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
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
SFC’s board of directors has announced that it
unanimously opposes the HKEx’s proposal for
weighted voting rights;
consultation, released last Friday, included suitability
standards and other measures to limit the number of companies
that adopted WVR, but the regulator was not
- However the regulator
mentioned primary listings with WVR, and it’s
hoped that secondary listings may be an option.
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
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.
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
"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
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
"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
The SFC’s response was directed at
primary listings; it didn’t mention the
Exchange’s proposals for potential secondary
At the moment companies with a centre of gravity in
Greater China are unable to have secondary listings on the Hong
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
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."
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