Tech firms question Hong Kong's plan for dual-class shares

Xiaomi is laying the groundwork for a dual-class structure listing in Hong Kong this year, while also being open to the idea of a secondary listing on the mainland. The Hong Kong regulators' response will play a big role in whether the smartphone mak
Xiaomi is laying the groundwork for a dual-class structure listing in Hong Kong this year, while also being open to the idea of a secondary listing on the mainland. The Hong Kong regulators' response will play a big role in whether the smartphone maker, which uses the so-called variable interest entity structure, chooses to list in the former British colony.PHOTO: REUTERS

HONG KONG • Technology companies and service providers are questioning key parts of Hong Kong's plan to allow dual-class shares, just as firms including Xiaomi Corp and Tencent Music Entertainment Group are considering going public.

Hong Kong Exchanges and Clearing (HKEX) wants to change its rules so that company founders can stay in control after their firms list, but the proposals may cause trouble for China's tech titans, which use an unusual type of corporate structure that restricts foreign ownership of their firms. Representatives for the firms are lobbying for HKEX and the Securities and Futures Commission to clear up the issue, they said.

The regulators' response will play a big role in whether businesses such as Xiaomi, which use the so-called variable interest entity (VIE) structures, choose to list in Hong Kong.

HKEX is seeking to compete head-on with markets in New York for coveted listings, after it saw Alibaba Group Holding, another VIE, go public in the United States. Alibaba is now the world's eighth-biggest company by market value.

Smartphone maker Xiaomi is laying the groundwork for a dual-class-structure listing in Hong Kong this year while also being open to the idea of a secondary listing on the mainland, but no decision has been made, according to people familiar with the matter.

Tencent Music Entertainment, which uses the VIE structure, is also considering whether to list in the former British colony.

Conditions in HKEX's proposal would see the super-voting rights of founders' shares expire in circumstances such as stock transfer and death. That could run up against the mainland's draft laws that cover VIE structures, said the sources.

China's Ministry of Commerce proposed in 2015 that companies with such set-ups need to ensure that Chinese investors hold control of the firm or ask for a State Council waiver.

The potential rule clash could mean that, for example, an Internet company would lose its Internet content provider licence in the world's most populous country, said Mr Will Cai, a capital markets partner at Skadden, Arps, Slate, Meagher & Flom.

An HKEX spokesman said the bourse sees super-voting rights and China's foreign ownership rules as separate issues that are not in conflict.

According to data compiled by Bloomberg, Hong Kong's ban on selling shares with different classes played a role in Chinese companies that now have a market value of more than US$740 billion (S$976.8 billion) holding their initial public offerings in New York.

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A version of this article appeared in the print edition of The Straits Times on March 06, 2018, with the headline 'Tech firms question HK's plan for dual-class shares'. Print Edition | Subscribe