HONG Kong will begin taking listing applications under the newly-approved dual-class share structure at the end of this week. However, scepticism lingers over the new regime, with some once again raising concerns over corporate governance risk, as well as the increased competition from China’s A-share reforms, which aim to attract large tech companies to the mainland market.
Hong Kong Exchanges and Clearing (HKEX) has approved the dual-share class structure (often referred to as “weighted voting rights” in Hong Kong) in its new initial public offering (IPO) rules and will start to take applications at the end of this week, according to Charles Li, chief executive of HKEX.
This listing structure aims to attract technology companies that want to list with shares of different voting rights, such as Alibaba, which listed in New York to take advantages of its weighted-voting rights share structure.
HKEX is likely to attract more than ten applications under the new listing rules, according to Li, noting that the first batch of companies will possibly list under the new regime in June this year.
Corporate governance
However, a majority in the region lack experience investing in firms with dual-class share structures, according to a recent CFA Institute survey, noting that there is a need to educate investors and the public. The CFA Institute supports the principle of “one-share, one-vote”, and holds that this principle is a bedrock of good corporate governance standards.
“Unequal voting rights could allow management or minority shareowners to override the wishes or best interests of majority shareholders for personal benefit and compromise accountability, leading to potential entrenchment issues,” explains Mary Leung, head of advocacy, Asia-Pacific, at the CFA Institute.
The CFA Institute warns that the introduction of dual-class share structures would weaken the system of checks and balances between shareholders and management, as it gives a group of shareholders control and voting power disproportionate to their shareholding.
Increased A-share competition
What adds to the uncertainty of the dual-class share structure is mainland China’s Chinese Depository Receipts (CDR) reform. The regulators have been recently discussing a CDR structure which allows overseas-listed Chinese tech companies to come back to the A-share market. China is particularly looking to attract tech unicorns back to the mainland.
Issued by Chinese banks, CDRs are a type of depositary receipts that allow overseas-listed companies to deposit their foreign equity with Chinese banks so that the equity can be traded in the A-share market. Newly drafted regulation recently revealed the qualifying requirements for companies wishing to apply for the CDR structure. These draft rules show support for certain Chinese tech companies in terms of IPO.
In this light, there is the possibility that the CDR reform will reduce the number of Chinese tech companies that are considering listing in Hong Kong, possibly weakening the appeal of the dual-share class structure.
“Perhaps the companies of the highest-quality will still come to Hong Kong. For example, Tencent is spinning off Tencent Music, which is considering listing in Hong Kong or New York; Xiaomi is going overseas as well,” says a senior fund manager based in Hong Kong talking to The Asset, noting that institutional investors, as well as the regulators, are still working on solving certain technical issues of the CDR structure.
“This (the CDR structure) is one of the most important reforms of A-share market. It will further open up mainland China’s market, which also indicates opportunities for Hong Kong,” according to Li.
Li says that the scale of the CDR reform is not probably big enough to impact Hong Kong’s implementation of the dual-class share structure.
Li adds that Hong Kong would face an altogether different situation if the CDR reform were to be more extensive. “But Hong Kong should be able to find its position in any circumstance. The policy changes in mainland China are more of an opportunity than a threat,” Li says.
“I think overall this macro market structure change is good, in the way that it is conforming to the international institutional markets requirements. The accessibility and the listing structure reforms are allowing higher quality global institutional investors to access Chinese companies one way or another,” says the Hong Kong-based senior fund manager.
