Snap's US IPO offers lessons for HKEx

The US tech giant’s sale of non-voting shares offers an opportunity for Hong Kong to rethink its approach to new listings. It's an option the city should reject.

While Asia's equity capital markets start the year slowly, envious eyes are being cast across the globe, as New York prepares for a multibillion-dollar IPO from Snap.

Based on its initial fundraising target of $3 billion, Snap promises to be the biggest US IPO in more than two years, since Alibaba's September 2014 listing. Its key product is Snapchat, an instant messaging app beloved by millennials for its playful picture filters and the fact messages sent using it vanish after a specified time.

Yet it is not the product or the valuation that have fed market chatter about this high-profile technology play. Rather, Snap is getting worldwide attention because its IPO will be the first in history to offer only shares with no voting rights. The unprecedented move has raised concerns about corporate governance.

According to Snap’s public filing, the IPO will consist purely of class A common stock – which gives neither voting rights nor power to appoint board members. Pre-IPO institutional investors will hold class B shares, which have one vote each but will be converted to class A shares when sold.

Nearly 90% of voting rights will be in the form of class C shares, which are designed exclusively for co-founders Evan Spiegel and Bobby Murphy. So extreme are Snap's measures that the pair will retain power after they quit the firm – and even from beyond the grave. Their voting rights will expire only nine months after their respective deaths.

If it succeeds, expect Snap's IPO to set a precedent for other companies. And that will pressure exchanges that ban shares with differential voting rights – such as Hong Kong Exchanges & Clearing – to scrap or ease those rules.

HKEx has stood up to this kind of pressure before. Here's why it should do so again.

Minority rapport

Firstly, Snap's heavily weighted voting structure goes directly against the principle of protecting minority investors, a core value HKEx has upheld over the years. It ensures equal treatment for all shareholders, giving them a say in the company that equals their voting rights.

After HKEx's refusal to countenance split voting rights saw Alibaba opt for a New York IPO instead, the bourse's own chief executive, Charles Li, was one of many voices calling for public consultation on a relaxing of the rule.

Writing on his official blog, Li argued investor protection might not necessarily equal "one share, one vote". He said protecting founders and controlling shareholders was as important as protecting minorities, and ensuring compliance with disclosure rules was more important than “refereeing” among shareholders.

Yet even with the most transparent of disclosure regimes, company founders will always have better, quicker access to information than other shareholders. In those circumstances, exercising their voting rights is the last resort for smaller shareholders to oppose the actions of senior management.

With weighted voting rights, minority shareholders will no longer be able to take a stand against excessive management compensation, an over-cautious dividend policy or a lack of boardroom diversity.

In short, split voting structures sound the death knell for shareholder activism.

An extreme example of what can go wrong was US-listed game developer Zynga, whose CEO Mark Pincus resigned twice between 2013 and 2016 amid accusations of mismanagement. Shares of Zynga plunged 85% in 2012 on Pincus’ watch, wiping $12 billion off the firm’s market value.

But despite holding only 15% of outstanding shares, no one could stop his second return because Zynga's multi-class share structure gave him 60% of voting rights.

That couldn't happen in Hong Kong.

Money is king?

Li also pointed out that dropping "one share, one vote" could be in favour of minority shareholders, because it overturns the rule that those who have a larger stake have bigger influence over the company – effectively mitigating the “money is king” principle.

In fact, "one share, one vote" is the best reflection of Hong Kong’s market fairness. Founders can choose to maintain control, but this must be done at the expense of owing the same proportion of economic interest.

By the same token, minority shareholders can exert influence by building up their shareholding – a strategy used by many activists to increase bargaining power.

Abandoning "one share, one vote" is in fact refereeing among shareholders and creating inequality between them. While “money is king” appears to be working against minority shareholders, that is exactly how a free market should work.

Different landscape

Supporters of weighted voting structures dismiss these concerns, stressing that the system is successful in the US. Yet, many of them appear to have ignored the fundamental difference between the Hong Kong and US markets.

American companies have a tradition of hiring experts and external advisors to help shape the company’s strategy and vision. They also tend to treat shareholder activism seriously and see challenges to the management as an opportunity to garner opinion to help improve their businesses.

In Hong Kong, however, shareholder activism is often perceived as a disruption to operations and a way for hedge funds to shake up a share price and make short-term profits.

That mentality is unlikely to change immediately. Traditional family-led companies still make up a large proportion of the city's listed firms. Generally run according to the vision of a high-profile founder, they are less receptive to class for change.

A typical example came in a clash last year between Bank of East Asia, led by grandson of its founder, and US hedge fund Elliott Management. The bank dismissed Elliott's repeated calls for a change in its business strategies, rejecting them as an attack on the lender itself.

Other cases prove that Hong Kong's shareholder protections can see minority shareholders win the day – even when facing off with mega conglomerates and powerful billionaires.

In late 2015, public shareholders of Power Assets Holdings decided against a takeover proposal from Li Ka-shing's Cheung Kong Infrastructure. Had the deal gone ahead, some analysts argued, it could have handed Li Ka-shing control of Power Assets’ huge cash pile at the expense of minority shareholders.

Now that the US is ready to accept its first IPO of non-voting shares, HKEx will get a clearer idea of how this trend will impact Hong Kong’s reputation as a global IPO hub in the long term.

Snap’s IPO suggests companies will push for more and more control once the floodgates open. In the US, this trend is irreversible, but Hong Kong can still decide to take a stand and avoid becoming another New York Stock Exchange or Nasdaq.

¬ Haymarket Media Limited. All rights reserved.
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