HK dual-class shares proposal needs more work

By John Loh

The Hong Kong Stock Exchange (HKEX) closed yet another consultation on dual-class shares in August, the latest effort to ensure the city has a place on the global stage for technology IPOs.

Market participants had been sounded out since June about the plan, which envisions the creation of a new board with less stringent regulation and, more crucially, weighted voting rights. The consultation paper specifically noted “there remain gaps in the Hong Kong market, prompting a number of mainland and other high growth companies from new economy sectors to choose to list on venues other than the exchange.” 

Having missed out on Alibaba, to take just one prominent example, the idea of the new board is that it would be better suited to companies from new economy sectors that currently can’t or don’t choose Hong Kong, either because they are pre-profit, or have what the exchange euphemistically calls “non-standard governance features”, which appears principally to mean weighted voter rights. 

The new board, under the proposal, would be divided into two: New Board Premium, which is open to retail and will have a similar regulatory position to the main board, and New Board Pro, open to professionals only and with a lighter-touch approach to initial listing requirements.

HKEX has been careful not to ruffle too many feathers with the proposal this time, limiting the dual-class share structure to the new board, as well as suggesting a number of safeguards.

But that didn’t stop global investors from giving HKEX the thumbs down — again. The Hong Kong Investment Funds Association (HKIFA), which represents domestic and international funds from Aberdeen to Vanguard, led the chorus of dissent, saying weighted voting rights were “against the interests of investors”.

It insisted that the bourse had been too gung-ho in promoting the merits of dual-class shares, without taking a deeper dive into the risks.

The investment management arm of Norges Bank, Norway’s central bank, echoed this stance. The $873 billion fund said in a letter to the exchange that its main concern was unequal voting rights, adding that it “would have liked to see a more balanced consideration of the interests of all the stakeholders in the listing environment”.

“Considerable weight is given to the interests of the exchange in attracting the listing of certain issuers compared to the interests of long-term investors in supplying capital to issuers,” Norges Bank Investment Management said in the letter. 

The fact that HKEX’s consultation has failed to placate the buy side is the clearest sign that the exchange needs to revisit the proposal.

To be sure, the bourse should not be faulted for wanting to make up for lost time. It deserves credit for trying to prevent another loss akin to Alibaba Group Holding’s world-beating IPO, and these efforts show it is dealing with the existential question of the exchange’s long-term future in a digital economy.

But what HKEX must realize is that in the absence of shareholder protections such as class action lawsuits, the “one share one vote” policy is the surest guarantee that investors reserve their rights.

It is true that the new board will leave Hong Kong’s flagship Main board untouched but, as investors such as Norges have argued, the very creation of a new board could pull listings away from the Main board, and result in a lowering of standards on the latter.

Good governance, after all, should not bend to the will of issuers. As Norges put it, issuers will be willing to adapt to higher standards of governance if incentivized by the listing framework to do so.

Ironically, in the months since HKEX released its consultation, a number of issuers from the technology sector have said they intend to float in Hong Kong — without the incentive of dual-class shares. Since Meitu listed last year, the likes of China Literature, Razer and ZhongAn Online Property and Casualty Insurance Co have filed IPO applications.

In late August, loss-making Cofco Womai, one of China’s biggest online grocery stores, submitted a draft prospectus for a $600 million IPO.

As for the banks, HKEX can take comfort in the fact that bulge-bracket firms see dual-class shares as a non-event, since issuers are increasingly exchange-agnostic. Moreover, issuers looking to raise over $100 million typically prefer the prestige of the Main board, and few would be willing to act as guinea pigs for the new board.

What all this proves is that Hong Kong need not rush into a decision on weighted voting rights.

Alibaba may have been the one that got away, but there is no denying Hong Kong holds its own as a listing destination. Although HKEX executives are keen to bring dual-class shares to the city, they would be better off losing the battle to win the war.