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International Corporate Regulation: Listing Rules and Overseas Companies

  • Iain MacNeil and Alex Lau

Extract

Listing rules have always played a significant role in corporate regulation by controlling the manner in which companies raise capital through the issue of securities and the subsequent trading of those securities between investors. The regulatory role of listing rules can be characterised as the top-tier in a system of regulation for listed companies in which the lower tiers are represented by securities law and general corporate law. Company law represents the bottom tier of regulation as it applies to all companies, albeit with some distinctions made between public and private companies. While company law does contain a substantial body of rules which are subject to change by share-holders (‘default rules’), it also contains a core of mandatory rules (not subject to change by shareholders) which are regulatory in their nature.

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1. This risk is not mere conjecture. Various incidents since the founding of the PRC in 1949 have educated Western investors that violence and unexpected events can frustrate overseas business interests. These include the confiscation of local and foreign assets in the 1950s, the Cultural Revolution in the 1960s and 1970s, as well as numerous political suppressions, the most recent example being the Tiananmen Square crackdown in 1989. No such incidents have occurred in Hong Kong since the handover.

2. For Hong Kong businesses, overseas incorporation may provide a way to avoid the stamp duty payable when a company increases its authorised or issued share capital.

3. Our research on the rationale for overseas listings is based primarily on information obtained from questionnaires completed by advisers to overseas listed companies, interviews with investment banks, fund managers and regulators and statistical data obtained from annual reports and the London and Hong Kong Stock Exchanges.

4. Overseas companies raised £65bn on the London Stock Exchange from January to August 2000 by comparison with £83bn for UK listed companies. For the whole of 1999, the figures were even closer, UK companies raising £101bn and overseas companies £98bn (source: LSE Primary Market Factsheet).

5. Source: London Stock Exchange Publication Listing in London—see also <www.londonstockexchange.com>. Part of the explanation for London's position in the trading of international securities can be attributed to the numbers and size of its overseas listed companies: as of 31 Aug 2000, the capitalisation of international listed companies on the LSE was £3,831bn compared to £l,968bn for UK listed companies.

6. See J. Kehoe and J. A. Bannister, ‘International Listings, Access to New Markets’, PLC May 1996 23–31 and L Fergusson and C. Rogers ‘Secondary Listings on the London Stock Exchange’, European Counsel Dec 1997/Jan 1998 27–36.

7. See Licht, A.N., ‘Genie in a Bottle? Assessing Managerial Opportunism in International Securities Transactions51(1) Columbia Business Law Review (2000) 51.

8. See Chan, , MacNeil, , and Lau, , ‘Lawyers Perceptions of Overseas Incorporated Companies Listed in Hong Kong290 Managerial Auditing Journal 2001) 165.

9. See Baker, H. Kent, ‘Why US companies list on the London, Frankfurt and Tokyo Stock Exchanges’, 6 Journal of International Securities Markets (1992) 219.

10. On 1 July 1997, sovereignty over Hong Kong reverted to the PRC. Their legal systems will remain separated for 50 years so that Hong Kong will continue with its common law system for the time being. The PRC is a civil law system.

11. Despite its vastness in geographical area, the PRC is one single jurisdiction. See Article 12 of the Lawyers' Law.

12. Hong Kong Economic Journal, 16 May 1996, p 14.

13. Ibid.

14. See Fung, E., ‘Legal Implications of foreign listings for PRC enterprises with particular reference to HK17(2) Co Law (1996) 35.

15. See above n. 5.

16. See above n. 4.

17. The mismatch will occur irrespective of whether jurisdiction in company law is defined by reference to incorporation or location of the ‘siège réel’. See generally A. Licht, ‘Regulatory Arbitrage for Real: Securities Regulation in a World of Interacting Securities Markets’, 38 Virgina Journal of International Law 563.

18. A solution favoured by the US Securities and Exchange Commission. See Policy Statement of the SEC on the Regulation of International Securities Markets, SEC Exchange Act Release No 6807, 53 Fed. Reg. 46,963 (1988).

19. Corporate regulation is understood in this context to cover listing rules, company law, codes of corporate governance and other legal or non-legal norms (eg the Takeover Code in the UK which has no formal legal basis) which control the manner in which companies are organised and managed.

