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Hong Kong Seeks Debate On Dual-Class Shares After Losing Alibaba
Perspective | 04 September 2014

Hong Kong’s stock exchange is seeking views on loosening shareholder voting rules that spurred Alibaba Group Holding to choose the US for what may be the world’s biggest initial public offering (IPO) this year.

The bourse issued a “concept paper” on 29 August about the possibility of allowing minority-control voting structures. Respondents have three months to answer questions including whether to allow dual-class shares or restrict them to certain industries, David Graham, head of listings at Hong Kong Exchanges & Clearing (HKEx), said at a press conference on 29 August. The bourse has “no view” on weighted voting rights, he said.

The city’s regulators rejected the governance structure of Alibaba this year, prompting the Chinese e-commerce company to turn to the US for an IPO that may raise about US$20 billion. Hong Kong should accommodate new shareholding and management structures to allow companies in different legal forms to conduct IPOs, a government advisory panel said in June.

“Hong Kong as a financial centre needs to be competitive,” Graham said. “This is not about HKEx, this is about Hong Kong as a financial centre. This is a development which may be potentially encouraging companies to list elsewhere.”

If there is support for changing the rules, the bourse will consult with the public on ways to proceed, Graham said.

Alibaba, whose IPO may edge past Visa’s $19.7 billion offering as the largest in US history, is governed by a partnership that has the exclusive right to nominate a majority of its board of directors, according to its US regulatory filings. The system enables Alibaba founder Jack Ma and his management team to keep control.

Advisory Board

The city should reconsider the “one share, one vote” concept and open up its IPO market to “quality companies from all corners of the world,” Hong Kong’s Financial Services Development Council said in a report on 18 June.

The paper set out the different rules on voting- class shares in countries including the US, the UK, Japan and Singapore, as well as current regulations that provide investor protection in the former British colony.

Hong Kong has maintained a “one share, one vote” policy since 1987, when companies including Jardine Matheson Holdings and Cheung Kong Holdings proposed issuing B shares in exchange for one or more of their ordinary equities that would have allowed controlling shareholders to increase voting power, according to David Webb, a former exchange director who founded local governance watchdog

‘Rational Debate’

Hong Kong’s absence of a class-action legal system has made the city’s regulators reluctant to change the status quo because less redress is available to small shareholders. In the US, companies with more than one type of share, including Google and Facebook, are subject to more stringent reporting requirements and a class-action litigation system.

Losing what may be the biggest internet offering in Chinese history shows Hong Kong needs to talk about its future competitiveness, Charles Li, the chief executive officer of HKEx, wrote on his blog in April.

“Our market still has room to improve and our efforts should not stop simply because one company has left for another market,” Li wrote. “It’s time for us to let our emotions subside and have a rational debate.”

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