LCQ2: Permitting the listing of companies with weighted voting right structures in Hong Kong
The Stock Exchange of Hong Kong Limited proposed in its consultation paper released last month that the Listing Rules be amended to permit the listing of emerging and innovative companies with weighted voting right structures (companies with WVR structures) in Hong Kong. Some members of the securities industry have indicated that in the absence of a class action mechanism in Hong Kong at present, the interests of the minority shareholders of such type of companies may not be adequately protected. In this connection, will the Government inform this Council:
(1) of the specific measures to be put in place to ensure that companies with WVR structures and issuers of their securities are subject to effective monitoring and regulation, so as to safeguard the interests of minority shareholders;
(2) whether it will introduce a mechanism for class actions; if so, of the specific timetable; if not, the reasons for that; and
(3) whether it will enact legislation to give the court greater discretionary power to consolidate its hearings of cases on litigation relating to the decisions made by the management of companies with WVR structures; if so, of the specific timetable; if not, the reasons for that?
The Stock Exchange of Hong Kong Limited (SEHK) published its consultation paper on a listing regime for companies from emerging and innovative sectors on February 23, 2018 which sets out detailed proposals to expand the existing listing regime to facilitate the listing of companies from emerging and innovative sectors in Hong Kong, including high growth and innovative companies that have weighted voting rights (WVR) structures, subject to appropriate safeguards. The SEHK will study and take into consideration the comments received on the consultation paper to decide on the way forward.
Having consulted the Department of Justice, the Securities and Futures Commission (SFC) and the SEHK on the relevant parts of the question, our response to the three parts of the question are as follows.
(1) In view of the potential risks associated with WVR, the SEHK has proposed requirements in the proposals that only applicants with suitable characteristics for listing with WVR would be eligible for listing. The SEHK will also reserve the right to reject an application on suitability grounds if the applicant's WVR structure is an extreme case of non-conformance with governance norms. An example is ordinary shares that carry no voting rights at all.
Meanwhile, the SEHK also proposed detailed post-listing safeguards in relation to companies with a WVR structure, including limits on WVR power, protection of non-WVR holders' right to vote, measures to enhance corporate governance as well as enhanced disclosure requirements. In addition, WVRs will fall away if WVR beneficiaries transfer their WVR shares, if they die or become incapacitated or if they cease to be a director. This will result in a "natural" sunset for WVRs so that they do not exist indefinitely.
The SEHK will incorporate the relevant safeguards into the Listing Rules using compulsive languages to facilitate its enforcement action. In other words, if a company listed on the SEHK with a WVR structure breaches the safeguards set out in the Listing Rules, the SEHK will take the breaches very seriously as with any breach of the Listing Rules by other listed companies. Where the conduct justifies it, the SEHK will take appropriate action against the relevant parties, and will refer the matter to other regulatory authorities as appropriate. The SEHK will also require WVR beneficiaries to provide an undertaking to the issuer that they will comply with the relevant WVR safeguards, which will expressly confer benefit on all existing and future shareholders. Besides, any circumvention of or non-compliance with a WVR requirement under the Listing Rules may also involve a contravention of the Securities and Futures (Stock Market Listing) Rules and/or the Securities and Futures Ordinance. The SFC may, on a case by case basis, exercise its powers under the above legislation over the listing applicants or listed issuers.
(2) The SEHK published concept papers on WVR twice in 2014 and 2017 for consultation. Only a small number of respondents considered the introduction of a class action regime to be a pre-requisite for permitting the listing of companies with WVR structures. Some market participants were also concerned that there was a higher risk of frivolous cases being brought if a class action regime was implemented. The responses also indicated that in the United States class action cases were most often brought in relation to matters relating to the disclosure of information, and not for the abuses of control that possibly arose under a WVR structure. Having considered the views collected, the SEHK stated in the consultation conclusions published in 2015 that it did not believe that a class action regime was a necessary pre-requisite for the acceptability of WVR structures. In the consultation conclusions published in 2017, the SEHK also stated that only several respondents advocated that a class action regime should be instituted if WVRs were introduced.
In addition, the Law Reform Commission (LRC) published a report in 2012, recommending an incremental approach to implementing a class action regime in Hong Kong. The class action regime proposed by the LRC is to start with consumer cases, covering tortious and contractual claims made by consumers in relation to goods, services and immovable property. The Department of Justice has established a cross-sector working group to study and consider the proposals of the LRC's report on class action. The working group will take into consideration views from different sectors and strike a balance for the overall benefits of the society. It will make recommendations to the Government upon completion of the study. Therefore, our understanding is that according to the LRC's recommendation regarding the introduction of a class action regime, disputes among company shareholders or issues of shareholders' rights would not be covered at the initial stage.
(3) According to the Rules of the High Court (Cap. 4, sub. leg. A) and the Rules of the District Court (Cap. 336, sub. leg. H), the Court may, by order, consolidate or try two or more claims on the same occasion. Relevant court cases indicate that the Court has an unfettered discretion in deciding whether or not to consolidate the actions. The Court will also take into consideration the particular circumstances of the case and flexibly exercise the discretion with a view to saving time and costs.
In addition, the Court could handle proceedings involving the same interest of numerous persons through "representative proceedings". The plaintiff proposed to represent in the proceeding should satisfy the threefold test of establishing "a common interest, a common grievance and a remedy which is beneficial to all the plaintiffs". The Court is also empowered, on the application of the plaintiffs, to appoint a defendant to act as representative of the other defendants being sued. A judgment or order given in representative proceedings will be binding on all persons so represented.
In other words, under the existing rules, the Court already has unfettered discretion to issue appropriate orders to try actions including those involving decisions made by the management of the WVR companies by means of consolidation or "representative proceedings", having regard to the specific circumstances of the case concerned.
Ends/Wednesday, March 28, 2018
Issued at HKT 15:00
Issued at HKT 15:00