Debate over dual-class shares in Hong Kong and Singapore

Feb 05, 2018
Concern over ‘regulatory race to the bottom’

A major debate is developing between asset managers, bankers and exchanges over dual-class shares, as the listings arrangements are introduced in Hong Kong and Singapore.

At issue is the number of fast-growing companies that want to list using the contentious structure, which strips away voting rights from shares and concerns fund managers in the process.

The point of focus and discussion surrounds the level of corporate governance. Jenn-Hui Tan, director of corporate finance at Fidelity International, tells IR Magazine: ‘Offering regulatory flexibility can attract listings in the short term but potentially impact long-term market development if corporate governance standards are not maintained. Capital market development and investor protection should not be viewed as mutually exclusive.

‘Exchanges competing to offer the most issuer-friendly environment can result in weaker standards across all markets. What we must avoid is a regulatory race to the bottom.’

Naturally, dual-class share listings have a certain appeal for bankers of multi-billion-dollar IPOs, with Xiaomi, Lufax and Alibaba subsidiaries are all examples of issuers looking at dual-class shares.

There is also the benefit they offer the region. ‘If the Hong Kong Stock Exchange (HKEX) is able to provide this platform, [dual-class listings] will help [persuade] a lot of tech companies in China to consider coming to Hong Kong for a listing,’ says Benson Wong, partner at PwC, in a statement.

There is no doubt dual-class shares have much potential in Asia, where there are many technology start-ups – which favor equity funding – and family-run companies whose founders want to preserve control to pass on to their sons and daughters. Wong says technology groups account for almost a third of all Hong Kong IPO fundraising, compared with just 3 percent two years ago.

In the past couple of months, HKEX has laid out plans for enabling companies to list with dual-class shares; Singapore Exchange soon followed suit.

‘Completing the listing reform is one of our top priorities in order to secure our relevance as a premier global capital formation center,’ HKEX CEO Charles Li says in a statement. ‘We have already received some inquiries about listing under the new regime.’

HKEX further argues that investor protection is high on the agenda. ‘We actually have a large number of companies that are family or state-controlled,’ adds Li. ‘So the protection measures of our regime are about protecting the little guy against abuse by the big guy.’

This may offer a solid reassurance, and mean things are moving forward for the HKEX, but there is an undercurrent of concern – and it’s a trend that’s not confined to Asia.

The NYSE has held dual-class shares since the late 1980s, becoming the exchange for tech companies – something the exchanges in Asia want to plug into. But when digital social media company Snap listed last year offering investors no voting rights, it prompted the FTSE Russell to exclude Snap from its indices.

Index provider MSCI is also talking to the market about whether to exclude certain companies with dual-share classes, referencing governance concerns. In the process, the index provider is currently putting together a discussion paper on the topic.

Any exclusion action risks stripping from index funds billions of dollars in shares. And when it comes to fund managers, many have expressed apprehension about the development but few are abstaining from investing – partly in fear of missing out on rewarding returns.

Leading houses such as Fidelity, Franklin Templeton and Aberdeen have all expressed their apprehension of dual-class shares but none has taken to boycotting dual-class securities.

Google was among the earliest of the tech giants to list with a dual-class structure on Nasdaq in 2004.

 

 

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