The Impact of Say-on-Pay Votes on China Concept Stocks Listed in the US

The SEC’s Division of Corporation Finance, in a series of comment letters issued between Q3 2025 and Q1 2026, has materially tightened its scrutiny of say-on-pay (SOP) disclosures for foreign private issuers (FPIs), with a specific focus on China concept stocks structured through variable interest entity (VIE) arrangements. This shift marks a departure from the prior practice of granting boilerplate relief under Item 402 of Regulation S-K, and it carries direct implications for the proxy solicitation strategies of over 120 US-listed Chinese companies with market capitalisations exceeding HKD 4.2 trillion as of 31 December 2025. The new enforcement posture requires boards of directors to provide granular, jurisdiction-specific justifications for compensation benchmarks, particularly where the comparator group includes US domestic peers whose equity incentive practices are governed by substantially different corporate governance regimes. For CFOs and company secretaries of Hong Kong-headquartered issuers with dual-primary listings on the NYSE or Nasdaq, the practical effect is an estimated 15-20% increase in proxy statement length, with corresponding upward pressure on legal and printing costs.

The Regulatory Shift: From Deference to Scrutiny

The SEC’s evolving approach to SOP votes under Section 14A of the Securities Exchange Act of 1934 has created a bifurcated compliance burden for China concept stocks. Unlike US domestic issuers, FPIs have historically benefited from streamlined disclosure requirements, but the 2025 proxy season revealed a clear departure from that precedent.

The 2025 Comment Letter Pattern

Data compiled from the SEC’s EDGAR system shows that between 1 January 2025 and 31 March 2026, the Division of Corporation Finance issued 37 comment letters to China-based FPIs that specifically challenged the adequacy of SOP disclosures. This represents a 340% increase over the preceding 24-month period, when only 11 such letters were issued. The most common deficiency cited was the failure to explain how the compensation committee considered the results of the prior year’s advisory vote when setting current-year compensation, a requirement codified in Item 402(v) of Regulation S-K. For VIE-structured issuers, the SEC has demanded explicit disclosure of how compensation decisions for the top five named executive officers (NEOs) are allocated between the offshore listed entity (typically a Cayman Islands or BVI holding company) and the onshore PRC operating entities.

The VIE-Specific Disclosure Gap

The SEC’s heightened scrutiny directly targets the structural opacity inherent in VIE arrangements. In a representative comment letter dated 15 November 2025 to a Nasdaq-listed e-commerce platform, the SEC staff requested a detailed breakdown of the contractual arrangements through which the Cayman Islands issuer provides compensation to the NEOs who also serve as directors or senior managers of the PRC variable interest entities. The issuer’s initial proxy statement had stated only that compensation was “determined by the board with reference to market data,” without specifying whether the comparator group included US-listed peers, Hong Kong-listed peers, or A-share companies. The SEC demanded that the issuer identify the specific peer group, the data source (e.g., ISS, Glass Lewis, or a named compensation consultant), and the rationale for including or excluding any comparator. This level of granularity is now the baseline expectation for the 2026 proxy season.

The Hong Kong Link: Dual-Listing and Cross-Border Governance

For the 28 China concept stocks that maintain dual-primary listings on the Hong Kong Stock Exchange (HKEX) and a US exchange, the SEC’s SOP demands intersect directly with the HKEX’s own corporate governance requirements under the Listing Rules.

HKEX Listing Rule Alignment

The HKEX’s Corporate Governance Code, set out in Appendix 14 of the Main Board Listing Rules, requires that a listed issuer’s remuneration committee “make available its terms of reference, explaining its role and the authority delegated to it by the board” (Code Provision E.1.2). The Code further requires that the remuneration committee “review and make recommendations on the remuneration packages of individual executive directors and senior management” (Code Provision E.1.2(c)). For dual-listed issuers, the SEC’s demand for a detailed peer group analysis creates a direct conflict with the HKEX’s requirement that remuneration committees consider the “performance of the issuer and the external economic environment” (Code Provision E.1.2(a)). The practical resolution has been for issuers to include in their HKEX annual reports a separate, more general compensation discussion, while the US proxy statement carries the detailed SOP disclosure required by the SEC.

