SFC rejects HKEx weighted voting rights conclusions

Author: Ashley Lee | Published: 26 Jun 2015
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The board of Hong Kong’s securities regulator unanimously opposed the Hong Kong Exchange (HKEx) proposal for allowing weighted voting rights. But a potential secondary listings regime wasn’t addressed.

Following the SFC’s release, HKEx announced that it will engage with the SFC. "The Exchange’s Listing Committee will decide the best way forward in light of the views of the SFC," it said.

When the consultation conclusions were released, HKEx’s chief regulatory officer and head of the Listing Committee, David Graham, said that the consultation was about to be finalised. But the SFC’s rejection has essentially torpedoed the consultation, because its board of directors must approve any changes in the listing rules.

"In carrying out its regulatory functions, the SFC considers both long-term and short-term objectives and seeks to uphold the core principles of fairness and transparency which underpin Hong Kong’s reputation as an international financial centre," said the regulator in a release.

The release of the so-called concept paper followed Hong Kong’s loss of the Alibaba initial public offering (IPO) – the largest IPO ever – following the regulator’s refusal to consider its partnership structure. The Chinese internet company ultimately raised $25 billion in its listing on the New York Stock Exchange last September


  • The SFC’s board of directors has announced that it unanimously opposes the HKEx’s proposal for weighted voting rights;
  • HKEx’s consultation, released last Friday, included suitability standards and other measures to limit the number of companies that adopted WVR, but the regulator was not convinced;
  • However the regulator mentioned primary listings with WVR, and it’s hoped that secondary listings may be an option.

Concept responses

Last Friday Graham announced details of the proposed consultation, which would have included a high minimum valuation, enhanced suitability criteria and WVR structures for only new listcos. The SFC refuted all those points in its release.

Hong Kong’s lawyers will likely be disappointed by the SFC’s announcement.

A number of law firms filed responses, including Baker & McKenzie, Cadwalader, Davis Polk & Wardwell and Slaughter and May. Freshfields Bruckhaus Deringer filed three – one on behalf of the Chinese investment banks in the market, one for seven international investment banks and the Asia Securities Industry and Financial Markets Association (Asifma), and one on its own behalf.

All but one supported the use of WVR structures in some circumstances, according to the conclusions. Davis Polk, the one firm that didn’t comment, instead focussed on whether US-style class action procedures are a material reason why WVR structures shouldn’t be permitted in Hong Kong.

In contrast, almost all individuals that responded – including retail investors and HKEx participant staff – opposed WVR structures. And most of the biggest asset managers, including Aberdeen Asset Management, BlackRock, Fidelity and State Street, agreed.

'Introducing WVRs would, in our view, make Hong Kong a less attractive market for minority and foreign investors when taken into consideration with the other unique characteristics of the market,’ wrote Pru Bennett, head of corporate governance and responsible investment, Asia-Pacific, at BlackRock.

Even lawyers were sceptical. One, speaking on condition of anonymity, believed that this was a risky proposal for Hong Kong. "In particular, Hong Kong has low free floats, constraints on class actions, and a limited amount of shareholder activism that would otherwise keep these companies in line in other jurisdictions.

SFC objections

Even before the SFC’s announcement, lawyers were sceptical that the HKEx’s suitability criteria could be implemented.

The US exchanges have made a strong statement that as long as dual-class voting structures are disclosed, investors can decide, said Stephen Peepels, head of US capital markets, Asia-Pacific at DLA Piper, before the SFC’s release yesterday.

"For Hong Kong to shift away from its traditional paternalistic way of looking at retail investors, and instead implement a halfway stance in which they only allow these structures in certain circumstances strikes me as a fairly difficult thing to put in practice," he said.

Some law firm respondents hoped that the criteria would be even more discretionary, instead depending on the Listing Committee’s views.

In Cadwalader’s response, its lawyers '[believed] that the Exchange should also be expressly granted discretion to allow use of these structures in other circumstances where the Listing Committee determines that the issuer’s situation makes use of such structures reasonable, without posing undue risk to investors’.

The SFC, however, took the opposite view on the suitability criteria: "A regime that relies on the subjective judgement of regulators to determine which listing applicants are eligible for WVR would give rise to regulatory uncertainty and could result in inconsistent and unfair decision-making."

"Hong Kong would be better off to decide whether it wants dual-class voting structures or whether it doesn’t," said Peepels. "If it does, there shouldn’t be a halfway point in relation to suitability."

Secondary listing potential

The SFC’s response was directed at primary listings; it didn’t mention the Exchange’s proposals for potential secondary listings.

At the moment companies with a centre of gravity in Greater China are unable to have secondary listings on the Hong Kong Exchange.

In its consultation conclusions the HKEx noted that respondents favoured giving secondary-listed companies greater flexibility regarding WVR structures if it is already listed in a market with credible regulatory standards – that they meet the requirements of the Joint Policy Statement for Overseas Companies.

Speaking at the press conference last week, Graham noted that the all-share requirement may not apply for these companies if they have been vetted by a qualified exchange.

Peepels believed this could boost Hong Kong’s equity markets. "Permitting secondary listings by US-listed companies with WVR structures is a more interesting conversation to have than trying to create a new way for companies to do an IPO on the Hong Kong Exchange by permitting a dual-class share structure," he said. "Putting such limitations on WVR structures narrows the universe of companies that could even take advantage on that."

See also

HK to consult further on dual class shares

Take-private HK IPO could start trend

HKEx proposes volatility control mechanism