Reintroducing the dual-class share structure in Hong Kong: For a balance between market openness and investor protection
Financial globalisation has given issuers more freedom to choose listing venues that best suit their needs and has thus intensified the inter-jurisdictional stock market competition. Against this backdrop, dual-class share structures (‘DCSSs’) have recently gained increasing acceptance in the global listing community, such as in Singapore (2018), China (2019) and the UK (2021). Also, Hong Kong reintroduced the DCSS in 2018 to enhance its attractiveness primarily to Chinese issuers, given that the Hong Kong stock market has a high level of reliance on the listing and trading of Chinese issuers.
Several years have elapsed since the implementation of the Hong Kong stock market reform. Notwithstanding this short experience, it is possible to draw some conclusions. Whether and to what extent has the reintroduction of DCSS helped the Hong Kong stock market accommodate Chinese issuers? To answer this question, my article explores the landscape of Chinese companies’ Hong Kong listings in the post-reform era.
Based mainly on empirical and comparative analyses, my article finds that Chinese issuers have only sparsely used DCSSs in Hong Kong listings in the post-reform period. I attribute this phenomenon to the strict ex-ante regulation in force in Hong Kong. As evidenced by empirical studies, from 30 April 2018 (when Hong Kong reintroduced the DCSS) to 31 December 2021, 120 Chinese issuers went public in the US with 74 of these adopting DCSSs. Of these, 28 did not meet the financial threshold of listings with a DCSS (ie the minimum market capitalisation requirement) in Hong Kong, and 15 companies attached more than 10 votes to each superior voting share, which is not allowed in Hong Kong. Besides, 17 issuers satisfied neither the listing financial requirements nor the 10:1 voting differential cap required in Hong Kong. In sum, 60 of the 74 US-listed Chinese DCSS issuers (81.1 per cent) may have been blocked from floating in Hong Kong due to the ex-ante regulation in force.
Considering the importance of accommodating Chinese issuers, the sparse use of the DCSS in the post-reform era appears to suggest that Hong Kong should relax its ex-ante constraints. But this conclusion is unwarranted. The original purpose of reintroducing DCSSs in Hong Kong was not to accommodate as many Chinese issuers as possible; otherwise, Hong Kong policymakers may have required issuers seeking to use the DCSS to satisfy listing criteria identical to one-share-one-vote (OSOV) counterparts. Instead, policymakers regard the proportionality principle as the ‘optimum method’ of allocating voting power. As such, on the one hand, they have abolished the blanket prohibition on the DCSS to increase market openness to certain issuers, while, on the other hand, employing stringent ex-ante regulatory constraints, eg the minimum market capitalisation requirement, to maintain market integrity to the benefit of public investors. It means that the stringent ex-ante regulation is a purposefully designed trade-off, aiming to limit the use of DCSSs to business giants. Take Xiaomi, the first Chinese issuer with a DCSS in Hong Kong: Xiaomi has attached 10 votes to each superior voting share, thereby enabling its founder to obtain 54.74 per cent of the total voting power by holding 29.4 per cent of the equity stake. Thus, the founder has floated Xiaomi in Hong Kong, in part to avail himself of using the DCSS to achieve corporate control. Put differently, reintroducing the DCSS has helped the Hong Kong stock market cater to the Chinese business giant, compared to the previous prohibition for decades.
Accommodating the initial public offerings of Chinese business giants only reflects a facet of the value of reintroducing DCSS. The purpose of Hong Kong’s policy shift towards the permission of disproportionality is also to accommodate certain Chinese issuers’ secondary listings. In its 2018 stock market reform, Hong Kong employed a high financial threshold to define the eligibility of qualifying issuers’ secondary listings. In this way, the secondary listing regime has been revised to accommodate Chinese business giants. However, without reintroducing the DCSS, the Hong Kong stock market reform may not play a significant role in catering to Chinese business giants’ secondary listings. The US serves as the second-largest offshore listing harbour of Chinese companies other than Hong Kong, in which the DCSS has enjoyed a broad spectrum of usage among Chinese issuers. Assuming a US-listed Chinese DCSS issuer conducts a secondary listing in Hong Kong with the issuance of new shares on a OSOV basis, a proportionate subscription would dilute the founder’s voting power. Therefore, without the availability of DCSSs to maintain control, certain qualifying Chinese issuers primarily listed in the US may be discouraged from pursuing a secondary listing in Hong Kong. This is reflected by market data: by the end of 2021, 12 of the top 20 US-listed Chinese companies in market capitalisation have conducted a secondary listing in Hong Kong; of these, 8 had adopted a DCSS.
Although China has afterwards permitted the DCSS to provide domestic issuers with a new landing zone, this article argues that there is no need or basis for Hong Kong to relax the ex-ante regulation on the use of the DCSS. Hong Kong is unlikely to encounter a race to the bottom with its Chinese counterpart and lose its competitiveness. Instead, upon the increasing integration of Hong Kong’s economy into the Chinese economy, building a cross-border common stock market to harmonise the competitive and cooperative relationship for both sides is a potential way forward in the long run. Moreover, without introducing alternative measures to ensure investor protection, eg a securities class action mechanism, there is no solid ground for reorientation away from the present ex-ante regulation.
Fa Chen is a Lecturer in Corporate and Commercial Law at King’s College London.
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