Transparency in safeguards, risks needed for proposed dual-class shares

HKEX’s proposal for two new boards geared toward tech companies is in line with the development of the city’s future competitiveness, but transparency of safeguards and downside risks are needed

PUBLISHED : Saturday, 26 August, 2017, 9:30am
UPDATED : Saturday, 26 August, 2017, 9:30am

Hong Kong is garnering support towards creating a third board to attract technology start-ups and new economy firms. But safeguards on corporate governance, investor education and transparency in the downside risks are needed to ensure the success of the market.

Hong Kong Exchanges and Clearing (HKEX) has just completed a consultation over the proposed third board, but a second round of consultation on the detailed rules is still needed.

The new third board will offer two markets, one for listing big companies that have the dual-share structure favoured by many technology firms, which would open to all investors. The second board is for start-ups which would be accessible only to professional investors.

Hong Kong’s main and GEM boards have adopted the one-share one-vote principle in the belief that a dual-class share structure can lead to potential abuse by corporate insiders. Venture capitalists and fund managers also tend to oppose to weighted voting rights as they reduce the price at which they can sell their shares relative to international peers.

But attitudes of Hong Kong regulators and some market participants are starting to shift, with focus turning to the development of the city’s future competitiveness and the appropriate measures to safeguard investors’ interests and mitigate governance risk.

“HKEX’s proposals strive to address the market quality and risk profile concerns,” said Nelson Tang, a partner in the corporate department of Hogan Lovells. “Clearer guidance however from the regulators is needed and a ‘one size fits all’ approach should be avoided.”

For example, the suggested accelerated delisting regime may allow for quicker enforcement by the stock regulator, which is key to enhancing profitability and corporate governance if listed companies want to maintain their listed status while removing poor performers from the board, Tang said.

The proposed new board PRO will restrict access to professional investors only in trading start-ups lacking a financial track record. While this may address concerns that retail investors are perceived to be more vulnerable and less sophisticated, some may argue that a complete ban is an unfair deprivation of an opportunity to invest in these high growth companies. A more flexible approach could be explored by allowing retail investors to participate with additional safeguards in place, Tang said.

Regulators are also looking at the “primary equity connect” concept, an extended model of Shanghai- and Shenzhen-Hong Kong Stock Connect programmes as an avenue to help with the liquidity of the new and current boards, Tang said.

Marketing and investor education will help make investors savvier when investing in the tech industry, and therefore enhance the appeal for those companies to list in Hong Kong, improving stock liquidity.

HKEX’s proposed third board consultation comes amid the government’s promotion on Hong Kong’s role in the Lok Ma Chau loop project with Shenzhen and the Greater Bay Area integration, which appears to be an effort in developing an innovative culture for education and investment of new economy companies in the city.

However, Luke Waddington, chief executive of Hong Kong-based fintech Bluepool, says Hong Kong requires a more coherent regulatory framework and bigger government grants to create an innovation technology ecosystem.

“These companies [in Singapore] are on the path towards growing into a large company quickly that eventually aim to IPO. But I don’t get the sense that is what has been happening in Hong Kong,” Waddington said.

He praised Singapore’s model as making things much easier for start-ups, citing the ease with which funding can be raised, as well as the ability to exit an investment.

Waddington added that Singapore has a more coherent regulatory framework designed to get different organisations to come together.

Singapore said earlier this year it was seeking public feedback on a suitable regulatory framework to allow the listing of dual-class structures. HKEX invited the public to submit their feedback on the proposed board under a deadline that ended earlier this month.

Singapore has also announced that it is replicating the UK model, linking the stock regulator with the central bank and businesses so that they can create funding and sandbox mechanisms.

In contrast, Hong Kong has allocated resources to business incubators in Science Park and Cyberport overseen by bureaucrats with little entrepreneurial experience.

Waddington said a better approach would be to give cash grants directly to entrepreneurs as small companies often struggle to cover the fees to meet licensing requirements.

“When the overall ecosystem can support innovative and new economy companies, then investors will understand why we need a third board and dual-share voting structure,” Edward Au, co-leader National Public Offering Group at Deloitte said. “This spirit seems to be starting to develop in Hong Kong now.”