In Hong Kong, where billionaire families dominate the economy, listing standards that prevent company insiders from hoarding control strike Pauline Dan as protections worth guarding.
The Asian city’s stock regulator is holding firm against looser governance arrangements that prevail in the U.S., costing Hong Kong Exchanges & Clearing Ltd. the initial share sale of Alibaba Group Holding Ltd. Resistance may be justified in a market that lacks class-action lawsuits and is home to four of Asia’s five richest people.
“There obviously will be missed opportunities, but it’s worthwhile for us to give them up,” said Dan, who helps manage $153 billion as Hong Kong-based head of greater China equities at Pictet Asset Management Ltd. “I don’t think it’s necessary for us to change this rule just to accommodate Alibaba in this instance.”
Alibaba, China’s biggest e-commerce company, said March 16 it will begin the process of filing for an initial public offering in the U.S., after struggling to persuade Hong Kong’s regulator that it should be allowed to let its partners nominate a majority of directors. Bourse head Charles Li said in a statement last week that the city needs to work out how to accommodate firms tied to “new economy.” Alibaba respects the viewpoint and policies of Hong Kong, the company said in a statement on March 16.
Only one Hong Kong-listed company has more than one class of stock: Swire Pacific Ltd., which operates businesses from real estate to aviation and issued B shares in 1973. The regulator barred the practice in 1987 after companies including Jardine Matheson Holdings Ltd., Cheung Kong Holdings Ltd. and Hutchison Whampoa Ltd. proposed issuing B shares in exchange for one or more of its ordinary equities, allowing controlling shareholders to increase voting power, according to David Webb, a former exchange director who founded local governance watchdog Webb-site.com.
NYSE took the opposite approach in the same decade, giving in to pressure after General Motors Co (GM:US). threatened to move its listing to an alternative venue to allow it to issue stock with fewer voting rights. The New York bourse reconsidered a policy of rejecting dual-class structures, spurring almost 50 companies to sell stock with different voting rights from GM in 1984 to the middle of 1987, according to the St John’s Law Review.
Alibaba’s board-nomination proposal to Hong Kong would have enabled its founder Jack Ma and his management team to maintain control. Executive Vice Chairman Joseph Tsai said in a September post on the company’s website that the structure didn’t involve more than one type of stock and therefore didn’t breach the “one-share-one-vote” principle.
For Jeffrey Mak, a partner in Hong Kong at law-firm DLA Piper, there is too much risk for Hong Kong regulators to change the status quo because without a class-action legal system, shareholders seeking redress are out of luck.
“The whole U.S. system is more litigious, meaning that if there’s anything wrong, then investors tend to go to lawyers to sue,” Mak said by phone. “In Hong Kong, there could be an inertia from investors to sue a company in such situations. The regulators want therefore to take a more proactive role in Hong Kong to protect the interest of shareholders.”
In Hong Kong, people have to pay upfront for their own lawsuits and the city lacks a class-action mechanism, Mak said. Of its 1,669 listed companies, 486 are domiciled in China, which has its own legal system.
Martin Wheatley, chief executive officer of the U.K.’s Financial Conduct Authority, said regulators should avoid knee-jerk changes.
“At your peril do you mess around with a set of rules at very short notice because of one or two individual instances,” Wheatley said in a Bloomberg TV interview in Hong Kong on March 20, while adding he was not commenting specifically on Alibaba. “My approach in the U.K., and I’m sure the approach here, is that you have to think very hard before you move away from some core principles.”
In the U.S., companies including Google Inc. (G:US) and Facebook Inc. have more than one type of share, as does Canada’s Canadian Tire Company Corp. In the U.K., Royal Dutch Shell Plc has two share classes that are identical for rights while the tax paid on dividends differs. Singapore doesn’t allow dual-class voting shares.
“Hong Kong should look to review and consider this,” George Boubouras, who helps oversee a portfolio of global equities worth $30 billion as chief investment officer at Equity Trustees Ltd. in Melbourne, said by phone. “Shareholders are becoming more interactive on proposals to changes on remuneration and inputs into the laws, so if they want to be heard there are ways of doing it.”
Alibaba said March 16 it would start the process for an IPO in the U.S., without specifying how many shares it would sell or at what price. It may sell about a 12 percent stake in itself, according to a person with knowledge of the matter, making it an $18.4 billion offering based on the $153 billion average valuation of analysts, according to data compiled by Bloomberg.
Alibaba would join Chinese Internet firms already listed and those looking to go public in America. Baidu Inc. (BIDU:US), owner of China’s biggest Internet search engine, sold shares in the U.S. in 2005 on Nasdaq OMX Group Inc. JD.com Inc., the Chinese retailing website that received an investment from Asia’s largest Internet company Tencent Holdings Ltd., has filed to raise $1.5 billion in the U.S.
The Hong Kong bourse hasn’t hosted an initial share sale of more than $4 billion since October 2010. The Hang Seng China Enterprises Index rose 2.8 percent today in Hong Kong to pare its 2014 drop to 10 percent.
Hutchison Whampoa Ltd., controlled by Asia’s richest man Li Ka-shing, said March 21 it had agreed to sell a 25 percent stake in its retail arm to Temasek Holdings Pte for HK$44 billion ($5.7 billion). Li said the companies will seek to list A.S. Watson & Co. in two to three years, changing a plan for an IPO this year. Hutchison fell 5.1 percent today, the biggest drop since October 2011.
Hong Kong Exchanges CEO Charles Li, 52, is positioning Hong Kong as the investment link between China and the rest of the world, buying the London Metal Exchange for $2.2 billion in 2012 to expand the bourse’s operations into commodities.
“We are proud of our tradition of respect for the rule of law and adherence to principles,” Li said in a statement. “However, we also need to find ways to make our market more responsive and competitive, particularly with respect to new economy or technology companies.”
Hong Kong’s Securities and Futures Commission Chairman Carlson Tong said the regulator does not object to the Hong Kong bourse consulting the market on new rules, while signaling the threshold for adopting a different stance is high.
“The principal of ‘one share one vote’ is deep-rooted in the Hong Kong capital market,” Tong said in an e-mailed statement on March 20. “Many questions need to be answered before we can consider changing.”
To contact the reporters on this story: Adam Haigh in Sydney at firstname.lastname@example.org; Kana Nishizawa in Hong Kong at email@example.com
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