LETTER OF THE LAW

Alibaba listing slight shouldn't blind Hong Kong to the cold hard facts of dual-class shareholding

Data shows "weighted voting right structures" would hurt Hong Kong's competitiveness

PUBLISHED : Tuesday, 09 June, 2015, 2:38am
UPDATED : Tuesday, 09 June, 2015, 2:38am

Hong Kong lost the Alibaba initial public offering to the United States last year. Since that time, the government has been abuzz with talk of reforming the listing rules.

A quick Google search on "weighted voting right structures" will reveal consultation documents by the Hong Kong stock exchange and Institute of Certified Public Accountants. Various law firms have also published opinions about allowing some companies' shareholders to cast more than one vote per share.

Yet - as usual - these studies and opinions rarely include data. Economists have for years studied the impact of dual-class shareholding, in which senior executives hold far more control than common shareholders.

With only limited exceptions, academics have found dual-class shareholding harms companies. A study conducted for the European Central Bank found European companies usually unified their share types over time. Even when companies have the option to use dual classes, they abandon it as they become bigger and more successful. A separate US study found investors in companies with dual-class shares lost money compared with their unitary share cousins. Dual-class shareholding companies brought in far less investment.

If the US dual-class shares are so great, why have institutional investors developed ways to level the playing field? These investors manufacture "empty voting shares" - or shares with their voting rights stripped and amassed into voting blocks. By playing with US corporate rules, they can gather together other investors' voting rights and use them to push through change. Such manoeuvring helps kick out bad management.

Academics have shown how dual-class shares are not right for the city. Raymond Chan Siu-yeung and John Ho Kong-shan show in a recent law review article that investors in the US can sue and litigate in a way they cannot in Hong Kong. If Jack Ma Yun runs off with investors' funds overnight, US courts will grab him. Hong Kong law does not allow shareholders to bring a suit as easily.

My own research supports the other academics. The city's highly concentrated, family-controlled businesses discourage foreign investment. Independent directors have been shown to "statistically significantly" fail to reduce various kinds of malfeasance.

Econometric studies show weighted voting right structures will hurt the city's companies and competitiveness as an international financial centre. So why do we talk about these "multiclass, weighted voting right structures"? Because Alibaba's choice to list in the US represents a slight to our pride.

So what do statistics tell us? Alibaba will probably unify its shareholding structure over time. They also indicate that - despite its astronomic IPO valuation - its long-term share price will suffer.

Statistics also suggest Alibaba has, by choosing such a structure, a higher probability of involvement in fraud or accounting scandals, and that future offerings will earn less than if Alibaba had only one class of shares.

In the debate on dual-class shareholding, let's stop throwing hand-picked examples and theories at one another. Let's use cold hard data instead.

Dr Bryane Michael is a senior fellow at the University of Hong Kong law faculty's Asian Institute for International Financial Law