【Stock】Is WVR structure the right choice for HK IPO market?

The Hong Kong Exchanges and Clearing Ltd (HKEX) has completed the consultation of the New Board proposal, which triggered mixed responses from the market on its idea of allowing companies with a Weighted Voting Rights (WVR) structure to raise capital in Hong Kong because it will give founder shareholders a greater voting right.

Arthur Bacci, chairman of the Hong Kong Investment Funds Association believes that WVR structure means the separation of the economic interests and ownership rights. The allowance of WVR structure will deteriorate investor protection and lower the quality of IPO in the market globally.

“Once the exchange start to apply WVR structure, other markets, like Singapore or London may follow suit, in order to compete,” he said, “the overall quality of listed companies then might fall. “

The thinking that Hong Kong should expand its listing criteria to attract information technology companies was initially proposed in 2015, shortly after the HKEX (0388) lost out on the mega listing of Alibaba to the US. Despite the exchange’s continued belief that WVR is important to attract new economy comapines, the proposal at the time was turned down by the Securities and Futures Commission (SFC), the Hong Kong’s regulator.

Alibaba’s company structure gives a group of founding shareholders he right to appoint a majority of the company’s board, which would have contravened the Exchange's "one-share-one-vote" principle. But the company later on, listed in the US by raising US$25 billion, which is ranked as the world’s biggest IPO ever.

According to the concept paper, the New Board will allow non-standard governance structures and will be divided into two segments: New Board PREMIUM and New Board PRO.This will enable the calibration of shareholder protection standards based on the level of perceived risk in each segment.

New Board PREMIUM would be open to retail investors and, accordingly, a regulatory approach similar to that of the Main Board would apply. New Board PRO would be open to professional investors only and would provide a “lighter touch” approach to initial listing requirements.

Edwin Tam, a senior analyst at HGI Capital, viewed the New Board as a possible approach to accept WVR structure. Information Technology companies’ founders sometimes seek to avoid dilution of control. A method of doing so is via WVR structures that give them voting control disproportionate to their economic interest in the company.
He said: “For some companies with WVR structures, they empower those who have long-term interests at board to exercise that control in the best long-term interests of the company, rather than making a great profit in short-term and recommend much dividends to shareholders.”
“Institutional investors and retail investors differ a lot.

As professionists, fund managers are fully aware of the risk under the WVR voting structure and they are able to estimate those risk. But most retail investors cannot tell the situation, which puts them in a great danger. As a result, the New Board draws a boundary between institutional investors and private investors, which gives us multiple investment choices and meanwhile may be an effective method to protect private investors.”

K C Chan, former Secretary for Financial Services and the Treasury, made it clear at a recent press conference that the SFC holds positive attitude to any feedback on the concept paper and believes that the New Board makes sense.
A major attraction of the US market for many such companies is that WVR structures are permitted there, whereas the Hong Kong market does not allow them.

According to the concept paper 2017, although only 33 out of 116 (28%) mainland companies with primary listings in the US have WVR structures but their combined market capitalizationof US$561 billion represents 84% of the market value of all US-listed mainland companies. Their market capitalization is equivalent to 15% of the entire market capitalization of the Hong Kong market.
However, Christopher Cheung, a member of the Legislative Council of Hong Kong representing the Financial Services constituency, objects to the New Board. He said that the approach will make the market too complex and more difficult to control.

《The Young Financial Post 新報人財經》



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