Is there a party, with Hong Kong’s listing rules all dressed up?
Hong Kong needs to consider carefully how to safeguard against abuses as it seeks to draw blockbuster IPOs
While Hong Kong Exchanges and Clearing has just announced its sweeping listing reform proposal to attract technology companies to the city, it is important for regulators to consider investor protection under the new regime.
The changes announced by HKEX chief executive Charles Li Xiaojia on Friday, are likely to take effect mid next year if all goes to plan.
Under the new listing requirements, biotech companies will not need to meet any revenue benchmarks, as long as they have an expected minimum valuation of HK$1.5 billion (US$192 million).
Companies with more than one class of share must be engaged in the new economy, have an expected valuation that exceeds HK$10 billion and minimum annual revenue of HK$1 billion. Companies valued at more than HK$40 billion will still be eligible if their annual revenue is below HK$1 billion.
This will be the biggest revamp to the listing rules since the 1980s, when dual class shares were banned by the Securities and Futures Commission because they were considered a violation of the spirit of “one share, one vote”. Technology giant Alibaba Group Holding, the owner of the South China Morning Post, bypassed Hong Kong in favour of New York for its 2014 blockbuster IPO, where companies with dual-class share structures are permitted.
Such share structures, also favoured by companies that include Facebook and Alphabet, enable company founders and/or the management to exercise strategic control even if they don’t own a majority stake.
In 2015, a plan by the HKEX to introduce dual class share companies was withdrawn following opposition by the SFC.
A source told White Collar that the SFC will not stand in the way this time, having agreed on the reform in a bid to support the government’s policy of attracting technology companies, and thereby enhance the competitiveness of the Hong Kong stock market.
With Hong Kong on track to become the first Asian financial centre to allow companies with more than one class of shares, the HKEX and the SFC must not abandon the importance of investor protection.
In the US, investors can pursue class action lawsuits to help prevent abuses, a legal avenue that is not available in Hong Kong.
In addition, the main US stock market is heavily traded by institutional investors who know how to defend their interests, whereas in Hong Kong, where retail investors play a bigger role, investors look to regulators to safeguard their interests.
Another big challenge will be to prevent companies that have little to do with innovation from listing under the new regime.
In some instances, traditional companies might be tempted to overplay their digital credentials, perhaps by talking up existing IT assets, in an effort to qualify for the dual class share structure.
The SFC and HKEX will need to show resolve in the battle to discourage such misleading practises, using their powers to disqualify when necessary.
There will be a detailed consultation on the proposed rule changes in the first quarter of the new year ahead of a likely approval by mid year. Let’s use this exercise to ensure there are sufficient safeguards in place.