Listing compliance in the Stock Connect era 沪港通时代 境外上市企业治理的新挑战
How should Chinese companies with listings inside and outside Mainland China address the different regulatory requirements and governance expectations of their various listing jurisdictions? The latest in the Institute’s Affiliated Persons ECPD seminar series addressed this and other governance challenges facing Chinese companies with listings overseas.
At the ‘38th Affiliated Persons (AP) ECPD H-share Corporate Regulatory Conference’ held by the Institute in Beijing from 16 to 18 September 2015, speakers and attendees were invited to share their views on ‘Effective corporate governance and internal control in the era of Shanghai-Hong Kong Stock Connect’.
In his address to the conference, Institute President Dr Maurice Ngai FCIS FCS(PE), said that, with the implementation of Shanghai-Hong Kong Stock Connect, H-share and A-share companies are exposed to the different regulatory requirements, corporate governance expectations and investment philosophies of the Mainland, Hong Kong and the international arena. The differences in regulation and practices between the Mainland and Hong Kong make it difficult for practitioners to understand and master such governance issues as information disclosure, inside information control, shareholder identification, investor communication and coordination of general meetings. These differences make correct judgements and decisions difficult and pose great challenges for companies with overseas listings.
Representatives from regulatory bodies from the Mainland and Hong Kong, including the China Securities Regulatory Commission (CSRC) and Hong Kong Exchanges and Clearing Ltd, together with seasoned professionals from within and outside Mainland China, were invited to discuss the issues with a view to providing a platform for communication, experience sharing and practical problem solving.
New trends in listing overseas
The representative of the CSRC Department of International Affairs spoke on the topic – ‘Overseas IPO examination system reform and practices’. Currently, there are three ways to go public overseas, namely, directly in the form of H-shares, or indirectly as red chips, or as ‘small red chips’. ‘Red chips’ are Chinese owned or controlled companies incorporated overseas – large red chips are mainly large, state-owned enterprises and small red chips are smaller private companies.
‘The current policy is to actively encourage eligible enterprises to go public overseas in accordance with the development strategy of the state and their own development needs, taking advantage of two different markets and two types of resources to enhance competitiveness. We support direct listing in the form of H-shares and do not encourage indirect listing as red chips,’ the representative said.
- The CSRC speaker added that there are a number of problems associated with the red chip approach.
- The legal framework is not complete. Comprehensive legislation or regulation on indirect listing overseas is not yet in place. Document 21 of 1997 covers only ‘red chips’, and Announcement 10 of the Ministry of Commerce does not cover a comprehensive range of regulatory targets; leaves ample room for supervisory arbitrage; involves relatively complicated procedures; and is difficult to operate.
- The cost of meeting overseas listing requirements is high and there is the risk of malicious short selling.
Regulatory loopholes have resulted in breaches of rules and laws. For a long time, there has been a regulatory gap for ‘small red chips’. Some of these companies have been evading tax or illegally transferring local assets.
- These companies are often beyond the reach of the macroeconomic [regulation and] control policies of the state. Some small red chip companies evade the policies and restrictions on foreign investment, industry policies, and control policies on real estate, excessive production capacity and heavy pollution, adversely affecting macroeconomic management.
Against the background of streamlining administration and decentralisation by the State Council, the CSRC representative presented recent reforms of the system of overseas IPO examination. In March 2015, the National Development and Reform Commission and the Ministry of Commerce revised the ‘Catalogue of Industries for the Guidance of Foreign Investments’, largely reducing the number of restricted industries and relaxing foreign investments.
In December 2014, the State Administration of Foreign Exchange removed the requirement for settlement of foreign exchange under repatriated funds raised through H-shares to be approved, facilitating the inward flow of funds. The Ministry of Environmental Protection removed the requirement for environmental examination for companies seeking overseas listing, and the Ministry of Land and Resources and Ministry of Housing and Rural-Urban Development improved the mechanism for land examination.
The CSRC also introduced a series of reforms from 2013, including removal of the financial threshold requirement, removal of financial examination, disclosing the flow, focus and progress of examination, removal of the pricing restrictions on A- and H-shares, removal of restrictions applicable to A-shares, substantial reduction of amount of feedback, improvement of internal and external examination procedures, substantial streamlining of reporting documents, and disclosing the focus and progress of examination for the first time.
