Stock exchange listings

Robin Hui HUANG

Professor of Law
Faculty of Law, CUHK

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Stock exchange listings

1. Public offering vs Listing

2. Where to list?
3. Listing methods
4. Listing requirements
5. Listing process
6. Recent development

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1. Public Offering vs Listing
❑ Distinct processes involving different things
◼ Public offering but not listing
❑ Public offering
◼ Function:
❑ A means of raising funds
❑ Public company vs private company
❑ Private Co cannot offer shares to the public: CO 29(1)
◼ Governing law:
❑ Companies Ordinance (CO)
◼ Legal documents:
❑ Prospectus
◼ Regulator
❑ SFC: give authorization for prospectus to be registered

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Public offering VS Listing
❑ Stock exchange listing
◼ Function
❑ Provide a secondary market
◼ Governing law:
❑ Listing Rules
◼ Legal document:
❑ Listing document
◼ Regulator
❑ Stock exchange: SEHK
❑ BUT: SFC, as a review body, has a power of veto

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IPO & Listing
◼ Two in one
❑ For many IPOs, public offerings and listings are synonymous
◼ Similar terms: ‘flotation’; ‘going public’

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Why Listing?
❑ Company—public Cos—listed companies: why?

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◼ Advantages and disadvantages of listing?
❑ Class discussion

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2. Where to list?

◼ Hong Kong
◼ Shanghai
◼ Singapore
◼ London – Main Board / Aim
◼ New York - NYSE / NasDaq

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Why HK?
◼ Class discussion

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3. Listing Methods
◼ Ch7 of LR

❑ 1. Offer for subscription

◼ An offer to the public by or on behalf of an issuer of its own
securities for subscription

❑ 2. Offer for sale

◼ An offer to the public by or on behalf of the holders or allottees of
securities already in issue or agreed to be subscribed

❑ 3. Placing
◼ The obtaining of subscriptions for or the sale of securities by an
issuer or intermediary primarily from or to persons selected or
approved by the issuer or intermediary

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Listing Methods (cont)
❑ 4. Introduction
◼ An application for listing of securities already in issue
◼ No marketing arrangements are required
❑ Examples: seek dual listing; change listing location

❑ 5. Rights issue
◼ An offer to existing holders of securities to subscribe securities in
proportion to their existing holdings
◼ ‘rights’:
❑ at a discount to market price
❑ Can be renounced

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Listing Methods (cont)
❑ 6. Open offer
◼ an offer to exiting holders of securities to subscribe securities,
whether or not in proportion to their exiting holdings

❑ 7. Capitalization issue
◼ An allotment of further securities to existing SH, in proportion to their
existing holdings
◼ Not involving any payment of consideration
❑ Example: bonus shares

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❑ 8. Consideration issue
◼ An issue of securities as consideration in a transaction
❑ Mergers & Acquisitions: scrip payment

❑ 9. Exchange
◼ an exchange or a substitution of securities for or a conversion of
securities into other classes of securities
❑ Examples: Preference shares; Convertible notes

❑ 10. Other methods

◼ Exercise of options or warrants

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4. Listing requirements
◼ Main Board or GEM?
❑ Main Board
Capital formation for larger and more established
companies which meet profit or other financial
standards requirements.

❑ GEM
A second board and a stepping stone towards the main
board.

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Applicable Rules
◼Main Board: Listing Rules
❑ Rules governing the Listing of Securities on the Stock Exchange
of Hong Kong
◼GEM:
❑ GEM Listing Rules

◼NOTE:
❑ SEHK has wide discretion, and may vary or waive the
requirements
❑ For listings and not offerings
❑ Focus on Main Board

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General Principles for Listing
LR2.03
◼ Applicants are suitable for listing;
◼ The issue and marketing of securities are conducted in a fair and orderly
manner and potential investors are given sufficient information to enable
them to make a properly informed assessment of an issuer;
◼ Investors and the public are kept fully informed by listed issuers, and in
particular immediate disclosure is made of any information, to be evenly
disseminated, which might reasonably be expected to have a material effect
on market activity in, and the prices of, listed securities;
◼ All holders of listed securities are treated fairly and equally;
❑ April 2018: (re)introduction of the Weighted Voting Rights (WVR) structure
❑ Later discussion
◼ Directors of a listed issuer act in the interests of its shareholders as a whole,
particularly where the public represents only a minority of the shareholders.

