Alternatives for U.S.-Listed Mainland Companies Pursuing Listings in Hong Kong
The decision of the Chinese e-commerce giant Alibaba to list on the New York Stock Exchange last year drew substantial international attention, calling into question whether The Stock Exchange of Hong Kong Limited (HKEx) can successfully execute its strategy to be the first choice for Mainland Chinese companies when seeking to raise capital in an international financial center.
In our Q&A, Hong Kong-based Capital Markets partner Steven D. Winegar discusses how HKEx can attract these companies back to the Hong Kong market through either a dual listing or a sole listing in Hong Kong following delisting from a U.S. stock exchange.
A key topic of discussion highlighted by Alibaba’s IPO is whether HKEx should change its rules to permit companies with weighted voting right (WVR) structures to list in Hong Kong. What are WVR structures and why are they relevant to Hong Kong listings?
WVR structures are corporate governance structures that give certain persons voting power or other related rights disproportionate to their shareholdings. Presently, HKEx’s listing rules do not permit these structures. The best known WVR structures are dual-class share structures, which have been adopted by many U.S.-listed Mainland companies. Alibaba does not have a dual-class share structure, but its articles of association allow a group of company founders and members of management to nominate a majority of the company’s board of directors, which is a WVR structure under HKEx’s listing rules.
Until HKEx changes it rules, the existence of a WVR structure will be a threshold issue for any company considering a Hong Kong listing.
Are there any examples of a successful dual listing for a Mainland Chinese company on Hong Kong and U.S. stock exchanges?
The most relevant example would be Melco Crown Entertainment Limited (MCE), a developer, owner, and operator of casino gaming and entertainment resort facilities in Asia, and best known as the operator of City of Dreams in Macau. Listed on NASDAQ in 2006, MCE sought a primary listing by way of introduction on the Main Board of the HKEx in 2011.
In January 2015, MCE announced its intention to voluntarily withdraw the listing of its shares on the Main Board, marking the end of its three-year experiment with dual primary listings in the U.S. and Hong Kong. It should still serve as a guide, though, for other U.S.-listed Mainland Chinese companies contemplating a Hong Kong listing.
What are the benefits and potential challenges for a dual primary listing in Hong Kong and the U.S.?
The Hong Kong and U.S. stock markets attract different investors and dual primary listings can provide companies with access to two diverse equity markets. Other potential benefits include increasing a company’s investor base and enhancing a company’s profile in Hong Kong, as well as facilitating investment by Hong Kong investors.
There are also costs that should be taken into account resulting from the fact that a company considering a Hong Kong listing can pursue only a primary listing if its center of gravity is in the Greater China region. A company with a primary listing will be subject to the full array of compliance obligations of other primary listed companies in Hong Kong, with limited exceptions. One such exception in the case of MCE was a waiver permitting it to report its financial information in accordance with U.S. GAAP if it provided a reconciliation to International Financial Reporting Standards.
Are there any recent examples of a sole listing in Hong Kong following a delisting from a U.S. stock exchange? In your perspective, do you think this will become a trend?
In February 2015, within a year of completing its privatization, 3SBio Inc., a biotechnology company in China, filed an application proof with HKEx relating to the proposed primary listing of its shares in Hong Kong. This development is noteworthy because 3SBio could become the first U.S.-listed Mainland Chinese company to successfully complete a Hong Kong listing following a delisting from a U.S. stock exchange.
If 3SBio can complete its Hong Kong listing by the middle of 2015, it will show that this method of exiting the U.S. market and listing in Hong Kong can be achieved in approximately three years. This could become a trend if HKEx is aggressive in creating an attractive market for companies in key technology sectors and is willing to change its listing rules to allow for companies with WVR structures.