20 August 2019
Alibaba opted to go public in the United States after the Hong Kong stock exchange refused to accept its dual-class share structure. Photo: Bloomberg
Alibaba opted to go public in the United States after the Hong Kong stock exchange refused to accept its dual-class share structure. Photo: Bloomberg

Should Hong Kong change its rules to lure tech IPOs?

Hong Kong regulators must have felt a tinge of regret as they watched Alibaba Group Holding Ltd.’s successful listing on the New York Stock Exchange last month.

They lost the chance to host what proved to be the biggest initial public offering ever.

The Chinese technology behemoth had opted to go public in the United States after the Hong Kong Exchanges & Clearing Ltd. (HKEx) refused to accept its dual-class share structure. Its shares have gone up 45 percent since then.

Alibaba’s good fortune has prompted a lot of people here to ask: Is Hong Kong being too strict in its regulations, making the city fall behind and lose its competitiveness in the IPO market?

“Hong Kong has already lost its edge,” Francis Leung Pak-to, who is dubbed as “the father of red chips”, told Ming Pao Daily in a recent interview. “Hong Kong has lost a year of IPO turnover as it turned down Alibaba. The incident shows that the city is unable to keep pace with the times.”

Many tech and media firms in the US adopted the dual-class sytem when they went public. There are many reasons behind this, but the main one is that it gives the founders and main leaders the final say in the company’s operations even if they hold less than 50 percent of the shares.

Google’s co-founder Larry Page has been one of the advocates of this shareholding system. “We believe this structure has clearly been an advantage,” Page commented on Google’s IPO filing back in 2004.

The structure gives the two founders, Page and Sergey Brin, total control over the company, and shareholders have benefited from the company’s tremendous growth.

However, other parties see pitfalls in the dual-class share structure. Shareholder rights activists, for example, argue that it hinders effective corporate governance.

If Google serves as a testament to the structure’s merits, Groupon’s case shows its dark side.

Since its listing in November 2011, the company has continued to post disappointing results. Its market value dropped 85 percent at one point in 2012.

Shareholders were naturally unhappy, but because Groupon’s founders hold majority voting rights, investors could not demand the ouster of Andrew Mason, the CEO at the time.

Other than exiting the shares, there was little shareholders could do.

As pressure mounted, the board fired Mason in March 2013, but the damage has been done. The company’s stock is still 70 percent below its IPO price.

Back to Hong Kong, HKEx has released a concept paper to gauge market support for regulatory changes that would allow companies to use a multi-tier voting structure to list on the exchange. It said such changes were needed for the bourse operator to “catch up with the times”.

Brokerages and securities firms don’t seem to be big fans of the proposed change. Their main concern is that such a structure won’t give small investors enough protection.

Wong Kwok-on, chairman of the Hong Kong Securities and Futures Professionals Association, said his group stands firm against the dual-class share system. “It wouldn’t make sense for investors to pay for the largest share while they cannot have a say in the company,” he said.

Others suggest that the change should only apply to some industry players such as tech or innovative firms and regulators must ensure a transparent trading environment for individual investors.

Nothing concrete has come up as market players debate the pros and cons of the proposal.

Meanwhile, the clock is ticking. A parade of China-based technology companies bypassed Hong Kong and chose New York to host their IPOs.

So far this year, 13 Chinese firms, including Alibaba, have listed on the NYSE or the NASDAQ. Of these companies, 10 offered shares with double voting rights and thus were barred from listing on the HKEx.

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EJ Insight writer

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