A proposal by Hong Kong Exchanges & Clearing to set up a new board open to issuers that stray from the "one share, one vote" structure has sparked feisty debate – and some harsh criticism – among the city's investors, lawyers, bankers and other market participants.
It's been dubbed a potential "trash board" and likened to the Wild West by observers who fear that Hong Kong lacks the shareholder protections found in other territories where such structures are popular, notably the United States.
But HKEx chief executive Charles Li painted a different picture when he gave a "preliminary" picture of the results of a public consultation that ended on August 18.
“Do we want to find ways to attract new economy companies into Hong Kong? [The answer is] overwhelmingly yes," Li said of the results of the consultation. "Do we want to consider potentially allowing pre-profit or even pre-revenue companies in the new economy to come [listed]? I think there’s tremendous amount of interest in wanting us to find a way to facilitate that."
"And third, if we think it’s necessary, do we like to introduce potentially weighted voting rights (WVR) to allow some of the major [new economy] companies to be listed here? I think the answer is very strongly in favour of that as well," Li added, while stressing that the bourse was still going through all the feedback.
Under weighted voting structures, one set of shares – typically held by founding partners – will have bigger voting rights than other sets. Snap’s US IPO, consisting purely of class-A common stock – which gives neither voting rights nor power to appoint board members – is a perfect, and extreme example of how WVR can assure the founders retain power even after they quit the firm. Unlike in the US, shareholders in a Hong Kong-listed company with such a structure would be unable to mount a class-action lawsuit.
Investor concerns over the quality of companies that would come to the New Board, if it’s launched, have led to strong rhetoric. Some argue it would be be akin to a “Wild West board with all sorts of companies”, or even more bluntly, that it looks like a “trash board” with trash companies.
“That I consider to be a trash comment. Serious people discuss serious issues seriously,” added Li, speaking at a Thomson Reuters Newsmaker event on Tuesday.
“When we talk about [companies with] misconduct, manipulation of market, and companies that choose not to be compliant with the rules, these are truly bad actors,” Li said, adding that’s where the regulators “need to take proactive and aggressive regulation enforcement actions” but the idea of blocking potential issuers on the grounds of possible future misconduct is “unrealistic”.
His analogy goes like this – people with valid driver’s licences could end up drink-driving or otherwise breaking the rules of the road, but it doesn't follow that they should never have been issued the licence in the first place.
“So while we focus on the vetting [process for allowing WVR listings], I think it's unrealistic for us to somehow believe that no bad actors get onto the market…Our [regulating] philosophy is everybody’s innocent until proved otherwise,” Li said.
That may not be in line with what some in the investor community believes though. “Companies that do not wish to comply with the Main Board listing rules should not be allowed to access Hong Kong public capital by listing on a new board with weaker corporate governance requirements,” shareholder activist David Webb wrote in an exchange with FinanceAsia on Tuesday, having earlier submitted a caustic response to HKEx’s concept paper.
There’s no “timetable yet” as to a launch of its much wanted New Board, according to HKEx’s Li, but “very intensive discussions [are in place] with the relevant stakeholders to essentially generate a conclusion out of those feedbacks, as divergent as they are, into action plans”.
“We most likely will come out [with the action plans], hopefully in the coming weeks, definitely months, and absolutely not years,” he summarised.
The action plan will put forward rules for a consultation on issues including what kind of new economy firms can be qualified for a WVR listing and whether there should be "sunset clauses" to bring such structures to an end, according to Li.
So far, financial industry professionals are still divided over the proposal. Parties including the Council of Institutional Investors, Hong Kong Investment Funds Association and Asian Corporate Governance Association, and the world’s biggest sovereign wealth fund Norges Bank Investment Management, have all come out against the plan.
The Asia Securities Industry and Financial Markets Association (Asifma) and Chamber of Hong Kong Listed Companies said they were supportive of having weighted voting rights in Hong Kong.