HKEx's latest plan for dual listings draws fire

After months of debate proposes allowing pre-revenue innovative companies with dual-class structures to list in the city. Investor have expressed concern.
Seeking start-ups: Hong Kong plans to change its rules on dual-class shares for 'new economy' companies
Seeking start-ups: Hong Kong plans to change its rules on dual-class shares for 'new economy' companies

Hong Kong Exchanges and Clearing (HKEx) has proposed allowing 'new economy' companies that are yet to generate profit to list dual-class shares on its main board in Hong Kong, sparking accusations the bourse's desire to attract more business could raise risks for investors and undermine the principles of responsible shareholding being touted by the territory’s financial regulator.

The exchange operator said on Friday (December 14) that it planned to expand the city's listing regime to facilitate listings of companies from emerging and innovative sectors as a conclusion to the New Board Concept Paper published on June 16, 2017. The paper had proposed setting up a New Board with less stringent listing requirements than the main board, in order to lure “new economy” companies.

HKEx has now announced plans to add two new chapters to its main board listing rules to allow the listing of biotech issuers that are pre-profit or pre-revenue, as well as issuers from emerging and innovative sectors that have weighted voting rights (WVR) structures, subject to certain limitations (see box) The exchange is finalising the proposals and will consult the public on the proposed rules in the first quarter of 2018.

The bourse's decision drew criticism from many onlookers, who worried that it could increase the risk of companies of insufficiently high quality listing on the exchange. Sally Wong, chief executive of the Hong Kong Investment Funds Association (HKIFA), said it was difficult to “draw the line” when it comes to identifying the strategic and financial sustainability of new economy companies.

Some traditional financial institutions may use simple technologies and call themselves fintech companies. In fact, some new economy companies may become typical mainstream stocks after a few years, she said. “They will drag down the overall standard [for listings in Hong Kong]."

The head of investment for the Hong Kong arm of a Chinese asset manager, who declined to be named, also expressed concern.

He said he believed many technology companies could not turn a profit in the early years of their operation and therefore need to access the capital markets.

But he doubted the listing officials would be able to maintain sufficient knowledge of the fast-evolving technology space to accurately determine whether the listing hopefuls can meet the “expected market capitalisation” requirement of such “innovative” companies, resulting in potential risks for investors, especially retail ones.


1. Market cap requirements:

  • Pre-revenue companies listing under the new biotech chapter would be required to have a minimum expected market cap of HK$1.5 billion;
  • Companies with weighted voting rights (WVR) structures would be required to have a minimum expected market cap of HK$10 billion and, if below HK$40 billion of market cap, would need to meet a higher revenue test of HK$1 billion  in the full financial year before listing. No revenue requirement was specified.

2. New economy companies are initially defined as those:

  • whose success is attributable to the application of new  technologies, innovations, and that have core business models that are different from those of existing companies;
  • whose research and development is a significant contributor of expected value;
  • with unique features or intellectual property; and
  • with an outsized market cap / intangible asset value relative to tangible asset value.

3. On WVR:

  • The voting power of shares with WVRs will be capped at 10 times that of ordinary shares;
  • Non-WVR shareholders must hold at least 10% of the votes eligible to be cast at general meetings.

The decision to introduce dual-class share structures also remains controversial, given the potential impact it has on corporate governance. The voting right structure is “inherently imbalanced” and cannot guarantee the interests of minority shareholders, said HKIFA's Wong.

What's more, the Securities and Futures Commission, Hong Kong’s financial regulator, has been advocating the principles of responsible ownership and encouraged fund managers to cast votes in shareholder meetings on behalf of their clients. The proposed rule conflict with these principles, she added. 

Uncertainties abound

HKEx’s decision to include such companies appears part of a concerted attempt to raise the amount of new listings the bourse is getting.

Hong Kong’s status as a hub for initial public offering (IPO) by volumes is set to slide from first in 2016 to fourth this year, after New York, Shanghai and London. Total IPO proceeds for 2017 look set to fall to HK$130 billion ($16.64 billion)—the lowest since 2012 (HK$90 billion), due to the lack of sizeable deals, according to KPMG.

Additionally, four out of the top 10 largest IPOs in Hong Kong in 2017 were companies in the new economy sector, which were heavily oversubscribed, indicating strong investor appetite for these companies, according to KPMG.

The emergence of ‘new economy’ IPOs and the anticipated new initiatives around listing reforms would likely boost IPO proceeds to more than HK$200 billion in 2018, up from HK$130 billion this year, according to KPMG in a report released in mid-December.

But there are risks to allowing such companies freer access to the bourse. Many new technology companies looking to list have enjoyed rapid customer and revenue growth but often have little to show in the way of profitability or a lengthy financial track record. They include those investing in core technologies such as artificial intelligence and those that tap into the Chinese consumer market, such as taxi-hailing app Didi.

These internet-focused firms have many initial uncertainties around their earnings and different factors affecting their valuations. Some may not even have direct industry comparables by which to offer a way to assess their potential value, said the unnamed investment head.

What's more, he added, Hong Kong does not allow class actions, making it difficult for investors to sue companies for compensation when they think they are in trouble.

HKEx acknowledged that it is hard to define such new economy companies, since they encompass a range of sectors and are not necessarily restricted to specific sectors, and the definition is likely to evolve over time. It will publish a guidance letter on the characteristics of innovative companies.

Weighted voting rights

As for the issue of weight voting rights, WVR share structures can exist in different forms, with the most notable being the dual-class share structure, which allows a company to have two classes of common stock with unequal voting rights.

Discussions for allowing companies with dual-class shares to list in Hong Kong started when e-commerce giant Alibaba’s Jack Ma decided to choose to list in New York rather than the Chinese territory in 2014.

HKEx initially issued a consultation paper on setting up a third board to allow dual-class share listings in June, but it appeared to retreat from the idea in October. However its latest announcement following the release of the paper’s conclusion suggests it is pushing ahead with a revised version, under which dual-class share companies would list on its main board instead.

Thus decision marks a big departure for Hong Kong, whose one-share-one-vote principle for all companies has been a hallmark of the bourse for decades.

An argument in favour of dual-class shares is that founders of innovative companies with extra voting rights can be protected against pressure for short-term returns and focus on the long-term growth of the companies. Against it lies the fact that all HKEx shareholders have until now enjoyed the same voting rights and ability to ask questions of any corporate in which they hold stock.

Allowing company managers to outweigh such concerns by dint of owning more senior share tranches allows them to avoid or reduce the impact of investor scrutiny and corporate governance. This raises the possibility that bad practices and poor decision-making will be allowed to go unchecked.

HKEx's move comes six months after the Singapore Exchange said it would allow companies with dual-class listings in another market to conduct a secondary listing in Singapore. Experts at the time said its decision was likely to increase the likelihood the HKEx would adopt dual-class shares itself, as part of the tit-for-tat competition between the two cities to be the most appealing international financial centre in Asia. 

This article was first published by FinanceAsia's sister title, AsianInvestor.

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