6.5 Possible Restriction to GEM Board or a Professionals Only Board
There have been suggestions that companies with WVR structures should be allowed to list on the Exchange’s Growth Enterprise Market (GEM). However, the GEM Listing Rules contain the same restriction on listing a company with multiple classes of shares with unequal voting power and amendments to those Rules would be required to allow the listing of WVR structure companies.
Another possibility raised is that companies with WVR structures could be allowed to list only on a newly-created board to which only professional investors would have access. This would however set the Hong Kong Exchange apart from other markets as there are no other markets which restrict the trading of ordinary equity securities to professional investors.
The Concept Paper notes that the Shanghai Stock Exchange has announced plans to launch a new board for “strategic emerging industries”, although would not permit the listing of companies with WVR structures.11The proposal has been submitted for approval which is still pending.
While the Concept Paper does not address the more general question of the re-positioning of GEM or the creation of a professional (or other) board for listing companies with weighted voting rights structures in Hong Kong, the Exchange will take into account any views from the market submitted in response to the Concept Paper on the acceptability or desirability of using GEM, a professional board, or another separate board focused on, for example, specific sectors or companies with specified characteristics.
6.6 Secondary Listing of Greater China Entities
The Concept Paper refers to the public debate on the acceptability of a secondary listing on the Exchange for Chinese companies with WVR structures that are already listed on US exchanges. According to the revised Joint Policy Statement for Overseas Companies issued by the Exchange and the SFC in September 2013, the Exchange will not approve an application for secondary listing by a company that has its “centre of gravity” in Greater China. This reflects the Exchange’s longstanding policy that the Exchange is the natural market for listings of Mainland and Hong Kong companies.
Unless this policy is changed, a US listed Chinese company can only apply for a dual primary listing on the Exchange and a secondary listing is not possible. The Exchange intends to review whether Chinese companies should be allowed to secondary list in Hong Kong at some point in the future.
6.7 Possible Restriction to Companies in Particular Industries
The US stock exchanges present the most competition to the Hong Kong Exchange in terms of listing Mainland Chinese companies. This is particularly true for information technology companies which account for 70% of the Mainland Chinese companies listing in the US with WVR structures and 90% of those companies by market capitalisation. In contrast, only two information technology companies (Tencent Holdings Limited and Lenovo Group Limited) are included in the 50 constituents of the Hang Seng Index.
To stave off competition from the US, while limiting the risks posed by dual-class share structures, it is suggested that the use of such structures should be allowed only for companies in particular industries, such as information technology companies. This would however make the Exchange the only major stock exchange to restrict the use of WVR structures to companies in a particular industry.
The Concept Paper also notes that while WVR structures are particularly prevalent in the information technology industry, they are also adopted by companies in a wide range of other industries. 80% of US IPOs by companies with dual-class share structures were of non-information technology companies in the period from 2001 to the end of 2013. While IPOs of information technology companies are the main area in which the Exchange currently competes with the US exchanges, that may change in the future, raising the question of whether it is sensible to restrict WVR use to information technology companies now.
6.8 Classification Issues
One difficulty with restricting weighted voting rights structures in Hong Kong to information technology companies is how these companies would be defined. Basing a definition on the Hang Seng Industry Classification (HSIC) System risks excluding certain types of company that in layman’s terms might be considered to be “technology” companies, for example bio-technology and clean energy companies. This definition also excludes companies in the telecommunications industry.
6.9 Possible Restriction to “Innovative Companies”
An alternative suggestion is to permit “innovative” companies only to use WVR structures. The aim would be to allow the listing of exceptional companies likely to have a transformative effect on their industry or society in general. It’s thought that in time, such companies could prove beneficial to the market and society as a whole. The decision as to whether a company is “innovative” would however be highly subjective and poses the further problem that a company that starts out as “innovative” will quickly become commonplace raising the question of whether it should have to abandon its WVR structure at that stage.
11 Announced by the CSRC on 7 March 2014.