Ensuring compliance with one set of listing rules is difficult enough, so spare a thought for the practitioners who need to ensure compliance with multiple, and potentially conflicting, sets. Senior company secretaries working for companies with multiple international listings offer some tips on the art of multi-jurisdictional compliance.
Over the last two decades there has been a steady increase in the numbers of companies opting to raise capital through equity issues outside of their home market. This can take the form of direct listings on overseas stock exchanges or via a cross-listing vehicle such as a depository receipt.
The benefits of these strategies are not limited to the obvious capital raising opportunities involved. There is also the potential for raising liquidity, enlarging the investor base and raising the company’s public image. A high profile listing on one of the world’s major stock exchanges certainly helps with a firm’s ‘visibility’ – a number of overseas companies have listed in Hong Kong in recent years with a view to raise their profile among the expanding numbers of affluent consumers in Mainland China.
As you might expect, however, having multiple international listings can be costly. There are the upfront costs of the overseas IPO launch and the ongoing costs of managing compliance with two, or even multiple, sets of listing requirements. In theory, given the gradual harmonisation of securities regulation around the world, multi-jurisdictional compliance should be fairly straightforward. Many internationally listed companies opt to comply with the most stringent regulations they are subject to in the assumption that this will mean that they will be in compliance with all relevant regulation.
The picture can sometimes be rather more complicated, however. There are cases, for example, where the requirements of two listing jurisdictions are incompatible. Back in September 2007, Standard Chartered Bank found itself in this dilemma. Disclosure obligations in the UK required it to release price-sensitive information (PSI) as soon as possible. Disclosure obligations in both Hong Kong and the UK required it to ensure the information was released simultaneously to all of its shareholders.
These two obligations came into a head-on collision due to Hong Kong’s then listing rule 2.07C(4) which prevented it from publishing the information to its Hong Kong investors during Hong Kong’s share trading hours. The Hong Kong listing rules will soon allow inside information announcements to be released during the stock exchange’s trading hours subject to a short trading halt. The trading halt proposals are expected to be implemented in mid-2014 – see the Hong Kong Exchanges and Clearing website (www.hkex.com.hk) for details. At the time, however, the only way out of the dilemma was for Standard Chartered to apply for a waiver from rule 2.07C(4).
The waiver was duly granted and such waivers, where a Hong Kong listing rule conflicts with the rules in a company’s home jurisdiction, are now easier to obtain than in the past (see ‘The waiver: the easy route to harmonisation?’ on page 11). There is an extensive list of common waivers for overseas companies with primary, dual primary as well as secondary listings, for which the Stock Exchange of Hong Kong has set out its conditions.
In search of a waiver
One benefit of the increased competition between the world’s stock exchanges for international listings has been a new willingness among bourses to relax requirements for dual and secondary listings. This helps companies ‘synchronise’ compliance with the rules in their various listing jurisdictions, but seeking a waiver often requires significant input from the company secretary. Bill Wang, Head of Group Listings, Asia at Standard Chartered Bank, and Company Secretary for Standard Chartered Bank (Hong Kong) Ltd, has a good knowledge of this aspect of the company secretarial role, having lobbied the Stock Exchange of Hong Kong on numerous occasions to simplify Hong Kong’s connected transaction rules.
The connected transaction rules in Hong Kong are designed to prevent majority shareholders from abusing their power to the detriment of minority shareholders – an important consideration in a jurisdiction where the majority of local issuers are predominantly family-controlled, or dominant shareholder-controlled. However, diversely-held companies may still be subject to these rules even where the risk of abuse is very low. Like many international companies, Standard Chartered has a diverse shareholding structure, but it does have a passive shareholder with a holding above the 10% threshold which triggers Hong Kong’s connected transaction rules.
The company has sought a waiver from these rules for a number of corporate transactions on the basis that the substantial shareholder – the Singapore sovereign fund Temasek – is a passive investor. ‘Temasek does not affect our management positions, it does not even have a board seat,’ says Wang. ‘We deal with our big shareholders in the same way we deal with smaller shareholders in terms of having arm’s length dealings. We are not in a situation where the substantial shareholder may have an incentive and the actual influence to do something to the detriment of the investing public.’