20. See, eg H. Hansmann and R. Kraakman, ‘The End of History for Corporate Law’, Yale International Center for Finance Working Paper No 00–09 <http://papers.ssrn.com/paper.taf?abstract_id=204528)> and R. J. Gilson, ‘Globalising Corporate Governance: Convergence of Form or Function’, Columbia Law School Centre for Law and Economic Studies Working Paper No 174 <http://papers.ssrn.com/paper.taf?abstract_jd=229517>.

21. See R. Romano, ‘Empowering Investors: A Market Approach to Securities Regulation, 107 Yale L.J. (1998) 2359 and Trachtman, J. P., ‘Regulatory Competition and Regulatory Jurisdiction’ (2000) Journal of International Economic Law 331.

22. The metaphor was coined by Justice Brandeis in Liggett v Lee 288 US 517, 557–60 (1933). See D. Charny (below n. 23).

23. But see Charny, D., ‘Competition among Jurisdictions in Formulating Corporate Law Rules: An American Perspective on the “Race to the Bottom” in the European Communities’, 32(2) Harvard International Law Journal (1991) 423. The decision of the European Court of Justice in Case C-212/97 Centros Ltd. v Erhvervsog Selskabsstyrelsen [1999] 1 ECR 1459 has prompted considerable interest in the differing requirements for incorporation demanded by EU Member States: see Micheler, E., ‘The impact of the Centros case on Europe's company laws’, 21(6) Company Lawyer (2000) 179.

24. See sections 19(b)(l)–(3), 19(c) of the 1934 Act.

25. See n. 44 below re the transfer of responsibility from the LSE to the UKLA.

26. The position in Hong Kong differs from the PRC, which is discussed below.

27. See Mahoney, P., ‘The Exchange as Regulator’, 83 Virginia Law Review (1997) 1453.

28. See Cheung, C. Sherman and Lee, J., ‘Disclosure environment and listing on foreign stock exchanges’, 19 Journal of Banking and Finance (1995) 347–62; A. Licht, ‘Regulatory Arbitrage etc (above n. 17).

29. See O Fuerst, ‘A theoretical analysis of the investor protection regulations argument for global listing of stocks’, International Centre for Finance at Yale (available at <www.ssrn.com>. This argument should not be confused with the disclosure of ‘inside’ information, which is a criminal offence. Fuerst refers to indirect communication of management's expectations rather than the specific communication of price-sensitive information. His argument is that an overseas listing on a foreign market with higher regulatory standards (especially as regards disclosure of information to investors) will be attractive to companies with the potential for above-average profits growth and vice versa. It is the exposure to the higher regulatory standard rather than the information disclosed at any particular point in time which is significant as the higher regulatory standard enhances the credibility of all information from the perspective of investors.

30. See Alexander, , Eun, , and Janakiramanan, , ‘International Listings and Stock Returns: Some Empirical Evidence’ (1988) 23 Journal of Financial and Quantitative Analysis 135; Lau, S. et al. , ‘Valuation effects of international stock exchange listings18 Journal of Banking and Finance (1994) 743; and Miller, D., ‘The market reaction to international cross-listings: evidence from depository receipts’, 59 Journal of Financial Economics (1999) 103.

31. See Ferrarini, G., ‘Towards a European Law of Investment Services and Institutions’ (1994) 31 CML Rev 1283 and ‘The European Regulation of Stock Exchanges: New Perspectives’ (1999) 36 CML Rev 569.

32. Council Directive 79/279 [1979] OJ L66/21.

33. Council Directive 80/390 [1980] OJ L100/1 as amended by Directive 87/345 relating to mutual recognition of listing particulars and Directive 94/18 relating to exemption from the obligation to publish listing particulars.

34. Council Directive 82/121 [1982] OJ L48/26.

35. Council Directive 89/298 [1989] OJ L124/8.

36. The Listing Rules refer to parts of the relevant Directives which they implement, thereby allowing a clear impression to emerge of the respective contribution to the content of the listing rules of EC Directives and UK regulation.

37. Prior to 1 May 2000, the London Stock Exchange was designated as the competent authority in the UK for the purposes of listing. Largely as a result of the reorganisation of the Exchange, which resulted in it becoming a company listed on the Exchange, the UK government decided to separate the functions of admission to listing and admission to trading. Admission to listing is now the responsibility of the Financial Services Authority (of which the UKLA is part) and admission to trading is the responsibility of recognised exchanges.

