Technology companies and service providers are questioning key parts of Hong Kong’s plan to allow dual-class shares, just as firms, including Xiaomi Corp. and Tencent Music Entertainment Group, are considering going public.
Hong Kong Exchanges and Clearing (HKEX) Ltd. wants to change its rules so that company founders can stay in control after their firms list, but the proposals may cause trouble for China’s tech titans, who use an unusual type of corporate structure that restricts foreign ownership of their firms. Representatives for the companies are lobbying for HKEX and the Securities and Futures Commission to clear up the issue, they said.
The regulators’ response will play a big role in whether businesses, such as Xiaomi, that use the so-called variable interest entity structures choose to list in Hong Kong. HKEX is seeking to compete head-on with markets in New York for coveted listings, after it saw Alibaba Group Holding Ltd., another VIE, go public in the United States.
Alibaba is now the world’s eighth-biggest company by market value.
Smartphone-maker Xiaomi is laying the groundwork for a dual-class-structure listing in Hong Kong this year while also being open to the idea of a secondary listing on the mainland, but no decision has been made, according to people familiar with the matter. Xiaomi declined to comment. Tencent Music Entertainment, which uses the VIE structure, is also considering whether to list in the former British colony. Conditions in HKEX’s proposal would see the super-voting rights of founders’ shares expire in circumstances including stock transfer and death. That could run up against the mainland’s draft laws that cover VIE structures, said the people. China’s Ministry of Commerce proposed in 2015 that companies with such setups need to ensure that Chinese investors hold control of the company or ask for a State Council waiver.
The potential rule clash could mean that, for example, an Internet company would lose its Internet Content Provider license in the world’s most populous country, said Will Cai, a capital markets partner at Skadden, Arps, Slate, Meagher & Flom Llp..
An HKEX spokesman said the bourse sees super-voting rights and China’s foreign ownership rules as separate issues that aren’t in conflict. The former British colony’s ban on selling shares with different classes played a role in Chinese companies that now have a market value of more than $740 billion, holding their initial public offerings in New York, according to data compiled by Bloomberg.
“There are companies listed on the exchange with mechanisms to comply with the draft foreign investment law,” she said. “For example, mechanisms to ensure that the majority of the board of its controlling shareholder is made up of Chinese nationals.”
Industry players are also lobbying for other changes to HKEX’s consultation paper, which was published on February 23. One issue is a clause that would end a dual-class structure if there are changes to class rights or the articles of a company, the people said. The proposal would mean that special-voting rights holders with less than a third of total issued capital could have their rights removed by remaining shareholders, according to a submission to the regulators seen by Bloomberg News.
The HKEX spokesman said that under its rules, an effort to change or remove the rights attached to an existing class of shares requires the approval of the relevant majority of holders of that class. The exchange interprets that this would also apply to super-voting rights shares, she said.
HKEX’s dual-class proposal is less flexible than the current US rules, said Bonnie Chan, a Hong Kong-based partner at Davis Polk & Wardwell Llp. Dozens of Chinese companies, including Alibaba and Baidu Inc., have chosen to list on the New York Stock Exchange and Nasdaq Stock Market in part because they permit dual-class shares. Hong Kong’s consultation period ends on March 23.