The stock exchange is sympathetic to this reasoning and has put out several market consultations proposing to relax the connected transaction rules. Currently the exchange grants applications from listed issuers on a case by case basis. ‘We have engaged them quite closely and have been quite successful in convincing them that, in most cases, we should get an exemption,’ says Wang. ‘To their credit, the exchange by and large takes a balanced and sensible regulatory approach without compromising investor protection or unduly burdening the listed issuers.
A global marketplace for shares?
The possibility of a global marketplace for shares governed by a single set of rules is still a very distant, and perhaps highly unlikely, prospect. While there has been a convergence between jurisdictions in areas such as accounting standards, there remains a significant disparity between corporate governance and listing requirements. This is nowhere more evident than here in Hong Kong where a large number of A+H share companies have the task of synchronising compliance with very different regulatory regimes.
‘If you have dual listings in Hong Kong and London or New York, the compliance challenges are not as great as they are for companies with dual listings in Mainland China and Hong Kong,’ says Gao Wei, Board Secretary and General Counsel, Sinotrans Ltd and HKICS Council member. ‘To start with, Mainland China’s legal system is based on civil law while that in Hong Kong is based on common law. The thinking, the logic of these two legal systems is therefore different.’
Over the last year a group of A+H share board secretaries, led by Dr Gao, has been working on a new HKICS guideline (Practices of Inside Information Disclosure of A+H Companies) on compliance with inside information disclosure requirements in Mainland China and Hong Kong.
‘There were many concerns among board secretaries about the new inside information disclosure requirements in Hong Kong since the implementation of the revised Securities and Futures Ordinance (SFO). This law is very complicated for Hong Kong companies, but for A+H share companies it is even more challenging,’ says Dr Gao.
One reason for this is that Mainland board secretaries are used to being able to consult with their relevant stock exchange about what disclosures need to be made, but this is less possible in Hong Kong where companies are expected to make their own judgements about what is or what is not inside information. ‘The SFC is the law enforcement agency – they will not explain your compliance obligations based on the facts, they just expect compliance with the law,’ Dr Gao says.
Paul Stafford, Corporation Secretary and Regional Company Secretary Asia-Pacific, The Hongkong and Shanghai Banking Corporation Ltd, points out that company secretaries also need to consider the differences between share registration and settlement systems in their listing jurisdictions. HSBC has listings in London and Hong Kong and needs therefore to synchronise corporate actions working via the CREST system in the UK and CCASS in Hong Kong.
‘The company secretary needs to understand how each system works and to design how corporate actions are coordinated for implementation across the jurisdictions,’ he says. He adds, however, that ‘most issues can be overcome with good planning and preparation’.
He also recommends that companies with dual listings should ensure that they have people in both locations with a knowledge of the rules in the other jurisdiction. ‘This prevents silos operating and also ensures any emerging issues or actions arising from developing regulations in one jurisdiction, but which impact or conflict with the other jurisdiction, are identified early during a consultation process and well before implementation date,’ he says.
The most important thing, Stafford suggests, is to have a culture to comply with both the spirit and letter of the requirements, and to have systems for prompt escalation and resolution. The mention of the ‘spirit’ of the requirements here is significant. There has been a growing trend towards ‘principles-based’ securities regulation globally since the UK moved to a comprehensive ‘principlesbased’ regime in 2003.
‘We certainly prefer a principles-based approach because there is no “one-sizefits-all” regulation that will do the job,’ says Bill Wang. ‘You need to provide space to the listed issuers to apply the principles and stick with the spirit of the rules and regulations, otherwise you would get a less meaningful box-ticking exercise – people can find ways to comply with the letter but the spirit of rules is what matters the most.’
What skills do I need?
Readers of this journal will be well aware of the complexities involved in listing rule compliance. Complying with multiple sets of rules further complicates the picture, but company secretaries have the skill sets needed for this work. Bill Wang believes that the most important thing is for practitioners to take the right approach to compliance. ‘Too many compliance officers just say, “these are the rules, you just have to implement them”,’ he says.
