HKEx: Duel over dual listings

Fed up with losing lucrative tech IPOs like Alibaba's, the bourse is determined to have a second go at dual-class shareholdings. But convincing the SFC and investors will not be easy.

Investors in Hong Kong can be forgiven for having a sense of déjà vu now that the city is looking again to square the circle for technology companies that are at once drawn to its highly liquid stock market yet repelled by its strict listing rules.

Ever since the city lost Alibaba’s record $25 billion initial public offering in 2014 to New York, the Hong Kong Exchanges and Clearing (HKEx) has been sweating hard to attract hot technology deals, primarily from China.

Dual-class shareholdings, whereby one set of shares – typically held by the founding partners – have more voting rights than publicly held shares, are the key sticking point; and two years ago HKEx failed to get them accepted on its main board. Now fed up with losing lucrative technology IPOs to the US and faced with rising competition from regional peers including Shenzhen, the exchange wants a second go at dual-class shares.

Adding to the pressure are powerful unicorns like Alibaba-affiliate Ant Financial, whose listing Hong Kong doesn’t want to miss and which is known to want a different listing regime than what the city now holds.

The flipside, though, is that Hong Kong's markets watchdog the Securities and Futures Commission cannot risk damaging the city’s reputation as a staunch upholder of retail investor rights.

So HKEx is a mulling a compromise – a brand new board, specifically for companies that hate the fundamental “one share, one vote” principle of the Hong Kong listing regime. On June 16, it published a consultation paper on the subject.

Some market observers, such as Jamie Allen, secretary general of the Asian Corporate Governance Association (ACGA), think the move could be the “thin end of the wedge” that chops away at Hong Kong’s long-standing reputation for high standards of corporate governance.

On the agenda is a third Hong Kong board called the New Board, which will be separate to HKEx’s Main Board and Growth Enterprise Market (GEM) and will host so-called new economy startups and established technology firms with weighted voting rights (WVR) structures, of which the dual-class shareholding is the most common form.


The industries targeted, according to HKEx, include biotechnology, healthcare technology, internet and direct marketing retail, internet software and services, IT services, software, technology hardware, and storage and peripherals.

Both segments of the proposed board – one for professional investors only (the pro segment) and the other open to retail investors (the premium segment) – would allow WVR. The so-called pro division welcomes pre-profit or early-stage new economy firms and places no requirements for them to demonstrate shareholder protection.

The premium unit hosts companies with WVR structures that can meet all other requirements on the Main Board. It, however, doesn’t require a company to demonstrate equivalent shareholder protection if it’s listed in the US already, opening the door for secondary listings by US-listed mainland Chinese companies.

Why now?

The timing of the proposal is curious. Several Chinese tech unicorns, most notably Jack Ma’s $60 billion Ant Financial, are yet to pick their listing venues. In November, Ma said Ant Financial would list in Hong Kong only if “we think the city is ready” to change the “outdated” listing regulations for start-ups and new economy businesses.

Although a Hong Kong listing doesn’t necessarily need to violate the regulator’s long-held “one share, one vote” principle (Ant Financial is not incorporated under a dual-share structure), the merit of luring Ant Financial to the city – and expecting others to follow – makes a strong case to push through whatever innovations that are wanted.

At the same time, the city faces a “rising competitive threat” – as the HKEx put it – from mainland listing venues, as well as from the US for the listings of some of the most sought-after Chinese companies, such as Alibaba, Baidu, and

“I think Hong Kong has little choice; it needs to continue to evolve as a market place. And clearly with the re-opening of China markets domestically, Hong Kong needs to keep its competitive aspect,” Keith Pogson, EY’s senior partner of APAC financial services, said.

This year, HKEx's Main Board ranked fourth globally in terms of IPO value as of June 23 with $4.3 billion worth of fundraising, behind the New York Stock Exchange ($20.5 billion), Shanghai Stock Exchange ($9 billion) and Nasdaq ($6.6 billion), according to Dealogic data.

HKEx said in its consultation paper that the city had lost $34 billion worth of IPOs over the past decade because it has not allowed WVR structures. 

“It’s never too late and Hong Kong has to design the regulatory regime first and send the message to the world that we are ready to attract the ‘new economy’ companies to the city,” Billy Au, a corporate and securities partner at Mayer Brown JSM, told FinanceAsia.

Asian rival Singapore in February kicked off a public consultation to allow companies to list with dual-class share structures.

Storing up trouble

To be clear, Hong Kong’s SFC sees protecting the interests of mom and pop investors as its priority and does not favour WVR structures, which is why in 2015 it struck down HKEx’s attempt to allow WVR on the Main Board.

Leaving the Main Board and GEM untouched and having a new market with laxer governance standards gets around the problem. But it could store up trouble further down the line.

“Clearly, if a company is listed on the new board in the premium category, [which means] it meets all the requirements for a Main Board listing but wants to have dual-class shares, at some point in time it will no doubt want to move to the Main Board,” Allen said, referring to the fact that the Main Board appeals to issuers more.

At that point, he added, there would be a lot of pressure to allow these companies to list on the Main Board with dual-class shares.

Allen is unsure about the likeliness of a ‘yes’ from the SFC but thinks geopolitical factors could also have a strong bearing. “I don't think the SFC has changed its view on WVR” but if Singapore goes ahead with dual-class shares, it would be a lot harder for the SFC to veto a third board that allows it, Allen said.

For Allen, HKEx has asked the right questions around how Hong Kong can attract more good quality companies but given the wrong answers by fixing the solution to WVR.

The GEM already gives investors the impression that it hosts companies that failed to make the main board and are therefore second rate. “And I’m sure a lot of people would think companies listed on the third board are third-rate companies, given that the exchange wants to lower listing standards and allow dual-class shares,” he said, making it something akin to a “Wild West board with all sorts of companies listed on [it].”

If new, up-and-coming companies really want to attract big international investors, then they should try to list on Hong Kong’s main market, Allen said, adding that what HKEx should really look at is making its entry requirements more flexible generally, so that it hosts high-quality companies that have good governance standards but may have yet to turn a profit.

“Profitability on paper and quality don't necessarily go together,” he said.

Shareholder activist David Webb is similarly unenthused by HKEx’s plans, arguing that the exchange is going in the wrong direction. For him, Hong Kong should have a single board rather than more boards to confuse the market.

Ultimately, the introduction of a third Hong Kong board could prove counterproductive if it weakened the resolve of the SFC and made Hong Kong a less attractive investment destination. If that happened, there would likely be a hefty price to pay.

The HKEx itself cites a survey by the ACGA of its mainly institutional members that suggests investors would apply an average discount of around 13% to the Hong Kong market if non-standard shareholding structures became common.

[Source: HKEx; click for full view]


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