Enhancing Hong Kong companies’ shareholder rights and transparency

14 December 2023
Hong Kong is one of the world’s top financial centres, with a large capital markets industry.

It is also known as a top destination for companies to have their IPOs. With ESG a major focus globally, there are growing demands for the city to promote robust governance. Listed companies (ListCos) need to ensure the protection of shareholder rights with increased transparency of ownership.

With the increasing popularity of newer shareholding and voting structures, Hong Kong authorities recognise the need to implement requirements that align with global standards. These requirements — such as the updated Companies (Amendment) Ordinance 2018 (CO) to require certain companies incorporated in Hong Kong to keep registers of persons who have significant control over the companies to enhance the transparency of corporate beneficial ownership — are essential to ensure companies observe and attain high standards of corporate governance.

Robust corporate governance

Complex shareholding structures involving layers of offshore entities are commonplace in Hong Kong. The release of the Panama papers has accelerated efforts to enhance the transparency of ownership structures globally. This transparency helps authorities detect and prevent tax evasion, corruption, money laundering, terrorist financing and unlawful activities. In addition, in corporate governance systems where ownership structures are concentrated among a few people, there is always a risk of misusing company assets. Individuals can make decisions for personal gain at the expense of minority investors and to the detriment of the company.

Robust corporate governance should entail maintaining a thorough framework of processes, policies and guidelines. These need to be implemented in compliance with recognized corporate governance practices. The board of a company needs to take an active role in driving sound governance. Being accountable to their shareholders, board members need to engage equally with both large and minority shareholders.

Beneficial ownership ordinance

The Companies (Amendment) Ordinance 2018 mandates that all companies incorporated in Hong Kong (except listed companies) obtain and maintain up-to-date beneficial ownership information through a Significant Controllers Register (SCR). Significant controllers are defined as person or persons who hold directly or indirectly more than 25 percent of voting shares, have more than 25 percent of voting rights, or have the right to appoint or remove the majority of directors. Those who have the right to exercise significant influence or control over the company also fall under this bracket.

The Companies Ordinance requires companies to take reasonable steps to identify significant controllers and maintain their details in the SCR. The SCR must be kept at the company’s registered office or a prescribed place while designating at least one representative in relation to the SCR.

In addition to the above, Hong Kong has strengthened minority shareholder rights through the Companies Ordinance (Cap.622). Cap.622 mandates companies to hold special resolutions to pass major decisions. The resolutions can take place only after giving due notice to shareholders. These resolutions can only be passed if at least 75 percent of the voting shareholders approve them. These resolutions are tables for major decisions, such as the alteration of the articles of association and reduction in the share capital of the company.

New world of dual-class shares and weighted voting rights

Before 2018, dual-class shares — where some shareholders have higher voting rights than ordinary shareholders — were not permitted on the HKEX, other than in exceptional circumstances approved by the exchange. To attract secondary listing of large technology firms, the HKEX has implemented new Main Board Listing Rules to enable weighted voting rights (WVR) for individual shareowners.

These rules only allow secondary listings of innovative companies from Greater China and listing of innovative companies that have a primary listing on overseas exchanges, such as the Nasdaq Stock Market (NASDAQ). In such cases, applicants need to have a minimum expected market cap of HK $10 billion. Firms with less than HK $40 billion in market cap must show at least HK $1 billion in revenue over the last audited financial year. Only company directors who collectively hold at least 10 percent of the share capital at the time of listing can be beneficiaries of WVR. These directors should have been materially responsible for the growth of the company.

To protect minority shareholders, the rules require that the WVR must be attached to a specific class of shares. In addition, the WVR must confer only enhanced voting powers on resolutions tabled at general meetings. To allow for prudent decision-making, the rules do not allow WVR to have more than 10 times the voting power of ordinary shares. Non-WVR shareholders must be able to cast at least 10 percent of the eligible votes. The proportion of WVR shareholding must remain at the same level or below the level of WVR at the time of listing. Certain resolutions are required to follow the one share, one vote rule. These include any changes to the company’s constitution, changes to class rights, appointment and removal of independent non-executive directors and auditors, and when resolving voluntary wind-up of the company.

In addition to permitting Weighted Voting Rights, the HKEX also allowed pre-revenue biotechnology firms to list on the board. This is subject to only pre-revenue companies that are at an advanced stage of development and a company has been engaged in business for at least two full financial years. With there being significant risks at these pre-revenue companies, transparency and corporate governance are critical to protect shareholder rights. The Listing Rules mandate that a company must comprise at least one-third of the board to be independent non-executive directors. The rules also recommend that the roles of chairman and CEO be separate to bring in stronger governance.

In a bid to attract more companies with dual-class shareholders, the HKEX issued a consultation paper in 2020 to get industry feedback on the listing of firms with corporate WVR. Given the mixed response to the proposal, the exchange decided to give market participants more time to increase their understanding of such structures and how they are regulated and governed.

Balancing the attractiveness of listing and corporate governance

As Hong Kong faces increasing competition from other financial centres, both in mainland China and overseas, there is a need to balance the easing of rules to increase the attractiveness of the city with enhancing corporate governance. With shareholding structures evolving rapidly, it is important to ensure transparency of beneficial ownership and strong protection of shareholder rights. Minority shareholders should be offered protection against dilution when there are takeover bids for the company. In addition, they need to be given the right to participate in decision-making and appointment of directors.

When there is concentrated ownership — as with family-controlled businesses in Hong Kong and other parts of Asia — controlling stakeholders could have an incentive to make decisions that lead to the diversion of company assets for personal gain at the expense of minority investors. The beneficial ownership regulation should promote transparency, enhance Hong Kong’s reputation as an international financial centre, and safeguard the integrity of the financial markets.

While considering expanding the WVR regime and increasing the listing of innovative new-economy companies, policymakers must weigh the impact of such structures on shareholder protection and transparency. They should consider preventing misalignment of shareholder interests, shorter sunset clauses, preventing abuse of conflict of interest, and better governance of management structures. Enhancing the transparency of corporate ownership is an important step to increase trust in businesses in Hong Kong. It will help prevent unlawful activities and improve corporate accountability, making Hong Kong an open, trusted, and competitive place to invest and do business.

This is a revised version of an article that was originally published on July 23, 2021.