With effect from 30 April 2018, the listing rules of the Hong Kong Stock Exchange were amended to permit issuers with individual weighted voting rights (WVR) to list on the exchange. The Consultation Paper (CP) on Corporate Weighted Voting Rights Beneficiaries proposes to extend this permission to cover issuers with corporate WVR.
As was the case with individual WVR, this proposal is highly controversial. Indeed, it was for this reason that HKEx decided to postpone the issue of the CP, originally targeted for 31 July 2018, “with the aim of developing a broader consensus on the subject.”
One of the reasons why WVR is so controversial is that it is a departure from Hong Kong’s traditional “one share, one vote” system, a bedrock principle of good corporate governance. As the CP itself states, this principle “continues to be the optimum method of empowering shareholders and aligning their interests in a company. Allowing corporate entities will add an additional level of complexity to the rules, if implemented.”
There would therefore have to be very good reasons for departing further from this principle, by extending individual WVR to corporate WVR. In other words, clear public benefit would have to be demonstrated if such a proposal were to be implemented. Moreover, there must be clear evidence that the benefits outweigh the costs and risks of doing so.
In terms of potential benefits, it seems that the main objective of the proposal, as with individual WVR, is to enable HKEx to compete more effectively with other exchanges (notably in the United States) for listings of innovative companies, particularly from Mainland China. The CP appears to imply that individual WVR has been insufficient to achieve this objective, and that corporate WVR would remedy this.
It would be helpful to know whether potential listing applicants in Hong Kong had chosen other venues due to the lack of corporate WVR in Hong Kong. In the absence of such information, it is difficult to see real benefits that would result from the proposal.
Even if corporate WVR were to achieve the objective of enabling HKEx to compete more effectively with overseas exchanges, this must not be done at the cost of reducing investor protection. Indeed, this is a requirement imposed on HKEx by the Securities and Futures Ordinance. There must be clear evidence that WVR structures pose no risks to the investing public before they are introduced, or if there are potential risks, there should be effective safeguards in place.
The CP does indeed identify a number of substantial risks with corporate WVR. Some of these were also risks identified by HKEx in its consultation paper on individual WVR. The CP states that certain of these risks (such as misalignment of shareholders’ interests) would be exacerbated by corporate WVR, and that corporate WVR also presents additional risks.
It is therefore all the more important to demonstrate that the proposed safeguards set out in Chapter 4 of the CP will be effective. We would welcome further explanation and reassurance from HKEx on these safeguards.
It would also be helpful to provide an explanation of the experience of implementing individual WVR. This could cover questions such as: which companies with WVR have been listed, whether there have been any disputed applications and how such disputes were resolved, and whether the safeguards for the investing public have proved effective.
As it is, certain aspects of the proposed safeguards would benefit from further clarification, particularly the “ring-fencing” measures which are designed to “reduce the risk of WVR proliferating and becoming commonplace in Hong Kong.” For example:
- In assessing whether the prospective corporate WVR beneficiary will make a sufficient contribution to its “ecosystem,” what is a “meaningful scale” that the ecosystem must have attained? And what will be considered sufficient experience in “emerging and innovative sectors”? These criteria are rather vague and subjective.
- The CP proposes that corporate WVR will lapse permanently if the corporate’s contribution to the WVR issuer is “substantially terminated or materially disrupted or suspended” for a period exceeding 12 months. But it is not clear how this provision would be assessed or enforced.
HKGCC understands HKEx’s underlying intent to enhance Hong Kong’s attractiveness as a listing destination through corporate WVR. We are prepared to support such an initiative but before we commit to doing so, there would need to be:
- Clear evidence that its introduction would add value to the current situation, namely, public benefits which cannot be achieved with individual WVR; and
- Clear evidence that, or at least a reasoned explanation as to why, the safeguards which HKEx proposes to combat the acknowledged additional risks of corporate WVR will be effective.