Professional Interpretation

On 23 February 2018, The Stock Exchange of Hong Kong Limited (“Stock Exchange”) released the Consultation Paper on A Listing Regime for Companies from Emerging and Innovative Sectors (“Consultation Paper”), proposing for public comments important amendments to the Main Board Listing Rules (“Listing Rules”) to allow companies with dual class shares or weighted voting rights and pre-revenue biotech companies to list in Hong Kong.

On 24 April 2018, the Stock Exchange issued the Conclusions to the Consultation Paper (“Consultation Conclusions”) which includes the final listing rules amendments. The Stock Exchange mentioned the diversity of views expressed during the consultation process, highlighting the difficulty of drawing any meaningful market consensus on a number of important issues. As a result, it decided to proceed broadly as proposed, with some fine-tuning of the rules and guidance after taking into account market comments.

The president of the Hong Kong Stock Exchange evaluated the reform as the most significant one in the Hong Kong market for the past two decades. After the completion of this reform, the HKEx will be able to provide more abundant choices for listed companies and investors at the same time, thereby making the Hong Kong market more diversified and more globally competitive. The Financial team of Beijing Docvit Law Firm would analyze the structure as follows:

I. What is “Dual Class Shares”

Generally, the company emphasizes that “one share one vote”, the Stock Exchange will consider the “optimum method of empowering shareholders and aligning their interests in a company”. Besides, all shareholders of listed securities shall be treated fairly and holders of listed securities of the same class shall be treated equally.

II. Why “Biotech companies”

The main reason for this structure is that the new economy companies usually have a large demand for capital investment in the early stage of development. After several rounds of financing, the shareholding ratio of the founder team has been diluted to a very large extent. However, a point in the market where it is relatively easy to reach consensus is that the founder team is very important to keep the growth of the new economic company and maintain its long-term competitiveness. In this structure, the new economic company allows the founder team of the long-term interests of the company to exercise control, without having to be excessively anxious at the level of control over the increase in the investment of the open market shareholder, which is beneficial to the long-term interests of the company.

The company is expected to:

→has minimum expected market cap of HK$1.5b;

→meets enhanced working capital requirement (125% of requirement for 12 months following date of prospectus)

→ has two years’ record of operations in the current business under substantially the same management

→ is able to demonstrate that it is both eligible and suitable as:

△ having at least one core product beyond the concept stage (measured against development milestones specified by the Stock Exchange in paragraph 3.3 of the relevant Guidance Letter)

△ primarily engaged in R&D for the core product(s) for at least 12 months

△ has as primary reason for listing the raising of funds for R&D for the core product(s)

△ has a portfolio of registered patents, patent applications and/or intellectual property in relation to the core products

→ has previously received meaningful third party investment from at least one sophisticated investor (including financial institutions) at least six months before listing and the investor must remain in place at the time of listing

The new rules and accompanying Guidance Letters will come into effect on 30 April 2018. Listing applicants and sponsors may submit pre-IPO enquiries at any time, and formal applications for listing under the new regime will be accepted as from 30 April 2018.

The Stock Exchange has promised the market to conduct a further round of public consultation on the question of allowing corporations to be WVR beneficiaries. This is expected to take place by 31 July 2018.

The new regime is an important new chapter in the history of the Hong Kong IPO market and we look forward to its successful implementation.