Market Overviewa123.g.akamai.net/7/123/121311/.../corpsechk13/pdf/...28-Feb Hyosung Corp 116 South...
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Market Overview James Grandolfo (Moderator) Bonnie Y. Chan Hon. Roberta S. Karmel Rupert Mitchell Tze-Gay Tan Yingmao Tang
Transcript of Market Overviewa123.g.akamai.net/7/123/121311/.../corpsechk13/pdf/...28-Feb Hyosung Corp 116 South...
Market Overview
James Grandolfo (Moderator)
Bonnie Y. Chan
Hon. Roberta S. Karmel
Rupert Mitchell
Tze-Gay Tan
Yingmao Tang
Market Review
Rupert Mitchell
Head of Asia Equity Syndicate
First Annual Institute on Corporate & Securities Law in Hong Kong 2013
6,2269,349
12,55717,230
24,65322,161
33,87839,012
71,939
40,219
84,490
57,984
22,898 24,947
66,322
47,888
127,371
68,205
55,177
31,621
55,45453,196
8,69013,187
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
90,000
100,000
110,000
120,000
130,000
140,000
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/Ch
ina
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/Ch
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HK
/Ch
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HK
/Ch
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/Ch
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/Ch
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2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Volu
me (
US
$m
m)
IPO FO
Asian / Greater China IPOs – Historical BackdropAfter 2 years of muted activity in the Greater China new issue market, Hong Kong‟s status as the centrepiece of global
ECM activity seems a long way off. Activity elsewhere (especially in ASEAN) has partially made up for the shortfall
APAC Regional issuance: HK/China vs. Rest of Asia ex Japan (2002 – 2013 YTD)
HK / CN Issuance (2002 – 2013 YTD)
Source: Dealogic, Citi; excluding domestic deals, A-shares and deals under US$30mm, as of March 8, 2013
6,22612,557
24,65333,878
71,939
84,490
22,898
66,322
127,371
55,177 55,454
8,690
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
90,000
100,000
110,000
120,000
130,000
140,000
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Volu
me (
US
$m
m)
IPO FO
HK/China HK/China HK/China HK/China HK/China HK/China HK/China HK/China HK/China HK/China HK/China HK/China
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
# of Deals / Total 27 50 99 91 182 317 91 201 292 152 114 32
IPO 12 21 40 49 70 126 30 59 107 66 23 6
FO 15 29 59 42 112 191 61 142 185 86 91 26
010,00020,00030,00040,00050,00060,00070,00080,00090,000
100,000110,000120,000130,000140,000
Volu
me (
US
$m
m)
IPO # of Deals / Total
1
0
2,000
4,000
6,000
8,000
10,000
12,000
40
50
60
70
80
90
100
110
120
Volu
me (
US
$m
m)
Index le
vel (R
ebased t
o 1
00)
China ADR Issuance S&P 500
0
5
10
15
20
25
30
35
40
45
50
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Index level (R
ebased t
o 1
00)
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
# of IPOs 4 0 1 2 15 8 14 39 10 18 46 14 3 0
# of IPOs
# of IPOs
Asian / Greater China IPOs – Does Listing Venue Matter?
China ADR Issuance vs. NASDAQ / S&P500 Indexes (2010 – 2013 YTD)
Source: Dealogic, Citi; excluding domestic deals, A-shares and deals under US$30mm, as of March 8, 2013
In the past, many Chinese companies have been tempted by the promise of a valuation premium with US listings…but
orphan listings leave issuers exposed when the „hot money‟ dries up
• Lack of a domestic bid and indexation support is the key risk
• Issuance activity (IPO and follow-on) by US listed Asian issuers has slowed to a trickle
• Delisting activity at record levels
• Most recent take private transactions eyeing a local listing for their capital markets return at a future date
2
460
470
480
490
500
510
520
530
540
550
560
570
MS
CI A
xJ
MSCI AxJ
2.8
2.3
0.2 0
.51.9
0.3
1.4
4.1
0.6
1.8
4.2 4.3
2.6
0.6
1.3
6.7
0.7
1.2
3.3
1.1
1.6
2.32.3
1.6
8.5
3.2
1.0
0.8
9.3
0.8
2.73
.0
2.4
4.2
-4
-2
0
2
4
6
8
10
6-J
ul
20-J
ul
3-A
ug
17-A
ug
31-A
ug
14-S
ep
28-S
ep
12-O
ct
26-O
ct
9-N
ov
23-N
ov
7-D
ec
21-D
ec
4-J
an
18-J
an
1-F
eb
15-F
eb
1-M
ar
Issuance (
US
$bn)
CB Follow -on/Block IPO Delayed/Pulled
Primary Market Conditions
Source: Bloomberg, Citi as of March 8, 2013. Chart represents weekly issuance volumes.
Note: (1) Includes recent 15 equity (ex CB and ex rights) transactions ≥ US$100m. Aftermarket performance based on offer price.
Fairly robust issuance volumes so far 2013YTD, with >US$25bn equity raised.
