HONG KONG (Reuters) - Hong Kong is set to allow controversial dual-class shares under rule changes to be proposed by the city’s stock exchange as it raises the stakes in its battle against New York for blockbuster Chinese initial public offerings (IPOs).
Hong Kong Exchanges and Clearing (HKEX) (0388.HK), the city’s exchange operator, said on Friday it had begun drafting specific rule changes that will be put up for a formal public consultation in the first three months of 2018.
Dual-class shares, which typically give one set of shareholders greater voting rights than others, have been favored by many owners of new age industries such as technology, with the extra voting power given to top executives seen as protection against pressure for short-term returns.
But they have also come in for criticism from corporate governance advocates, who have warned of its potential abuse by company insiders. Hong Kong’s proposed changes, which stem from a discussion paper published in June, come as a series of hotly anticipated Chinese tech groups are considering their options for listing next year.
These include Xiaomi, which on Friday was due to hear bank pitches for a role in an IPO expected to value the smartphone maker at least $50 billion.
In spite of Hong Kong’s role as the world’s biggest equity capital-raising center for four of the last 10 years, it has fallen well behind New York, its arch-rival, in the battle for hot tech stocks and other growth sectors.
Just 3 per cent of Hong Kong listings in the past decade, by market value, have been so-called “new economy” companies, compared with 47 per cent for the New York Stock Exchange, according to the HKEX’s June discussion paper.
The exchange said on Friday that “a large majority” of the 360 responses it received to its June paper were supportive of permitting dual-class shares.
“The market has made it clear they want the Exchange to take action to broaden Hong Kong’s capital markets access and enhance its competitiveness,” HKEX chief executive Charles Li said in a statement.
“By the second half of next year we hope that we will see a significant number of innovative companies beginning to choose Hong Kong.”
Other stock exchanges, including London and Singapore, are also weighing allowing dual-class shares.
Allowing dual-class shares marks a big departure for Hong Kong whose one-share-one-vote principle has for 30 years blocked efforts by tycoons from Li Ka-shing to Alibaba’s (BABA.N) Jack Ma to list alternative shareholding structures.
Alibaba held its record $25 billion public float in New York in 2014 after Hong Kong, its favored venue, refused to accept its governance structure where a self-selecting group of senior managers control the majority of board appointments.
Under HKEX’s plans outlined on Friday, would-be dual-class companies will have to be an “innovative” company to qualify for weighted voting rights - qualities that will be specified by the exchange.
Each company must also justify the rationale for weighting its voting rights when it applies to list and have an expected market capitalization of at least HK$10 billion.
Weighted rights will be limited to a ratio - meaning no company can sell shares carrying zero rights as Snap Inc (SNAP.N) did in New York earlier this year - and any future equity capital-raisings must maintain the ratio between weighted and ordinary shares.
“Overall, our sense is that a broad range of investors, including buy-side fund managers and other institutional investors, are now keen to access a far more diverse range of larger listed companies in Hong Kong - particularly tech companies,” SFC Chief Executive Ashley Alder said in a statement.
Alder also emphasized that the SFC - which must approve any new rules put forward - did not want to see weighted voting rights become commonplace and would look to ensure investor protections were included.
The proposed rule changes however come as a series of tech listings in Hong Kong have been well-received by investors with one, China Literature Ltd (0772.HK), jumping 86 percent on its debut in November.
“This contradicts the notion we cannot attract these kind of companies from China,” said David Webb, an independent investor and analyst.
“None of these things like weighted voting rights are allowed in the mainland market - so why inflict them on Hong Kong?” he added.
Reporting by Jennifer Hughes; Editing by Muralikumar Anantharaman and David Evans