Alibaba: the non-IPO that keeps on giving

An investor survey conducted by the Asian Corporate Governance Association offers food for thought as the Hong Kong Stock Exchange mulls rule changes.
Jack Ma, founder and chairman of Alibaba
Jack Ma, founder and chairman of Alibaba

(Nearly) gone but definitely not forgotten.

Alibaba might have decided in March to abandon plans for a Hong Kong initial public offering of shares in favour of a US listing but the debate rumbles on: should the Hong Kong Stock Exchange allow dual-class listing structures?

The Asian Corporate Governance Association (ACGA) thinks it knows the answer and on Tuesday announced the results of a survey it conducted on the subject.

In short, 98% of respondents indicated that they were against companies listed in Hong Kong having dual classes of shares that gave controlling shareholders more votes than other investors – the structure Alibaba pushed for in its Hong Kong IPO.

The “ACGA survey on Alibaba and non-standard shareholding structures in Hong Kong” generated responses from 54 institutional investors with total assets under management of more than US$14 trillion.

The message was clear: one share, one vote.

“Simply saying that it [dual class listings] works in the US so therefore it will work in Hong Kong, we think would be the worst of all worlds. You would have excessive concentration of the controlling shareholders and you wouldn’t have the same investor protection as you get in the US,” Jamie Allen, secretary-general of ACGA, told reporters on Tuesday.

Although Alibaba dropped its Hong Kong listing plans after the HKEx turned down its proposed ownership structure, the exchange discussed a draft discussion paper on weighted voting rights at a recent regular policy meeting. 

The listing division continues to work with the listing committee and the Securities & Futures Commission (SFC) on the subject, the HKEx told FinanceAsia on Tuesday.

The ACGA's investor poll, therefore, can be seen less as a moot point and more as a warning.

The broad thrust of the survey's responses is that if HKEx were to change its rules and allow hybrid shareholder structures, the reputational damage could translate into an actual price discount for the entire market.

Some 71% of respondents said they would apply a discount to Alibaba if it were allowed to list under a dual-class structure, while 61% said they would apply a discount to the entire market if such non-standard shareholder structures became common.

So rather than boost its profile, HKEx could actually risk its position as one of the world’s favoured listing hubs if it changed its rules to avoid losing out on lucrative mega-IPOs such as Alibaba's, Allen suggested.

“South Korea [for example] has some good companies but they are trading at a discount because of perceived corporate governance issues,” said Allen. “We haven’t seen a great deal of evidence that Hong Kong would actually miss out on IPOs. If Tencent can list in Hong Kong under our rules, why can't Alibaba?”

Of course, corporate governance issues are not going to simply evaporate if Alibaba lists in New York but the reality is that investors in the US have more protection than in Hong Kong if they feel their rights are being abused.

“In the US, there is a more disclosure-orientated approach as well as a culture of litigation,” Mark Chan, capital markets lawyer at Berwin Leighton Paisner, told FinanceAsia. “Investors don’t need the exchanges to protect them as much as they do in Hong Kong, where the exchange plays more of a regulator role and where litigation is not as prevalent.”

Dual role

This dual role of HKEx is a particular sore point, which Allen (pictured below left with Michael Cheng, ACGA's research director, on Tuesday) admits has not helped the debate on Alibaba and dual-class structures.

“It muddies the waters a lot because you have certain people in the exchange who want to adjust the rules to suit certain companies but they’re not thinking about the long-term regulatory integrity of Hong Kong and [about] investor protection."

Allen went on to cast doubt on HKEx’s ability to act as an enforcer, in light of the SFC’s move to set up its own surveillance department. “To us that is a significant move and if HKEx was doing an excellent job of enforcing its own rules the SFC wouldn’t need to be setting up its own corporate surveillance department,” he said.

HKEx, in response to the survey, told FinanceAsia that it “is committed to strengthening market quality and respecting the rule of law and due process. HKEx has a host of measures to address any potential conflicts of interests.” 

“The exchange and the SFC have two distinct roles in terms of market regulation: while the exchange is the front-line regulator enforcing the market rules, the SFC is the statutory regulator administering the laws,” it said. 

Of course, HKEx has attracted a fair amount of criticism for not only its dual role but also its handling of the Alibaba saga, with some analysts and market watchers lamenting the slowness of its decision-making.

One of the survey questions asked investors to rate the exchange, the SFC and the Hong Kong government in terms of how they had handled the issue. Whereas 41% thought the SFC had done a good job, only 11% thought the same about HKEx, and 28% thought the exchange had done a bad job.

The SFC declined to comment.

Of course, HKEx ultimately refused to buckle to Alibaba’s demands and so part of ACGA’s argument is indeed moot. The exchange clearly found itself in a difficult position – between a rock and a hard place – but chose to err on the side of protecting shareholders while letting a blockbuster IPO slip through its fingers.

But the debate goes on. The issues raised during the often arduous saga have provided a contentious platform for debate that, ultimately, will benefit investors and companies seeking to list in the city.

“It’s not just an issue in Hong Kong, it’s an issue everywhere; having for-profit exchanges as regulators generally leads to fairly inefficient enforcement of listings,” Allen said.

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