With Brazil's Vale listing in Hong Kong, will the region become a meaningful international listing destination for Latin American issuers? Thomas Vita (pictured) and Julian Chung report

While the path north to New York is well trod by some of Latin America's largest companies seeking to list their equity internationally, Vale's secondary listing of its common and preferred shares in the form of Hong Kong depositary receipts (HDRs) on the Hong Kong Stock Exchange (HKEX) in December last year has caused many to ask whether the HKEX is a meaningful international listing destination for other Latin American companies.

The listing made Vale, the world's second-largest mining group in terms of market value and one of the largest companies in Latin America, the largest non-financial Western company to go public in Hong Kong as well as the first to list HDRs since the HKEX introduced them in 2008. Vale explained in its Hong Kong listing document that its sales activities had increased significantly in Asia, particularly in China, and are likely to keep doing so in the short term: "Therefore, it is believed that a secondary listing in Hong Kong is very important to raise the company's profile in the region and show its commitment to Asia."

With listings on the BM&FBOVESPA – the Brazilian securities, commodities and futures exchange – the New York Stock Exchange (NYSE) and the HKEX as well as trading on NYSE Euronext Paris, Vale's shares now trade close to 24 hours a day on regulated markets. While Vale's election of a Hong Kong listing has been unique, at least so far, among Latin American companies, 2010 more generally saw a reopening of a number of initial public offering (IPO) markets for companies in the region, following Banco Santander's massive New York debut at the end of 2009.

thomas-vita-norton-roseIt is fair to say the majority of these companies sought listings on their domestic markets (principally Brazil and Mexico), some with international institutional placings, with only a handful looking to New York and one, Ferrous Resources, announcing its intention to list in London.

Although every offering is different, there were a number of other notable foreign companies that listed in Hong Kong in 2010, including other issuers in the metals and mining sector and one luxury brand company. In March this year, SBI Holdings, a Japanese company listed on the Tokyo Stock Exchange that is engaged in the provision of internet financial services, became the second company to apply for a secondary listing of its shares in the form of HDRs on the HKEX and the first to undertake an HDR offering at the same time as its listing. If press reports are to be believed, a number of additional high-profile foreign listings should follow in 2011, if market conditions allow.

Previously, only companies incorporated in Hong Kong, mainland China, Bermuda and the Cayman Islands were accepted for listing in Hong Kong. However, as part of its efforts to attract more foreign listings and to improve its competitiveness among the major international stock exchanges, the HKEX began to extend the list of accepted jurisdictions for listing in Hong Kong in 2007. To date, a total of 16 jurisdictions have been approved, which include Australia, Brazil, British Virgin Islands, Canada (British Columbia and Ontario), Cyprus, France, Germany, Isle of Man, Italy, Japan, Jersey, Luxembourg, Singapore, the UK and the US (California).

In the case of a company incorporated in a jurisdiction that has yet to be approved, an application must be made by the company for the approval of that jurisdiction (which largely will be based on a comparison of a range of shareholder protection matters against Hong Kong company law) before making its listing application.

For companies that are already listed elsewhere and are seeking a further listing in Hong Kong, there is the option of applying for a primary or secondary listing. The main difference is that a company seeking a primary listing will be expected to comply fully with all of the listing and ongoing compliance requirements that normally apply to listed companies in Hong Kong, whereas a company seeking a secondary listing will have more flexibility in obtaining waivers from those requirements.

One of the prerequisites for a secondary listing, though, is that the HKEX must be satisfied that the regulatory requirements of the primary listing venue confer a comparable standard of shareholder protection to those in Hong Kong. Irrespective of whether it is a primary or secondary listing, there is no requirement that the company must undertake a share offering at the time of listing.

If the company chooses not to undertake an offering, the listing would be effected by 'introduction' and the investment bank(s) sponsoring the listing would be required by the Hong Kong regulators to implement certain measures to ensure that sufficient liquidity in the market would be maintained within a specific period after the listing.

While no doubt some other foreign companies will, like Vale, seek listings in Hong Kong to raise their profiles and show their commitment to the region as the Chinese and certain other Asian economies continue their ascendancy, other companies will instead simply be looking for new sources of international capital and increased liquidity. Even though a Hong Kong listing does not, per se, allow a company to raise funds in mainland China and enable it to access China's potentially huge retail investor base, Hong Kong clearly is an attractive market for offshore funds around Asia as well as retail Hong Kong investors and consequently can be a substantial source of capital.

One commonly cited reason for foreign companies choosing not to list in Hong Kong is the relatively low liquidity levels experienced by some of the companies that have listed so far. Of course, companies that decide to list by introduction without a concurrent share offering are unlikely to immediately have a substantial investor base trading in their shares. The potential costs and delay of converting positions into HDRs may discourage existing shareholders elsewhere from moving their positions into that format absent meaningful arbitrage opportunities.

As in any other retail market, even when an IPO or secondary offering is made concurrently with the listing, name recognition is also an important determinant of retail interest. Likewise, for issuers that decide to use them, HDRs are still a relatively new instrument in Hong Kong and investors no doubt will need to get comfortable with them.

Even for issuers for whom a Hong Kong listing (whether primary or secondary) makes eminent sense, the transaction costs are undoubtedly substantial, certainly by comparison to most domestic listings. The Hong Kong disclosure requirements for listing documents and approval procedures for listing applications are among the most onerous of the major international markets.

However, unlike the US, where the high cost of ongoing regulatory compliance is a meaningful hurdle and the fear of shareholder litigation an even greater deterrent, the ongoing compliance costs of a Hong Kong listing are more manageable.

In the coming years, we have no doubt that there will be other Latin American companies that consider seeking a primary or secondary listing in Hong Kong, particularly as they strengthen trading and commercial ties with Chinese and other Asian partners or expand their activities into the region. Some will no doubt decide to go forward with the Hong Kong listing; others will continue to look to New York or follow the small but increasing number of companies to London; yet others will instead simply list at home and seek to attract international investors with an international institutional offering.

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The Vale Hong Kong listing at a glance

In December 2010, Vale completed the secondary listing of its common and preferred shares in the form of Hong Kong depositary receipts (HDRs) on the Hong Kong Stock Exchange. Vale, with common and preferred shares listed on Brazil's BM&FBOVESPA and American depositary receipts (ADRs) representing common and preferred shares listed on the New York Stock Exchange (NYSE) and traded on NYSE Euronext Paris, was the first Brazilian company to list shares in Hong Kong and the first company to employ the HDR mechanism to accomplish such a listing.

Vale did not raise any new money through the listing, which was accomplished by means of an 'introduction' of existing Vale shares. Instead, Vale investors holding ADRs were invited to convert their ADRs into HDRs, allowing them to migrate their holding from the NYSE to Hong Kong. Investors reportedly converted ADRs representing an aggregate of 5.3 million common and 2.4 million preferred shares before trading in HDRs commenced in Hong Kong.

An important aspect of the listing process was the extensive range of waivers that Vale obtained from compliance with the Hong Kong regulatory requirements, primarily on the grounds that Vale is already subject to comparable requirements in one or more of its other listing jurisdictions or because a waiver from the Hong Kong requirement was necessary to avoid inconsistency with regulatory requirements in those other jurisdictions.

Thomas Vita is a finance partner based in Norton Rose's London office. Julian Chung is a finance partner in the firm's Hong Kong office.