38. See sections 144(2) and 144(2A) of the Financial Services Act 1986.

39. Art 43.

40. This term is commonly used to refer to companies incorporated and listed in Hong Kong, but with controlling shareholders which are PRC entities.

41. See The State Council Directions regarding asset injections into ‘red chips’ (21 June 1997) and the CSRC's directives on approving listing on the Growth and Enterprise (GEM) market.

42. The first two criteria give effect to provisions of the EC Admissions Directive 79/279. The possibility of special conditions applicable to a particular listing is specifically provided for by rule 3.1 UKLA.

43. The position is changed under the Financial Services and Markets Act 2000 (FSMA 2000) which will eventually replace the provisions of the FSA 1986 in respect of listing: s. 76 FSMA 2000 provides for a right of appeal to the Financial Services and Markets Tribunal created by the Act.

44. On the basis of the principle established in R v Panel on Takeovers and Mergers, ex p Datafin plc and another [1987] 1 All ER 564.

45. Rule 17.2.

46. According to Art 78 of the PRC Company Law a minimum share capital of RMB 10 million (about £800,000) is required. This share capital must be fully paid-up.

47. See ch 3 of the UKLA rules and ch 19 of the SEHK rules.

48. Rule 3.3 of the UKLA.

49. Rule 17.3 of the UKLA.

50. See below.

51. See ch 19A SEHK for additional requirements relating to PRC incorporated OLCs and Appendix 13 for additional provisions relating to Bermuda and the Cayman Islands.

52. See Fung (above n. 14).

53. Rules 17.5 and 17.6.

54. The term ‘prospectus’ is used in this context rather than listing particulars, as the issue of liability to investors will only arise if shares are issued in conjunction with a listing and in those circumstances a prospectus will have to be issued by the company.

55. Rule 6.A.3 UKLA requires a declaration to be included in listing particulars identifying the directors and indicating that they have taken reasonable care in verifying information included in the prospectus and in ensuring that no material information has been omitted.

56. Financial Services Act 1986 s. 152. See also s. 90 and schedule 10 FSMA 2000.

57. S. 40 of the Companies Ordinance.

58. See in respect of the UK S47 FSA 1986, the same provision now appearing in s. 397 FSMA 2000. See in respect of Hong Kong, s. 138 of the Securities Ordinance (Cap.333).

59. Nor has the matter been the subject of guidance by the Investment Committee of the Association of British Insurers (ABI) which acts as a self-regulator for institutional investors in the UK. However, there are very few examples of such shares in the UK and in recent years some non-voting shares have been granted voting rights.

60. They are generally referred to as B shares but should be distinguished from B shares listed in the PRC where A shares were in the past only available to PRC residents while B shares were only available to residents of Hong Kong, Macau, Taiwan and abroad. B shares can now be purchased by mainland residents using foreign currency they have deposited in mainland banks before 19 Feb 2001. This date restriction was lifted on 1 June 2001.

61. Rule 8.11.

62. This means persons other than directors, chief executives or shareholders holding more than 10 per cent of the shares of the issuer or persons associated with any of the above persons.

63. In HK, if the market capitalisation exceeds HK$ 4 billion (about GBP 330 million), the 25 per cent may go down to 10 per cent.

64. This could arise for example where A or B shares are listed on one of the stockmarkets in the PRC.

65. Subject to the rule referred to in n. 64 above, which may result in the percentage falling within the range 10–25 per cent.

66. See UKLA rule 17.8.

67. The rights referred to here are those in s. 89–96 of the Companies Act 1985. See I. MacNeil ‘Shareholders’ Pre-Emption Rights', Journal of Business Law (2001 forthcoming)

68. Directive 77/91 [1977] OJL26/1.

69. Rule 2.03(6).

70. Art 33 of the PRC Company Law provides for pre-emption in respect of new capital raised by Limited Liability Companies in the PRC. The relevant provision provides for existing shareholders to have priority but does not specify in detail how this is to operate.

71. The Guidance for Articles of Association of Listed Companies in the PRC and the Mandatory Provisions in Articles of Association for Companies Listed Overseas both refer to the possibility of a pre-emption clause being included in the Articles but do not require such a provision.

72. See Porta, La et al. , ‘Legal Determinants of External Finance’, 52 Journal of Finance 1131 (1997) and ‘Law and Finance’, 106 Journal of Political Economy 1113 (1998); B. Black, ‘The Legal and Institutional Preconditions for Strong Securities Markets’, Stanford Law School John M. Olin Program in Law and Economics Working Paper No. 179 (see <http://papers.ssrn.com/paper.taf?abstract_id=182169)>.

