International Companies Seeking Listing in Hong Kong Legal and Regulatory Implications

Michael Liu, Partner Stanley Chow, Partner September 2011

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Historical Perspective and Recent Trends (1)

Majority of companies listed on the Hong Kong Stock Exchange are overseas incorporated companies. Most of them with sole primary listing in Hong Kong. Began to see dual A and H share listings for PRC state owned enterprises since 2006. Bank of China, China Life were amongst the first. Dual or sole primary listings or secondary listings for international companies not headquartered in China became more popular since the relaxation in acceptable jurisdictions for incorporation in 2007.

Historical Perspective and Recent Trends (2)

About 10 international companies listed in Hong Kong in the last 2 years. LOccitane, Prada, Samsonite have gone for seeking a primary listing in Hong Kong for the first time. All these companies raised cash and did NOT have another listing status elsewhere. Vale (Brazilian incorporated), SouthGobi (British Columbia incorporated), Kazakhmys (English incorporated), all of which were existing listed companies, sought secondary listing in Hong Kong by way of introduction. No cash was raised at the time. Glencore (Jersey incorporated) sought a secondary listing status in Hong Kong at the same time as a London IPO. Concurrent offerings in London and Hong Kong took place at the time of its London/HK IPO.
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Summary of Choices in Hong Kong Listing

Primary listing for the first time (raises cash, typically there will be an international offering). Primary listing at home coupled either with a dual primary listing in Hong Kong (less likely) or a dual secondary listing in Hong Kong (more likely) at the same time. Typically will raise cash. For existing listed companies, seeking a secondary listing in Hong Kong by introduction (no cash raised) or with an offering.

Examples of Dual Offerings and Dual Listings

Simultaneous dual offerings/listings

HK/New York Stock Exchange China Life HK/London Stock Exchange Glencore International plc HK/Euronext Paris United Company RUSAL Ltd. (placing to professional investors only in HK) HK/Toronto Stock Exchange China Gold International Resources Corp. Ltd. HK/Singapore Stock Exchange Prudential plc (also listed on London Stock Exchange and New York Stock Exchange) HK/New York Stock Exchange/Euronext Paris/Brazil Stock Exchange/Madrid Stock Exchange Vale S.A. (listing of HDRs) HK/London Stock Exchange/Kazakhstan Stock Exchange Kazakhmys PLC HK/London AIM Asian Citrus Holdings Ltd. HK/Toronto Stock Exchange SouthGobi Energy Resources Ltd. HK/Tokyo and Osaka Stock Exchanges SBI Holdings (listing of HDRs) HK/Singapore Stock Exchange China New Town Development Co. Ltd., Fortune REIT, China Print Power Group Ltd., China Animal Healthcare Ltd., Midas Holdings Ltd.
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Other dual listings

Hong Kong Listing Requirements (1)

Basic requirements the same for both primary listing and secondary listing in Hong Kong: Track record: profit test market cap (HK$2B)/ revenue (HK$500M)/ positive cash flow (HK$100M) test market cap (HK$4B)/revenue (HK$500M) test Management continuity: the Issuer must have management continuity of at least three financial years. Ownership continuity: there must be ownership continuity and control for at least the most recent audited financial year. Suitability for listing: if the Issuers controlling shareholder (with a 30% or more shareholding) has an interest in a competing business, the Issuer must demonstrate that it is capable of carrying on its business independently and at arms length from the competing business. If competition is significant, HKSE may regard the Issuer as unsuitable for listing.

Hong Kong Listing Requirements (2)

Independent operations and connected transactions: the Issuer should be able to operate independently (i.e. financial independence, operational independence, management independence), particularly from its controlling shareholder (and its associates) after listing. There should not be a significant number of related party transactions, and related party transactions should be conducted on an arms length basis. Acceptable country of incorporation Management presence in Hong Kong: the Issuer must have a sufficient management presence in Hong Kong - normally at least two of its executive directors must be resident in Hong Kong, although the HKSE has the discretion to grant waivers.

