Hong Kong can have its dual-class cake and eat it

The Star Malaysia - StarBiz - - Viewpoint - By NISHA GOPALAN

HONG Kong’s mar­kets are clos­ing the week on a dra­matic note.

As the stock ex­change shut its iconic trad­ing floor yes­ter­day, it ap­peared the gov­ern­ment was pre­par­ing to leave the past be­hind in a more sig­nif­i­cant way by aban­don­ing the prin­ci­ple of one share, one vote.

The stock ex­change will al­low com­pa­nies with mul­ti­ple classes of shares to raise cap­i­tal in Hong Kong un­der a pi­lot plan to be in­tro­duced next year, the South China Morn­ing Post re­ported. The pro­gramme will be restricted to com­pa­nies that have achieved a val­u­a­tion of at least US$1bil and will be sub­ject to in­vestor pro­tec­tion pro­vi­sions, pos­si­bly in­clud­ing sun­set clauses that set time lim­its on such share­hold­ing struc­tures, the news­pa­per said.

The trad­ing floor is an anachro­nism and its time to close had come; al­low­ing com­pany founders in­or­di­nate con­trol to keep ac­tivist in­vestors at bay is another mat­ter.

Hong Kong Ex­changes & Clear­ing Ltd can be for­given for crav­ing a change. Chief ex­ec­u­tive of­fi­cer Charles Li has be­moaned the loss of some US$50bil of ini­tial pub­lic of­fer­ings (IPOs) by Chi­nese firms that went to the US, where Facebook Inc, Ford Mo­tor Co and Google par­ent Al­pha­bet Inc are among com­pa­nies that have dual-class share struc­tures.

The big­gest kick in the teeth was the loss of Alibaba Group Hold­ing Ltd, which chose to list in New York after Hong Kong re­fused to yield on one-share-one-vote, rais­ing US$25bil in the world’s big­gest-ever IPO in 2014.

The com­pany had sought per­mis­sion for a struc­ture that would keep board con­trol in the hands of co-founder Jack Ma and his part­ners.

Hong Kong’s change of heart comes as the ex­change faces the prospect of los­ing out on another lu­cra­tive flota­tion by Alibaba af­fil­i­ate Ant Fi­nan­cial, which dom­i­nates China’s bur­geon­ing fin­tech pay­ments sys­tem and has been val­ued at US$75bil by CLSA.

Still, the tim­ing is strange. This is turn­ing into a hot year for IPOs, es­pe­cially of the tech va­ri­ety that in­vestors cur­rently crave. That’s not­with­stand­ing the post­pone­ment of some ma­jor deals such as China Tower Corp, whose planned US$10bil fundrais­ing has been pushed to next year.

On­line in­surer ZhongAn On­line P&C In­surance Co has turned around the city’s re­cent rep­u­ta­tion as a waste­land for Chi­nese state­firm list­ings, ral­ly­ing by close to 60% in the five days after it went pub­lic last month. The US$1bil of­fer­ing by Ten­cent Hold­ings Ltd’s China Lit­er­a­ture Ltd is in such hot de­mand it has squeezed in­ter­bank bor­row­ing costs, while com­puter hard­ware maker Razer Inc is re­port­edly seek­ing as much as US$600mil.

Ul­ti­mately, whether Hong Kong is right to adopt a dual class sys­tem may be be­side the point. It may have had lit­tle choice.

With even Sin­ga­pore and Lon­don look­ing into du­al­class op­tions, the city might have found it­self run­ning against the global grain by stick­ing with one-share-one-vote.

The ar­gu­ment that in­vestors buy du­al­class com­pa­nies at their peril also has some merit: Snap Inc, which is­sued only non-vot­ing shares in its March IPO in the US, has tanked since list­ing.

As I have dis­cussed pre­vi­ously, sun­set clauses would of­fer some safe­guards in Hong Kong, a mar­ket where fraud among listed com­pa­nies has been a re­cur­ring is­sue and where in­vestors don’t have re­course to clas­s­ac­tion law­suits. Hong Kong’s reg­u­la­tory chal­lenges also in­clude the dom­i­nance of fam­ily-con­trolled groups and the preva­lence of main­land-based com­pa­nies that can be hard to po­lice.

The way to have dual-class stocks and still pre­serve mi­nor­ity in­vestor rights may lie in nar­row­ing the pool of en­trants.

Leave the dual-class sys­tem to tech com­pa­nies that can jus­ti­fi­ably ar­gue founders need the breath­ing space to keep in­no­vat­ing with­out be­ing sub­ject to earn­ings-fo­cused pres­sure from short-term out­side in­vestors.

There’s no rea­son to follow the US in al­low­ing all com­ers from me­dia com­pa­nies to in­vest­ment banks to jump on the du­al­class band­wagon.

This way, Hong Kong could have a chance of lur­ing US traded stocks such as Baidu Inc and JD.com Inc, and open­ing the gates to Ant with­out un­duly shrink­ing the pool of com­pa­nies avail­able to in­vestors who ob­ject to such dis­crim­i­na­tory share struc­tures.

Alibaba magic: After los­ing out to Alibaba’s list­ing to New York, Hong Kong is hav­ing a change of heart as the ex­change faces the prospect of los­ing out on another lu­cra­tive flota­tion by Alibaba af­fil­i­ate Ant Fi­nan­cial. — AFP

Newspapers in English

Newspapers from Malaysia

© PressReader. All rights reserved.