Recent Equity Pricings(1)
Date IssuerSize
(US$mm)Country
Deal Type
Final Offer Price vs. Price Range
Disc (%)
Aftermkt Perf.(1)
8-Mar A-REIT 326 Singapore FO -4.2 2%
6-Mar RCBC 150 Philippines FO Fixed Price -4.5 4%
6-Mar Ayala Land 299 Philippines FO -7.2 2%
5-Mar China Longyuan Power 135 China Block -3.3 -1%
28-Feb Termbray Petro-king 106 Hong Kong IPO NA 32%
28-Feb Hyosung Corp 116 South Korea Block -7.1 2%
27-Feb MGCCT 1,359 Singapore IPO NA 13%
25-Feb Hanwha Life Insurance 113 South Korea Block -9.7 -1%
25-Feb Global Logistic Properties 1,252 Singapore Block -5.5 0%
21-Feb Keppel REIT 124 Singapore FO Fixed Price -1.1 0%
21-Feb CP All 315 Thailand Block -5.5 1%
20-Feb Jaiprakash Power Ventures 175 India FO Fixed Price -8.0 -7%
20-Feb Shriram Transport 305 India Block -5.4 1%
14-Feb KB Financial Group 669 Korea Block -1.4 4%
8-Feb SP Setia 305 Malaysia FO -5.2 14%
0% 50% 100%
Asia (ex-Japan) Primary Issuance Volume (Since Jul 2012)
BDO US$1.0bn
Rights
IHH
US$2.0bn
IPO
GTI Trust
US$1bn IPO
AIA
US$2.0bn
Block
Zhengzhou Coal
US$500mm IPO
Astro
US$1.5bn IPO
Maybank
US$1.2bn FO
HDFC
US$839 m
BlockSingTel
US$1.0bn
Block
Carin India
US$929m
Block
Ispat Nigam
US$450mm IPO
PICC
US$3.1 bn
IPO
Tingyi
US$118mm Block
Dynasty REIT
US$670mm IPO
Horizon Hospital US$800mm IPO
Aircraft Capital Trust US$700mm IPO
PTT E&P
US$3.0 bn
Rights
HKEx
US$1.0bn
FO
Posco Specialty
US$430mm IPO
AIA
US$6.4 bn
Block
Year-end
holiday
Sinopec
US$3.1 bn
FO
NTPC
US$2.1 bn
OFS
Mapletree
Greater China
Commercial
Trust US$1.4
bn IPO
4
Most Recent 25 Asia Pacific Ex-Japan IPO
Recent Asia IPOs Pricing Conditions
Date Issuer CountrySize
(US$mm)Offer Price
Final Offer Price vs. Price Range
Issuer P/E Valuation
InstitutionDemand
Performance Since IPO
28-Feb-13 Petro-king Oilfield Services Hong Kong 106 HK$3.28 12.5x 12x 0%
27-Feb-13 Mapletree Greater China Commercial Trust Singapore 1,360 S$0.93 5.6%1 38x N/A
29-Jan-13 PanAsialum Holdings Hong Kong 160 HK$4.13 9.6x Multiple -37%
29-Jan-13 Time Watch Investments Hong Kong 104 HK$1.35 NA Multiple 0%
24-Jan-13 Chinalco Mining Corp China 398 HK$1.75 8.8x Multiple -29%
19-Dec-12 Wison Engineering Services China 216 HK$2.79 7.5x >1x 39%
17-Dec-12 Bharti Infratel India 767 INR220.00 10.0x2 3x -7%
17-Dec-12 China Machinery Engineering China 575 HK$5.40 6.8x 35x 27%
14-Dec-12 PC Jeweller India 112 INR135.00 8.2x 5x -10%
13-Dec-12 Credit Analysis & Research India 100 INR750.00 21.4x 43x 6%
5-Dec-12 Waskita Karya Indonesia 122 IDR380.00 10.4x 2x 61%
30-Nov-12 PICC China 3,562 HK$3.48 1.3x3 1.5x 31%
28-Nov-12 Zhengzhou Coal Mining China 296 HK$10.38 6.5x 1x -18%
26-Nov-12 D&L Industries Philippines 129 PHP4.30 13.5x >2x 66%
26-Nov-12 Ananda Development Thailand 183 THB4.20 7.8x Multiple 4%
22-Nov-12 Future Land Development China 265 HK$1.45 (73.0)%4 >1x -7%
20-Nov-12 Tsui Wah Holdings Hong Kong 112 HK$2.27 15.8x Multiple 81%
16-Nov-12 CIFI Holdings China 215 HK$1.33 4.1x 1.5x 17%
24-Oct-12 Shanghai Fosun Pharmaceutical China 512 HK$11.80 12.0x 1x 4%
11-Oct-12 Religare Health Trust Singapore 415 S$0.90 Below Range 9.0%3 2.5x -3%
8-Oct-12 Courts Asia Singapore 111 S$0.77 Fixed, No Range 10.3x 5.6x 16%
4-Oct-12 Astro Malaysia Malaysia 1,492 M$3.00 12.8x2 32x -6%
6-Sep-12 IGB REIT Malaysia 269 M$1.25 5.1%1 30x 11%
16-Aug-12 Far East Hospitality Trust Singapore 525 S$0.93 6.3%1 25x 18%
18-Jul-12 Ascendas Hospitality Singapore 364 S$0.88 7.9%1 >1x 14%
Average: 12%
Source: Dealogic, Bloomberg, FinanceAsia, IFR, Citi as of March 5, 2013. Deal size greater or equal to US$100 million.
