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