5. Alternative Weighted Voting Rights Structures in Hong Kong
The Exchange’s review found that dual class shares are the most common type of WVR structure in the US. These structures often give incumbent controllers either enhanced or exclusive rights to elect directors (usually a majority) to the company’s board. It also found that it is possible for Mainland Chinese companies to list in the US with alternative WVR structures and the Concept Paper seeks views on whether these alternative structures should be considered for companies seeking to list in Hong Kong. The principal types of alternative structures identified are:
- Dual-class director election
A survey showed that 45 companies (3%) in the S&P 1500 Composite Index6 were controlled through shares allowing the holders to elect a fixed number or percentage (usually a majority) of board members. The boards of 21 of these companies are split into two groups, each of which is associated with a share class: i.e. “Class A” directors and “Class B” directors. Directors are elected at general meetings where Class A shareholders elect the Class A directors and Class B directors are voted for by the Class B shareholders. One class of shareholders, typically the company’s founders, will have the right to nominate a larger number of directors to the board than the other class. Companies using this structure include Nike Inc and the New York Times Company.
- Non-voting ordinary shares
These companies have classes of non-voting ordinary shares and a separate class of shares carrying one vote per share, which are normally held by insiders. As a result, outside investors have little say in the major decisions made by the company. Companies listed in the US with non-voting ordinary shares include Apollo Group Incorporated and Federated Investors Inc.
Some companies have issued shares entitling holders to both multiple votes per share and the exclusive right to elect a majority of the board. Companies with such shares include Expedia Inc., the Hershey Company and the Ralph Lauren Corporation.
- Special control rights granted in Articles
It is also possible for a company to list in the US using a WVR structure that gives special control rights to particular persons through provisions in the articles only; the rights do not therefore attach to any particular class of shares. For example, the articles of Autohome, Inc., a Mainland Chinese online automobile sales company listed on NYSE in December 2013, state that while the company’s current controlling shareholders hold at least 39.3% of its total ordinary share capital, they are entitled, but not obligated, to appoint at least a majority of the directors to its board. They also have special rights to fill a vacancy following the removal of a director they appointed. Directors appointed by a controlling shareholder are not subject to retirement by rotation.In the case of JD.com, a Mainland Chinese online direct sales company listed on NASDAQ, the articles state that the quorum for a board meeting of the company is not achieved unless the founder is present. The founder has a casting vote where directors cast an equal number of votes in favour or against a particular issue and he must approve any appointment of a director to fill a casual vacancy. JD.com also has a dual-class share structure: the “B” shares held by the founder entitle him to 20 votes per share.LightInTheBox Holding Company Ltd, a Mainland Chinese online retailer listed on the NYSE, has a single class shareholder structure that entitles shareholders to one vote per share on most shareholder resolutions. However, the company’s articles provide that its founders have three votes per share on any resolution concerning a change in control of the company.Alibaba Group Holding Limited has a single class of ordinary shares which entitle holders to one vote per share on all matters on which ordinary shareholders are entitled to vote. However, the Alibaba Partnership has the exclusive right to nominate a simple majority of the directors on the board. The election of each director nominee is subject to majority approval of the company’s shareholders at the company’s annual general meeting.
6. Additional Considerations
The following additional issues are raised for consideration in the Concept Paper’s Chapter 6.
6.1 Possible Restriction to New Listing Applicants
In its 1987 report on dual-class share structures, the Standing Committee on Company Law Reform stated that such structures should only be allowed when companies apply to list on the Exchange. Investors in such companies would acquire shares in full knowledge of the fact that their shares carry rights which are inferior to those carried by the shares held by the company’s controllers. As they have no existing stake in the company, there is no question of their existing rights being reduced by the adoption of a WVR structure at IPO. On the other hand, if the implementation of a WVR structure in favour of the controlling shareholder(s) were permitted post listing, this risks limiting the rights of the company’s minority shareholders.
In the US, the NYSE and NASDAQ allow new listing applicants to list with WVR structures. Any listing of shares on such markets that may prejudice the interests of the existing shareholders of the company is however prohibited.
The NYSE Listed Company Manual provides that the voting rights of existing shareholders of publicly traded common stock registered under section 12 of the Exchange Act cannot be disparately reduced or restricted through any corporate action or issue. Non-exhaustive examples of such corporate action or issue are stated to include: the adoption of time phased voting plans, the adoption of capped voting rights plans, the issue of super voting stock, or the issue of stock with voting rights less than the per share voting rights of the existing common stock through an exchange offer.7
NASDAQ’s Stock Market Rules also prohibit a company from creating a new class of security that votes at a higher rate than an existing class of securities, or from taking any other action that has the effect of restricting or reducing the voting rights of an existing class of securities.
6.2 Hong Kong Weighted Voting Rights and Circumvention Risk
The Concept Paper raises the concern that a restriction that would permit only new listing applicants to adopt a WVR structure, could lead to existing listed companies seeking to circumvent the restrictions. Means of circumventing the restriction include: transferring assets/businesses to a private company and subsequently listing the private company with a WVR structure; spinning off assets or businesses as new listed companies with WVR structures or conducting reverse takeovers with such structures; or de-listing in order to re-list as a company with a WVR structure.
The Concept Paper raises the possibility of the Exchange adding general anti-avoidance provisions to the Listing Rules to prevent existing listed companies from circumventing the restriction. Drawbacks highlighted are that the anti-avoidance provisions may not always succeed, and that the decision as to whether a particular transaction constitutes an attempt to circumvent the restriction will be a subjective one in each case.
