Market criticises HKEX’s new board concept

Author: Amélie Labbé | Published: 30 Aug 2017
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By Amélie Labbé, editor

The Hong Kong Stock Exchange’s (HKEX) proposals to relax its listing rules to attract a broader spectrum of companies has run into opposition from the market.

Some participants have come out against the planned introduction of a third board which they feel could compromise the market’s entire structure. Critics include the Asia Corporate Governance Association (ACGA) which called the plans 'strategically unsound’ in an August letter.

HKEX has been trying for a while to ease requirements to encourage more varied corporate listings amid fierce competition from other exchanges. London, for instance, has been touting the possibility of a new premium listing category to attract companies controlled by a sovereign entity, such as Saudi’s flagship oil company Aramco which is planning to go public in 2018.

The right way

According to HKEX’s New Board Concept paper, published in June, a third exchange would help attract companies that don’t meet the requirements to list in Hong Kong – these could be new economy companies (NECs), startups that don’t meet the financial or track record criteria to list and companies with non-standard governance structures (family-owned or state-controlled companies for example).

"Dual-class shares are controversial as they allow investors who don’t control the company economically to control its decision-making process"

But several market participants feel this is not the right way to diversify the exchange’s client base. There has been widespread criticism that competing for global IPOs is not really a standalone reason for reform.

"HKEX is a fairly mature market so creating a third board with lower requirements is not the best way forward to develop the market," said Jamie Allen, the ACGA’s founding secretary general. "Having three boards acts as a signal on what type of company you’re investing in: a third board could be seen as third rate."

A number of exchanges globally have been vying for the position to house mega IPOs and offerings of attractive companies which don’t necessarily fit the mould of an eligible company. Saudi Aramco is one name that’s been widely discussed but so-called US and Asian tech unicorns could also be in the pipeline.


  • The Hong Kong Stock Exchange (HKEX) wants to relax rules to allow a broader group of companies to list, including those that don’t meet capital or financial track record criteria;
  • The proposals also include the introduction of a third board, which could be used by companies wanting to use dual class shares;
  • These securities have been criticised by investors globally because they don’t entitle the holder to any voting rights. They are favoured by the founders of companies who don’t want to relinquish control but still want to tap capital markets;
  • Several Hong Kong organisations have come out against the HKEX’s plans, arguing they add more complexity to an already challenging market.

If approved after the current consultation, which ends in the autumn, HKEX’s plans would mean the introduction of the more flexible framework in 2018.

Hong Kong’s main board is not small company-friendly, and instead caters to more established organisations which are profitable, and have met required market capitalisation and corporate governance standards. A company is required to have reported profit of at least HK50 million ($6.42 million) in the three years before the listing, a criterion that some of the smaller organisations would find difficult to fulfil.

Hong Kong’s other exchange, the Growth Enterprise Market, puts the emphasis on strong disclosure, which some companies could find equally as difficult to satisfy.

"It would be more sensible to look at the main board’s requirements again," said Allen. "Revisions could be made to entry requirements around profitability and minimum market capitalisation for example, and a case could be made for listing pre-profit companies with higher governance and disclosure standards."

What about dual-class shares?

Hong Kong floated plans to introduce weighted voting rights (WVRs) a few years ago, in a bid to attract the $25 billion listing of Alibaba Group. It didn’t admit the Chinese company to trading at the time because Alibaba’s governance structure allowed some of its founding shareholders to appoint most of the company's board, in direct opposition to the exchange’s 'one-share-one-vote’ principle.

"The HKEX had a hard line against dual-class companies but the feeling is that they want to attract more listings – at what cost?" said Amy Borrus, deputy director at the Council of Institutional Investors.

Dual-class shares are controversial as they allow investors who don’t control the company economically to control its decision-making process.  

But a few years down the line, it seems as HKEX is thinking about the same issue again, as is neighbouring Singapore. According to Bloomberg data, seven out of the top 10 listed Chinese companies have dual-class shares including Alibaba, Baidu and Weibo. A large proportion of companies which could go public in the future, especially in the tech sector, seem to favour them. In the US, two recent high-profile IPOs, those of Snap and Blue Apron, went ahead with non-voting shares, while 10% of all listed companies are believed to have a dual-class structure.

The chief executive of the Hong Kong Investment Funds Association, Sally Wong Chi-ming, concedes that a key argument in support of allowing the dual share class structure is that the HKEx is missing out on the new economy, and is stuck in old economy sectors such as banking and property.

"However, on balance, from an investor’s perspective, we are concerned that WVRs are a negative development in terms of protecting investors as it strips them of an extremely important tool to have sway over the management of a listed company," she said.  

There is an idea that only if a WVR structure is allowed will HKEX be able to attract new economy companies.

Wong Chi-ming challenges this. "Over the years, a not insignificant number of NECs (including mega sized ones) have been listed on HKEX," she said. "If one looks at what’s in the pipeline (via the A1 application list), quite a number of them are NECs."

Hong Kong and all of Asia more generally don’t have the level of corporate disclosure seen in other jurisdictions. Most of the jurisdictions there, to the exclusion of China, don’t allow class action lawsuits either which could further undermine investor rights.

"State and family ownership is also quite common so there’s already a lot of corporate governance challenges to overcome," said Allen. "Adding dual class shares will make the whole environment more complex."HKEX

Fears that a new exchange could act as a so-called Trojan Horse have also been expressed. A company which has a dual share structure could choose to list on the third board then move to the main board a few years later, once it meets the necessary requirements to do so. Borrus stresses this could become a race to the bottom which could ultimately make companies less accountable to public shareholders.

Where do we go from here?

  In a July article, Edward Bibko, head of Baker Mckenzie’s EMEA capital markets group told IFLR that there were some state-backed companies which would potentially be interested in listing on a separate venue to reflect their different status. While he was referring to the ongoing debate surrounding the London Stock Exchange’s own proposed introduction of relaxed listing rules, the argument applies elsewhere as well. 

"The best way forward on mega IPOs should be: let’s think about a way to list these companies that completely segregates them but does not change the standards for the entire market," said Allen. "These companies are an exception and need to be listed as such."


  See also

  FCA woos Aramco with relaxed listing rules

  Aramco not responsible for UK IPO reform

  Blue Apron’s no-vote shares IPO concerns investors

  PRIMER: the Hong Kong-China Bond Connect