Move towards Greater Shareholder Rights in Major Financial Centres
Hong Kong is one of the world’s top financial centres with a large capital markets industry. It is also known as the top destination for companies to have their IPOs. With ESG a major focus globally, there are growing demands for the city to have robust governance framework. Listed companies (ListCos) need to ensure protection of shareholder rights with increased transparency of ownership.
With the increasing popularity of newer shareholding and voting structures, there is a need for enhancement of regulatory policies in line with global standards. Policies such as the updated Companies (Amendment) Ordinance 2018 to require certain companies incorporated in Hong Kong to keep registers of persons who have significant control over the companies to enhance transparency of corporate beneficial ownership, are essential to ensure companies observe and attain high standards of corporate governance.
Robust Corporate Governance
Complex shareholding structures involving layers of offshore entities are commonplace in Hong Kong. The release of the Panama papers[1] has accelerated the need to enhance the transparency of ownership structures globally. This transparency is necessary to detect and prevent tax evasion, corruption, money laundering, terrorist financing and unlawful activities. In addition, corporate governance systems where ownership structures are concentrated among few people, there is always a risk of subverting company assets. Individuals can take decisions for personal gain at the expense of minority investors and to the detriment of the company.
Robust corporate governance should entail maintaining thorough framework of processes, policies, and guidelines. These need to be implemented in compliance with recognized corporate governance practices. The board of a company need to take an active role in driving better governance. Being accountable to their shareholders, board members need to engage equally with both large and minority shareholders.
Beneficial Ownership Ordinance
The Companies (Amendment) Ordinance 2018 (CO) mandates all companies incorporated in Hong Kong (except listed companies) to obtain and maintain up-to-date beneficial ownership information through a Significant Controllers Register (“SCR”). Significant controllers are defined as person/s who hold directly or indirectly more than 25% of voting shares, have more than 25% of voting rights or have the right to appoint or remove the majority of directors. In addition, those who have the right to exercise significant influence or control over the company also fall under this bracket.
The Companies Ordinance requires companies to take reasonable steps to identify significant controllers, and to maintain their details in the SCR. The SCR must be kept at the company’s registered office or a prescribed place, while designating at least one designated representative in relation to the SCR.
In addition to the above, Hong Kong has strengthened minority shareholder rights through the Companies Ordinance (Cap.622). Cap.622 mandates companies to hold special resolutions to pass major decisions. The resolutions can take place only after giving due notice to shareholders. These resolutions can only be passed if at least 75% of the voting shareholders approve them. These resolutions are tables for major decisions, such as the alteration of the articles of association, and reduction in the share capital of the company.
New World of Dual Class Shares and Weighted Voting Rights
Before 2018, dual-class shares, where some shareholders have higher voting rights than ordinary shareholders with one share one vote system, were not permitted on the HKEX other than in exceptional circumstances approved the exchange. To attract secondary listing of large technology firms, the HKEX has implemented new Main Board Listing Rules to enable Weighted Voting Rights (WVR) for individual share owners.
These rules only allow secondary listings of innovative companies from Greater China and listing of innovative companies who have a primary listing on overseas exchanges, such as Nasdaq Stock Market (NASDAQ). In such cases, applicants need to have a minimum expected market cap of HK $10 Billion. For firms with less than HK $40 Billion in market cap, they need to show at least HK $1 Billion in revenue over the last audited financial year. Only company directors who collectively hold at least 10% of the share capital at the time of listing can be beneficiaries of WVR. These directors should have been materially responsible for the growth of the company.
To protect minority shareholders, the rules require that the WVR must be attached to specific class of shares. In addition, the WVR must confer only enhanced voting powers on resolutions tabled at general meetings. To allow for prudent decision making, the rules do not allow WVR to have more than 10 times the voting power of ordinary shares. Non-WVR shareholders must be able to cast at least 10% of the eligible votes. The proportion of WVR shareholding must remain at the same level or below the level of WVR at the time of listing. Certain resolutions are required to follow the one share one vote rule. These include any changes to company’s constitution, changes to class rights, appointment and removal of independent non-executive directors and auditors, and when resolving voluntary wind up of the company.
In addition to permitting Weighted Voting Rights, the HKEX also allowed biotechnology firms who are pre-revenue to list on the board. This is subject to only pre-revenue companies who are at an advanced stage of development and a company have been engaged in business for at least two full financial years. With there being significant risks at these pre-revenue companies, transparency and corporate governance are critical to protect shareholder rights. The Listing Rules mandate that a company must comprise at least 1/3rd of the board to be independent non-executive directors. The rules also recommend that the role of Chairman and CEO be separate to bring in stronger governance.
In a bid to attract more companies with dual class shareholder, the HKEX had issued a consultation paper in 2020 to get industry feedback on listing of firms with Corporate WVR. Given the mixed response on the proposal, the Exchange decided to give market participants more time to increase their understanding of such structures and how these structures need to be regulated and governed.
Balancing Attractiveness of Listing and Corporate Governance
As Hong Kong faces increasing competition from other financial centres, both in Mainland and overseas, there is a need to balance easing of rules to increase attractiveness of the city and enhancing corporate governance. With shareholding structures evolving significantly in the modern day and age, it is important to ensure transparency of beneficial ownership and strong protection of shareholder rights. Minority shareholders should be offered protection against dilution and when there are takeover bids for the company. In addition, they need to be given rights to participate in decision making and appointment of directors.
When there is concentrated ownership, like with family-controlled businesses in Hong Kong and other parts of Asia, controlling stakeholders could have an incentive to take decisions that lead to diversion of company assets for personal gain at the expense of minority investors. The beneficial ownership regulation brought is a step in providing greater transparency leading to enhancing Hong Kong’s reputation as an international financial centre and to safeguard the integrity of the financial markets.
While considering expanding the WVR regime as well as increasing the listing of innovative new-economy companies, the policy makers must weigh in the impact of such structures on shareholder protection and transparency. These would include providing considerations for prevention of misalignment of shareholder interests, shorter sunset clauses, preventing abuse of conflict of interest and better governance of management structures. Enhancing the transparency of corporate ownership is an important step to increase trust in businesses of Hong Kong. This will help prevent unlawful activities and improve corporate accountability making Hong Kong an open, trusted and competitive place to invest and do business.
