SFC outlines conditions for dual-share listings

The Securities and Futures Commission has unveiled key conditions for companies seeking to list in the city with dual-share structures, marking a major step forward in reform of the listing rules designed to help Hong Kong compete with the US in attracting listings by technology firms and other innovative enterprises.

The conditions have high thresholds as the regulator does not plan to open the door too wide and allow too many companies to apply for such a shareholding structure, because the city does not allow class-action lawsuits to protect shareholders’ interests, unlike the United States.

The SFC only wants to allow certain types of newly listed, innovative companies to be eligible for dual-share structures, and only as long as they meet conditions the SFC considers important for shareholder protection.

SFC chairman Carlson Tong Ka-shing said companies applying for dual-share structures would have to be restricted to firms whose founders held only small stakes but whose contributions or innovations were vital to the business, such as in technology firms. Companies with majority shareholders should not be allowed to have such structures.

Other conditions designed to ensure investor protection should include sunset provisions, so that the special shareholding structure would end in a certain number of years or when the founders sold their stakes or left the company.

Tong said the SFC would support the Hong Kong Exchanges and Clearing (HKEx) carrying out a second phase of detailed consultation on dual-share structure reform if the exchange could address those issues.

“The SFC still supports one share, one vote,” Tong said. “We do not plan to allow all companies to do it. However, we are not turning a deaf ear to market demand to enhance our market to compete with the US for new listings.”

It was the first time the SFC had made its position clear on controversial listing reform proposals. HKEx is pushing for reforms to enable Hong Kong to maintain its position as a listing hub for mainland firms after the city lost some heavyweight technology firm listings to the US in recent years.

The SFC is the city’s ultimate market regulator and the HKEx reform proposal would need its approval. Its position appears to clear a major obstacle for the reform, with some market watchers saying it could be introduced in six months to a year. That could help attract many technology firms such as mobile phone maker Xiaomi to list in Hong Kong instead of the US.

HKEx consulted the market last year on whether it should change listing rules to introduce the controversial dual-class share structure which it banned in 1989, after refusing to give Alibaba an exemption from the ban. The mainland e-commerce giant wanted to list in a way that would allow its founder and key executives to nominate a majority of the board even though they only held a minority stake.

At the time, the SFC said it believed an exemption would go against the one-share, one-vote principle in Hong Kong. The SFC still believes no exemption should be given but supports rules with clear conditions for companies seeking to apply for such structures.

Alibaba took its listing to New York, where dual-class share structures are allowed.

At the end of May, a third of the 102 mainland companies listed in the US had dual-class share structures and 70 per cent of them were information technology companies. In Hong Kong, only 6 per cent of newly listed companies from January 2010 to December 2013 were IT firms.

Dual-class share structures allow one class of shareholder to have more rights than others. Many technology firms’ founders sell stakes early on as they seek funding, resulting in them holding small stakes. They argue that dual-share structures protect their interests but many fund managers believe such structures are unfair because they would damage investor protection for small shareholders.