In August 2014, the Hong Kong Exchanges and Clearing Limited (HKEx) published a Concept Paper '('the Concept Paper") inviting public comment on a "weighted voting rights" structure ("the WVR Structure"). The Concept Paper was prompted, in part, by the prohibition in Hong Kong against weighted voting structures, and therefore the decision by Alibaba to list in the US. Alibaba was the largest IPO in the world, raising USD 25 billion in September 2014. WVR Structures are permissible in the US, and are otherwise known as "dual class voting structures". They account for around one seventh of all US listed companies, by market capitalisation. The majority of these companies are in the IT sector.
The responses to the Concept Paper were mixed but revealed a general market consensus for a review of the existing Listing Rules on the potential suitability of WVR structures in Hong Kong.
In June 2015, the HKEx published its consultation conclusions (the Conclusions) on the Concept Paper. In light of the responses, the HKEx proposed to explore changes to the Listing Rules for a second stage public consultation. The HKEx intends also to seek public comments in relation to the feasibility of secondary listing in Hong Kong as part of its second stage consultation.
The SFC response
In Hong Kong, changes to the Listing Rules (LR) must be approved by the Securities & Futures Commission. Introduction of WVR Structures in Hong Kong would certainly require LR changes, as detailed below.
The SFC has taken the unusual step of issuing a statement to the market indicating its views publicly and quickly: it "does not support" WVR Structures.
The future of WVR Structures therefore remains very uncertain in Hong Kong.
WVR Structures vs. "one share, one vote" concept
WVR Structures allow certain shareholders to have voting power or other rights disproportionate to their shareholding in a listed company. Well-known examples of companies with WVR Structures are Ford, Google and Facebook.
Currently, WVR Structures are prohibited in Hong Kong under Rule 8.11 of the Listing Rules. Listed companies, and those seeking to list, must follow the principle of fair and equal treatment of shareholders and must ensure that the voting power of their shares is proportionate to their equity interest held in those shares. This is the "one share, one vote" concept that is integral to the listing and shareholding structure in Hong Kong.
Why consider the WVR structures?
Traditionally, Hong Kong, with its comprehensive regulatory framework and investor friendly regime, is a popular destination for Mainland Chinese company listings and international listings.
In recent years, however, there has been an increasing number of Mainland Chinese companies choosing the US (NYSE or NASDAQ) as their primary listing venue, rather than Hong Kong. Whilst their choice of listing venue may be driven by many different reasons, many of the recently listed Mainland Chinese companies appear to prefer the US as a listing venue for the flexibility it offers in shareholding structures. Companies are, understandably, intent on maintaining control over the company's decision making processes with the company's founders and core management, despite relatively limited equity interests. Alibaba chose NYSE as its listing venue over Hong Kong because Hong Kong could not accommodate the intended WVR Structure.
Conclusions to the concept paper
A major concern identified from the responses to the Concept Paper is the lack of proportionality between shareholdings and control as a result of unequal voting rights. To strike a balance between safeguarding investors' interests and flexibility in shareholding rights, the HKEx is looking into a range of ring-fencing measures, such as imposing restrictions on the transfer of shares, introducing a mandatory minimum equity shareholding requirement, and introducing a high market capitalisation test.
The HKEx is also looking at enhancing corporate governance standards. The HKEx has put forward suggestions, such as implementing a greater role of independent non-executive directors, establishing Corporate Governance Committees, and introducing Compliance Advisor as a permanent position in companies proposing to adopt the WVR Structure. In other words, the WVR Structure will likely be restricted only to companies that meet the specific pre-determined criteria.
Further, it is apparent that the HKEx does not intend to make available the WVR Structures in all circumstances. It is suggested that the WVR Structure should be restricted to new applicants only.
The two regulators – opposing views
The SFC does not agree. It opposes WVR Structures. However, it has not commented on the possibility of a potential secondary listings regime.
The SFC has said: "In carrying out its regulatory functions, the SFC considers both long-term and short-term objectives and seeks to uphold the core principles of fairness and transparency which underpin Hong Kong's reputation as an international financial centre".
In light of the recent market trends and fierce competition from the overseas listing markets, it is inevitable that the HKEx is actively exploring ways to increase its competitiveness in the global listing market. Whilst adopting or enabling WVR Structures may be considered as the way forward, the consultation process is still at an early stage; and uncertain given the SFC's pronounced views. The future of Hong Kong's listing and shareholding structures remain to be seen. In the meantime, the "one share, one vote" shareholding concept will continue in Hong Kong for the balance of 2015 and into 2016.
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