Consultation on the Hong Kong Listing Rules relating to PRC issuers

The Hong Kong Stock Exchange published a consultation paper towards the end of February 2023, proposing a number of changes to the Hong Kong Listing Rules affecting PRC issuers.

The changes are triggered by the implementation of new PRC regulations on overseas listings and the repeal of certain PRC regulations (i.e. the Mandatory Provisions and the Regulations, both as defined under the Listing Rules).  These changes take effect on 31 March 2023.  

Under the new PRC regulations, holders of domestic shares and H shares are no longer deemed as different classes of shareholders.  The new PRC regulations also introduce a new filing regime for all overseas listings and securities offerings by PRC companies.  PRC companies will be required to register their overseas listings and securities offerings by filing materials relating to key compliance issues with the CSRC (and this will replace the existing CSRC approval system for overseas listings).

Changes to the Listing Rules are divided into three areas.

1. Consequential amendments to the Listing Rules due to changes in PRC laws: No market consultation will take place as the amendments are purely consequential changes.  The amendments will take effect on a date to be announced.
2. Proposed changes to the Listing Rules relating to PRC issuers due to changes in PRC laws: The consultation period for these changes will end on 24 March 2023.
3. Housekeeping changes to the Listing Rules relating to PRC issuers: These changes are set out in Appendix I to the consultation paper, and are generally made to remove duplicated or outdated provisions. There is no formal consultation relating to these changes.

Set out below is a summary of the proposed changes for items (1) and (2) above.

Consequential amendments 

Certain provisions in the Listing Rules will need to be revised to reflect the upcoming changes to the PRC regulatory framework.  No market consultation will take place as the changes below are purely consequential changes. 

The consequential changes involve:

• removing / amending various definitions and references to reflect (i) that domestic and H shares are no longer deemed as different classes of shares; and (ii) the repeal of the Mandatory Provisions and the Regulations.
• removing the class meeting and related requirements for the issuance and repurchase of shares by PRC issuers, and aligning requirements applicable to PRC issuers with those applicable to overseas issuers, such as:
  • requiring the issuance or repurchase of shares to be approved by ordinary resolution (rather than special resolution) in general meeting;
  • exemptions from the shareholders’ approval requirement for the issuance of shares; and
  • removing the exemption for issuance of shares under a PRC issuer’s plan adopted at the time of its establishment and implemented within 15 months from the date of the approval by the CSRC (which is specified under the Mandatory Provisions but not the new PRC regulations);

• removing the requirement for disputes involving H shareholders to be resolved through arbitration – this means that shareholders of a PRC issuer may enforce their rights under the articles in the same manner as shareholders of other overseas issuers.  They may seek to enforce their rights through commencing legal proceedings in (i) a court of the issuer's place of incorporation or (ii) a Hong Kong court; 
• removing the requirement for PRC issuers’ articles to include the Mandatory Provisions and other ancillary provisions – section 1 of Appendix 13D will be repealed; section 2 of Appendix 13D will also be repealed but the provisions will be moved to Appendix 1A; 
• aligning the timing requirement for PRC issuers to dispatch circulars and listing documents with other issuers – this means that the relevant documents should be dispatched at the same time as (or before) the notice of the general meeting; and
• amending the documentary requirements for new listing applications to reflect the new PRC filing requirements for overseas listings – such applicants will need to submit to the Exchange, at least four clear business days before the expected hearing date, the CSRC notification confirming completion of the new PRC filing procedures.

The consequential amendments will become effective on a date to be announced, subject to the necessary regulatory approvals.

Existing PRC issuers are advised to consult with their PRC legal advisors on whether their articles need to be amended to comply with the new PRC regulations. PRC issuers listed in Hong Kong need to comply with the Listing Rules and their articles. This means that, until their articles are amended, PRC issuers will still need to comply with their existing articles (which reflect the Mandatory Provisions, such as class meetings).  

New listing applicants incorporated in the PRC are expected to follow the new PRC regulations when preparing their articles.  The Exchange will allow these applicants to comply with the Listing Rules during the period between the repeal of the Mandatory Provisions and the effective date of the Listing Rule changes. 

