Weight watch­ers’ club

China Daily (Canada) - - FRONT PAGE - By OSWALD CHAN in Hong Kong oswald@chi­nadai­lyhk.com

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

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