Client update: Dual class share listings February 2018 1. Introduction Both the Singapore and Hong Kong markets are keenly watching in anticipation the coming into play of dual class shares ('DCS') and the effect it will have on the growth of the stock market scene in Asia. While awaiting the results of the consultation and the publication of the exact requirements, in view of the adoption in Hong Kong, it is timely to consider the proposals in both markets. Clients who wish to discuss the feasibility of DCS structures should contact Farhana Siddiqui and Polly Chu for a detailed discussion. 2. Proposals in Singapore As mentioned previously, on 16 February 2017, Singapore Exchange Limited ('SGX') released a consultation paper on the 'Possible Listing Framework for Dual Class Share Structures', seeking public views regarding broad policy considerations on whether to introduce a listing framework for DCS structures in Singapore ('DCS Framework'), and the possible proposals and safeguards should a DCS Framework be introduced. Currently, companies with primary listings in markets considered by the SGX to be 'developed markets' can apply for secondary listing on the SGX. Under a DCS structure, certain shareholdings are given voting power or other related rights disproportionate to their shareholding. Shares in one class carry one vote ('OV shares'), while shares in another class carry multiple votes ('MV shares'). While the findings of the consultation are not available yet, we have set out a general overview of the proposed DCS Framework and possible safeguards to be adopted in Singapore and the position in Hong Kong in the comparative table in this update. 3. Proposals in Hong Kong The Stock Exchange of Hong Kong Limited ('SEHK') had in June 2017 released a concept paper on the 'New Board', which similarly discussed the possibility of DCS structures for companies listed on the SEHK. The DCS structures were referred to as weighted voting rights ('WVR') structures within the concept paper. The consultation conclusions on the 'New Board' concept paper were published in December 2017, and an overview of these conclusions is provided in the comparative table below.
SEHK proposes to facilitate the listing of high growth and innovative companies with a WVR structure through a new chapter in the Rules Governing the Listing of Securities on SEHK for the main board (the 'Main Board Listing Rules'). They are in the process of finalising the details of the proposals and have commenced drafting proposed amendments to such rules to put the proposals into effect. SEHK expects to proceed with the formal consultation on the proposed rule amendments in the first quarter of 2018.
4. Comparative Table Between the Proposed DCS Framework in Singapore and Hong Kong Proposed Framework SGX SEHK Minimum market Issuer with a DCS structure is expected to have a minimum market Applicants to list with WVR structure to have a minimum capitalisation capitalisation of S$500 million based on the issue price at the initial public offering ('IPO') and post-invitation issued share capital expected market capitalisation at the time of listing of HK$10 billion If below HK$40 billion of expected market capitalisation, applicant must also meet higher revenue test of HK$1 billion in the most recent audited financial year Compelling reason test SGX has proposed to subject prospective applicants to a 'compelling N/A reason' test where there should be a compelling reason for adopting a DCS structure. It is currently unclear what would satisfy this requirement and each case may have to be reviewed based on its own merits, after making a holistic assessment of all relevant factors Listing Advisory Council ('LAC') suggested that SGX should make a holistic assessment taking into account factors such as the listing applicant's industry and operating track record External validation Issuer must have raised funds from sophisticated investors Applicant must have received meaningful (being more than Safeguard provides some assurance on the quality of the issuer, as just a token investment) third party funding from sophisticated investors would have undertaken due diligence and assessment prior to investing in issuer sophisticated investors (including financial institutions), who will retain an aggregate of 50% of their investment at the time Expected that sophisticated investors must have a substantial/material stake in the issuer with a DCS structure at IPO of listing for a period of at least six months post-ipo (subject to exceptions for de minimis investments by specific investors) Nature of the company and company success LAC is in favour of SGX conducting a holistic assessment when determining the suitability of a listing applicant to list using a DCS structure Characteristics of an innovative company (to be set out in a guidance letter) will be used to determine an issuer's eligibility to list with a WVR structure. SEHK presently expects an innovative company to possess two or more of the following characteristics:
Holistic assessment may take into account factors such as the listing its success is attributable to the application of new applicant's industry, size, operating track record and raising of funds technologies, innovations, and/or business model to the from sophisticated investors company s core business, which also serves to Each of these factors while relevant, is not determinative on its own differentiate the company from existing players; R&D is a significant contributor of expected value, and constitutes a major activity and expense; its success is demonstrated to be attributable to unique features or intellectual property; and it has an outsized market capitalisation/intangible asset value relative to its tangible asset value. Applicant to demonstrate a track record of high business growth which can be objectively measured by operational metrics such as by business operations, users, customers, unit sales, revenue, profits, and/or market value, and its high growth trajectory is expected to continue Contribution and SGX will not accept the listing of an issuer with a DCS structure that Each WVR holder has been materially responsible for the responsibility of WVR does not have certain restrictive provisions in its constitutional growth of the business, by way of their skills, knowledge, holders, and eligible documents meeting inter alia the following criteria. The actual wording and/or strategic direction where the value of the company is persons of such restrictive provision is the responsibility of the issuer and will be largely attributable or attached to their contributions required to be pre-cleared with SGX Each WVR holder has an active executive role within the At IPO, in the case of a single owner manager, he should assume business and contributes to a material extent to the ongoing the role of executive chairman or the chief executive officer growth of the business ('CEO') or equivalent. In the case of a group of owner managers, Each WVR holder is or would assume the role of director of at least one of the owner managers must assume the role of the the issuer at the time of listing executive chairman or the CEO or equivalent. Remaining owner WVR will cease upon cessation of directorship, death or managers must be either an executive director or executive officer incapacity, or transfer of the share Post-listing, if an owner manager sells or transfers part or all of his WVR holder must meet minimum equity thresholds at time of MV shares to another owner manager or third party, such MV IPO to make sure WVR holders interests are aligned with shares will be automatically converted into OV shares, unless other shareholders