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Main Board: Chapter 8 Qualifications for
Listing
LR 8.01
❑ Chapter 8 sets out basic conditions to be met as pre-
requisite to the listing of equity securities.
❑ Applies to every method of listing.
❑ Applies to new applicants and listed issuers.
❑ Further conditions for certain types of companies
❑ Non-exhaustive requirements – Exchange retains
absolute discretion

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Basic Conditions LR8.02-8.04
◼ 8.02 - Issuer must be duly incorporated
◼ 8.03 - Must not be a private company.
◼ 8.04 – Both issuer and its business, must in the opinion
of the Exchange be suitable for listing
◼ 8.05 – Satisfy one of the three financial tests

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Key Listing Requirements
◼ Financial Requirements (LR8.05)
❑ Profits Test 8.05(1)
❑ Market Cap/Revenue Test 8.05(2)
❑ Market Cap/Rev/Cashflow Test 8.05(3)

◼ Operating History and Management

❑ Trading Record
❑ Management Continuity
❑ Ownership continuity and control

◼ Spread of Shareholders
◼ Minimum Public Float (LR8.07-8.08)
◼ Underwriting

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Financial Requirements

❑ A. Profits Test

❑ B. Market Cap/Revenue Test

❑ C. Market Cap/Rev/Cashflow Test

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Financial Requirements:
(A) Profits Test
◼ Profit Attributable to Shareholders
Profits of HK$50 million in the last 3 years with HK$20
million in the most recent year and an aggregate of
HK$30 million in the two preceding years

◼ Market Cap
At least HK$200 million at the time of listing

◼ No requirement for revenue or cashflow.

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Financial Requirements:
(B) Market Capitalisation / Revenue /
Cashflow Test
Market capitalisation
◼ Listing applicant must have a market capitalisation of at least
HK$2 billion at listing;

Revenue
◼ Revenue of at least HK$500M for the most recent financial year
comprising 12 months;

Cashflow
◼ A positive cash flow from operating activities aggregating at least
HK$100M for 3 preceding financial years

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Financial Requirements:
(C) Market Capitalisation / Revenue Test

• Market Capitalisation
They have a market capitalisation of at least HK$4
billion at listing.
• Revenue
Revenue of at least HK$500M for the most recent
financial year comprising 12 months.

This test caters particularly for large size applicants who

generate substantial revenue and command significant
investor interest (at least 1,000 shareholders at listing).

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Operating History and Management
LR 8.05: New applicants must have a
❑ trading record of at least 3 financial years;
❑ management continuity for at least the 3
preceding financial years; and
❑ ownership continuity and control for at least
the most recent audited financial year.

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Relaxation of rules (8.05A)
Under the Market Cap/Revenue test, the Exchange may
accept a shorter trading record period under
substantially the same management if:

❑ the new applicants’ directors and management have sufficient

and satisfactory experience of at least 3 years in the line of
business and industry of the applicant;

❑ and the new applicant has management continuity for the most
recent audited financial year;

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Relaxation of rules (8.05B)

The Exchange may accept a shorter trading

period and/or vary or waive the above profit or
other financial standards requirement in rule
8.05 in the cases of:

❑ mineral companies (LR 8.05B(1), Chp 18 LR);

❑ newly formed "project" companies (LR 8.05B(2));
❑ exceptional circumstances (LR8.05(3)).

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Minimum Public Float
◼ At least 25% of the issuer's total issued share capital must at all
times be held by the public. (LR8.08(1)(a))

◼ If issuer has more than one class of securities, class of securities

for which listing is sought must not be less than 15%, having an
expected market capitalisation of not less than HK$50,000,000.
(LR8.08(1)(b)).

◼ For issuers with an expected market capitalisation of over HK$10

billion (US$1.3 billion) at the time of listing, the Exchange may
accept a lower percentage of between 15% and 25%.
(LR 8.08(d))

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Spread of Shareholders
The equity securities in the hands of the public should be
held among:

◼ at least 300 holders (the Profit test or Market

Cap/Revenue/Cashflow test) (LR 8.08(2)) and

◼ 1,000 holders (the Market Cap/Revenue test) (LR8.05(f))

◼ Note: No more than 50% of securities held by 3 largest

public shareholders. (LR8.08(3)).