73. For explanations as to why jurisdictions differ and may not converge towards the most efficient approach see eg L. Bebchuck and M. Roe, ‘A Theory of Path Dependence in Corporate Governance and Ownership’, Columbia Law School Center for Law and Economic Studies, Working Paper No 131 (see <http://papers.ssrn.com/paper.taf?abstract_id=192414>).

74. Rule 3.12 UKLA makes it a condition for listing that a company which has a controlling shareholder must be capable at all times of carrying on its business independently of such controlling shareholders and all transactions between the company and any controlling shareholder must be at arm's length and on a normal commercial basis. This rule applies to OLCs but is not a comprehensive statement of the UK law relating to minority protection. A similar rules appears in ch 9 (continuing obligations rule 9.34 ) but OLCs are exempt from this rule. It would appear that rule 3.12 UKLA does not impose a continuing obligation on OLCs, in part because of the difficulty of enforcing a rule equivalent to rule 9.34 on OLCs. The UKLA has not, however, issued guidance on this point but can rely on enforceable declarations made by OLCs and their sponsors in this respect.

75. These are contained in Rule 19.05(l)(b) (for primary listing) and 19.25(l)(b) (for secondary listing).

76. Special provisions for Bermuda, Cayman Islands and Cook Island.

Appendix 13a, b, c and d of the Listing Rules sets out the minimum requirements (in respect of relevant articles of association) on protection towards minority shareholders for OLCs incorporated in these jurisdictions respectively. Requirements for the first three jurisdictions can be summarised as follows:

—maintenance of class rights,

—notice periods prior to shareholders' meetings,

—proper accounting,

—procedure for approval of director's remuneration, and

—no subsequent amendments of the Articles by the OLC which may affect any of these rights.

77. Special provisions for PRC companies.

These are much more detailed than those applicable to the three jurisdictions above. The main requirements are:

—The requirements for the above three jurisdictions also apply,

—The OLC must adopt its articles of association following the Mandatory Provisions for Companies Listed Overseas issued in August 1994 by the PRC State Council Securities Policy Committee and the State Commission for Restructuring the Economic System. This is a provision which unifies all OLCs' articles of association. It should be noted that in the PRC, articles of associations, be they coming from private, public, listed or OLCs are all registered at the State Administration of Industry and Commerce. However, the articles are not freely available to the public. An applicant needs an acceptable reason in order to be entertained. For example, he is entering into a substantial business transaction with, or plans to litigate with, the target company. Even so, he must be represented, usually by a lawyer. With such a semi-open system, one may not need to see the actual articles knowing that the Mandatory Provisions have already set down certain minimum requirements therein.

—Procedure on the change of office of the auditors.

—Disputes concerning the Articles and Company Law as between defined individuals (eg ‘H’ shareholders and the company) must be referred to arbitration either at the HK Arbitration Centre or the China International Economic and Trade Arbitration Commission.

78. Such conduct is governed on a self-regulatory basis by the Investment Committee of the Association of British Insurers.

79. Report of the Committee on the Financial aspects of Corporate Governance (London: Gee, 1992).

80. Committee on Corporate Governance, Final Report (London: Gee, 1998). See Dignam, A, ‘A principles approach to self-regulation? The Report of the Hampel Committee on Corporate Governance’ (1998) 19 Co Law 141.

81. Rule 12.43A paraphrased.

82. See FSA 1986, s145.

83. See appendix 14.

84. Part I of appendix 7 of the SEHK Listing Rules applies to PRC companies and Part b of Appendix 7 applies to non-PRC overseas companies.

85. See appendix 7 of the SEHK Listing Rules.

86. See n. 84 above.

87. See ch 14 of the SEHK rules and Practice Note 13.

88. See Fung (above n. 14).

* The Law School, Aberdeen University, Scotland, and Department of Accountancy and Law, Hong Kong Baptist University respectively. We are grateful for financial assistance provided by the British Council in Hong Kong and for guidance provided by Matthew Chan of Sidley & Austin in Hong Kong on the operation of the SEHK listing rules. Any errors or omissions remain the responsibility of the authors.

International Corporate Regulation: Listing Rules and Overseas Companies

  • Iain MacNeil and Alex Lau

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