Why Hong Kong
Michael Chan, Assistant Vice President of the Global Markets Division of the Hong Kong Stock Exchange (“HKEx”), was recently in Canada, visiting Calgary, Toronto and Vancouver and delivering a presentation entitled “HKEx – the Listing Venue of Choice”. There was interest from many representatives from the local financial and business communities, reflecting an interest in accessing Asian capital.
The Toronto Stock Exchange (“TSX”) and TSX Venture Exchange (“TSXV”) have flourished as listing platforms for mining and other resource companies, both for domestic Canadian companies and for companies from outside of Canada. The flexibility of the Capital Pool Company (CPC) has over the years attracted many businesses, including those from Asia, into utilizing the TSX and TSXV as a capital markets gateway. As a result, TSX and TSXV have been arguably the most successful markets in drawing resource company IPOs.
Hong Kong has a user-friendly common law legal system, minimal government interference with business, a highly sophisticated banking structure, lack of foreign exchange controls, as well as a collection of financial institutions and markets characterized by a high degree of liquidity. Its geographical accessibility and absence of language barriers has made it a magnet for Mainland Chinese capital, and with it an eager investor population which has been ready to part with their cash.
Although 2012 was not the best year for fund-raising, the numbers are still significant. According to government statistics, Hong Kong’s stock market was the sixth largest in the world and the second largest in Asia in terms of market capitalization as at the end of September 2012, even with the global slowdown of economic activity. Hong Kong was the most active market for initial public offering (“IPO”) funds raised globally in 2009, 2010 and 2011. Even with the growth slowdown of 2012, 1,533 companies were listed on the HKEx as at the end of September of that year, with a market capitalization of close to HK$ 20,000 billion (US$ 2,580 billion). Among them, 710 were Mainland Chinese enterprises which have together, since 1993, raised close to HK$3,400 billion (US$440 billion).
How to get listed on the HKEx
You can go public in Hong Kong in one of three ways – an IPO, by introduction (where existing shares are listed with no fund-raising) and by acquiring a listed “shell”. For mid-cap and small-cap companies, however, the second method does not achieve the goal of raising new capital, whilst the third option is a costly exercise. That leaves the plain vanilla IPO.
Hong Kong boasts a substantial following of both retail and institutional investors and both local and overseas investors. This healthy mix gives the market a good volume of activity, hence liquidity.
For resource companies, recent changes to Chapter 18 of the Listing Rules have made the HKEx a resources-friendly stock market.
Some features are worth noting:
- Companies must demonstrate:
- for petroleum companies, at least a meaningful portfolio of Contingent Resources; or
- for mining companies, at least a meaningful portfolio of Indicated Resources.
- New applicant Mineral Companies must demonstrate that they have rights to participate actively in the exploration for and/or extraction of minerals or petroleum;
- The profit test, the market capitalization/revenue cash flow test and the market capitalization/revenue test can be waived if the HKEx is satisfied that the directors and management of the Mineral Company have sufficient and satisfactory experience of at least five years in mining and/or exploration activities. The management continuity requirement will still apply unless waived.
- New applicant Mineral Company applicants must include independent technical reports (Competent Persons Report) on Reserves and Resources in their listing documents. If they have not commenced production, they must publicize their plans to proceed to production with indicative dates and costs. A Competent Person must provide an opinion to support this.
- New applicant Mineral Company applicants must also have working capital for 125% of their present requirements for the twelve months following listing.
- Possible Reserves, Contingent Resources or Prospective Resources carry no economic value.
As for mining and other resource companies listed in Hong Kong to date, count amongst them China Gold International Resources, South Gobi Energy Resources (both mentioned below), United Company Rusal, Glencore, Kazakhmys PLC, Mongolian Mining Corporation and Vale.
Are the provinces of Canada acceptable overseas jurisdictions for companies applying to list?
To date, Canadian companies listed in Hong Kong have come from British Columbia (SouthGobi Energy Resources Ltd. and China Gold International Resources Corp. Ltd.), Ontario (Manulife Financial Corporation) and Alberta (Sunshine Oilsands Ltd.).
BC, Ontario and Alberta are, up to now, the only Canadian jurisdictions currently accepted by the HKEx. That’s not to say that Canadian companies incorporated in other provinces cannot list in Hong Kong. They just have to make a case that their shareholder protection provisions under local corporate law are just as protective as provisions under Hong Kong company law. This requirement in Hong Kong is a universal requirement for all companies from foreign jurisdictions wishing to list, even companies from Mainland China.
The HKEx has provided rather extensive information on a comparison of Hong Kong and Alberta corporate law. Hong Kong law governing companies lies mainly in the provisions of the Hong Kong Companies Ordinance (“CO“) which has tracked English company law for many years. The HKEx has noted that the Alberta Business Corporations Act (“ABCA“) is different in some ways, and has stated that a listing applicant can either change its constitutional documents to provide for equal protection to that of the CO or provide full disclosure in the listing prospectus so that investors can assess whether they feel safe enough to invest. Amongst the matters with respect to the ABCA which were considered were:
- The CO requires a three-fourths majority to vote through issues relating to variation of incorporation documents, share class rights, voluntary winding-up and share capital reduction, while the ABCA requires only a two-thirds majority.
- The CO allows holders of greater than 10% of the issued shares of a certain class to petition the courts to cancel a variation in class rights. The ABCA, on the other hand, only has shareholders’ rights of dissent to require the company to purchase their shares in the case of a fundamental amendment to the company’s articles; and
- The ABCA provides different ways to effect a repurchase of shares, dividend distribution, share capital reduction, etc.
Is it worthwhile?
To be sure, Hong Kong is not the easiest place in the world to get listed. The HKEx micro-manages the listing process, rather than leaving it to the investors’ own devices to sue if something goes wrong. This is due to the large retail investor population in the region. In fact, in the case of United Company Rusal, the HKEx took the unprecedented step of setting a minimum amount of investment in an effort to deter retail investors.
Another issue to consider is cost. Hong Kong regulators place a huge responsibility on investment banks to do due diligence on the companies they seek to bring to the market, and as a result, bankers will look to spend a substantial amount of fees conducting as thorough due diligence as possible, fees which they will pass on to the listing applicant. This process becomes disproportionately costly if not properly controlled.
All in all, the market is open for business – international companies and resource companies are welcome and companies seeking to take the next step to a dual listing can look to the “Eastern Promise”.
*All charts from Hong Kong Stock Exchange and sources quoted therein.