Note: 1. Based on Dividend Yield. 2. Based on Embedded Value. 3. Based on EV/EBITDA. 4. Based on discount to NAV.
0% 20% 40% 60% 80% 100%
Average: 55%
Investor participation and demand varies greatly by situation – marketing, valuation and timing are critical for successful
execution.
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6
8
10
12
14
16
18
20
Jan-07 Nov-07 Oct-08 Aug-09 Jul-10 May-11 Apr-12 Mar-13
90
100
110
120
130
Jan-12 Apr-12 Aug-12 Nov-12 Mar-13
(Rebased to 1
00)
S&P 500 FTSE 100 MSCI AxJ
Asian Equity Markets
5-year Historical
Average: 13.2x
Current: 12.0x
P/E
(x)
23.3%
21.5%
16.4%
July 26: Draghi says ECB
will do all it can to preserve
the euro
Sep 13: QE3
announced
Nov 6:
US
Presidential
elections
Sep 6: ECB announces unlimited
purchases of government bonds
Equity Markets Accelerating Into 2013 Market Performance (2012-13YTD)
…And Valuations Remain CompellingMSCI Asia ex-Japan Forward P/E (Last 5 Years)
Earnings Revision To Show Positive MomentumEarnings Revisions Index Standard Deviation from Mean (IBES Aggregates)
Jan 1:
US Senate
approved bill to
avoid fiscal cliff
Source: Bloomberg, IBES Aggregates, Citi as of March 8, 2013.
450
470
490
510
530
550
570
MS
CI A
xJ
(1,500)
(500)
500
1,500
2,500
3,500
4,500
Mar-09 Jan-10 Nov-10 Sep-11 Jul-12
QE1/China
Stimulus
QE2
BoJ
Net
Inflow
s (
US
$ in M
illio
ns)
ECB
Loosening
+ LTRO1
LTRO2
BoJ QE
QE3
Liquidity Remains Abundant…Citi Asia (ex Japan) Net Equity Inflows US Averts
Fiscal Cliff
Feb-13
3
Greater China Fund FlowsFund flows was on a nearly 6-month net inflow streak before Cyprus worries ended it.,,, a return to trend required before
we see a significant pick up in ECM activity for the Greater China region
HK/China Fund Flows (2002 – 2013 YTD)
HK/China Fund Flows (2010 – 2013 YTD)
Source: EPFR, Citi as of March 20, 2013
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
12%
1/02 1/03 1/04 1/05 1/06 1/07 1/08 1/09 1/10 1/11 1/12 1/13
HK+CN 4wk Flows % AUM Hang Seng Index 4wk %, RHS
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
-3%
-2%
-1%
0%
1%
2%
3%
4%
5%
1/10 5/10 9/10 1/11 5/11 9/11 1/12 5/12 9/12 1/13
HK+CN 4wk Flows % AUM Hang Seng Index 4wk %, RHS
6
Tze-Gay Tan
April 2013
DIFFERENCES IN LISTING REGIMES AND
TREATMENT OF SHAREHOLDERS ACROSS
BORDERS – SINGAPORE AND MALAYSIA
Introduction 10
• Rise in cross-border listings and greater competition for listings
• Key contributor to long-term attractiveness and integrity of listing venue
is protection of shareholder rights under listing rules, regardless of:
• country of incorporation of issuer
• geographical location of shareholders
11Key Shareholder Rights 11
• Right to attend, speak and vote at shareholder meetings critical to
enabling investors in listed companies to protect their interests
• Safeguards in stock exchange listing rules typically require key matters
affecting shareholders‟ interests to be subject to shareholders‟ approval in
general meeting
• Safeguards not truly effective unless shareholders have equal opportunity
to attend or be adequately represented at shareholder meetings
12Safeguards to protect shareholder interests 12
• Changes in capital require shareholders‟ approval
• Typically listed companies obtain general shareholders‟ mandate at
annual general meeting
• General mandate gives power to directors to issue additional equity
securities subject to prescribed limits:
• SGX: 50% of issued shares for pro rata issues to shareholders
(sub-limit of 20% for non pro rata issues)
• BM: 10% of issued shares
Singapore Exchange (SGX)
Bursa Malaysia (BM)
13Safeguards to protect shareholder interests 13
• Transactions with interested persons or related parties (e.g. director, CEO,
major shareholder, controlling shareholder or their associates or connected
persons) above stated thresholds require shareholders‟ approval• SGX: value of transaction ≥ 5% of NTA of listco group
• BM: percentage ratios ≥ 5%
Value of asset : Net assets of listco group
Net profit attributable to asset : Net profit of listco group
Aggregate value of consideration : Net assets of listco group
Equity share capital issued as consideration : Equity share capital in issue
Aggregate value of consideration : Market capitalisation
Total assets : Total assets of listco group
JV - project costs attributable to listco group
JV – equity participation of listco group
:
:
Total assets of listco group
Net assets of listco group
Disposal of asset acquired in last 5 years
