Hong Kong regulators must maintain high standards for IPOs
Alibaba's snub of Hong Kong in favour of New York for its record initial public offering continues to divide market authorities. Hong Kong Exchanges and Clearing (HKEx) says it will go ahead soon with the second stage of its consultation on changing its listing rules to allow IPOs with dual-class share structures, such as Alibaba's. But market watchdog the Securities and Futures Commission (SFC), has reaffirmed its strong opposition.
Alibaba bypassed Hong Kong after HKEx rejected its bid for exemption from the one-share, one-vote rule so its founder and top executives could control its board membership. This newspaper supported the decision not to bend the rules in this case but welcomes a review to see if they are in line with the times. One question is whether even limited departure from the one-share, one-vote principle would be good for the international image of the Hong Kong market in the long run.
Investor concerns remain, including conflicts of interest. For example, HKEx is a listed company on its own boards whose directors may face a conflict in reconciling efforts to boost the city's standing as a financial centre with the best interests of investors. And unlike New York, Hong Kong investors cannot resort to class-action lawsuits if they want to take action against an unscrupulous or incompetent controlling shareholder.
In response to concerns, the second-stage consultation emphasises higher governance standards for dual-share-class listings. The SFC wants to know how many standards could be monitored on an ongoing basis and what public shareholders or regulators could do about it if they were not upheld. These are reasonable questions, since the proposal could blur the alignment of interests between controlling and minority shareholders. At the end of the day it comes down to the quality and accountability of management. The one-share, one-vote principle is not to be abandoned lightly. But it is bound to come under increasing pressure, especially from hi-tech entrepreneurs and innovators who tend to favour two-tier share structures to retain management control.