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HKEx Consults On Weighted Voting Rights

by Mary Swire, Lowtax.net, Hong Kong
03 September, 2014

The Stock Exchange of Hong Kong Limited has published a Concept Paper, which seeks views on whether governance structures that give certain persons disproportionately greater voting power than their shareholding should be allowed for listed companies or those companies seeking to list.

Currently, both applicants and listed companies must ensure that the voting power of their shares bears a "reasonable relationship" to the equity interest those shares represent. This means a shareholder cannot have greater voting power than another if both have the same amount of equity in a company.

The Exchange, a wholly-owned subsidiary of Hong Kong Exchanges and Clearing Limited (HKEx), anticipates the paper may lead to one of two outcomes:

  • A conclusion that no amendment to the Listing Rules to allow companies to use weighted voting right (WVR) structures is appropriate at this time and that current practice is supported. In this case, the Exchange would publish conclusions explaining the reasons for any such outcome; or
  • Support for a material change to the Listing Rules on the acceptability of WVR structures. In these circumstances, the Exchange would again publish conclusions. Any change to the Listing Rules would require a second stage formal consultation process, including consultation on the details of the scope and language of any proposed Listing Rule changes.

David Graham, HKEx's Chief Regulatory Officer and Head of Listing, stated: "The Listing Rules say they should reflect currently acceptable standards in the market place so the Exchange has a responsibility to review the Rules periodically and consult the market when appropriate. Almost 25 years have passed since the restriction on WVR structures was implemented in the Listing Rules."

"Our aim in publishing the Concept Paper is to provide a formal opportunity for an informed debate on a topic that is of great market interest and potential significance to Hong Kong, and which has been the subject of much discussion and commentary," he added. "The Concept Paper is intended to be a neutral, factual, and analytical presentation of the relevant issues and considerations. The Exchange has formed no view and looks forward to receiving the views of respondents."

The Concept Paper points out that "one-share, one-vote … is broadly regarded as appropriate in relation to the fair and equal treatment of shareholders principle. It has, for many years, been seen as an important aspect of investor protection in Hong Kong in the sense that it helps align controlling shareholders' interests with those of other shareholders and makes it possible for incumbent managers to be removed, if they underperform, by those with the greatest equity interest in the company."

Hong Kong has established itself as the leading financial center for the listing and trading of Mainland Chinese enterprises outside the Mainland, with those companies now accounting for 57 percent of total market capitalization of the SEHK and 70 percent of total equity turnover.

Singapore and the UK also have restrictions against WVR structures, but the United States exchanges NYSE and NASDAQ allow companies to list with WVR structures. As at May 31, 2014, 102 Mainland Chinese companies were listed in the US, rather than in Hong Kong. Over half (56 percent) of these companies have been listed since the beginning of 2010, and almost one-third (29 percent) have a WVR structure. A large majority of Mainland Chinese US-listed companies with a WVR structure are information technology companies.

Since 2011, the number of Mainland Chinese companies with a primary listing in the US with these structures has been greater than those listing without them. 9 of the 12 Mainland companies that have this year decided to list on a US exchange have done so with a WVR structure.

The paper notes that the HKEx "has found no global trend towards or away from WVR structures." Some jurisdictions have permissive regimes (e.g. US, Canada and Sweden), while others prohibit both listed and unlisted companies from using WVR structures through their corporate law (e.g. Germany, Spain, and Mainland China), and some, like Hong Kong, allow unlisted companies to use such structures, but prohibit companies with, or seeking, a primary listing from using them (e.g. Australia, Singapore, and the UK).

Responses to the Concept Paper should be submitted by November 30, 2014.

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