Hong Kong Listing Requirements (3)

Corporate governance: INED (three with one having accounting/ financial expertise) Hong Kong Company Secretary (HK qualifications and residency) Audit/Remuneration/Nomination Committees: the Issuer must establish an audit committee with at least 3 members that are non-executive directors (and the majority of the members, including the chairman, must be independent, non-executive directors). One of the independent audit committee members must have appropriate professional qualifications or accounting or related financial management expertise. the Issuer should have both remuneration and nomination committees composed of a majority of independent, non-executive directors (if the Issuer does not have such committees, it must explain why in its annual report). Public float: normally a minimum of 25% of the shares must be held by the public (this can be lower if market capitalization is sufficiently large, subject to HKSE approval), and not more than 50% of the shares in public hands at the time of listing can be beneficially owned by the three largest public shareholders.
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Information on Acceptable Jurisdictions of Incorporation

Acceptable jurisdictions

The Hong Kong Stock Exchange may refuse the listing of an overseas issuer if it is not satisfied that the issuer is incorporated or otherwise established in a jurisdiction where the standards of shareholder protection are at least equivalent to those provided in Hong Kong. Traditionally, only accepted foreign companies incorporated in Bermuda, Cayman Islands and the PRC.

Now, other jurisdictions formally ruled to be acceptable jurisdictions:

- Australia - British Virgin Islands - Canada (British Columbia) - Cyprus - Isle of Man - Japan - Luxemburg - United Kingdom - Brazil - Canada (Alberta) - Canada (Ontario) - France - Italy - Jersey - Singapore - USA (State of California)
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Requirements for Secondary Listings in Hong Kong

For secondary listing, may apply for a waiver from certain of the basic requirements on a case-by-case basis. In practice, extensive waivers are given. Additional requirements for secondary listing:

Issuer must have a primary listing on another regulated exchange where the standards of shareholder protections are at least equivalent to those provided in Hong Kong. Issuer must be subject to equivalent shareholder protection standards in its jurisdiction of incorporation. Issuer must maintain a share register and appoint an agent to accept service of process in Hong Kong.

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Availability of Secondary Listing Status in Hong Kong

Quote from Hong Kong Stock Exchange website (Centre of Gravity test):

Secondary listing issuers are primarily listed on another stock exchange and the majority of their equity securities are not usually traded on the Exchange. Secondary listing is available to overseas issuers, excluding Greater China issuers, seeking a Main Board listing and having sufficient connections with a foreign market. In determining whether an issuer has sufficient connections with a foreign market to warrant a secondary listing, we will not only consider the issuers place of incorporation but also look at other factors to determine its centre of gravity, including:

the number of Hong Kong shareholders; the extent of equity securities trading on the Exchange; the location of head office and place of central management; the location of business and assets with reference to its corporate and tax registration; and the protection available to Hong Kong investors under any foreign laws or regulations.
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Information on Waivers for Secondary Listing

Examples Waivers for secondary listing Common waivers sought for overseas companies: - Management presence in HK - Certain connected transactions - Property valuation report - Joint company secretary - Public float requirement - Clawback mechanism - HK accountants - Equity fund raising rules - Share repurchase rules - Certain disclosure requirements - Partial waivers from disclosure of price-sensitive information requirements - Notifiable and connected transactions - Corporate governance codes - Takeovers Code public company - Accounting principles
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Typical Hong Kong IPO Timeline

T (60 to 120) Kick-off Meeting Day T A1 Confidential Application to HKSE H + 19 Sign HK U/W Agreement / Prospectus Registration H + 14 Bulk-print of Red Herring H + 24 Sign IPA / Pricing / H + 23 Print Final HK Offering International closes Offering Circular Day H + 53 End of Stabilization Period

DUE DILIGENCE VERIFICATION OF PROSPECTUS DRAFT PROSPECTUS DEALING WITH HKSE QUERIES RESEARCH REPORTS PREPARED RESEARCH REPORT BLACK-OUT PERIOD ROADSHOW STABILIZATION & GREENSHOE EXERCISE PERIOD

H HKSE Hearing Date

H + 20 HK Offering commences H + 16 Bulk-print Prospectus

H + 32 Listing

Note: This timeline is for illustration purposes only. The exact dates depend on the circumstances of the case. 13