidance of doubt, such platform or products or services does not need to represent the main business of the prospective corporate WVR beneficiary); the components within the ecosystem (including the listing applicant) both benefit from, and contribute to, the ecosystem by sharing certain data, users and/or technology (for example, software, applications, proprietary know-how or patents); the ecosystem must have attained meaningful scale, which will normally be measured by reference to indicators such as the number and technological sophistication of the components connected to the ecosystem, the size of its (combined) user base, or the frequency and extent of cross-interaction between the users or customers of different components; the core components within the ecosystem, and the listing applicant, are in substance controlled by the corporate WVR beneficiary; and the growth and success of the listing applicant was materially attributable to its participation in and co-evolvement with the ecosystem; and the applicant is expected to continue to benefit materially from being part of that ecosystem.
	Eligibility requirements
	-	A corporate WVR beneficiary must be primary listed on the Exchange or on a Qualifying Exchange2 and have a minimum market capitalisation of at least $200 billion.
	-	A corporate WVR beneficiary must be either the company that meets the proposed requirements to benefit from WVR itself or be a wholly owned subsidiary of that company.
	-	The listing applicant must not represent more than 30 per cent of the corporate WVR beneficiary in terms of market capitalisation at time of listing.
	Additional ongoing requirements
	-	The following additional ongoing requirements will be imposed:
		the WVRs of a corporate beneficiary must carry no more than five times the voting power of ordinary shares; a corporate WVR beneficiary must own at least 30 per cent of the economic interest of the listed issuer on a continuing basis (a mechanism will be introduced to allow the corporate WVR beneficiary to subscribe for ordinary shares to prevent dilution below 30 per cent); a corporate WVR beneficiary must have at least one corporate representative on the board of directors of the listed issuer; a corporate WVR beneficiary must remain listed on the Exchange or a Qualifying Exchange2; and the WVR attached to a corporate WVR beneficiary’s shares must lapse permanently if the corporate’s contribution to the WVR issuer is substantially terminated or materially disrupted or suspended for a period exceeding 12 months.
	“Sunset” clause
	-	The WVRs held by a corporate beneficiary must have a time-defined “sunset” period of not more than ten years for the WVR of a corporate WVR beneficiary, which may then be renewed for successive periods of not more than five years with the approval of independent shareholders.


Notes:
1.	Pre-IPO economic interest requirements A corporate WVR beneficiary must meet the minimum 10 per cent economic interest requirement for at least two financial years and any stub period up to the date on which it increases its stake in the applicant to meet the minimum 30 per cent economic interest requirement. A corporate WVR beneficiary may increase its economic stake to meet this requirement in compliance with existing Rules and guidance on pre-IPO investments and placing to existing shareholders.
2.	Definition of a “Qualifying Exchange” NYSE, NASDAQ or the Main Market of the London Stock Exchange (and belonging to the UK Financial Conduct Authority’s “Premium Listing” segment).