On 24 July 2020, HKEX announced two important initiatives. The first moves toward resolving a shortcoming in the regime for new listing applicants. The second aspires to improve Hong Kong’s environmental practices via a paperless listing regime. Both reflect a continuation of the environmental global leadership HKEX has shown, the most recent initiative being HKEX’s Sustainable and Green Exchange - STAGE. While both proposals set a directionally positive tone, there are some devils in the details.
Updated Guidance for New Listing Applicants
To date, it has been an anomaly that a listing applicant is not required to make disclosures in their listing documents as to their practices or standards regarding corporate governance (CG) or environmental, social and governance (ESG) (save in relation to certain conflicts of interests). This anomaly was the subject of recommendation C4.7.1 of the HKICPA’s Report on Improving Corporate Governance in Hong Kong (December 2017). It proposed the listing applicant be required to make a statement about its CG practices in the prospectus in view of the listing rule (LR) provisions it will be subject to upon being listed. There is a strong argument that CG and ESG standards would be fostered, and investors better informed, by requiring a listing applicant to consider and disclose its practices prior to listing being granted.
Updated Guidance Letter HKEX-GL86-16 now requires applicants to have in place mechanisms that put them in compliance with CG and ESG “requirements” upon listing. Given that many provisions in LR Appendices 14 (re CG) and 27 (re ESG) are merely “comply or explain” not mandatory requirements, the guidance falls short of the more comprehensive progress envisaged by recommendation C4.7.1. In particular, it does not appear to procure “explain” disclosures that would deliver more meaningful information increasingly expected by responsible investors. More remains to be done.
A Paperless Listing Document and Subscription Regime
Despite international acceptance among regulators that electronic access equals delivery, Hong Kong’s penchant for printed prospectuses is environmentally wasteful and unnecessary. The present authors suggested in an earlier edition of this journal that Hong Kong already has a paperless prospectus regime that nevertheless needs modernising to properly accommodate electronic public offering and application processes (Hong Kong’s Paperless Prospectus Law, January 2020).
One key hurdle is the Companies (Winding-up and Miscellaneous Provisions) Ordinance (Cap. 32) (CWUMPO), which prohibits a form of application being issued otherwise than being “issued with a prospectus”. Per the SFC/HKEX 2010 Joint Consultation Conclusions, this is “commonly interpreted” as requiring a paper-based application form to be accompanied by a printed prospectus. An avenue for electronic prospectuses and printed application forms was subsequently provided by the Mixed Media Offering (MMO) introduced in 2010. Although a wholly paperless offering is possible under CWUMPO, Alibaba’s secondary listing in November 2019 took place subject to waivers from LR that posed uncertainties regarding printing requirements (see Hong Kong’s Paperless Prospectus Law, January 2020).
The HKEX Consultation Paper seeks to facilitate electronic-only offerings by proposing (i) the LR require listing documents to be published "solely in an online environment and cease printed form", and (ii) new listing subscriptions are “to be made through electronic channels only” (except MMOs). Item (i) envisages the LR being amended to recognise only electronic listing documents. HKEX expects CWUMPO’s prohibitions will deliver item (ii) – while the Exchange is statutorily empowered to make rules covering applications for the listing of securities, that does not appear to extend to matters concerning the offering of and application for securities.
However, the proposal synchronises poorly with the law. Public offers are regulated by CWUMPO, which is silent, ie permissive save for the prohibition already noted, as to the medium of a prospectus or application form. Since the proposed changes to the LR have no bearing on the provisions of CWUMPO, listing applicants would in theory remain free to bulk-print a CWUMPO-compliant IPO prospectus and submit an online listing document cum prospectus to the Exchange. Further, the CWUMPO prohibition applies to the issue of application forms, not vice versa, suggesting electronic subscription may also remain possible.
While such an outcome may seem absurd, and frustrates the intent of the proposal, the failure of the MMO to cause a shift away from bulk-printing prospectuses could be prognostic: will the proposed LR changes be sufficient to alter a cultural preference for printed prospectuses? Listing applicants and underwriters may be reluctant to tamper with customary IPO practices that have proven successful if they still have a choice when, commercially, environmental responsibility is typically a secondary consideration.
To the extent the proposed changes to the LR, which are non-statutory and operate by way of contract, seek to remove the printed medium (albeit falling short of guaranteeing that outcome) they could be construed as an improper attempt to in practice negate what is legally permitted under CWUMPO. If so, it might cause difficulties for the SFC to approve the rule change having regard to its statutory responsibilities.
For these reasons, the Consultation Paper may have overshot the mark by seeking to “outlaw” a printed option and going beyond international standards that enable, not restrict. Why not undertake a less ambitious clarification of the LR that simply removes the need for waivers? Absent a change in the permissive and media-neutral laws currently enjoyed by Hong Kong, re-aligning endemic practices and preferences with environmental aspirations may rely on regulators providing stronger incentives. A little pushing at the envelope of regulation may nevertheless be necessary to help practices modernise, and to lead.
A fuller discussion of the above and other issues is provided in our Submission to the Consultation, which can be found at the author’s page at SSRN.com/ abstract=3670542.
– Syren Johnstone, Executive Director of the LLM (Compliance & Regulation) Programme, The University of Hong Kong
– Frederick J. Long, Founding Managing Director, Olympus Capital Asia