- Original cost of investment : Net assets of listco group
14Safeguards to protect shareholder interests 14
• Certain acquisitions and disposals above stated thresholds require require
shareholders‟ approval
• SGX: relative figures > 20%
• BM: percentage ratios ≥ 5%
Net asset value of asset (disposals only) : Net asset value of listco group
Net profit attributable to asset : Net profit of listco group
Aggregate value of consideration : Market capitalisation
Equity share capital issued as consideration : Equity share capital in issue
15Key Shareholder Rights 15
• One share, one vote v. dual-class voting shares
• Dual-class voting shares allow entrenchment of control by shareholders
disproportionate to their economic interest
• Currently cannot be listed on SGX or BM
Right to vote
16Key Shareholder Rights 16
• Fundamental right to attend, speak and vote at shareholder meeting must
be preserved
• Location
• Not prescribed by SGX or BM
• 2011, SGX consultation paper on whether to require SGX listed
companies to hold general meetings in Singapore (except where
prohibited by laws in country of incorporation) – not implemented to-
date
Right to attend shareholder meetings
17Key Shareholder Rights 17
• SGX listed companies typically call for vote on show of hands, unless
poll is demanded
• SGX encourages poll voting for all resolutions
• More transparent and fair
• Objections relating to poll voting (time consuming and cumbersome)
mitigated by electronic voting
• 2011, SGX consultation paper on whether SGX listed companies
must adopt poll voting on all resolutions – not implemented to-date
Mandatory voting by poll - SGX
18Key Shareholder Rights 18
• Likewise, BM encourages poll voting for substantive resolutions and use
of electronic voting
• From 1 June 2013, BM requires poll voting when BM listed companies
seek shareholders‟ approval for related party transactions
Mandatory voting by poll - BM
19Key Shareholder Rights 19
• Currently, investor holding shares in SGX listed companies through
custodian can only attend and vote at shareholder meetings as proxy of
custodian
• Most SGX listed companies do not permit custodian to appoint more than
2 proxies
• Singapore Companies Act amendment proposed to allow custodians to
appoint more than 2 proxies
• Only affects Singapore incorporated companies listed on SGX
Right to attend shareholder meetings
- Enfranchising beneficial shareholders
20Tze-Gay Tan 20
Tze-Gay Tan has been a Partner since 1992 and is the Head of the Equity Capital Markets
team. She has been involved in a broad range of international transactions in Asia including
debt and equity issues and the establishment of investment funds. She also advises
international securities and asset management firms on licensing, regulatory and
compliance matters.
Tze-Gay graduated from the National University of Singapore with an LLB (Hons) degree in
1987. She was called to the Singapore Bar in 1988 and joined Allen & Gledhill the same
year. Tze-Gay is widely recognised as a leading finance practitioner in Singapore by
notable legal publications including The Asia Pacific Legal 500 (2003 to 2011), Chambers
Asia (2008 to 2012) and IFLR1000 (2004 to 2011). Chambers Asia 2012 notes that Tze-
Gay is “a prominent name in the market and is a major asset for the team when it comes to
high-level IPOs”. In Chambers Global 2011, she is reported that she “warrants special
mention as an outstanding and expeditious capital markets professional” and IFLR1000
2011, she is recognised as one of the best capital markets lawyers in Singapore, where she
“knows all the issues and always tries to find win-win solutions for issuers and
underwriters”. She is also listed in The International Who’s Who of Business Lawyers (2007
to 2010), The International Who’s Who of Capital Markets Lawyers (2009 and 2011) and
Who’s Who Legal: Singapore (2008).
Admissions Singapore Bar (1988)
Practice(s) Capital Markets, Corporate Regulatory & Compliance
+65 6890 7712
21
Notes:
• This presentation is intended to provide general information and is not meant to be exhaustive, comprehensive or
authoritative. Allen & Gledhill LLP does not warrant its accuracy or completeness or accept any liability for any loss or
damage arising from any reliance thereon.
• The information in this presentation should not be treated as a substitute for specific legal advice concerning particular
situations.