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Expected Market Capitalisation

◼Expected market capitalisation of securities held by the

public must be at least HK$50M. (LR8.09(1))

◼Expected market capitalisation at least HK$200M at the

time of listing. (LR8.09(2))

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Underwriting

Underwriting arrangement
Public tranche must be fully underwritten.

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Recap
◼ Financial Requirements (LR8.05)
❑ Capitalization requirement: big company
❑ Profit/revenue requirement: good company
◼ Operating History and Management
❑ Stable company
◼ Minimum Public Float (LR8.07-8.08)
◼ Spread of Shareholders
◼ Expected Market Capitalisation
◼ Underwriting

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Additional Listing requirements
◼ Additional requirements for non-HK issuers
❑ Ch19 of LR
◼ applies generally to non-HK issuers seeking either a primary or a
secondary listing on SEHK
❑ Ch 19A of LR
◼ Applies specifically to PRC issuers in addition to Ch 19 of LR

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5. Listing process: Are you ready?

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Listing process (cont)
◼ Offering authorization: Companies Ordinance
❑ CO S 38D:
◼ No prospectus shall be issued unless
❑ It complies with the content requirements
❑ Its registration has been authorized by SFC
❑ It has been registered by the Registrar

◼ Authorization for registration

❑ Application to be made to SFC together with a copy of the
prospectus signed by the directors
❑ If approved, SFC will issue a certificate of authorization

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Dual filing regime for listing
authorization
❑ Note: SFO s25
◼ In case of IPO, the powers of SFC have been
transferred to SEHK
❑ Securities and Futures (Stock Market Listing) Rules
❑ rule 2.04 of the Listing Rules
❑ paragraph 10.6 of the Memorandum of Understanding
Governing Listing Matters in January 2003
◼ How it works?: Next slide

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◼ How it works?: S&F (Stock Market Listing) Rules
❑ Submit the application to both SEHK and SFC
◼ First to SEHK, and then to SFC within one business day thereafter
◼ the company can authorize SEHK to file the application with SFC on
its behalf
❑ SFC may, within a specified period (10 days), give notice
that
◼ It does not object to the listing, or
◼ It does not object subject to the satisfaction of certain conditions,
or
◼ It objects to the listing for reasons like
❑ Failure to comply with relevant laws and regulations
❑ Inadequacy of info disclosure
❑ Not in the public interest
❑ No listing if objection of the SFC is outstanding

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❑ In practice
◼ SFC has rarely exercised the veto power
❑ First case: in January 2015, it objected to one listing
application on public interest grounds
▪ SFC had concerns about the fact that the company’s
assets were concentrated in a jurisdiction with which it
had no codified regulatory relationship: p47 of SFC
Annual Report 2014-15
❑ A later case: SFC indicated the concern and the application
withdrawn…
◼ SFC can require further info from the company
❑ The calculation of 10 days will restart…

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❑ 2014-15
◼ SFC received a total of 164 applications
❑ 2012-13: 124
❑ 2013-14: 188
◼ Five listing applications were returned and an eight-
week moratorium was imposed because the application
proofs were not substantially complete
❑ Following implementation of the new IPO sponsor regime
on 1 October 2013, the respective applicants can only
submit a new listing application with a new application proof
no less than eight weeks after the return

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Documents involved in an IPO

◼ Form A1

◼ Prospectus

◼ Other documents

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Form A1
1.A. Form A1 Listing application form
I.B. Additional information to be submitted
I.C. Basic qualifications for new listing
I.D. Basic requirements for contents of Prospectus
I.E. Offering mechanism
I.F. Property valuation
I.G. Share option scheme
I.H. Accountants’ report
I.K. Sponsor’s undertaking
I.L. Sponsor’s statement of independence

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Listing document cum prospectus

◼ Listing document
❑ required for an application of listing
◼ May include prospectus, circular, or other equivalent documents
◼ No prospectus is required if the process does not involve any
offer to the public
❑ In many cases, such as IPO,
◼ A listing document and a prospectus are usually the same
document
◼ Next slide

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Listing document cum prospectus
◼ Comply with two sets of requirements
❑ Not mutually exclusive, but may overlap to some degree
❑ 1. Offerings: last class
◼ Company Ordinance: s38; Part 1 & 2 of the 3rd schedule
❑ 2. Listings:
◼ Securities and Futures (Stock Market Listing) Rules [SMLR]:
❑ Gives statutory backing to the Listing Rules
❑ S 3(c):
▪ it must contain such particulars and information which, having regard
to the particular nature of the applicant and the securities, is necessary
to enable an investor to make an informed assessment of the activities,
assets and liabilities and financial position, of the applicant at the time
of the application and its profits and losses and of the rights attaching
to the securities
◼ LR:
❑ Chapter 11; Appendix 1

