Hong Kong to scrap separate vote for H share investors from 1 August

Hong Kong’s stock exchange will no longer require separate class votes for holders of H shares where their rights are to be varied or abolished under listing rule changes which come into force on 1 August 2023.

The move—which would strip investors of a separate say in circumstances where shares are to be issued or repurchased, with an increased risk of dilution—comes despite significant opposition by the investor, securities and fund management industry.

Issuers will still have to change their articles of association to scrap the separate class rights. Hong Kong Exchanges and Clearing (HKEX) has clarified that this must be done by a separate vote of H and A (or domestic) shareholders.

The listing rule changes align Hong Kong with new regulations in the PRC, according to HKEX. As we previously outlined on 8 March 2023 and 20 March, HKEX says the China amendments no longer deem domestic and H shares of a PRC issuer as separate classes of stock. However, HKEX will paradoxically still require separate class votes of H and domestic/A shareholders where there is a proposal to delist or privatise the H shares of a PRC issuer.

The Securities and Futures Commission (SFC) will also treat holders of H and domestic shares as distinct for privatisations and delisting under the takeovers code, stating: “the (SFC) Executive considers that holders of H shares should continue to benefit from the protection that it had prior to the PRC rule change.’’

Investor opposition

HKEX did not consult on the rule change. It did seek market views in a February 2023 consultation on related amendments, most notably whether to dismantle separate mandate limits for domestic and H shares (it will do so: general mandates and scheme mandates respectively will be set at 20% and 10% of the total issued shares of a PRC issuer rather than 20% and 10% per class.)

Organisations representing a wide segment of the investor, securities and funds industry both domestically and globally voiced strong protest over the scrapping of separate class votes which specifically protect the interests of minority shareholders.

In its submission, ACGA highlighted the lack of fungibility between domestic and H shares which renders them as distinct and cautioned that the rule change could lead to hardy dilution of H share holdings through aggressive A share issuance. We also questioned the way the rule change is being implemented, particularly as no cogent legal opinion has been shared by HKEX.

The Asia Securities Industry & Financial Markets Association (ASIFMA) voiced concern that the repeal of separate class meetings would lead to “unequal outcomes for A and H shareholders.’’ It stressed that it could create additional hurdles for foreign institutional investors in meeting their stewardship obligations. “In the long term we believe this will lead to a reduction in the size and liquidity of the H share market relative to the A share market,’’ it said.

The Hong Kong Investment Funds Association (HKIFA) in its submission said it has major concerns over the scrapping of separate voting rights, labelling it a ‘policy change’. “This has been a fundamental mechanism to protect the interests of H shareholders since 1993,’’ it said, noting that members were taken aback when it was announced that it would be repealed, without full market consultation. Members have already started to re-evaluate the risk profile and liquidity of H shares, it added.

ACGA has a membership of 108 firms from 19 markets, of which 70% are institutional investors with more than US$40 trillion in assets under management globally. ASIFMA represents 173 member firms, including 42 asset managers, 57 financial institutions and 74 non-banks. Members of the HKIFA include both domestic and foreign investment funds in Hong Kong.

HKEX said that 45% of respondents to the consultation expressed concerns over the potential reduction in the size and liquidity of the H share market.