SFC shoots down HKEx's dual-class shares plan

Hong Kong's securities regulator has publicly criticised the local stock exchange's proposals to introduce dual-class share structures. It means that HKEx's draft plan will not be implemented in its current form.
SFC shoots down HKEx's dual-class shares plan

Hong Kong’s securities regulator has rejected the local bourse's draft proposals to introduce dual-class share structures into the market.

The Securities and Futures Commission's (SFC) surprisingly public move has effectively killed off the Hong Kong stock exchange’s proposals to introduce the controversial share structure, but a modified plan could be submitted for consideration.

The proposals, which were outlined by Hong Kong Exchanges and Clearing (HKEx) last week in a bid to lure back listings of Chinese e-commerce giant Alibaba and other “innovative” companies, offered different voting rights based on the class of shares owned and has divided opinion in the investment industry.

But the opinion of the SFC board, which has “unanimously concluded that it does not support the draft proposal for primary listings with [weighted voting rights (WVR)] structures”, means that the current proposal cannot move forward, at least in its current form.

An HKEx proposal that only newly-listed companies with a high market capitalisation could adopt the structure was listed as one key concern, with the SFC suggesting that a company’s size did not necessarily equate to a fair treatment of shareholders. It said a larger company was likely to affect even more investors such as passive funds, which would have to buy into a stock if it was included in a benchmark.

The SFC also criticised HKEx’s vagueness in defining eligible criteria for dual-share structures. These criteria included testing the competitive advantage of a company within an industry, as well as what the founders’ contributions were.

The subjective standards, which the commission said were “inherently vague”, could lead not only to uncertainty for applicants, but also created the potential for inconsistent and unfair decision-making.

And HKEx’s plan to let only new listing applicants have dual-class structures was also questioned by the financial watchdog. The SFC asked whether HKEx would be able to limit the number of WVR structures in the city.

Anti-avoidance measures against existing listed companies, which would be disqualified from applying, was criticised by the SFC. It questioned how HKEx could prevent corporate structuring, such as spin-offs and asset transfers, from achieving the same goal.

Likewise, future acquisitions of existing listed businesses by WVR-structured firms, as well as a lack of detail provisioning how regulators would monitor safeguards preventing listed businesses from abusing their position over non-voting right shareholders, were raised as issues.

“A focus of the discussion to date on WVR has been competition from the United States for the listing of mainland China businesses. Hong Kong’s business and competitive environment is affected by many factors and can change significantly within a relatively short period,” the SFC said in a statement.

“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 response to the SFC’s scathing comments, HKEx said it would work with the regulator to decide on the next step. “The Exchange has said that any rule amendments require approval by the SFC’s board of directors. Their view will be material to the final proposal that the Exchange puts forward for formal second-stage consultation,” HKEx said.

The SFC is not in principle against dual-share listing, with CEO Ashley Alder having said in March that it is open to the idea so long as it met stringent criteria.

One fund manager who declined to be named noted that the idea was controversial to begin with amongst the investor community.

“The consensus amongst the investors here is that they don’t like this dual voting structure … you want to keep a certain discipline in the market so that people continue to see Hong Kong has a good degree of corporate governance,” he said.

“To me, I don’t object to the idea of Alibaba going into the indices. If it got listed in Hong Kong it would be more accessible to us and we would not have to wake up in the middle of the night [to trade on New York time].

“But Hong Kong as an international market needs to be careful because bending the rules for specific situations could be badly perceived by international investors in terms of market fairness.”

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