With these measures in place, there has been an upsurge in the number of applications for overseas listing. According to the CSRC representative, as at end of August 2015, 51 applications for overseas listing had been received, a 104% growth over the same period last year. The efficiency of the examination process had been greatly enhanced. By the end of August 2015, CSRC had completed the processing of 43 applications, an increase of 48% over the same period last year, and the examination time had been reduced by over 50%. The amount of funds raised also increased markedly. As at the end of August 2015, 23 Mainland enterprises raised has a total of about US$28.3 billion, an increase of 310% over the same period last year.
Overseas listing has become more open, transparent and predictable. Going forward, the CSRC will – in line with the ‘go global’ strategy, the ‘One Belt, One Road’ initiative and relevant arrangements under CEPA in support of the development of the Hong Kong market – continue to pursue reforms of the regulation of overseas listing to strengthen and enhance the role of Hong Kong as an international financial centre.
Shanghai-Hong Kong Stock Connect – an update
Franky Chung, Senior Vice-President, Mainland Division, Hong Kong Exchanges and Clearing Ltd, shared with participants the ‘latest developments of Hong Kong’s capital market under the Stock Connect system’. In comparison with other markets, he considered that the Hong Kong market is less volatile, mainly comprising mature institutional investors. Most listed companies in Hong Kong pay dividends to attract investors. The steady and consistent stream of dividend provides a stable source of income for investors. And Mainland enterprises play a very important role in the Hong Kong market . The top 10 enterprises in terms of market capitalisation include China Mobile, China Construction Bank, etc. The top 10 enterprises with the greatest turnover include Tencent, Ping An Insurance, etc. The transaction patterns of Shanghai-Hong Kong Stock Connect show that investments into Shanghai focus on large-scale financial, industrial and consumer stocks, while investments into Hong Kong are spread among a large variety of stocks, with a marked preference for medium-sized companies. He said that Mainland investors participating in Stock Connect are mostly individuals, but the number of institutional investors is growing fast. In future, the Shanghai-Hong Kong Stock Connect model can be expanded and copied to various asset classes.
Effective communication with investors
The BlackRock Group takes an active engagement approach to its investments in Mainland enterprises listed in Hong Kong. Pru Bennett, the Group’s Head of Corporate Governance and Responsible Investment in Asia-Pacific, discussed the concept of ‘responsible investment’ at the conference. ‘Investors have a duty to supervise the companies they invest in, and stay in contact with those companies through voting and direct dialogue,’ she said.
In managing its investments, BlackRock bases its decisions largely on the state of corporate governance of the listed companies. It analyses the impact of environment, social and governance issues before making an investment. It communicates with the management or board of directors of the companies on corporate governance issues. For some special industries, social, ethical and environment issues are covered in the dialogue. It votes at annual general meetings and special general meetings in the best long-term economic interests of shareholders. It participates actively in the market to understand best practices to promote the creation of long-term value for shareholders. BlackRock is focused on protecting and enhancing the economic value of the companies its clients invest in, but does not make social, ethical and environmental value judgements for its clients.
Shareholder engagement was also addressed by another institutional investor at the conference. Cas Sydorowitz, Managing Director, Georgeson UK, spoke on ‘Corporate governance and general meetings’. He said that communication with investors is essential for companies. The media is quick to report crises and ‘news value’ tends to be associated with the discord between investors and listed companies. Confrontations with investors will therefore only lead to negative attention. In this context, communication with investment decision makers is a powerful tool to improve relations with investors, he said.
He added that communication should start at the beginning of the process, not just before a meeting. Remuneration should be tied to the implementation of agreed strategies and the achievement of company goals. There must be communication with beneficial shareholders when appropriate, and with corporate governance professional firms whose names do not appear in the register of shareholders. Communication should be maintained with holders of US depository receipts because they may hold common shares. Communication must be maintained with every investor who has contacted the company for various reasons.
CRRC’s restructuring – a case scenario
The China Railway Rolling Stock Corporation (CRRC) is the world’s largest train builder. It was formed on 1 June 2015 with the merger of China Southern Rail Corporation and China Northern Rail Corporation. Xie Jilong, CRRC’s Board Secretary, discussed this merger as an interesting case scenario for how to manage such large-scale restructurings.
