As Chinese e-commerce giant
Alibaba Group races toward a possibly record-breaking
initial public offering on the New York Stock Exchange,
regulators and bankers in Hong Kong are looking on with envy.
Many cant help musing that if it wasnt for the Hong
Kong exchanges one-share, one-vote principle,
Alibabas expected $20 billion fundraising would be
occurring in Hong Kong instead of New York.
Alibaba, whose founder and executive chairman, Jack Ma, and
management own only about 10 percent of the shares but control
the board and have majority say in voting rights within the
company, chose New York for the IPO in March after Hong Kong
regulators refused to budge on the one-share, one-vote
Losing Alibaba was a strategic blunder for Hong Kong
and the Hong Kong Stock Exchange, says Paul Schulte,
chief executive officer of Schulte Research International, a
Hong Kongbased independent financial research firm.
Alibaba is the future of finance, and Hong Kong is left
with a bunch of Old World banks. Asia is not exactly a bastion
of minority shareholder interest, and there have been
exceptions before. Hong Kong should aggressively review its
Charles Li, the CEO of the exchanges parent, Hong
Kong Exchanges and Clearing, is calling for a discussion on the
possibilities of amending the Hong Kong listing rules. The
exchanges listing committee has begun discussing a draft
consultation paper that may set in motion regulatory approval
of amendments to listing rules that currently do not allow
two-tier shareholding voting structures.
Such rules, implemented in the late 1980s, ensured better
corporate governance and prevented management from riding
roughshod over the interests of institutional investors. But
they also prevent Hong Kong from attracting the likes of
Alibaba, Facebook and other technology companies founded and
run by venture-capital- and private-equity- backed
entrepreneurs who may have majority stakes but choose to cede
control of the board to management.
In my opinion, Hong Kongs core values are the
rule of law and due process, Li wrote on his blog in
April. These are sacrosanct foundations of our market
that must be protected at all costs. These core values dictate
that we must not change our rules haphazardly for a single
company, and any significant change would need to go through
due process. But on the other hand, due process does not
dictate refusal to debate the future of our market. Our market
still has room to improve, and our efforts should not stop
simply because one company has left for another market.
Its time for us to let our emotions subside and have a
The calls for change are meeting stiff resistance from
global fund managers, however.
In the wake of the Alibaba listing controversy, the Hong
Kongbased Asian Corporate Governance Association (ACGA)
conducted a survey of global institutional investors to gauge
their views on the issue of dual-class shares and other
nonstandard shareholding structures. The survey reveals
overwhelming opposition to nonstandard shareholding structures,
such as the one proposed by Alibaba when it sought a listing in
Hong Kong, and indicates that most investors would likely apply
substantial discounts to companies with these structures.
The survey was sent to senior officers of corporate
governance departments and portfolio managers of investor
members of the association late last year. The majority of
association members are significant global institutions,
including some of the worlds largest
pension funds and money managers, with combined assets
under management of more than $14 trillion.
The results also indicated that global investors would be
inclined to apply a discount to Alibabas shares of
between 10 percent to 25 percent (with the average around 19
percent) if the company listed with a special partnership
structure. If such nonstandard shareholding structures became
common in Hong Kong, investors would apply an average discount
to the Hong Kong market of more than 13 percent, the group
Our institutional investor members show staunch
support for one-share, one-vote, says ACGA research
director for Asia and Hong Kong Michael Cheng, who served as
head of the Hong Kong Exchanges and Clearings listing
policy team from 2007 to 2012.
Although the U.S. permits two-tier voting structures at
listed companies, the U.S. judicial system also allows
class-action lawsuits, in which disgruntled shareholders can
band together to collectively sue managements of listed
companies over corporate governance issues, says Cheng, a
lawyer who once also served as head of the legal department at
China International Capital Corp. Hong Kongs judicial
system, however, doesnt recognize class-action suits,
Cheng notes, adding that a further complication is the
financial hubs takeover code, which requires that when an
investor acquires more than 30 percent of any listed company,
that investor must follow through with a general offer to the
rest of the shareholders.
Hong Kong has based its whole regulatory regime on
one-share, one-vote for almost 30 years, says Cheng.
For sound and robust protection for all shareholders, it
simply needs one-share, one-vote. Bottom line is that you
cant think of amending one-share, one-vote without
changing the entire regulatory regime. If you think of changing
one-share, one-vote without improving the regulatory regime,
that is a recipe for disaster.
Cheng says the Hong Kong exchange will begin public
consultations about scrapping the one-share, one-vote principle
in the coming months and may present the plans for change to
the Securities and Futures Commission as early as the end of
this year. The listing committee is caught between a rock
and hard place, he says. That is because of
inherent conflict of interest of the exchange, which serves a
dual role as a for-profit entity and as a regulator of listed
Even if the exchange recommends reforming the rules, the
final decision is in the hands of the Securities and Futures
Commission. The regulators spokesman, Jonathan Li,
refused to comment, but David Webb, a deputy chairman of the
commissions Takeover and Mergers Panel, says he doubted
that Hong Kongs top securities regulator would oblige.
No, I dont think the SFC will allow HKEx [Hong Kong
Exchanges and Clearing] to list companies with second-class
shares, says Webb, who is also a Hong Kongbased
independent investor and shareholder activist. Scrapping the
one-share, one-vote rule would make Hong Kong less competitive
in the longer term, he says. It would be a race to
the bottom of regulatory standards and is not a recipe
for long-term success, he adds.
There is no question that battle lines are being drawn in
Hong Kong over the principle of one-share, one-vote. The
results of the fight may well affect Hong Kongs position
as the premier financial capital of China and the rest of Asia
in the decades ahead. Alibabas listing in the U.S. may
not only be a milestone for a Chinese Internet company; it also
could well usher in an era of regulatory changegood or
bad, as only time will tellin Hong Kong.
Get more on
Follow Allen T. Cheng on Twitter at @acheng87.