The Hong Kong Stock Exchange was in the news recently with the launch of the world's fifth largest seller of smartphones Xiaomi's initial public offering (IPO) in July. Our lawyers from the corporate team in Hong Kong share some issues to consider when planning an IPO launch there.
1. Why do I need separate advice given that my company will be
engaging advisers for the IPO?
There are a number of areas where your interests as
founder/controller and those of the company conflict. There may be
non-core assets which you wish to extract from the group prior to
IPO or businesses outside the group. You
will therefore need to negotiate the terms of any such pre IPO reorganisation and you need independent
legal representation to ensure that the reorganisation is
implemented on terms favourable to you and acceptable to the
listing criteria set out in the Listing Rules.
2. What level of confidence can I have in the bookrunners'
views on valuation?
For larger IPOs, we would usually
recommend that companies seeking a listing ('issuers') take
advice from an independent investment bank which can look over the
shoulders of the bookrunners and ensure that they are not leaving
too much money on the table for investors. The perceived wisdom is
that it is sensible to price an IPO so
that the share price rises immediately following admission to the
market because if a stock starts trading at below its issue price,
it is much more difficult to subsequently regain investors'
confidence in the stock. There is an inherent conflict, however, in
banks keeping their key clients who are investing in the IPO happy – through an uplift in value in
their investment following the IPO
– as opposed to making sure the founders/controlling
shareholders receive full value for their stock, which reduces the
profits made by the investors.
3. What obligations will I have to take on as part of the IPO process?
3.1 Lock-up
You will be asked to enter into a lock-up arrangement pursuant to
which you are not able to sell your shares for 12 months, or six
months if you are not a controlling shareholder. You would usually
want to negotiate some carve outs to any such lock-in e.g. to allow
you to transfer shares into a family trust or foundation or to
family members.
3.2 Representations and warranties under the underwriting
agreement
Back-to-back confirmations by the controlling shareholders,
proposed directors and the company are usually required. If the
founders/owners have stepped away from the day-to-day running of
the business and/or they are not on the board, they would want to
ensure that any warranties were qualified by their awareness and,
in any event, their liability should be made subject to limitations
both as regards the length of time in which warranty claims can be
brought and their overall limit of liability.
3.3 Statutory liability as a director of the company
Directors collectively and individually accept full responsibility
of the information disclosed in the prospectus, which includes a
session in relation to the underwriting agreement.
3.4 Service agreement/letter of
appointment/non-competition
Normally, a new arm's length service agreement or letter of
appointment would be put in place in anticipation of the IPO. You would want to ensure that you had the
benefit of a separate contractual indemnity for directors'
liabilities from the company and ensure that the company maintains
cover for you under a directors' and officers' insurance
policy. You would also want to review the provisions of any service
agreement or letter of appointment. Typical issues to negotiate in
a service agreement include termination provisions, the ability for
the company to put you on garden leave, the scope of your duties
and your overall compensation package. You may also be asked to
enter into a non-competition deed which would need to be carefully
reviewed.
4. What role can my relatives and I have in the management of
the company post-IPO?
For a Hong Kong IPO, the Listing Rules
require a company to have at least three independent non-executive
directors comprising of at least one-third of the board. Relevant
qualifications for being an independent non-executive director
include having a knowledge in finance, accounting or law.
5. Voting/non-voting shares
Dual-class shares may now be listed in Hong Kong, with Xiaomi as
the first dual-class share structure to have listed. Hong Kong
requires the special rights attached to dual class shares to be
cancelled if the founder dies, is incapacitated or otherwise ceases
to be a director. The founder's shares do not have to be held
personally but can be held in a trust, limited partnership or
private company. A Hong Kong listed company with a dual class
listing is required to establish a corporate governance committee
comprised entirely of independent non-executive directors appointed
on a one-share-one-vote basis.
6. Do I need to address the structure of my holding above the
company in view of the potential liabilities identified above and
for tax reasons?
It is important, both commercially and from a tax point of view,
that you take steps in advance of the IPO
to adopt the optimal structure for your holding. At the very least,
you will need to ensure that the jurisdiction chosen for the IPO vehicle does not jeopardise your personal
tax position or, if that is not possible, ensure that it is held
through an appropriate holding structure to shield you from any
unwanted liabilities.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.