Warfare rages, shareholders wrestle with control freaks
SCAN stock markets around the world, and you’d be forgiven for thinking democracy was under attack.
The principle of one share, one vote has been around since companies started selling shares to the public in the early 17th century. Today its recurring nemesis- dual- class shares, which grant different classes of owners different voting rights-is back, big time. And exchanges that have shunned dual- class share listings are wrestling with an age- old dilemma: Should we or shouldn’t we?
For exchanges, the appeal of such listings is plain enough. Competitive pressures among stock markets are intense. Plus, there are some big technology listings on the horizon, including Dropbox and Mobvoi, an Alphabet-backed Chinese artificial intelligence startup. So Hong Kong, London, and Singapore are weighing whether, like some of their competitors in New York and elsewhere, they should list dual- class shares.
“There is an air of inevitability around it,” says David Smith, Asia head of corporate governance at Aberdeen Standard Investments. “We are mindful of the risk of contagion. Once one regime allows it, others will surely follow.”
The lessons for exchanges that have steered clear of dualclass share listings are equally obvious. Take Hong Kong. Over the past decade, Hong Kong Exchanges & Clearing, a natural listing venue for Mainland Chinese companies, lost out to the US on US$ 34 billion ( RM153 billion) in initial public offerings featuring weighted voting rights, including Alibaba Group Holding, the world’s largest IPO.
“A big concern for HKEX is that there will be more really significant companies like Alibaba, and Hong Kong will lose them if it doesn’t do something to accommodate the special governance arrangements they have,” says Robert Cleaver, a corporate lawyer in Hong Kong for global law firm Linklaters. “There is a strong feeling in the market that they have got to do something.”
Dual- class structures have long been seen as the niche province of newspaper barons (the Sulzbergers at the New York Times, for example) and automakers (the Fords, say, at Ford Motor Co.), and drug makers ( Roche Holding). They allow founding families to retain control and raise funds at the same time, wielding outsize powers at the expense of ordinary shareholders. Because of that, they’ve been stirring controversy for decades.
In 1925, Dodge Brothers Motor Car Co. caused a ruckus on the New York Stock Exchange when the family owned 1.7 per cent of the company but had total voting control.
The imbalance eventually led to a 1940 NYSE rule outlawing new dual- class stock issues. Then, in the 1980s era of corporate raiders, the tables turned as dual- class structures were increasingly used as armour against take- overs. In the end, after some companies threatened to list on the upstart
There is an air of inevitability around it ... We are mindful of the risk of contagion. Once one regime allows it, others will surely follow.
Nasdaq, the Big Board relented and let dual- class listings back in.
T oday’s founders of technology startups have followed in the footsteps of industrial and manufacturing magnates of old, embracing a governance model that allows them to tap capital markets yet retain control.
In 2004, only six years after it started doing business, Google Inc. went public with an eyepopping US$ 23 billion valuation, a price- earnings ratio of 80- and, through its dual- class share structure, a huge bet on its creators, Larry Page and Sergey Brin. Other tech companies soon followed: Facebook, Groupon, and, from China, JD.com, Baidu, and Alibaba, which gave special voting rights to management partners.
One per cent of US IPOs had weighted voting rights in 2005, according to Sutter Securities Inc. in San Francisco; a decade later 15 per cent did, with technology companies making up more than half the total.
Given the storied but checkered history of dual- class shares, it’s perhaps inevitable that the weight of opposition would shift against them once more.
It peaked in March when Snap Inc. went public, offering new shareholders zero voting rights. For many, this was a listing too far. (As of Sept 15, Snap shares had fallen 10 per cent.)
“The issue has really been brought to the fore by Snap,” says Mark Makepeace, chief executive officer of FTSE Russell, an index provider owned by the London Stock Exchange Group.
The world-wide enthusiasm for dual- class shares isn’t just about money.
Nabbing big listings brings prestige and increased trading volumes as well as fees to the winning exchange.
“You can argue that in this economy it could be the vision, could be the product, could be the patent, could be a lot of things that are intangible,” says Charles Li, head of Hong Kong’s stock exchange operator. “In this new world, we need to look at that, give credit to that particular power.”
Dual- class shares may be about to make a comeback in Hong Kong.
They first appeared in the former colony in the 1970s, only to be scrapped more than a decade later amid a wave of public-interest concern. HKEX currently offers two platforms: The main one, for established profitable companies, and a second, its Growth Enterprise Market. It recently consulted the market about introducing a third board, where dual- class listings would be permitted.
Hong Kong’s push comes amid a shrinking global IPO market. In 2006 more than 2,100 companies raised US$ 293 billion through initial share sales, according to data compiled by Bloomberg. Last year that number tumbled to US$ 144 billion. HKEX’s move could have a domino effect in other regions.
Bankers, traders, and the exchanges themselves are all “very powerful forces” in favour of generating new business, says Jamie Allen, secretary general of the Asian Corporate Governance Association in Hong Kong. “Other exchanges have told us that if Hong Kong goes ahead,” he says, “they will have to consider it.” — WP-Bloomberg
David Smith, Asia head of corporate governance at Aberdeen Standard Investments