By Amélie Labbé,
The Hong Kong Stock Exchange’s (HKEX) proposals
to relax its listing rules to attract a broader spectrum of
companies has run into opposition from the market.
Some participants have come out against the planned
introduction of a third board which they feel could compromise
the market’s entire structure. Critics include the
Asia Corporate Governance Association (ACGA) which called the
plans 'strategically unsound’ in an August
HKEX has been trying for a while to ease requirements to
encourage more varied corporate listings amid fierce
competition from other exchanges. London, for instance, has
been touting the
possibility of a new premium listing category to attract
companies controlled by a sovereign entity, such as
Saudi’s flagship oil company Aramco which is
planning to go public in 2018.
The right way
According to HKEX’s New Board Concept paper,
published in June, a third exchange would help attract
companies that don’t meet the requirements to list
in Hong Kong – these could be new economy companies
(NECs), startups that don’t meet the financial or
track record criteria to list and companies with non-standard
governance structures (family-owned or state-controlled
companies for example).
"Dual-class shares are
controversial as they allow investors who
don’t control the company economically to
control its decision-making process"
But several market participants feel this is not the right
way to diversify the exchange’s client base. There
has been widespread criticism that competing for global IPOs is
not really a standalone reason for reform.
"HKEX is a fairly mature market so creating a third board
with lower requirements is not the best way forward to develop
the market," said
Jamie Allen, the ACGA’s founding secretary
general. "Having three boards acts as a signal on what type of
company you’re investing in: a third board could
be seen as third rate."
A number of exchanges globally have been vying for the
position to house mega IPOs and offerings of attractive
companies which don’t necessarily fit the mould of
an eligible company. Saudi Aramco is one name
that’s been widely discussed but so-called US and
Asian tech unicorns could also be in the pipeline.
- The Hong Kong Stock Exchange (HKEX) wants to
relax rules to allow a broader group of companies to list,
including those that don’t meet capital or
financial track record criteria;
- The proposals also include the introduction of a
third board, which could be used by companies wanting to use
dual class shares;
- These securities have been criticised by
investors globally because they don’t entitle
the holder to any voting rights. They are favoured by the
founders of companies who don’t want to
relinquish control but still want to tap capital
- Several Hong Kong organisations have come out
against the HKEX’s plans, arguing they add more
complexity to an already challenging market.
If approved after the current consultation, which ends in
the autumn, HKEX’s plans would mean the
introduction of the more flexible framework in 2018.
Hong Kong’s main board is not small
company-friendly, and instead caters to more established
organisations which are profitable, and have met required
market capitalisation and corporate governance standards. A
company is required to have reported profit of at least HK50
million ($6.42 million) in the three years before the listing,
a criterion that some of the smaller organisations would find
difficult to fulfil.
Hong Kong’s other exchange, the Growth
Enterprise Market, puts the emphasis on strong disclosure,
which some companies could find equally as difficult to
"It would be more sensible to look at the main
board’s requirements again," said Allen.
"Revisions could be made to entry requirements around
profitability and minimum market capitalisation for example,
and a case could be made for listing pre-profit companies with
higher governance and disclosure standards."
What about dual-class shares?
Hong Kong floated plans to introduce weighted voting rights
(WVRs) a few years ago, in a bid to attract the $25 billion
listing of Alibaba Group. It didn’t admit the
Chinese company to trading at the time because
Alibaba’s governance structure allowed some of its
founding shareholders to appoint most of the company's board,
in direct opposition to the exchange’s
"The HKEX had a hard line against dual-class companies but
the feeling is that they want to attract more listings
– at what cost?" said
Amy Borrus, deputy director at the Council of Institutional
Dual-class shares are controversial as they allow investors
who don’t control the company economically to
control its decision-making process.
But a few years down the line, it seems as HKEX is thinking
about the same issue again, as is neighbouring Singapore.
According to Bloomberg data, seven out of the top 10 listed
Chinese companies have dual-class shares including Alibaba,
Baidu and Weibo. A large proportion of companies which could go
public in the future, especially in the tech sector, seem to
favour them. In the US, two recent high-profile IPOs, those of
Snap and Blue Apron, went ahead with
non-voting shares, while 10% of all listed companies are
believed to have a dual-class structure.
The chief executive of the Hong Kong
Investment Funds Association, Sally Wong Chi-ming, concedes
that a key argument in support of allowing the dual share class
structure is that the HKEx is missing out on the new economy,
and is stuck in old economy sectors such as banking and
"However, on balance, from an investor’s
perspective, we are concerned that WVRs are a negative
development in terms of protecting investors as it strips them
of an extremely important tool to have sway over the management
of a listed company," she said.
There is an idea that only if a WVR structure is allowed
will HKEX be able to attract new economy companies.
Wong Chi-ming challenges this. "Over the years, a not
insignificant number of NECs (including mega sized ones) have
been listed on HKEX," she said. "If one looks at
what’s in the pipeline (via the A1 application
list), quite a number of them are NECs."
Hong Kong and all of Asia more generally don’t
have the level of corporate disclosure seen in other
jurisdictions. Most of the jurisdictions there, to the
exclusion of China, don’t allow class action
lawsuits either which could further undermine investor
"State and family ownership is also quite common so
there’s already a lot of corporate governance
challenges to overcome," said Allen. "Adding dual class shares
will make the whole environment more complex."
Fears that a new exchange could act as a so-called Trojan
Horse have also been expressed. A company which has a dual
share structure could choose to list on the third board then
move to the main board a few years later, once it meets the
necessary requirements to do so. Borrus stresses this could
become a race to the bottom which could ultimately make
companies less accountable to public shareholders.
Where do we go from here?
In a July article,
Edward Bibko, head of Baker Mckenzie’s EMEA
capital markets group told IFLR that there were some
state-backed companies which would potentially be interested in
listing on a separate venue to reflect their different status.
While he was referring to the ongoing debate surrounding the
London Stock Exchange’s own proposed introduction
of relaxed listing rules, the argument applies elsewhere as
"The best way forward on mega IPOs should be:
let’s think about a way to list these companies
that completely segregates them but does not change the
standards for the entire market," said Allen. "These companies
are an exception and need to be listed as such."
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PRIMER: the Hong Kong-China Bond