Weight watchers’ club
Arguments favoring weighted voting rights should take into account that this share-class structure will entail several corporate governance issues.
The first issue is that weighted rights will violate the principle of proportionality. The proportionality principle, enshrined in the “one share, one vote” structure, ensures that all major shareholders are given a proportionate say on corporate affairs.
The weighted structure, however, will not treat shareholders as having equal say on matters affecting the value of their stockholding, and therefore on future capital gain and cash flow.
Second, a weighted voting structure may tempt controlling shareholders to extract personal benefit from the company. That is because they can enjoy full benefits from the company, but suffer less downside risk in equity value reduction due to their acts of private benefit extraction.
Third, weighted rights can prevent non-controlling owners from removing directors who extract private benefits and fail to manage the business.
The entrenchment risk that this structure brings should not be ignored.
However, arguments favoring weighted voting say that allowing this corporate structure may encourage more quality companies, which follow this setup, to seek to list in Hong Kong.
A weighted structure may also inspire controlling shareholders to take a long-term view since it gives directors the freedom to run a business to maximize growth and value for shareholders over the long term.
Moreover, backing such a structure may spark an expansion in investors’ ability to put their money into companies that use this structure, and thus render HKEx more efficient in achieving capital allocation from investors for listed companies.
A weighted voting structure also enables fast-growing enterprises to expand without further diluting the ownership of their founders, so that they can maintain management continuity. collectively represent 14 percent of the total market capitalization of all large US-listed corporates, according to the Concept Paper.
The Concept Paper also said that there is no global trend toward or away from the WVR structure. US, Canada and Sweden permit it, while it is prohibited in Germany, Spain and the Chinese mainland for both listed and unlisted companies.
Elsewhere, unlisted companies are allowed to use such structures but those seeking primary listings are prohibited from using them. These IPO hubs include Hong Kong, Singapore, Australia and the UK.
There are no firm academic conclusions on whether companies with dual-class share structures will outperform or underperform, the Paper added.
Raphael Ding Waichuen, chief executive at the Hong Kong Institute of Certified Public Accountants, said: “HKEx should undertake a comprehensive review of the shareholder protection regime rather than deal with WVR in isolation. If current shareholder protection is inadequate, introducing WVR will make it even worse. It is all about protecting investors from abuse of power and underperformance by management of WVR companies.”
Allowing weighted voting rights with acceptable shareholder protection mechanism as the permissible corporate structure in IPOs is only one of the factors that may help diversify the city’s IPO fund-raising platform, analysts from the “Big Four” accounting advisory firms told China Daily.
“Other factors such as market valuation and fulfi of listing requirements are also key,” Louis Lau Tai-cheong, partner at KPMG China’s Capital Markets Group, told China Daily. “Having a larger number of technology firms list in Hong Kong will cultivate an investor base for this sector; they may be more willing to pay a premium for these companies.”
Fellow KPMG partner Paul Lau Kwok-yin spoke of “other measures to capture IPO candidates amid the possibility of introduction of WVR, such as the repositioning of the Growth Enterprise Board to attract listings by smaller companies, or those at their startup stage and lacking a profitable track record.”
“HKEx may also explore ways to attract secondary listings for companies with primary listings in overseas exchanges,” Paul Lau said.
Another growth driver will be the stock connect program between Hong Kong and the mainland.
“If the proposed Shenzhen-Hong Kong Stock Connect allows mainland investors to trade company shares listed in the Growth Enterprise Market, it would draw more mainland technology companies to consider listing in the city,” Deloitte’s Au said.
Chan at PwC said: “If the Shanghai-Hong Kong Stock Connect platform and proposed Shenzhen-Hong Kong Stock Connect can be refined to allow IPO subscription service, it would provide incentives for more companies to pursue listings in Hong Kong.”
Long-term, Hong Kong should do more to consolidate the technology industry ecosystem. “By encouraging more technology investment fund managers to establish their operations in the city, more technology companies may pursue IPOs because these companies can be more extensively researched,” Au said.
The Hong Kong bourse raised HK$232.5 billion from 122 new listings, up 38 percent from 2013, according to HKEx. As of December, the SAR was poised to take second place globally on fund-raising, behind New York. Contact the writer at oswald@chinadailyhk. com