A touch of (dual) class

Allowing the listing of Alibaba on its own terms would have undermined the Hong Kong Stock Exchange’s reputation.

It might be too late for Alibaba but Hong Kong Exchanges & Clearing is reportedly going to launch its consultation on non-standard shareholding structures soon.

The Asian Corporate Governance Association (ACGA) strongly supports equal treatment for all shareholders on voting and other rights. 

The fact that Hong Kong does not allow such dual-class share structures led Alibaba and its bankers last year to negotiate with the Hong Kong regulators and explore other mechanisms through which control could be retained, such as a deal allowing Jack Ma and his management partners to control nominations to the company’s board, or even grant exemptions to so-called “innovative companies”.

The calculation seems to be that the prospect of a US$15 billion listing should be enough to force Hong Kong to kowtow.

Fortunately, the Securities and Futures Commission (SFC) of Hong Kong signalled its opposition to giving exceptions to Alibaba from the cardinal principle of equal treatment for all shareholders on voting or other shareholders’ rights. Alibaba has now said it intends to list in the US.

We applaud the SFC on standing firm, and their logic is very simple. Allowing the listing of Alibaba on its own terms would undermine the Hong Kong Stock Exchange’s reputation and likely create innumerable problems: If Alibaba can list with special rights, why not other IPO applicants? And will existing issuers seek comparable terms?

Any departure or deviation from “equal treatment” will compromise investor protection irreversibly and any exemptions for so called innovative companies or other special situations are merely cosmetic disguising of prejudice against investors.

Financial pundits have observed that since dual-classes of shares are allowed in the US, so why not in Hong Kong? Dual-classes of shares are indeed allowed in the US but they are balanced by an infrastructure of a class action culture not available in Hong Kong and a more robust disclosure and enforcement regime.

Illustration by Harry Harrison

These structures will also create problems for the soundness of the SFC-administered Code on Takeovers and Mergers. There is no doubt that a US$15 billion share float would be beneficial to the Exchange’s business interests. But if it came at the price of the quality and reputation of the Hong Kong market, the benefits would be short-lived and illusory.

Recent data from the World Federation of Exchanges show Hong Kong steadily losing ground to the Shanghai and Shenzhen exchanges in volume terms (market capitalisation and share trading value). Hong Kong can no longer compete with mainland exchanges on crude quantitative measures. It must differentiate itself on the quality of its regulation, the rule of law and good governance. If not, we fear it will have an increasingly emasculated role in China’s future capital market.

Regarding the proposed HKEx consultation on non-standard shareholding structures, Charles Li was recently quoted by the media as saying that this was a matter for the Listing Committee. We do not disagree, and ACGA is not opposed to the idea of a public consultation per se. We are happy to participate and will reiterate our strong opposition to any deviation from the “equal treatment” principle in the Listing Rules.

ACGA is conducting a member survey and early survey results reveal overwhelming support for fair treatment of all shareholders and opposition to dual classes of shares and the so-called partnership structure. Investor feedback also casts doubt on the suggestion of exemption from the Hong Kong Listing Rules for “innovative companies” as that concept is very hard to define.

ACGA will publish the survey results and respond to the HKEx consultation when released.

Jamie Allen is secretary-general of ACGA; while Michael Cheng is research director, China & Hong Kong.

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