Other proposed changes 

The Exchange also proposed other changes to the Listing Rules in light of changes to PRC laws and the development of the financial market in Mainland China. The proposals generally relate to the two areas set out below.

(A) Proposals relating to the removal of the class distinction between domestic shares and H shares 

Mandate limits on share issuances

As domestic shares and H shares are no longer deemed to be different classes of shares, the Exchange proposes to amend Listing Rule 19A.39 so that the general mandate and the scheme mandate would be subject to an overall cap of 20% and 10% respectively of a PRC issuer’s total issued shares (i.e. there will be no separate mandate limits for the domestic and H shares).  

The removal of the separate mandate limits means that a PRC issuer will have more flexibility within the overall cap to decide how many H shares it may wish to issue.

However, as A shares and H shares are traded on separate exchanges and are not fungible, if the proposal is adopted, there is a chance that the H share public float would drop to a low level (as a percentage of the total issued shares) if a PRC issuer chooses to issue only new A shares after listing.  This may reduce the relative liquidity and investors’ interest in the H share market (relative to the A share market).

Limits on issue price

In relation to the issue of new shares under the general mandate and the exercise price for share options, the Exchange proposes to retain the current Listing Rules provisions benchmarking the issue / exercise price to the market price of the H shares.  The purpose of the share price limit is to limit the dilution impact to shareholders from a share issuance.

The Exchange will consider, on a case by case basis, a request for the issue of A shares under a general mandate to be benchmarked to the market price of the A shares.

Rules with specific requirements for H shares

The Exchange proposes to retain certain provisions in the Listing Rules governing the trading of H shares (as A and H shares are not fungible), such as:

• calculating the maximum number of shares that may be repurchased by reference to the number of issued H shares;
• requiring a PRC issuer to obtain the Exchange’s approval for the trading of H shares;
• requiring H shareholders’ approval for a withdrawal of listing on the Exchange;
• allowing an A+H issuer to calculate its market capitalisation based on the prevailing market prices of A and H shares in issue for the purpose of the percentage ratios under Chapters 14 and 14A; and
• allowing an A+H issuer to calculate its public float with reference to both A and H shares held by the public. 

(B) Proposals to remove certain requirements that are no longer necessary 

The current Chapter 19A of the Listing Rules includes provisions which only apply to PRC issuers (but not overseas issuers).  The Exchange proposes to adopt a consistent framework in relation to the matters below, regardless of the issuer's place of incorporation. 

• Undertakings: Removing the requirements for directors, officers and supervisors of PRC issuers to provide undertakings to the issuers and their shareholders to comply with the PRC Company Law and the issuer's articles (as overseas issuers are not required to provide similar undertakings).
• Sponsors and compliance advisors: Aligning requirements on compliance advisers under Chapter 19A (for PRC issuers) with those in Chapter 3A (for all issuers).  In particular, 
  
  • the requirement for issuers to provide access to their compliance advisers and the compliance advisers to inform the issuers of any changes to applicable laws and regulations will be moved from Chapter 19A to Chapter 3A; and 
  • the requirements in Chapter 19A relating to the role of sponsors and compliance advisers and their termination and replacement will be removed as Chapter 3A contains similar requirements.

• Other matters: Removing certain requirements in Chapter 19A relating to:
  
  • the online display or physical inspection of certain documents (as the information is readily available); and
  • the disclosure of material differences in laws and regulations between the PRC and Hong Kong in the listing documents of new applicants (as new applicants should highlight material matters and specific risk factors that are relevant to them in any event).

Conclusions

The new regulatory regime may bring about some positive changes to PRC issuers.  PRC issuers might find it easier to undertake corporate actions relating to the issuance and repurchase of shares (as class meetings and special resolutions will no longer be required).   If the separate mandate limits for share issuances are removed, a PRC issuer may also have more flexibility within the overall cap to decide how many H shares it may wish to issue.

As domestic shares and H shares will no longer be treated as different classes of shares, uncertainties remain as to how other Hong Kong laws / regulations will be applied (e.g. disclosure of interests under the Securities and Futures Ordinance, application of the Takeovers Code).  The market will need to wait for additional guidance on these matters. 

For further information, please reach out to your usual contact at Ashurst or the partners mentioned below.