Davis Polk & Wardwell, Hong Kong Solicitors
Challenges US issuers face when listing in Hong Kong
Presented by
Bonnie Chan
April, 2013
23
Rules applying to US issuers looking to list in Hong Kong
Chapter 19 Main Board Listing Rules (Chapter 24 GEM Listing Rules) provides general
framework applicable to overseas companies seeking a listing in Hong Kong
Main Board LR 19.05(1)(b): HKSE must be satisfied that the overseas issuer is
incorporated or otherwise established in a jurisdiction where the standards of
shareholder protection are at least equivalent to those provided in Hong Kong
Traditionally, only four jurisdictions were recognized for listing:
Hong Kong
Cayman Islands
Bermuda
PRC
24
Rules applying to US issuers looking to list in Hong Kong
March 2007 HKSE and SFC Joint Policy Statement
(http://www.hkex.com.hk/eng/newsconsul/hkexnews/2007/documents/044_joint_statement
_e.pdf)
established a mechanism for companies from other jurisdictions to be qualified to list in
Hong Kong
sets out a list of 25 items extracted from the Companies Ordinance which supposedly
constitute core shareholder protection provisions for Hong Kong incorporated
companies
standard approach: line-by-line comparison of these items with the protections available under
the applicant‟s home law
gaps could be plugged by amending applicant‟s constitutional documents
25
Streamlined regime for listings of overseas issuers
GL12-09 (http://www.hkex.com.hk/eng/rulesreg/listrules/listguid/documents/gl12-09.pdf)
September 2009
second-comers allowed to piggy-back on first-issuer
no need for line-by-line comparison
adopt similar arrangements in constitutional documents
cross-benchmarking allowed
can compare shareholder protection standards to other acceptable jurisdictions (not just Hong Kong)
purposive interpretation of shareholder protection “equivalence” requirements
e.g. while Hong Kong requires a 75% shareholder vote, a two-thirds majority vote is still acceptable
issuers not rigidly required to change their constitutional documents
e.g. where not legally permitted or too burdensome
issuers not required to regularly review law of jurisdiction of incorporation
no ongoing monitoring obligation
Listing of overseas issuers in Hong Kong
To date, companies incorporated in the following overseas jurisdictions have
been approved for listing in Hong Kong:
Australia
Brazil
BVI
Canada (Alberta, British Columbia,
Ontario)
Cyprus
France
Germany
Guernsey
Isle of Man
Italy
Japan
Jersey
Korea
Luxembourg
Singapore
United Kingdom
US (California, Delaware, Maryland)
26
27
US jurisdictions acceptable to HKSE
California
LD111-1 (http://www.hkex.com.hk/eng/rulesreg/listrules/listdec/Documents/ld111-1.pdf),
November 2010
Delaware
LD24-2012 (http://www.hkex.com.hk/eng/rulesreg/listrules/listdec/Documents/ld24-
2012.pdf), February 2012
Maryland?
Coach Inc. secondary listing, December 2011
LD27-2012 (http://www.hkex.com.hk/eng/rulesreg/listrules/listdec/Documents/ld27-
2012.pdf) , March 2012
HKSE subsequently clarified that Maryland is not treated as an “accepted jurisdiction”
future candidates will be considered on their own facts and circumstances
28
Why have we not seen more US issuers list in Hong Kong since Coach?
Technical issues
Restrictions on the use of dual-class structure for securities
Tax considerations
Valuation and liquidity issues
29
De-listing / de-registration in the US
US listed companies have registered their securities with the SEC and need to
comply with ongoing SEC reporting obligations because of the registration
Delisting is a relatively simple process: Listco can apply to voluntarily delist from
NYSE or Nasdaq
However, delisting from NYSE / Nasdaq itself will not terminate Listco‟s SEC reporting
obligations
To deregister, Listco needs to satisfy certain tests
US incorporated Listco can only deregister if it has fewer than 300 holders of record
“Foreign private issuers” can generally deregister if (1) its US average daily trading
volume (ADTV) is 5% or less of worldwide ADTV for a recent 12-month period; or (2) its
equity securities are held of record by (x) fewer than 300 persons worldwide or (y)
fewer than 300 persons resident in the US
30
“Home-coming” listings
Traditional reasons:
Controlling shareholder believes the company is trading cheaply
Allow management to focus on long-term objectives
Allow the company to have a more leveraged capital structure that might not be acceptable for a
public company
Compliance cost-saving (e.g. Sarbanes Oxley Act)
New trend: Many Chinese companies are dissatisfied with valuations in the US
compared with their counterparts in some of the Asian exchanges
May consider re-listing in Hong Kong or other exchanges in Asia
31
Key considerations for home-coming listings
Any ongoing regulatory investigations in the US
Suitability for listing issues
Due diligence and disclosure
Dual-class capital structure
No deferred / golden shares etc. for Hong Kong-listed companies
VIE structure (HK parlance: structured contracts)
Enhanced scrutiny
Structural and disclosure requirements
32
Listing a variable interest entity in Hong Kong
Direct ownership
Contractual arrangements
Holding Company (Listco)
(Cayman Islands)
Intermediate Holding Company
WFOE
VIE (opco) VIE (opco)
Shareholders of VIE Shareholders of VIE
OFFSHORE
ONSHORE
100%
100%
100% 100%
A typical VIE structure
33
HKSE regulation of VIE
Listing Decision 43-3 (original 2005, subsequently updated):
http://www.hkex.com.hk/eng/rulesreg/listrules/listdec/Documents/LD43-3.pdf
Subject to certain requirements, VIE are basically acceptable for listing
VIE arrangements will be considered on a case-by-case basis
Generally acceptable only for restricted businesses
If a non-restricted business is involved (i.e. VIE structure is not necessitated by industry
restrictions), the Listing Division will normally elevate the case to the Listing Committee
34
Basic requirements for a VIE
Listco and sponsor must provide reasons for using the VIE structure, which should be narrowly tailored to
minimise conflict with laws
Full disclosure must be made in the prospectus
If available, regulatory assurance should be obtained from the relevant regulatory authorities, failing which a
legal opinion is required that “all possible actions or steps taken to enable [the legal adviser] to reach its
conclusions has been taken”
VIE structure must be unwound as soon as the law allows the business to be operated without it
Certain mandatory provisions in the structured contract, e.g.
