SFC’s expectations of INEDs in a world

of front loaded regulation, Weighted

Voting Rights (WVR) structures and

pre-profit biotech companies

30th July 2018

Michael Duignan

Senior Director, Corporate Finance Division

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Agenda

Front loaded approach

New listing regimes

Corporate Governance implications

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What does “front loaded approach” mean?

The SFC’s front-loaded regulatory approach

– emphasises earlier and more targeted intervention,

– with an aim to deliver a faster response and

– maximise the impact of our actions.

Impacts at IPO stage and on an ongoing basis

Examples include:

– Guidance on Valuations and use of valuation reports,

– Objections to listing,

– Objections to unreasonable capital raisings,

– Serious concerns about certain transactions, which

might even result in suspension of share trading.

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Key Aspects of the New Listing Regimes

• Primary listed on a Qualifying Exchange

• Non-Greater China Issuers and Grandfathered Greater

China Issuers may secondary list in HK with existing WVR

structures

• Non-Grandfathered Greater China Issuers must meet HK

style WVR safeguards and WVR structures

• To be considered as dual-primary listed in HK if bulk of

trading (i.e. 55% or more of total trading) migrates to HK

• Takeovers Code doesn’t apply unless bulk of trading

migrates to HK

• Aimed at innovative companies

Secondary listing

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Key Aspects of the New Listing Regimes

• Pre-revenue Biotech Companies (e.g. drug, medical devices and

diagnostics)

• Min. market cap: HK$1.5bn

• Working capital to cover ≥125% of group’s cost in next 12 months

• Developed at least one Core Product beyond concept stage (i.e. product

being regulated by CAs + having conducted human testing)

• Enhanced disclosure requirements (e.g. material communication with

Competent Authorities and R&D costs)

• Min public float: HK$375m (exclusive of subscriptions by existing

shareholders at IPO and subscriptions through cornerstone investments)

• Restriction on fundamental change of business after listing without prior

consent from the Exchange

• Issuers have 12 months to re-comply with requirements of maintaining

sufficient assets / operations before being delisted

• Mandatory stock marker: B

Biotech

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Key Aspects of the New Listing Regimes

• Innovative in nature and able to demonstrate high growth

• Min. market cap: HK$10bn (+ HK$1bn revenue for applicants with

market cap below HK$40bn)

• WVR beneficiaries must be directors at listing and remain afterwards

• “Natural” sunset clause on WVR beneficiaries (death; retirement;

incapacity; transfer of WVR shares)

• Max ratio of 10:1 voting differential for WVR shares

• Non-WVR holders must hold ≥10% of the voting rights

• Certain fundamental matters to be decided on an OSOV basis (e.g.

amendment of articles and appointment / removal of INEDs)

• Establish a Corporate Governance Committee comprised of only

INEDs with enhanced scope of duties

• Mandatory stock marker: W

WVR

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Role of the Corporate Governance Committee enhanced

1) Only INEDs

2) Review and monitor all risks relating to the WVR structure, including

connected transactions involving WVR beneficiaries

3) Confirm the WVR holders have been directors and complied with their

other obligations relating to shares

4) Review and monitor whether the listed issuer is operated and

managed for the benefit of all its shareholders

5) Review and monitor the management of conflicts of interest AND

make recommendations to the board regarding any transactions

involving a conflict of interest between the issuer/public shareholders,

on the one hand, and a WVR beneficiary, on the other

6) Make recommendations to the Board regarding the appointment and

removal of the compliance adviser

7) Facilitate effective communication between listed company and

shareholders

8) Report on its work and its recommendations to the Board and publish

in the annual and semi-annual reports on a “comply or explain” basis.

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Different models of corporate governance

The Anglo-American “model” tends to

emphasize the interests of shareholders.

The Multi-stakeholder “model” associated with

Continental Europe and Japan also recognizes

the interests of workers, managers, suppliers,

customers, and the community.

SEBI defines it as the

"acceptance by management of the inalienable rights

of shareholders as the true owners of the corporation

and of their own role as trustees on behalf of the

shareholders. It is about commitment to values, about

ethical business conduct and about making a

distinction between personal & corporate funds in the

management of a company.“

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Worth considering Corporate Governance 2.0 ?

Three principles

1. Boards should have the right to manage the

company for the long term

2. Boards should install mechanisms to ensure the

best possible people in the boardroom

3. Boards should give shareholders an orderly

voice

© Guhan Subramanian - Harvard Business Review

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Thank you (Q+A)

SFC website: www.sfc.hk