January 26, 2018 / 4:56 AM / a month ago

Breakingviews: Super-voting stock returns a split-ticket

By Breakingviews columnists

HONG KONG (Reuters Breakingviews) - As part of a series of events marking the publication of the annual Breakingviews Predictions book, a panel convened in Hong Kong on Jan. 9 spent time debating the autonomous Chinese territory’s plan to open the door to dual-class share structures.

The participants were Alain Lam, Credit Suisse’s head of technology, media and telecom for the Asia-Pacific region; Pru Bennett, BlackRock’s head of investment stewardship in APAC; Lihong Wang, managing director of Bain Capital Private Equity, Asia; and Janice Lee, managing director of PCCW Media Group. Breakingviews Deputy Editor Jeffrey Goldfarb moderated the discussion.

Below is a partial transcript, edited for length and readability. There is also a video link to the full discussion and audio of this segment.

GOLDFARB: THE HONG KONG STOCK EXCHANGE IS ON ITS WAY TO OPENING ITS DOORS TO COMPANIES WITH MULTIPLE CLASSES OF STOCK. WHAT WILL THE IMPACT BE?

Lam: Certainly I think it helps the stock price of the Hong Kong Stock Exchange, which has been going up every day. I’m a happy shareholder. At the same time I think it’s good for the market because a lot of Chinese issuers in the past were suffering from a lack of choice.

I think the market is certainly more receptive to [tech, media and telecom] stocks, in Hong Kong in general, looking at the performance of the stocks that were listed last year: Zhong An, China Literature etc. I do see that there will be a wave of companies that will go public in Hong Kong under this dual-class mechanism. I think it is good for the stock exchange to impose some kind of limitations. Otherwise, you’ll see a lot of small companies coming up which might not necessarily be good for the market.

Not only do we have a lot of dialogue with startup companies that want to list in Hong Kong under this dual-class structure, a lot of companies that went private [in the United States] are going to go back to the Asia market and are thinking about whether Hong Kong is a likely venue. The third wave will be the existing listed companies coming back to Hong Kong.

It’s yet to be seen whether companies like Alibaba will shift the liquidity from the U.S. market to the Hong Kong market.

GOLDFARB: WE’VE SEEN A FEW MORE SUNSET CLAUSES BEING PUT INTO BYLAWS, WHICH IMPOSES AN EXPIRY DATE ON THESE DUAL-CLASS SHARES.

Bennett: BlackRock as a firm is very much supportive of “one share one vote.” And I think what really hasn’t been done in Hong Kong is to ask the question of why have all of these companies gone to New York to list. Is it just because of dual-class shares? Less than 50 percent of the Chinese tech companies that are listed in the U.S. have dual class shares. Baidu is “one share one vote.” What they all have in common is they’re all incorporated in the Cayman Islands. The Cayman Islands has basically no corporate governance standards.

If you then go and list in the U.S., the U.S. law says you can just bring your governance furniture from your place of incorporation, and you just have to use that. You don’t have to comply with U.S. corporate governance standards. Baidu has never held an annual general meeting. If you’re going to have secondary listings and have Baidu here and not have an annual general meeting, I just think that’s appalling. Now if you say to Baidu, you can have a secondary listing but you have to have an annual general meeting, then they’ll say why bother coming to Hong Kong? I really don’t think it’s going to have an impact. 

Sina.com [was] “one share one vote” until a few weeks ago. There was a proxy contest, and they didn’t like it. I think the founder had about 5 percent or 6 percent, and overnight control went up to over 50 percent. I don’t think that’s what Hong Kong wants. This is a real problem, and I don’t think it’s been thought through properly, particularly around secondary listings.

The U.S. is different than Hong Kong; it’s a very litigious environment. It’s a check and balance. We don’t have that same system here. I’m not advocating that as a good system. I would prefer a sound governance system where shareholders have a voice, and there is a fiduciary duty for the board and senior management to act in the interests of shareholders, and that system doesn’t support that.

GOLDFARB: IS THERE A WAY TO CONTAIN THE EFFECTS?

Bennett: We’ve got a public document out there about the whole index issue. Our view on the index providers is that the index should represent the market, and that includes classes with no voting rights, which don’t hold annual general meetings. They’ve got to be there to represent the market. Now, we will have clients that don’t want to invest in companies that have no voting rights, so therefore there will be an index ex-companies that have no voting rights, just as we have clients too that don’t want to invest in tobacco companies, so they can go to the MSCI and say they want ex-tobacco or ex-controversial weapons or whatever criteria meets their beliefs. So that’s how it’ll work for us.

Lam: To be fair, if a company that is already listed in the U.S. were to do a secondary listing in Hong Kong, they are still facing the same litigation environment in the U.S. in the first place.

Bennett: Yes, but not if you’re a Hong Kong shareholder. If you buy those shares in the Hong Kong market, you won’t have the same rights as if you had bought them in the U.S.

Lam: Right. That’s my point also. It will drive some liquidity differences. Maybe because BlackRock will buy into the U.S. stock counter and not buy the Hong Kong counter, or some other fund will do that. So I think, ultimately, there are differential investor choices between the different exchanges.

GOLDFARB: JANICE, THIS AFFECTS YOU IN A DIFFERENT WAY. HOW ARE YOU THINKING ABOUT THIS?

Lee: First of all, as a stakeholder of the Hong Kong market, of course this flexibility of the dual-class listing is generally welcomed from TMT, especially startup sectors. It gives founders and management some level of control, especially now if you look at even creative companies being part of TMT. A lot of the time investors want to invest in that founding team which is really the creative brains behind it. But I love what Pru just said because it gives the other side of the coin. I’m actually on both sides.

Wang: I do think there is a philosophical issue here. Practically, I think it is a good thing for Hong Kong, but as a long-term investor, I think control governance has really important issues for us. The philosophical issue is that everyone gets old. [For founders], within a certain time they grab the opportunity, they create a great company, but I just don’t believe this would sustain for 60, 70 years. And a later stage, what’s going to happen?

I’m actually torn. I think this is a higher-ground corporate governance issue. I also agree that in China there’s not enough legal means that you can pursue. Even [for] directors, there’s no such [thing as] fiduciary duty per se in China.

Lam: If you have a global standard – everybody has “one share one vote” everywhere in the world and everyone has the same litigious environment – the market will be efficient. But absent that, people will arbitrage more, and maybe unfortunately or fortunately — it always [goes] to the lowest common denominator, which is what’s happening.

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