power of attorney by which opco‟s shareholder (normally listco‟s controlling shareholder) grants to listco‟s
directors the power to exercise all its rights as opco‟s shareholder
contain dispute resolution clauses that empower arbitrators to award remedies over the shares or assets of
opco
allow liquidators to seize opco‟s assets (in case of a winding up) for the benefit of listco‟s shareholders and
creditors
There must also be appropriate arrangements to:
protect listco‟s interests in the event of death, bankruptcy or divorce of such shareholders
address the potential conflicts of interest between listco and opco‟s shareholder
Bonnie Y. ChanPARTNER
35
Hong Kong Office
852 2533 3308 tel
852 2533 1708 fax
Ms. Chan is a partner in Davis Polk‟s Corporate Department, resident in Hong Kong. Her practice includes
advising issuers and underwriters on capital markets transactions and advising on securities, corporate and
governance matters, generally.
Before joining the firm in 2010, Ms. Chan served as a senior vice president of the Hong Kong Exchanges and
Clearing Limited, where she led the IPO Transactions Department of the Listing Division. Previously, she was
an in-house counsel at Morgan Stanley, where she was responsible for overseeing their capital markets
transactions in Asia.
WORK HIGHLIGHTS
Ms. Chan was selected as one of the two legal advisers to a group of investment banks in Hong Kong to
respond to the Securities and Futures Commission (SFC) Consultation Paper on the Regulation of Sponsors
(May 2012).
Equity
China Nonferrous Mining Corporation‟s $252 million Hong Kong IPO and global offering
China Yongda Automobiles Services‟ $215 million Hong Kong IPO and global offering
RECOGNITION
Band 1 for Capital Markets: Equity (International Firms) – Chambers Asia 2012/2013
Leading lawyer – IFLR1000
Bonnie Y. Chan (cont.)PARTNER
36
OF NOTE
Ms. Chan regularly speaks on capital markets and issues associated with the Hong Kong Stock Exchange. Her recent speaking roles have included:
“Hong Kong: China‟s Global Financial Center Conference” (March 2011, New York) – hosted by The Financial Services and the Treasury Bureau of the
Government of the Hong Kong SAR, supported by Invest Hong Kong, Hong Kong Monetary Authority and Securities and Futures Commission
“Hong Kong Stock Exchange: Current and Emerging Issues” (March 2011, Hong Kong) – Asialaw‟s In-house Counsel Summit
“Navigating Changes in the Global Financial System” (April 2011, Boston) – Harvard Business School‟s Asia Business Conference
Ms. Chan recently conducted a customized training seminar for a number of Davis Polk clients entitled, “A New Era in Hong Kong IPO Sponsors Regulation:
October 2013.”
PROFESSIONAL HISTORY
Partner, Davis Polk, 2010-present
Senior Vice President and Head of IPO Transactions Department of Listing Division, Hong Kong Exchanges and Clearing Limited, 2007-2010
Executive Director, Morgan Stanley, 2003-2007
ADMISSIONS
Hong Kong
State of New York
EDUCATION
LL.B., University of Hong Kong, Faculty of Law, 1991
LL.M., Harvard Law School, 1993
Issues Non-PRC Companies Face when
Listing on the International Board in
Shanghai
Yingmao Tang April 18, 2013
First Annual Institute on Corporate & Securities Law in Hong Kong 2013
Market Overview Panel
Overview of the International Board 3
Selected Substantive Issues 8
Table of Contents
38
Overview of the International Board
39
What is the International Board?
Qualifications for Listings on the International Board
Will the International Board be Launched ?
When will the International Board be Launched?
Overview of the International Board
40
What is the International Board?
The China Securities Regulatory Commission (“CSRC”) has not yet
provided a legal definition of the International Board.
We expect that the International Board will have at least the following
three important elements:
public offerings in the PRC of new shares or depositary receipts that
are traded in RMB;
by non-PRC issuers (“Non-PRC Issuers”); and
listings of these securities in Shanghai.
Therefore, we expect that potential candidates may include both
multinational companies and “red-chip” companies incorporated outside
the PRC such as China Mobile.
Overview of the International Board
41
Qualifications for listings on the International Board
Criteria for listings by PRC issuers in the PRC is quite extensive and
contains both qualitative (i.e., issuer’s independence) and quantitative
tests (i.e., making profits in each of the recent three years).
A separate set of criteria will be formulated to apply to Non-PRC Issuers.
Currently, the CSRC appears to focus on
(i) whether a Non-PRC Issuer is a foreign company listed on an
internationally-recognized exchange such as NYSE or HKSE; and
(ii) a Non-PRC Issuer’s prestige and commitment to China.
Overview of the International Board
42
Will the International Board be launched?
Our assessment is that the International Board will be launched because
it is part of a national strategy to make Shanghai a global financial center.
In March 2011, the launch of the International Board is included by the
State Council as one task for The Twelfth Five-year Plan of National
Economic and Social Development.
In January 2012, the National Development and Reform Commission
released a blueprint for transforming Shanghai into a global financial
center by 2015, and reiterating China’s determination to launch the
International Board.
In February 2013, CSRC Vice-Chairman Yao Gang wrote in an article
“foreign companies will definitely be allowed to list in China sooner or
later. We need only to consider when and how to let this happen”.
