There’s been a growing trend of Hong Kong and Asian companies taking an interest in Canadian markets in recent months – particularly around corporate finance and possible IPOs. Speaking to Julia Charlton, principal partner at law firm Charltons, she says that there was significant growth in the M&A and general corporate sectors from 2014 to 2019.
"There was some slowdown around about 2015 in mainland China,” she says. “And their stock markets and so on – but generally speaking, the growth, the activity certainly from 2014 to the end of 2019, was extraordinary. [There] were phenomenal levels of growth during that time.”
This growth, however, was interrupted by events such as the civil unrest in Hong Kong in 2019 and the onset of the COVID-19 pandemic in 2020. Discussing the knock-on dynamics of Hong Kong's financial landscape, Charlton noted a shift in market dynamics, particularly in the smaller market cap area.
“In a number of years over the past decade, Hong Kong has been the largest market in the world in terms of new IPO funds raised,” says Charlton. “And it's usually been in the top three over the past 10 years prior to the last couple of years – however, last year it was about sixth. The particular sector, which has slowed quite dramatically since 2020, has been the smaller market cap area. Partly this has been due to the draining of liquidity out of the Hong Kong market – Hong Kong regulators and government have been looking at ways to address that. But in the small to medium cap sector, a factor was definitely Hong Kong’s onerous regulations in this area – GEM, HKEX’s second board, has seen no IPOs for three years.”
One significant area of interest for Charlton was the growing connection between Hong Kong and Canadian markets.
“Why would Hong Kong and perhaps China and Asian companies genuinely be interested in the Canadian markets? Well, a number of Hong Kong-based or China-based companies have listed on NASDAQ recently. So, despite the US/China tensions, there has been some continuing fundraising on NASDAQ. And I think that's why there is interest in the Toronto market. Of course, traditionally that's been in the mining sector – because Toronto has got such a strong reputation in the mining sector.
“Nevertheless, I think there is also more general interest in capital raising because of the regulatory difficulties and raising capital in Hong Kong at the moment – on public markets for smaller companies.”
Charlton also touched upon the recent regulatory changes in Hong Kong, including the allowance for listing weighted voting right companies.
“Weighted voting rights – that’s where the original founders have more votes than new investors coming in so that they can maintain a level of control over the company,” says Charlton. “Because tech companies tend to grow through large equity raises rather than through debt capital, founders tend to lose control of the companies. There was a lot of debate around this area in Hong Kong.
“Finally, some rules introduced by 2018 allowed the listing of weighted voting right companies – and also paved the way for some of the large Chinese companies which had listed in the US to be able to secondary list in Hong Kong – perhaps with a view to changing the main listing status to Hong Kong at some point.”
Looking at Hong Kong's strengths and prospects, Charlton maintained a positive outlook.
"The Hong Kong government remains extremely positive in terms of wanting to attract more liquidity, more IPOs,” says Charlton. “There's no question that it remains open for business. And I think people should remember that Hong Kong still has a common law legal system, it still has rule of law, and it remains a very different place from mainland China.”
For legal professionals aspiring to specialize in corporate law, particularly in cross-border transactions, Charlton emphasized the importance of specialization, experience, and passion.
"Legal markets are increasingly specialized, unlike, say, 30 years ago when this trend was beginning,” she says. “But I think it's more pronounced – now a lot of lawyers tend to become specialists in particular areas like private equity or IPOs or M&A. So, for anybody who aspires to a cross-border career, I think they need to be qualified in a robust jurisdiction and to focus on a particular area of practice. They need to gain a lot of experience and, really, they've got to love what they do. Because it's actually very demanding to work the long hours that are required for transactional corporate finance work.”