(Feb 17): Hong Kong and Singapore are at it again. The Asian financial hub rivals are reviving a debate on dual-class shares as global competition for the hottest initial public offerings intensifies.
Singapore is a few steps ahead. Prime Minister Lee Hsien Loong last week gave his approval to dual-class shares and other measures proposed by a panel to drive economic growth. The city-state’s stock exchange on Thursday started a public consultation, a final hurdle before allowing the structure. Hong Kong Exchanges & Clearing Ltd Chief Executive Officer Charles Li in January revisited the topic after a 2015 proposal was shot down by his regulator.
While Hong Kong is one of the world’s leading IPO venues, it’s been passed over by big Chinese companies such as Alibaba Group Holding Ltd and Baidu Inc, which listed on New York bourses where different classes of shares are allowed. As Alibaba’s banking and payments arm Ant Financial prepares an IPO, Singapore and Hong Kong are trying to balance the interests of founding shareholders with those of other investors.
“The timing is not a coincidence in that it is seemingly driven by high-profile IPOs that feature dual-class structures,” said Mark Humphery-Jenner, a Sydney-based associate professor of finance at the University of New South Wales Business School. “It is an attempt to capture a share of entrepreneurial listings and to provide an alternative to a US exchange.”
Dual-class structures comprise a class of stock, often distributed to founding shareholders, that carries more voting rights than the ordinary shares sold to the public. Facebook Inc has said such shares allow its founder and CEO Mark Zuckerberg to focus on long-term goals instead of being distracted by the short-term pressures of a listed company.
About 15% of IPOs in the US had the structures in 2015, up from 1% in 2005, according to a presentation by Gilbert Matthews, senior managing director of Sutter Securities Inc. More than half the dual-class IPOs in the US in 2015 were technology companies.
The New York Stock Exchange, now a unit of Intercontinental Exchange Inc, lifted a 60-year ban on dual-class shares in the 1980s, responding to competition from Nasdaq Inc. Weighted voting rights aren’t allowed in countries including Spain, South Korea and India. One reason is because many institutional investors are opposed to the structure and its implications for effective corporate governance.
“We, as with the overwhelming majority of other long-term investors, strongly believe in ‘one share one vote,’ with control proportionate to economic interests,” said David Smith, head of corporate governance at Aberdeen Asset Management Asia Ltd, a unit of Aberdeen Asset Management Plc. “We are very concerned that this effects a contagion across the region, with other exchanges no doubt having to reconsider their position on this issue if SGX does indeed go ahead.”
Sutter’s Matthews sees the use of such structures increasing despite some investor opposition. “The success of dual-class offerings in recent years has shown that investors continue to accept low-vote shares,” he said.
In the US, companies with more than one type of share class have tougher reporting rules and shareholders can band together on lawsuits. The bar for similar lawsuits in Singapore and Hong Kong is much higher.
While Singapore Exchange Ltd’s listing advisory committee gave the nod to dual-class shares, it said it wanted safeguards in place, and added that the one-share-one-vote structure would be the default for new listings. In October, Hong Kong’s chief regulator, Securities and Futures Commission CEO Ashley Alder, said it was not impossible some version of the structure could be accepted on the city’s markets.
“An interesting development at an interesting time,” Singapore Exchange CEO Loh Boon Chye said in January, referring to HKEX’s efforts to reconsider dual-class shares.
Shares of Singapore Exchange closed down 0.8% on Friday. HKEX stock was down 1.1%.
Under the SGX proposal for dual-class shares released on Thursday, companies would need to have a market value of at least S$500 million, participation by institutional and accredited investors and a so-called sunset provision, where the dual-class structure would expire. The exchange said it will hold a second consultation to get further feedback if there’s market consensus on the structure. The first consultation closes on April 17.
“If we collectively do this right, Singapore can be the preferred operating place and fund raising venue for individuals with the ideas and strategies that can radically change the business landscape, create jobs and transform our economy,” said Chew Sutat, head of equities and fixed income at the Singapore Exchange.
HKEX’s Li said dual-class shares may be considered for a proposed third exchange in the city — a potentially lengthy process that would require regulatory approval. That bourse might be only for professional investors, he said.
“Dual-class shares will always have its supporters and its detractors,” said Raymond Tong, a Singapore-based capital markets lawyer at Clifford Chance LLP. “Exchanges will always need to see how they can develop new products for their markets.”