23 May 2019
Alibaba IPO problems have highlighted the need for Hong Kong to revisit its listing rules. Photo: Bloomberg
Alibaba IPO problems have highlighted the need for Hong Kong to revisit its listing rules. Photo: Bloomberg

HK must rethink its rules to lure new-age tech IPOs, experts say

Hong Kong should change its stock market listing rules to incorporate either a five-year-term requirement for company directors or a dual-class share structure with limited board rights if the city wants to attract more flotations of technology firms, experts said.

Whatever course regulators ultimately choose, it may take a while before we see some concrete policy action, they said, adding that it is unlikely that the listing rules will be amended by mid-2014, the purported timeframe set by Chinese e-commerce giant Alibaba Holdings to complete its initial public offering.

“A dual-class share structure is workable in Hong Kong but more should be done to protect the majority shareholders who don’t enjoy the nomination right,” Edward Au, Co-Leader of National Public Offering Group of Deloitte China, said in a phone interview.

The listing rules should ensure that the board, if chaired by the founder who owns a minority stake, should seek approval at a shareholders’ meeting before changing the company’s long-term business direction or issuing new shares to dilute other shareholders’ interests, Au said.

For example, the founder of a business-to-business internet company should enjoy a right to nominate the board members but not the power to diversify the firm’s business to the property sector, he said. 

However, Patrick Wong, a partner at law firm Mayer Brown JSM, said a founder who does not hold a majority stake in his firm should lose the nomination right after five years from the listing date. The founder can renew his term by opting for re-election every five years. Such practice can provide an incentive for the top management to make decisions that are in shareholders’ interests, he said.


The whole debate about changing Hong Kong’s listing rules has come about in recent months due to issues surrounding the initial public offering (IPO) plan of Alibaba Holdings. 

Alibaba founder and chairman Jack Ma {馬雲} was quoted by the media as saying in early October that if the e-commerce giant goes public in Hong Kong, the group will retain its corporate partnership structure. The proposal, which would allow Ma’s management team to nominate more than half of the board directors and retain control of the firm, was rejected by Hong Kong Exchanges and Clearing Ltd. (HKEx, 00388.HK), which operates the local bourse, the Hong Kong Economic Journal reported on Oct. 3.

Several media reports said later that Alibaba may consider a listing in London or the United States as part of its potential US$15 billion share sale plan. However, Ma said that Hong Kong remains the group’s preferred destination to go public, with a flotation targeted within the first half of next year, the Nikkei reported on Nov. 20. Ma is said to have expressed hope that Hong Kong will change the listing rules to accommodate Alibaba’s needs.

“It makes sense that Ma prefers to list in Hong Kong instead of London or New York as all of Alibaba’s major businesses are located in the Asian time zone,” Wong said. If Alibaba is listed in London or New York, investors there will be unable to support the company’s share prices even though the company may be enjoying fantastic business performance during the daytime in China, he said.

That said, a dual-class share structure may not be suitable for Hong Kong, Wong said. The structure has been criticized by local market participants in the United States over the past few years despite the implementation of many additional rules to protect small investors, he said.

“It is unfair if a founder, who does not own a majority stake, can enjoy the nomination right forever,” Wong said. They should lose such right after the company has been listed for five years, he said. 

Meanwhile, Au said a five-year arrangement may not be flexible enough in practical operations. Small investors will still be unable to have the nomination right during the first five years after the listing. Therefore, he prefers a dual-class share structure with limited rights with the board.

Also, stock exchange regulators should educate the public that investors may suffer extra risks due to a lack of nomination right when they buy shares in the companies with a dual-class share structure, Au said. 

Alibaba listing plan

Although IPO service providers hold different views on the matter, one thing they seem to agree on is that Hong Kong should change its listing rules to meet the market needs. They say such move will not only help bring in Alibaba but also all the technology companies that have similar shareholding structure.

“It is unlikely that Hong Kong can complete its listing rule amendment by June next year as the public consultation will last at least six months, apart from the time to draft the rules,” Au said. If Alibaba is in a rush to go public in the first half next year, Hong Kong will not be among its choices, he said. 

“Losing one or two listing candidates is not a big deal for Hong Kong but losing a generation of companies from China’s new economy is,” Charles Li, chief executive of HKEx, wrote on his blog on Oct. 24. 

Maintaining the status quo comes at a cost, Li said. “Hong Kong lost out in the last technology revolution in the US and many believe we cannot afford to lose out in the next one, especially since so many of the large future new economy companies are likely to come from China,” he said.  

– Contact the reporter at [email protected] 



Chief reporter at EJ Insight

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