Overview of the International Board
43
When will the International Board be launched?
The CSRC has not yet announced a timetable for the opening of the
International Board. Shanghai Stock Exchange (“SHSE”) has indicated its
ambition to launch it as early as possible.
In 2011, a number of Non-PRC Issuers joined the race to be included in
the first wave of companies to be listed on the International Board partly
encouraged by a preliminary approval by the State Council of the launch
of the International Board.
Our assessment is that it is unlikely that it will be launched in 2013 due to,
among other factors, the change of leadership in the CSRC as well as the
country, but professionals are currently assessing the possibility of 2014.
Selected Substantive Issues
44
Financial/Accounting Issues
Prospectus Disclosure Issues
Reporting Issues
Corporate Governance and Shareholder Protection Tests
Foreign Currency Control and Repatriation of Offering Proceeds
Selected Substantive Issues
45
Financial/accounting issues – IFRS vs. CAS
A Non-PRC Issuer may be required to submit financial statements
prepared in accordance with (i) China Accounting Standards (“CAS”); or
(ii) International Financial Reporting Standards (“IFRS”) with qualitative
reconciliations to CAS.
It is uncertain whether U.S. GAAP will be acceptable to the CSRC and
what approach that the CSRC will adopt to accommodate U.S. candidates.
Certain U.S candidates have proposed to submit financial statements
prepared in accordance with U.S. GAAP with a reconciliation of important
items (i.e., net income) to CAS, but it is unclear whether the CSRC will
accept such proposal.
Selected Substantive Issues
46
Financial/accounting issues – auditor’s qualification
The CSRS may require that audit reports should be issued by (i) a PRC-
certified public accountant (i.e., KPMG China); or (ii) a non-PRC public
accountant (i.e., KPMG Paris) if its home country accepts reports of a PRC
public accountant.
EU has agreed to grant China equivalent status with respect to audit
oversight, which paves the way for the Chinese regulator to negotiate with
EU member states to cooperate on cross-border oversight of auditors.
It is unclear whether any of the EU member states has reached any
agreement with the Chinese regulator. It is also unclear whether any
progress has been made between China and the U.S. in this regard.
Selected Substantive Issues
47
Prospectus disclosure issues – use of proceeds
The CSRS has promulgated prospectus disclosure requirements (i.e., No.
1 Rule), to apply to PRC issuers, which are not entirely harmonized with
IOSCO disclosure standards adopted by markets such as U.S. and HK.
We understand that the CSRC will promulgate a separate disclosure rule
to apply to Non-PRC Issuers, but it is uncertain how and to what extent
the CSRC will accommodate these issuers in a number of key issues.
For example, PRC issuers are not allowed under No. 1 Rule to disclose in
a prospectus that “offering proceeds will be used for working capital and
other general corporate purposes”, which is a common disclosure
practice of many multinational companies outside the PRC.
Selected Substantive Issues
48
Reporting issues – post-listing reports
The following reports are required for PRC issuers:
Annual reports due within 4 months after each year-end;
Semi-annual reports due within 2 months after the end of the first half
of each year;
Quarterly reports due within 1 month after the end of the first and the
third quarter, respectively; and
Major event reports due within 2 days after the occurrence of a
significant event.
Selected Substantive Issues
49
Reporting issues – post-listing reports (cont’d)
As for periodic reports, certain Non-PRC Issuers are not required by their
home jurisdictions to prepare quarterly reports (i.e., those from Europe)
or semi-annual reports (i.e., those from the U.S.).
The CSRC may waive the quarterly report requirement for certain Non-
PRC Issuers (i.e., those from Europe), but it is unclear whether it will
waive the semi-annual report requirement for other issuers (i.e., those
from the U.S.).
As for major event reports, a Non-PRC Issuer may be required to make
timely disclosure in China of the same information disclosed outside
China to ensure that Chinese shareholders will receive the same
information.
Selected Substantive Issues
50
Corporate governance and shareholder protection tests
The CSRC will not require a Non-PRC Issuer to have the same corporate
governance as that of a PRC issuer, but may require a Non-PRC Issuer to
comply with a series of tests relating to corporate governance and
shareholder protection.
In general, a Non-PRC Issuer will be required to establish that “the
standard of corporate governance of a Non-PRC Issuer and shareholder
protection provided by such Non-PRC Issuer is equivalent to the standard
of corporate governance of, and shareholder protection provided by, a
PRC issuer”.
Tests may include tests for shareholders’ rights, shareholders’ meetings
and board of directors.
Selected Substantive Issues
51
Foreign currency control – repatriation of offering proceeds
It appears that a Non-PRC Issuer will likely be allowed to either use RMB
offering proceeds within mainland China, or convert RMB proceeds to
foreign currencies and repatriate them out of mainland China.
If a Non-PRC Issuer has plans to use RMB in mainland China, the
International Board will provide it with a channel for accessing RMB in a
larger scale comparing to RMB financing outside mainland China such as
offering Dim Sum bonds in Hong Kong.
If a Non-PRC Issuer has capital needs in foreign currencies outside
mainland China, it may also apply with the SAFE for converting and
repatriating offering proceeds out of mainland China subject to the rules
to be formulated by this agency.
