The rivalry between two Asian financial centers is getting heated and the region’s CFOs may be the beneficiaries. Both Hong Kong and Singapore are planning to ease initial public offering rules to attract new listings, including dual-class shareholding.
The intensified competition was on display when Ashley Alder, Chief Executive of Hong Kong’s Securities and Futures Commission (SFC), made trenchant remarks at a public forum in Hong Kong in response to statements made by an executive of the Singapore Exchange.
“Hong Kong is part of China, whether you like it or not. Singapore is not. Is Hong Kong really the best place to list, where China has some influence on the Securities and Futures Commission?”
Not every company will benefit. Both Hong Kong and Singapore are targeting “innovative” enterprises, typically in high technology fields such as IT and biotechnology. And safeguards will be put in place to protect minority shareholders, including a minimum expected market capitalization and eventual conversion of multiple-vote shares to one-vote shares.
Not Very Adult
The spat between the bourses came to a boil when the Singapore Exchange’s Chew Sutat, who is the executive vice president in charge of equities and fixed income products, observed in a media conference in Hong Kong that “Hong Kong is part of China, whether you like it or not. Singapore is not.”
Asked Chew: “Is Hong Kong really the best place to list, where China has some influence on the SFC?”
“We don’t normally as an organization dignify remarks made by competitors with a response, but I thought today I’d make an exception to that rule,” Alder responded on March 14.
Characterizing Chew’s remarks as not “very adult,” he said any suggestion that the SFC is influenced by China “is totally false.” Alder described the relationship between China’s policy makers and the Securities and Futures Commission as one that is “arm’s length.”
Weighted Voting Rights
The testiness highlights the intensifying competition between two of Asia’s leading financial centers. The stock exchanges in both cities are proposing new rules to attract initial public offerings, including allowing weighted voting rights (WVR) structures. In 2014, Hong Kong lost out to New York on e-commerce giant Alibaba’s blockbuster US$21.8-billion initial public offering because its stock exchange’s one-share-one-vote rule did not allow founder Jack Ma to retain control of the company.
In the proposed new rules that may come into force in April, at the earliest, the Hong Kong Stock Exchange will be flexible in allowing the listing of companies with WVR structures. Existing rules actually allow the bourse to permit, in exceptional circumstances, the listing of shares “that have voting power that does not bear a reasonable relationship to the equity interest of those shares,” but the exchange has never exercised this option, not even for Alibaba.
Under the proposed new listing rule, “good quality, high growth and innovative companies” will be allowed to have WVR structures. These companies “sometimes rely heavily” on the technical expertise, market knowledge and foresight of their owner managers, observes the proposal, but often see the shareholdings of those managers diluted as the company raises funds from outside investors prior to its IPO.
Thus, when they finally list, these companies want to put in place WVR structures to enhance the voting power of key individuals so they can maintain control, despite owning only relatively small number of shares.
The Hong Kong proposal does not mandate what kind of WVR structure listing candidates can put in place, but it notes that the most common structure used by companies listed in the US is the Dual Class Share (DCS) structure, where one unlisted super-voting share carries typically ten times the vote of one listed share.
Protecting Minority Shareholders
For its part, the Singapore Stock Exchange is anticipating that the first listing of a company with a DCS structure will come after June this year. “The majority of respondents to our consultation supported implementing a Dual Class Shares structure,” says Tan Boon Gin, chief executive of the Singapore bourse’s regulator, SGX RegCo. But the final shape of the framework “will be driven by market feedback,” he added.
Not all companies will benefit from the proposed listing changes. Hong Kong makes clear that the enterprises it wants are “companies from emerging and innovative sectors,” while Singapore says it is targeting “companies in high-technology industries”
Singapore’s Companies Act allows the formation of companies with a multiple vote structure and the influential government body Committee on the Future Economy has already recommended permitting DCS listings provided there are appropriate safeguards.
The safeguards could include the following, based on the proposals the stock exchange floated for feedback in 2017:
- imposing admission criteria over and above current Main Board requirements, such as a minimum market capitalization of S$500 million
- prohibiting the issuance of multiple-vote shares by a company that is already listed
- converting multiple vote shares to one-vote shares after a certain period or through a vote by the one-vote shareholders
- treating all classes of shareholders, including multiple-vote shareholders, as one-share, one-vote in the election of independent directors
Does Your Company Qualify?
Additionally, Hong Kong proposes to broaden the range of companies that may list on the main board before they had generated profits and revenues to biotech companies “engaged in the R&D, application and commercialization of Regulated Products only.” The waiver currently applies only to mining companies whose primary activity is the exploration for and/or extraction of natural resources and which are in the pre-production, exploration and/or development phase.
A third proposal is to allow secondary listings by companies that are already listed in a qualifying exchange (which includes the New York Stock Exchange and NASDAQ). To prevent regulatory arbitrage, such public companies are currently not allowed to list secondary shares in Hong Kong if their “center of gravity” is in the Greater China region. Thus, Alibaba cannot have a secondary listing in Hong Kong because, for one, its main business operations and assets are in China.
It should be noted that not all companies will benefit from the proposed listing changes in Hong Kong and Singapore. Both jurisdictions make clear that the enterprises they want are “companies from emerging and innovative sectors,” in the words of the Hong Kong Stock Exchange’s consultation paper, and “companies in high-technology industries,” in the words of the Singapore Exchange.
What is considered innovative, says the HKEX, “depends on the state of the industry(ies) and market(s) in which an applicant operates, and will change over time as technology, markets and industries develop and evolve.”
But in general, an innovative company will possess more than one of the following characteristics:
- Its success is demonstrably attributable to the application of new technologies, innovations, and/or a new business model in the company’s core business, which also serves to differentiate the company from existing players. An example of the application of a new business model is the creation of a new way of connecting consumers and providers.
- Research and development is a significant contributor to the company’s expected value and constitutes a major activity and expense.
- The company is able to demonstrate that its success is attributable to its unique features or intellectual property.
- The company has an outsized market capitalization/intangible asset value relative to its tangible asset value.
As an investor protection measure, the bourses are also likely to scrutinize the expected market capitalization of applicants that want a weighted voting rights structure. The proposed threshold in Hong Kong is at least HK$10 billion (US$1.3 billion), with those expecting a market cap of HK$40 billion or lower required to make HK$1 billion a year in revenue.
Interestingly, the Singapore Exchange has floated a much lower minimum market cap – at S$500 million, equivalent to US$380 million – as an admission criterion for companies with a Dual Class Shares structure. A lower threshold is potentially a competitive advantage for Singapore, along with the suggestion that Beijing exerts some influence on Hong Kong regulators, unlike in sovereign Singapore.
Bring it on.