Mind the Gap | Refusal to establish a start-up board is a competitive setback for Hong Kong
Without the so-called Third Board, start-ups will be unable to get funding at a critical stage of growth
“It’s not really money unless you use it,” as the old Cantonese saying goes. The same can be said about government power and authority. Last week, we witnessed this conundrum in action.
Hong Kong’s stock market operator and the regulator have decided, under certain conditions, to allow companies with dual-class shares to list on the city’s bourse, according to the South China Morning Post’s reports. That’s not surprising, given that it’s a competitive requirement in today’s technology-driven capital markets, since many start-ups feature founders who own stocks with extra privileges.
But it’s disappointing how they arrived at the decision of not starting a special board – the so-called Third Board for these start-ups to list.
I have yet to see a definitive study showing that companies using a dual-class structure are necessarily governed more badly than those with a single class
Regulators changed their opposition to the idea after last month’s successful initial public offering by ZhongAn Online P&C Insurance, even though its profit track-record didn’t meet the main board’s requirement of a combined profit of HK$50 million in the three years before application.
Accepting dual-class shares is not quite the blasphemy against the one vote, one share philosophy that its defenders state. I have yet to see a definitive study showing that companies using a dual-class structure are necessarily governed more badly than those with a single class.
The ugly truth is that if you were to flip through the archives of Hong Kong Exchanges & Clearing, you would find many egregious announcements of related-party transactions, abusive rights issues and dubious asset transfers done by single-class share companies controlled by a majority shareholder or concert parties. You don’t need to control more than 50 per cent to wreak bad governance on minority shareholders.
The refusal to establish a start-up board is a competitive setback for Hong Kong’s struggle to reposition its economy. HKEX is understandably a profit-making organisation seeking to expand its global market share for listings, while minimising risk. They prefer to list well formed, billion dollar unicorns like ZhongAn Online.