About the Speaker
52
Mr. Yingmao Tang
Mr. Tang is an associate professor of Peking University Law School. He
also provides counseling to King & Wood Mallesons where he has been
involved in a number of cross-boarder capital market and M&A projects.
Prior to 2009, Mr. Tang was a practicing lawyer with Sullivan & Cromwell
LLP and an in-house counsel for China International Capital Corporation.
Mr. Tang received his bachelor‟s degree in law and master‟s degree in
law from Peking University Law School in 1997 and 1999, and his LLM
and J.S.D degrees from Yale Law School in 1999 and 2004.
Telephone: (+86 10) 5878 5163
Email: [email protected] /[email protected]
Roberta S. Karmel, Professor of Law and
Co-Director, Dennis J. Block Center
For the Study of International Business Law,
Brooklyn Law School
IMPLICATIONS OF THE JOBS ACT FOR
FOREIGN PRIVATE ISSUERS
53
INTRODUCTION
The Jumpstart Our Business Startups (JOBS) Act was passed over
a year ago, on April 5, 2012.
The JOBS Act applies to U.S. and non-U.S. issuers, and their
underwriters and placement agents except for crowdfunding
offerings.
Thus far, the Securities and Exchange Commission (SEC) has not
passed rules implementing the JOBS Act, but some statutory
provisions became effective when the Act was passed.
54
EMERGING GROWTH COMPANIES (EGCS) The JOBS Act contains a number of provisions to make it easier for
EGCs, whether a domestic or foreign issuer, to ease into an initial public offering (IPO) and reporting provisions of the Securities Exchange Act of 1934 (Exchange Act) thereafter.
An EGC is an issuer that has annual gross revenues of less than $1 billion. A public issuer will remain an EGC until the earliest of:
The last day of the fiscal year during which it had gross revenues of $1 billion or more;
The last day of the fiscal year following the 5th anniversary of its IPO;
The date on which it has issued more than US $1 billion in non-convertible debt during the previous 3 years;
The date on which it becomes a “large accelerated filer” (has a public float greater than US $700 million)
55
CONFIDENTIAL REVIEW OF DRAFT
REGISTRATION STATEMENTS
An EGC may submit a draft of its IPO registration statement for confidential review by the SEC prior to making a public filing. The draft must be substantially complete and include a signed audit report.
In December 2011, the SEC limited confidential reviews for dually-listed foreign issuers, but the JOBS Act reversed this policy so foreign issuers may take advantage of confidential reviews if they are EGCs.
There has been strong acceptance of this procedure. A significant majority of EGCs that commence IPOs between April 15, 2012 and the end of the year submitted at least one confidential draft registration statement.
56
AUDITED FINANCIAL STATEMENTS
EGCs may present only 2 rather than 3 years of audited financial
statements in an IPO registration statement. Foreign private
issuers that are first-time adopters of IFRS may be required to
include 3 years.
EGCs are not required to comply with new or revised financial
accounting standards until those standards apply to private
companies.
Most companies making IPOs have not taken advantage of these
provisions.
57
AUDITOR ATTESTATION REPORTS
EGCs are exempt from the Sarbanes-Oxley Section 404(b)
requirement for an auditor attestation regarding the quality and
reliability of the company’s internal control over financial
reporting.
Most EGCs that went public in 2012 disclosed an intention to rely
upon this exemption.
Nevertheless, an EGC is not exempt from providing management’s
opinion on its internal controls or CEO and CFO certifications for
10Ks and 10Qs.
58
EXECUTIVE COMPENSATION DISCLOSURE
EGCs may avoid the detailed compensation disclosure of Item 402
of Regulation S-K.
The Compensation Discussion and Analysis (CD&A) may be
omitted.
Compensation Disclosure may be made for the top 3 rather than
the top 5 executives, but must include the CEO
Some compensation tables may be omitted.
59
TESTING THE WATERS AND OTHER
COMMUNICATIONS
EGCs and their authorized representatives may test the waters
with qualified institutional buyers (QIBs) and institutional
accredited investors to determine their interest in an offering
prior to and after filing a registration statement.
Pre-JOBS Act quiet period rules for analyst reports are relaxed.
Investment banks may publish research reports during the
pendency of an offering.
Practice regarding these communications are evolving.
60
GENERAL SOLICITATION IN PRIVATE
OFFERINGS
The JOBS Act requires the SEC to eliminate the prohibition
against general solicitation and general advertising when
conducting private placements pursuant to Rule 506 of Regulation
D and Rule 144.
Such changes would allow companies to advertise broadly when
conducting private placements so long as securities are purchased
only by accredited investors or QIBs.
The SEC was ordered to pass implementing rules in 90 days, but
the rules have not yet been passed.
61
THE PROPOSED RULES
The SEC proposed rules to implement general solicitation
pursuant to Rule 506 would allow general offers, provided all sales
are made to accredited investors and the issuer takes reasonable
steps to verify that the purchasers are in fact, accredited investors.
NAASA and other consumer advocates have argued for more
stringent verification procedures.
Some critics of the proposal believe it should not apply to hedge
funds and private equity funds.
The Regulation S ban on directed selling efforts in the U.S. was
not proposed to be changed.
62