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Listing document (cont)
◼ Layout of prospectus: two parts
❑ ‘Front end’
◼ Details of the offering
◼ Description of the company’s business
❑ ‘Back end’
◼ Everything else
❑ Accountant’s report, property valuations etc
❑ Application procedures and forms for interested investors
◼ Major contents in IPO context
❑ Issuer;

❑ securities;
❑ directors and management;

❑ shareholders; business;

❑ financial information on the issuer;

❑ …

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◼ Example
❑ Agriculture Bank of China (H Shares): p366
(commission and expenses)

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Other documents
1. Documents effecting organization of the listed group
2. Directors’ service agreements
3. Share option schemes
4. Property valuation report
5. Foreign legal opinion re corporate establishment and property
interest
6. Principal share registrar’s agreement
7. Hong Kong branch share registrar’s agreement
8. Receiving banker’s agreement
9. Verification notes
10. Tax indemnity
11. Compliance checklists

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Other documents
1. Director’s resolutions
2. Director’s undertakings
3. Shareholder’s resolutions
4. Underwriting agreement
5. Underwriting and sponsor’s agreement
6. Agreement amongst underwriters/managers
7. Subscription Agreement
8. Placing Agreement
9. Lock-in Agreements
10. …

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SEHK Application Timetable
1. Apply to SEHK for advance booking (Form A1)

2. Documentary submissions (at 20, 15, 10 days prior)

3. Formal application for listing (at 4 days prior)

4. Listing division recommends (or rejects) to Listing Committee

5. Listing Committee approves (or rejects)

6. Issue of prospectus and formal notice

7. Dealings in shares commerce

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6. Recent development
◼ 17 Jun 2016: SFC and HKEX issue joint consultation on listing
regulation
◼ Main proposals
❑ two new Exchange Committees on which the SFC and the Exchange are equally
represented will be established – the Listing Policy Committee, which will initiate,
steer and decide listing policy with participation by representatives of the HKEX
Board and the Takeovers and Mergers Panel, and the Listing Regulatory
Committee, which will decide on IPO and post-IPO matters that have suitability
concerns or broader policy implications;
❑ the Listing Committee will provide a non-binding view to both the Listing Policy
Committee and the Listing Regulatory Committee on their decisions;
❑ the listing function will remain within the Exchange which will continue to be the
frontline regulator for listing matters;
❑ the Listing Committee, together with the Listing Department, will continue to
decide a large majority of initial listing applications and post-listing matters; and
❑ the SFC’s powers and functions in relation to listing matters will remain
unchanged, but the ways in which those powers and functions are exercised and
performed will be enhanced.

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◼ Aims:
❑ Achieve, through the Listing Policy Committee, closer coordination and
cooperation between the SFC and the Exchange on listing policy
formation and provide the SFC with earlier and more direct input on
listing policy matters and listing regulation.
❑ Streamline, through the Listing Regulatory Committee, the processes for
important or difficult listing decisions that raise suitability issues or have
broader policy implications. This would allow the SFC to have earlier and
more direct input on these decisions and to collaborate with the
Exchange on decision-making.
❑ Simplify the process for initial listing applications so that they can be
vetted and approved more efficiently; as part of the proposals, the SFC
will no longer as a matter of routine issue a separate set of comments on
draft IPO prospectuses under the dual filing regime.
❑ Establish clearer accountability for decision-making in listing regulation
and for oversight of the administration of the Listing Rules
◼ The three-month consultation ends on 19 September 2016

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◼ 15 Sept 2017: conclusion
❑ The role of the Listing Committee under the Listing Rules will
remain unchanged.
❑ Going forward, the Chief Executive of HKEX will attend Listing
Committee meetings as a non-voting member representing the
HKEX’s board only where listing policy matters are discussed,
and will not attend Listing Committee meetings on individual
cases.
❑ The SFC will discharge its statutory oversight of the Exchange’s
listing function through a materially enhanced, published audit
of the Listing Committee and the Listing Department
❑ A new Listing Policy Panel will be established as an advisory,
consultative and steering body outside the SFC and the
Exchange to initiate and centralise discussion of listing policies
with broader regulatory or market implications

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