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Hong Kong stock exchange's plan to attract tech listings by expanding dual-class shares structures gains traction

·4 min read

Hong Kong Exchanges and Clearing has gained support among fund managers and stockbrokers for its mooted plan to attract more tech giants to list in the city by allowing expanding the use of dual-class shares.

The city's exchange has proposed allowing corporate shareholders, as well as founders and key managers, to own shares with more voting rights than other shareholders. The exchange is collecting views on its plan until Sunday.

While fund managers and stockbrokers remain wary of allowing a handful of shareholders to exercise overweening influence on a company's future, they hope more safeguards will protect ordinary shareholders.

Hong Kong's bourse is rolling out the welcome mat for US-listed mainland Chinese tech firms to decamp to Hong Kong due to the increasingly tense relationship between the US and China. Online shopping company JD.com and gaming giant NetEase have already applied for a secondary listing in the city.

Charles Li Xiaojia, HKEX's CEO is encouraging US-listed Chinese companies to come home. Photo: Nora Tam alt=Charles Li Xiaojia, HKEX's CEO is encouraging US-listed Chinese companies to come home. Photo: Nora Tam

At least 38 US-listed mainland tech giants, including Tencent Music, currently do not qualify to list in Hong Kong as they have corporate shareholders with a weighted voting rights WVR structure. Such structures are allowed in the US and Singapore.

About 42 per cent of all US-listed mainland tech firms have WVR structures while 84 per cent of the 50 biggest technology unicorns in mainland China have corporate shareholders, HKEX said in its proposal.

HKEX's move would expand the listing reform it introduced in April 2018 that allowed the listing of companies whose founders or other key staff held shares with greater voting rights. The exchange is now proposing to ­admit firms with corporate shareholders who also own such shares.

"It is a logical move for the HKEX to expand the listing reform further. If an individual can hold the shares with more voting rights, a corporate shareholder should also be allowed to do so," said Clement Chan Kam-wing, managing director of accounting firm BDO.

The 2018 listing reform allowed companies with multiple classes of shares with different voting rights to list here. It has successfully attracted Chinese smartphone maker Xiaomi, online food-delivery company Meituan Dianping, as well as a secondary listing by the South China Morning Post's New York-listed parent company, Alibaba Group Holding.

The three together commanded a market value of about HK$5.3 trillion (US$679 billion) at the end of 2019 " or 14 per cent of the market capitalisation of all companies listed in Hong Kong.

The proposed rule change will make Hong Kong a more attractive listing venue, according to Stephen Chan, a partner at law firm Dechert.

"The new rules would particularly benefit any innovative businesses that are a part of an ecosystem of companies, or those that are locked in a corporate structure after rounds of pre-IPO funding," Stephen Chan said in a written interview.

Hong Kong Investment Funds Association, the industry body for international fund management companies operating in the city, consider the safeguards already proposed by the HKEX inadequate.

It believes that the sunset clause limiting the WVRs shares by corporate shareholders to no more than 10 years, with an option to renew by no more than five years subject to the approval of independent shareholders, is too long.

The HKEX should cut it down to five years with a renewal of no more than three years, subject to independent shareholders' approval, said Bruno Lee Kam-wing, chairman of Hong Kong Investment Funds Association.

"The listing applicant should understand that corporate WVR class share is a privilege and that it does not come as a default," Lee said.

The association also urges the exchange to allow tech companies to have either individuals or corporate shareholders with WVR, and not both.

Financial Services Development Council, a government body says the HKEX proposal could enhance the competitiveness of Hong Kong as a listing venue while safeguarding the interest of the investors.

Market capitalisation requirements for a corporate shareholder to own WVR shares limit the number of candidates to less than 300 firms globally, the council says on its website.

HKEX's proposal will limit WVRs to companies with a market cap of at least HK$200 billion, and they must own at least 30 per cent of the company to be listed.

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2020 South China Morning Post Publishers Ltd. All rights reserved.

Copyright (c) 2020. South China Morning Post Publishers Ltd. All rights reserved.