Chinese property platform KE overcame significant hurdles to complete a dual-primary listing via introduction on the HKEX with weighted voting rights (WVR) in the first such so-called “homecoming” debut in Hong Kong.
Unlike IPOs and secondary listings, KE will raise no capital and issue no new shares in what is termed a listing by way of introduction. KE listed on the NYSE on 13 August 2020. KE debuted on the HKEX on 11 May 2022, aiming to avoid a delisting crisis that was expected due to a move by US authorities to reduce the period of non-inspection of audits from three to two years, which effectively bans trading of its shares.
KE general counsel Chen Yan predicts that the delisting crisis affecting some Chinese companies will begin as soon as the beginning of next year, and secondary listing companies in Hong Kong must resubmit listing documents.
Chen had also revealed that the death of founder Zuo Hui had increased the difficulty of KE going public in Hong Kong.
Avoiding delisting risks
In June 2021, the US Senate passed the Accelerating Holding Foreign Companies Accountable Act (AHFCAA), which revises provisions concerning a Securities and Exchange Commission certification requirement that publicly traded companies are not owned or controlled by a foreign government. The US House of Representatives passed this bill on 4 February 2022.
Under the previous law, if the Public Company Accounting Oversight Board was unable to inspect the company’s audit reports for three years, its securities were banned from public trading on a national exchange. The AHFCAA reduces this time to two consecutive years.
Chen said that if worse came to worst, China concept stocks would face delisting as early as January. Despite these complications, KE was resolute in its decision for a dual-primary listing.
The secondary listing bourse is a subordinate market with less stringent requirements compared to the primary exchange, attracting most Chinese companies to a homecoming debut, while a dual-primary listing must adhere to the listing requirements of both qualifying exchanges.
“Once [the AHFCAA] becomes a real risk, all [secondary listed] companies have to switch to primary listing, which means that the flexibility and exempted listing rule requirements will have to be resubmitted,” said Chen.
US-listed Chinese shares have been in a steep downtrend currently due to a deterioration in US-China relations. Chen believed that KE’s share price in US capital markets had been seriously underestimated by at least 70% since January.
Considering KE’s sound cash flow, with more than USD10 billion at hand, it decided to abandon its IPO two weeks before filing the listing documents and instead chose to go public by way of introduction to avoid a bad impact from lacklustre fundraising. That said, the transaction did not allow it to issue new shares or raise funds from its debut.
Difficult negotiations
KE wanted to retain the WVR scheme in Hong Kong as it did in the US. However, the sudden death of founder Zuo last year posed obstacles to its Hong Kong listing. The HKEX regulations state that if a founding shareholder dies or is incapacitated, the higher voting right will lapse, which opens the door to a hostile takeover of KE.
According to the listing document, the voting rights of co-founder Peng Yongdong and executive director Shan Yigang would have been around 30%. To avoid future problems, KE’s in-house legal team sought to incorporate the voting rights of Zuo’s family trust into the WVR structure.
KE’s team negotiated with shareholders and regulators for five months to settle down on co-founder share conversion, shareholding ratio, market value and economic interests.
Chen said the in-house counsel team had anticipated the Muddy Waters short report on KE, so they took the initiative to hire an international law firm, whose name remains confidential, and one of the big four auditors to conduct an independent audit.
On 28 January 2022, KE said “the audit committee has concluded that the allegations in the Muddy Waters report were not substantiated”, and its audit report had been submitted to the HKEX. Chen credited the success of KE’s HKEX debut to the in-house team’s handling of information confidentially and sensitively with intermediaries