6.3 Restrictions in Use on US Markets
The Concept Paper notes that US listed companies generally impose restrictions on WVR structures voluntarily. For example, multiple voting shares must normally convert to ordinary shares that entitle the holder to one vote for each share held on all matters subject to shareholder approval at general meeting (OSOV shares) on a transfer of beneficial ownership to a person that is not affiliated with the original holder. Other companies require holders of multiple voting shares to maintain beneficial ownership of a specified percentage of the company’s share capital. One US listed company, Groupon, has a five year sunset clause after which its dual-class share structure terminates. The Concept Paper welcomes comments on whether these or other restrictions should be imposed on WVR structures if companies using them are to be allowed to list in Hong Kong.
The table below summarises the restrictions on the rights of holders of shares with multiple voting rights in US listed companies.
|Characteristic||Description of Restriction||Prevalence in Mainland Chinese Companies||Non-Chinese Examples|
Multiple voting shares must convert into OSOV shares if beneficial ownership is transferred to persons who arenot “affiliated” with the original holders.8
Three companies (China Dangdang, Qihoo 360, and Qunar Cayman) also require conversion if an “affiliate” transfers the shares within six months of gaining beneficial ownership.
One company (Mindray Medical) requires conversion if an “affiliate” transfers the shares at any time after gaining beneficial ownership.
|27 of 30 companies(all except Shanda Games, eLong and LightInTheBox)||
|Minimum equity threshold held by founders or others||
If at any time the founders of the company hold less than 5% of the multiple voting shares, all multiple voting shares in issue must convert into OSOV shares.One company (Autohome) sets this threshold at 39.3% of the sum of both classes of its shares and another (RenRen) sets it at 50% of the founders’ total holding of both its share classes at IPO. iKang Healthcare sets this threshold at 8% of the company’s total issued common stock. JD.com requires conversion of its B shares if its founder does not hold any.
Two companies, in addition to the founder threshold above, require conversion of multiple voting shares if the holding of any non-founder changes by more than 50% (NQ Mobile and YY Inc). RenRen requires conversion if non-founders’ total ordinary shareholding at IPO falls below 50%.
|13 of 30companies(58.com, Autohome, Baidu, China Dangdang, iKang Healthcare, JD.com, Jumei International, NQ Mobile, Perfect World, RenRen, TAL Education, Weibo and YY)||
AMCEntertainment Holdings, Inc
(30% of all outstanding shares threshold)
|Change of control event||One company (Autohome)requires conversion of all multiple-voting shares into OSOV shares if there is a change in control of the company.||One of 30 companies(Autohome)||No example found|
|Retirement / incapacity / death of founder||One company (JD.com) requires conversion of all multiple voting shares intoOSOV shares if the founder is no longer employed as the chief executive officer or cannot permanently attend board meetings due to his physical and/or mental condition.||One of 30 companies (JD.com Holdings)||
|Minimum threshold of shares outstanding||One company (Mindray Medical) requires conversion of its multiple voting shares into OSOV shares if the number of those shares outstanding falls below 20% of total share capital.||One of 30 companies (Mindray Medical)||LinkedIn, Zynga(conversion below minimum 10% of share capital threshold)|
|Vote of shareholders||A requirement for the conversion of all multiple voting shares into OSOV shares if holders of multiple voting shares vote for it.||None||
Facebook(approval by majority of multiple voting shareholders)
(approval by 66.6% of multiple voting shareholders)
|Sunset clause||A requirement for the conversion of multiple voting shares into OSOV shares at a particular future date.||None||Groupon(conversion into OSOV shares after five years10)|
6.4 Possible Additional Restrictions for Hong Kong Listed Shares with WVR Structures
Additional restrictions that the Exchange raises for consideration include:
- a requirement for warnings in all corporate communications;
- an “X” in their short stock names;
- a cap on the number of votes that can be carried by one share;
- enhancing the powers of independent non-executive directors; and
- additional circumstances that may require a company to unwind its WVR structure at either a shareholder or board level.
6 as at 1 January 2012.
7 NYSE Listed Company Manual, Rule 313(A).
8 “Affiliated persons” normally means: (a) the holder’s immediate family, a trust established for their benefit and companies wholly or partially owned by those family members; and (b) companies controlled by the holder.
9 Unless the multiple-voting shares are transferred to another founder or to a trustee nominated by the founder prior to his death and approved by the board of directors (see Google, Inc certificate of incorporation, exhibit 3.01.2 to Form S-1/A filed on 9 August 2004, Article IV, Section 2(f)(iv)). Groupon has a similar provision in its certificate of incorporation (see Groupon, Inc certificate of incorporation, exhibit 3.2 to Form S-1/A filed on 1 November 2011, Article IV, Section 4(f)).
10 Groupon’s two classes of common stock will automatically convert into a single class of common stock on 9 November 2016, five years after the filing of their sixth amended and re-stated certificate of incorporation with the State of Delaware (Sources: Groupon, Inc, certificate of incorporation, exhibit 3.2 to Form S-1/A, filed on 1 November 2011, Article IV, Section 4(a)(iii) “Final Conversion Date” and (d) “Final Conversion of Class A Common Stock and Class B Common Stock”; and 2013 Proxy Statement (Form DEF 14A), filed on 29 April 2013, Note 1 to “Information Regarding Beneficial Ownership of Principal Shareholders, Directors and Management”).