shareholders approve otherwise in a general meeting where the voting is on the basis that one MV share is limited to only one vote (the 'Enhanced Voting Process') Where an owner manager no longer holds the position of the executive chairman or the CEO or equivalent, unless otherwise approved by shareholders through the Enhanced Voting Process: In the case of a single owner manager, all his MV shares will be automatically converted into OV shares In the case of a group of owner managers, at least one of the owner managers must assume the role of the executive chairman or the CEO or equivalent, otherwise all MV shares (including those held by other owner managers) will be automatically converted into OV shares and the DCS structure of the issuer will cease Sunset clause that provides for the automatic conversion of MV shares to OV shares at a particular future date, such as 5 years after listing. SGX is seeking views on whether it should be mandatory for issuers to adopt a sunset clause, and if so, the terms of such a clause Ring-fencing measures Existing companies which had listed with a one-share-one-vote structure would not be permitted to convert to a DCS structure postlisting LAC has advised to prohibit the issuer from undertaking equity fundraising by issuing MV shares post-listing except in the event of a rights issue. For the avoidance of doubt, owner managers should only be allowed to retain (but not increase) their existing control in the event of a rights issue Only new applicants can have WVR structure Anti-avoidance measures will be put in place to prevent circumvention Circumvention will constitute a breach of listing rules and will bring into play the normal regulatory enforcement powers After listing, a company is prohibited from increasing the proportion of WVR in issue, or issuing any further WVR shares (except in a rights issue or open offer)
Limits on WVR powers LAC has advised to set a maximum ratio of the voting differential between each MV share and OV share at 10 to 1, where each MV share carries up to 10 votes and each OV share carries one vote A ratio that is less than 10 to 1 is permitted, but the voting differential must be fixed at the point of IPO and may not be changed subsequently by the issuer post-listing Key matters must be decided where voting is based on the Enhanced Voting Process e.g. waiver of automatic conversion of MV shares and appointment of independent directors Enhanced disclosure & corporate governance Issuers must give disclosure of the rights of shareholders by complying with the safeguards in the Companies Act (Chapter 50) of Singapore ('Companies Act') (regardless of their place of incorporation). As a result, provisions under the Companies Act against minority oppression and discrimination may apply Prominent disclosure of the risks of DCS structures may also be required in the prospectuses of issuers Issuers will also be required to disclose the holders of MV shares, regardless of their shareholding, both at the point of listing and on a continuing basis in its annual report SGX will also clearly demarcate, on trading screens, the securities of issuers with DCS structures, by identifying them in a distinctive manner Some suggested safeguards may include enhanced independence element on boards 1, limitation on the extent of concentration of control and enhanced disclosure of rights of MV shares WVR to be attached to specific class(es) of shares the rights attached to the WVR shares must be the same as other classes except only as to voting rights WVR to be capped to not more than 10 times the voting power of ordinary shares, and non-wvr holders must hold at least 10% of the votes eligible to be cast at general meeting and this same percentage (10%) of one-share-onevote shares must be able to convene a general meeting Key matters must be decided on a one-share one-vote basis e.g. material changes to constitutional document, variation of class rights, etc. Enhanced disclosure will be required in relation to issuers with WVR structures, including the use of a unique stock code or marker, and appropriate warnings in the prospectus and ongoing corporate communications Enhanced corporate governance will also be required (e.g. mandatory requirements for a corporate governance committee comprising independent non-executive directors and the engagement of compliance advisers)
Coat-tail provision Listing rules may require (i) a coat-tail agreement to be entered into among the holders of MV shares, the issuer and a trustee; and (ii) terms of the coat-tail agreement to be precleared with SGX Coat-tail agreement designed to prevent transactions that would otherwise deprive the holders of OV shares of rights under the Singapore Code on Take-overs and Mergers to which they would have been entitled if the MV shares had been OV shares In general, holders of MV shares under the coat-tail agreement will be obliged not to sell, directly or indirectly, any MV shares unless concurrently an offer is made to purchase OV shares on similar terms and conditions that are elaborated upon within the SGX consultation paper Secondary listing SGX has separately clarified on 28 July 2017 that companies with a DCS structure that are primary-listed in "developed markets" can seek a secondary listing on SGX All companies applying for a secondary listing are subject to the listings review process and must satisfy the relevant suitability criteria N/A SEHK proposes to modify the existing Main Board Listing Rules in relation to overseas companies (and make other consequential changes) to create a new secondary listing route to attract innovative issuers that are primary listed on a qualifying exchange Applicants seeking a secondary listing with a WVR structure will generally be required to meet the eligibility and suitability criteria applicable to a primary listing For more specific advice, please contact: Farhana Siddiqui farhanasiddiqui@witherskhattarwong.com +65 6238 3244 Polly Chu polly.chu@withersworldwide.com +852 3711 1633