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The benefits of pre-IPO trust planning

Trust structures are generally associated with estate and succession planning because of the important potential advantages and safeguards that a well-structured trust can provide. However, trusts can also play an essential role in the planning phases leading up to an initial public offering (IPO) for major shareholders (founders) of a company that are looking to take their company public.

Careful pre-IPO trust planning can provide the founders with a number of benefits in respect of their shareholdings in the company to be listed (ListCo). Trusts can also be used to create employee incentive schemes to reward, motivate and retain employees during the IPO process.

Hong Kong is a highly attractive IPO market for China-based companies. This should be further enhanced after the Stock Exchange of Hong Kong (HKSE) announced in April 2018 the addition of new listing rules to facilitate the listing of high-growth companies from emerging and innovative sectors.

The listing reform opens the gateway to companies from emerging and innovative sectors, with weighted voting right (WVR) structures and biotechnology companies without any prior record of revenue or profit now able to be listed on the HKSE. It also provides a concessionary secondary listing route for Greater China and international innovative companies listed on qualifying exchanges overseas.

These shareholding structures are particularly attractive to fast-growing, entrepreneur-led companies because they offer the founders the prospect of continuing control, without the distraction of hostile bidders or activist shareholders, leaving them free to focus on developing the business for the long term.

Permitting WVR marks a big departure for Hong Kong’s strict one-share, one-vote principle and should attract a whole new breed of entrepreneur-led company that might previously have sought a listing in the US, where dual-class structures have always been permitted.

A WVR beneficiary must either be an individual who has been materially responsible for the growth of the business or who has an active executive role within the business and is a director at the time of listing. He or she may, for estate planning purposes, choose to hold WVR shares through a limited partnership, trust, private company or other vehicle.

We expect to see China-based companies listing in Hong Kong continuing to make use of trusts in various forms in their IPO planning phases. One such structure is a Restricted Share Unit (RSU) scheme – a type of employee benefit scheme whereby restricted share units (RSUs) are granted to employees, with each RSU representing a share in the ListCo.

Subject to the employee meeting certain vesting criteria – generally based on performance and/or length of service – the shares in the ListCo underlying the RSUs will be transferred to the employee, giving them equity in the ListCo.

An RSU scheme is therefore a highly effective mechanism for companies approaching an IPO to incentivise, motivate and retain their employees. In addition, the cost to the employee of participating in an RSU scheme is minimal because the ListCo carries most of the expenses associated with establishment and administration.

Sovereign Trust (Hong Kong) can assist with all aspects of pre-IPO planning associated with the establishing of an RSU scheme. Our licensed and regulated professional trustees can also administer and maintain the RSU scheme. For further information, email our Hong Kong office or phone on +852 2542 1177.

Contact our Hong Kong office


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Sovereign Trust (Gibraltar) Limited
Tel: +350 200 76173