HKEx bids to convince market over dual-class shares

The Hong Kong bourse is consulting investors over current rules which ban dual-class shares, indicating it wants change. But it faces opposition from a group of large fund managers which favour one share, one vote.
HKEx bids to convince market over dual-class shares

Hong Kong's stock exchange has reopened the debate on dual-class share structures as it launched a concept paper over its controversial rules which led to the rejection of Alibaba's IPO last year.

The city's bourse announced the review of the current regulatory framework late last week as officials sought to persuade investors of the merits of dual-class shares.

But shareholders appear to be divided over the issue, and a number of large investors have raised serious concerns about a rule change.

After having failed to attract the likes of Chinese e-commerce giant Alibaba and other dual-share structured firms onto the city’s bourse, Hong Kong Exchanges and Clearing (HKEx) revisited the issue by releasing a paper last Friday aimed at seeking the investment community's views.

In the upcoming proposal that will soon be open to public comments, HKEx said that it will be holding preliminary discussions with investment managers, especially those which have previously said no, to see what types of safeguards and ring-fencing could persuade them to be more comfortable with dual-share structures.

Draft proposals published on Friday indicated that HKEx is currently looking at ring-fencing features, where only new companies seeking to list on the exchange would be allowed to apply for dual-share voting structures.

Safeguards could include limits on the extent of rights, with those that are beneficiaries of weighted voting rights (WVR) losing those rights if they are transferred to un-affiliated parties, as well as holding a certain proportion of shares in order to maintain greater rights.

But ten fund managers remained staunchly against the idea, with the likes of Aberdeen, BlackRock and Fidelity raising concerns. Fidelity cited worries that such structures could “reduce the alignment between controlling and minority shareholders", a key “soft” protection in a low free-float market such as Hong Kong.

HKEx chief regulatory officer David Graham called for those opposing the concept to put aside their differences, in the hope they could be persuaded that investor protection would be made a priority under a proposal to be published in the coming months.

“I think it’s fair to say that if we had a completely free hand, nobody would have these types of structures, but that’s not the world we live in,” said Graham.

“I think at this stage we are trying to move away from re-debating the whole question and moving towards a stage where we want to introduce something – what is the sort of thing we can introduce? What are the consequences of it and what would it mean to the investment management community?” said Graham, when asked whether he would find it challenging to convince the industry.

Graham noted that some of the fund managers opposed to the change also ran global portfolios which invest into such companies' overseas structures, whether actively or passively. “It’s not like they have an in-principle opposition to it,” he said.

Meanwhile, another set of investors have called for WVR structures to be allowed in some circumstances. Such investors include Avant Capital Management, CICC Hong Kong Asset Management and Norges Bank Investment Management.

CICC said in its concept paper response that given investors in Hong Kong-listed companies generally have limited influence on a company’s business, such investments are essentially the same as taking a stake in a company with a WVR structure.

Separately, HKEx said it was also looking to lure back overseas-listed mainland Chinese companies by reviewing the current ban on secondary listings in the city.

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