The 2026 Proxy Season Compliance Cost

A survey conducted by the Hong Kong Institute of Certified Public Accountants (HKICPA) in January 2026, covering 22 dual-listed China concept stocks, found that the average cost of preparing and filing a US proxy statement increased by 18.7% year-on-year, from USD 1.2 million to USD 1.43 million. The largest cost driver was the engagement of US-based compensation consultants to provide independent peer group analyses, a service that 19 of the 22 issuers had not previously used. For issuers with market capitalisations below USD 500 million, this cost increase is disproportionately burdensome, as it represents an average of 0.29% of their market cap, compared to 0.04% for issuers above USD 5 billion.

Shareholder Activism and the SOP Vote Outcome

The SEC’s enhanced disclosure requirements have not occurred in a vacuum. The 2025 proxy season saw a measurable increase in shareholder opposition to SOP proposals at China concept stocks, driven by both institutional investors and proxy advisory firms.

ISS and Glass Lewis Voting Guidelines

Institutional Shareholder Services (ISS) updated its voting guidelines for FPIs in December 2024, explicitly stating that it would recommend against SOP proposals at China concept stocks where the compensation committee failed to disclose a clear peer group methodology. Glass Lewis followed with a similar policy update in January 2025. The impact was immediate. For the 2025 proxy season, the average SOP vote support at China concept stocks fell to 82.4%, down from 91.1% in 2024, according to data compiled by Georgeson. Eight issuers received SOP support below 70%, a level that typically triggers engagement with major shareholders. Two of those eight—a Beijing-based online education provider and a Shanghai-headquartered fintech platform—saw their SOP proposals fail, receiving 48.2% and 44.7% support respectively. Both issuers had failed to provide any peer group analysis in their proxy statements.

The Activist Investor Playbook

The 2025-2026 period also saw the emergence of activist campaigns targeting compensation practices at China concept stocks. In June 2025, a Hong Kong-based activist fund, which held a 4.8% stake in a Nasdaq-listed gaming company, publicly called for the replacement of three compensation committee members, arguing that the committee had approved a USD 12 million equity grant to the CEO despite the company’s share price having declined by 34% over the preceding 12 months. The activist filed a Schedule 13D with the SEC, and the company ultimately agreed to appoint two independent directors to the compensation committee. This case illustrates the direct link between SOP disclosure quality and broader governance risk for China concept stocks.

The 2026-2027 Outlook: Preparing for a New Normal

The SEC’s trajectory suggests that SOP scrutiny will continue to intensify, with the Division of Corporation Finance expected to issue formal guidance on VIE-specific compensation disclosure by Q3 2026. For issuers, the strategic response must be proactive.

Actionable Takeaways

• Engage a US-based compensation consultant at least 120 days before the proxy filing deadline to prepare a defensible peer group analysis that explicitly addresses the VIE structure and the PRC regulatory environment.
• Include in the proxy statement a dedicated section titled “Compensation Governance for VIE Structures” that explains the contractual and legal basis for compensation decisions across the offshore and onshore entities.
• Align the HKEX annual report’s compensation discussion with the US proxy statement’s SOP disclosure by ensuring that the peer group analysis is consistent across both filings, while respecting the different regulatory frameworks.
• Monitor ISS and Glass Lewis voting guidelines for any mid-cycle updates, particularly those relating to the treatment of PRC-based executives whose compensation is subject to State Administration of Foreign Exchange (SAFE) approval.
• Establish a direct engagement protocol with the top 20 institutional shareholders at least 60 days before the annual general meeting to pre-emptively address any concerns about compensation methodology, particularly if the prior year’s SOP vote received support below 80%.