He points out that this approach simply does not work in the context of a company with multiple international listings faced with competing sets of regulations. ‘Sometimes you just have to step back and say, “Does that make sense? Why do we have those regulations in the first place? Do we have an alternative way of complying without the unintended consequences?”’ He adds that there should be no stigma attached to a company which has clearly thought through the rationale behind the rules and has come up with an alternative way of complying – this after all is the whole intention of the ‘comply or explain’ principle.
‘Ticking the box is relatively easy; thinking about multiple options that will achieve the same goal and selecting the one that fits the company and society as a whole, that requires more work and a more thorough analysis, but once you’ve been through that process you will have better credibility with regulators and society. You are showing that you have thought through the issues and come up with a sensible solution that serves everyone’s purposes,’ he says.
In addition, Wang argues that company secretaries need to have a passion for the job. Wang used to be the Senior Group Legal Counsel for the Standard Chartered Group, but has appreciated the move into the company secretary role. ‘I can tell you it is definitely not a paper pusher role,’ he says. ‘It is not just about keeping the administrative matters in order, it is very much a trusted advisory role to senior management and the board on governance issues, on control issues, on what are the best policies and procedures to adopt in various areas such as risk governance.’
For Wang, the move into the company secretary role was a logical step up to the next level, where he needed to combine his technical knowledge of the rules with a much broader strategic perspective of how all the relevant factors would impact the company’s business. ‘When I was in the legal function, I also had a trusted advisory role but the audience was quite limited. Since switching to the governance role I find that the audience has widened. It can be a CEO, a chairman – these are your main stakeholders. They are busy people so you have to articulate the strategic and governance issues in very succinct manner and make sure they get facts and options and the best possible advice for their decision making. That is very big picture stuff. So you are elevated to the next level, you become a strategic adviser rather than a purely technical issue adviser,’ he says, ‘but having had solid legal training and experience is certainly a plus to the role.’.
The new guideline on information disclosure in Mainland China and Hong Kong (‘Practices of Inside Information Disclosure of A+H Companies’) is available on the ‘Publications’ section of the Institute’s website: www.hkics.org.hk
The waiver: the easy route to harmonisation?
There has been observable progress towards the harmonisation of securities regulation internationally, but the process is a very slow one. Transnational networks of regulators, such as IOSCO and the Basel Committee on Banking Supervision, have been gaining prominence but their standards are non-binding and they do not have monitoring or dispute resolution mechanisms.
The world’s stock exchanges have nevertheless found ways to mitigate the compliance hurdles for internationally listed companies. As Dr Bryane Michael, Senior Fellow at the University of Hong Kong Law Faculty’s Institute of International Financial Studies and the Centre for Comparative and Public Law, points out, ‘regulators seem to be rather accommodating on many aspects of mutual recognition.’
Mutual recognition seems in fact to have become the favoured route to harmonisation through the back door. There have been formal bilateral ‘mutual recognition’ agreements between exchanges recognising the adequacy of both parties’ regulation, or, lower down the scale, ‘memorandums of understanding’. The easiest and the most common route, however, is for stock exchanges to grant waivers for conflicting or inappropriate requirements on a case by case basis, and these have been increasingly evident in Hong Kong.
The Stock Exchange of Hong Kong now grants extensive waivers from the listing rules to companies with a secondary listing on the exchange where the Hong Kong rules are at odds with the rules of the company’s home jurisdiction, or are simply burdensome in the context of two sets of listing rules. There are conditions attached, however. To qualify for ‘secondary listing’ status, companies must have, among other things, a good compliance track record and their primary listing must be on a ‘recognised stock exchange’ where the standards of shareholder protection are at least equivalent to those in Hong Kong.
A list of ‘recognised stock exchanges’ is set out in the ‘Joint policy statement regarding the listing of overseas companies’, issued by the Stock Exchange of Hong Kong and the Securities and Futures Commission (SFC) on the Hong Kong Exchanges and Clearing website: www.hkex.com.hk.