Looking to attract the attention of tech titans dripping in potential profit, at the end of April HKEX made the decision to allow companies with dual class share structures to go public in Hong Kong.
Many believe this is in direct response to Alibaba opting to IPO New York. It was an almost Shakespearean turn of events: the shame of the golden child of the Chinese tech world snubbing its own family to elope with the NYSE, which has long allowed the dual class structure (much to the chagrin of Liberty Media shareholders, amongst others).
Recently the Chinese cellphone giant Xiaomi has begun to evaluate its own IPO and HKEX, refusing to have its heart broken twice, is a much more tempting suitor to the young Xiaomi with dual class share structures to go with roses.
Dual class shares, allow for key figures (founders, executives, family members) to own only a small percentage of total equity but retain majority voting power because the shares they hold contain many times the voting power of a normal share.
The dual class share model would essentially turn investors into capital cows, unable to affect the direction of company operations without a meaningful voice. Proponents argue that this ensures the company will not be compromised by short-term-profit oriented investors; but it’s worth considering whether the muzzling of the entire investment block is too high a price to pay. Once disenfranchised, investors are left with no option but to vote with their feet – except that offloading a stake can be difficult for indexed investors.
Currently Hong Kong is the only Asian market with the dual class structure but Singapore has expressed its intentions to follow suit. Other neighbors will likely be close behind, eager to keep their competitive edge. From a governance perspective, it’s looking like a race to the bottom – reminiscent of the NYSE’s adoption of dual class structures, which came after the exchange felt pressure from rival NASDAQ.
Zachary is an analyst covering the Hong Kong market.