Why Hong Kong’s blind pursuit of technology listings is dangerous
The debate over dual-share listings is irrelevant; an efficient venture capital ecosystem is the key to cultivating a technology-led economy
The blind pursuit of technology listings by the Hong Kong Stock Exchange has become so poorly considered that it threatens to return the bourse to its squalid, garish past - heavy laden with mediocre listings whose owners’ malevolent corporate governance and tawdry treatment of minority shareholders made an unmitigated mockery of everything and tainted the entire exchange with profound scepticism before it was reorganised.
Recently, Jack Ma, the founder of Alibaba, owner of the South China Morning Post, criticised the listing rules of the Hong Kong Stock Exchange as being “designed for decades for property developers, financiers and traditional retailers and not relevant to start-ups and new businesses.”
Whether or not HKEX can or should attract or accommodate ‘new economy’ or technology businesses is a complex issue full of both promise and hazard. The hunger for listings this year has been heightened by the fact fewer firms have filed initial public offerings on US exchanges so far than in any year since 2009.
Hong Kong has processed the most IPO listings in the year to date, making it the world’s largest IPO market for the second consecutive year. However, about 80 per cent of technology IPOs in the US this year have chosen to list on Nasdaq.
The controversy orbits around the introduction and regulation of dual-class shares. However, there are no studies that categorically show that more abuses are inflicted upon minority shareholders by dual-class holders compared to a single-class structure.
Indeed, it is not uncommon for Chinese families who own 75 per cent or more of their Hong Kong listed company to shuffle assets between their listed vehicle versus their private holdings at any given time. By arbitraging the price of their stock versus the value of their assets, they guarantee that hapless minorities never make money.
Dual-class shares won’t necessarily change the corporate governance landscape in Hong Kong. There really is no difference in practice between an arrangement where one group controls a company with 75 per cent, and another with a partnership scheme or dual-class shares. Either of them can effectively do whatever they want with the business and inflict abuse on minority shareholders. Dual-class or special partnership structures may not necessarily worsen that predicament.
It is only natural that insiders want to control a company, tech or non-tech, with a special class of shares that only require them to hold a smaller percentage ordinary shares. But, tech founders give circuitous reasons to justify it.
One argument is that a technology business is so complicated and unique that it demands special protections in the form of dual-class shares to shield it from the ignorant public or predatory investors. If that’s the case then maybe it should not even be listed.
In the US, the Securities and Exchange Commission only allows companies that are seeking a new listing to employ a dual-class structure. Switching from an existing, all common share, one-class structure listing into a dual-class is not allowed because it would be considered unfair to minority shareholders who initially bought shares under the assumption of equal voting rights.
But in Hong Kong, a similar restriction would encourage an avalanche of listed companies to delist and then relist with a dual-class structure. Its advantages would be too tempting.
One solution is to impose a sunset clause that requires a reversion to one-class after a determined time period, much like Google’s capital structure. Google’s dual-class structure is designed to last for only one generation. By agreement of the majority or controlling shareholders, the powers and ownership of Google’s super-voting shares cannot be passed on in perpetuity, thereby limiting their duration to the current owners. And if they are transferred, the shares convert into ordinary voting shares.
This addresses the argument that key management, founders and controlling shareholders are ‘special’ or ‘indispensable’. But it restricts that privilege to the original controlling group; allow them special treatment, but don’t allow them to pass or trade it onward. Those special rights should be specific to the group at listing.
Dual-class shares have existed for a long time. They are not essential for building or running a successful technology company. There are many technology, biotech and communication companies that have flourished without it.
Instead, Hong Kong desperately needs an efficient venture capital ecosystem to cultivate a technology economy. New stock exchange rules are transient. A third board for start-ups would be a regulatory quagmire. Entrepreneurs cannot access government funds because the application hurdles are too difficult. Creating conditions for funding new ideas and businesses is Hong Kong’s real frontier.
Peter Guy is a financial writer and former international banker