Imagine buying a home when the previous owner is still continuing to live in it and is calling the shots, indefinitely. Imagine running a market that matches such sellers with buyers.
That’s the dilemma facing Hong Kong and other financial hubs such as Singapore and London as they consider accepting the dual-class shareholding structure used by United States-listed tech giants like Facebook and China’s Baidu.
The system allows founders to remain in control with a minority of the equity and, in some cases, gives new owners no voting rights at all.
Alibaba Group Holding ditched Hong Kong for New York after the city’s stock exchange blocked a similar arrangement for its world-record initial public offering in 2014, dealing a blow to Hong Kong’s fund-raising ambitions.
(Alibaba didn’t propose a dual-class structure but one where the company’s “partners” would have the power to vote for the majority of the board in perpetuity.)
On purely ethical grounds, it’s hard to see why Hong Kong should yield on its long-cherished “one-share, one-vote” principle. But there’s no doubt the city’s stock market needs to find a way of attracting China’s emerging new-economy stars or persuading those already publicly traded, such as Baidu or JD.com, to seek secondary listings in Hong Kong.
If the Chinese city drops its objection to dual-class structures, then safeguards – and specifically embedded time limits, also known as “sunset clauses” – will be key.
Hong Kong Exchanges & Clearing ended a consultation on Aug 18 on allowing two types of markets to house new-economy firms: one for “pre-revenue” companies that would be open to professional investors only; and the other for firms that use weighted voting rights.
The results of the exercise will be released in the next few months but, according to the exchange operator, the cost to Hong Kong for sticking with its principles has been steep. Chinese companies with weighted voting rights raised US$34 billion (S$45.8 billion) in the US in the past decade, or 11.5 per cent of the total netted from initial public offerings in the territory over the same period.
That the Hong Kong stock exchange needs to be sexier isn’t in doubt. Internet behemoth Tencent Holdings may be the Hang Seng Index’s top stock, boasting a US$400 billion market value, but it sits in a lonely space in Hong Kong, with few new-economy peers for company.
At the same time, China’s listed companies have a spotty corporate-governance record, so weakening the ability of shareholders to exercise oversight may exacerbate risks.
BlackRock, which has been vocal about its distaste for uneven control mechanisms, pointed out in a recent submission to the exchange that weighted voting rights are no guarantee of attracting tech stocks. Canada allows weighted voting rights, the New York-based money manager said, but has fewer tech and biotech listings than Australia, which doesn’t.
If the consultation finds that such shareholding structures are the only way to shake Hong Kong out of its old-economy-driven reverie, then the exchange should at least insist on sunset clauses. These set a time limit on dual-class arrangements, after which firms revert to one-share, one-vote.
Dual-class shares give founders the power to push through their vision for a company without having to worry about short-term investor pressures. But without checks and balances, management abuse and unwise decisions – such as resisting a takeover that’s clearly in the best interests of the company – are inevitable. All privileges need limits.
•This column does not necessarily reflect the opinion of Bloomberg LP and its owners.