On 18 September 2014, China Southern Rail Corporation and China Northern Rail Corporation set up a steering committee to initiate a merger. The relevant regulatory authorities were contacted to discuss the merger plan. Technically, China Northern Rail Corporation was acquired by China Southern Rail Corporation. There is usually a premium on the price of the shares of the company being acquired in most acquisition deals, but, out of cost-benefit considerations, the CRRC merger was achieved on an equal footing.
In addition to the approval by the State Council, the restructuring required approvals by the three groups of bodies set out below.
1. Governance bodies – these included the board, shareholders and the State-Owned Assets Supervision and Administration Commission, the de facto controller.
2. Administrative and industry supervisory bodies – these included the Ministry of Commerce, State Administration for Industry and Commerce, China Railway Corporation, Ministry of Industry and Information Technology, Ministry of Finance, State Administration of Taxation and various anti-monopoly departments.
3. Capital market supervisory bodies – these included the securities regulatory authorities and stock exchanges on the Mainland and overseas, and the China Securities Depository and Clearing Corporation.
The restructuring deal could have been voted down if 10% or more of the shareholders of China Northern Rail Corporation were opposed to it. So the voting of H-share shareholders of China Northern Rail Corporation was a key risk area for this transaction. To ensure smooth approval, both Northern and Southern Rail Corporation closely monitored the market and adequately communicated with their shareholders.
On the day and the day following the announcement of the transaction, joint telephone conferences were held to present to investors the structure of, and justifications for, the transaction. Financial advisers were engaged to answer relevant questions. After the issue of the shareholder’s circular and before the general meeting, joint press meetings and analyst meetings were held, joint road shows were conducted where the senior management met with key shareholders of the two companies to discuss in depth the details of the transaction and to answer questions. A professional nominee company was engaged to collect shareholders’ feedback, as well as information on voting preferences and shareholding structures. Meetings were held through this nominee company with ISS and Glass Lewis, two large service companies collecting shareholders’ views. Continuous market monitoring was maintained via the financial advisers.
Based on the experience of this restructuring exercise, Xie Jilong concluded that agreeing on the principal responsible party is a prerequisite of restructuring, and achieving a consensus among all stakeholders is key to a successful restructuring. Other key things to get right include the design of the restructuring proposal and ensuring the work team has the knowledge and expertise to successfully conclude the deal.
The ‘38th Affiliated Persons ECPD H-share Corporate Regulatory Conference’ was held in Beijing from 16 to 18 September 2015. See page 41 of this month’s journal for more information.
境外上市新趋势 – 更为公开、透明、可预期
贝莱德集团是世界上最大的投资管理公司，其亚太区公司治理与责任投资主管Pru Bennett 是首家国际机构投资者主动与内地在香港上市公司接触沟通的高层领导，她介绍了贝莱德集团的责任投资管理方法。她指出“投资者有责任监控被投资公司，并通过投票和直接对话与其保持对接”。贝莱德的投资管理方法是：在决策时非常看重上市公司的公司治理状况，在投资前分析环境、社会、公司治理(ESG)问题对其投资的影响；就公司治理与管理层或董事会成员进行对接或交流，对某些特殊行业企业还涉及社会、道德及环境事项；在公司年度股东大会和特别会议上就股东的最佳长期经济利益进行投票；积极参与市场以了解促进股东长期价值创造的最佳实践，并对其做出贡献。贝莱德专注于保护和提高其所代表的客户所投资的公司的经济价值，但不代表客户做出社会、道德及环境价值的判断。
由于南北车集团均不持有H股，只要有10%的北车股东反对，交易就会被否决，因此北车H股股东投票问题是本次交易的重要风险点。为确保交易通过，南北车集团充分做好了市场监测与股东沟通工作：交易公告当天或第二天举行联合电话会议向投资者介绍交易结构和理据，并安排财务顾问公司代为回答相关问题；在发出股东通函后股东大会前，举行联合新闻宣传会与分析师会议，公司高管举行联合路演与双方的重要股东会面，深入讨论交易细节和回答问题，聘请专业股东投票代理机构收集股东反馈意见，投票意向资料和股东结构信息，通过此股东投票代理机构与市场两大股东意见服务机构ISS和Glass Lewis 会晤；并持续通过财务顾问每天提供的信息进行市场监测。