How dual-class share system could be a boost for HK

Under a pilot plan to be introduced next year, Hong Kong's stock exchange will allow companies with multiple classes of shares to raise capital in the city, in effect abandoning the principle of "one share, one vote".
Under a pilot plan to be introduced next year, Hong Kong's stock exchange will allow companies with multiple classes of shares to raise capital in the city, in effect abandoning the principle of "one share, one vote".PHOTO: BLOOMBERG

HONG KONG • Markets in Hong Kong are closing the week on a dramatic note. As the stock exchange shut its iconic trading floor, it appeared the government was preparing to leave the past behind in a more significant way by abandoning the principle of "one share, one vote".

The stock exchange will allow companies with multiple classes of shares to raise capital in Hong Kong under a pilot plan to be introduced next year, the South China Morning Post reported.

The programme will be restricted to companies that have achieved a valuation of at least US$1 billion (S$1.37 billion) and will be subject to investor protection provisions, possibly including sunset clauses that set time limits on such shareholding structures, the newspaper said.

The trading floor is an anachronism and its time to close had come; allowing company founders inordinate control to keep activist investors at bay is another matter.

Hong Kong Exchanges & Clearing can be forgiven for craving a change. Chief executive Charles Li has bemoaned the loss of about US$50 billion of initial public offerings (IPOs) by Chinese firms that went to the United States, where Facebook, Ford Motor and Google parent Alphabet are among firms with dual-class share structures.

The biggest kick in the teeth was the loss of Alibaba Group Holding, which chose to list in New York after Hong Kong refused to yield on "one share, one vote", raising US$25 billion in the world's biggest-ever IPO in 2014. 

The company had sought permission for a structure that would keep board control in the hands of co-founder Jack Ma and his partners.

With even Singapore and London looking into dual-class options, the city might have found itself running against the global grain by sticking with 'one share, one vote'. 

Hong Kong's change of heart comes as the exchange faces the prospect of losing out on another lucrative flotation by Alibaba affiliate Ant Financial, which dominates China's fintech payments system and has been valued at US$75 billion by investment firm CLSA.

Still, the timing is strange. This is turning into a hot year for IPOs, especially of the tech variety. That is notwithstanding the postponement of some major deals such as China Tower, whose planned US$10 billion fundraising has been pushed to next year.

Online insurer ZhongAn Online P&C Insurance has turned around the city's recent reputation as a wasteland for Chinese state-enterprise listings, rallying by close to 60 per cent in the five days after it went public last month. 

The US$1 billion offering by Tencent Holdings' China Literature is in such hot demand it has squeezed interbank borrowing costs, while computer hardware maker Razer is reportedly seeking as much as US$550 million.

Ultimately, whether Hong Kong is right to adopt a dual-class system may be beside the point. It may have had little choice.

With even Singapore and London looking into dual-class options, the city might have found itself running against the global grain by sticking with "one share, one vote". 

The argument that investors buy dual-class companies at their peril also has some merit: Snap, which issued only non-voting shares in its March IPO in the US, has tanked since listing.

Sunset clauses would offer some safeguards in Hong Kong, a market where fraud among listed companies has been a recurring issue and where investors do not have recourse to class-action lawsuits.

Hong Kong's regulatory challenges also include the dominance of family-controlled groups and the prevalence of mainland-based companies that can be hard to police.

The way to have dual-class stocks and still preserve minority investor rights may lie in narrowing the pool of entrants.

Leave the dual-class system to tech companies that can justifiably argue founders need the breathing space to keep innovating without being subject to earnings-focused pressure from short-term outside investors.

There is no reason to follow the US in allowing all comers, from media firms to investment banks, to jump on the dual-class bandwagon.

This way, Hong Kong could have a chance of luring US-traded stocks such as Baidu and JD.com, and opening the gates to Ant without unduly shrinking the pool of companies available to investors who object to such discriminatory share structures.

BLOOMBERG

A version of this article appeared in the print edition of The Straits Times on October 28, 2017, with the headline 'How dual-class share system could be a boost for HK'. Print Edition | Subscribe