No More Class Meetings for Hong Kong Listed PRC Issuers in Repurchasing or Issuing Shares

The Hong Kong Stock Exchange (HKEX) recently announced certain Listing Rules amendments relating to PRC issuers, which will take effect on 1 August 2023. These amendments include:

• Removing the class meeting (domestic shares and H shares) requirements for the issuance and repurchase of shares.
• Removing the requirements for disputes involving holders of H shares to be resolved through arbitration.
• Allowing the limits on the general mandate for the issuance of new shares and scheme mandate for share schemes to be calculated by reference to a PRC issuer’s total issued shares (instead of referencing to each class of domestic shares and H shares, respectively).

The Listing Rules amendments were proposed by HKEX in its February 2023 consultation paper soon after the China Securities Regulatory Commission announced implementation of a new regulatory framework for overseas listing of PRC enterprises effective on 31 March 2023. Under the new PRC regulations, the Special Regulations on Overseas Listing (国务院关于股份有限公司境外募集股份及上市的特别规定) and the related Mandatory Provisions (到境外上市公司章程必备条款) – which were both promulgated in 1994 (as amended, supplemented or otherwise modified from time to time) and form the basis of the current Listing Rules in relation to PRC issuers – would be repealed; and holders of domestic shares and holders of H shares would no longer be treated as different classes of shareholders.

Though the Listing Rules amendments are framed as ‘consequential’ to or in connection with the new PRC regulations, certain industry associations (such as the Asian Corporate Governance Association and the Hong Kong Investment Funds Association) expressed concerns that the removal of class meeting requirements might adversely affect the interests of holders of H shares by taking away their veto power.

In response, HKEX maintained that the class distinction between domestic shares and H shares is removed following the repeal of the Special Regulations and the Mandatory Provisions. It is not the intention of the Listing Rules to protect certain groups of minority shareholders with veto power to address differences in economic exposure arising from the issuers’ proposals.

HKEX reiterated that for matters affecting the listing or trading of H shares – specifically a withdrawal of listing of H shares from HKEX – an approval of the holders of H shares is and will be required. This position is also adopted by the Hong Kong Securities and Futures Commission (SFC) in the administration of the Takeovers Code and the Share Buy-backs Code.

As set out in Practice Note 25, the SFC will continue to treat domestic shares and H shares as separate classes when applying the provisions relating to, amongst others, disclosure of dealings during an offer period, delistings and privatisations. Similarly, in calculating the percentage figure of interests in its shares for the purpose of Part XV of the Securities and Futures Ordinance – Disclosure of interest – the current practice of reporting H shares and domestic shares separately remains unchanged.

Takeaway. Repeal of the Special Regulations and the Mandatory Provisions and the implementation of the Listing Rules amendments would not render a PRC issuer’s existing articles of association (which contain provisions on class meetings) void. Such class meeting requirements remain valid and binding until and unless the articles of association are amended. If a PRC issuer proposes to amend its articles of associations to remove the class meeting requirements, the resolutions of the holders of domestic shares and the holders of H shares must be passed at separate class meetings, respectively, in accordance with the PRC issuer's existing articles of association.

The Consultation Conclusions on Listing Rules amendments is available to view on the HKEX website.